Item 1. Business.
INTRODUCTION
Courier Corporation, together with its subsidiaries, (“Courier,” the “Company,” “We,” “Our,” or “Us”) is among America’s largest book manufacturers and a leader in content management and customization in new and traditional media. The Company also publishes books under two brands offering award-winning content and thousands of titles. Courier Corporation, founded in 1824, was incorporated under the laws of Massachusetts on June 30, 1972. The Company has two operating segments: book manufacturing and publishing.
The book manufacturing segment focuses on streamlining 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. Courier’s principal book manufacturing markets are religious, education and trade. Revenues from this segment, including intersegment sales, accounted for approximately 91% of Courier’s consolidated sales in fiscal 2014.
The publishing segment consists of Dover Publications, Inc. (“Dover”) and Research & Education Association, Inc. (“REA”). Dover publishes over 10,000 titles in more than 30 specialty categories including children’s books, literature, art, music, crafts, mathematics, science, religion and architecture. REA publishes test preparation and study guide books for high school, college and graduate students, and professionals. Revenues in this segment were approximately 12% of consolidated sales in fiscal 2014. In September 2014, the Company sold Federal Marketing Corporation, d/b/a Creative Homeowner (“Creative Homeowner”), and accordingly Creative Homeowner’s results are reported as a discontinued operation and excluded from the discussion of the results of continuing operations below.
The combination of Dover’s and REA’s publishing, sales and distribution skills with Courier’s book manufacturing, digital content conversion, and e-commerce skills provides a comprehensive end-to-end solution for Courier’s customers.
Additional segment information, including the amounts of operating income and total assets, for each of the last three fiscal years, is contained in Note E in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
OPERATING SEGMENTS - CONTINUING OPERATIONS
BOOK MANUFACTURING SEGMENT
Courier’s book manufacturing segment produces hard and softcover books, manages content and provides warehousing and distribution services for its customers, which include publishers, religious organizations and other information providers. Courier provides book manufacturing and related services from five facilities in Westford and North Chelmsford, Massachusetts; Philadelphia, Pennsylvania; and Kendallville and Terre Haute, Indiana.
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 technology serves publishers and other companies interested in providing a self-publishing platform to their customers or communities. In addition, FastPencil provides a platform and services to thousands of self-publishers. The acquisition complements the Company’s content management and customization technology and gives the Company an entry into the rapidly growing self-publishing market. The Company paid $5 million at the time of acquisition, with additional future “earn out” potential payments, conditioned upon the achievement of revenue targets with a current maximum payout of three payments of up to $5.5 million, $1.25 million and $5.25 million which may be paid out over the next three and a half years. The acquisition was accounted for as a purchase and, accordingly, FastPencil’s financial results are included in the book manufacturing segment in the consolidated financial statements from the date of acquisition. In fiscal 2014, the Company concluded it was necessary to record an impairment of FastPencil’s goodwill
of $4.5 million at the end of the second quarter of fiscal 2014 and $0.3 million at the end of the fourth quarter, as well as an impairment charge of $1.2 million for FastPencil’s other intangible assets at the end of the fourth quarter. In addition, the Company performed a fair value analysis of the related contingent “earn out” consideration payable at the end of the second and fourth quarters of fiscal 2014 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 and September 27, 2014 resulting in a reduction in the liability of $2.6 million and $1.5 million, respectively. The net impact of the impairments of FastPencil’s goodwill and other intangible assets, offset in part by the related reductions in the contingent consideration payable, was a pre-tax charge of $1.9 million in fiscal 2014.
On January 15, 2010, the Company acquired the assets of Highcrest Media LLC (“Highcrest Media”), a Massachusetts-based provider of solutions that streamline the production of customized textbooks and other materials for use in colleges, universities and businesses. The acquisition of Highcrest Media complements the Company’s investments commencing in fiscal year 2010 in digital printing technology. The $3 million cash acquisition was accounted for as a purchase, and accordingly, Highcrest Media’s financial results are included in the book manufacturing segment in the consolidated financial statements from the date of acquisition. Additional “earn out” payments of $1.2 million were earned and paid by the Company in the three years following the acquisition of Highcrest Media.
In the second quarter of fiscal 2011, the Company closed 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. The Company consolidated the Stoughton operations into its other manufacturing facilities. In fiscal 2012, the Company further reduced its one-color offset press capacity at its Westford, Massachusetts facility.
Courier’s book manufacturing operations utilize both offset and digital print technologies, combined with various binding capabilities, to produce both soft and hard cover books. Each of Courier’s five facilities work together, although each has certain specialties adapted to the needs of the market niches Courier serves, such as printing on lightweight paper, book cover production, four-color book manufacturing, and digital printing. These services are primarily sold to publishers of educational, religious and trade books. The Company has four-color offset book manufacturing capabilities with four manroland offset presses at its Kendallville, Indiana facility. During 2010, the Company built a state-of-the-art digital printing operation at its North Chelmsford, Massachusetts facility through a relationship with HP and installed two more digital presses in fiscal 2011. In fiscal 2013, a complete digital production line was installed at the Kendallville, Indiana facility and the installation of a second digital press was completed in the first quarter of fiscal 2014. These digital print capabilities, combined with Highcrest Media and FastPencil, comprise the Company’s newest market offerings, Courier New Media and Courier Digital Solutions. In addition, Highcrest Media manages content for leading financial services companies.
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 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. 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 were 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 had not met expectations. As a result, in August 2014 the Company successfully renegotiated its agreement with the founder of Digital Page to restructure the investment. Under the revised terms, the Company will hold a 60% interest in Digital Page in place of the original 40% interest for the same 20 million Brazilian reals investment amount. After the end of the fiscal year, on November 18, 2014, the Company closed this transaction and paid approximately $4 million toward the purchase price. The remainder was satisfied by the principal amount of the loans being credited towards the total purchase price of $8.5 million for the Company’s 60% ownership interest. Under the second agreement, the Company has a licensing arrangement for its proprietary custom textbook platform with the Brazilian subsidiary of Santillana, the largest Spanish/Portuguese educational publisher in the world. Digital page has a multiyear commercial print agreement with Santillana.
Courier has achieved Chain-of-Custody certification from the Forest Stewardship Council (FSC), Sustainable Forestry Initiative (SFI) and Programme for the Endorsement of Forest Certification (PEFC). These certifications reflect Courier’s systematic adherence to environmentally responsible practices in the use of paper and other products throughout its manufacturing locations.
Courier’s book manufacturing sales force of 13 people is responsible for all of the Company’s sales to almost 400 book-manufacturing customers. Courier’s salespeople operate out of sales offices located in New York, New York; Philadelphia, Pennsylvania; Terre Haute, Indiana; Campbell, California; and North Chelmsford, Massachusetts.
Sales to Pearson Education, Inc. aggregated approximately 32% of consolidated sales from continuing operations in fiscal 2014, 33% in fiscal 2013 and 31% fiscal 2012. Sales to The Gideons International aggregated approximately 23% of consolidated sales from continuing operations in fiscal years 2014 and 2013 and 24% in fiscal 2012. A significant reduction in order volumes or price levels from these customers could have a material adverse effect on the Company. No other customer accounted for more than 10% of consolidated sales from continuing operations in any of the past three fiscal years. The Company distributes products around the world; export sales, as a percentage of consolidated sales from continuing operations, were approximately 22% in fiscal 2014, 24% in fiscal 2013 and 21% in fiscal 2012. Approximately 94% of the export sales were in the book manufacturing segment in fiscal year 2014, 95% in fiscal 2013 and 92% in fiscal year 2012.
All phases of Courier’s business are highly competitive. The printing industry has almost 47,000 establishments. While some of these companies are relatively small, several of the Company’s competitors are considerably larger or are affiliated with companies that are considerably larger and have greater financial resources than Courier. Customers switching from traditional manufacturing processes to digital printing and ebooks as well as competition from printing companies in lower cost countries such as China have increased competitive pressures. In recent years, consolidation of both customers and competitors within the Company’s markets has increased pricing pressures. The major competitive factors in Courier’s book manufacturing business in addition to price are product quality, speed of delivery, customer service, availability of appropriate printing capacity and paper, content management and related services, and technology support.
PUBLISHING SEGMENT
Dover, a subsidiary of the Company, is a publisher of books in over 30 specialty categories, including fine and commercial arts, children’s books, crafts, music scores, graphic design, mathematics, physics and other areas of science, puzzles, games, social science, stationery items, and classics of literature for both the children’s and adult markets, including the Dover Thrift Editionsä. In 2008, Dover introduced a new premium series of hardcover reproductions, Dover Calla Editionsä and in 2012, launched a new adult coloring series, Creative Haven® and an online image store, DoverPictura®. In 2013, Dover introduced a new educational series branded Boost®.
Dover sells its products through most American bookstore chains, online retailers, independent booksellers, mass merchandisers, children’s stores, craft stores and gift shops, as well as a diverse range of distributors around the world. Dover sells its ebooks through all of the major ebook platforms. Dover has also sold its books directly to consumers for over 50 years through its specialty catalogs and over the Internet at www.doverpublications.com. Dover also sells ebooks directly from its website. Dover mails its proprietary catalogs to approximately 280,000 consumers and annually sends almost 155 million emails to electing customers. In addition, Dover maintains www.DoverDirect.com, which is a business-to-business site for its retailers and distributors, and its image store at www.DoverPictura.com.
REA publishes more than 600 test preparation and study guide titles. Product lines include Problem Solvers®, Essentials®, Super Reviews® and Test Preparation books, including its Crash Courseä and All Access Seriesä. REA sells its products around the world through major bookseller chains, online retailers, college bookstores, and teachers’ supply stores, as well as directly to teachers and other consumers through catalogs and over the Internet at www.REA.com. REA sells its ebooks through all of the major ebook platforms.
In the third quarter of fiscal 2011, faced with the prospect of Borders Group, Inc.’s liquidation, significant store closings and the permanent loss of what was an important customer, the Company concluded that the carrying value of REA’s goodwill exceeded its estimated fair market value and a pre-tax impairment charge of $8.6 million was recorded, representing 100% of REA’s goodwill, as well as approximately $200,000 for prepublication costs related to underperforming titles.
The U.S. publishing market is comprised of thousands of publishers, many of these publishers are much larger than Dover or REA, or are part of much larger organizations. In addition, newer sources of competition have emerged with large retailers launching or expanding publishing operations and with the continued adoption of ebooks by consumers. New web-based publishing businesses are starting up as well. Dover distinguishes its products by offering an extremely wide variety of high quality books at modest prices. REA offers high quality study guides, test preparation books and software products in almost every academic area including many specialized areas such as Advance Placement, CLEP, teacher certification, and professional licensing.
MATERIALS AND SUPPLIES
Courier purchases its principal raw materials, primarily paper, but also plate materials, ink, adhesives, cover stock, casebinding materials and cartons, from numerous suppliers, and is not dependent upon any one source for its requirements. Many of Courier’s book manufacturing customers purchase their own paper and furnish it at no charge to Courier for book production. Dover and REA purchase a significant portion of their books from Courier’s book manufacturing operations. Paper prices have been relatively stable over the last eighteen months, although recent reductions in capacity may impact paper production.
ENVIRONMENTAL REGULATIONS
The Company’s operations are subject to federal, state and local environmental laws and regulations relating to, among other things: air emissions; waste generation, handling, management and disposal; wastewater treatment and discharge; and remediation of soil and groundwater contamination. The Company periodically makes capital expenditures so that its operations comply, in all material respects, with applicable environmental laws and regulations. No significant expenditures for this purpose were made in 2014 or are anticipated in 2015. In 2007, the Company adopted an “Environmental, Health and Safety Policy” which is available on the Company’s website at www.courier.com. The Company does not believe that its compliance with applicable environmental laws and regulations will have a material impact on the Company’s financial condition or liquidity.
EMPLOYEES
The Company employed 1,576 persons at September 27, 2014 compared to 1,560 a year ago. The Company considers its relations with its employees to be satisfactory.
OTHER
Courier’s educational sales, which represent over 40% of its business, has seasonal demand which is highest in the second half of our fiscal year, with the peak season being in the Company’s fourth quarter. The remainder of Courier’s business is not significantly seasonal in nature. There is no portion of Courier’s business subject to cancellation of government contracts or renegotiation of profits.
Courier does not hold any material patents, licenses, franchises or concessions upon which our operations are dependent, but does have trademarks, service marks, and Universal Resource Locators (URL’s) on the Internet in connection with each of its business segments. Through its acquisitions of Highcrest Media and FastPencil, the Company owns certain customization and content management software utilized by its customers in the publishing and financial services industries. Substantially all of REA’s publications and a majority of Dover’s publications are protected by copyright, either in its own name, in the name of the author of the work, or in the name of a predecessor publisher from whom rights were acquired. Many of Dover’s publications include works that are in the public domain.
The Company makes available free of charge (as soon as reasonably practicable after they are filed with the Securities and Exchange Commission) copies of its Annual Report on Form 10-K, as well as all other reports required to be filed by Section 13(a) or 15(d) of the Securities Exchange Act of 1934, via the Internet at www.courier.com or upon written request to Peter M. Folger, Senior Vice President and Chief Financial Officer, Courier Corporation, 15 Wellman Avenue, North Chelmsford, MA 01863.
Item 1A.
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, customers switching from traditional manufacturing processes to digital printing and ebooks as well as excess capacity and competition from printing companies in lower cost countries such
as China may increase competitive pricing pressures. Furthermore, some of our competitors have greater sales, assets and financial resources than us, and those in foreign countries may derive significant advantages from local governmental regulation, including tax holidays and other subsidies. All or any of these competitive pressures could affect prices or customers’ demand for our products, impacting our profit margins and/or resulting in a loss of customers and market share.
A reduction in orders or pricing from, or the loss of, any of our significant customers may adversely impact our operating results.
We derived approximately 55% and 57% of our fiscal 2014 and 2013 revenues from continuing operations, respectively, from two major customers. We expect similar concentrations in fiscal 2015. 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 shareholders or 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.
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 the 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 $357,000 to these two plans in fiscal 2015, 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 September 27, 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 both of these employers could materially increase the amount of our required contributions to this plan. Under our contract with the bindery union, if certain events occur we 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 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 may make investments in companies over which we do not have sole control, including our investment in Digital Page in Brazil.
From time to time, we may 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 own only 60% of the Digital Page equity interests (acquired in November 2014). 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. Creative Homeowner was sold in September 2014 and is included in discontinued operations in our consolidated financial statements.
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 over 5,000 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 changes in economic conditions, 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, 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.
· 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.
· 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, the Company concluded it was necessary to record impairment charges of $4.8 million for FastPencil’s goodwill in fiscal 2014 as well as an impairment charge of $1.2 million for FastPencil’s other intangible assets. The impact of these impairment charges was offset in part by the reduction of $4.1 million in the related contingent consideration liability during fiscal 2014.
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 1B.
Item 1B. Unresolved Staff Comments.
None.
Item 2.
Item 2. Properties.
REAL PROPERTIES
The following schedule lists the facilities owned or leased by Courier at September 27, 2014. Courier considers its plants and other facilities to be well maintained and suitable for the purposes intended.
(1) Houses corporate headquarters and Courier Digital Solutions, as well as sales and marketing offices supporting both the book manufacturing and publishing segments.
(2) The Stoughton plant was closed in March 2011 and its operations consolidated into the Company’s other manufacturing facilities. A 40,000 square foot section was sublet effective March 2013 through October 2015, which is the end of the lease term.
(3) A 19,500 square foot section was sublet effective June 2014 through January 2019, which is the end of the current lease term.
EQUIPMENT
The Company’s products are manufactured on equipment that in most cases is owned by the Company, although it leases certain computers and other equipment. Capital expenditures amounted to approximately $11.1 million in 2014, $22.2 million in 2013, and $9.9 million in 2012. More than half of the expenditures during the past three years were related to expansion of the Company’s digital print capabilities. Capital expenditures for fiscal 2015 are expected to be between $9 and $11 million. Courier considers its equipment to be in good operating condition and adequate for its present needs.
ENCUMBRANCES AND RENTAL OBLIGATIONS
For a description of encumbrances on certain properties and equipment, see Note D of Notes to Consolidated Financial Statements of this Annual Report on Form 10-K. Information concerning leased properties and equipment is disclosed in Note K of Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
Item 3.
Item 3. Legal Proceedings.
In the ordinary course of business, the Company is subject to various legal proceedings and claims. The Company believes that the ultimate outcome of these matters will not have a material adverse effect on its financial statements.
Item 4.
Item 4. Mine Safety Disclosures.
None.
PART II
Item 5.
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
On November 20, 2014, the Company announced the approval by its Board of Directors for the repurchase of up to $10 million of the Company’s outstanding common stock from time to time on the open market or in privately negotiated transactions, including pursuant to a Rule 10b5-1 nondiscretionary trading plan. This stock repurchase authorization is effective for a period of twelve months. During fiscal 2014, the Company repurchased 153,150 shares of common stock for approximately $2.0 million under a similar program which expired on November 21, 2013.
ISSUER PURCHASES OF EQUITY SECURITIES
Under previous stock repurchase programs, the Company repurchased 123,261 shares of common stock for approximately $1.6 million during fiscal 2013 and 823,970 shares of common stock for approximately $10 million in fiscal 2012.
PEER PERFORMANCE TABLE
The graph below compares the Company’s cumulative total stockholder return on its Common Stock with the cumulative total return on the Standard & Poor’s 500 stock index (the “S&P 500 Index”), a peer group of companies selected by the Corporation for purposes of the comparison and described more fully below (the “Peer Group”). This graph assumes the investment of $100 on October 1, 2009 in each of Courier Common Stock, the S&P 500 Index, and the Peer Group Common Stock, and reinvestment of quarterly dividends at the monthly closing stock prices. The returns of each company have been weighted annually for their respective stock market capitalizations in computing the S&P 500 and Peer Group indices.
The Peer Group includes the following companies: Barnes & Noble, Inc., Ennis Business Forms, Inc., Quad/Graphics, Inc., R. R. Donnelley & Sons Company, Scholastic Corporation, The Standard Register Company, and John Wiley & Sons, Inc. Consolidated Graphics, previously included in the Company’s Peer Group, was acquired by R. R. Donnelley & Sons Company in 2014.
Other information required by this Item is contained in the section captioned “Selected Quarterly Financial Data (Unaudited)” appearing on page of this Annual Report on Form 10-K and in Part III, Item 12, captioned “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
Item 6.
Item 6. Selected Financial Data.
The information required by this Item is contained in the section captioned “Five-Year Financial Summary” appearing on page of this Annual Report on Form 10-K.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The information required by this Item is contained in the section captioned “Management’s Discussion and Analysis” on pages through of this Annual Report on Form 10-K.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Other than as disclosed in Note H of the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K, the Company does not hold any derivative financial instruments, derivative commodity instruments or other financial instruments. At September 27, 2014, the Company had two forward exchange contracts to sell approximately 8 million South African Rands (ZAR) designated as cash flow hedges against two foreign currency customer orders to be settled for a total of approximately $ 0.7 million in December 2014 and March 2015. The fair value of the foreign exchange forward contract was valued using market exchange rates. The Company engages neither in speculative nor derivative trading activities. The Company is exposed to market risk for changes in interest rates on invested funds as well as borrowed funds. The Company’s revolving bank credit facility bears interest at a floating rate, with further information contained in Note D of Notes to Consolidated Financial Statements of this Annual Report on Form 10-K. The Company believes it is remote that this could have a material impact on results of operations.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item is contained on pages through of this Annual Report on Form 10-K.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A. Controls and Procedures
(a) Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, we carried out an evaluation under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e). Disclosure controls are procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. Disclosure controls are also designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
(b) Changes in Internal Controls over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the fourth quarter of fiscal year 2014 that have materially affected, or that are reasonably likely to materially affect, the Company’s internal control over financial reporting.
(c) Management’s Responsibility for Financial Statements
Management of the Company is responsible for the preparation, integrity and objectivity of the Company’s consolidated financial statements and other financial information contained in its Annual Report to Stockholders. Those consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States. In preparing those consolidated financial statements, the Company’s management was required to make certain estimates and judgments, which are based upon currently available information and management’s view of current conditions and circumstances.
The Audit Committee of the Board of Directors (“Audit Committee”), which consists solely of independent directors, oversees the Company’s process of reporting financial information and the audit of its consolidated financial statements. The Audit Committee stays informed of the financial condition of the Company and regularly reviews management’s financial policies and procedures, the independence of the independent auditors, the Company’s internal control and the objectivity of its financial reporting. The independent registered public accounting firm has free access to the Audit Committee and to meet with the Audit Committee periodically, both with and without management present.
The Company has filed with the Securities and Exchange Commission the required certifications related to its consolidated financial statements as of and for the year ended September 27, 2014. These certifications are exhibits to this Annual Report on Form 10-K for the year ended September 27, 2014.
(d) Management’s Report on Internal Control Over Financial Reporting
Management has responsibility for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management has assessed the effectiveness of the Company’s internal control over financial reporting as of September 27, 2014.
In making its assessment of the Company’s internal control over financial reporting, the Company’s
management has utilized the criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission in Internal Control-Integrated Framework (1992). Management concluded that based on its assessment, the Company’s internal control over financial reporting was effective as of September 27, 2014. Deloitte & Touche LLP, an independent registered public accounting firm that audited the consolidated financial statements included in this Annual Report, has issued its attestation report on the effectiveness of the Company’s internal control over financial reporting as of September 27, 2014, which appears below.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Courier Corporation
North Chelmsford, Massachusetts
We have audited the internal control over financial reporting of Courier Corporation and subsidiaries (the “Company”) as of September 27, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 27, 2014, based on the criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended September 27, 2014 of the Company and our report dated December 1, 2014 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/Deloitte & Touche LLP
Boston, Massachusetts
December 1, 2014
(e) Limitations on Design and Effectiveness of Controls
The Company’s management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are effective at the reasonable assurance level. However, the Company’s management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must take into consideration resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected in a timely manner. These inherent limitations include the fact that controls can be circumvented by individual acts, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Finally, over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors and Executive Officers and Corporate Governance.
Courier’s executive officers, together with their ages and all positions and offices with the Company presently held by each person named, are as follows:
The terms of office of all of the above executive officers continue until the first meeting of the Board of Directors following the next annual meeting of stockholders and the election or appointment and qualification of their successors, unless any officer sooner dies, resigns, is removed or becomes disqualified.
Mr. Conway III was elected Chairman of the Board in September 1994 after serving as acting Chairman since December 1992. He has been Chief Executive Officer since December 1992 and President since July 1988.
Mr. Folger became Senior Vice President and Chief Financial Officer in November 2006. He had previously been Controller since 1982 and Vice President since November 1992. In November 2011, Mr. Folger assumed responsibility for the Company’s book manufacturing operations.
Mr. Balakrishna was promoted to Senior Vice President in November 2011 and assumed responsibility for the Company’s publishing operations. He became Secretary and Clerk in January 2008. He joined Courier in February 2007 as Vice President and General Counsel. Prior to that, since 1996, he was an attorney at the law firms of Proskauer Rose LLP and Goodwin Procter LLP and in house Counsel at John Hancock Financial Services, Inc.
The Company has adopted a code of ethics entitled “Courier Corporation Business Conduct Guidelines,” which is applicable to all of the Company’s directors, officers, and employees. These Business Conduct Guidelines are available on the Company’s Internet website, located at www.courier.com.
All other information called for by Item 10 will be contained in the definitive Proxy Statement, under the captions “Item 1: Election of Directors,” “Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting
Compliance,” to be delivered to stockholders in connection with the Company’s 2015 Annual Meeting of Stockholders. Such information is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation.
Information called for by Item 11 will be contained in the definitive Proxy Statement, under the caption “Compensation Discussion and Analysis,” to be delivered to stockholders in connection with the Company’s 2015 Annual Meeting of Stockholders. Such information is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table provides information as of September 27, 2014 regarding shares of common stock of the Company that may be issued under its existing compensation plans, including the Courier Corporation 2011 Stock Option and Incentive Plan (the “2011 Plan”), the Courier Corporation Amended and Restated 1993 Stock Incentive Plan (the “1993 Plan”), which was replaced by the 2011 Plan, the Courier Corporation 1999 Employee Stock Purchase Plan, and the Courier Corporation 2010 Stock Equity Plan for Non-Employee Directors (the “2010 Plan”).
Equity Compensation Plan Information
(1) Does not include any restricted stock as such shares are already reflected in the Company’s outstanding shares.
(2) 132,237 shares of these 543,080 shares were reserved for future issuance under the Company’s Employee Stock Purchase Plan.
(3) Includes up to 410,843 securities that may be issued in the form of restricted stock.
All other information called for by Item 12 will be contained in the definitive Proxy Statement, under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Compensation Discussion and Analysis,” to be delivered to stockholders in connection with the Company’s 2015 Annual Meeting of Stockholders. Such information is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions and Director Independence.
Information called for by Item 13 will be contained in the definitive Proxy Statement, under the captions “Director Independence” and “Related Party Transactions,” to be delivered to stockholders in connection with the Company’s 2015 Annual Meeting of Stockholders. Such information is incorporated herein by reference.
Item 14.
Item 14. Principal Accounting Fees and Services
Information called for by Item 14 will be contained in the definitive Proxy Statement, under the caption “Item 2: Ratification and Approval of Selection of Independent Auditors,” to be delivered to stockholders in connection with the Company’s 2015 Annual Meeting of Stockholders. Such information is incorporated herein by reference.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules.
(a) Documents filed as part of this report
1. Financial statements
Page(s)
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for each of the three years in the period ended September 27, 2014
Consolidated Statements of Comprehensive Income (Loss) for each of the three years in the period ended September 27, 2014
Consolidated Balance Sheets as of September 27, 2014 and September 28, 2013
to
Consolidated Statements of Cash Flows for each of the three years in the period ended September 27, 2014
Consolidated Statements of Changes in Stockholders’ Equity for each of the three years in the period ended September 27, 2014
Notes to Consolidated Financial Statements
to
2. Financial statement schedule
Schedule II - Consolidated Valuation and Qualifying Accounts
S-1
3. Exhibits
Exhibit No.
Description of Exhibit
3A-1
Articles of Organization of Courier Corporation, as of June 29, 1972 (filed as Exhibit 3A-1 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 26, 1981, and incorporated herein by reference).
3A-2
Articles of Amendment of Courier Corporation (changing stockholder vote required for merger or consolidation), as of January 20, 1977 (filed as Exhibit 3A-2 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 26, 1981, and incorporated herein by reference).
3A-3
Articles of Amendment of Courier Corporation (providing for staggered election of directors), as of January 20, 1977 (filed as Exhibit 3A-3 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 26, 1981, and incorporated herein by reference).
3A-4
Articles of Amendment of Courier Corporation (authorizing class of Preferred Stock), as of February 15, 1978 (filed as Exhibit 3A-4 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 26, 1981, and incorporated herein by reference).
3A-5
Articles of Amendment of Courier Corporation (increasing number of shares of authorized Common Stock), as of January 16, 1986 (described in item #2 of the Company’s Proxy Statement for the Annual Meeting of Stockholders held on January 16, 1986, and incorporated herein by reference).
3A-6
Articles of Amendment of Courier Corporation (providing for fair pricing procedures for stock to be sold in certain business combinations), as of January 16, 1986 (filed as Exhibit A to the Company’s Proxy Statement for the Annual Meeting of Stockholders held on January 16, 1986, and incorporated herein by reference).
3A-7
Articles of Amendment of Courier Corporation (limiting personal liability of directors to the Corporation or to any of its stockholders for monetary damages for breach of fiduciary duty), as of January 28, 1988 (filed as Exhibit 3A-7 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 24, 1988, and incorporated herein by reference).
3A-8
Articles of Amendment of Courier Corporation (establishing Series A Preferred Stock), as of November 8, 1988 (filed as Exhibit 3A-8 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 24, 1988, and incorporated herein by reference).
3A-9
Articles of Amendment of Courier Corporation (increasing number of shares of authorized Common Stock), as of January 17, 2002 (filed as Exhibit 3 to the Company’s Quarterly Report on Form 10-Q for the period ended March 30, 2002, and incorporated herein by reference).
3A-10
Articles of Amendment to the Articles of Organization of Courier Corporation for Amended and Restated Resolutions of Directors (establishing Series B Junior Participating Cumulative Preferred Stock), as of March 19, 2009, (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K, dated March 19, 2009, and incorporated herein by reference).
3B-1
By-Laws of Courier Corporation, amended and restated as of March 24, 2005 (filed as Exhibit 3 to the Company’s Current Report on Form 8-K, dated March 24, 2005, and incorporated herein by reference).
3B-2
Amendment No. 1 to Amended and Restated Bylaws dated as of August 6, 2008 (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K, dated August 7, 2008, and incorporated herein by reference).
3B-3
Amendment No. 2 to Amended and Restated Bylaws dated as of November 15, 2012 (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K, dated November 20, 2012, and incorporated herein by reference).
10.1*
Amendment No. 2 to Second Amended and Restated Revolving Credit Agreement, dated March 22, 2012, between Courier Corporation, RBS Citizens, KeyBank, TD Bank N.A., and J P Morgan Chase Bank.
10.2*
Amendment No. 3 and Waiver to Second Amended and Restated Revolving Credit Agreement, dated March 22, 2012, between Courier Corporation, RBS Citizens, KeyBank, TD Bank N.A., and J P Morgan Chase Bank.
10.3*
First Amendment to Stock Purchase and Sale Agreement for the acquisition of the capital stock of FastPencil, Inc.
10A+
Letter Agreement, dated February 8, 1990, of Courier Corporation relating to supplemental retirement benefit and consulting agreement with James F. Conway, Jr. (filed as Exhibit 10B to the Company’s Annual Report on Form 10-K for the fiscal year ended September 29, 1990, and incorporated herein by reference).
10B-1+
The Courier Executive Compensation Program, as amended and restated on December 5, 2005 (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K on December 7, 2005, and incorporated herein by reference).
10B-2+
Amendment No. 1, effective September 18, 2007, to the Courier Executive Compensation Program, as amended and restated on December 5, 2005 (filed as Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 29, 2007, and incorporated herein by reference).
10B-3+
Amendment No. 2, effective September 17, 2010, to the Courier Executive Compensation Program, as amended and restated on December 5, 2005 (filed as Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 25, 2010, and incorporated herein by reference).
10C-1+
Courier Corporation Senior Executive Severance Program, as amended and restated on December 5, 2005 (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K on December 7, 2005,
and incorporated herein by reference).
10C-2+
Amendment, effective March 14, 2007, to the Courier Corporation Senior Executive Severance Program, as amended and restated on December 5, 2005 (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2007, and incorporated herein by reference).
10D
Rights Agreement between Courier Corporation and Computershare Trust Company, N.A., as Rights Agent, dated March 18, 2009 (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K, dated March 18, 2009, and incorporated herein by reference).
10E-1+
Courier Corporation 1999 Employee Stock Purchase Plan (filed as Exhibit A to the Company’s Proxy Statement for the Annual Meeting of Stockholders held on January 21, 1999, and incorporated herein by reference).
10E-2+
Amendment, effective March 1, 2005, to the Courier Corporation 1999 Employee Stock Purchase Plan (filed as Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 24, 2005, and incorporated herein by reference).
10E-3+
Amendment No. 1, effective September 23, 2009, to the Courier Corporation 1999 Employee Stock Purchase Plan (filed as Exhibit A to the Company’s Definitive Proxy Statement, as filed on December 4, 2009, and incorporated herein by reference).
10F-1+
Agreement, as of March 3, 1993, of Courier Corporation relating to employment contract and supplemental retirement benefit with George Q. Nichols (filed as Exhibit 10J to the Company’s Annual Report on Form 10-K for the fiscal year ended September 25, 1993, and incorporated herein by reference).
10F-2+
Amendment, as of April 16, 1997, to supplemental retirement benefit agreement with George Q. Nichols (filed as Exhibit 10J-2 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 27, 1997, and incorporated herein by reference).
10F-3+
Amendment, as of November 9, 2000, to supplemental retirement benefit agreement with George Q. Nichols (filed as Exhibit 10I-3 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 29, 2001, and incorporated herein by reference).
10G-1
Second Amended and Restated Revolving Credit Agreement, dated May 23, 2008, between Courier Corporation, RBS Citizens, KeyBank, Wells Fargo Bank, and J P Morgan Chase Bank providing for a $100 million revolving credit facility (filed as Exhibit 10 to the Company’s Current Report on Form 8-K on May 29, 2008, and incorporated herein by reference).
10G-2
Amendment No. 1 and Waiver to Second Amended and Restated Revolving Credit Agreement, dated March 22, 2012, between Courier Corporation, RBS Citizens, KeyBank, TD Bank N.A., and J P Morgan Chase Bank (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on March 27, 2012, and incorporated herein by reference).
10H-1+
Courier Corporation Amended and Restated 1993 Stock Incentive Plan (filed January 19, 2005 as Exhibit 10.5 to the Company’s Registration Statement No. 333-122136 and incorporated herein by reference).
10H-2+
Amendment, effective July 15, 2009, to the Courier Corporation Amended and Restated 1993 Stock Incentive Plan (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended June 27, 2009 and incorporated herein by reference).
10H-3+
Form of Incentive Stock Option Agreement for the Courier Corporation 1993 Stock Incentive Plan (filed as Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 25, 2004, and incorporated herein by reference).
10H-4+
Form of Non-Qualified Stock Option Agreement for the Courier Corporation 1993 Stock Incentive Plan (filed as Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 25, 2004, and incorporated herein by reference).
10H-5+
Form of Stock Grant Agreement for the Courier Corporation 1993 Stock Incentive Plan (filed as Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 25, 2004, and incorporated herein by reference).
10I-1+
Courier Corporation 2005 Stock Equity Plan for Non-Employee Directors (filed January 19, 2005 as Exhibit 10.1 to the Company’s Registration Statement No. 333-122137 and incorporated herein by reference).
10I-2+
Amendment, effective July 15, 2009, to the Courier Corporation 2005 Stock Equity Plan for Non-Employee Directors (filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended June 27, 2009 and incorporated herein by reference).
10I-3+
Form of Non-Qualified Stock Option Agreement for the Courier Corporation 2005 Stock Equity Plan for Non-employee Directors (filed as Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 25, 2004, and incorporated herein by reference).
10I-4+
Form of Stock Unit Agreement for the Courier Corporation 2005 Stock Equity Plan for Non-employee Directors (filed as Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 25, 2004, and incorporated herein by reference).
10J+
Courier Corporation 2010 Stock Equity Plan for Non-Employee Directors, effective September 23, 2009 (filed as Exhibit B to the Company’s Definitive Proxy Statement, as filed on December 4, 2009, and incorporated herein by reference).
10K-1+
Courier Corporation Deferred Compensation Program as Amended and Restated as of January 1, 2009 (filed as Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 26, 2009, and incorporated herein by reference).
10K-2+
First Amendment to Terms and Conditions of Courier Corporation Deferred Compensation Program as Amended and Restated as of January 1, 2009, effective January 1, 2010 (filed as Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 26, 2009, and incorporated herein by reference).
10L-1+
Courier Corporation 2011 Stock Option and Incentive Plan (filed as Exhibit A to the Company’s Definitive Proxy Statement, as filed on December 3, 2010, and incorporated herein by reference).
10L-2+
Form of Incentive Stock Option Agreement for the Courier Corporation 2011 Stock Option and Incentive Plan (filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended December 25, 2010 and incorporated herein by reference).
10L-3+
Form of Non-Qualified Stock Option Agreement for the Courier Corporation 2011 Stock Option and Incentive Plan (filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the period ended December 25, 2010 and incorporated herein by reference).
10L-4+
Form of Stock Grant Agreement for the Courier Corporation 2011 Stock Option and Incentive Plan (filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the period ended December 25, 2010 and incorporated herein by reference).
10M+
Agreement by and between Courier Corporation and Mr. Robert P. Story, Jr. dated November 14, 2011 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on November 15, 2011, and incorporated herein by reference).
10N+
Stock Purchase and Sale Agreement for the acquisition of the capital stock of FastPencil, Inc. dated as of April 29, 2013 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on May 3, 2013, and incorporated herein by reference).
10O-1
Investment Agreement in Digital Page Gráphica e Editora dated as of October 24, 2013 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on October 29, 2013, and incorporated herein by reference).
10O-2
Second Amendment to the Investment Agreement by and among Courier Brazil Holdings Ltda., Digital Page Grafica e Editora Ltda. and its shareholders dated August 8, 2014 (filed as Exhibit 10.1
to the Company’s Current Report on Form 8-K on August 13, 2014, and incorporated herein by reference).
21*
Schedule of Subsidiaries.
23*
Consent of Deloitte & Touche LLP, independent registered public accounting firm.
31.1*
Certification of Chief Executive Officer pursuant to 15 U.S.C. Section 10A, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Chief Financial Officer pursuant to 15 U.S.C. Section 10A, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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
* Exhibit is furnished herewith.
+ Designates a Company compensation plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on December 1, 2014.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated, on December 1, 2014.
s/James F. Conway III
s/Peter M. Folger
James F. Conway III
Peter M. Folger
Chairman, President and
Senior Vice President and
Chief Executive Officer
Chief Financial Officer
(Principal Executive Officer)
(Principal Financial Officer)
s/Paul Braverman
s/Kathleen M. Leon
Paul Braverman
Kathleen M. Leon
Director
Vice President and Controller
(Principal Accounting Officer)
s/Kathleen Foley Curley
s/Ronald L. Skates
Kathleen Foley Curley
Ronald L. Skates
Director
Director
s/Edward J. Hoff
s/W. Nicholas Thorndike
Edward J. Hoff
W. Nicholas Thorndike
Director
Director
s/John J. Kilcullen
s/Susan L. Wagner
John J. Kilcullen
Susan L. Wagner
Director
Director
s/Peter K. Markell
Peter K. Markell
Director
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Courier Corporation
North Chelmsford, Massachusetts
We have audited the accompanying consolidated balance sheets of Courier Corporation and subsidiaries (the “Company”) as of September 27, 2014 and September 28, 2013, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended September 27, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15(a)2. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Courier Corporation and subsidiaries as of September 27, 2014 and September 28, 2013, and the results of their operations and their cash flows for each of the three years in the period ended September 27, 2014, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of September 27, 2014, based on the criteria established in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 1, 2014 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
December 1, 2014
COURIER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share amounts)
The accompanying notes are an integral part of the consolidated financial statements.
Fiscal year 2012 was a 53-week period.
COURIER CORPORATION
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(Dollars in thousands except per share amounts)
The accompanying notes are an integral part of the consolidated financial statements.
COURIER CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
The accompanying notes are an integral part of the consolidated financial statements.
COURIER CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
The accompanying notes are an integral part of the consolidated financial statements.
COURIER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
The accompanying notes are an integral part of the consolidated financial statements.
COURIER CORPORATION
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands)
The accompanying notes are an integral part of the consolidated financial statements.
COURIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies
Business: Courier Corporation and its subsidiaries (“Courier” or the “Company”) print, publish and sell books, providing content management and customization in new and traditional media. Courier has two operating segments: book manufacturing and publishing. In April 2013, the Company acquired FastPencil, Inc. (“FastPencil”), a California-based developer of end-to-end, cloud-based content management technologies for traditional publishers and self-publishers (see Note F), which was included in the book manufacturing segment.
Principles of Consolidation and Presentation: The consolidated financial statements, prepared on a fiscal year basis, include the accounts of Courier Corporation and its subsidiaries after elimination of all intercompany transactions. Such financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”). The Company’s fiscal year ends on the last Saturday of September. Fiscal years 2014 and 2013 were 52-week periods compared with fiscal year 2012, which was a 53-week period.
Discontinued Operations: The Company sold one of the businesses in its publishing segment, Federal Marketing Corporation, d/b/a Creative Homeowner (“Creative Homeowner”), in September 2014 (see Note J). Creative Homeowner was classified as a discontinued operation in the Company’s financial statements for all periods presented.
Fair Value Measurements: Certain assets and liabilities are required to be recorded at fair value on a recurring basis, while other assets and liabilities are recorded at fair value on a nonrecurring basis, generally as a result of impairment charges (see Note G). Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Assets measured at fair value on a nonrecurring basis include long-lived assets and goodwill and other intangible assets. The three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies, is:
Level 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, accounts receivable, investment in a convertible promissory note, accounts payable, debt obligations, and contingent consideration (see Notes F and G). At September 27, 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 Company classifies as cash and cash equivalents amounts on deposit in banks and instruments with maturities of three months or less at time of purchase. 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 (see Note D).
Short-term investments consist of mutual fund investments for which underlying funds primarily invest in equity securities. Such short-term instruments are held for trading purposes. These investments are classified as trading securities and are recorded at fair value utilizing quoted prices in active markets at year end. Earnings from such investments were $115,000 in fiscal 2014, $136,000 in fiscal 2013, and $238,000 in fiscal 2012. Such amounts are included in the caption “Interest expense, net” in the accompanying consolidated statements of operations.
At September 27, 2014, the Company had two forward exchange contracts to sell approximately 8 million South African Rands (ZAR) designated as cash flow hedges against two foreign currency customer orders to be settled for a total of approximately $0.7 million in December 2014 and March 2015. The fair value of the foreign exchange forward contracts was valued using market exchange rates (Level 2). The unrealized gain on this foreign currency cash flow hedge of $1,000, net of tax, was included in accumulated other comprehensive loss at September 27, 2014. The Company expects to reclassify the unrealized gain or loss in accumulated other comprehensive loss into earnings upon settlement of the related hedged transactions. The Company does not use financial instruments for trading or speculative purposes.
Property, Plant and Equipment: Property, plant and equipment are recorded at cost, including interest on funds borrowed to finance the acquisition or construction of major capital additions. No interest was capitalized in the three years presented. The Company provides for depreciation of property, plant and equipment on a straight-line basis over periods ranging from 10 to 40 years on buildings and improvements and from 3 to 10 years on equipment and
furnishings. Expenditures for maintenance and repairs are charged against income as incurred; betterments that increase the value or materially extend the life of the related assets are capitalized. When assets are sold or retired, the cost and accumulated depreciation are removed from the accounts and any gain or loss is included in income.
Goodwill and Other Intangibles: The Company evaluates possible impairment annually at the end of its fiscal year or whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. These tests are performed at the reporting unit level, which is the operating segment or one level below the operating segment. The goodwill impairment test is a two-step test. In the first step, the Company compares the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of its net assets, then goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the net assets of the reporting unit exceeds its fair value, then a second step is performed in order to determine the implied fair value of the reporting unit’s goodwill and compare it to the carrying value of its goodwill (see Note G). “Other intangibles” include trade names, customer lists and technology. Trade names with indefinite lives are not subject to amortization and are reviewed at least annually for potential impairment at the end of the fiscal year or whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable.
Prepublication Costs: Prepublication costs, associated with creating new titles in the publishing segment, are amortized to cost of sales using the straight-line method over estimated useful lives of three to four years.
Long-Lived Assets: Management periodically reviews long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be entirely recoverable. When such factors and circumstances exist, management compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amounts. The impairment loss, if any, is measured as the excess of the carrying amount over the fair value of the asset or group of assets.
Income Taxes: Deferred income tax liabilities and assets are determined based upon the differences between the financial statement and tax bases of assets and liabilities, and are measured by applying enacted tax rates and laws for the taxable years in which these differences are expected to reverse.
Revenue Recognition: Revenue is recognized upon shipment of goods to customers or upon the transfer of ownership for those customers for whom the Company provides manufacturing and distribution services. Revenue for distribution services is recognized as services are provided. Shipping and handling fees billed to customers are classified as revenue. In the publishing segment, revenue is recognized net of an allowance for sales returns. The process which the Company uses to determine its net sales, including the related reserve allowance for returns, is based upon applying an estimated return rate to current year sales. This estimated return rate is based on actual historical return experience. In the Company’s book manufacturing segment, sales returns are not permitted.
Use of Estimates: The process of preparing financial statements in conformity with generally accepted accounting principles requires management to make estimates of assets and liabilities and disclosure of contingent assets and liabilities and assumptions that affect the reported amounts at the date of the financial statements. Actual results may differ from these estimates.
Net Income per Share: Basic net income per share is based on the weighted average number of common shares outstanding each period. Diluted net income per share also includes potentially dilutive items such as stock options (see Note L).
New Accounting Pronouncements: In May 2014, the FASB issued Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which outlines a single comprehensive model for entities to use in accounting for revenue using a five-step process that supersedes most current revenue recognition guidance. ASU 2014-09 also requires additional quantitative and qualitative disclosures. ASU 2014-09 will be effective for the Company in the first quarter of fiscal year 2018. The standard allows the option of either a full retrospective adoption, meaning the standard is applied to all periods presented, or a modified retrospective adoption, meaning the standard is applied only to the most current period. The Company is currently evaluating the impact of the provisions of ASU 2014-09 and determining which transition method will be used.
In April 2014, the FASB issued ASU No. 2014-08 “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”), which modifies the requirements for disposals to qualify as discontinued operations and expands related disclosure requirements. ASU 2014-08 will be effective in the first quarter of the Company’s fiscal year 2016. The adoption of ASU 2014-08 may impact whether future disposals qualify as discontinued operations and therefore could impact the Company’s financial statement presentation and disclosures.
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 62% and 55% of the Company’s inventories at September 27, 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 at September 27, 2014 and September 28, 2013:
On a FIFO basis, reported year-end inventories would have been higher by $6.4 million and $5.4 million in fiscal 2014 and fiscal 2013, respectively.
C. Income Taxes
The income tax provision from continuing operations differs from that computed using the statutory federal income tax rates for the following reasons:
The provision for income taxes from continuing operations consisted of the following:
The following is a summary of the significant components of deferred tax assets and liabilities, including deferred income taxes related to discontinued operations, as of September 27, 2014 and September 28, 2013:
In fiscal 2014 the Company sold its Creative Homeowner subsidiary (see Note J), resulting in a reduction in the related deferred tax assets, including approximately $4.6 million for the remaining tax basis in goodwill and other intangible assets.
The Company fully provided valuation allowances for net operating loss and credit carryforwards in states where the Company does not expect to realize the benefit. The losses and credits expire in fiscal years 2015 through 2035. The Company decreased its valuation allowance by $3.4 million in 2014 and $0.5 million in 2013. The decrease in 2014 was mainly due to the sale of Creative Homeowner (see Note J).
There was no liability for unrecognized tax benefits at the end of fiscal years 2014 and 2013 and the Company does not anticipate any significant changes in the amount of unrecognized tax benefits over the next twelve months. The Company recognizes any interest and penalties related to unrecognized tax benefits in income tax expense.
The Company files federal and state income tax returns in various jurisdictions of the United States. With few exceptions, the Company is no longer subject to income tax examinations for years prior to fiscal 2011. Substantially all U.S. federal tax years prior to fiscal 2011 have been audited by the Internal Revenue Service and closed.
In September 2013, the Internal Revenue Service released final tangible property regulations under IRC Sections 162(a) and 263(a), regarding the deduction and capitalization of expenditures related to tangible property as well as rules for expensing materials and supplies. Also released were proposed regulations under IRC Section 168 regarding dispositions of tangible property. These final and proposed regulations will be effective for the Company’s fiscal year ending September 26, 2015. The Company does not expect these rules to have a material impact on the Company’s consolidated financial statements.
D. Long-Term Debt
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 both September 27, 2014 and September 28, 2013 was 1.4%. At September 27, 2014 and September 28, 2013, the Company had $24.5 million and $24.6 million, respectively, in borrowings outstanding under its long-term revolving credit facility, which matures in March 2016.
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 September 27, 2014, $8.5 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 $0.5 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 fiscal 2014.
The revolving credit facility contains restrictive covenants including provisions relating to the incurrence of additional indebtedness and a quarterly test of EBITDA to debt service. The Company was in compliance with all such financial covenants at September 27, 2014. The revolving credit facility also provides for a commitment fee not to exceed 3/8% per annum on the unused portion. These fees are included in the caption “Interest expense, net” in the accompanying consolidated statements of operations. The revolving credit facility is available to the Company for both long-term and short-term financing needs.
E. Operating Segments
The Company has two operating segments: book manufacturing and publishing. The book manufacturing segment offers a full range of services from production through storage and distribution for religious, educational and trade
book publishers. In April 2013, the Company acquired FastPencil, Inc. (“FastPencil”), which was included in the book manufacturing segment (see Note F). The publishing segment consists of Dover and REA. In September 2014, the Company sold its Creative Homeowner business (see Note J), which had been included in the publishing segment. Creative Homeowner was classified as a discontinued operation in the Company’s financial statements and, as such, was not reflected in the net sales and operating income (loss) in the table below.
Segment performance is evaluated based on several factors, of which the primary financial measure is operating income. For segment reporting purposes, operating income is defined as gross profit (sales less cost of sales) less selling and administrative expenses, and includes severance and other restructuring costs but excludes stock-based compensation. 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.
Stock-based compensation, as well as the elimination of intersegment sales and related profit, are reflected as “unallocated” in the following table. Impairment charges (discussed more fully in Note G) are also included in “unallocated” in the following table. Corporate expenses that are allocated to the segments include various support functions such as information technology services, finance, legal, human resources and engineering, and include depreciation expense related to corporate assets. The corresponding corporate asset balances are not allocated to the segments. Unallocated corporate assets consist primarily of cash and cash equivalents and fixed assets used by the corporate support functions. Dollar amounts in the following table are presented in thousands.
Export sales as a percentage of consolidated sales from continuing operations were approximately 22% in 2014, 23% in 2013 and 21% in 2012. Approximately 94% of export sales were in the book manufacturing segment in fiscal year 2014, 95% in 2013, and 92% in 2012. Sales to the Company’s largest customer amounted to approximately 32% of consolidated sales from continuing operations in 2014, 33% in 2013, and 31% in 2012. In addition, sales to another customer amounted to approximately 23% of consolidated sales from continuing operations in both fiscal 2014 and 2013 and 24% in 2012. These two customers are in the book manufacturing segment and no other customer accounted for more than 10% of consolidated sales from continuing operations. Customers are granted credit on an unsecured basis. Receivables for the customers that account for more than 10% of consolidated sales, as a percentage of consolidated accounts receivable, were 44% and 48% at September 27, 2014 and September 28, 2013, respectively.
F. 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 a five-year period following acquisition 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 balance sheet as of September 28, 2013.
Based on these valuations, the purchase price allocation was as follows:
G. 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 (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 F), 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 at the end of both the second and fourth quarters of fiscal 2014. After performing the step-one tests, 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 these conclusions, the Company used a valuation methodology based on a discounted cash flow 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 and $0.3 million at the end of the fourth quarter of fiscal 2014, as well as an impairment charge of $1.2 million for FastPencil’s other intangible assets at the end of the fourth quarter of fiscal 2014. In addition, the Company performed a fair value analysis of the related contingent “earn out” consideration payable at the end of the second and fourth quarters of fiscal 2014 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 and September 27, 2014 resulting in a reduction in the liability of $2.6 million and $1.5 million, respectively. The net impact of the impairments of FastPencil’s goodwill and other intangible assets and the related reductions in the contingent consideration payable was a charge of $1.9 million in fiscal 2014.
These adjustments are non-cash and the goodwill impairments and adjustments to the contingent consideration liability are not deductible for income tax purposes.
The following table reflects the components of “Goodwill” for each period presented:
The following table reflects the components of “Other intangibles,” all within the book manufacturing segment, for each period presented:
“Other intangibles” at September 27, 2014 included customer lists related to Moore-Langen Printing Company, Inc. (“Moore Langen”), which are being amortized over a 10-year period, as well as customer lists, technology and other intangibles related to the acquisition of Highcrest Media, which are being amortized over a 5-year period. In addition, the Company recorded technology, trade name and other intangibles related to the acquisition of FastPencil, Inc. (“FastPencil”), which are being amortized over periods ranging from three to fifteen years (see Note F). “Other intangibles” also include trade names with indefinite lives which are not subject to amortization. Amortization expense was $927,000 in fiscal 2014, $629,000 in fiscal 2013, and $410,000 in fiscal 2012. Annual amortization expense over the next five years will be $356,000 in fiscal 2015, $230,000 in fiscal 2016, $221,000 in fiscal 2017, $116,000 in fiscal 2018 and $10,000 in fiscal 2019. At September 27, 2014, “other intangibles” were net of accumulated amortization of $2.8 million for the book manufacturing segment.
H. 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 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. 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 were 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 had not met expectations. As a result, in August 2014 the Company successfully renegotiated its agreement with the founder of Digital Page to restructure the investment. Under the revised terms, the Company will hold a 60% interest in Digital Page in place of the original 40% interest for the same 20 million Brazilian reals investment amount. At September 27, 2014, approximately $4 million of cash was on deposit in Brazil in the Company’s bank accounts in anticipation of a potential closing of the transaction. After the end of the fiscal year, on November 18, 2014, the Company closed this transaction and paid approximately $4 million toward the purchase price. The remainder was satisfied by the principal amount of the loans being credited towards the total purchase price of $8.5 million for the
Company’s 60% ownership interest. Acquisition costs of approximately $157,000 were included in selling and administrative expenses in fiscal 2014. Due to the timing of the acquisition, the initial accounting of the value of the acquired assets and liabilities is not complete. A preliminary purchase price allocation is currently expected to be included in the Company’s consolidated financial statements for the quarter ending December 27, 2014. Under the second agreement, the Company has a licensing arrangement for its proprietary custom textbook platform with the Brazilian subsidiary of Santillana, the largest Spanish/Portuguese educational publisher in the world. Digital Page has a multiyear commercial print agreement with Santillana.
Long-term investments also include convertible promissory notes for $1.5 million issued by Nomadic Learning Limited, a startup business focused on corporate and educational learning. At September 27, 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 fiscal year. In addition, a fair value assessment of the conversion feature embedded in the convertible promissory notes was performed at September 27, 2014 resulting in a fair value of $0.5 million reflected in “Long-term investments” and “Accumulated other comprehensive loss” in the accompanying consolidated balance sheet.
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 convertible promissory notes and contingent consideration (see Notes F and G). 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 F and G).
The following table shows the assets and liabilities carried at fair value measured on a recurring basis as of September 27, 2014 and September 28, 2013 classified in one of the three levels as described in Note A:
The contingent consideration liability at September 27, 2014 and September 28, 2013 relates to the acquisition of FastPencil in April 2013 (see Note F). The fair value of the contingent consideration was determined to be Level 3 under the fair value hierarchy and was measured using a probability weighted, discounted cash flow model, which uses significant inputs which are unobservable in the market. Increases or decreases in the fair value of the contingent consideration liability would primarily result from changes in the estimated probabilities of achieving revenue targets during the earn out period. At March 29, 2014 and September 27, 2014, the Company performed fair value analyses of the related contingent “earn out” consideration payable and lowered the probability of FastPencil meeting the revenue targets during the earn out period. Accordingly, reductions in the contingent consideration liability were recorded at March 29, 2014 and September 27, 2014 resulting in reductions in the liability of $2.6 million and $1.5 million, respectively.
In the third quarter of fiscal 2013, the Company invested $500,000 in a convertible promissory note issued by Nomadic Learning Limited, a start-up business focused on corporate and educational learning. During fiscal 2014, the Company invested in two additional $500,000 convertible promissory notes with Nomadic Learning Limited. The fair value of the convertible promissory notes was determined to be Level 3 under the fair value hierarchy and was measured using a discounted cash flow model. Significant unobservable inputs include estimates of future revenues and earnings and the discount rate. In addition, a fair value assessment of the conversion feature embedded in the convertible promissory notes was performed at September 27, 2014 resulting in a fair value of $0.5 million reflected in
“Long-term investments” and “Accumulated other comprehensive loss” in the accompanying consolidated balance sheet.
The following table reflects fair value measurements using significant unobservable inputs (Level 3):
In fiscal 2014, assets remeasured at fair value on a nonrecurring basis subsequent to initial recognition are summarized below:
In both the second and fourth quarters 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 impairment charges of $4.8 million for FastPencil’s goodwill and $1.2 million for FastPencil’s other intangible assets (see Note G).
J. Discontinued Operations
In September 2014, the Company sold Creative Homeowner, which was a separate reporting unit within its publishing segment, for $1.0 million. Proceeds received from the sale in fiscal 2014 were $450,000 with the balance due in fiscal 2015. The following table summarizes the operating results of this discontinued operation:
K. Commitments and Contingencies
The Company is committed under various operating leases to make annual rental payments for certain buildings and equipment. Amounts charged to operations under such leases approximated $1,296,000 in 2014, $1,265,000 in 2013, and $1,350,000 in 2012. As of September 27, 2014, minimum annual rental commitments under the Company’s long-term operating leases were approximately $920,000 in 2015, $806,000 in 2016, $784,000 in 2017, $707,000 in 2018, $734,000 in 2019 and $743,000 in the aggregate thereafter. These rental commitments exclude the Company’s lease obligation for the Stoughton, Massachusetts facility, which expires in October 2015 and was included in restructuring costs (see Note O). At September 27, 2014 and September 28, 2013, the Company had letters of credit outstanding of $1,980,000 and $2,180,000, respectively. The Company was committed to purchase $1.5 million of equipment at September 27, 2014.
In the ordinary course of business, the Company is subject to various legal proceedings and claims. The Company
believes that the ultimate outcome of these matters will not have a material adverse effect on its consolidated financial statements.
L. Net Income per Share
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.
M. Share Repurchase Plan
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 September 27, 2014 the Company repurchased 153,150 shares of common stock for approximately $2.0 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.
N. 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 “ESPP”). 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, and the related tax benefit, were as follows:
Unrecognized stock-based compensation cost at September 27, 2014 was $1.5 million to be recognized over a weighted-average period of 1.8 years.
Stock Incentive Plan: In January 2011, stockholders approved the adoption of the Courier Corporation 2011 Stock Option and Incentive Plan (the “2011 Plan”). Under the 2011 Plan provisions, stock grants as well as both non-qualified and incentive stock options to purchase shares of the Company’s common stock may be granted to key employees up to a total of 600,000 shares. The 2011 Plan replaced the Company’s Amended and Restated 1993 Stock Incentive Plan (the “1993 Plan”). No further options will be granted under the 1993 Plan. Under the 2011 Plan, the option price per share may not be less than the fair market value of stock at the time the option is granted and incentive stock options must expire not later than ten years from the date of grant. The Company annually issues a combination of stock options and stock grants to its key employees. Such options and grants were issued in November of 2013 and 2012 for fiscal years 2013 and 2012 and previously had historically been issued in September of each fiscal year. As such, no annual awards were issued during the fiscal year ended September 29, 2012. Stock options and stock grants generally vest over three years.
The following is a summary of all option activity for these plans:
The aggregate intrinsic value for options outstanding at September 27, 2014 was $505,000. There were 160,255 non-vested stock grants outstanding at the beginning of fiscal 2014 with a weighted-average fair value of $9.34 per share. During 2014, 38,287 stock grants were awarded with a weighted-average fair value of $17.27 per share. There were 84,158 stock grants that vested in 2014 with a weighted-average fair value of $7.47 per share. During 2014, there were 1,076 stock grants forfeited, which had a weighted-average fair value of $9.59 per share. At September 27, 2014, there were 113,308 non-vested stock grants outstanding with a weighted-average fair value of $13.39.
Directors’ Stock Equity Plans: In January 2010, stockholders approved the Courier Corporation 2010 Stock Equity Plan for Non-Employee Directors (the “2010 Plan”). On January 22, 2013, stockholders approved an amendment to the 2010 Plan increasing the shares authorized under the plan by 300,000 to an aggregate of 600,000 shares of Company common stock available for issuance under the plan. Under the plan provisions, stock grants as well as non-qualified stock options to purchase shares of the Company’s common stock may be granted to non-employee directors. The 2010 Plan replaced the previous non-employee directors’ plan, which had been adopted in 2005 (the “2005 Plan”). No further options will be granted under the 2005 Plan. Under the 2010 Plan, the option price per share is the fair market value of stock at the time the option is granted and options must expire not later than ten years from the date of grant. Stock options and stock grants generally vest over three years.
The following is a summary of all option activity for these plans:
The aggregate intrinsic value for options outstanding at September 27, 2014 was $190,000. Under the 2010 Plan, there were 29,246 non-vested stock grants outstanding at the beginning of fiscal 2014 with a weighted-average fair value of $12.07 per share. During 2014, 22,752 stock grants were awarded with a weighted-average fair value of $17.58 per share. There were 14,091 stock grants that vested in 2014 with a weighted-average fair value of $12.50 per share. At September 27, 2014, there were 37,907 non-vested stock grants outstanding with a weighted-average fair value of $15.22.
Directors may also elect to receive their annual retainer and committee chair fees as shares of stock in lieu of cash. Such shares issued in 2014, 2013 and 2012 were 17,363 shares, 12,320 shares, and 14,784 shares at a fair market
value of $18.00, $11.77and $11.50, respectively.
Employee Stock Purchase Plan: The ESPP allows eligible employees to purchase shares of Company common stock at not less than 85% of fair market value at the end of the grant period. On January 20, 2010, stockholders approved an amendment to the ESPP increasing the shares authorized under the plan by 300,000 to an aggregate of 637,500 shares of Company common stock available for issuance under the plan. During 2014, 2013, and 2012, 26,362 shares, 28,322 shares, and 36,808 shares, respectively, were issued under the plan at an average price of $12.61 per share, $11.84 per share, and $9.35 per share, respectively. Since inception, 505,263 shares have been issued. At September 27, 2014, an additional 132,237 shares were reserved for future issuances.
Stockholders’ Rights Plan: On March 18, 2009, the Board of Directors renewed its ten-year stockholders’ rights plan. Under the plan, the Company’s stockholders of record at March 19, 2009 received a right to purchase a unit (“Unit”) comprised of one one-thousandth of a share of preferred stock for each share of common stock held on that date at a price of $100, subject to adjustment. Until such rights become exercisable, one such right will also attach to subsequently issued shares of common stock. The rights become exercisable if a person or group acquires 15% or more of the Company’s common stock or after commencement of a tender or exchange offer which would result in a person or group beneficially owning 15% or more of the Company’s common stock. When exercisable, under certain conditions, each right entitles the holder thereof to purchase Units or shares of common stock of the acquirer, in each case having a market value at that time of twice the right’s exercise price. The Board of Directors will be entitled to redeem the rights at one cent per right, under certain circumstances. The rights expire in 2019.
Stock-Based Compensation: The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Expected volatility was calculated primarily based on the historical volatility of the Company’s stock. The average estimated life was based on the contractual term of the option and historic exercise experience. The following key assumptions were used to value options issued:
The weighted average fair value per share of options granted during fiscal years 2014, 2013 and 2012 was $4.72, $2.10 and $1.12, respectively, under the Company’s Employee 2011 Plan. Under the Directors’ 2010 Plan, the fair value per share was $2.05 and $2.70 during fiscal years 2013 and 2012, respectively; no stock options were awarded under this plan in fiscal 2014. For all options issued, the exercise price was equal to the stock price on the grant date.
O. Restructuring Costs
In fiscal 2012, approximately $3.3 million of pre-tax restructuring charges were recorded for cost reduction measures taken throughout the year in both of the Company’s operating segments, including a reduction in the Company’s one-color offset press capacity. Severance and post-retirement benefit expenses were $1.9 million and accelerated depreciation on an unutilized one-color press was $1.4 million. Approximately $1.7 million of these costs were included in cost of sales in the Company’s book manufacturing segment. Approximately $1.0 million and $0.6 million of these costs were included in selling and administrative expenses in the Company’s book manufacturing segment and publishing segment, respectively. At September 27, 2014, approximately $0.1 million of the remaining restructuring payments were included in “Other current liabilities” in the accompanying consolidated balance sheet.
In fiscal 2011, the Company recorded restructuring costs of $7.7 million associated with closing and consolidating its Stoughton, Massachusetts manufacturing facility due to the impact of technology and competitive pressures affecting the one-color paperback books in which the plant specialized. Restructuring costs included $2.3 million for employee severance and benefit costs, $2.1 million for an early withdrawal liability from a multi-employer pension plan, and $3.3 million for lease termination and other facility closure costs; no sub-lease income was assumed at the time due to local real estate market conditions. Subsequently, a portion of the facility was sublet beginning in March 2013. Remaining payments of approximately $2.7 million will be made over periods ranging from one year for the building lease obligation to 17 years for the liability related to the multi-employer pension plan. At September 27, 2014, approximately $0.6 million of future restructuring payments were included in “Other current liabilities” and $2.1 million were included in “Other liabilities” in the accompanying consolidated balance sheet. The following table depicts the accrual balances for these restructuring costs.
P. Retirement Plans
The Company and its consolidated subsidiaries maintain various defined contribution retirement plans covering substantially all of its employees. Dover, acquired in September 2000, also provides retirement benefits through a defined benefit plan as described below.
Retirement costs of multi-employer union plans consist of contributions determined in accordance with the respective collective bargaining agreements. Retirement benefits for non-union employees are provided through the Courier Profit Sharing and Savings Plan (“PSSP”), which includes an Employee Stock Ownership Plan (“ESOP”). Retirement costs included in the accompanying financial statements amounted to approximately $3,535,000 in 2014, $3,530,000 in 2013, and $3,085,000 in 2012. At both September 27, 2014 and September 28, 2013, the Company had $1.5 million accrued for the PSSP, which is included in the accompanying consolidated balance sheet under the caption “Other current liabilities.”
The PSSP is qualified under Section 401(k) of the Internal Revenue Code. The plan allows eligible employees to contribute up to 100% of their compensation, subject to IRS limitations, with the Company matching 100% of the first 2% of pay plus 25% of the next 4% of pay contributed by the employee. The Company also makes contributions to the plan annually based on profits each year for the benefit of all eligible non-union employees.
Shares of Company common stock may be allocated to participants’ ESOP accounts annually based on their compensation as defined in the plan. During the last three years, no such shares were allocated to eligible participants. At September 27, 2014, the ESOP held 278,842 shares on behalf of the participants.
Dover has a noncontributory, defined benefit pension plan covering substantially all of its employees. As of December 31, 2001, Dover employees became eligible to participate in the PSSP. As such, plan benefits under the Dover defined benefit plan (the “Dover plan”) were frozen as of that date.
The following tables provide information regarding the Dover plan:
Weighted-average assumptions used to determine:
The discount rate and expected return on plan assets used for calculating costs and benefit obligations are determined by the Company’s management after considering actuary recommendations. The assumed discount rates are based on the yield on high quality corporate bonds as of the applicable measurement date. Accrued pension cost of $775,000 at September 27, 2014 and $715,000 at September 28, 2013 was included in the accompanying consolidated balance sheet under the caption “Other liabilities.”
The Company expects to make cash contributions of approximately $139,000 to its pension plan in 2015. The Company’s strategy is generally to achieve a long-term rate of return sufficient to satisfy plan liabilities while minimizing plan expenses and mitigating downside risks. Assets are currently allocated 100% to Guaranteed Insurance Contracts, however, the Company reviews this weighting from time to time in order to achieve overall objectives in light of current circumstances. The fair value of the insurance contracts was based on negotiated value and the underlying investments, and considers the credit worthiness of the issuer of such contracts. Insurance contracts held by the Dover plan are issued by a well-known, highly rated insurance company. The underlying investments are government, asset-backed and fixed income securities.
Estimated future benefit payments under the Dover plan over the next five fiscal years are as follows:
Multi-Employer Pension Plans
The Company contributes to two multi-employer pension plans under collective bargaining agreements, each of which was renewed in fiscal 2013, covering certain employees at its book manufacturing facility in Philadelphia. Multi-employer pension plans cover employees of and receive contributions from two or more unrelated employers pursuant to one or more collective bargaining agreements, and the assets contributed by each employer may be used to fund the benefits of all employees covered by the plan.
The risks of participating in these multi-employer benefit plans are different from single-employer benefit plans in the following aspects:
· Assets contributed to the multi-employer benefit plan by one employer may be used to provide benefits to employees of other participating employers.
· If a participating employer stops contributing to the multi-employer benefit plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
· If the Company stops participating in either of its multi-employer pension plans, the Company may be required to pay those plans an amount based on its allocable share of the underfunded status of the plan, referred to as a withdrawal liability, subject to safe harbors based on its annual contribution level.
The Company is required to make contributions to the multi-employer plans in accordance with two separate collective bargaining agreements covering the Company’s employees in each plan as well as the terms of such plan.
The following table provides key information relative to each of the multi-employer pension plans for the fiscal years ended September 27, 2014, September 28, 2013, and September 29, 2012:
The Company’s contributions for the Bindery Industry Employers GCC/IBT Pension Plan represented approximately 70% of total contributions in each of the last three years. This plan currently includes only two other contributing employers. The Company contributed less than 5% of total contributions to the GCIU - Employer Retirement Benefit Plan in each of the past three years. The Company currently estimates that it would be required to contribute approximately $357,000 to these two plans in fiscal 2015. These contributions could significantly increase due to other employers’ withdrawals or changes in the funded status of the plans. Both plans are estimated to be underfunded as of September 27, 2014 and have a Pension Protection Act zone status of critical (“red”). Such status identifies plans that are less than 65% funded. Rehabilitation plans have been adopted for each plan.
On January 6, 2013, a new 5-year contract was entered into for the Bindery Industry Employers GCC/IBT Pension Plan. This new contract provides the Company with the right to withdraw from the plan if certain future events occur. If one of these future events were to occur and the Company exercises its right to withdraw from the plan, the potential withdrawal liability would equal the Company’s proportionate share of the unfunded vested benefits based on the year in which the liability is triggered, subject to safe harbors based on the Company’s annual contribution level. In addition, a new 5-year contract was entered into for the GCIU - Employer Retirement Benefit Plan effective May 1, 2013. The Company was not subject to surcharges after entering the new contracts for both plans.
The Company believes that the multi-employer pension plans in which it currently participates have significant unfunded vested benefits. Due to uncertainty regarding future withdrawal liability triggers or further reductions in participation or withdrawal by other employers, the Company is unable to determine the amount and timing of its future withdrawal liability, if any. The Company’s participation in these multi-employer pension plans could have a material adverse impact on its financial condition, results of operations or liquidity. Disagreements over a potential withdrawal liability for either plan may lead to legal disputes.
Q. Other Income
The Company historically leased non-operating real property to cell phone companies for two cell-tower sites on a month-to-month basis. In the first quarter of fiscal 2012, the Company recorded a gain of $587,000 associated with the sales and assignments of both of these interests. The Company does not have further financial obligations under these arrangements.
R. Subsequent Event
On November 18, 2014, the Company acquired a 60% ownership interest in Digital Page Gráfica E Editora (“Digital Page”), a Sao Paulo-based digital printing firm serving the education market in Brazil, for approximately $8.5 million (see Note H). Due to the timing of the acquisition, the initial accounting of the value of the acquired assets and liabilities is not complete. A preliminary purchase price allocation is currently expected to be included in the Company’s consolidated financial statements for the quarter ending December 27, 2014.
* * * * *
COURIER CORPORATION
FIVE-YEAR FINANCIAL SUMMARY
(Dollars in millions except per share data)
Fiscal year 2014, 2011 and 2010 results include non-cash pre-tax impairment charges of $1.9, $8.6 and $4.7 million, respectively (Note G).
Fiscal year 2012 was a 53-week period.
Net income (loss) per diluted share is based on weighted average shares outstanding; stockholders’ equity per share is based on shares outstanding at year end.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FORWARD-LOOKING INFORMATION
Statements contained herein include 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-K 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, reduction in orders or pricing from, or the loss of, one of our two largest 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 foreign 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, 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.
OVERVIEW
Courier Corporation, founded in 1824, is among America’s leading book manufacturers and a leader in content management and customization in new and traditional media. The Company also publishes books under two brands offering award-winning content and thousands of titles. The Company has two operating segments: book manufacturing and publishing. The book manufacturing segment streamlines the process of bringing books from the point of creation to the point of use. 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”) and Research & Education Association, Inc. (“REA). Dover publishes over 10,000 titles in more than 30 specialty categories including children’s books, literature, art, music, crafts, mathematics, science, religion and architecture. REA publishes test preparation and study-guide books and software for high school, college and graduate students, and professionals.
In the past year, the Company achieved many goals in both of its operating segments despite another challenging year for the book industry as the marketplace continues to change. In the book manufacturing segment, the Company continued to benefit from its leadership and investment in four-color book manufacturing technology despite continued pricing pressure for which increases in volume and share only partly compensated. In the first quarter of fiscal 2014, the Company expanded its digital print facilities with the installation of a second HP digital inkjet press and additional binding capabilities at its Kendallville, Indiana location. Revenues from the Company’s digital operations increased over 10% during the year reflecting growth in demand for customized versions of college textbooks as well as shorter runs of trade books. By printing shorter runs, publishers are able to anticipate demand more accurately and avoid obsolescence and excess inventory issues. Publishers are increasingly utilizing digital printing in combination with offset to capture the full life-cycle potential of every title.
In the publishing segment, the Company continued to reduce the loss in this segment by adding to its digital offerings with over 5,000 titles available in ebook form on all the major platforms, while reducing costs. Thousands of titles are available to consumers across all four of the leading ebook platforms of Amazon, Apple, Barnes & Noble and Google. The Company’s publishing segment showed improvement over fiscal 2013 from the higher profitability of ebooks as well as positive consumer response to new products and continued cost containment efforts. This segment reduced its operating loss by nearly 90% from fiscal 2013, to under $200,000, on comparable sales.
Key challenges facing the Company and the book industry continue to include competitive pricing pressures, changes in retail channels and growth in electronic delivery of books. However, the Company is well positioned compared to its peers due to its relatively low level of debt and significant liquidity, which has allowed for investment in growth opportunities. In addition, the Company enjoys strong relationships with its major customers in key long-term markets. Coupled with its industry leading customer service and technology, the Company believes that it will be
able to achieve further volume growth with its integrated solutions for customized textbook production, provide additional short-run opportunities among trade publishers, and continue the steady expansion of products and services on behalf of its largest religious customer. In the publishing segment, the Company expects to benefit from sales growth from its investments in ebooks and new products, both in print and electronic format.
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 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. 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 were 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 had not met expectations. As a result, in August 2014 the Company successfully renegotiated its agreement with the founder of Digital Page to restructure the investment. Under the revised terms, the Company will hold a 60% interest in Digital Page in place of the original 40% interest for the same 20 million Brazilian reals investment amount. After the end of the fiscal year, on November 18, 2014, the Company closed this transaction and paid approximately $4 million toward the purchase price. The remainder was satisfied by the principal amount of the loans being credited towards the total purchase price of $8.5 million for the Company’s 60% ownership interest. Under the second agreement, the Company has a licensing arrangement for its proprietary custom textbook platform with the Brazilian subsidiary of Santillana, the largest Spanish/Portuguese educational publisher in the world. Digital page has a multiyear commercial print agreement with Santillana. The investment in Digital Page complements the Company’s license of its custom publishing platform to Santillana, with hopes to capitalize on the growth of custom textbooks in the largest student population in South America.
On April 30, 2013, the Company acquired all of the outstanding stock of FastPencil, a California-based developer of end-to-end, cloud-based content management technologies. FastPencil’s technology serves publishers and other companies interested in providing a self-publishing platform to their customers or communities. In addition, FastPencil provides a platform and services to thousands of self-publishers. The acquisition complements the Company’s content management and customization technology and gives the Company an entry into the rapidly growing self-publishing market. The Company paid $5 million at the time of acquisition, with additional future “earn out” potential payments, conditioned upon the achievement of revenue targets with a maximum payout of three payments of up to $6.5 million, $1.25 million and $5.25 million (undiscounted) which may be paid out over a five-year period following acquisition. The future earn out potential payments were valued at acquisition at $4.7 million using a probability weighted, discounted cash flow model. The acquisition was accounted for as a purchase and, accordingly, FastPencil’s financial results are included in the book manufacturing segment in the consolidated financial statements from the date of acquisition.
In fiscal 2014, the Company concluded it was necessary to record an impairment of FastPencil’s goodwill of $4.5 million at the end of the second quarter of fiscal 2014 and $0.3 million at the end of the fourth quarter, as well as an impairment charge of $1.2 million for FastPencil’s other intangible assets at the end of the fourth quarter. In addition, the Company performed a fair value analysis of the related contingent “earn out” consideration payable at the end of the second and fourth quarters of fiscal 2014 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 and September 27, 2014 resulting in a reduction in the liability of $2.6 million and $1.5 million, respectively. The net impact of the impairments of FastPencil’s goodwill and other intangible assets, offset in part by the related reductions in the contingent consideration payable, was a pre-tax charge of $1.9 million in fiscal 2014. Both adjustments are non-cash and the goodwill impairment and adjustment to the contingent “earn out” consideration are not deductible for income tax purposes.
In September 2014, the Company sold Federal Marketing Corporation, d/b/a Creative Homeowner (“Creative Homeowner”), one of the businesses in its publishing segment, for $1 million resulting in a gain of approximately the same amount. Creative Homeowner’s results are reported as a discontinued operation and, therefore, excluded from the discussion of the results of continuing operations below.
RESULTS OF CONTINUING OPERATIONS
FINANCIAL HIGHLIGHTS
(Dollars in thousands except per share amounts)
Fiscal years 2014 and 2013 were 52-week periods compared with a 53-week period in fiscal year 2012.
Revenues in fiscal 2014 grew 5% to $283 million compared with fiscal 2013. In the book manufacturing segment, revenues increased 5% to $259 million with sales growth in all three of the segments’ principal markets. For the publishing segment, revenues were down slightly to $33.4 million from $33.7 million last year. Net income from continuing operations was $8.7 million in fiscal 2014 compared to $11.5 million in fiscal 2013. Fiscal 2014 results include a net pre-tax impairment charge of $1.9 million, or $.13 per diluted share, related to FastPencil, Inc. (“FastPencil”), which was acquired in 2013.
Revenues in fiscal 2013 grew 5% to $271 million compared with the fiscal 2012 53-week period. Book manufacturing segment sales increased 6% to $247 million, largely due to growing demand from educational publishers. For the publishing segment, revenues were $34 million in fiscal 2013, down 1% from the prior year, with modest sales growth at Dover offset by sales declines at REA. Overall net income from continuing operations for fiscal 2013 was $11.5 million, or $1.00 per diluted share, compared with $10.5 million, or $.88 per diluted share, for fiscal 2012, which included pre-tax restructuring costs of $3.1 million, or $.16 per diluted share, as well as a pre-tax gain of $0.6 million, or $.03 per diluted share, from the sale of certain non-operating assets.
Book Manufacturing Segment
SEGMENT HIGHLIGHTS
(Dollars in thousands)
Revenues
Within this segment, the Company focuses on three key publishing markets: education, religious and trade. Revenues to the education market grew 5% to $118 million compared to fiscal 2013, largely due to increased sales of elementary and high school textbooks, reflecting improving state budgets and associated school funding levels. The revenue growth to the education market also reflects an 11% increase in revenues from the Company’s digital print capabilities compared with fiscal 2013. Sales to the religious market were up 4% in fiscal 2014 to $72 million compared to the prior year, driven by growth in sales to the Company’s largest religious customer. Sales to the trade market increased 3% to $61 million in fiscal 2014 compared with fiscal 2013, reflecting higher demand for both four-color work and sales of digital print.
In fiscal 2013, revenues to the education market rose 14% to $112 million compared to fiscal 2012, largely due to increased sales of customized college textbooks. Sales of elementary and high school textbooks also rose in fiscal 2013 compared with the prior year, following several years of slower sales. The revenue growth to the education
market in fiscal 2013 reflected a 39% increase in revenues from the Company’s digital print capabilities compared with fiscal 2012. Sales to the religious market were up 2% in fiscal 2013 to $69 million compared to the prior year, reflecting growth in sales to the Company’s largest religious customer. Sales to the trade market decreased 2% to $59 million in fiscal 2013 compared with fiscal 2012, reflecting tight inventory management among publishers.
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 /Gross Profit
Cost of sales in the book manufacturing segment in fiscal 2014 increased by $12.5 million compared with the prior year. This increase reflects the growth in sales as well as higher depreciation expense of $1.6 million, primarily related to the expansion of the Kendallville digital facility. Gross profit for fiscal 2014 decreased 2% to $52.6 million compared with fiscal 2013 and, as a percentage of sales, decreased to 20.3% from 21.8%. This decline in gross profit as a percentage of sales reflects a highly competitive pricing environment and increased depreciation expense.
In fiscal 2013, cost of sales in the book manufacturing segment increased $10.4 million to $193.5 million compared to fiscal 2012. The increase reflected the growth in sales and lower recycling income from waste byproducts, including paper, as well as increased expense associated with the LIFO method of accounting for certain inventories. Gross profit increased $3.9 million to $53.9 million in fiscal 2013 and, as a percentage of sales, increased to 21.8% from 21.4%, compared with fiscal 2012, which included $1.7 million of restructuring costs. For fiscal 2013, the segment’s gross profit margin reflected a favorable sales mix and improved capacity utilization offset by a highly competitive pricing environment and reduced waste recycling income.
Selling and Administrative Expenses
Selling and administrative expenses for the book manufacturing segment increased $2.5 million to $34.4 million compared to fiscal 2013, primarily due to operating and amortization expenses related to FastPencil, which was acquired in the third quarter of last year.
In fiscal 2013, selling and administrative expenses for the book manufacturing segment increased $2.7 million to $32.0 million compared to fiscal 2012, which included $1.0 million of restructuring costs. The increase reflected growth in the Company’s digital print operation and an increase in variable compensation tied to increased sales and income in fiscal 2013. In addition, selling and administrative expenses in fiscal 2013 included approximately $1.1 million of costs related to the investment in Brazil and the acquisition of FastPencil, such as transaction costs, amortization of intangible assets and the change in fair value of contingent consideration.
Operating Income
Operating income in the book manufacturing segment was $18.2 million compared with $22.0 million in fiscal 2013, with operating losses at FastPencil being the principal factor for the year-over-year decline. Other factors included pricing pressures and increased depreciation expense.
In fiscal 2013, operating income in the book manufacturing segment was $22.0 million compared with $20.7 million in fiscal 2012, which included $2.7 million of restructuring costs. Despite improvements in sales mix and capacity utilization, these results reflect a highly competitive pricing environment and include startup costs related to the new digital print production line, reduced recycling income, and expenses associated with the acquisition of FastPencil and the investment in Brazil.
Publishing Segment
SEGMENT HIGHLIGHTS
(Dollars in thousands)
Revenues
The Company’s publishing segment is comprised of Dover and REA. In September 2014, the Company sold Creative Homeowner and accordingly, Creative Homeowner’s results are reported as discontinued operations and excluded from the table above. Revenues in fiscal 2014 were $33.4 million, a slight decline from fiscal 2013. Sales at Dover were $29.0 million, comparable to the prior year, with growth in Dover’s ebook sales and sales to online retailers offset by a decline in both direct-to-consumer and international sales. Revenues at REA were down 4% to $4.5 million compared with fiscal 2013. In 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 fiscal 2014, the segment continued to increase its range of titles offered online in both printed and ebook form, including over 5,000 titles now available as ebooks through Amazon, Apple, Barnes & Noble and Google. Sales of ebooks were $1.9 million in fiscal 2014 compared with $1.3 million in the prior year.
In fiscal 2013, revenues in the publishing segment declined slightly to $33.7 million compared with fiscal 2012. Sales at Dover were $29.0 million, which was comparable to the prior year. Sales at REA were down 5% to $4.6 million compared with fiscal 2012. These declines reflect in part a shrinking base of brick and mortar retail channels. Sales of ebooks were launched in the second half of 2012 and were approximately $1.3 million in fiscal 2013; such ebook sales were less than $200,000 in fiscal 2012.
Cost of Sales/Gross Profit
Cost of sales in this segment declined 5% to $20.2 million compared to fiscal 2013, reflecting cost reductions. Gross profit increased 7% to $13.2 million and, as a percentage of sales, increased to 39.5% from 36.7% in the prior year, reflecting a favorable sales mix, including the impact of growth in ebook sales, and an improved cost structure in the segment.
In fiscal 2013, cost of sales in the publishing segment declined 6% to $21.3 million compared to fiscal 2012, primarily due to an improved cost structure. Gross profit increased 8% to $12.4 million compared to fiscal 2012 and, as a percentage of sales, increased to 36.7% from 33.6%, reflecting the benefit of prior cost reduction measures as well as the impact of ebook sales.
Selling and Administrative Expenses
Selling and administrative expenses for the segment decreased $0.7 million to $13.4 million compared to fiscal 2013, largely attributable to cost reduction measures.
In fiscal 2013, selling and administrative expenses in the publishing segment were comparable to the prior year. Fiscal 2013 included costs related to website and marketing enhancements which offset restructuring costs of $0.4 for severance and post-retirement benefits in fiscal 2012.
Operating Loss
The operating loss in fiscal 2014 was $187,000 compared with an operating loss of $1.8 million in the prior year. This improvement reflects increased revenues and profits from ebooks and the benefit of cost containment measures.
The operating loss for the publishing segment in fiscal 2013 was $1.8 million, compared to $2.6 million in the prior year, reflecting the impact of cost reduction benefits and the increase in ebook revenues, as well as $0.4 million of restructuring costs in fiscal 2012.
Total Consolidated Company
Interest expense, net of interest income, decreased to $552,000 in fiscal 2014 compared to $803,000 in fiscal 2013. Interest expense, net of interest income, decreased to $803,000 in fiscal 2013 compared to $895,000 in fiscal 2012, primarily due to lower average borrowings. 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 September 27, 2014, $8.5 million of debt was outstanding under this arrangement at an implicit interest rate of 1.8%, generating interest expense of approximately $138,000 in fiscal 2014. A four-year term loan that the Company had entered into in fiscal 2010 to finance digital print assets was completed in fiscal 2014. The following table summarizes the Company’s average borrowings and average annual interest rate for the past three fiscal years.
In addition, approximately $115,000, $135,000 and $165,000 of interest expense was amortized in fiscal years 2014, 2013 and 2012, 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 fiscal 2014, the Company recorded interest income of approximately $370,000 from loans made in connection with the investment in Brazil.
In the first quarter of fiscal 2012, the Company recorded other income of $587,000 from the sale of its interests in non-operating real property relating to cell towers.
The Company’s effective tax rate from continuing operations in fiscal 2014 was 38.5%, which includes the impact of the goodwill impairment charges and corresponding reductions 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 from continuing operations for fiscal 2014 was 37%, comparable to the 37% rates in both fiscal years 2013 and 2012.
For purposes of computing net income per diluted share, weighted average shares outstanding increased by approximately 55,000 for fiscal 2014 compared to fiscal 2013, reflecting shares issued under the Company’s stock plans which were offset by the Company’s repurchase of approximately 153,000 shares during the year. Weighted average shares outstanding in fiscal 2013 decreased by approximately 497,000 from fiscal 2012 reflecting the Company’s repurchase of approximately 123,000 shares and 824,000 shares in fiscal years 2013 and 2012, respectively.
Restructuring Costs
In fiscal 2012, approximately $3.3 million of pre-tax restructuring charges were recorded for cost reduction measures taken throughout the year in both of the Company’s operating segments, including a reduction in the Company’s one-color offset press capacity. Severance and post-retirement benefit expenses were $1.9 million and accelerated depreciation on an unutilized one-color press was $1.4 million. Approximately $1.7 million of these costs were included in cost of sales in the Company’s book manufacturing segment. Approximately $1.0 million and $0.6 million of these costs were included in selling and administrative expenses in the Company’s book manufacturing segment and publishing segment, respectively. At September 27, 2014, approximately $0.1 million of the remaining restructuring payments were included in “Other current liabilities” in the accompanying consolidated balance sheet.
In fiscal 2011, the Company recorded restructuring costs of $7.7 million associated with closing and consolidating its Stoughton, Massachusetts manufacturing facility due to the impact of technology and competitive pressures affecting the one-color paperback books in which the plant specialized. Restructuring costs included $2.3 million for employee severance and benefit costs, $2.1 million for an early withdrawal liability from a multi-employer pension plan, and $3.3 million for lease termination and other facility closure costs; no sub-lease income was assumed at the time due to local real estate market conditions. Subsequently, a portion of the facility was sublet beginning in March 2013. Remaining payments of approximately $2.7 million will be made over periods ranging from one year for the building lease obligation to 17 years for the liability related to the multi-employer pension plan. At September 27, 2014, approximately $0.6 million of future restructuring payments were included in “Other current liabilities” and $2.1 million were included in “Other liabilities” in the accompanying consolidated balance sheet. The following table depicts the accrual balances for these restructuring costs.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities in fiscal 2014 provided $26.8 million of cash, compared to $32.1 million in fiscal 2013. Net income was $7.8 million, which included a non-cash impairment charge of $6.0 million and net reduction in the fair value of contingent consideration of $3.5 million. Depreciation for fiscal 2014 was $20.8 million, amortization of prepublication costs was $3.6 million and amortization of other intangibles was $0.9 million for the year. Deferred income taxes provided cash of $4.1 million, including recognition of deferred tax assets related to the sale of Creative Homeowner. Changes in working capital used $13.6 million of cash in fiscal 2014, largely due to an increase in accounts receivable, inventory and recoverable income taxes.
Investment activities in fiscal 2014 used $18.6 million of cash. Capital expenditures were $11.1 million, with more than half of the spending related to expanding digital capabilities. Capital expenditures for fiscal 2015 are expected to be between $9 and $11 million. Prepublication costs in the publishing segment in fiscal 2014 were $2.8 million compared to $3.4 million in the prior year. These costs are expected to be between $2 and $3 million in fiscal 2015. During fiscal 2014, the Company increased its investment by $1 million to $1.5 million in convertible promissory notes issued by Nomadic Learning Limited, a start-up business focused on corporate and educational learning.
In October 2013, the Company announced plans to invest in the education market in Brazil, the largest such market in Latin America. 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. 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 were 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 had not met expectations. As a result, in August 2014 the Company successfully renegotiated its agreement with the founder of Digital Page to restructure the investment. Under the revised terms, the Company invested 18.75 million Brazilian Reals in Digital Page and purchased shares from the founder for 1.25 million Brazilian Reals, resulting in a 60% interest in Digital Page in place of the original 40% interest for the same investment amount. At September 27, 2014, approximately $4 million of cash was on deposit in Brazil in the Company’s bank accounts in anticipation of a potential closing of the transaction. After the end of the fiscal year, on November 18, 2014, the Company closed this transaction and paid approximately $4 million toward the approximately $8.5 million purchase price. The remainder was satisfied by the principal amount of the loans being credited towards the purchase price of the Company’s 60% ownership interest.
Financing activities in fiscal 2014 provided approximately $4.1 million of cash. Cash dividends of $9.7 million were paid and overall net borrowings increased by $7.3 million during fiscal 2014. 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 September 27, 2014, $8.5 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 September 27, 2014, the Company had $24.5 million in borrowings under this facility at an interest rate of 1.4%. The revolving credit facility, which matures in March 2016, contains restrictive covenants including provisions relating to the incurrence of additional indebtedness and a quarterly test of EBITDA to debt service. The Company was in compliance with all debt covenants at September 27, 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 long-term and short-term financing needs. The Company believes that its cash on hand, cash from operations and the available credit facility will be sufficient to meet its cash requirements for at least the next twelve months.
On November 20, 2014, the Company announced the approval by its Board of Directors for the repurchase of up to $10 million of the Company’s outstanding common stock from time to time on the open market or in privately negotiated transactions, including pursuant to a Rule 10b5-1 nondiscretionary trading plan. During fiscal 2014, the Company repurchased 153,150 shares of common stock for approximately $2.0 million under a similar program which expired November 21, 2014. In November 2012, the Company’s Board of Directors had approved a similar program for the repurchase of up to $10 million of the Company’s outstanding common stock. During fiscal 2013, the Company repurchased 123,261 shares of common stock for approximately $1.6 million under that program.
The following table summarizes the Company’s contractual obligations and commitments at September 27, 2014 to make future payments as well as its existing commercial commitments.
(1) Includes $24.5 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 financing. Future interest on the Company’s revolving credit facility is not included because the interest rate and principal balance fluctuate on a daily basis and an estimate could differ significantly from actual interest expense.
(3) Represents amounts at September 27, 2014, except for the Stoughton, Massachusetts building lease obligation which was included in the restructuring accrual in “Other liabilities.”
(4) Represents capital commitments.
(5) Related to the acquisition of FastPencil in April 2013.
(6) Includes approximately $2.8 million of restructuring costs related to closing the Stoughton, Massachusetts facility, in addition to a current liability of $0.8 million. Operating leases exclude the Stoughton building lease obligation which is included above in other liabilities.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which outlines a single comprehensive model for entities to use in accounting for revenue using a five-step process that supersedes most current revenue recognition guidance. ASU 2014-09 also requires additional quantitative and qualitative disclosures. ASU 2014-09 will be effective for the Company in the first quarter of fiscal year 2018. The standard allows the option of either a full retrospective adoption, meaning the standard is applied to all periods presented, or a modified retrospective adoption, meaning the standard is applied
only to the most current period. The Company is currently evaluating the impact of the provisions of ASU 2014-09 and determining which transition method will be used.
In April 2014, the FASB issued ASU No. 2014-08 “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”), which modifies the requirements for disposals to qualify as discontinued operations and expands related disclosure requirements. ASU 2014-08 will be effective in the first quarter of the Company’s fiscal year 2016. The adoption of ASU 2014-08 may impact whether future disposals qualify as discontinued operations and therefore could impact the Company’s financial statement presentation and disclosures.
RISKS
Our businesses operate in markets that are highly competitive. In book manufacturing, the Company faces competition on the basis of price, product quality, speed of delivery, customer service, availability of appropriate printing capacity and paper, related services and technology support. In the publishing segment, competitive factors include quality of content, product offerings, technology and marketing. Some of our competitors have greater sales, assets and financial resources than our Company and others, particularly those in foreign countries, may derive significant advantages from local governmental regulation, including tax holidays and other subsidies. These competitive pressures could affect prices or customers’ demand for our products, impacting both revenue and profit margins and/or resulting in a loss of customers and market share. The Company derived approximately 55% and 57% of its fiscal 2014 and 2013 revenues, respectively, from two major customers. A significant reduction in order volumes or price levels from either of these customers could have a material adverse effect on the Company.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. 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 credit worthiness. 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 27, 2014, which resulted in no change to the nature or carrying amounts of its intangible assets, with the exception of FastPencil, a reporting unit within the book manufacturing segment. The Company concluded it was necessary to record a goodwill impairment charge of $4.5 million at the end of the second quarter of fiscal 2014 and $0.3 million at the end of the fourth quarter of fiscal 2014, as well as an impairment charge of $1.2 million for FastPencil’s other intangible assets at the end of the fourth quarter of fiscal 2014. Changes in market conditions or poor operating results could result in a decline in the fair value of the Company’s goodwill and other intangible assets thereby potentially requiring an impairment charge in the future.
Prepublication Costs. The Company capitalizes prepublication costs, which include the costs of acquiring rights to publish a work and costs associated with bringing a manuscript to publication such as artwork and editorial efforts. Prepublication costs are amortized on a straight-line basis over periods ranging from three to four years. Management regularly evaluates the sales and profitability of the products based upon historical and forecasted demand. If actual market conditions are less favorable than those projected by management, additional amortization expense may be required.
COURIER CORPORATION
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in thousands except per share data)
Diluted share amounts are based on weighted average shares outstanding.
Common shares of the Company are traded on the Nasdaq Global Select Market - symbol “CRRC.”
There were 966 stockholders of record of the Company’s common stock as of September 27, 2014.
COURIER CORPORATION
SCHEDULE II
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(1) Other changes reflect amounts related to the sale of one of the Company’s publishing businesses.
S-1