**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

| **ý**                                                                                                                                                                                                                                                                                                                                                                                           |   | **QUARTERLY REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                                          |
| **For the quarterly period  ended  June 26, 2004**                                                                                                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                                          |
| **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**

(Exactname of registrant as specified in its charter)

 

**Massachusetts**

(Stateor other jurisdiction of incorporation or organization)

 

**04-2502514**

(I.R.S.Employer Identification No.)

 

| **15 Wellman Avenue, North Chelmsford, Massachusetts** |   | **01863**   |
|--------------------------------------------------------|--------|-------------|
| (Address  of principal executive offices)              |   | (Zip  Code) |

 

**(978) 251-6000**

(Registrant’stelephone number, including area code)

 

**NO CHANGE**

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

 

Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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   ý  No   o

 

Indicate by check mark whether theregistrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

 

Yes   ý  No   o

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 
| **Class**                   |   | **Outstanding at August 5, 2004** |
|-----------------------------|--------|-----------------------------------|
| Common  Stock, $1 par value |   | 7,992,778  Shares                 |

 

 

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COURIERCORPORATION

CONSOLIDATEDSTATEMENTS OF INCOME (UNAUDITED)

(Dollarsin thousands except per share amounts)

 
|                                |   | **QUARTER  ENDED** |   | **NINE  MONTHS ENDED** |   |
|-------------------------------------|--------|--------------------|--------|------------------------|--------|
|                                |   | **June 26,  2004** |   | **June 28,  2003**     |   | **June 26,  2004** |   | **June 28,  2003** |   |
|                                |   |               |   |                   |   |   |   |   |   |
| Net sales                           |   | $                  | 55,489 |                   | $      | 51,076 |   | $ | 151,971 |   | $ | 148,463 |   |
| Cost of sales                       |   | 38,140             |   | 34,114                 |   | 103,466 |   | 100,527 |   |
|                                |   |               |   |                   |   |   |   |   |   |
| Gross profit                        |   | 17,349             |   | 16,962                 |   | 48,505 |   | 47,936 |   |
|                                |   |               |   |                   |   |   |   |   |   |
| Selling and administrative expenses |   | 9,604              |   | 9,578                  |   | 28,878 |   | 29,064 |   |
| Interest (income) expense, net      |   | 28                 |   | (2                     | )      | (26 | ) | 66 |   |
| Gain on real estate sale            |   | 250                |   | —                 |   | 250 |   | — |   |
|                                |   |               |   |                   |   |   |   |   |   |
| Income before taxes                 |   | 7,967              |   | 7,386                  |   | 19,903 |   | 18,806 |   |
|                                |   |               |   |                   |   |   |   |   |   |
| Provision for income taxes (Note C) |   | 2,773              |   | 2,614                  |   | 6,946 |   | 6,497 |   |
|                                |   |               |   |                   |   |   |   |   |   |
| Income from continuing operations   |   | $                  | 5,194  |                   | $      | 4,772 |   | $ | 12,957 |   | $ | 12,309 |   |
|                                |   |               |   |                   |   |   |   |   |   |
| Discontinued operations (Note F):   |   |               |   |                   |   |   |   |   |   |
| Loss from operations, net of tax    |   | —             |   | —                 |   | — |   | (65 | ) |
| Gain on disposal, net of tax        |   | —             |   | —                 |   | — |   | 861 |   |
|                                |   |               |   |                   |   |   |   |   |   |
| Net income                          |   | $                  | 5,194  |                   | $      | 4,772 |   | $ | 12,957 |   | $ | 13,105 |   |
|                                |   |               |   |                   |   |   |   |   |   |
| Income per basic share (Note D):    |   |               |   |                   |   |   |   |   |   |
| Continuing operations               |   | $                  | 0.65   |                   | $      | 0.61 |   | $ | 1.63 |   | $ | 1.57 |   |
| Discontinued operation (Note F):    |   |               |   |                   |   |   |   |   |   |
| Loss from operation, net of tax     |   | —             |   | —                 |   | — |   | (0.01 | ) |
| Gain on disposal, net of tax        |   | —             |   | —                 |   | — |   | 0.11 |   |
|                                |   |               |   |                   |   |   |   |   |   |
| Net income per basic share          |   | $                  | 0.65   |                   | $      | 0.61 |   | $ | 1.63 |   | $ | 1.67 |   |
|                                |   |               |   |                   |   |   |   |   |   |
| Income per diluted share (Note D):  |   |               |   |                   |   |   |   |   |   |
| Continuing operations               |   | $                  | 0.63   |                   | $      | 0.59 |   | $ | 1.58 |   | $ | 1.52 |   |
| Discontinued operation (Note F):    |   |               |   |                   |   |   |   |   |   |
| Loss from operation, net of tax     |   | —             |   | —                 |   | — |   | (0.01 | ) |
| Gain on disposal, net of tax        |   | —             |   | —                 |   | — |   | 0.11 |   |
|                                |   |               |   |                   |   |   |   |   |   |
| Net income per diluted share        |   | $                  | 0.63   |                   | $      | 0.59 |   | $ | 1.58 |   | $ | 1.62 |   |
|                                |   |               |   |                   |   |   |   |   |   |
| Cash dividends declared per share   |   | $                  | 0.0875 |                   | $      | 0.075 |   | $ | 0.2625 |   | $ | 0.225 |   |

 

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

 

2

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COURIER CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands)

 
|                                                                                                                         |   | **June 26,  2004** |    | **September  27,  2003** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|--------------------------|--------|
| ASSETS                                                                                                                       |   |               |    |                     |   |
|                                                                                                                         |   |               |    |                     |   |
| Current assets:                                                                                                              |   |               |    |                     |   |
| Cash and cash equivalents                                                                                                    |   | $                  | 15,272  |                     | $      | 23,824 |   |
| Accounts receivable, less allowance for  uncollectible accounts of $1,873 at June 26, 2004 and $1,741 at September 27,  2003 |   | 31,331             |    | 29,174                   |   |
| Inventories (Note B)                                                                                                         |   | 25,390             |    | 20,681                   |   |
| Deferred income taxes                                                                                                        |   | 3,218              |    | 3,164                    |   |
| Other current assets                                                                                                         |   | 717                |    | 830                      |   |
|                                                                                                                         |   |               |    |                     |   |
| Total current assets                                                                                                         |   | 75,928             |    | 77,673                   |   |
|                                                                                                                         |   |               |    |                     |   |
| Property, plant and equipment, less  accumulated depreciation: $107,952 at June 26, 2004 and $101,356 at September  27, 2003 |   | 46,653             |    | 43,342                   |   |
|                                                                                                                         |   |               |    |                     |   |
| Goodwill (Note A)                                                                                                            |   | 33,630             |    | 24,847                   |   |
|                                                                                                                         |   |               |    |                     |   |
| Prepublication costs (Note A)                                                                                                |   | 5,114              |    | 3,810                    |   |
|                                                                                                                         |   |               |    |                     |   |
| Other assets                                                                                                                 |   | 1,460              |    | 1,429                    |   |
|                                                                                                                         |   |               |    |                     |   |
| Total assets                                                                                                                 |   | $                  | 162,785 |                     | $      | 151,101 |   |

 

The accompanying notes are an integral partof the consolidated condensed financial statements.

 

3

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COURIER CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands)

 
|                                                                                               |   | **June 26,  2004** |    | **September  27,  2003** |   |
|----------------------------------------------------------------------------------------------------|--------|--------------------|---------|--------------------------|--------|
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                          |   |               |    |                     |   |
|                                                                                               |   |               |    |                     |   |
| Current liabilities:                                                                               |   |               |    |                     |   |
| Current maturities of long-term debt                                                               |   | $                  | 81      |                     | $      | 81 |   |
| Accounts payable                                                                                   |   | 7,147              |    | 6,494                    |   |
| Accrued payroll                                                                                    |   | 6,791              |    | 8,031                    |   |
| Accrued taxes                                                                                      |   | 4,439              |    | 6,521                    |   |
| Other current liabilities                                                                          |   | 6,478              |    | 5,686                    |   |
|                                                                                               |   |               |    |                     |   |
| Total current liabilities                                                                          |   | 24,936             |    | 26,813                   |   |
|                                                                                               |   |               |    |                     |   |
| Long-term debt                                                                                     |   | 532                |    | 593                      |   |
| Deferred income taxes                                                                              |   | 7,258              |    | 5,597                    |   |
| Other liabilities                                                                                  |   | 2,693              |    | 2,678                    |   |
|                                                                                               |   |               |    |                     |   |
| Total liabilities                                                                                  |   | 35,419             |    | 35,681                   |   |
|                                                                                               |   |               |    |                     |   |
| Stockholders’ equity:                                                                         |   |               |    |                     |   |
| Preferred stock, $1 par value - authorized  1,000,000 shares; none issued                          |   |               |    |                     |   |
| Common stock, $1 par value - authorized  18,000,000 shares; issued 8,088,000 shares                |   | 8,088              |    | 8,088                    |   |
| Additional paid-in capital                                                                         |   | 1,171              |    | 650                      |   |
| Retained earnings                                                                                  |   | 119,690            |    | 108,827                  |   |
| Unearned compensation                                                                              |   | (230               | )       | (350                     | )      |
| Treasury stock, at cost: 102,000 shares at  June 26, 2004 and 157,000 shares at September 27, 2003 |   | (1,353             | )       | (1,795                   | )      |
|                                                                                               |   |               |    |                     |   |
| Total stockholders’ equity                                                                    |   | 127,366            |    | 115,420                  |   |
|                                                                                               |   |               |    |                     |   |
| Total liabilities and stockholders’ equity                                                    |   | $                  | 162,785 |                     | $      | 151,101 |   |

 

The accompanying notes are an integral part of theconsolidated condensed financial statements.

 

4

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COURIERCORPORATION

CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollarsin thousands)

 
|                                                                             |   | **NINE  MONTHS ENDED** |   |
|----------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                             |   | **June 26,  2004**     |   | **June 28,  2003** |   |
|                                                                             |   |                   |   |   |   |
| Operating Activities:                                                            |   |                   |   |   |   |
| Net income                                                                       |   | $                      | 12,957 |   | $ | 13,105 |   |
| Adjustments to reconcile net income to cash  provided from operating activities: |   |                   |   |   |   |
| Depreciation and amortization                                                    |   | 8,304                  |   | 7,431 |   |
| Deferred income taxes                                                            |   | 1,607                  |   | 888 |   |
| Changes in assets and liabilities:                                               |   |                   |   |   |   |
| Accounts receivable                                                              |   | (1,086                 | )      | 2,142 |   |
| Inventory                                                                        |   | (2,780                 | )      | (57 | ) |
| Accounts payable                                                                 |   | (133                   | )      | 59 |   |
| Accrued taxes                                                                    |   | (2,082                 | )      | (2,461 | ) |
| Other elements of working capital                                                |   | (492                   | )      | 25 |   |
| Gain on sale of assets (Notes F and G)                                           |   | (163                   | )      | (861 | ) |
| Other, net                                                                       |   | (822                   | )      | (270 | ) |
|                                                                             |   |                   |   |   |   |
| Cash provided from operating activities                                          |   | 15,310                 |   | 20,001 |   |
|                                                                             |   |                   |   |   |   |
| Investment Activities:                                                           |   |                   |   |   |   |
| Capital expenditures                                                             |   | (10,069                | )      | (4,048 | ) |
| Prepublication costs                                                             |   | (2,032                 | )      | (1,653 | ) |
| Business acquisition (Note E)                                                    |   | (11,850                | )      |   |   |
| Proceeds from sale of assets (Notes F and  G)                                    |   | 1,664                  |   | 1,500 |   |
|                                                                             |   |                   |   |   |   |
| Cash used for investment activities                                              |   | (22,287                | )      | (4,201 | ) |
|                                                                             |   |                   |   |   |   |
| Financing Activities:                                                            |   |                   |   |   |   |
| Long-term debt repayments                                                        |   | (61                    | )      | (59 | ) |
| Cash dividends                                                                   |   | (2,094                 | )      | (1,763 | ) |
| Proceeds from stock plans                                                        |   | 580                    |   | 446 |   |
|                                                                             |   |                   |   |   |   |
| Cash used for financing activities                                               |   | (1,575                 | )      | (1,376 | ) |
|                                                                             |   |                   |   |   |   |
| Increase (decrease) in cash and cash  equivalents                                |   | (8,552                 | )      | 14,424 |   |
|                                                                             |   |                   |   |   |   |
| Cash and cash equivalents at the beginning  of the period                        |   | 23,824                 |   | 5,630 |   |
|                                                                             |   |                   |   |   |   |
| Cash and cash equivalents at the end of the  period                              |   | $                      | 15,272 |   | $ | 20,054 |   |

 

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

 

5

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**COURIER CORPORATION**

** **

**NOTES TO CONSOLIDATED CONDENSED FINANCIALSTATEMENTS (UNAUDITED)**

 

**A.****                                    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Unaudited FinancialStatements**

Thebalance sheet as of June 26, 2004, the statements of income for the three-monthand nine-month periods ended June 26, 2004 and June 28, 2003, and thestatements of cash flows for the nine-month periods ended June 26, 2004 andJune 28, 2003 are unaudited.  In theopinion of management, all adjustments necessary for a fair presentation ofsuch financial statements have been recorded. Such adjustments consisted only of normal recurring items. Certainamounts for fiscal 2003 have been reclassified in the accompanying financialstatements in order to be consistent with the current year’s classification.

 

Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States (“generally accepted accounting principles”) have been condensedor omitted.  The balance sheet data asof September 27, 2003 was derived from audited year-end financial statements,but does not include all disclosures required by generally accepted accountingprinciples.  It is suggested that theseinterim financial statements be read in conjunction with the Company’s mostrecent Form 10-K and Annual Report for the year ended September 27, 2003.

 

**PrepublicationCosts**

Prepublicationcosts, associated with the specialty publishing segment, are amortized usingthe straight-line method over estimated useful lives of three years forrecently acquired Research and Education Association (see Note E) and four yearsfor Dover Publications.  Effective withthe second quarter of fiscal 2003, amortization expense of prepublication costswas reclassified to cost of sales from selling and administrative expense.  Prior periods presented in the accompanyingfinancial statements have been reclassified in order to be consistent with thecurrent classification.

 

**Goodwill**

The Company evaluates possibleimpairment annually or whenever events or circumstances indicate that thecarrying value of the assets may not be recoverable.

 

**Stock Split**

On November 6, 2003, theCompany announced a three-for-two stock split effected in the form of a 50%stock dividend, except for treasury shares, which was distributed on December5, 2003.  Previously authorized but unissuedshares were used to effect the dividend. Weighted average shares outstanding and per share amounts presented inthe accompanying financial statements for periods prior to the stock split havebeen restated to give effect to the stock split.

 

**Stock-Based Compensation**

The Company applies therecognition and measurement principles of APB Opinion No. 25, “Accounting forStock Issued to Employees” and related interpretations.  Accordingly, because the number of shares isfixed and the exercise price of the stock options equals the market price ofthe underlying stock on the date of grant, no compensation expense has beenrecognized.

 

6

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Had compensation cost for stockoptions, and grants under the Employee Stock Purchase Plan, been determinedunder the provisions of SFAS No. 123, the Company’s net income would have beenas follows:

 
|                                                                                                |   | **(000’s  Omitted)** |   |
|-----------------------------------------------------------------------------------------------------|--------|---------------------------|--------|
|                                                                                                |   | **Quarter  Ended**        |   | **Nine  Months Ended** |   |
|                                                                                                |   | **June 26,  2004**        |   | **June 28,  2003** |   | **June 26,  2004** |   | **June 28,  2003** |   |
|                                                                                                |   |                      |   |   |   |   |   |   |   |
| Net income as reported                                                                              |   | $                         | 5,194  |   | $ | 4,772 |   | $ | 12,957 |   | $ | 13,105 |   |
| Deduct: Stock-based compensation expense  determined under SFAS No. 123, net of related tax effects |   | (353                      | )      | (245 | ) | (1,051 | ) | (720 | ) |
| Pro forma net income                                                                                |   | $                         | 4,841  |   | $ | 4,527 |   | $ | 11,906 |   | $ | 12,385 |   |
|                                                                                                |   |                      |   |   |   |   |   |   |   |
| Net income per share as reported:                                                                   |   |                      |   |   |   |   |   |   |   |
| Basic                                                                                               |   | $                         | 0.65   |   | $ | 0.61 |   | $ | 1.63 |   | $ | 1.67 |   |
| Diluted                                                                                             |   | 0.63                      |   | 0.59 |   | 1.58 |   | 1.62 |   |
|                                                                                                |   |                      |   |   |   |   |   |   |   |
| Pro forma net income per share:                                                                     |   |                      |   |   |   |   |   |   |   |
| Basic                                                                                               |   | $                         | 0.61   |   | $ | 0.58 |   | $ | 1.50 |   | $ | 1.58 |   |
| Diluted                                                                                             |   | 0.59                      |   | 0.56 |   | 1.45 |   | 1.53 |   |

 

# **B.**                                    INVENTORIES

 

Inventoriesare valued at the lower of cost or market. Cost is determined using the last-in, first-out (LIFO) method forapproximately 38% and 44% of the Company’s inventories at June 26, 2004 andSeptember 27, 2003, respectively.  Otherinventories, primarily in the specialty publishing segment, are determined on afirst-in, first-out (FIFO) basis.  REA’sinventory of $1.5 million at June 26, 2004 is included in finished goods.  Inventories consisted of the following:

 
|            |   | **(000’s Omitted)** |   |
|-----------------|--------|--------------------------|--------|
|            |   | **June 26,  2004**       |   | **September 27,  2003** |   |
| Raw materials   |   | $                        | 3,502  |   | $ | 1,704 |   |
| Work in process |   | 5,200                    |   | 3,833 |   |
| Finished goods  |   | 16,688                   |   | 15,144 |   |
| Total           |   | $                        | 25,390 |   | $ | 20,681 |   |

 

On a FIFO basis, reported inventories would have been higher by $5.7million at June 26, 2004 and $5.5 million at September 27, 2003.

 

# **C.**                                    INCOME TAXES

 

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

 
|                                                   |   | **(000’s  Omitted)** |   |
|--------------------------------------------------------|--------|---------------------------|--------|
|                                                   |   | **Quarter  Ended**        |   | **Nine  Months Ended** |   |
|                                                   |   | **June 26,  2004**        |   | **June 28,  2003** |   | **June 26,  2004** |   | **June 28,  2003** |   |
| Federal taxes at statutory  rates                      |   | $                         | 2,788  |   | $ | 2,563 |   | $ | 6,966 |   | $ | 6,529 |   |
| State taxes, net of federal  benefit                   |   | 222                       |   | 201 |   | 552 |   | 455 |   |
| Foreign sales corporation (FSC)  Export related income |   | (232                      | )      | (144 | ) | (575 | ) | (502 | ) |
| Other                                                  |   | (5                        | )      | (6 | ) | 3 |   | 15 |   |
| Total                                                  |   | $                         | 2,773  |   | $ | 2,614 |   | $ | 6,946 |   | $ | 6,497 |   |

 

7

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**D.****                                    NETINCOME PER SHARE**

 

Following is a reconciliationof the shares used in the calculation of basic and diluted income pershare.  Potentially dilutive shares,calculated using the treasury stock method, consist of shares issued under theCompany’s stock option plans.  Theseshares have been adjusted to reflect the three-for-two stock split effected inthe form of a dividend distributed on December 5, 2003 (see Note A).

 
|                                    |   | **(000’s  Omitted)** |   |
|-----------------------------------------|--------|---------------------------|--------|
|                                    |   | **Quarter  Ended**        |   | **Nine  Months Ended** |   |
|                                    |   | **June 26,  2004**        |   | **June 28,  2003** |   | **June 26,  2004** |   | **June 28,  2003** |   |
|                                    |   |                      |   |   |   |   |   |   |   |
| Average shares outstanding for  basic   |   | 7,967                     |   | 7,856 |   | 7,948 |   | 7,838 |   |
| Effect of potentially dilutive  shares  |   | 263                       |   | 278 |   | 269 |   | 268 |   |
| Average shares outstanding for  diluted |   | 8,230                     |   | 8,134 |   | 8,217 |   | 8,106 |   |

 

**E.****                                      BUSINESSACQUISITION**

 

OnJanuary 6, 2004, the Company purchased substantially all of the assets ofResearch & Education Association (REA), a publisher of test preparation andstudy guide books and software for high school, college, graduate students, andprofessionals, with total annual sales of approximately $6 million.  The Company expects REA to be neutral tofiscal 2004 earnings and to contribute positively in 2005 and beyond.

 

Theacquisition was accounted for as a purchase, and accordingly, REA’s financialresults were included in the specialty publishing segment in the consolidatedfinancial statements from the date of acquisition.  The purchase price was approximately $12 million, with an initialallocation of approximately $9 million to goodwill in the accompanyingfinancial statements.  This allocationwill be finalized later this year.  As aresult of the REA acquisition, $24.4 million of the $33.6 million ofconsolidated goodwill is attributed to the specialty publishing segment and$9.2 million to the book manufacturing segment.

 

**F.****                                      DISCONTINUEDOPERATION**

 

OnDecember 17, 2002, the Company sold the assets of its whollyowned subsidiary, Courier Custom Publishing, Inc., which comprised all of theactivities of the customized education segment.  The customized education segment provided customized coursepacksand textbooks. Fiscal 2003 financial results of this discontinued operationthrough the date of disposal were a loss, net of tax, of $65,000 or $.01 perdiluted share.  Proceeds from the salewere $1.5 million resulting in an after-tax gain of approximately $0.9 million,or $.11 per diluted share, in fiscal 2003.

 

**G.****                                    GAINON REAL ESTATE SALE**

 

On May26, 2004, the Company completed the sale of approximately 200,000square feet of unoccupied and underutilized portions of its multi-buildingmanufacturing complex in Westford, Massachusetts for $1.7 million, resulting ina pretax gain of $250,000, or $.02 per diluted share.  The Company will continue its current levels of bookmanufacturing at the site.

 

8

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**H.****                                    BUSINESSSEGMENTS**

 

TheCompany has two business segments: full-service book manufacturing andspecialty publishing. The book manufacturing segment offers a full range ofservices from production through storage and distribution for religious,educational and specialty trade book publishers. The specialty publishingsegment consists of Dover Publications, Inc. and, beginning with the secondquarter of fiscal 2004, REA (see Note E).

 

Inevaluating segment performance, management primarily focuses on income or lossbefore taxes and other income.  Theelimination of intersegment sales and related profit represents sales from thebook manufacturing segment to the specialty publishing segment.  Corporate expenses that are allocated to thesegments include various support functions such as information technologyservices, finance, human resources and engineering, and include depreciationand amortization expense related to corporate assets*.*

 

Thefollowing table provides segment information for the three-month and nine-monthperiods ended June 26, 2004 and June 28, 2003. Information relating to thediscontinued customized education segment is not included (see Note F).

 
|                                |   | **(000’s) Omitted)** |   |
|-------------------------------------|--------|---------------------------|--------|
|                                |   | **Quarter  Ended**        |   | **Nine  Months Ended** |   |
|                                |   | **June 26,  2004**        |   | **June 28,  2003** |   | **June 26,  2004** |   | **June 28,  2003** |   |
|                                |   |                      |   |   |   |   |   |   |   |
| Net sales:                          |   |                      |   |   |   |   |   |   |   |
| Book manufacturing                  |   | $                         | 46,955 |   | $ | 43,561 |   | $ | 127,600 |   | $ | 126,528 |   |
| Specialty publishing                |   | 10,394                    |   | 8,948 |   | 29,585 |   | 26,390 |   |
| Elimination of intersegment  sales  |   | (1,860                    | )      | (1,433 | ) | (5,214 | ) | (4,455 | ) |
| Total for continuing operations     |   | $                         | 55,489 |   | $ | 51,076 |   | $ | 151,971 |   | $ | 148,463 |   |
|                                |   |                      |   |   |   |   |   |   |   |
| Income before taxes:                |   |                      |   |   |   |   |   |   |   |
| Book manufacturing                  |   | $                         | 6,352  |   | $ | 6,294 |   | $ | 16,082 |   | $ | 15,722 |   |
| Specialty publishing                |   | 1,503                     |   | 1,208 |   | 3,883 |   | 3,457 |   |
| Elimination of intersegment  profit |   | (138                      | )      | (116 | ) | (312 | ) | (373 | ) |
| Gain on sale of real estate         |   | 250                       |   | — |   | 250 |   | — |   |
| Total for continuing operations     |   | $                         | 7,967  |   | $ | 7,386 |   | $ | 19,903 |   | $ | 18,806 |   |

 

9

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**COURIER CORPORATION**

 

**Item 2.****                                                           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**Critical AccountingPolicies and Estimates:**

 

TheCompany’s consolidated condensed financial statements have been prepared inaccordance with generally accepted accounting principles.  The preparation of these financialstatements requires management to make estimates and assumptions that affectthe amounts reported in these financial statements and accompanying notes.   On an ongoing basis, management evaluatesits estimates and judgments, including those related to collectibility ofaccounts receivable, recovery of inventories, impairment of goodwill,prepublication costs and income taxes. Management bases its estimates and judgments on historical experienceand various other factors believed to be reasonable under the circumstances,the results of which form the basis for making judgments about the carryingvalue of assets and liabilities at the date of the financial statements and thereported amounts of revenues and expenses during the periods presented.  Actual results may differ from theseestimates.  The significant accountingpolicies which management believes are most critical to aid in fullyunderstanding and evaluating the Company’s reported financial results includethe following:

 

# **AccountsReceivable**   Managementperforms ongoing credit evaluations of the Company’s customers and adjustscredit limits based upon payment history and the customer’s currentcreditworthiness.  Collections andpayments from customers are continuously monitored.  A provision for estimated credit losses is determined based uponhistorical experience and any specific customer collection issues that havebeen identified.  If the financialcondition of the Company’s customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may berequired.

 

Inventories   Managementrecords reductions in the cost basis of inventory for excess and obsoleteinventory based primarily upon historical and forecasted product demand.  If actual market conditions are lessfavorable than those projected by management, additional inventory charges maybe required.

 

Goodwill  The Company evaluates possible impairmentannually or whenever events or circumstances indicate that the carrying valueof the assets may not be recoverable. The Company completed its annual impairment test at September 27, 2003resulting in no change to the nature or carrying amounts of its intangibleassets.  Changes in market conditions orpoor operating results could result in a decline in value thereby potentiallyrequiring an impairment charge in the future.

 

PrepublicationCosts   TheCompany capitalizes prepublication costs, which include the costs of acquiringrights to publish a work and costs associated with bringing a manuscript topublication such as artwork and editorial efforts. Prepublication costs areamortized on a straight-line basis over periods ranging from three to fouryears.  Management regularly evaluatesthe sales and profitability of the products based upon historical andforecasted demand.  Based upon thisevaluation, adjustments may be required to amortization expense.

 

Income Taxes   The income tax provision and relatedaccrued taxes are based on amounts reported on the Company’s tax returns andchanges in deferred taxes.  Deferredincome tax liabilities and assets aredetermined based upon the differences between the financial statement and taxbases of assets and liabilities. Changes in the recoverability of the Company’s deferred tax assets oraudits by tax authorities could result in future charges or credits to incometax expense, and related accrued and deferred taxes.

 

10

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**Results of Operations:**

 

For the third quarter of fiscal 2004, the Company’s incomefrom continuing operations increased 9% to $5.2 million, or $.63 per dilutedshare, compared to last year’s third quarter results of $4.8 million, or $.59per diluted share.  Sales fromcontinuing operations in the third quarter were $55.5 million, up 9% from $51.1million in the same period last year. Gross profit increased to $17.3 million in the third quarter compared to$17.0 million in the same period last year, and, as a percentage of sales, was31.3% compared to 33.2% in the prior year.

 

For the first nine months of fiscal 2004, income fromcontinuing operations was $13.0 million, or $1.58 per diluted share, up 5% from$12.3 million, or $1.52 per diluted share, for the first nine months of fiscal2003.  Sales of $152.0 million for thefirst nine months were up 2% from sales for the corresponding period lastyear.  Gross profit for the first ninemonths of fiscal 2004 was $48.5 million compared to $47.9 million lastyear.  As a percentage of sales, grossprofit decreased slightly for the first nine months of fiscal 2004 to 31.9%from 32.3% last year.

 

Boththe quarter and nine-month results include the results of Research &Education Association, Inc. (REA). On January 6, 2004, the Company purchasedsubstantially all of the assets of REA, a publisher of test preparation andstudy guide books and software for high school, college, graduate students, andprofessionals, with total annual sales of approximately $6 million.  The acquisition was accounted for as apurchase, and accordingly, REA’s financial results were included in thespecialty publishing segment in the consolidated financial statements from thedate of acquisition.  The purchase pricewas approximately $12 million, with an initial allocation of approximately $9million to goodwill in the accompanying financial statements. This allocationwill be finalized later this year.  TheCompany expects REA to be neutral to fiscal 2004 earnings and to contributepositively in 2005 and beyond.  Inaddition, on May 26, 2004, the Company realized a pretax gain of $250,000, or$.02 per diluted share, from the sale of the unutilized portions of itsmulti-building manufacturing complex in Westford, Massachusetts.  The quarter and nine-month results do notinclude the results of a discontinued operation (see section below onDiscontinued Operation).

 

**Continuing Operations**

 

*Book ManufacturingSegment*

Salesfrom the Company’s book manufacturing segment were $47.0 million in the thirdquarter, an increase of 8% from the same period last year.  Sales for the first nine months of fiscal2004 were up 1% to $127.6 million compared to the prior year.  Within this segment, the Company focuses onthree key markets: education, religious, and specialty trade.  Sales in the education market increased 26%in the third quarter and 13% for the first nine months compared to fiscal 2003.Sales to the elementary/high school market were up 30% both in the quarter andthe first nine months, primarily as a result of gains in market share with keycustomers.  Higher-education sales wereup 23% in the third quarter, bringing the nine-month sales increase to 6%.  Sales in the religious market were down 3%in the third quarter, with nine-month sales comparable to the correspondingperiod last year.  Sales to thespecialty trade market were down by 4% in the quarter and down 11% for thefirst nine months compared to the same periods last year as continuing declinesin sales of computer game books offset small gains in other segments of thespecialty trade market.  The Companyrecently expanded its four-color capabilities with the addition of a major newfour-color press at its Kendallville, Indiana facility.  The press became operational in April 2004.

 

Grossprofit as a percentage of sales in the book manufacturing segment decreased by270 basis points to 26.8% in the third quarter from 29.5% in the same quarterlast year.  The decline was due to acombination of lower pricing tied to market share increases and start-up costsrelated to the new four-color press. For the first nine months of fiscal 2004, gross profit in this segmentwas 27.3% compared to 28.5% in the prior year.

 

11

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Sellingand administrative expenses decreased by 6% in the third quarter to $6.3million compared to the same period in the prior year.  For the first nine months, selling andadministrative expenses of $19.0 million were down by 7% compared to the sameperiod of fiscal 2003.  As a percentageof sales, selling and administrative expenses were 13% and 15% in the thirdquarter and the first nine months, respectively, compared to 15% and 16%,respectively, for the corresponding periods last year.  The reductions were due, in part, to lowerbad debt expense as well as reductions in incentive compensation.

 

Interestincome allocated to the book manufacturing segment was $53,000 in the thirdquarter of fiscal 2004 resulting in interest income of $239,000 for the firstnine months of this year, compared to $76,000 and $213,000 in the correspondingperiods of fiscal 2003, respectively. Fiscal 2004 interest income includes capitalized interest related to thenew four-color press, which amounted to $13,000 for the third quarter and$74,000 for the first nine months of the year.

 

Thirdquarter pretax income in this segment was $6.4 million, or $.50 per dilutedshare, up 1% from the corresponding quarter last year.  For the first nine months, pretax income wasup 2% over last year to $16.1 million, or $1.28 per diluted share.

 

*Specialty PublishingSegment*

TheCompany’s specialty publishing segment is comprised of Dover Publications, Inc.(“Dover”), as well as REA since its acquisition on January 6, 2004.  Third quarter sales in this segment were$10.4 million, up 16% from $8.9 million in last year’s third quarter, with theincrease primarily attributable to REA. For the first nine months, sales increased 12% over the same period lastyear to $29.6 million.  Dover’s saleswere up approximately 2% in the third quarter to $9.1 million and up 3% for thefirst nine months to $27.2 million compared to the corresponding periods lastyear.  Within Dover, sales to U.S.retailers, which account for approximately 70% of Dover’s total sales, were up2% in the third quarter.  Sales to largebookstore chains were down 7%, offsetting sales growth to gift shops, craftstores and other non-bookstore outlets. International sales were flat in the third quarter compared to a verystrong quarter in the prior year and, for the first nine months of fiscal 2004,were up 13%.  Direct-to-consumer salesincreased 5% compared to last year’s third quarter.

 

Gross profit as a percent ofsales in the specialty publishing segment was 47.3%, comparable to last year’sthird quarter. Dover’s gross profit as a percentage of sales continued toimprove in the third quarter with an increase of 200 basis points to 49.2% ofsales.  REA’s gross profit percentagewas 33.7%, which included approximately $200,000 of expense related to arequired write up of inventory to fair market value when REA was acquired.  The total inventory write up wasapproximately $1 million, which will be expensed as the acquired inventory issold, which is expected to take approximately one year.  Excluding this expense, REA’s gross profitpercentage in the third quarter would have been 49.2%.  On a year-to-date basis, gross profit as apercent of sales in this segment was 47.1% compared to 46.3% for thecorresponding period last year.

 

Selling and administrativeexpenses in this segment were $3.3 million in the third quarter, an increase of13% over the corresponding prior year period. The addition of REA accounted for most of the increase.  For the first nine months of fiscal 2004,selling and administrative expenses of $9.8 million were 16% higher than thecorresponding period last year as a result of the acquisition of REA as well asincreased sales and marketing initiatives at Dover.

 

Interestexpense is allocated to the specialty publishing segment based on theacquisition cost of Dover and REA, reduced by cash generated by each businesssince acquisition.  Such interestexpense in the third quarter was $81,000, comparable to the same period lastyear, and split evenly between Dover and REA. Interest expense for the first nine months was $213,000 compared to$279,000 for the first nine months of the prior year with the decreaseprimarily attributable to cash generated by Dover.

 

12

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Pretaxincome in the specialty publishing segment was $1.5 million, or $.12 perdiluted share, a 24% increase over last year’s third quarter.  REA was slightly profitable for the quarter,as expected, with its earnings reduced by approximately $.02 per diluted sharefor post-acquisition costs, such as the expense related to the write up ofinventory to fair market value, and allocated interest expense.  For the first nine months, pretax income inthis segment increased 12% to  $3.9million, or $.30 per diluted share, from $3.5 million, or $.27 per diluted share,for the same period last year.

 

*Total ConsolidatedCompany*

Interestexpense, net of interest income, was $28,000 in the third quarter of fiscal2004 compared to interest income of $2,000 in the same period of fiscal2003.  There were no borrowings underthe Company’s $60 million revolving credit facility in the first nine months ofeither year, however, interest expense includes commitment fees and other costsassociated with maintaining this credit facility.  Cash investments in the third quarter of fiscal 2004 averagedapproximately $12.2 million invested at an average annual interest rate of1.3%, generating interest income of approximately $40,000.  For the same period last year, the Company’saverage cash investments were $18.5 million invested at an average annualinterest rate of 1.1%, generating approximately $51,000 of interestincome.  For the first nine months offiscal 2004, interest income, net of interest expense, was $26,000 compared tonet interest expense of $66,000 in the corresponding period of fiscal2003.  Capitalized interest was $13,000in the third quarter and $74,000 for the first nine months of fiscal 2004.  No interest was capitalized in the correspondingprior year periods.

 

The Company’s effective taxrate for the third quarter and first nine months of fiscal 2004 was 35%,comparable to the same periods in the prior year.

 

For purposes of computing netincome per diluted share, weighted average shares outstanding increased byapproximately 96,000 shares and 111,000 shares over last year’s third quarterand first nine months, respectively. The increase in both periods was largely due to options exercised. OnDecember 5, 2003, a three-for-two stock split was effected in the form of a 50%stock dividend, except for treasury shares. Weighted average shares outstanding and per share amounts presented inthe accompanying financial statements for periods prior to the stock split havebeen restated to give effect to the stock split.

 

**Discontinued Operation**

On December 17, 2002, the Companysold the assets of its wholly owned subsidiary, Courier Custom Publishing,Inc., which comprised all of the activities of the Customized Educationsegment. The Customized Education segment provided customized coursepacks andtextbooks.  Results for the firstquarter of fiscal 2003 for this discontinued operation were a loss, net of tax,of $65,000, or $.01 per diluted share. Proceeds from the sale of Courier Custom Publishing were $1.5 million,resulting in an after-tax gain of approximately $0.9 million, or $.11 perdiluted share recorded in last year’s first quarter.

 

**Liquidity and CapitalResources:**

 

Duringthe first nine months of fiscal 2004, operations provided approximately $15.3million of cash.  Income from continuingoperations was $13.0 million, depreciation and amortization were $8.3 million,and deferred income taxes increased $1.6 million.  Working capital used approximately $6.6 million of cash, due inpart to an increase in inventories and accounts receivable, and payment ofaccrued taxes.

 

Investmentactivities in the first nine months of fiscal 2004 used $22.3 million of cash,including approximately $12 million for the acquisition of REA. Capitalexpenditures were approximately $10.1 million, primarily for the new four-colorpress installed in the Kendallville, Indiana facility.  For the entire fiscal year, capitalexpenditures are expected to be approximately $15 million, includingapproximately $10 million for the new press project. Prepublication costs were$2.0 million and are projected to be approximately $3 million for the fullfiscal year.

 

13

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On May26, 2004, the Company completed the sale of approximately 200,000square feet of unoccupied and underutilized portions of its multi-buildingmanufacturing complex in Westford, Massachusetts for $1.7 million, resulting ina pretax gain of $250,000, or $.02 per diluted share.  The Company will continue its current levels of bookmanufacturing at the site.

 

Financingactivities for the first nine months of fiscal 2004 used approximately $1.6million of cash.  Dividend payments were$2.1 million while proceeds from stock plans were $580,000.  At June 26, 2004, the Company had $15.3million in cash and no borrowings under its $60 million long-term revolvingcredit facility, which bears interest at a floating rate.  The revolving credit facility is used by theCompany for both its long-term and short-term financing needs. On March 31,2004, the Company extended the maturity date of this facility to March2007.   The Company believes that itscash from operations and available credit facilities will be sufficient to meetits cash requirements through fiscal 2005.

 

Thefollowing table summarizes the Company’s contractual obligations and commitmentsat September 27, 2003 to make future payments as well as its existingcommercial commitments.

 
|                        |   |      |   | **(000’s omitted)**   |   |
|-----------------------------|--------|-----------|--------|----------------------------|--------|
|                        |   |      |   | **Payments due by period** |   |
|                        |   | **Total** |   | **Less than  1 Year**      |   | **1 to 3  Years** |   | **4 to 5  Years** |   | **After 5  Years** |   |
| Contractual Payments:       |   |      |   |                       |   |   |   |   |   |   |   |
| Long-Term Debt              |   | $         | 674    |                       | $      | 81 |   | $ | 168 |   | $ | 179 |   | $ | 246 |   |
| Operating Leases            |   | $         | 9,654  |                       | $      | 3,679 |   | $ | 4,033 |   | $ | 1,942 |   | $ | — |   |
| Purchase Obligations (1)    |   | $         | 2,481  |                       | $      | 2,481 |   | $ | — |   | $ | — |   | $ | — |   |
| Other Long-Term Liabilities |   | $         | 2,678  |                       | $      | — |   | $ | 1,294 |   | $ | 360 |   | $ | 1,024 |   |
|                             |        |           |        |                            |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          Represent amounts at June 26, 2004 primarily for capital commitments forthe new four-color press.

 

**Forward-LookingInformation:**

This Quarterly Report on Form10-Q and the Company’s Annual Report for the year ended September 27, 2003 onForm 10-K include forward-looking statements. Statements that describe future expectations, plans or strategies areconsidered “forward-looking statements” as that term is defined under thePrivate Securities Litigation Reform Act of 1995 and releases issued by theSecurities and Exchange Commission.  Thewords “believe,” “expect,” “anticipate,” “intend,” “estimate” and otherexpressions which are predictions of or indicate future events and trends andwhich do not relate to historical matters identify forward-lookingstatements.  Such statements are subjectto risks and uncertainties that could cause actual results to differ materiallyfrom those currently anticipated. Factors that could affect actual results include, among others, changesin customers’ demand for the Company’s products, including seasonal changes incustomers’ orders, changes in raw material availability or costs, pricingactions by competitors, consolidation among customers and competitors, successin the integration of acquired businesses, unanticipated changes in operatingexpenses, costs related to starting up new printing presses, changes intechnology, changes in copyright laws, changes in tax policy including exportcredits, and general changes in economic conditions including changes in interestrates.  Although the Company believesthat the assumptions underlying the forward-looking statements are reasonable,any of the assumptions could be inaccurate, and therefore, there can be noassurance that the forward-looking statements will prove to be accurate.  The forward-looking statements includedherein are made as of the date hereof, and the Company undertakes no obligationto update publicly such statements to reflect subsequent events orcircumstances.

 

14

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#### **COURIERCORPORATION**

 

**Item 3.****                                                           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

Therehave been no material changes from the information concerning the Company’s“Quantitative and Qualitative Disclosures About Market Risk” as previouslyreported in the Company’s Annual Report on Form 10-K for the year endedSeptember 27, 2003.

 

**Item 4.****                                                           CONTROLSAND PROCEDURES**

 

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

 

As required by Rule 13a-15 under theSecurities Exchange Act of 1934, as of the end of the period covered by thisquarterly report, the Company carried out an evaluation under the supervisionand with the participation of the Company’s management, including the Company’sChief Executive Officer and Chief Financial Officer, of the effectiveness ofthe design and operation of the Company’s disclosure controls andprocedures.  Based upon that evaluation,the Chief Executive Officer and Chief Financial Officer concluded that theCompany’s disclosure controls and procedures are effective to ensure thatinformation required to be disclosed by the Company in the reports it files orsubmits under the Exchange Act is recorded, processed, summarized and reported,within the time periods specified in the Securities and Exchange Commission’srules and forms.

 

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

 

There was no change in the Company’sinternal control over financial reporting that occurred during the periodcovered by this quarterly report that has materially affected, or that isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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**COURIER CORPORATION**

 

**PART II. OTHER INFORMATION**

 
| **Item 1.** | **Legal Proceedings**                                    |
|-------------|----------------------------------------------------------|
|        |                                                     |
|        | None.                                                    |
|        |                                                     |
| **Item 2.** | **Changes in  Securities and Use of Proceeds**           |
|        |                                                     |
|        | None.                                                    |
|        |                                                     |
| **Item 3.** | **Defaults Upon Senior Securities**                      |
|        |                                                     |
|        | None.                                                    |
|        |                                                     |
| **Item 4.** | **Submission of  Matters to a Vote of Security Holders** |
|        |                                                     |
|        | None.                                                    |
|        |                                                     |
| **Item 5.** | **Other Information**                                    |
|        |                                                     |
|        | None.                                                    |
|        |                                                     |
| **Item 6.** | **Exhibits and Reports on Form 8-K**                     |
|        |                                                     |
|        | (a)  Exhibits                                       |

 

 
| **Exhibit No.**               |   | **Description**                           |
|-------------------------------|--------|-------------------------------------------|
|                          |   |                                      |
| 31.1                          |   | Certification  of Chief Executive Officer |
|                          |   |                                      |
| 31.2                          |   | Certification  of Chief Financial Officer |
|                          |   |                                      |
| 32.1                          |   | Certification  of Chief Executive Officer |
|                          |   |                                      |
| 32.2                          |   | Certification  of Chief Financial Officer |
|                          |   |                                      |
| (b)  Reports on Form 8-K |

 

Filed April 15, 2004, reporting under Item 12 a press release datedApril 15, 2004 reporting financial results for the quarter ended March 27,2004.

 

Filed May 27, 2004, reporting under Item 5 a press release dated May26, 2004 announcing the completion of a previously announced agreement for thesale of real estate.

 

16

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**SIGNATURES**

 

 

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

 

 

**COURIERCORPORATION**

**(Registrant)**

 

 
| *  August  9, 2004* |   | By:    | *   s/ James F. Conway III*              |   |
|-------------------------------|--------|--------|----------------------------------------------------|--------|
| Date                          |   |   | James F. Conway III                                |
|                          |   |   | Chairman, President and  Chief Executive Officer   |
|                          |   |   |
|                          |   |   |
| *  August  9, 2004* |   | By:    | *   s/ Robert P. Story, Jr.*             |   |
| Date                          |   |   | Robert P. Story, Jr.                               |
|                          |   |   | Senior Vice President and  Chief Financial Officer |
|                          |   |   |
|                          |   |   |
| *  August  9, 2004* |   | By:    | *   s/ Peter M. Folger*                  |   |
| Date                          |   |   | Peter M. Folger                                    |
|                          |   |   | Vice President and  Chief Accounting Officer       |
|                               |        |        |                                                    |        |  |  |

 

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