Courier Corporation (NASDAQ:CRRC)
F3Q 2013 Results Earnings Call
August 1, 2013 2:30 PM ET
Jim Conway - Chairman and CEO
Peter Folger - Chief Financial Officer
Rajeev Balakrishna - Senior Vice President and General Counsel
Good day, ladies and gentlemen. And welcome to the Quarter Three 2013 Courier Corporation Earnings Conference Call. My name is Patrick, and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)
As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. James F Conway III, Chairman and Chief Executive Officer. Please proceed, sir.
Thank you, Patrick. Good afternoon. And welcome to Courier Corporation’s third quarter earnings conference call. I’m Jim Conway, Chairman and Chief Executive Officer. Thank you for joining us. We released our earnings at about 8:30 this morning. I hope you have all had a chance to see the results.
We had a solid third quarter with particular strength in the education market and ending with healthy order flow, heading into our fourth quarter. Sales were up 9% from last year and our earnings for share were up 15%.
Our new four-color digital plant in Kendallville, Indiana ramped up smoothly and served us well throughout the quarter. Anticipating further growth, yesterday, we announced that we are buying a second digital press for Kendallville to be up and running this fall. Also this morning, we declared our regular quarterly dividend of $0.21 per share.
Courier’s Chief Financial Officer, Peter Folger is here with me today. Rajeev Balakrishna, Courier’s Senior Vice President and General Counsel is also here with us. Peter will begin with an overview of our financial results for the quarter. I will then discuss the key issues driving our business. I will also provide an outlook for the reminder of the year. Peter, please go ahead.
Thank you, Jim. Before I begin I should point out a couple of things. First, during this call, we will be making forward-looking statements relating to the company’s financial goals and business environment that are subject to uncertainty. Information about the factors that could potentially impact our financial results and guidance are included in today’s press release and our filings with the SEC.
Second, we will discuss certain non-GAAP financial measures, including EBITDA and adjusted operating results. These adjusted operating results exclude restructuring charges, as well as certain non-recurring items.
Specifically, adjusted results for the first nine months of last year excludes severance and post-retirement costs of $1.8 million or $0.09 per share, and a gain of $587,000 or $0.03 per share from the sales of our lease-hold interest in two cell towers.
You will find additional disclosures regarding these non-GAAP measures in our press release, including reconciliation of these measures with the comparable GAAP measures. These non-GAAP measures should be considered in addition to, not as a substitute for or superior to GAAP financial measures. Also, during this call, whenever we refer to earnings per share, it will be on a diluted basis.
Now let’s turn to the results. Sales for the third quarter of fiscal 2013 were $64 million, up 9% from last years third quarter. Net income in the quarter was $1.7 million or $0.15 per share, compared to $1.6 million or $0.13 per share last year.
For the first nine month of the year, sales were $191 million, up 4% from $184 million last year. Net income for the first nine months of the year was $4.4 million or $0.39 per share, compared to adjusted net income of $4.2 million or $0.35 per share last year.
Now I’ll discuss each of our two business segments. I’ll start with our Publishing segment, which includes Dover Publications, Research & Education Association or REA and Creative Homeowner.
Publishing sales were $8.8 million in the third quarter, down 3% from last year. Sales were up from last year at Dover, but down at REA and Creative Homeowner. Publishing sales through nine months of the fiscal year were $27.3 million, also down 3% from last year, again with sales up at Dover, but down at the other two businesses. Despite slow sales the segment continued to narrow its operating loss. The loss for the third quarter was $889,000 versus a loss of $975,000 last year.
For the first nine months of this year, the segment lost $2.4 million, down from $3.3 million for the same period last year.
Factors contributing to this improvement included several well received new products, continued reduction in operating costs, a decrease in inventory obsolescence expense and increasing revenues from ebook sales.
Now let’s look at our book manufacturing segment. Third quarter sales in the segment were $58 million, up 11% from $52 million last year, while sales for the first nine months were $171 million, up 5% from last year. In this segment, we focused on three markets, education, religious and specialty trade.
Sales for the education market in the third quarter were up 18% from last year to $28 million and for the first nine months of fiscal 2013 they are up 9% to $72 million. The year-to-date growth in this market came primarily from higher sales of college textbooks and reflects an increase of over 40% in revenues from our digital print capabilities, including sales of customized textbooks produced by Courier Digital Solutions.
As Jim mentioned, we now have a fully functioning second digital facility in Kendallville, Indiana to complement the one here in Massachusetts. The second facility located right down the street from our four-color offset plant ramped up smoothly this spring and was kept busy almost from day one, thanks to the ongoing shift from standard version of college textbooks to customized versions tailored to the needs of the individual courses.
Given the continuing growth in demand, yesterday we announced that we will be buying a second new HP digital press for the Kendallville plant. We will also be adding a new binding system which will enable the plant to produce hard cover books.
The total project cost for these improvements will be about $12 million, of which, we will be paying approximately half in the current fiscal year and half next year. We expect to install a traditional capacity in September with the scheduled start-up in October.
In the religious market, third quarter sales were up 7% from last year at $15 million. Sales for the year-to-date were up 4% to $50 million with sales to our largest religious customer up 5%.
In our third key market specialty trade, sales were up 4% at $12 million in the third quarter, reflecting an increased use of digital printing. However, sales to nine months were down 1% to $42 million reflecting tight inventory management among publishers.
During the quarter, we also made significant progress on the integration of our April acquisition of FastPencil, a California startup that has developed a powerful cloud based collaboration platform spanning both print and e-books. Jim will have more to say about in a few minutes.
For now, I will simply know that the book manufacturing segments third quarter financial performance reflects approximately $250,000 in transaction costs relating to this acquisition, which together with the amortization of operating cost had a total effect on operating income of approximately $500,000 or $0.03 per share.
Overall, the book manufacturing segments, third quarter operating income was $4.2 million, up 7% from $4 million than last year's third quarter. These results reflect the combination of a favorable sales mix and increased capacity utilization which more than offset the effects of a competitive pricing environment and reduced recycling income.
For the first nine months of this year, operating income was $11.1 million, up 6% from $10.5 million for the same period last year, which included the first quarter items mentioned previously. Gross profit in the segment was $11.9 million or 20.4% of sales in this year's third quarter versus $10.2 million or 19.5% of sales last year. For the first nine months of this year, gross profit was $33.3 million versus $31.9 million last year and as a percentage of sales was 19.4% in both periods.
Moving on to taxes. Our effective rate for the first nine months of fiscal 2013 was 37% comparable to the rate for the same period last year. Now, I will shift gears and talk about cash flow and our financial condition.
Cash provided from operating activities was $21 million in the first nine months versus $22 million last year. Investment activities for the first nine months of the year used $23 million of cash, including approximately $5 million for the acquisition of FastPencil, $3 million for people location cost and $14 million of capital expenditures.
Capital expenditures for fiscal 2013 are expected to total between $23 million and $25 million with approximately $20 million dedicated to our digital offerings, primarily the expanded digital capacity in Kendallville. Prepublication costs are expected to be lower than 2012 levels as we tighten our focus to Creative Homeowner.
In November, the board authorized a $10 million stock repurchase program, of which, we have now used about $2 million to purchase shares. We ended the quarter with $26 million of debt, $11 million higher than the start of the year and we have a committed credit facility of $100 million spread among four leading financial institutions and maturing in 2016.
So to sum up, it was a good quarter for Courier with revenues and income, both up over last year. In book manufacturing, sales were up 18% in the education market, up 7% in religious market, and up 4% in the specialty trade market, helped by continued growth at Courier Digital Solutions.
Our second digital facility in Indiana started producing in April, ran well through the remainder of the quarter and is now preparing for the installation of additional capacity this fall. And we complemented our content management offerings with the acquisition of FastPencil.
In publishing, we continued to cut cost and see meaningful revenues from ebooks. As a result, while sales were down 3%, we continue to reduce the segment’s operating loss. We announced our regular quarterly dividend. We still have authorization for an additional repurchase of up to approximately $8 million of Courier stock. And we have a healthy balance sheet that leads us well positioned to pursue future growth opportunities.
Now, I'll turn the call back over to Jim.
Thank you, Peter. As you heard, we accomplished a lot this quarter. We beat last year’s numbers handily in book manufacturing. And we continue to trim our losses in publishing and took important actions for the future.
As a book manufacturer, we grew revenues with both of our two largest customers and in all three of our principal markets. With two four-color digital inkjet printing facilities now online, we have the capacity and the flexibility to help our educational and trade publishing customers more than ever, with complete lifecycle content management print and inventory solutions. Meanwhile, we continue to deliver for our largest religious customer, growing our share we’re helping them reach into more than 100 countries.
As a publisher, we saw continuation of Dover’s recent sales growth led by ebook sales which has now passed the million dollar mark as our list of ebook titles also continues to grow. As of today, we have more than 4,000. While sales were down elsewhere, Creative Homeowner actually returned a small profit, thanks to its stronger product focus and reduced operating cost.
Overall, the segment’s loss for the year today is down 40% from last year. This combination of achievements made it a very solid quarter.
But today, I’d like to focus on three other steps we’ve taken since our last conference call. All of which offer great promise for the future. These include our April 30th acquisition of FastPencil, our May 29th announcement of a new strategic relationship with Ingram Content Group and our decision to buy a second HP digital press for Kendallville, barely three months after the first one began operations back in the spring.
Let’s take them in order. FastPencil is an exciting young company we acquired partly for its powerful content management and collaboration platform for book publishers and partly for its demonstrated ability to reach out the self-publishers who accounts to one of the fastest growing segments of the publishing world today.
The FastPencil platform has the ability to take projects all the way from content development to production and distribution quickly and seamlessly in both print and ebook form. Put that platform together with Courier sales, marketing and print capabilities, not to mention our connections to an unusually wide network of retailers and readers and it’s a terrific long-term opportunity for both sides. In the short term, we’ve made substantial progress by integrating key systems, including sales, marketing, distribution, inventory, accounting and HR. There is much more to come but we’re off to a great start.
Now, for the Ingram agreement. Ingram Content Group provides books, music and media content services to over 38,000 retailers, libraries, schools and distribution partners in 195 countries. Joining forces with Ingram to combine our expertise in process management and print production with Ingram’s channel connections, global customer base and fulfillment capabilities creates an extraordinary opportunity for both companies. Not to mention the authors, publishers and retailers we both serve.
The opportunity expands both of our business segments and both have already started taking advantage of it. A couple of examples, as a manufacturer, our Westwood plant has already shipped its first offset order to one of the 25,000 customers of Ingram’s Life Print operation. Dover in publishing, Dover is already tied into Ingram’s print-on-demand capabilities to capture lot sales from out-of-print titles and to create hard cover versions of as many as 2400 paperback titles for libraries and high-end buyers.
As with FastPencil, we are just getting start with Ingram but the relationship has substantial to allow Dover to reach a five greater range of international markets at very attractive cost while bringing an expanded customer base to our book manufacturing operations.
Now, to the third item, the doubling of our HP digital inkjet press capacity in Kendallville. The timing of this announcement just a little over three months after the startup of our first Kendallville T410 press may seem surprising. But the reasoning has been pretty clear all a lot in the continuing rise in digital demand that we have been experiencing for several years.
We knew before we begin that if things when according to plan, the Kendallville digital plan was likely to grow quickly. In fact, we chose a facility that is room not only for these two presses but more.
Between the high press capacity and our new case binding line, we will be able to serve more customers with a greater variety of multi-print strategies, quickly and cost effectively from a single central U.S. location and it’s all happening in the next couple of months. Also, it continues to be exciting times at Courier as we move further into the digital future by building on two centuries of innovation in print.
And with that, let’s go to our outlook. We start our fourth quarter exceptionally well positioned to serve our customers in today’s economy. We have carved out a distinctive profile as a complete state-of-the-art resource for publishers in all our principal markets, with capabilities tailing to the revolving content process and distribution needs.
Our ability to deliver customized versions in any quantity continues to help us grow share in the education and trade markets. While our expanding role on behalf of our largest religious customer is enabling it to reach more people in more countries than ever before.
We continue to expect our performance in fiscal 2013 to reflect our customary seasonal pattern with the largest portion of our earnings coming in the fourth quarter. In line with our past practice, today’s guidance including comparisons to prior performance excludes impairment and restructuring charges. Overall, we expect fiscal 2013 sales of between $269 million and $278 million and increase of between 3% and 6% over the 53 week period of fiscal 2012.
We also expect earnings per share of between $0.80 and $1, which includes cost of approximately $0.05 per share related to FastPencil. This compares with our fiscal 2012 adjusted earnings of $0.91 per share. And in fiscal 2013, we expect EBITDA to be between $40 million and $44 million compared to $42 million in fiscal 2012 excluding restructuring charges.
Factors not incorporated in to this guidance include the possibility of future impairment or restructuring charges.
So at this point, I'll turn the call over the questions. So therefore it’s back to you Patrick.
(Operator Instruction) I show that there are no audio questions at this time. I would now like to turn the call back over to Mr. Conway for closing remarks.
Patrick, thank you very much and folks thank you very much for listening in and joining us today. And we look forward to talking to you next quarter at year end. Good bye for now.
Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.
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