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Courier Reports Revenue Down 5%, Hurt by Borders Bankruptcy

Press release from the issuing company

NORTH CHELMSFORD, Mass., – Courier Corporation, one of America's leading book manufacturers and specialty publishers, today announced results for the quarter ended June 25, 2011, the third quarter of its 2011 fiscal year. Revenues were $61.9 million, down 5% from last year's third-quarter sales of $64.9 million, helped by solid gains in textbook sales but hurt by the continuing fallout from the bankruptcy proceedings of one of the nation's largest booksellers.

The loss of sales to Borders Group, Inc., was particularly damaging to Courier's Research & Education Association (REA) publishing business, for which Borders had been a key customer. Faced with continuing uncertainty about the fate of the remaining Borders stores, Courier took a pre-tax, non-cash impairment charge of $8.6 million or $.43 per diluted share, representing all of REA's goodwill. As a result, the company reported a third-quarter net loss of $3.1 million or $.26 per diluted share. Excluding the impairment charge, adjusted net income for the quarter was $2.0 million or $.17 per diluted share, up 15% from net income of $1.8 million or $.15 per diluted share in the third quarter of fiscal 2010. A reconciliation of adjusted net income and other non-GAAP measures is included in the tables at the end of this release.

For the first nine months of fiscal 2011, Courier revenues were $185.7 million, versus $186.9 in fiscal 2010. Net loss for the year to date was $6.3 million or $.52 per diluted share, versus net income of $6.0 million or $.50 per diluted share in the first nine months of fiscal 2010. Excluding the third-quarter impairment charge and second-quarter charges for restructuring following a plant closing and a bad-debt provision related to Borders, adjusted net income for the first nine months of fiscal 2011 was $4.0 million or $.34 per diluted share.

In Courier's book manufacturing segment, robust demand for college textbooks highlighted a strong quarter in the education market. However, trade sales were down sharply, reflecting reduced ordering in the wake of Borders' store closings. Courier's publishing segment was similarly affected, with sales to Borders down $650,000 in the third quarter and down $2.4 million for the first nine months of fiscal 2011.

"The situation at Borders continued to be a major thorn in our side," said Courier Chairman and Chief Executive Officer James F. Conway III. "The resulting shrinkage in trade demand affected both our own publishing segment and the publishing customers we serve as a manufacturer.

"Yet it was also a quarter of important accomplishments. With new presses up and running at both our Indiana and Massachusetts facilities, we extended our leadership in four-color technology while meeting high demand for college textbooks and even faster growth in customized textbook production. We had another solid quarter with our largest religious customer, helping them to bring Scriptures to more countries than ever. We published several books that won prestigious industry awards. And we completed the painful task of closing our one-color plant in Stoughton, Massachusetts, achieving significant savings with no adverse impact on our service to customers.

"Not least of all, we also maintained our strong cash flow and healthy balance sheet. And as a result, we have once again declared our quarterly dividend of $.21 per share, signaling a continuing commitment to deliver value to shareholders."

Book manufacturing: delivering with digital and offset

Courier's book manufacturing segment had third-quarter sales of $55 million, down 3% from $56.8 million in last year's third quarter. The segment's third-quarter operating income was $5.1 million, up 35% from $3.7 million a year ago. Gross profit in the segment was $11.6 million or 21% of sales, versus $10 million or 17.6% of sales in fiscal 2010, reflecting an increased percentage of four-color work as well as operating efficiencies made possible by recent technology investments and the closing of the Stoughton plant.

For fiscal 2011 to date, book manufacturing sales were $163.6 million, up slightly from $161.7 million in fiscal 2010. The segment's operating income through nine months was $11.3 million, versus $12.2 million in fiscal 2010, excluding the second-quarter restructuring costs.

The book manufacturing segment focuses on three publishing markets: education, religious, and specialty trade. Sales to the education market were up 10% in the quarter and up 6% through nine months, reflecting higher sales of four-color textbooks for colleges and universities. Sales to the religious market were down 3% from fiscal 2010's third quarter, but up 6% at the company's largest religious customer. Through the first nine months of fiscal 2011, religious sales were up 4%. Sales to the specialty trade market were down 23% from last year's third quarter and down 9% for the year to date, as publishers adjusted their ordering in response to the problems at Borders and the impact of e-books.

In June, the company installed its third HP four-color digital inkjet press at its Courier Digital Solutions facility in Chelmsford, Massachusetts, immediately utilizing this added capacity to meet sharply increased demand for customized textbooks. Meanwhile it successfully redistributed the one-color work formerly assigned to its Stoughton plant to other facilities with no impact on quality or customer service. Courier expects the plant closing to result in annualized pre-tax savings of approximately $4.5 million.

"The healthy market for college textbooks in general, and customized editions in particular, drove the strongest growth in our manufacturing segment," said Mr. Conway. "In the religious market, we had a very good quarter with our largest customer, continuing the momentum from an outstanding second quarter and extending our Scripture distribution partnership into more than 100 countries. But while we had expected trade sales to be off following the Borders bankruptcy, the slump proved deeper than we had anticipated, with many trade publishers holding back on ordering and others reducing quantities in the face of a diminished sales channel.

"The good news was that our increased four-color capacity proved extremely useful both at our Kendallville, Indiana offset plant and at Courier Digital Solutions, with both facilities operating around the clock as the education market headed toward its seasonal peak. While demand for elementary and high school textbooks continues to be hampered by tight school budgets and the uncertainties surrounding state textbook adoption programs, the college market keeps chugging along, with customized textbooks growing even faster."

Publishing: channel erosion at Borders

Courier's specialty publishing segment includes three businesses: Dover Publications, a niche publisher with thousands of titles in dozens of specialty trade markets; Creative Homeowner, which publishes books on home design, decorating, landscaping and gardening; and Research & Education Association (REA), a publisher of test preparation books and study guides.

Third-quarter revenues for the segment were $9.9 million, down 9% from $10.9 million in last year's third quarter, with reduced sales to Borders accounting for more than two-thirds of the shortfall. The segment's operating loss for the quarter was $1.2 million, versus a loss of $0.4 million last year. For fiscal 2011 to date, segment sales were $30.8 million, versus $34.1 million for the first nine months of fiscal 2010. The segment's operating loss through nine months was $3.2 million, excluding the second-quarter bad-debt provision for Borders, versus a loss of $925,000 for last year's first nine months.

Fallout from the impact of the Borders bankruptcy continued to affect all three publishing businesses, but was most acute at REA, where sales were down 21% in the quarter and 29% for the first nine months of the year. Despite this drop, REA remained profitable in the quarter, helped by the continuing popularity of its AP Crash Course books. However, given the current situation at Borders, Courier recorded an impairment of all of REA's goodwill through a pre-tax, non-cash charge of $8.6 million or $.43 per diluted share.

Meanwhile, results varied through other sales channels. Reduced traffic at home improvement centers continued to hurt Creative Homeowner sales, down 10% in the quarter and 11% year-to-date. But at Dover, increases in online and international business partially offset the decline in Borders sales; for the quarter, Dover's sales were off 6%.

"It has been a tough year for bricks-and-mortar booksellers and the publishers who serve them," said Mr. Conway. "In response, all of our publishing businesses have become leaner and more focused; as a result, for example, Creative Homeowner was able to cut its third-quarter loss to less than half of last year's. Equally important, all three businesses continue to produce outstanding titles, including two Gold winners in the 2011 Benjamin Franklin Awards and a Bronze winner in the Independent Publisher Book Awards. And our growth in online and international sales testifies to our strong connection to readers and families everywhere.

"The uneasy economy continues to take its toll, but we are fortunate to be able to produce exceptionally attractive books quickly and economically due to our access to Courier Digital Solutions. This capability will serve us even better when consumer spending improves."


"Our fourth quarter is traditionally the strongest in our fiscal year," said Mr. Conway. "We expect that pattern to hold true this year as well. Our relationships with world leaders in educational and religious publishing have never been stronger, and with the college textbook market in full swing, we are benefiting from our recent investments in capacity through higher utilization of our most efficient equipment.

"At the same time, the Borders situation continues to cast a shadow over both of our business segments, and as a result we have adjusted our guidance to reflect no further sales to Borders as well as a continued shortfall in trade sales in the book manufacturing segment. In addition, we recognize that e-books will probably continue to account for an increasing percentage of trade book sales.

"As a result, for the fourth quarter of fiscal 2011, we expect earnings of $.36 to $.46 per diluted share, versus $.35 per diluted share in last year's fourth quarter.

"For fiscal 2011 overall, we expect to achieve total sales of between $258 million and $263 million, versus $257 million in fiscal 2010. And we expect earnings per diluted share of between $.70 and $.80, excluding the second-quarter restructuring costs and bad-debt provision, as well as the third-quarter impairment charge. This compares with fiscal 2010 earnings of $.85 per diluted share, excluding last year's impairment charge.

"In addition to measuring our performance by generally accepted accounting principles (GAAP), we also track several non-GAAP measures including EBITDA (earnings before interest, taxes, depreciation and amortization) as an additional indicator of the company's operating cash flow performance. This measure should be considered in addition to, not a substitute for or superior to, measures of financial performance prepared in accordance with GAAP. In fiscal 2011, we expect EBITDA to be between $38 million and $40 million, excluding the second-quarter restructuring costs and bad-debt provision, and the third-quarter impairment charge. This compares with EBITDA of $38 million in fiscal 2010, excluding last year's impairment charge.

"Factors not incorporated into our guidance include the possibility of future impairment or restructuring charges."


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