**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.  20549**

**FORM10-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 March 31, 2007**                                                                                                                                                                                                                                                                                                                                                                                    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |
| **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 filenumber  0-7597**

**COURIER CORPORATION**(Exact name of registrant as specified in its charter)

**Massachusetts**(State or 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’s telephone number, including area code)

**NO CHANGE**(Former name, former address and former fiscal year, if changed since lastreport)

Indicate by check mark whetherthe registrant (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  x    No  o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer (as defined in Exchange Act Rule 12b-2).
| Large accelerated filer  o | Accelerated filer  x | Non-accelerated filer  o |
|--------------------------------------|--------------------------------|------------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Exchange Act Rule12b-2).

Yes  o    No  x

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

| **Class**                   | ** ** | **Outstanding  at May 8, 2007** |
|-----------------------------|------------|---------------------------------|
| Common Stock, $1  par value |       | 12,530,852  shares              |

 

 

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COURIER CORPORATIONCONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)(Dollars in thousands except per share amounts)
| ** **                           | ** ** | **QUARTER ENDED** | ** ** | **SIX MONTHS ENDED** | ** ** |
|--------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **March 31,**     | ** ** | **March 25,**             | ** ** | **March 31,** | ** ** | **March 25,** | ** ** |
| ** **                           | ** ** | **2007**               | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                 |       |                   |       |                           |       |   |   |   |   |
| Net sales                            |       | $                      | 76,336     |                           | $          | 57,527 |   | $ | 140,648 |   | $ | 115,211 |   |
| Cost of sales                        |       | 52,706                 |       | 39,652                         |       | 96,874 |   | 78,805 |   |
|                                 |       |                   |       |                           |       |   |   |   |   |
| Gross profit                         |       | 23,630                 |       | 17,875                         |       | 43,774 |   | 36,406 |   |
|                                 |       |                   |       |                           |       |   |   |   |   |
| Selling and  administrative expenses |       | 14,203                 |       | 11,123                         |       | 27,704 |   | 22,803 |   |
| Interest expense  (income), net      |       | 476                    |       | (100                           | )          | 698 |   | (248 | ) |
|                                 |       |                   |       |                           |       |   |   |   |   |
| Pretax income                        |       | 8,951                  |       | 6,852                          |       | 15,372 |   | 13,851 |   |
|                                 |       |                   |       |                           |       |   |   |   |   |
| Provision for income  taxes (Note C) |       | 3,342                  |       | 2,459                          |       | 5,740 |   | 4,971 |   |
|                                 |       |                   |       |                           |       |   |   |   |   |
| Net income                           |       | $                      | 5,609      |                           | $          | 4,393 |   | $ | 9,632 |   | $ | 8,880 |   |
|                                 |       |                   |       |                           |       |   |   |   |   |
| Net income per share  (Note D):      |       |                   |       |                           |       |   |   |   |   |
|                                 |       |                   |       |                           |       |   |   |   |   |
| Basic                                |       | $                      | 0.45       |                           | $          | 0.36 |   | $ | 0.77 |   | $ | 0.72 |   |
|                                 |       |                   |       |                           |       |   |   |   |   |
| Diluted                              |       | $                      | 0.44       |                           | $          | 0.35 |   | $ | 0.76 |   | $ | 0.71 |   |
|                                 |       |                   |       |                           |       |   |   |   |   |
| Cash dividends declared per share    |       | $                      | 0.18       |                           | $          | 0.12 |   | $ | 0.36 |   | $ | 0.24 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

2

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COURIER CORPORATIONCONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)(Dollars in thousands)
| ** **                                                                                                                    | ** ** | **March 31,** | ** ** | **September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                                    | ** ** | **2007**           | ** ** | **2006**               | ** ** |
|                                                                                                                          |       |               |       |                   |       |
| Current assets:                                                                                                               |       |               |       |                   |       |
| Cash and cash equivalents                                                                                                     |       | $                  | 1,368      |                   | $          | 1,483 |   |
| Accounts receivable, less allowance for  uncollectible accounts of $1,719 at March 31, 2007 and $1,593 at September  30, 2006 |       | 44,084             |       | 46,002                 |       |
| Inventories (Note B)                                                                                                          |       | 35,371             |       | 29,565                 |       |
| Deferred income taxes                                                                                                         |       | 3,694              |       | 3,703                  |       |
| Other current assets                                                                                                          |       | 1,061              |       | 1,110                  |       |
|                                                                                                                          |       |               |       |                   |       |
| Total current assets                                                                                                          |       | 85,578             |       | 81,863                 |       |
|                                                                                                                          |       |               |       |                   |       |
| Property, plant  and equipment, less accumulated depreciation: $134,982 at March 31, 2007 and  $129,323 at September 30, 2006 |       | 90,398             |       | 85,248                 |       |
|                                                                                                                          |       |               |       |                   |       |
| Goodwill (Note  A)                                                                                                            |       | 55,406             |       | 55,406                 |       |
|                                                                                                                          |       |               |       |                   |       |
| Other  intangibles, net (Note A)                                                                                              |       | 13,290             |       | 13,691                 |       |
|                                                                                                                          |       |               |       |                   |       |
| Prepublication  costs (Note A)                                                                                                |       | 9,885              |       | 9,327                  |       |
|                                                                                                                          |       |               |       |                   |       |
| Other assets                                                                                                                  |       | 1,697              |       | 1,653                  |       |
|                                                                                                                          |       |               |       |                   |       |
| Total assets                                                                                                                  |       | $                  | 256,254    |                   | $          | 247,188 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

3

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| ** **                                                                                                                            | ** ** | **March 31,** | ** ** | **September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                          | ** ** | **2007**           | ** ** | **2006**               | ** ** |
|                                                                                                                                  |       |               |       |                   |       |
| Current  liabilities:                                                                                                                 |       |               |       |                   |       |
| Current maturities of long-term debt                                                                                                  |       | $                  | 88         |                   | $          | 88 |   |
| Accounts payable                                                                                                                      |       | 16,068             |       | 15,778                 |       |
| Accrued payroll                                                                                                                       |       | 7,323              |       | 9,534                  |       |
| Accrued taxes                                                                                                                         |       | 702                |       | 3,362                  |       |
| Other current liabilities                                                                                                             |       | 5,306              |       | 6,928                  |       |
|                                                                                                                                  |       |               |       |                   |       |
| Total current liabilities                                                                                                             |       | 29,487             |       | 35,690                 |       |
|                                                                                                                                  |       |               |       |                   |       |
| Long-term debt                                                                                                                        |       | 24,265             |       | 17,222                 |       |
| Deferred income  taxes                                                                                                                |       | 10,037             |       | 8,913                  |       |
| Other  liabilities                                                                                                                    |       | 2,975              |       | 3,037                  |       |
|                                                                                                                                  |       |               |       |                   |       |
| Total liabilities                                                                                                                     |       | 66,764             |       | 64,862                 |       |
|                                                                                                                                  |       |               |       |                   |       |
| 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 12,515,000 at March 31, 2007 and 12,445,000 at September 30,  2006 |       | 12,515             |       | 12,445                 |       |
| Additional paid-in capital                                                                                                            |       | 10,548             |       | 8,592                  |       |
| Retained earnings                                                                                                                     |       | 166,427            |       | 161,289                |       |
|                                                                                                                                  |       |               |       |                   |       |
| Total stockholders’ equity                                                                                                       |       | 189,490            |       | 182,326                |       |
|                                                                                                                                  |       |               |       |                   |       |
| Total liabilities and  stockholders’ equity                                                                                      |       | $                  | 256,254    |                   | $          | 247,188 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

4

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COURIER CORPORATIONCONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)(Dollars in thousands)
| ** **                                                                       | ** ** | **SIX MONTHS ENDED** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                       | ** ** | **March 31,**             | ** ** | **March 25,** | ** ** |
| ** **                                                                       | ** ** | **2007**                       | ** ** | **2006** | ** ** |
|                                                                             |       |                           |       |   |   |
| Operating  Activities:                                                           |       |                           |       |   |   |
| Net income                                                                       |       | $                              | 9,632      |   | $ | 8,880 |   |
| Adjustments to reconcile net income to cash provided  from operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                    |       | 9,250                          |       | 7,101 |   |
| Stock based compensation                                                         |       | 726                            |       | 696 |   |
| Deferred income taxes                                                            |       | 1,133                          |       | 748 |   |
| Changes in assets and liabilities:                                               |       |                           |       |   |   |
| Accounts receivable                                                              |       | 1,918                          |       | 1,229 |   |
| Inventory                                                                        |       | (5,806                         | )          | (3,524 | ) |
| Accounts payable                                                                 |       | 290                            |       | (1,078 | ) |
| Accrued taxes                                                                    |       | (2,660                         | )          | (1,928 | ) |
| Other elements of working capital                                                |       | (3,784                         | )          | (1,660 | ) |
| Other, net                                                                       |       | (189                           | )          | (339 | ) |
|                                                                             |       |                           |       |   |   |
| Cash provided  from operating activities                                         |       | 10,510                         |       | 10,125 |   |
|                                                                             |       |                           |       |   |   |
| Investment  Activities:                                                          |       |                           |       |   |   |
| Capital expenditures                                                             |       | (11,793                        | )          | (11,793 | ) |
| Business acquisition, net of cash acquired                                       |       | —                         |       | (14,163 | ) |
| Prepublication costs                                                             |       | (2,757                         | )          | (1,600 | ) |
|                                                                             |       |                           |       |   |   |
| Cash used for  investment activities                                             |       | (14,550                        | )          | (27,556 | ) |
|                                                                             |       |                           |       |   |   |
| Financing  Activities:                                                           |       |                           |       |   |   |
| Long-term debt borrowings (repayments)                                           |       | 7,043                          |       | (42 | ) |
| Cash dividends                                                                   |       | (4,494                         | )          | (2,958 | ) |
| Proceeds from stock plans                                                        |       | 1,175                          |       | 695 |   |
| Excess tax benefits from stock-based compensation                                |       | 201                            |       | — |   |
|                                                                             |       |                           |       |   |   |
| Cash provided  from (used for) financing activities                              |       | 3,925                          |       | (2,305 | ) |
|                                                                             |       |                           |       |   |   |
| Decrease in cash  and cash equivalents                                           |       | (115                           | )          | (19,736 | ) |
|                                                                             |       |                           |       |   |   |
| Cash and cash  equivalents at the beginning of the period                        |       | 1,483                          |       | 34,038 |   |
|                                                                             |       |                           |       |   |   |
| Cash and cash  equivalents at the end of the period                              |       | $                              | 1,368      |   | $ | 14,302 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

5

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**COURIER CORPORATION**NOTESTO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

**A.            SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

**Unaudited Financial Statements**

The balance sheet as of March 31, 2007, the statements of income for thethree-month and six-month periods ended March 31, 2007 and March 25, 2006, andthe statements of cash flows for the six-month periods ended March 31, 2007 andMarch 25, 2006 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. 

Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States (“generally accepted accountingprinciples”) have been condensed or omitted. The balance sheet data as of September 30, 2006 was derived from auditedyear-end financial statements, but does not include disclosures required bygenerally accepted accounting principles. It is suggested that these interim financial statements be read inconjunction with the Company’s most recent Form 10-K and Annual Report for theyear ended September 30, 2006.

**PrepublicationCosts**

Prepublication costs, associated with creating new titles in thespecialty publishing segment, are amortized to cost of sales using thestraight-line method over estimated useful lives of three years for Research& Education Association, Inc. (“REA”), four years for Dover Publications,Inc. (“Dover”) and five years for Federal Marketing Corporation d/b/a CreativeHomeowner (“Creative Homeowner”).

**Goodwill and Other Intangibles**

The Companyevaluates possible impairment annually or whenever events or circumstancesindicate that the carrying value of the assets may not be recoverable. Therewere no such events or circumstances in the period presented.  Other intangibles include customer listsrelated to the fiscal 2006 acquisitions of Creative Homeowner and Moore-LangenPrinting Company, Inc. (“Moore Langen”), which are being amortized over 15-yearand 10-year periods, respectively (Note G). Amortization expense related to customer lists in the second quarters offiscal 2007 and 2006 was approximately $200,000 and $5,000, respectively, andfor the first six months of fiscal 2007 and 2006 was approximately $400,000 and$9,000, respectively.

**NewAccounting Pronouncements**

In July 2006, theFASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”(“FIN No. 48”), an interpretation of FASB Statement No. 109, “Accounting forIncome Taxes.”  FIN No. 48 applies tofiscal years beginning after December 15, 2006; the Company’s 2008 fiscalyear.  In September 2006, the FASB issuedStatement of Financial Accounting Standards No. 158, “Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans” (“SFAS 158”), whichwill be effective at the end of the Company’s 2007 fiscal year.  The Company does not believe the adoption ofeither FIN No. 48 or SFAS 158 will have a material effect on its consolidatedfinancial position, results of operations or cash flows.

6

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**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 44% and 37% of the Company’sinventories at March 31, 2007 and September 30, 2006, respectively.  Other inventories, primarily in the specialtypublishing segment, are determined on a first-in, first-out (FIFO) basis.  Inventories consisted of the following:
|                 | ** ** | **(000’s Omitted)** | ** ** |
|-----------------|------------|-------------------------------|------------|
| ** **      | ** ** | **March 31,  2007**      | ** ** | **September 30,  2006** | ** ** |
| Raw materials   |       | $                             | 5,220      |   | $ | 3,910 |   |
| Work in process |       | 8,917                         |       | 6,295 |   |
| Finished goods  |       | 21,234                        |       | 19,360 |   |
| Total           |       | $                             | 35,371     |   | $ | 29,565 |   |

 

# **C.            INCOMETAXES**

The provision for income taxesdiffers from that computed using the statutory federal income tax rates for thefollowing reasons:
|                                       | ** ** | **(000’s Omitted)** | ** ** |
|---------------------------------------|------------|-------------------------------|------------|
| ** **                            | ** ** | **Quarter Ended**        | ** ** |
| ** **                            | ** ** | **March 31,  2007**      | ** ** | **March 25,  2006** | ** ** |
| Federal taxes at statutory rates      |       | $                             | 3,133      |   | 35.0 | % | $ | 2,400 |   | 35.0 | % |
| State taxes, net of federal benefit   |       | 290                           |       | 3.2 |   | 203 |   | 3.0 |   |
| Federal manufacturers’ deduction |       | (77                           | )          | (0.9 | ) | (72 | ) | (1.1 | ) |
| Tax benefit of export related income  |       | (33                           | )          | (0.4 | ) | (110 | ) | (1.6 | ) |
| Stock-based compensation (Note F)     |       | 13                            |       | 0.1 |   | 37 |   | 0.5 |   |
| Other                                 |       | 16                            |       | 0.2 |   | 1 |   | — |   |
| Total                                 |       | $                             | 3,342      |   | 37.3 | % | $ | 2,459 |   | 35.9 | % |

 
|                                       | ** ** | **(000’s Omitted)**  | ** ** |
|---------------------------------------|------------|--------------------------------|------------|
| ** **                            | ** ** | **Six Months Ended** | ** ** |
| ** **                            | ** ** | **March 31,  2007**       | ** ** | **March 25,  2006** | ** ** |
| Federal taxes at statutory rates      |       | $                              | 5,380      |   | 35.0 | % | $ | 4,849 |   | 35.0 | % |
| State taxes, net of federal benefit   |       | 504                            |       | 3.3 |   | 411 |   | 3.0 |   |
| Federal manufacturers’ deduction |       | (132                           | )          | (0.9 | ) | (145 | ) | (1.1 | ) |
| Tax benefit of export related income  |       | (55                            | )          | (0.4 | ) | (222 | ) | (1.6 | ) |
| Stock-based compensation (Note F)     |       | 21                             |       | 0.1 |   | 75 |   | 0.5 |   |
| Other                                 |       | 22                             |       | 0.1 |   | 3 |   | 0.1 |   |
| Total                                 |       | $                              | 5,740      |   | 37.3 | % | $ | 4,971 |   | 35.9 | % |

 

7

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**D.            NET INCOME PER SHARE**

The following is areconciliation of the shares used in the calculation of basic and dilutedincome per share.  Potentially dilutiveshares, calculated using the treasury stock method, consist of sharesissued under the Company’s stock option plans.
|                                         | ** ** | **(000’s Omitted)** | ** ** |
|-----------------------------------------|------------|-------------------------------|------------|
| ** **                              | ** ** | **Quarter Ended**        | ** ** | **Six Months Ended** | ** ** |
| ** **                              | ** ** | **March 31,  2007**      | ** ** | **March 25,  2006** | ** ** | **March 31,  2007** | ** ** | **March 25,  2006** | ** ** |
|                                    |       |                          |       |   |   |   |   |   |   |
| Average shares outstanding for basic    |       | 12,446                        |       | 12,307 |   | 12,431 |   | 12,298 |   |
| Effect of potentially dilutive shares   |       | 236                           |       | 274 |   | 242 |   | 270 |   |
| Average  shares outstanding for diluted |       | 12,682                        |       | 12,581 |   | 12,673 |   | 12,568 |   |

 

# **E.             BUSINESSSEGMENTS**

TheCompany has two business segments: book manufacturing and specialty publishing.The book manufacturing segment offers a full range of services from productionthrough storage and distribution for religious, educational and specialty tradebook publishers. The specialty publishing segment consists of Dover and REA, aswell as Creative Homeowner since its acquisition in April 2006 (Note G).

# In evaluating segment performance, managementprimarily focuses on income or loss before taxes, stock-based compensation andother income.  The elimination ofintersegment sales and related profit represents sales from the bookmanufacturing segment to the specialty publishing segment.  Corporate expenses that are allocated to thesegments include various support functions such as information technologyservices, finance, legal, human resources and engineering, and includedepreciation and amortization expense related to corporate assets*.*

Thefollowing table provides segment information for the quarter and six-monthperiods ended March 31, 2007 and March 25, 2006.
|                                    | ** ** | **(000’s Omitted)** | ** ** |
|------------------------------------|------------|-------------------------------|------------|
| ** **                         | ** ** | **Quarter Ended**        | ** ** | **Six Months Ended** | ** ** |
| ** **                         | ** ** | **March 31,  2007**      | ** ** | **March 25,  2006** | ** ** | **March 31,  2007** | ** ** | **March 25,  2006** | ** ** |
|                               |       |                          |       |   |   |   |   |   |   |
| Net sales:                         |       |                          |       |   |   |   |   |   |   |
| Book manufacturing                 |       | $                             | 60,464     |   | $ | 49,431 |   | $ | 110,426 |   | $ | 97,665 |   |
| Specialty publishing               |       | 18,160                        |       | 10,262 |   | 34,918 |   | 21,183 |   |
| Elimination of intersegment sales  |       | (2,288                        | )          | (2,166 | ) | (4,696 | ) | (3,637 | ) |
| Total                              |       | $                             | 76,336     |   | $ | 57,527 |   | $ | 140,648 |   | $ | 115,211 |   |
|                               |       |                          |       |   |   |   |   |   |   |
| Income before taxes:               |       |                          |       |   |   |   |   |   |   |
| Book manufacturing                 |       | $                             | 7,877      |   | $ | 6,338 |   | $ | 13,768 |   | $ | 12,501 |   |
| Specialty publishing               |       | 1,363                         |       | 1,064 |   | 2,170 |   | 2,149 |   |
| Stock-based compensation           |       | (363                          | )          | (360 | ) | (726 | ) | (696 | ) |
| Elimination of intersegment profit |       | 74                            |       | (190 | ) | 160 |   | (103 | ) |
| Total                              |       | $                             | 8,951      |   | $ | 6,852 |   | $ | 15,372 |   | $ | 13,851 |   |

 

8

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**F.             STOCK-BASED COMPENSATION**

The Companyrecords stock-based compensation expense for the cost of stock options andstock grants as well as shares issued under the Company’s 1999 Employee StockPurchase Plan. The fair value of each option awarded is calculated on the dateof grant using the Black-Scholes option-pricing model. Stock-based compensationrecognized in selling and administrative expenses in the accompanying financialstatements in the second quarter of fiscal 2007 and 2006 was $363,000 and$360,000, respectively, and the related tax benefit recognized was $112,000 and$88,000, respectively. For the first six months of 2007 and 2006, stock-basedcompensation was $726,000 and $696,000, respectively, and the related taxbenefit recognized was $224,000 and $168,000, respectively. Unrecognizedstock-based compensation cost at March 31, 2007 was $2.1 million, to berecognized over a weighted-average period of 2.0 years.

**StockIncentive Plan:** TheCompany’s stock incentive plan provides for the granting of stock options andstock grants up to a total of 2,064,375 shares. Under the plan provisions, both non-qualified and incentive stockoptions to purchase shares of the Company’s common stock may be granted to keyemployees.  The option price per sharemay not be less than the fair market value of stock at the time the option isgranted and incentive stock options must expire not later than ten years fromthe date of grant.  The Company annuallyissues a combination of stock options and stock grants to its key employees.Stock options and stock grants generally vest over 3 years.  During the second quarter of fiscal 2007,6,993 restricted stock awards were granted with a weighted-average fair valueof $38.54 per share and for the first six months, a total of 11,093 such shareswere granted with a weighted-average fair value of $38.46.  At March 31, 2007, non-vested restrictedstock grants outstanding were 47,063 shares with a weighted-average grant-datefair value of $34.88. 

Thefollowing table provides stock option activity under this plan in the first sixmonths of fiscal 2007:
|                                   | ** ** | ** **         | ** ** | **Weighted Average** | ** ** | **Aggregate**                  | ** ** |
|-----------------------------------|------------|--------------------|------------|---------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **Option  Shares** | ** ** | **Exercise  Price**       | ** ** | **Remaining  Term (yrs)** | ** ** | **Intrinsic  Value** | ** ** |
| Outstanding at September 30, 2006 |       | 401,891            |       | $                         | 21.69      |                           |       |   |   |   |
| Issued                            |       | 5,384              |       | 38.82                     |       |                           |       |   |   |
| Exercised                         |       | (34,247            | )          | 17.91                     |       |                           |       | $ | 744,000 |   |
| Outstanding at March 31, 2007     |       | 373,028            |       | $                         | 22.28      |                           | 3.1        |   | $ | 6,264,000 |   |
|                              |       |               |       |                      |       |                           |       |   |   |
| Exercisable at March 31, 2007     |       | 306,784            |       | $                         | 19.15      |                           | 2.7        |   | $ | 6,112,000 |   |
| Available for future  grants      |       | 255,948            |       |                      |       |                           |       |   |   |

 

The fair value of each option grant was estimated using the Black-Scholesoption-pricing model on the date of the grant. The key assumptions used tovalue the options were a risk-free interest rate of 4.7%, expected volatilityof 27%, a dividend yield of 1.9%, and an expected life of 5 years.

**Directors’ Option Plan:** In January 2005, stockholders approved the Courier Corporation 2005Stock Equity Plan for Non-Employee Directors (the “2005 Plan”). Under the 2005Plan provisions, non-qualified stock options to purchase shares of the Company’scommon stock may be granted to non-employee directors up to a total of 225,000shares.  The option price per share isthe fair market value of stock at the time the option is granted.  The options are immediately exercisable andhave a term of five years. The 2005 Plan replaced the previous non-employeedirectors’ plan, which had been adopted in 1989.  The fair value of each option grant wasestimated on the date of the grant using the Black-Scholes option-pricingmodel.  Directors may also elect toreceive their annual retainer and committee chair fees as shares of stock inlieu of cash; 4,338 such shares were issued in the second quarter of fiscal2007 with a fair market value of $39.18 per share.

9

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Thefollowing table provides activity under the directors’ option plans in thefirst six months of fiscal 2007:
|                                   | ** ** | ** **         | ** ** | **Weighted Average** | ** ** | **Aggregate**                  | ** ** |
|-----------------------------------|------------|--------------------|------------|---------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **Option  Shares** | ** ** | **Exercise  Price**       | ** ** | **Remaining  Term (yrs)** | ** ** | **Intrinsic  Value** | ** ** |
| Outstanding at September 30, 2006 |       | 185,127            |       | $                         | 25.78      |                           |       |   |   |   |
| Issued                            |       | 38,064             |       | 39.18                     |       |                           |       |   |   |
| Exercised                         |       | (24,594            | )          | 23.10                     |       |                           |       | $ | 391,000 |   |
| Outstanding at March 31, 2007     |       | 198,597            |       | $                         | 28.68      |                           | 2.7        |   | $ | 2,067,000 |   |
|                              |       |               |       |                      |       |                           |       |   |   |
| Exercisable at March 31, 2007     |       | 198,597            |       | $                         | 28.68      |                           | 2.7        |   | $ | 2,067,000 |   |
| Available  for future grants      |       | 93,282             |       |                      |       |                           |       |   |   |

 

The key assumptions used to value the 38,064 options issued in the secondquarter were a risk-free interest rate of 4.7%, expected volatility of 27%, adividend yield of 1.8%, and an expected life of 5 years.

**Employee Stock Purchase Plan:** The Company’s 1999 Employee Stock Purchase Plan (“ESPP”), as amended,covers an aggregate of 337,500 shares of Company common stock for issuanceunder the plan.  Eligible employees may purchaseshares of Company common stock at not less than 85% of fair market value at theend of the grant period.  On March 1,2007, 9,529 shares were issued under the ESPP at a price of $32.47 per share.

**G.            BUSINESS ACQUISITIONS**

OnOctober 17, 2005, the Company acquired Moore Langen, an Indianapolis-basedprinter specializing in book covers, in a $15 million cash transaction.  The acquisition was accounted for as apurchase, and accordingly, Moore Langen’s financial results were included inthe book manufacturing segment in the consolidated financial statements fromthe date of acquisition. On April 28, 2006, the Company acquired CreativeHomeowner, a New Jersey-based publisher and distributor of books, home plansand related products for the home and garden retail book market.  The Company purchased 100% of the stock in a$37 million cash transaction.  Theacquisition was accounted for as a purchase, and accordingly, Creative Homeowner’sfinancial results were included in the specialty publishing segment in theconsolidated financial statements from the date of acquisition. Theallocation of Creative Homeowner’s purchase price to assets acquired was asfollows:
| Goodwill                       |   | $          | 16,619,000 |   |
|--------------------------------|--------|------------|------------|--------|
| Customer lists                 |   | 11,502,000 |       |
| Prepublication  costs          |   | 3,046,000  |       |
| Trade name                     |   | 1,370,000  |       |
| Accounts  receivable           |   | 7,485,000  |       |
| Inventory                      |   | 2,876,000  |       |
| Property, plant  and equipment |   | 440,000    |       |
| Accounts payable               |   | (4,863,000 | )          |
| Other  liabilities assumed     |   | (2,105,000 | )          |
| Other assets                   |   | 641,000    |       |
| Total purchase price           |   | $          | 37,011,000 |   |

 

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

 

**Critical Accounting Policies and Estimates:**

The Company’s consolidatedcondensed financial statements have been prepared in accordance with generallyaccepted accounting principles.  Thepreparation of these financial statements requires management to make estimatesand assumptions that affect the amounts reported in these financial statementsand accompanying notes.   On an ongoingbasis, management evaluates its estimates and judgments, including thoserelated to collectibility of accounts receivable, recovery of inventories,impairment of goodwill, prepublication costs and income taxes.  Management bases its estimates and judgmentson historical experience and various other factors believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying value of assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe periods presented.  Actual resultsmay differ from these estimates.  Thesignificant accounting policies which management believes are most critical toaid in fully understanding and evaluating the Company’s reported financialresults include the following:

# Accounts Receivable 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 isdetermined based upon historical experience and any specific customercollection issues that have been identified. If the financial condition of the Company’s customers were todeteriorate, resulting in an impairment of their ability to make payments,additional allowances may be required.

InventoriesManagement records reductions in the costbasis of inventory for excess and obsolete inventory based primarily uponhistorical and forecasted product demand. If actual market conditions are less favorable than those projected bymanagement, additional inventory charges may be required.

##### Goodwill andOther Intangibles Other intangibles include customerlists, which are amortized on a straight-line basis over periods ranging fromten to fifteen years. The Company evaluates possible impairment of goodwill andother intangibles annually or whenever events or circumstances indicate thatthe carrying value of the assets may not be recoverable.  The Company completed the annual impairmenttest at September 30, 2006 resulting in no change to the nature or carryingamounts of its intangible assets. Changes in market conditions or poor operating results could result in adecline in value thereby potentially requiring an impairment charge in thefuture.

Prepublication CostsThe Company capitalizes prepublication costs, which include the costs ofacquiring rights to publish a work and costs associated with bringing amanuscript to publication such as artwork and editorial efforts. Prepublicationcosts are amortized on a straight-line basis over periods ranging from three tofive years.  Management regularlyevaluates the sales and profitability of the products based upon historical andforecasted demand.  Based upon thisevaluation, adjustments may be required to amortization expense.

Income TaxesThe income tax provision and related accrued taxes are based on amountsreported on the Company’s tax returns and changes in deferred taxes.  Deferred income tax liabilities and assets are determined based upon the differences betweenthe financial statement and tax bases of assets and liabilities.  Changes in the recoverability of the Company’sdeferred tax assets or audits by tax authorities could result in future chargesor credits to income tax expense, and related accrued and deferred taxes.

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**Overview:**

Courier Corporation, founded in1824, is one of America’s leading book manufacturers and specialtypublishers.  The Company has two businesssegments: book manufacturing and specialty publishing.  The book manufacturing segment streamlinesthe process of bringing books from the point of creation to the point ofuse.  Based on sales, Courier is thefourth largest book manufacturer in the United States and the largest in theNortheast, offering services from prepress and production through storage anddistribution.  The specialty publishingsegment consists of Dover Publications, Inc. (“Dover”) and Research &Education Association, Inc. (“REA”), as well as the April 2006 acquisition ofFederal Marketing Corporation d/b/a Creative Homeowner (“Creative Homeowner”).  Dover publishes over 9,000 titles in morethan 30 specialty categories ranging from literature and poetry classics topaper dolls, and from music scores to clip art. REA publishes test preparation and study-guide books and software forhigh school, college and graduate students, and professionals.  Creative Homeowner publishes and distributesbooks, home plans and related products to the home and garden market.

**Results of Operations:**
|                                      | ** ** | **FINANCIAL HIGHLIGHTS**                                                     | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **(dollars in thousands except per share amounts)** | ** ** |
| ** **                           | ** ** | **Quarter Ended**                                                            | ** ** | **Six Months Ended** | ** ** |
| ** **                           | ** ** | **March 31,  2007**                                                          | ** ** | **March 25,  2006** | ** ** | **%  Change** | ** ** | **March 31,  2007** | ** ** | **March 25,  2006** | ** ** | **%  Change** | ** ** |
|                                 |       |                                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                            |       | $                                                                                 | 76,336     |   | $ | 57,527 |   | 32.7 | % | $ | 140,648 |   | $ | 115,211 |   | 22.1 | % |
| Cost of sales                        |       | 52,706                                                                            |       | 39,652 |   | 32.9 | % | 96,874 |   | 78,805 |   | 22.9 | % |
| Gross profit                         |       | 23,630                                                                            |       | 17,875 |   | 32.2 | % | 43,774 |   | 36,406 |   | 20.2 | % |
| As a percentage of sales             |       | 31.0                                                                              | %          | 31.1 | % |   |   | 31.1 | % | 31.6 | % |   |   |
| Selling and administrative  Expenses |       | 14,203                                                                            |       | 11,123 |   | 27.7 | % | 27,704 |   | 22,803 |   | 21.5 | % |
| Interest expense (income), net       |       | 476                                                                               |       | (100 | ) |   |   | 698 |   | (248 | ) |   |   |
| Pretax income                        |       | 8,951                                                                             |       | 6,852 |   | 30.6 | % | 15,372 |   | 13,851 |   | 11.0 | % |
| Net income                           |       | $                                                                                 | 5,609      |   | $ | 4,393 |   | 27.7 | % | $ | 9,632 |   | $ | 8,880 |   | 8.5 | % |
|                                 |       |                                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net  income per diluted share        |       | $                                                                                 | 0.44       |   | $ | 0.35 |   | 25.7 | % | $ | 0.76 |   | $ | 0.71 |   | 7.0 | % |

 

# Revenues in the second quarter and first half offiscal 2007 increased in both of the Company’s operating segments compared tothe same periods last year. Book manufacturing revenues were up 22% for thesecond quarter and 13% for the first half of the year compared to thecorresponding periods last year, reflecting growth across all markets.  Sales in the specialty publishing segmentwere up 77% in the second quarter and 65% year to date compared to the sameperiods last year, reflecting incremental sales from the April 2006 acquisitionof Creative Homeowner as well as organic growth in the segment’s otherbusinesses in the second quarter.

# *Business Acquisitions*

OnApril 28, 2006, the Company acquired Creative Homeowner, a New Jersey-basedpublisher and distributor of books, home plans and related products for thehome and garden retail book market.  Theacquisition was accounted for as a purchase, and accordingly, CreativeHomeowner’s financial results were included in the specialty publishing segmentin the consolidated financial statements from the date of acquisition. OnOctober 17, 2005, the Company acquired Moore-Langen Printing Company, Inc. (“MooreLangen”), an Indianapolis-based printer specializing in book covers.  The acquisition was accounted for as apurchase, and accordingly, Moore Langen’s financial results were included inthe book manufacturing segment from the date of acquisition.

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*Book Manufacturing Segment*
|                                      | ** ** | **SEGMENT HIGHLIGHTS**                                                       | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **(dollars in thousands except per share amounts)** | ** ** |
| ** **                           | ** ** | **Quarter Ended**                                                            | ** ** | **Six Months Ended** | ** ** |
| ** **                           | ** ** | **March 31,  2007**                                                          | ** ** | **March 25,  2006** | ** ** | **%  Change** | ** ** | **March 31,  2007** | ** ** | **March 25,  2006** | ** ** | **%  Change** | ** ** |
|                                 |       |                                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                            |       | $                                                                                 | 60,464     |   | $ | 49,431 |   | 22.3 | % | $ | 110,426 |   | $ | 97,665 |   | 13.1 | % |
| Cost of sales                        |       | 44,787                                                                            |       | 36,266 |   | 23.5 | % | 81,697 |   | 70,936 |   | 15.2 | % |
| Gross profit                         |       | 15,677                                                                            |       | 13,165 |   | 19.1 | % | 28,729 |   | 26,729 |   | 7.5 | % |
| As a percentage of sales             |       | 25.9                                                                              | %          | 26.6 | % |   |   | 26.0 | % | 27.4 | % |   |   |
| Selling and administrative  expenses |       | 7,795                                                                             |       | 6,972 |   | 11.8 | % | 15,174 |   | 14,572 |   | 4.1 | % |
| Interest expense (income)            |       | 5                                                                                 |       | (145 | ) |   |   | (213 | ) | (344 | ) |   |   |
| Pretax  income                       |       | $                                                                                 | 7,877      |   | $ | 6,338 |   | 24.3 | % | $ | 13,768 |   | $ | 12,501 |   | 10.1 | % |

 

Within this segment, the Company focuses on three key markets: education,religious and specialty trade.  Sales tothe education market increased $5.2 million, or 24%, to $26.6 million in thesecond quarter of fiscal 2007 compared to the same period last year, with thegreatest growth in four-color textbooks. For the first six months, sales to this market increased by $5.4million, or 15%, to $41.7 million compared to the first half of fiscal2006.  Textbook demand started veryslowly in the beginning of the fiscal year, but picked up strongly starting inDecember. The start up of the third new four-color press was completed at theend of the first quarter of fiscal 2007 and provided the necessary capacity tomeet the growing demand for educational books. Sales to the religious market were up $3.1 million, or 22%, to $17million in the second quarter compared to last year, due in part to ordertiming issues.  For the first half of theyear, sales to this market were $32.7 million, an increase of $2.6 million, or8% over the first six months of fiscal 2006, closer to historical growthtrends.  Sales to the specialty trademarket were up $3.0 million, or 29%, to $13.3 million for the second quarterand were up $4.7 million, or 20%, to $28.4 million for the first six monthscompared to the corresponding periods last year as a result of several largeone-time orders in the first quarter as well as share increases across a rangeof customers.   

Cost of sales in this segment increased by 23.5% to $44.8 million for thequarter and increased 15% to $81.7 million for the first six months of fiscal2007 compared to the same periods last year, reflecting higher sales volume andhigher health care costs.  The newfour-color press that began operation in the Kendallville, Indiana plant inDecember 2006 had a smooth start up without significant additional costs in thesecond quarter. Gross profit in this segment increased by 19% to $15.7 millionfor the quarter, and as a percentage of sales decreased to 25.9% from 26.6% inlast year’s second quarter, reflecting pricing pressure and higher health carecosts.  Gross profit for the first sixmonths of fiscal 2007 increased 7.5% to $28.7 million but decreased as apercentage of sales to 26.0% from 27.4% in the corresponding period last yearreflecting pricing pressure as well as lower sales growth and a less favorableproduct mix in the first quarter.

Selling and administrative expenses for the segment increased 12% in thesecond quarter to $7.8 million and, as a percentage of sales, decreased to12.9% from 14.1% last year.  Thisincrease in expenses for the quarter resulted from costs associated with theincreased sales volume, such as sales commissions and customer serviceexpenses, and incentive compensation costs tied directly to improvedprofitability. For the first half of fiscal 2007, such expenses increased 4% to$15.2 million and, as a percentage of sales, decreased to 13.7% from 14.9% inthe same period last year.

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Intercompany interest expense allocated to the book manufacturing segmentwas $5,000 in the second quarter compared to interest income of $145,000 in thesame period last year resulting from the high level of capital expenditures inthe past year associated with the expansion of the Kendallville facility.  For the first six months, intercompanyinterest income allocated to this segment decreased to $213,000 compared to$344,000 last year.

Pretax income in the book manufacturing segment was $7.9 million in thesecond quarter of fiscal 2007, a 24% increase over the same period lastyear.  For the first six months of fiscal2007, pretax income was $13.8 million, up 10% over the first half of fiscal2006.

*Specialty Publishing Segment*
|                                      | ** ** | **SEGMENT HIGHLIGHTS**                                                       | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **(dollars in thousands except per share amounts)** | ** ** |
| ** **                           | ** ** | **Quarter Ended**                                                            | ** ** | **Six Months Ended** | ** ** |
| ** **                           | ** ** | **March 31,  2007**                                                          | ** ** | **March 25,  2006** | ** ** | **%  Change** | ** ** | **March 31,  2007** | ** ** | **March 25,  2006** | ** ** | **%  Change** | ** ** |
|                                 |       |                                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                            |       | $                                                                                 | 18,160     |   | $ | 10,262 |   | 77.0 | % | $ | 34,918 |   | $ | 21,183 |   | 64.8 | % |
| Cost of sales                        |       | 10,280                                                                            |       | 5,362 |   | 91.7 | % | 20,033 |   | 11,403 |   | 75.7 | % |
| Gross profit                         |       | 7,880                                                                             |       | 4,900 |   | 60.8 | % | 14,885 |   | 9,780 |   | 52.2 | % |
| As a percentage of sales             |       | 43.4                                                                              | %          | 47.7 | % |   |   | 42.6 | % | 46.2 | % |   |   |
| Selling and administrative  expenses |       | 6,045                                                                             |       | 3,791 |   | 59.5 | % | 11,805 |   | 7,535 |   | 56.7 | % |
| Interest expense                     |       | 472                                                                               |       | 45 |   |   |   | 910 |   | 96 |   |   |   |
| Pretax  income                       |       | $                                                                                 | 1,363      |   | $ | 1,064 |   | 28.0 | % | $ | 2,170 |   | $ | 2,149 |   | 1.0 | % |

 

The Company’s specialtypublishing segment reported second quarter sales of $18.2 million, up 77% from$10.3 million in last year’s second quarter and sales of $34.9 million for thefirst six months of the year, up 65% over last year.  Creative Homeowner, acquired in April 2006,contributed incremental sales of $7.3 million and $14.1 million for the secondquarter and first half of fiscal 2007, respectively.  Creative Homeowner achieved increased salescompared to the same period last year, prior to their acquisition, despite asoft housing market that has depressed sales in the home center market.  Creative Homeowner achieved a small, but importantshare gain in this channel in the second quarter to offset market softness andcontinued to expand their line of craft books realizing impressive growth inthe bookstore and craft store channels. Dover sales were up 5% in the second quarter to $8.9 million, reboundingsignificantly from a weak first quarter when sales were down by 13%, leavingfirst half sales down 5% to $17.3 million for the first half of fiscal 2007compared to the same period last year, in a period of weak market demand.  Second quarter sales growth at Dover occurredacross most of its sales channels, including both large and small retailers,helped by the expansion of its new “Dover Fun Kitsä”product line and by new merchandising programs, which continue to expandplacement of Dover display racks at existing and new customer locations. Salesat REA increased 12% in the second quarter to $1.9 million and 14% for thefirst six months to $3.5 million compared to the same periods last yearprimarily due to growth in the educational testing market and by increases indirect marketing to teachers and school administrators.  

Cost of sales in this segmentincreased by 92% to $10.3 million for the quarter and increased 76% to $20.0million for the first six months of fiscal 2007 compared to the same periodslast year, reflecting the incremental impact of Creative Homeowner as well asthe higher sales volume in the segment’s other businesses.  Gross profit as a percentage of sales for thesegment decreased in the quarter to 43.4% from 47.7% in the correspondingperiod last year.  Creative Homeownerreduced the overall gross profit percentage in the segment because of theirlower-margin distribution business.  As apercentage of sales, gross profit for Dover and REA for the second quarter wascomparable to the same period last year. 

Selling and administrativeexpenses in this segment were $6.0 million in the second quarter, an increaseof 59.5% over the second quarter of fiscal 2006, primarily due to the additionof Creative Homeowner.  As a percentageof sales, selling and administrative expenses decreased to 33.3% from 36.9% inthe 

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correspondingperiod last year. Similarly, for the first six months of fiscal 2007, sellingand administrative expenses increased 56.7% to $11.8 million compared to lastyear, reflecting the acquisition of Creative Homeowner, while as a percentageof sales, such expenses decreased to 33.8% from 35.6% in the first half offiscal 2006.

Intercompanyinterest expense is allocated to the specialty publishing segment based onacquisition costs, reduced by cash generated by each business sinceacquisition.  Interest expense for thesecond quarter of fiscal 2007 was $472,000compared to $45,000 last year and for the first six months was $910,000 versus$96,000 in the corresponding period of fiscal 2006.  The increase reflects the $37 millionpurchase of Creative Homeowner in April 2006. 

Pretax income in the specialty publishing segment for the second quarterwas $1.4 million, up 28% from $1.1 million last year, and for the first half offiscal 2007 was $2.2 million, up 1% from the same period last year.

*Total Consolidated Company*

Interest expense, net of interest income, was $476,000 in the secondquarter of fiscal 2007, compared to net interest income of $100,000 in the sameperiod of fiscal 2006.  For the first sixmonths of fiscal 2007, interest expense, net of interest income, was $698,000compared to net interest income of $248,000 in the first half of fiscal 2006.Average debt under the revolving credit facility in the second quarter offiscal 2007 was approximately $26.2 million at an average annual interest rateof 5.8%, generating interest expense of approximately $390,000.  Average debt under this facility for thefirst half of fiscal 2007 was approximately $22.4 million at an average annualinterest rate of 5.8%, generating interest expense of approximately$670,000.  Interest expense also includescommitment fees and other costs associated with maintaining this credit facility.  Interest capitalized in the first six monthsof fiscal 2007 was approximately $134,000, related primarily to the expansionof the Kendallville facility; no interest was capitalized last year.  In the second quarter of fiscal 2006, cashinvestments averaged approximately $14.8 million invested at an average annualinterest rate of 4.2%, generating interest income of approximately$155,000.  For the first six months offiscal 2006, average cash investments were $18.9 million invested at an averageinterest rate of 3.8%, generating interest income of approximately $355,000.

The Company’s effective taxrate for the second quarter and first half of fiscal 2007 was 37.3% compared to35.9% for the same periods last year. The increase in the effective tax rate reflects the phase out of the taxbenefit on export related income and a slower phase in of the domesticmanufacturing deduction.  In addition,there was a slight increase in the Company’s effective state tax rate.

For purposes of computing netincome per diluted share, weighted average shares outstanding increased byapproximately 101,000 shares and 105,000 shares over last year’s second quarterand first six months.  The increases werelargely due to options exercised and shares issued under the Company’s stockplans.  

**Liquidity and Capital Resources:**

During the first six months offiscal 2007, operations provided approximately $10.5 million of cash.  Net income was $9.6 million and depreciationand amortization was $9.3 million. Working capital increased by approximately $10.0 million, compared to$7.0 million in the same period last year, reflecting the increase in salesvolume.  The change in working capital inthe first half of fiscal 2007 includes a $5.8 million increase in inventories,of which $2.6 million was a growth in work in process.

Investment activities in the second quarter of fiscal 2007 usedapproximately $14.6 million of cash. Capital expenditures were approximately$11.8 million, primarily for the four-color press that was installed inDecember 2006 in the Kendallville, Indiana facility as well as a relatedbindery expansion. This press is identical to the presses installed in April2004 and December 2005.  For the entirefiscal year, capital expenditures are expected to be approximately $25 to $28million.  This amount includes completionof the current four-color expansion program at Kendallville as well asexpansion of printing and binding 

15

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capacity in the religious book manufacturing operation inPhiladelphia.  Prepublication costs inthe specialty publishing segment were $2.8 million compared to $1.6 million inthe first six months last year, primarily from the addition of CreativeHomeowner.  For the full fiscal year,capitalized prepublication costs are projected to be approximately $5 million.

Financing activities for the first six months of fiscal 2007 providedapproximately $3.9 million of cash.  Cashdividends were $4.5 million while borrowings increased by $7.0 million andproceeds from stock plans were $1.2 million, primarily from the exercise ofstock options.  At March 31, 2007, theCompany had $24.0 million in borrowings under its $100 million long-termrevolving credit 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.  In November 2006, the Company increased theamount available under this facility to $100 million and extended the maturitydate to March 2011.  The Company believesthat its cash on hand, cash from operations and the available credit facilitywill be sufficient to meet its cash requirements through 2007.

The following table summarizesthe Company’s contractual obligations and commitments at March 31, 2007 to makefuture payments as well as its existing commercial commitments.
|                                | ** ** | ** ** | ** ** | **(000’s Omitted)**                      | ** ** |
|--------------------------------|------------|------------|------------|----------------------------------------------------|------------|
| ** **                     | ** ** | ** ** | ** ** | **Payments due by period (1)** | ** ** |
| ** **                     | ** ** | ** ** | ** ** | **Less than**                                 | ** ** | **1 to 3** | ** ** | **4 to 5** | ** ** | **After 5** | ** ** |
| **Contractual Payments:** | ** ** | **Total**  | ** ** | **1 Year**                                    | ** ** | **Years** | ** ** | **Years** | ** ** | **Years** | ** ** |
| Long-Term Debt (2)             |       | $          | 24,353     |                                               | $          | 88 |   | $ | 140 |   | $ | 24,125 |   | $ | — |   |
| Operating Leases (3)           |       | 10,432     |       | 3,103                                              |       | 3,727 |   | 2,056 |   | 1,546 |   |
| Purchase Obligations (4)       |       | 8,623      |       | 8,623                                              |       | — |   | — |   | — |   |
| Other Long-Term Liabilities    |       | 2,975      |       | —                                             |       | 1,247 |   | 350 |   | 1,378 |   |
| Total                          |       | $          | 46,383     |                                               | $          | 11,814 |   | $ | 5,114 |   | $ | 26,531 |   | $ | 2,924 |   |

 

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(1) Amounts do not include interest expense.

(2) Includes the Company’s revolving credit facility.

(3) Represents amounts at September 30, 2006.

(4) Represents capital commitments.

**NewAccounting Pronouncements**

InJuly 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertaintyin Income Taxes” (“FIN No. 48”), an interpretation of FASB Statement No. 109, “Accountingfor Income Taxes.”  FIN No. 48 applies tofiscal years beginning after December 15, 2006; the Company’s 2008 fiscalyear.  In September 2006, the FASB issuedStatement of Financial Accounting Standards No. 158, “Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans” (“SFAS 158”), whichwill be effective at the end of the Company’s 2007 fiscal year.  The Company does not believe the adoption ofeither FIN No. 48 or SFAS 158 will have a material effect on its consolidatedfinancial position, results of operations or cash flows.

**Forward-Looking Information:**

ThisQuarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K forthe year ended September 30, 2006 include forward-looking statements.  Statements that describe future expectations,plans or strategies are considered “forward-looking statements” as that term isdefined under the Private Securities Litigation Reform Act of 1995 and releasesissued by the Securities and Exchange Commission.  The words “believe,” “expect,” “anticipate,” “intend,”“estimate” and other expressions, which are predictions of or indicate futureevents and trends and which do not relate to historical matters identifyforward-looking statements.  Suchstatements are subject to risks and uncertainties that could cause actualresults to differ materially from those currently anticipated.  Factors that could affect actual resultsinclude, among others, changes in customers’ demand for the Company’s products,including seasonal changes in customer orders and shifting orders to lower costregions, changes in market growth rates such as the housing market, changes inraw material costs and availability, pricing actions by

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competitorsand other competitive pressures in the markets in which the Company competes,consolidation among customers and competitors, success in the execution ofacquisitions and the performance and integration of acquired businesses,changes in operating expenses including medical and energy costs, changes intechnology including migration from paper-based books to digital, difficultiesin the start up of new equipment or information technology systems, changes incopyright laws, changes in tax regulations, changes in the Company’s effectiveincome tax rate, and general changes in economic conditions, including currencyfluctuations and changes in interest rates. Although the Company believes that the assumptions underlying theforward-looking statements are reasonable, any of the assumptions could beinaccurate, and therefore, there can be no assurance that the forward-lookingstatements will prove to be accurate. The forward-looking statements included herein are made as of the datehereof, and the Company undertakes no obligation to update publicly suchstatements to reflect subsequent events or circumstances.

**Item 3.                    QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

There have been no material changes from the information concerning theCompany’s “Quantitative and Qualitative Disclosures About Market Risk” aspreviously reported in the Company’s Annual Report on Form 10-K for the yearended September 30, 2006.

#### **Item4.                    CONTROLSAND PROCEDURES**

**(a)       Evaluation of disclosure controls andprocedures**

As required by Rule 13a-15under the Securities Exchange Act of 1934, as of the end of the period coveredby this Quarterly Report, the Company carried out an evaluation under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures.  Based upon thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures are effective to ensurethat information required to be disclosed by the Company in the reports itfiles or submits under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

**(b)       Changes in internal controls overfinancial reporting**

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

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#### **PART II. OTHER INFORMATION**

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

None.

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

There have been nomaterial changes to the risk factors as previously disclosed in Item 1A in the Company’s Annual Report on Form 10-K forthe year ended September 30, 2006.

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

None.

### **Item 3.****                                                           DefaultsUpon Senior Securities**

None.

**Item 4.****                                                           Submission of Matters to a Vote of SecurityHolders**

The Annual Meetingof Stockholders of the registrant was held on January 17, 2007.  Following are the matters voted on at themeeting.

1) All nominees ofthe Board of Directors of the registrant were elected for a three-yearterm.  Votes were cast as follows: ArnoldS. Lerner – 11,766,960 for and 89,223 withheld; Peter K. Markell – 11,807,828for and 48,355 withheld, George Q. Nichols – 11,738,984 for and 117,199 withheld,and Ronald L. Skates – 11,799,357 for and 56,826 withheld.

2) Stockholdersvoted to ratify and approve the selection by the Audit and Finance Committee ofthe Board of Directors, of Deloitte & Touche LLP as independent publicaccountants for the Corporation for the fiscal year ending September 29,2007.  Votes were cast as follows:11,766,992 votes for, 76,695 votes against, and 12,496 votes abstained.

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

None.

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

| Exhibit No. | ** ** | **Description**                                                                                                                            |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                       |
| 10.1*       |       | Amendment, dated March 14, 2007, to Courier  Corporation Senior Executive Severance Program, as amended and restated on  December 5, 2005. |
| 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.

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**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934, theCompany has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
| **COURIER CORPORATION** |
|-------------------------|
| **(Registrant)**        |
| ** **              |   |   |
| ** **              |   |   |
| * May 9, 2007*     | * * | By: | *  s/James F. Conway  III* | * * |
| Date                    | James F. Conway III |   |
|                    | Chairman, President and |   |
|                    |   Chief Executive Officer |   |
|                    |   |   |
|                    |   |   |
| * May 9, 2007*     | * * | By: | *  s/Peter M. Folger* | * * | * * |
| Date                    | Peter M. Folger |   |
| ** **              | Senior Vice President and |   |
|                    |   Chief Financial Officer |   |
|                    |   |   |
|                    |   |   |
| * May 9, 2007*     | * * | By: | *  s/Kathleen M. Leon* | * * | * * |
| Date                    | Kathleen M. Leon |   |
| ** **              | Controller and |   |
|                    |   Chief Accounting Officer |   |
|                         |  |  |  |  |  |  |  |  |

 

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**EXHIBIT INDEX**
| Exhibit No. | ** ** | **Description**                                                                                                                            |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                       |
| 10.1*       |       | Amendment, dated March 14, 2007, to Courier  Corporation Senior Executive Severance Program, as amended and restated on  December 5, 2005. |
| 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.

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