Table of Contents
Nine Months Ended September 30, 2009 and 2008
Net
Sales
. Our net sales increased by $3.5 million, or
4.0%, to $89.1 million in the first nine months of 2009 from $85.6 million in
the first nine months of 2008. Orders were $5.5 million higher in the first
nine months of 2009 than in the first nine months of 2008; however, higher
orders were offset by a $2.4 million increase in the amount of revenue deferred
as compared to the same quarter last year.
Product
revenue increased by $0.3 million, or 0.4%, to $63.8 million in the first nine
months of 2009 from $63.5 million in the same period in 2008. The product
revenue increase is the result of both the increase in orders in the first nine
months of 2009 and from revenue recognized from the prior years subscription
orders.
Service
revenue increased by $3.2 million, or 14.4%, to $25.3 million in the first nine
months of 2009 from $22.1 million in the first nine months of 2008. Nearly all
categories of service revenue were up except for onsite professional
development. The most significant increases were in hosting and other technical
services which increased by $1.9 million and $1.2 million, respectively.
Cost
of Sales
. Cost of sales of products decreased by $0.6
million, or 5.1%, to $10.6 million in the first nine months of 2009 from $11.2
million in the first nine months in 2008. As a percentage of product sales, the
cost of sales of products was 16.6% in the first nine months of 2009, compared
to 17.6% in the first nine months of 2008. Product cost of sales improvement
was due to the higher proportion of software in the 2009 sales mix as compared
to 2008, as our margins are higher on software than on hardware, and to lower
production costs for our responders and scanners. The cost of sales of services
decreased by $1.2 million, or 12.2%, to $8.8 million in the first nine months
of 2009 from $10.0 million in the first nine months of 2008. About 70% of the
dollar decrease was due to savings from not holding a National Conference in
2009, with the remainder of the dollar decrease attributable to cost
efficiencies in our other services, the cost of which is relatively fixed,
especially with respect to our technical services and software support. As a
percentage of sales of services, the cost of sales of services decreased to
34.7% in the first nine months of 2009 from 45.2% in the first nine months of
2008.
Product
development.
Product development expenses decreased by
$0.3 million, or 2.6%, to $12.5 million in the first nine months of 2009,
compared to $12.8 million for the first nine months of 2008. As a percentage of
net sales, product development expenses decreased to 14.0% in the first nine
months of 2009, from 15.0% for the first nine months of 2008. The change in
product development expenses was primarily due to savings of approximately $0.6
million in the second and third quarters of 2009 from our restructuring, offset
by $0.1 million less capitalized development expense in 2009 and the remainder
mostly attributable to the additional costs we incurred in the first quarter of
2009 to effect the restructuring.
Selling
and Marketing.
Selling and marketing expenses
decreased by $0.3 million, or 1.3%, to $26.9 million in the first nine months
of 2009, compared to $27.2 million for the first nine months of 2008. Selling
expenses were flat and marketing expenses decreased due to cost efficiencies in
our advertising programs. As a percentage of net sales, selling and marketing
expenses decreased to 30.2% in the first nine months of 2009 from 31.8% in the
first nine months of 2008.
General
and Administrative.
General and administrative
expenses decreased by $1.8 million, or 14.9%, to $10.0 million in the first
nine months of 2009 from $11.8 million in the first nine months of 2008. The
decrease is due to a $0.6 million charge taken in the prior year for a 2004
lawsuit settlement regarding defective parts from a supplier, and $0.4 million
of fees incurred in the prior year to cancel certain future professional
development events. The remaining $1.0 million of the decrease is primarily
attributable to staff reductions and other non-payroll cost constraints
implemented earlier in 2009 as part of our cost reduction efforts. As a
percentage of net sales, general and administrative expenses decreased to 11.3%
in the first nine months of 2009 from 13.8% in the first nine months of 2008.
Operating
Income.
Operating income increased by $7.7 million, or
60.9%, to $20.3 million in the first nine months of 2009 from $12.6 million in
the same period in 2008. As a percentage of net sales, operating income
increased to 22.8% in the first nine months of 2009 from 14.7% in the first
nine months of 2008. The increase was due to the higher revenues, gross profit
margin improvement, and decreased operating expenses as explained in more
detail above.
Income
Tax Expense.
Income tax expense of $7.5 million was
recorded in the first nine months of 2009 at an effective income tax rate of
38.0% of pre-tax income, less a tax benefit of $0.4 million relating to the
lapse of the statue of limitations on various tax positions. This compares to
income tax expense of $4.7 million that was recorded in the first nine months
of 2008 at an effective income tax rate of 38.0% of pre-tax income, less a tax
benefit of $0.3 million relating to the settlement of various state audit
issues and to the lapse of the statue of limitations on various tax positions.
-11-
Table of Contents
Liquidity and Capital Resources
As
of September 30, 2009, our cash, cash equivalents and investment securities
were $33.8 million, up $16.0 million from $17.8 million at December 31, 2008.
The increase was primarily due to $21.7 million of cash flow provided by
operations offset by $6.1 million used to pay dividends.
As
of September 30, 2009, we have a $15.0 million secured revolving line of credit
with a bank which is available until July 1, 2010. The line of credit bears
interest at either a floating rate or a fixed rate for a period of up to 90
days based on LIBOR plus 1.5%. The rate is at our option and is determined at
the time of borrowing. We also have a $2.0 million unsecured revolving line of
credit with a bank available until April 30, 2010, which bears interest at the
prime rate. As of September 30, 2009, the lines of credit had not been used.
On
April 17, 2002, our Board of Directors authorized the repurchase of up to
5,000,000 shares of our common stock; on February 9, 2005, our Board of
Directors authorized the repurchase of an additional 3,000,000 shares; and on
February 6, 2008, our Board of Directors authorized the repurchase of an
additional 1,000,000 shares under the stock repurchase program. No time limit
was placed on the duration of the repurchase program, nor is there any dollar
limit on the program. We repurchase shares on the open market as well as from
employees who elect to surrender shares to pay their payroll withholding taxes
associated with stock-based compensation. Repurchased shares become treasury
shares and may be used for stock-based employee benefit plans, equity
compensation plans and, for other general corporate purposes. From January 1,
2009 through September 30, 2009, we repurchased approximately 20,000 shares at
a cost of $182,000. Since the original authorization of the repurchase program
in 2002, we have repurchased approximately 7.8 million shares at a cost of
$135.1 million. Depending on our stock valuation, cash availability and other
factors, we may repurchase additional shares as a beneficial use of our cash to
enhance shareholder value.
In
each of the first three quarters of 2009 we paid a cash dividend of $0.07 per
share. We paid quarterly cash dividends of $0.07 per share in each of the four
quarters of 2008 along with a special dividend of $0.75 per share in the fourth
quarter of 2008. On October 21, 2009, our Board of Directors declared a
quarterly cash dividend of $0.07 per share, payable December 1, 2009 to
shareholders of record as of November 6, 2009.
We
intend to continue to pay quarterly cash dividends, subject to capital
availability and a determination that cash dividends continue to be in the best
interests of the company and our shareholders. Our Board of Directors also
considers several additional factors when declaring dividends, including: (1)
the companys financial statements as of the most recent practicable date; (2)
the expected cash costs to deliver the products and services sold and recorded
as deferred revenue; (3) the companys ability to provide the products and
services underlying the amounts recorded as deferred revenue; (4) the
likelihood of recognizing amounts recorded as deferred revenue as net sales
based on the companys historical experience and most recent projections; (5)
the short time period over which such recognition has historically occurred and
is expected to occur; (6) seasonal cash flow; (7) general economic outlook; and
(8) other information, opinions, reports and statements prepared and presented
by the companys officers and employees about the companys business,
operations and financial condition.
We
believe our strong cash position coupled with cash flow from operations will be
sufficient to meet both our short-term and long-term working capital
requirements.
Off-Balance Sheet Arrangements and Aggregate
Contractual Obligations
We
do not have any off-balance sheet transactions, arrangements or obligations
(including contingent obligations), that would have a material effect on our
financial results.
Operating
Leases.
We enter into operating leases, primarily for
facilities that we occupy in order to carry out our business operations. We
utilize operating leases for some of our facilities to gain flexibility as
compared to purchasing facilities outright and to limit our exposure to many of
the risks of owning commercial property, particularly with regard to
international operations. These agreements are generally for terms of one to
five years. Some of the leases have early termination clauses, but they
generally cannot be terminated by either the lessor or us for reasons other
than breach of the lease agreement. We do not anticipate the early termination
of any significant lease agreement.
Purchase
Obligations.
We enter into commitments with certain
suppliers to purchase our hardware products, such as
Neo
laptops,
AccelScan
scanners and the
2Know!
response
system. The majority of these
obligations will be satisfied within one year.
-12-
Table of Contents
Tax
Audit Settlements and Deposits
. Currently we do not
anticipate making any significant cash payments related to the settlement of
tax audits or deposits for unsettled audit issues. Estimation of the amounts
and timing of payments in periods after 2009 are highly uncertain and therefore
are not included in the table.
As
of September 30, 2009, our approximate contractual obligations for operating
leases, tax audit payments and purchase obligations (by period due) were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
Obligations
|
|
|
|
|
Payments Due by Period
|
|
(In
Thousands)
|
|
Total
|
|
Less than
1 year
|
|
1-3
years
|
|
3-5
years
|
|
More than
5 years
|
|
Operating lease obligations
|
|
$
|
3,783
|
|
$
|
395
|
|
$
|
2,080
|
|
$
|
1,157
|
|
$
|
151
|
|
Purchase obligations
|
|
|
3,766
|
|
|
3,753
|
|
|
13
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,549
|
|
$
|
4,148
|
|
$
|
2,093
|
|
$
|
1,157
|
|
$
|
151
|
|
Critical Accounting Policies and Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
judgments, estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates. There have been no significant changes to our critical
accounting policies that were disclosed in our 2008 Annual Report.
Forward-Looking Statements
In
accordance with the Private Securities Litigation Reform Act of 1995, we can
obtain a safe-harbor for forward-looking statements by identifying those
statements and by accompanying those statements with cautionary statements
which identify factors that could cause actual results to differ materially
from those in the forward-looking statements. Accordingly, the foregoing Managements
Discussion and Analysis of Financial Condition and Results of Operations and
the following Quantitative and Qualitative Disclosures About Market Risk may
contain certain forward-looking statements regarding strategic growth
initiatives, growth opportunities and managements expectations regarding
orders and financial results for 2009 and future periods. These forward-looking
statements are based on current expectations and current assumptions which
management believes are reasonable. However, these statements involve risks and
uncertainties that could cause actual results to differ materially from any
future results encompassed within the forward-looking statements. Factors which
may cause such a difference to occur include: (i) the failure of
Accelerated Reader Enterprise
,
Accelerated Math Enterprise
and laptop
orders to achieve expected growth targets, (ii) a decline in reading quiz and
math library sales that exceeds expectations, (iii) risks associated with our
strategic growth initiative involving our transition to subscription-based
products, (iv) dependence on educational institutions and government funding
and (v) other risks affecting our business as described in our filings with the
Securities and Exchange Commission, including our 2008 Annual Report,
subsequently filed quarterly reports on Form 10-Q and current reports on Form
8-K, which factors are incorporated herein by reference. We expressly disclaim
a duty to provide updates to forward-looking statements, whether as a result of
new information, future events or other occurrences.
I
tem 3.
Quantitative and
Qualitative Disclosures About Market Risk
Interest
Rate Risk
. Our exposure to market interest rate risk
consists of: (i) the increase or decrease in the amount of interest income we
can earn on our investment portfolio and (ii) the decrease or increase in the
value of our investment security portfolio if market interest rates increase or
decrease, respectively. We anticipate that we will have sufficient liquidity to
hold our investments to maturity; therefore, we do not expect to recognize any
material losses or gains related to an increase or decrease in market interest
rates.
Market
Risk.
Our exposure to market risk relates to the
quality of the holdings in our investment security portfolio. The fair market
value of our investments is subject to increases or decreases in value
resulting from the performance of the securities issuer, from upgrades or
downgrades in the creditworthiness of the securities issuer, upgrades or
downgrades in the creditworthiness of the insurer of the securities, and from
changes in general market conditions.
-13-
Table of Contents
We
seek to manage our exposure to market risk by investing in accordance with our
corporate investment policy as established by our Board of Directors. The goals
of the policy are: (i) preservation of capital, (ii) provision of adequate
liquidity to meet projected cash requirements, (iii) minimization of risk of
principal loss through diversification and (iv) maximization of yields in
relationship to the guidelines, risk, market conditions and tax considerations.
Our
investment policy permits investments in obligations of the U.S. Treasury
department and its agencies, money market funds and, high quality investment-grade
corporate and municipal interest-bearing obligations. The policy requires
diversification to prevent excess concentration of issuer risk and requires the
maintenance of minimum liquidity levels. The policy precludes investment in
equity securities except for the specific purpose of funding the obligations
related to our Supplemental Executive Retirement Plan. As of September 30,
2009, our investment securities had a market value of approximately $5.3
million and a carrying value of $5.3 million. Due to the type and duration of
our investments, we do not expect to realize any material gains or losses
related to market risk.
Foreign
Currency Exchange Rate Risk
. The financial position
and results of operations of our foreign subsidiaries are measured using local
currency. Revenues and expenses of such subsidiaries have been translated into
U.S. dollars using average exchange rates prevailing during the period. Assets
and liabilities have been translated at the rates of exchange on the balance
sheet date. We use the historical exchange rates published by the OANDA
Corporation for these translations. Translation gains or losses are deferred as
a separate component of shareholders equity. Aggregate foreign currency
transaction gains and losses are included in determining net income. As such,
our operating results are affected by fluctuations in the value of the U.S.
dollar compared to the British pound, Canadian dollar and the Euro. At this
time, foreign exchange rate risk is not significant due to the relative size of
our foreign operations and revenues derived from sales in foreign currencies.
I
tem 4.
Controls and
Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed,
summarized and reported within the time periods specified in the rules and
forms of the SEC, and that such information is accumulated and communicated to
our management, including our Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), as appropriate, to allow timely decisions regarding
required disclosures. In designing and evaluating our disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives and management was necessarily
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
As
of September 30, 2009, an evaluation was performed under the supervision and
with the participation of management, including our CEO and CFO, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, management, including the CEO and CFO,
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the rules and forms of the SEC.
There
has been no change in our internal control over financial reporting that has
occurred during the quarter ended September 30, 2009 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
P
art II - OTHER INFORMATION
I
tem 1A.
Risk Factors
There
have been no material changes from risk factors previously disclosed in our
2008 Annual Report in response to Item 1A to Part I of Form 10-K.
I
tem 2.
Unregistered
Sales of Equity Securities and Use of Proceeds
On
April 17, 2002, our Board of Directors authorized a repurchase program which
provides for the repurchase of up to 5,000,000 shares of our common stock. On
February 9, 2005, our Board of Directors authorized the repurchase of an
additional 3,000,000 shares under the stock repurchase program. On February 6,
2008, our Board of Directors authorized the repurchase of an additional
1,000,000 shares under the stock repurchase program.
-14-
Table of Contents
No
time limit was placed on the duration of the repurchase program, nor is there
any dollar limit on the program. We repurchase shares on the open market as
well as from employees who elect to surrender shares at the time of vesting to
pay their payroll withholding taxes. Repurchased shares will become treasury
shares and may be used for equity compensation plans, stock-based employee
benefit plans and for other general corporate purposes.
The
following table shows information relating to the repurchase of shares of our
common stock during the three months ended September 30, 2009:
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|
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|
|
|
|
|
|
|
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Period
|
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Total Number
of Shares
Purchased
|
|
Average Price
Paid per Share
|
|
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
|
|
Maximum Number of
Shares that May Yet Be
Purchased Under the Plans
or Programs
|
|
July 1-31
|
|
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6,004
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|
$
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9.54
|
|
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6,004
|
|
|
1,216,463
|
|
August 1-31
|
|
|
1,376
|
|
|
9.81
|
|
|
1,376
|
|
|
1,215,087
|
|
September 1-30
|
|
|
|
|
|
|
|
|
|
|
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1,215,087
|
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Total
|
|
|
7,380
|
|
$
|
9.59
|
|
|
7,380
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-15-
Table of Contents
I
tem 6.
Exhibits
Exhibits.
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Exhibit
No.
|
|
Description
|
|
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31.1
|
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Section 302
certification by Terrance D. Paul
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31.2
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Section 302
certification by Mary T. Minch
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32.1
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Section 906
certification by Terrance D. Paul
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32.2
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Section 906
certification by Mary T. Minch
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-16-
Table of Contents
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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RENAISSANCE LEARNING, INC.
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(Registrant)
|
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November
9, 2009
|
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/s/ Terrance D. Paul
|
|
|
Date
|
|
Terrance D. Paul
|
|
|
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Chief Executive Officer
and a Director
|
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|
|
(Principal Executive
Officer)
|
|
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November
9, 2009
|
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/s/ Mary T. Minch
|
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|
Date
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Mary T. Minch
|
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|
|
Senior Vice
President-Finance, Chief Financial Officer and
|
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Secretary (Principal
Financial and Accounting Officer)
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Table of Contents
Index to Exhibits
|
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|
|
|
Exhibit
No.
|
|
Description
|
|
|
|
|
|
|
31.1
|
|
Section 302 certification
by Terrance D. Paul
|
|
|
|
|
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31.2
|
|
Section 302 certification
by Mary T. Minch
|
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|
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|
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32.1
|
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Section 906 certification
by Terrance D. Paul
|
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32.2
|
|
Section 906 certification
by Mary T. Minch
|
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