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| CRRC > SEC Filings for CRRC > Form 10-Q on 7-May-2009 | All Recent SEC Filings |
7-May-2009
Quarterly Report
Critical Accounting Policies and Estimates:
The Company's consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates and judgments, including those related to collectibility of accounts receivable, recovery of inventories, impairment of goodwill and other intangibles, prepublication costs and income taxes. Management bases its estimates and judgments on historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results may differ from these estimates. The significant accounting policies which management believes are most critical to aid in fully understanding and evaluating the Company's reported financial results include the following:
Accounts Receivable Management performs ongoing credit evaluations of the Company's customers and adjusts credit limits based upon payment history and the customer's current creditworthiness. Collections and payments from customers are continuously monitored. A provision for estimated credit losses is determined based upon historical experience and any specific customer collection issues that have been identified. If the financial condition of the Company's customers were to deteriorate, it may result in their inability to make payments, and such events could possibly lead to their insolvency, and therefore 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 which are amortized on a straight-line basis over periods ranging from ten to fifteen years. The Company evaluates possible impairment of goodwill and other intangibles at the reporting unit level, 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, 2008 resulting in no change to the nature or carrying amounts of its intangible assets in the book manufacturing segment. In the second quarter of fiscal 2009, the Company performed an interim impairment test for Dover Publications, Inc. ("Dover"), a reporting unit within the specialty publishing segment, due to the continued downturn in the economic environment and in consumer spending. As a result of the impairment tests, the Company concluded that the carrying value of Dover's goodwill exceeded its estimated fair value and a pre-tax impairment charge of $15.6 million, representing 100% of Dover's goodwill, was recorded at the end of the second quarter. The Company continues to monitor the value of its intangible assets closely in each of its segments. Changes in market conditions, further declines in operating results or cash flows, or deterioration in the market value of the Company or its peers, could result in an impairment charge in the future. Continued disruption in the credit markets may contribute to possible future impairment charges.
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 five 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.
Income Taxes The income tax provision and related accrued taxes are based on amounts reported on the Company's tax returns and changes in deferred taxes. Deferred income tax liabilities and assets are determined based upon the differences between the financial statement and tax bases of assets and liabilities. Changes in the recoverability of the Company's deferred tax assets or audits by tax authorities could result in future charges or credits to income tax expense, and related accrued and deferred taxes.
Overview:
Courier Corporation, founded in 1824, is one of America's leading book
manufacturers and specialty publishers. The Company has two business segments:
book manufacturing and specialty publishing. The book manufacturing segment
streamlines the process of bringing books from the point of creation to the
point of use. Based on sales, Courier is the third largest book manufacturer in
the United States, offering services from prepress and production, through
storage and distribution. The specialty publishing segment consists of Dover
Publications, Inc. ("Dover"), Research & Education Association, Inc. ("REA"),
and Federal Marketing Corporation, d/b/a Creative Homeowner ("Creative
Homeowner"). Dover publishes over 9,000 titles in more than 30 specialty
categories ranging from literature to paper dolls, and from music scores to clip
art. REA publishes test preparation and study-guide books and software for high
school, college and graduate students, as well as professionals. Creative
Homeowner publishes books on home design, decorating, landscaping, and
gardening, and sells home plans.
Results of Operations:
FINANCIAL HIGHLIGHTS
(dollars in thousands except per share amounts)
Quarter Ended Six Months Ended
March 28, March 29, % March 28, March 29, %
2009 2008 Change 2009 2008 Change
Net sales $ 59,360 $ 67,787 -12.4 % $ 119,007 $ 130,650 -8.9 %
Cost of sales 48,737 48,418 0.7 % 93,956 94,540 0.6 %
Gross profit 10,623 19,369 -45.2 % 25,051 36,110 -30.6 %
As a percentage of
sales 17.9 % 28.6 % 21.1 % 27.6 %
Selling and
administrative
expenses 12,081 13,674 -11.6 % 25,157 27,890 -9.8 %
Impairment charge 15,607 - 15,607 -
Operating income
(loss) (17,065 ) 5,695 (15,713 ) 8,220
Interest expense, net 194 272 -28.7 % 421 567 -25.7 %
Pretax income (loss) (17,259 ) 5,423 (16,134 ) 7,653
Income tax provision
(benefit) (6,086 ) 2,040 (5,664 ) 2,854
Net income (loss) $ (11,173 ) $ 3,383 $ (10,470 ) $ 4,799
Net income (loss) per
diluted share $ (0.94 ) $ 0.27 $ (0.88 ) $ 0.38
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Revenues in the second quarter and first half of fiscal 2009 decreased in both of the Company's segments compared to the same periods last year. Book manufacturing segment revenues were down 6% for the second quarter and down 2% for the first six months compared to the corresponding periods last year, with growth in sales of four-color books offset by reduced demand for one- and two-color books. In the specialty publishing segment, revenues were down 28% in the second quarter and down 26% in the first half of fiscal 2009, compared to the same periods last year, with sales in all three of the publishing businesses below prior-year levels, primarily due to the weak economy and reduced consumer spending. The winding down of Creative Homeowner's book distribution services early in the quarter also contributed to the segment's sales decline.
Overall for fiscal 2009 to date, the Company recorded a second-quarter net loss of $11.2 million, or $.94 per diluted share, and a net loss of $10.5 million, or $.88 per diluted share, for the first half of the year. These results include restructuring costs related to cost saving initiatives in both of the Company's segments totaling $3.5 million for the second quarter and $3.7 million year to date. In addition, the Company recorded a pre-tax impairment charge of $15.6 million at the end of the second quarter related to Dover's goodwill. Restructuring and impairment charges totaled $19.1 million in the second quarter, or $1.04 per diluted share, and $19.3 million for the first six months, or $1.05 per diluted share.
Impairment Charge
The Company evaluates possible impairment of goodwill and other intangibles at the reporting unit level, which is an operating segment or one level below an operating segment, on an annual basis or whenever events or circumstances indicate that the carrying value of the assets may not be recoverable. Due to a decline in sales and profits at Dover, resulting from the continued downturn in the economic environment and in consumer spending, the Company performed an interim test of Dover's goodwill. As a result of the impairment tests, the Company concluded that the carrying value of Dover's goodwill exceeded its estimated fair value and recorded a pre-tax impairment charge of $15.6 million, representing 100% of Dover's goodwill, at the end of the second quarter. On an after-tax basis, the impairment charge was $10.1 million, or $.86 per diluted share.
Restructuring Costs
The Company recorded restructuring costs of $3.5 million in the second quarter of fiscal 2009 and $3.7 million in the first half of the year. Restructuring costs included employee severance expenses related to costs savings initiatives in both of the Company's segments as well as ceasing Creative Homeowner's distribution services within the specialty publishing segment. Restructuring costs also included expenses related to closing and consolidating the Book-mart Press manufacturing facility within the book manufacturing segment during the second quarter of fiscal 2009. The following tables detail restructuring costs by segment and by classification in the accompanying consolidated statements of operations.
(000's Omitted)
Quarter Ended Six Months Ended
Book Specialty Book Specialty
Manufacturing Publishing Total Manufacturing Publishing Total
Segment Segment Company Segment Segment Company
Employee severance
costs $ 1,112 $ 299 $ 1,411 $ 1,128 $ 484 $ 1,612
Write down of
property, plant and
equipment 591 - 591 591 - 591
Inventory write downs 778 - 778 778 - 778
Lease termination and
other facility
closure costs 748 - 748 748 - 748
Total restructuring
costs $ 3,229 $ 299 $ 3,528 $ 3,245 $ 484 $ 3,729
Included in cost of
sales $ 2,754 $ 107 $ 2,861 $ 2,754 $ 107 $ 2,861
Included in selling
and administrative
expenses 475 192 667 491 377 868
Total restructuring
costs $ 3,229 $ 299 $ 3,528 $ 3,245 $ 484 $ 3,729
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Employee severance costs in the specialty publishing segment included centralizing back office and order fulfillment operations in addition to ceasing Creative Homeowner's distribution services. Within the book manufacturing segment, the Company closed its Book-mart Press manufacturing facility during the second quarter in order to reduce redundant capacity and to lower costs. Book-mart Press, located in North Bergen, New Jersey, was dedicated to short-run, single-color production. Book-mart had 72 employees and sales of approximately $7 million annually. Also during the second quarter, a voluntary severance program was offered throughout the Company, which was followed by additional workforce reductions in the book manufacturing segment due primarily to reduced one- and two-color capacity utilization. These actions were all completed during the second quarter. Overall, total headcount was reduced by 175, or approximately 10%, in the second quarter. At March 28, 2009, approximately $550,000 of severance costs were accrued and the Company anticipates that payments associated with employee terminations will be substantially completed by June 2009. Annual savings from the reduction in staffing are projected to be approximately $5 million in the book manufacturing segment and approximately $3 million in the specialty publishing segment.
In connection with the closing and consolidation of the Book-mart Press facility, the Company wrote down the carrying value of assets that will not be utilized at other locations and for which the carrying value exceeded the fair value. Where applicable, the fair value of such assets was determined by estimating the proceeds that would be received based on the market value of similar assets. Lease termination and other Book-mart Press facility closure costs accrued at March 28, 2009 were approximately $500,000. Payments related to the lease obligation are scheduled to continue until July 2010. The Company anticipates additional costs of approximately $400,000 related to closing and consolidating the Book-mart Press facility in the second half of fiscal 2009.
Book Manufacturing Segment
SEGMENT HIGHLIGHTS
(dollars in thousands)
Quarter Ended Six Months Ended
March 28, March 29, % March 28, March 29, %
2009 2008 Change 2009 2008 Change
Net sales $ 49,899 $ 53,359 -6.5 % $ 100,781 $ 103,066 -2.2 %
Cost of sales 43,870 40,563 8.2 % 84,140 79,879 5.3 %
Gross profit 6,029 12,796 -52.9 % 16,641 23,187 -28.2 %
As a percentage
of sales 12.1 % 24.0 % 16.5 % 22.5 %
Selling and
administrative
expenses 6,681 7,476 -10.6 % 13,705 15,489 -11.5 %
Operating income
(loss) $ (652 ) $ 5,320 $ 2,936 $ 7,698 -61.9 %
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Within the book manufacturing segment, the Company focuses on three key markets:
education, religious and specialty trade. Sales to the education market were
down 4% to $21.5 million in the second quarter and down 1% to $38.8 million for
the first six months compared to the same periods last year. Higher education
sales were up for the quarter and year to date, particularly growth in sales of
four-color college textbooks, while sales of elementary and high school
textbooks were down, largely due to continued pressure on state and local school
budgets. Sales to the specialty trade market of $13.3 million were comparable to
the second quarter last year and were up 5% to $28.4 million for the first six
months compared to the prior year. Growth in sales of four-color specialty
trade books, as well as a number of new customers, was offset in part by
declines in one- and two-color sales. Sales to the religious market were down
13% to $12.5 million in the second quarter compared to the prior year's second
quarter and were down 6% to $28.9 million in the first six months compared to
the first half of last year. On a trailing 12-month basis, sales to the
religious market increased 5%, which is in line with long-term historical growth
trends.
Growth in four-color sales in this segment was offset by a continuing decline in demand for one- and two-color books, resulting in reduced capacity utilization at some the Company's manufacturing plants. In response, faced with the weak economy and the need to reduce redundant capacity and lower costs, the Company closed its Book-mart Press manufacturing facility and reduced one-color capacity in other manufacturing facilities. Cost of sales in this segment increased 8% to $43.9 million in the quarter and increased 5% to $84.1 million in the first six months compared to the same periods last year. The increased cost of sales is due in part to restructuring charges of $2.8 million for severance and facility closing costs incurred in the second quarter. Gross profit in the book manufacturing segment in the second quarter decreased to $6.0 million, or 12% of sales, down from $12.8 million, or 24% of sales, in the second quarter of the preceding year. Gross profit for the first six months decreased to $16.6 million, or 17% of sales, compared to $23.2 million, or 22.5% of sales, in the same period last year. In addition to the impact of lower sales and restructuring costs incurred in the quarter, the decline in gross profit also reflects continued industry-wide competitive pricing pressures and reduced revenues from recycling programs.
Selling and administrative expenses for the book manufacturing segment decreased 11% in the second quarter to $6.7 million and, as a percentage of sales, decreased to 13.4% from 14.0% last year. On a year-to-date basis, such expenses decreased 12% to $13.7 million, and, as a percentage of sales, decreased to 13.6% from 15.0%. These decreases resulted from reductions in staffing and other cost saving initiatives implemented in the past year along with reduced variable compensation and were obtained despite restructuring costs of approximately $0.5 million in the second quarter of fiscal 2009.
The operating loss in the book manufacturing segment in the second quarter was $0.7 million compared to operating income of $5.3 million in the same period last year. For the first six months, operating income was $2.9 million compared to $7.7 million in the first half of last year. The decline in operating income includes restructuring costs of approximately $3.2 million in the quarter and first six months of fiscal 2009.
Specialty Publishing Segment
SEGMENT HIGHLIGHTS
(dollars in thousands)
Quarter Ended Six Months Ended
March 28, March 29, % March 28, March 29, %
2009 2008 Change 2009 2008 Change
Net sales $ 12,058 $ 16,758 -28.0 % $ 23,561 $ 32,014 -26.4 %
Cost of sales 7,566 10,218 -26.0 % 15,327 19,227 -20.3 %
Gross profit 4,492 6,540 -31.3 % 8,234 12,787 -35.6 %
As a percentage
of sales 37.3 % 39.0 % 34.9 % 39.9 %
Selling and
administrative
expenses 5,058 5,898 -14.2 % 10,727 11,660 -8.0 %
Operating income
(loss) $ (566 ) $ 642 $ (2,493 ) $ 1,127
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The Company's specialty publishing segment reported second quarter sales of $12.1 million, down 28% from last year's second quarter, primarily due to the weak economy and reduced consumer spending. For the first six months, segment sales decreased to $23.6 million, 26% below the first half of fiscal 2008. Sales at Creative Homeowner decreased 55% in the second quarter to $3.1 million and 49% in the first six months to $6.2 million, compared to the corresponding periods last year. These decreases reflect the persistent weakness in the nation's housing sector, which has reduced store traffic and sales in the home center market, its largest channel, as well as the impact of ceasing its distribution services. In November 2008, the Company announced that Creative Homeowner would cease its book distribution services for one nationwide retailer, which was accomplished at the beginning of January, allowing Creative Homeowner to focus on its core publishing business. Dover's sales decreased 10% to $7.2 million in the second quarter and decreased 12% to $14.3 million year to date, compared to the same periods last year. Revenues for REA were down 9% to $1.8 million in the second quarter and down 18% to $3.1 million in the first half of the year compared to the corresponding periods in the prior year. Revenues for Dover and REA were also impacted by the drop in consumer spending as well as continued inventory reductions by major book retailers and distributors in the first two quarters of fiscal 2009.
Cost of sales in the specialty publishing segment decreased 26% to $7.6 million for the second quarter and decreased 20% to $15.3 million for the first six months of fiscal 2009 reflecting the lower sales volume compared to the prior year periods. The reduction in cost of sales for this segment was offset in part by restructuring costs related to employee severance of approximately $100,000 in the second quarter and year to date as well as an increase of approximately $250,000 in the reserve for inventory obsolescence. Gross profit as a percentage of sales for the segment decreased in the quarter to 37.3% from 39.0% and year to date decreased to 34.9% from 39.9% compared to the corresponding periods in fiscal 2008. Gross profit percentages for all three publishers in this segment were lower than the second quarter and first six months of last year because of the drop in sales, as well as restructuring charges for severance and costs associated with ceasing the distribution services at Creative Homeowner.
Selling and administrative expenses in this segment decreased 14% to $5.1 million and 8% to $10.7 million in the second quarter and first six months, respectively, when compared to the same periods last year. The decline in such expenses reflect reduced expenses related to Creative Homeowner's former distribution services as well as cost savings initiatives throughout the segment. These savings were offset in part by severance costs of approximately $200,000 in the second quarter and $400,000 year to date for restructuring charges related to centralizing back office and order fulfillment operations in the segment in order to reduce costs and improve efficiency.
The operating loss for the specialty publishing segment for the second quarter was $566,000, compared to operating income of $642,000 in last year's second quarter. On a year-to-date basis, the operating loss was $2.5 million compared to operating income of $1.1 million in the first half of fiscal 2008. These declines were largely due to the sales shortfall for all three publishing businesses resulting from reduced spending by both retailers and consumers, the restructuring charges incurred in the quarter and first half of fiscal 2009, and losses incurred prior to winding down Creative Homeowner's distribution services in January.
Total Consolidated Company
Interest expense, net of interest income, was $194,000 in the second quarter of fiscal 2009, compared to $272,000 of net interest expense in the same quarter last year. For the first six months, interest expense, net of interest income, was $421,000 compared to $567,000 of net interest expense in the first half of fiscal 2008. Average debt under the revolving credit facility in the second quarter of fiscal 2009 was approximately $26.7 million at an average annual interest rate of 1.0%, generating interest expense of approximately $65,000. Average debt under the revolving credit facility in the second quarter of last year was approximately $23.9 million at an average annual interest rate of 4.2%, generating interest expense of approximately $250,000. Average debt under the revolving credit facility for the first six months of fiscal 2009 was approximately $26.0 million at an average annual interest rate of 2.0%, generating interest expense of approximately $260,000. For the first half of fiscal 2008, average debt under this facility was approximately $21.1 million at an average annual interest rate of 4.9%, generating interest expense of approximately $510,000. Interest expense also includes commitment fees and other costs associated with maintaining the Company's $100 million revolving credit facility. Interest capitalized in the first six months of fiscal 2008 was approximately $123,000; no interest was capitalized in the first half of fiscal 2009.
The income tax benefit for the second quarter was $6.1 million compared to income tax expense of $2.0 million in the same quarter last year. On a year-to-date basis, the income tax benefit was $5.7 million compared to income tax expense of $2.9 million for the first six months of fiscal 2008. The tax benefit related to Dover's impairment charge was recognized at 35%; no state tax benefit was recognized as the Company fully provided a valuation allowance on the related deferred state tax asset. Excluding the effect of the tax benefit of the impairment charge for Dover, the effective tax rate was 37.8% in the second quarter and 38.3% for the first six months of fiscal 2009 compared to 37.6% and 37.3% in the same periods last year, respectively, primarily because of a higher effective state tax rate.
Weighted average shares outstanding used to compute net income (loss) per diluted share decreased by 679,000 shares and 775,000 from last year's second quarter and first six months, respectively, primarily due to the Company's repurchase of approximately 856,000 shares during fiscal 2008.
Liquidity and Capital Resources:
During the first six months of fiscal 2009, operations provided $10.3 million of cash. The net loss of $10.5 million in the first half of the year included a non-cash, after-tax impairment charge of $10.1 million. Depreciation and amortization was $10.6 million, comparable to the first six months of last year. Working capital used $1.8 million in the first half of fiscal 2009,compared to $10.2 million in the same period last year. The improvement in working capital was primarily from a reduction in accounts receivable of $13.8 million, which was largely offset by an increase in inventories of $3.6 million and a decrease in accounts payable and accrued taxes totaling $8.7 million.
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