**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**(Mark One)**

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

 

**For the quarterly period ended December 25, 2010**

 

**OR**

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

 

**For the transition period from                   to                   **

 

**Commission file number 0-7597**

 

**COURIER CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Massachusetts**                                              | ** ** | **04-2502514**                       |
|----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization) |       | (I.R.S. Employer Identification No.) |
|                                                           |       |                                 |
| **15 Wellman Avenue, North Chelmsford,   Massachusetts**       | ** ** | **01863**                            |
| (Address of principal executive offices)                       |       | (Zip Code)                           |

 

**(978) 251-6000**

(Registrant’s telephone number, including area code)

 

**NO CHANGE**

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

 

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

 

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

 

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

 

| Large accelerated filer o                |   | Accelerated filer x         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non- accelerated filer o                 |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                             |

 

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

 

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

 

| **Class**                  | ** ** | **Outstanding   at February 1, 2011** |
|----------------------------|------------|--------------------------------------------|
| Common Stock, $1 par value |       | 12,080,390 shares                          |

 

 

 

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COURIER CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

(Dollars in thousands except per share amounts)

 
| ** **                          | ** ** | **THREE MONTHS ENDED** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **December 25,**            | ** ** | **December 26,** | ** ** |
| ** **                          | ** ** | **2010**                         | ** ** | **2009** | ** ** |
|                                |       |                             |       |   |   |
| Net sales                           |       | $                                | 61,152     |   | $ | 63,104 |   |
| Cost of sales                       |       | 45,847                           |       | 45,808 |   |
|                                |       |                             |       |   |   |
| Gross profit                        |       | 15,305                           |       | 17,296 |   |
|                                |       |                             |       |   |   |
| Selling and administrative expenses |       | 12,522                           |       | 12,651 |   |
|                                |       |                             |       |   |   |
| Operating income                    |       | 2,783                            |       | 4,645 |   |
|                                |       |                             |       |   |   |
| Interest expense, net               |       | 203                              |       | 118 |   |
|                                |       |                             |       |   |   |
| Pretax income                       |       | 2,580                            |       | 4,527 |   |
|                                |       |                             |       |   |   |
| Income tax provision (Note C)       |       | 924                              |       | 1,743 |   |
|                                |       |                             |       |   |   |
| Net income                          |       | $                                | 1,656      |   | $ | 2,784 |   |
|                                |       |                             |       |   |   |
| Net income per share (Note E):      |       |                             |       |   |   |
|                                |       |                             |       |   |   |
| Basic                               |       | $                                | 0.14       |   | $ | 0.23 |   |
|                                |       |                             |       |   |   |
| Diluted                             |       | $                                | 0.14       |   | $ | 0.23 |   |
|                                |       |                             |       |   |   |
| Cash dividends declared per share   |       | $                                | 0.21       |   | $ | 0.21 |   |

 

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

 

2

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COURIER CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands)

 
| ** **                                                                                                                                   | ** ** | **December 25,** | ** ** | **September 25,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                                                                                   | ** ** | **2010**              | ** ** | **2010**               | ** ** |
| ASSETS                                                                                                                                       |       |                  |       |                   |       |
|                                                                                                                                         |       |                  |       |                   |       |
| Current assets:                                                                                                                              |       |                  |       |                   |       |
| Cash and cash equivalents                                                                                                                    |       | $                     | 78         |                   | $          | 107 |   |
| Investments                                                                                                                                  |       | 1,177                 |       | 1,090                  |       |
| Accounts receivable, less allowance for   uncollectible accounts of $958 at December 25, 2010 and $968 at   September 25, 2010     |       | 32,756                |       | 35,123                 |       |
| Inventories (Note B)                                                                                                                         |       | 40,855                |       | 39,933                 |       |
| Deferred income taxes                                                                                                                        |       | 4,099                 |       | 4,109                  |       |
| Other current assets                                                                                                                         |       | 1,686                 |       | 2,388                  |       |
|                                                                                                                                         |       |                  |       |                   |       |
| Total current assets                                                                                                                         |       | 80,651                |       | 82,750                 |       |
|                                                                                                                                         |       |                  |       |                   |       |
| Property, plant and equipment, less accumulated   depreciation: $170,659 at December 25, 2010 and $166,528 at   September 25, 2010 |       | 102,658               |       | 103,009                |       |
|                                                                                                                                         |       |                  |       |                   |       |
| Goodwill (Note A)                                                                                                                            |       | 24,697                |       | 24,697                 |       |
|                                                                                                                                         |       |                  |       |                   |       |
| Other intangibles, net (Note A)                                                                                                              |       | 2,610                 |       | 2,712                  |       |
|                                                                                                                                         |       |                  |       |                   |       |
| Prepublication costs, net (Note A)                                                                                                           |       | 7,715                 |       | 7,734                  |       |
|                                                                                                                                         |       |                  |       |                   |       |
| Other assets                                                                                                                                 |       | 1,291                 |       | 1,292                  |       |
|                                                                                                                                         |       |                  |       |                   |       |
| Total assets                                                                                                                                 |       | $                     | 219,622    |                   | $          | 222,194 |   |

 

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

 

3

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COURIER CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands)

 
| ** **                                                                                                                             | ** ** | **December 25,** | ** ** | **September 25,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                                                                             | ** ** | **2010**              | ** ** | **2010**               | ** ** |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                              |       |                  |       |                   |       |
|                                                                                                                                   |       |                  |       |                   |       |
| Current liabilities:                                                                                                                   |       |                  |       |                   |       |
| Current maturities of long-term debt                                                                                                   |       | $                     | 1,796      |                   | $          | 1,794 |   |
| Accounts payable                                                                                                                       |       | 10,273                |       | 14,399                 |       |
| Accrued payroll                                                                                                                        |       | 6,519                 |       | 8,792                  |       |
| Accrued taxes                                                                                                                          |       | 877                   |       | 617                    |       |
| Other current liabilities                                                                                                              |       | 8,210                 |       | 6,566                  |       |
|                                                                                                                                   |       |                  |       |                   |       |
| Total current liabilities                                                                                                              |       | 27,675                |       | 32,168                 |       |
|                                                                                                                                   |       |                  |       |                   |       |
| Long-term debt                                                                                                                         |       | 25,057                |       | 21,904                 |       |
| Deferred income taxes                                                                                                                  |       | 1,233                 |       | 1,385                  |       |
| Other liabilities                                                                                                                      |       | 3,287                 |       | 3,788                  |       |
|                                                                                                                                   |       |                  |       |                   |       |
| Total liabilities                                                                                                                      |       | 57,252                |       | 59,245                 |       |
|                                                                                                                                   |       |                  |       |                   |       |
| Stockholders’ equity (Note F):                                                                                                    |       |                  |       |                   |       |
| Preferred stock, $1 par value - authorized 1,000,000   shares; none issued                                                             |       | —                |       | —                 |       |
| Common stock, $1 par value - authorized 18,000,000   shares; issued 12,057,000 at December 25, 2010 and September 25,   2010 |       | 12,057                |       | 12,057                 |       |
| Additional paid-in capital                                                                                                             |       | 18,058                |       | 17,762                 |       |
| Retained earnings                                                                                                                      |       | 132,953               |       | 133,828                |       |
| Accumulated other comprehensive loss                                                                                                   |       | (698                  | )          | (698                   | )          |
|                                                                                                                                   |       |                  |       |                   |       |
| Total stockholders’ equity                                                                                                        |       | 162,370               |       | 162,949                |       |
|                                                                                                                                   |       |                  |       |                   |       |
| Total liabilities and stockholders’ equity                                                                                        |       | $                     | 219,622    |                   | $          | 222,194 |   |

 

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

 

4

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COURIER CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)

 
| ** **                                                                        | ** ** | **THREE MONTHS ENDED** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                        | ** ** | **December 25,**            | ** ** | **December 26,** | ** ** |
| ** **                                                                        | ** ** | **2010**                         | ** ** | **2009** | ** ** |
|                                                                              |       |                             |       |   |   |
| Operating Activities:                                                             |       |                             |       |   |   |
| Net income                                                                        |       | $                                | 1,656      |   | $ | 2,784 |   |
| Adjustments to reconcile net income to cash   provided from operating activities: |       |                             |       |   |   |
| Depreciation and amortization                                                     |       | 5,410                            |       | 5,130 |   |
| Stock-based compensation                                                          |       | 338                              |       | 349 |   |
| Deferred income taxes                                                             |       | (142                             | )          | 124 |   |
| Gain on disposition of assets                                                     |       | —                           |       | (183 | ) |
| Changes in assets and liabilities:                                                |       |                             |       |   |   |
| Accounts receivable                                                               |       | 2,367                            |       | (13 | ) |
| Inventory                                                                         |       | (922                             | )          | 233 |   |
| Accounts payable                                                                  |       | (4,126                           | )          | (866 | ) |
| Accrued taxes                                                                     |       | 260                              |       | (690 | ) |
| Other elements of working capital                                                 |       | 73                               |       | 2,719 |   |
| Other long-term, net                                                              |       | (552                             | )          | (469 | ) |
|                                                                              |       |                             |       |   |   |
| Cash provided from operating activities                                           |       | 4,362                            |       | 9,118 |   |
|                                                                              |       |                             |       |   |   |
| Investment Activities:                                                            |       |                             |       |   |   |
| Capital expenditures                                                              |       | (3,780                           | )          | (1,020 | ) |
| Prepublication costs                                                              |       | (1,148                           | )          | (1,036 | ) |
| Proceeds from disposition of assets                                               |       | —                           |       | 590 |   |
| Short-term investments                                                            |       | (87                              | )          | (63 | ) |
|                                                                              |       |                             |       |   |   |
| Cash used for investment activities                                               |       | (5,015                           | )          | (1,529 | ) |
|                                                                              |       |                             |       |   |   |
| Financing Activities:                                                             |       |                             |       |   |   |
| Long-term debt borrowings (repayments)                                            |       | 3,155                            |       | (5,082 | ) |
| Cash dividends                                                                    |       | (2,531                           | )          | (2,511 | ) |
|                                                                              |       |                             |       |   |   |
| Cash provided from (used for) financing activities                                |       | 624                              |       | (7,593 | ) |
|                                                                              |       |                             |       |   |   |
| Decrease in cash and cash equivalents                                             |       | (29                              | )          | (4 | ) |
|                                                                              |       |                             |       |   |   |
| Cash and cash equivalents at the beginning of the   period                        |       | 107                              |       | 492 |   |
|                                                                              |       |                             |       |   |   |
| Cash and cash equivalents at the end of the period                                |       | $                                | 78         |   | $ | 488 |   |

 

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

 

5

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**COURIER CORPORATION**

 

**NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)**

 

**A.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Unaudited Financial Statements**

The consolidated condensed balance sheet as of December 25, 2010, and the consolidated condensed statements of operations and statements of cash flows for the three-month periods ended December 25, 2010 and December 26, 2009 are unaudited.  In the opinion of management, all adjustments, consisting of normal recurring items, considered necessary for a fair presentation of such financial statements have been recorded.  The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”) have been condensed or omitted.  The balance sheet data as of September 25, 2010 was derived from audited year-end financial statements, but does not include disclosures required by generally accepted accounting principles.  It is suggested that these interim financial statements be read in conjunction with the Company’s most recent Annual Report on Form 10-K for the year ended September 25, 2010.

 

**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. There were no such events or changes in circumstances in the period presented.  “Other intangibles” includes customer lists related to Moore-Langen Printing Company, Inc. (“Moore Langen”) as well as customer lists and technology related to Highcrest Media LLC (“Highcrest Media”), which are being amortized over 10-year and 5-year periods, respectively.  Amortization expense related to customer lists and technology was approximately $102,000 and $50,000 in the first quarters of fiscal 2011 and 2010, respectively.

 

**Fair Value Measurements**

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

 

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

 

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

 

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

 

**Fair Value of Financial Instruments**

Financial instruments consist primarily of cash, investments in mutual funds (Level 1), accounts receivable, accounts payable, debt obligations and contingent consideration (Level 3 — see Note G).  At December 25, 2010 and September 25, 2010, the fair value of the Company’s financial instruments approximated their carrying values.  The fair value of the Company’s revolving credit facility approximates its carrying value due to the variable interest rate and the Company’s current rate standing.

 

**Prepublication Costs**

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

 

6

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**COURIER CORPORATION**

 

**NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)**

 

**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 53% and 54% of the Company’s inventories at December 25, 2010 and September 25, 2010, respectively.  Other inventories, primarily in the specialty publishing segment, are determined on a first-in, first-out (FIFO) basis.  Inventories consisted of the following:

 
| ** **      | ** ** | **(000’s Omitted)** | ** ** |
|-----------------|------------|-------------------------------|------------|
| ** **      | ** ** | **December 25,   2010**  | ** ** | **September 25,   2010** | ** ** |
| Raw materials   |       | $                             | 5,276      |   | $ | 5,557 |   |
| Work in process |       | 10,218                        |       | 9,371 |   |
| Finished goods  |       | 25,361                        |       | 25,005 |   |
| Total           |       | $                             | 40,855     |   | $ | 39,933 |   |

 

**C.            INCOME TAXES**

 

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

 
| ** **                              | ** ** | **(000’s Omitted)**    | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **Three Months Ended** | ** ** |
| ** **                              | ** ** | **December 25,   2010**     | ** ** | **December 26,    2009** | ** ** |
| Federal taxes at statutory rates        |       | $                                | 903        |   | 35.0 | % | $ | 1,584 |   | 35.0 | % |
| State taxes, net of federal tax benefit |       | 113                              |       | 4.4 |   | 227 |   | 5.0 |   |
| Federal manufacturer’s deduction   |       | (88                              | )          | (3.4 | ) | (79 | ) | (1.7 | ) |
| Other                                   |       | (4                               | )          | (0.2 | ) | 11 |   | 0.2 |   |
| Total                                   |       | $                                | 924        |   | 35.8 | % | $ | 1,743 |   | 38.5 | % |

 

**D.            BUSINESS SEGMENTS**

 

The Company has two business segments: book manufacturing and specialty publishing. The book manufacturing segment offers a full range of services from production through storage and distribution for religious, educational and specialty trade book publishers. In January 2010, the Company acquired Highcrest Media, which has been included in the book manufacturing segment (see Note G).  The specialty publishing segment consists of Dover Publications, Inc., Federal Marketing Corporation, Inc., d/b/a Creative Homeowner, and Research & Education Association, Inc.

 

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

 

7

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**COURIER CORPORATION**

 

**NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)**

 

The following table provides segment information for the three-month periods ended December 25, 2010 and December 26, 2009.

 
| ** **                          | ** ** | **(000’s Omitted)**    | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **Three Months Ended** | ** ** |
| ** **                          | ** ** | **December 25,   2010**     | ** ** | **December 26,   2009** | ** ** |
| Net sales:                          |       |                             |       |   |   |
| Book manufacturing                  |       | $                                | 53,043     |   | $ | 54,841 |   |
| Specialty publishing                |       | 10,752                           |       | 11,561 |   |
| Elimination of intersegment sales   |       | (2,643                           | )          | (3,298 | ) |
| Total                               |       | $                                | 61,152     |   | $ | 63,104 |   |
|                                |       |                             |       |   |   |
| Pretax income:                      |       |                             |       |   |   |
| Book manufacturing operating income |       | $                                | 3,841      |   | $ | 5,701 |   |
| Specialty publishing operating loss |       | (809                             | )          | (514 | ) |
| Stock-based compensation            |       | (338                             | )          | (349 | ) |
| Elimination of intersegment profit  |       | 89                               |       | (193 | ) |
| Interest expense, net               |       | (203                             | )          | (118 | ) |
| Total                               |       | $                                | 2,580      |   | $ | 4,527 |   |

 

**E.         NET INCOME PER SHARE**

 

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

 
| ** **                            | ** ** | **(000’s Omitted)**    | ** ** |
|---------------------------------------|------------|----------------------------------|------------|
| ** **                            | ** ** | **Three Months Ended** | ** ** |
| ** **                            | ** ** | **December 25,   2010**     | ** ** | **December 26,   2009** | ** ** |
|                                  |       |                             |       |   |   |
| Weighted average shares for basic     |       | 11,961                           |       | 11,892 |   |
| Effect of potentially dilutive shares |       | 27                               |       | 17 |   |
| Weighted average shares for diluted   |       | 11,988                           |       | 11,909 |   |

 

**F.             STOCK-BASED COMPENSATION**

 

The Company records stock-based compensation expense for the cost of stock options and stock grants as well as shares issued under the Company’s 1999 Employee Stock Purchase Plan, as amended. The fair value of each option awarded is calculated on the date of grant using the Black-Scholes option-pricing model. Stock-based compensation recognized in selling and administrative expenses in the accompanying financial statements in the first quarters of fiscal 2011 and 2010 was $338,000 and $349,000, respectively.  The related tax benefit recognized in the first quarters of fiscal 2011 and 2010 was $121,000 and $125,000, respectively.  Unrecognized stock-based compensation cost at December 25, 2010 was $2.1 million, to be recognized over a weighted-average period of 2.5 years.

 

**Stock Incentive Plan:** The Company’s Amended and Restated 1993 Stock Incentive Plan (the “1993 Plan”) provides for the granting of stock options and stock grants up to a total of 2,064,375 shares.  Under the plan provisions, both non-qualified and incentive stock options to purchase shares of the Company’s common stock may be granted to key employees.  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. Stock options and stock grants generally vest over 3 years.

 

8

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**COURIER CORPORATION**

 

**NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)**

 

There was no stock option activity under this plan in the first quarter of fiscal 2011.  There were 518,437 option shares outstanding at December 25, 2010 with a weighted average exercise price of $21.94, a weighted average remaining term of 3.1 years, and an aggregate intrinsic value of approximately $179,000. Of these option shares, 257,389 were exercisable at December 25, 2010 with a weighted average exercise price of $28.38, a weighted average remaining term of 2.0 years, and no aggregate intrinsic value.  During the first quarter of fiscal 2011, no stock grants had vested. At December 25, 2010, there were 83,274 non-vested stock grants outstanding with a weighted-average fair value of $16.78. There were 108,010 shares available for future grants under this plan at December 25, 2010.

 

On January 18, 2011, stockholders approved adoption of the Courier Corporation 2011 Stock Option and Incentive Plan (the “2011 Plan”), which will replace the 1993 Plan and provides for the granting of stock options and stock grants up to a total of 600,000 shares.

 

**Directors’ Option Plans:** In January 2010, stockholders approved the Courier Corporation 2010 Stock Equity Plan for Non-Employee Directors (the “2010 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 up to a total of 300,000 shares.  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 have a term of five years. Stock options and stock grants generally vest over three years.

 

There was no stock option activity under these plans in the first quarter of fiscal 2011.  At December 25, 2010, 206,866 option shares were outstanding with a weighted average exercise price of $24.39, a weighted average remaining term of 2.3 years and an aggregate intrinsic value of approximately $115,000.  Of these option shares, 153,687 were exercisable with a weighted average exercise price of $28.08, a weighted average remaining term of 1.7 years and an aggregate intrinsic value of approximately $18,000.  Directors may also elect to receive their annual retainer and committee chair fees as shares of stock in lieu of cash; no such shares were issued in the first quarter of fiscal 2011.  At December 25, 2010, there were 221,236 shares available for future grants under the 2010 Plan.

 

**Employee Stock Purchase Plan:** The Company’s 1999 Employee Stock Purchase Plan (“ESPP”), as amended, covers an aggregate of 637,500 shares of Company common stock for issuance under the plan.  Eligible employees may purchase shares of Company common stock at not less than 85% of fair market value at the end of the grant period.  During the first quarter of fiscal 2011, no shares were issued under the ESPP. At December 25, 2010, there were 272,503 shares available for future issuances.

 

**G.        BUSINESS ACQUISITION**

 

On January 15, 2010, the Company acquired the assets of 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 $3 million cash acquisition, which has additional future “earn out” potential payments of up to $1.2 million, 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.

 

The acquisition of Highcrest Media was recorded by allocating the fair value of consideration of the acquisition 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 consideration of the acquisition over the net amounts assigned to the fair value of the assets acquired and liabilities assumed was recorded as goodwill. Goodwill and other intangibles are tax deductible. The Company also assumed operating leases for some of Highcrest Media’s equipment.

 

9

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**COURIER CORPORATION**

 

**NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)**

 

The purchase price allocation was as follows:

 
| ** **                                                  | ** ** | **(000’s Omitted)** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------|------------|
|                                                        |       |                          |       |
| Accounts receivable                                         |       | $                             | 379        |   |
| Inventories                                                 |       | 41                            |       |
| Machinery, equipment and other long-term assets             |       | 272                           |       |
| Amortizable intangibles                                     |       | 1,930                         |       |
| Goodwill                                                    |       | 1,517                         |       |
| Accounts payable and accrued liabilities                    |       | (289                          | )          |
| Fair value of contingent “earn out” consideration |       | (850                          | )          |
| Net cash paid                                               |       | $                             | 3,000      |   |

 

The future earn out potential payments were valued at acquisition at $850,000 using a probability weighted discounted cash flow model (Level 3 in the hierarchy) and may be paid out over three years based on achieving certain revenue targets. A fair value assessment of the contingent earn out consideration payable was performed at December 25, 2010 resulting in recognition of $60,000 of expense in the first quarter of fiscal 2011 and a liability of $980,000 at December 25, 2010.

 

**H.        SUBSEQUENT EVENTS**

 

On February 3, 2011, the Company announced that it is considering closing its manufacturing plant in Stoughton, Massachusetts, due to the impact of technology and competitive pressures affecting the one-color paperback books in which the plant specializes. The Company is soliciting input from the union that represents many of the plant employees to ensure that employees’ interests are represented as it works toward a final decision on the matter, which is expected by the end of February 2011.  This one-color plant is the smallest and least versatile of the Company’s six manufacturing facilities, and has seen its volume decline in recent years as customers have increasingly turned to shorter print runs and more efficient short-run alternatives such as digital printing, in which the Company has invested heavily in the past year.

 

On January 31, 2011, one of the Company’s specialty publishing segment customers, Borders Group, Inc. (“Borders”), issued a press release announcing that they will delay payments to vendors, landlords and other parties in order to maintain liquidity while they seek to complete a refinancing or restructuring of their existing credit facilities and other obligations. The Company’s current accounts receivable from Borders is approximately $750,000, and as of the issuance of these consolidated financial statements, the Company has seen no disruption in Borders’ payment practices. The Company believes, as of the date of this filing, that its allowance for uncollectible accounts at December 25, 2010 is adequate and no additional provision is required as of that date. The Company continues to closely monitor this situation and if Borders’ financial condition were to further deteriorate, resulting in an impairment of their ability to make payments, an additional allowance may be required.

 

10

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

 

**Critical Accounting Policies and Estimates****:**

 

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

 

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

 

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

 

Goodwill and Other Intangibles.  Other intangibles include customer lists, which are amortized on a straight-line basis over periods ranging from five to ten years. 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 25, 2010, which resulted in no change to the nature or carrying amounts of its intangible assets in its book manufacturing segment.  However, the Company determined that the fair value of Creative Homeowner at the end of fiscal 2010 was below its carrying value and a pre-tax impairment charge of $4.7 million was recorded, which represented 100% of Creative Homeowner’s goodwill and other intangible assets as well as $0.5 million of prepublication costs.  Changes in market conditions or poor operating results could result in a decline in value of the Company’s goodwill and other intangible assets thereby potentially requiring an additional impairment charge in the future.

 

Prepublication Costs.   The Company capitalizes prepublication costs, which include the costs of acquiring rights to publish a work and costs associated with bringing a manuscript to publication such as artwork and editorial efforts. Prepublication costs are amortized on a straight-line basis over periods ranging from 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.

 

11

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**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, as well as state-of-the-art digital print capabilities.  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)

 
| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **December 25,   2010**     | ** ** | **December 26,   2009** | ** ** | **%   Change** | ** ** |
|                                |       |                             |       |   |   |   |   |
| Net sales                           |       | $                                | 61,152     |   | $ | 63,104 |   | -3 | % |
| Cost of sales                       |       | 45,847                           |       | 45,808 |   | — |   |
| Gross profit                        |       | 15,305                           |       | 17,296 |   | -12 | % |
| As a percentage of sales            |       | 25.0                             | %          | 27.4 | % |   |   |
|                                |       |                             |       |   |   |   |   |
| Selling and administrative expenses |       | 12,522                           |       | 12,651 |   | -1 | % |
| Operating income                    |       | 2,783                            |       | 4,645 |   | -40 | % |
| Interest expense, net               |       | 203                              |       | 118 |   | 72 | % |
| Pretax income                       |       | 2,580                            |       | 4,527 |   | -43 | % |
| Provision for income taxes          |       | 924                              |       | 1,743 |   | -47 | % |
| Net income                          |       | $                                | 1,656      |   | $ | 2,784 |   | -41 | % |
|                                |       |                             |       |   |   |   |   |   |   |
| Net income per diluted share        |       | $                                | 0.14       |   | $ | 0.23 |   | -39 | % |

 

Revenues in the first quarter of fiscal 2011 were $61.2 million, 3% lower than the same period last year.  Book manufacturing segment revenues decreased by 3% to $53.0 million, largely due to the timing of orders in the religious market. In the specialty publishing segment, revenues of $10.8 million were down 7% from the first quarter of last year with lower sales at Dover and REA offset in part by 7% sales growth at Creative Homeowner.

 

Net income for the quarter was $1.7 million, compared to $2.8 million in the first three months of fiscal 2010, with results off in both of the Company’s business segments.  Results in the first quarter reflect the Company’s history of quarter-to-quarter fluctuations in the timing of orders as well as continued competitive pricing pressure and reduced demand for one-color books.

 

*Business Acquisition*

On January 15, 2010, the Company acquired the assets of Highcrest Media LLC (“Highcrest Media”), a Massachusetts-based provider of solutions that streamlines the production of customized textbooks for use in colleges, universities and businesses.  The acquisition has also complemented the Company’s investment during fiscal years 2010 and 2011 in digital printing technology. The $3 million cash acquisition, which has additional future “earn out” potential payments of up to $1.2 million, 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.

 

12

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*Book Manufacturing Segment*

 

SEGMENT HIGHLIGHTS

(dollars in thousands)

 
| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **December 25,   2010**     | ** ** | **December 26,   2009** | ** ** | **%   Change** | ** ** |
|                                |       |                             |       |   |   |   |   |
| Net sales                           |       | $                                | 53,043     |   | $ | 54,841 |   | -3 | % |
| Cost of sales                       |       | 41,654                           |       | 41,766 |   | — |   |
| Gross profit                        |       | 11,389                           |       | 13,075 |   | -13 | % |
| As a percentage of sales            |       | 21.5                             | %          | 23.8 | % |   |   |
|                                |       |                             |       |   |   |   |   |
| Selling and administrative expenses |       | 7,548                            |       | 7,374 |   | 2 | % |
| Operating income                    |       | $                                | 3,841      |   | $ | 5,701 |   | -33 | % |

 

Within the book manufacturing segment, the Company focuses on three key markets: education, religious and specialty trade.  In the first quarter of fiscal 2011, sales to the education market rose 4% to $21 million, primarily from sales of four-color textbooks to colleges and universities. This improvement included sales growth from the Company’s new digital print capability and from the acquisition of Highcrest Media.  Sales of elementary and high school books declined in the first quarter compared to the same period last year reflecting continued budget pressures on school systems nationwide.  Sales to the religious market were down 22% to $14 million compared to the prior year’s first quarter, reflecting both the timing of orders from the Company’s largest religious customer and prior-year comparison to one of its strongest quarters in decades. During the first quarter of fiscal 2011, the Company entered into a multi-year agreement with its largest religious customer, a leading global missionary organization, which provides incentives for additional growth.  Sales to the specialty trade market grew 4% to $16 million compared with the first quarter of fiscal 2010, with growth in four-color sales as well as new digital print opportunities. The improved efficiency in short-run production with digital print capability has led to an increasing flow of orders from education and trade publishers, including the Company’s specialty publishing segment, as publishers reduce inventories or bring older titles back into print.

 

Cost of sales in the book manufacturing segment decreased only slightly in the first quarter compared to the same period last year, despite the 3% decline in sales, reflecting lower traditional one-color capacity utilization.  Gross profit decreased by 13% to $11.4 million for the quarter, and as a percentage of sales, was 21.5% compared to 23.8% in last year’s first quarter.  The decline in gross profit reflects the lower sales volume and continued industry-wide competitive pricing pressures.

 

In October 2010, a second HP digital inkjet press was installed which provided needed capacity for demand of four-color custom textbooks and one-color trade books.  In addition, at the end of the first quarter, installation was completed on a fourth high-speed four-color manroland press at the Company’s Kendallville, Indiana facility.  Both presses experienced smooth startups during the quarter.  In January 2011, the Company signed a multi-year book manufacturing agreement with Pearson Education, the world’s largest educational publisher. This agreement reflects the value of the Company’s investments in digital inkjet technology and continued expansion of its four-color capacity.  A third HP digital press is scheduled to be installed during the Company’s third quarter in order to meet expected growth in demand during the upcoming textbook season.

 

Selling and administrative expenses for the segment increased 2% in the first quarter to $7.5 million compared to the same period last year, primarily due to the new digital print facility.

 

First quarter operating income in this segment decreased 33% to $3.8 million, compared to the same period last year, reflecting the reduction in sales to the religious market during the quarter as well as lower one-color capacity utilization and continued industry-wide pricing pressures.

 

13

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*Specialty Publishing Segment*

 

SEGMENT HIGHLIGHTS

(dollars in thousands)

 
| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **December 25,   2010**     | ** ** | **December 26,   2009** | ** ** | **%   Change** | ** ** |
|                                |       |                             |       |   |   |   |   |
| Net sales                           |       | $                                | 10,752     |   | $ | 11,561 |   | -7 | % |
| Cost of sales                       |       | 6,926                            |       | 7,148 |   | -3 | % |
| Gross profit                        |       | 3,826                            |       | 4,413 |   | -13 | % |
| As a percentage of sales            |       | 35.6                             | %          | 38.2 | % |   |   |
|                                |       |                             |       |   |   |   |   |
| Selling and administrative expenses |       | 4,635                            |       | 4,927 |   | -6 | % |
| Operating loss                      |       | $                                | (809       | ) | $ | (514 | ) |   |   |

 

The Company’s specialty publishing segment reported first quarter sales of $10.8 million, down 7% from last year’s first quarter.  Sales were down 3% at Dover to $8.2 million while sales at REA decreased 31% to $1.3 million compared to last year’s first quarter.  The decline in REA’s sales reflects an exceptionally strong first quarter in the prior year due to both a major product launch and a chain-wide merchandising order at a large nationwide bookseller.  Retail sell-through of REA’s products was up in the first quarter of fiscal 2011. Sales at Creative Homeowner grew 7% to $1.3 million, reflecting improving home-center book sales.

 

Cost of sales in the specialty publishing segment decreased 3% to $6.9 million for the first three months of fiscal 2011 compared to the same period last year, reflecting lower sales and the improved cost structure in the segment.  Gross profit decreased 13% to $3.8 million in the quarter and, as a percentage of sales, decreased to 35.6% from 38.2% in the corresponding period last year, due to the decline in sales volume at Dover and REA.

 

Selling and administrative expenses in this segment decreased 6% to $4.6 million in the first quarter compared to the same period last year, reflecting cost reductions achieved by prior year initiatives, which included centralizing back office operations.

 

The operating loss for the specialty publishing segment for the first quarter was $0.8 million, compared to an operating loss of $0.5 million in last year’s first quarter, reflecting the impact of the lower sales at Dover and REA.  Creative Homeowner’s operating loss in the quarter was $0.7 million, an improvement of $0.5 million compared to the first three months of last year.

 

*Total Consolidated Company*

Interest expense, net of interest income, was $203,000 in the first quarter of fiscal 2011, compared to $118,000 of net interest expense in the first three months of last year.  Average debt under the revolving credit facility in the first quarter of fiscal 2011 was approximately $20.7 million at an average annual interest rate of 0.8%, generating interest expense of approximately $39,000.  Average debt under the revolving credit facility in the first quarter of last year was approximately $11.9 million at an average annual interest rate of 0.7%, generating interest expense of approximately $22,000.  Interest expense also includes commitment fees and other costs associated with maintaining the Company’s $100 million revolving credit facility.  In addition, the Company entered into a four-year term loan in March 2010 providing up to $8 million to finance the purchase of digital print assets.  At December 25, 2010, $6.1 million was borrowed under this term loan, which added $53,000 of interest expense in the first quarter.  Interest capitalized in the first quarter of fiscal 2011 was approximately $26,000; no interest was capitalized in the first three months of fiscal 2010.

 

The Company’s effective tax rate for the first quarter of fiscal 2011 was 35.8% compared to 38.5% for the same period last year reflecting an increased benefit from the Federal manufacturer’s deduction.

 

14

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For purposes of computing net income per diluted share, weighted average shares outstanding increased by approximately 79,000 shares from last year’s first quarter, reflecting shares issued under the Company’s stock plans.

 

**Liquidity and Capital Resources****:**

During the first three months of fiscal 2011, operations provided $4.4 million of cash, compared to $9.1 million in the first quarter of last year.  Net income was $1.7 million and depreciation and amortization were $5.4 million.  An increase in working capital used $2.3 million of cash in the first quarter of fiscal 2011.

 

Investment activities in the first quarter of fiscal 2011 used $5.0 million of cash. Capital expenditures were $3.8 million, primarily related to the Company’s investment in a second HP digital inkjet press at its North Chelmsford, Massachusetts facility and its fourth four-color manroland press at the Kendallville, Indiana facility.  For the entire fiscal year, capital expenditures are expected to be approximately $23 to $25 million, including installation of a third HP digital inkjet press scheduled for the third quarter.  Prepublication costs were $1.1 million, comparable to the first three months of last year.  For the full fiscal year, prepublication costs are projected to be approximately $4 million.

 

Financing activities for the first three months of fiscal 2011 provided approximately $0.6 million of cash.  Cash dividends of $2.5 million were paid and borrowings increased by $3.2 million during the first quarter of fiscal 2011.  At December 25, 2010, borrowings under a term loan used to finance the purchase of the Company’s new digital print assets were $6.1 million, with $2.5 million at a fixed annual interest rate of 3.9% and $3.6 million at a fixed annual interest rate of 3.6%.  The Company also has a $100 million long-term revolving credit facility in place under which the Company can borrow at a rate not to exceed LIBOR plus 1.5%.  At December 25, 2010, the Company had $20.7 million in borrowings under this facility at an interest rate of 0.8%.  The revolving credit facility, which matures in 2013, contains restrictive covenants including provisions relating to the maintenance of working capital, the incurrence of additional indebtedness and a quarterly test of EBITDA to debt service.  The Company was in compliance with all such covenants at December 25, 2010.  The facility also provides for a commitment fee not to exceed 3/8% per annum on the unused portion.  The revolving credit facility is used by the Company for both its long-term and short-term financing needs.  The Company believes that its cash on hand, cash from operations and the available credit facility will be sufficient to meet its cash requirements through 2011.

 

The following table summarizes the Company’s contractual obligations and commitments at December 25, 2010 to make future payments as well as its existing commercial commitments.

 
| ** **                     | ** ** | ** ** | ** ** | **(000’s Omitted)**                      | ** ** |
|--------------------------------|------------|------------|------------|----------------------------------------------------|------------|
| ** **                     | ** ** | ** ** | ** ** | **Payments due by period (1)** | ** ** |
| ** **                     | ** ** | ** ** | ** ** | **Less than**                                 | ** ** | **1 to 3** | ** ** | **3 to 5** | ** ** | **More than** | ** ** |
| **Contractual Payments:** | ** ** | **Total**  | ** ** | **1 Year**                                    | ** ** | **Years** | ** ** | **Years** | ** ** | **5 Years** | ** ** |
| Long-Term Debt (2)             |       | $          | 26,853     |                                               | $          | 1,796 |   | $ | 24,396 |   | $ | 661 |   | $ | — |   |
| Operating Leases (3)           |       | 9,969      |       | 1,566                                              |       | 2,593 |   | 2,097 |   | 3,713 |   |
| Purchase Obligations (4)       |       | 864        |       | 864                                                |       | — |   | — |   | — |   |
| Other Long-Term Liabilities    |       | 3,287      |       | —                                             |       | 1,088 |   | 311 |   | 1,888 |   |
| Total                          |       | $          | 40,973     |                                               | $          | 4,226 |   | $ | 28,077 |   | $ | 3,069 |   | $ | 5,601 |   |

 

----

(1) Amounts do not include interest expense.

(2) Includes the Company’s revolving credit facility, which has a maturity date of March 2013.

(3) Represents amounts at September 25, 2010.

(4) Represents capital commitments.

 

15

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**Forward-Looking Information****:**

This Quarterly Report on Form 10-Q includes forward-looking statements.  Statements that describe future expectations, plans or strategies are considered “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995 and releases issued by the Securities and Exchange Commission.  The words “believe,” “expect,” “anticipate,” “intend,” “estimate” and other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements.  Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those currently anticipated.  Some of the factors that could affect actual results are discussed in Item 1A of this Form 10-Q and include, among others, changes in customers’ demand for the Company’s products, including seasonal changes in customer orders and shifting orders to lower cost regions, changes in market growth rates, changes in raw material costs and availability, pricing actions by competitors and other competitive pressures in the markets in which the Company competes, consolidation among customers and competitors, changes in the Company’s labor relations, success in the execution of acquisitions and the performance and integration of acquired businesses including carrying value of intangible assets, restructuring and impairment charges required under generally accepted accounting principles, changes in operating expenses including medical and energy costs, changes in technology including migration from paper-based books to digital, difficulties in the start up of new equipment or information technology systems, changes in copyright laws, changes in consumer product safety regulations, changes in environmental regulations, changes in tax regulations, changes in the Company’s effective income tax rate and general changes in economic conditions, including currency fluctuations, changes in interest rates, changes in consumer confidence, changes in the housing market, and tightness in the credit markets.  Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements will prove to be accurate.  The forward-looking statements included herein are made as of the date hereof, and the Company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances.

 

**Item 3****.****                                                          ****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

There have been no material changes from the information concerning the Company’s “Quantitative and Qualitative Disclosures About Market Risk” as previously reported in the Company’s Annual Report on Form 10-K for the year ended September 25, 2010.

 

**Item 4****.****                                                          ****CONTROLS AND PROCEDURES**

 

**(a)       Evaluation of disclosure controls and procedures**

 

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

 

**(b)       Changes in internal controls over financial reporting**

 

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

 

16

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**PART II.  OTHER INFORMATION**

 

**Item 1****.****                   ****Legal Proceedings**

 

None.

 

**Item 1A****.****                ****Risk Factors**

 

The Company’s consolidated results of operations, financial condition and cash flows can be adversely affected by various risks.  Our business is influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results and are often beyond our control.  These risks include, but are not limited to, the principal factors listed below and the other matters set forth in this Quarterly Report on Form 10-Q.  You should carefully consider all of these factors.  For other factors that may cause actual results to differ materially from those indicated in any forward-looking statement contained in this report, see *Forward-Looking Information* in *Management’s Discussion and Analysis of Financial Condition and Results of Operations*.

 

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

 

The book industry is extremely competitive.  In the book manufacturing segment, consolidation over the past few years of both customers and competitors within the markets in which the Company competes has caused downward pricing pressures.  In addition, excess capacity and competition from printing companies in lower cost countries may increase competitive pricing pressures.  Furthermore, some of our competitors have greater sales, assets and financial resources than us, particularly those in foreign countries, who 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 from, or the loss of, any of our significant customers may adversely impact our operating results.**

 

We derived approximately 47% and 44% of our fiscal 2010 and 2009 revenues, respectively, from two major customers.  We expect similar concentrations in fiscal 2011.  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, any of these customers could determine to reduce their order volume with us.  A significant reduction in order volumes from, or the loss of, either of these customers could have a material adverse effect on our results of operations and financial condition.

 

**The substitution of electronic delivery for printed materials may adversely affect our business.**

 

Electronic delivery of documents and data, including the online distribution and hosting of media content, offers alternatives to traditional delivery of printed documents.  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.  To the extent that our customers’ acceptance of these electronic alternatives should continue to grow, demand for our printed products may be adversely affected.

 

**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 specialty publishing segments, we may be adversely affected by the current worldwide economic downturn, including as a result of changes in government, business and consumer spending.  Examples of how our financial results may be impacted include:

 

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

 

·                  Consumer demand for books can be impacted by reductions in disposable income when costs 

 

17

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such as electricity and gasoline reduce discretionary spending.

 

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

 

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

 

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

 

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

 

**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;

 

·                  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.

 

18

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**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.  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, in the fourth quarter of fiscal 2010, due to the reduction in revenue and operating results at Creative Homeowner, we impaired our remaining goodwill and other intangible assets, as well as $0.5 million of prepublication costs, resulting in a non-cash impairment charge of $4.7 million.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

**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 four acquisitions, including Highcrest Media in fiscal 2010, Moore Langen and Creative Homeowner in fiscal 2006, and REA in fiscal 2004, and may continue to make acquisitions in the future.  We believe that these acquisitions provide strategic growth opportunities for us.  Achieving the anticipated benefits of these acquisitions will depend in part upon our ability to integrate these businesses in an efficient and effective manner.  The challenges involved in successfully integrating acquisitions include:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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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.  Any of these factors may materially and adversely affect our business and 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 two of our locations, and periodically, contracts with those unions come up for renewal.  The outcome of those negotiations could have an adverse affect on our operations at those locations.  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 affect on our operations.

 

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

 

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

 

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

 

None.

 

**Item 3****.****                   ****Defaults Upon Senior Securities**

 

None.

 

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**Item 4****.****                   ****Removed and Reserved**

 

**Item 5****.****                   ****Other Information**

 

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

 

**Item 6****.****                   ****Exhibits**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                           |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                 |       | 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). |
|                 |       |                                                                                                                                                                                                      |
| 10.2*                |       | Form   of Incentive Stock Option Agreement for the Courier Corporation 2011 Stock   Option and Incentive Plan.                                                                                            |
|                 |       |                                                                                                                                                                                                      |
| 10.3*                |       | Form   of Non-Qualified Stock Option Agreement for the Courier Corporation 2011   Stock Option and Incentive Plan.                                                                                        |
|                 |       |                                                                                                                                                                                                      |
| 10.4*                |       | Form   of Stock Grant Agreement for the Courier Corporation 2011 Stock Option and   Incentive Plan.                                                                                                       |
|                 |       |                                                                                                                                                                                                      |
| 31.1*                |       | Certification   of Chief Executive Officer                                                                                                                                                                |
|                 |       |                                                                                                                                                                                                      |
| 31.2*                |       | Certification   of Chief Financial Officer                                                                                                                                                                |
|                 |       |                                                                                                                                                                                                      |
| 32.1**               |       | Certification of Chief Executive Officer                                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                      |
| 32.2**               |       | Certification   of Chief Financial Officer                                                                                                                                                                |

 

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*            Filed herewith.

**     Furnished herewith.

 

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**SIGNATURES**

 

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

 

 

**COURIER CORPORATION**

**(Registrant)**

 

 
| *February   3, 2011* | * * | By:    | *s/James   F. Conway III*                           |
|----------------------|----------|--------|-----------------------------------------------------|
| Date                 |     |   | James   F. Conway III                               |
|                 |     |   | Chairman,   President and Chief Executive Officer   |
|                 |     |   |
|                 |     |   |
| *February   3, 2011* | * * | By:    | *s/Peter   M. Folger*                               |
| Date                 |     |   | Peter   M. Folger                                   |
|                 |     |   | Senior   Vice President and Chief Financial Officer |
|                 |     |   |
|                 |     |   |
| *February   3, 2011* | * * | By:    | *s/Kathleen   M. Leon*                              |
| Date                 |     |   | Kathleen   M. Leon                                  |
|                 |     |   | Vice   President and Controller                     |

 

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**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                           |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                 |       | 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). |
|                 |       |                                                                                                                                                                                                      |
| 10.2*                |       | Form   of Incentive Stock Option Agreement for the Courier Corporation 2011 Stock   Option and Incentive Plan.                                                                                            |
|                 |       |                                                                                                                                                                                                      |
| 10.3*                |       | Form   of Non-Qualified Stock Option Agreement for the Courier Corporation 2011   Stock Option and Incentive Plan.                                                                                        |
|                 |       |                                                                                                                                                                                                      |
| 10.4*                |       | Form   of Stock Grant Agreement for the Courier Corporation 2011 Stock Option and   Incentive Plan.                                                                                                       |
|                 |       |                                                                                                                                                                                                      |
| 31.1*                |       | Certification   of Chief Executive Officer                                                                                                                                                                |
|                 |       |                                                                                                                                                                                                      |
| 31.2*                |       | Certification   of Chief Financial Officer                                                                                                                                                                |
|                 |       |                                                                                                                                                                                                      |
| 32.1**               |       | Certification of Chief Executive Officer                                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                      |
| 32.2**               |       | Certification   of Chief Financial Officer                                                                                                                                                                |

 

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*            Filed herewith.

**     Furnished herewith.

 

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