Product revenue increased by $2.5 million, or 12.9%, to $21.9 million in the third quarter of 2009 from $19.4 million in the third quarter of 2008 due to increases in revenue across all product lines. The product revenue increase is the result of both strong orders in the period and from revenue recognized from prior period’s subscription orders.
Service revenue increased by $1.0 million, or 12.0%, to $9.8 million in the third quarter of 2009 from $8.8 million in the third quarter of 2008. About half of the service revenue increase is a result of increased hosting revenue which is recognized ratably over the subscription period and is a direct result of the increasing number of customers who are utilizing our hosting services. The remainder of the increase is related to increased revenue for technical consulting services that we provide to help our customers to implement and get started using our products. These increases were somewhat offset by decreases in onsite professional development revenue.
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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 year’s 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.
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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 company’s 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 company’s 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 company’s 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 company’s officers and employees about the company’s 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 the2Know! response system. The majority of these obligations will be satisfied within one year.
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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 “Management’s 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 management’s 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 ofAccelerated 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.
Item 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.
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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.
Item 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.
Part II - OTHER INFORMATION
Item 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.
Item 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.
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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:
| | | | | | | | | | | | | |
Period | | 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 | | | 6,004 | | $ | 9.54 | | | 6,004 | | | 1,216,463 | |
August 1-31 | | | 1,376 | | | 9.81 | | | 1,376 | | | 1,215,087 | |
September 1-30 | | | — | | | — | | | — | | | 1,215,087 | |
Total | | | 7,380 | | $ | 9.59 | | | 7,380 | | | | |
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Item 6.Exhibits
Exhibits.
| | | | |
Exhibit No. | | Description | |
| | | |
| 31.1 | | Section 302 certification by Terrance D. Paul |
| | | |
| 31.2 | | Section 302 certification by Mary T. Minch |
| | | |
| 32.1 | | Section 906 certification by Terrance D. Paul |
| | | |
| 32.2 | | Section 906 certification by Mary T. Minch |
| | | |
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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.
| | | | |
| | | RENAISSANCE LEARNING, INC. |
| | | (Registrant) |
| | | |
| November 9, 2009 | | /s/ Terrance D. Paul | |
| Date | | Terrance D. Paul |
| | | Chief Executive Officer and a Director |
| | | (Principal Executive Officer) |
| | | |
| November 9, 2009 | | /s/ Mary T. Minch | |
| Date | | Mary T. Minch |
| | | Senior Vice President-Finance, Chief Financial Officer and |
| | | Secretary (Principal Financial and Accounting Officer) |
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Index to Exhibits
| | | | |
Exhibit No. | | Description | |
| | | |
| 31.1 | | Section 302 certification by Terrance D. Paul |
| | | |
| 31.2 | | Section 302 certification by Mary T. Minch |
| | | |
| 32.1 | | Section 906 certification by Terrance D. Paul |
| | | |
| 32.2 | | Section 906 certification by Mary T. Minch |
