Investor call - Martin E. Kenney's prepared statement
Good morning, everyone. I have a few prepared statements that I think will be
helpful as we review the financial results for the first quarter. Also in
attendance with me today are Bob Lynch, WRC's COO and Rick Nota, WRC's VP,
Finance.
Before getting into the specifics of our financial results as I generally do, I
would like to spend a moment commenting on the current competitive and economic
environment.
As you all probably know, the U.S K-12 education marketplace has been impacted
by state cutbacks in education funding and delays in federal funding
The overall amount and suddenness of state budget shortfalls has been unusual-
the National Governor's Association has estimated the total budget shortfall for
all states to approximate $40 billion. To try to offset this funding deficit, 36
states have made significant budget cuts, frozen spending or have plans to do
so. While WRC should benefit significantly from numerous provisions in the
recently passed "No Child Left Behind Act" - most of this funding will not be
available until the latter half of 2002, with some purchasing decisions spilling
over to 2003. In the first quarter, we noted an apprehension on the part of
school districts to spend existing funds as a result of confusion created by the
changing mix of future federal and state funding. Schools are taking a "wait and
see" approach before spending existing funds. In many, but not all, instances
new increased federal funding is merely offsetting significantly reduced state
funding. The new guidelines - the result of the re-authorization of the
Elementary and Secondary Education Act ("ESEA") - that must be met in order to
qualify for the new federal funds are somewhat confusing and this uncertainty
has protracted the selling process. We continue to believe the movement towards
increased school accountability - coupled with the difficult funding environment
- - will lead schools to look for complete solutions. It is becoming increasingly
difficult - and expensive - for schools to assemble all of their curriculum and
assessment needs on a piece meal basis. This should prove to be a favorable
trend for WRC, as the new funds get released in the latter half of the year.
WRC is at the forefront of the movement for school accountability - the
overriding issue facing school administrators is how to improve their school's
performance on high stakes tests. The "No Child Left Behind Act" increases both
the frequency and stakes of these tests. We believe we are poised to benefit
greatly over the next several years since we are strategically positioned to
both diagnose and remediate areas of weakness at the child, classroom, school
and district level. AGS and Compass are poised to serve the test diagnostic and
preparedness market as well as teacher training and assessment. Weekly Reader,
Gareth Stevens and our other brands should benefit from dollars earmarked for
early childhood reading and supplemental education.
Again, in the long run - these converging trends should significantly benefit
our company.
As you will see, WRC continues to perform well in a very challenging current
market environment.
First Quarter Financial Review
Consolidated Results
WRC Media's consolidated EBITDA (excluding unrestricted subsidiaries) for the
first quarter showed an increase of approximately $600 thousand or 7.5% to $8.1
million versus $7.5 million for the same period in 2001. Operating income was up
significantly for the three months ended March 31, 2002 - $2.4 million of income
versus a loss of $9.9 million for the first quarter of last year. The improved
EBITDA performance was driven by WRC's ongoing restructuring, which began in
early 2001, with the reorganization of our original four operating units into
two operating groups: The Assessment, Curriculum and Educational Technology
Group (comprised of the CompassLearning and AGS operating units) and the
Reference and Periodicals Group (comprised of the World Almanac Education Group
and Weekly Reader operating units). This reorganization was the next logical
step in furthering our strategy for continued market leadership, fully
integrating our substantial asset base, and fully leveraging the operating
infrastructure to allow for future growth. The 2002 phase of this restructuring
has resulted in the further elimination of approximately $6 million in fixed
annual operating costs. I am confident our organizational structure is not only
leaner, but also more market focused, positioning us to immediately capitalize
on growth opportunities in the marketplace as the new federal funds are released
in the second half of 2002.
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First Quarter Unit Results
Consolidated core revenue was down approximately 4% to $45.1 million from $47.1
million for the same period in 2001.
At AGS, net revenue increased 0.3% to $12.2 million for the three months ended
March 31, 2002 from $12.1 million for the same period in 2001. Curriculum sales
increased $400 thousand, while assessment sales decreased $300 thousand.
At World Almanac Education Group, first quarter sales decreased by 2.3%, to
$12.7 million from $13.0 million for the same period in 2001, primarily as a
result of lower sales at WAE Library Services partially offset by higher sales
at Gareth Stevens and Facts On File News Services (FOFNS). The lower sales at
WAE Library Services are driven by lower sales to the school library channel,
which has experienced significant funding cuts. At FOFNS, the first quarter of
2002 revenue of $1.9 million was 11.8% greater than the first quarter of 2001
driven by significant growth at the division's Internet news services. For the
first quarter of 2002, revenue from World Almanac's FACTS.com, Today's Science
On File @FACTS.com and Issues & Controversies@ FACTS.com websites grew an
impressive 46.7% compared to the same period in 2001.
At Weekly Reader, net sales decreased 11.9%, to $9.2 million for the
three-months ended March 31, 2002 from $10.4 million, for the same period in
2001. This decrease is primarily attributable to (1) lower periodical revenue
resulting from lower 2001/2002 school year circulation, ($900 thousand); (2) and
lower Lifetime Learning revenue, ($300 thousand) caused in part from the media
advertising recession in the marketplace.
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At CompassLearning, net revenue decreased 9.9% to $12.5 million for the three
months ended March 31, 2002 from $13.9 million in 2001. This decrease was
primarily due to (1) a decrease in new software revenue of approximately 18%, to
$5.7 million from $6.9 million in 2001 primarily as a result of delayed Title
One funding and post-September 11 state budget deficits, which contributed to
additional spending delays - and (2) a planned decrease in hardware revenue of
approximately 78% to $200 thousand from $800 thousand in 2001. The decrease was
offset by an increase in professional development revenue of approximately 24%,
to $3.1 million from $2.5 million in 2001. The growth in professional
development revenues is directly attributable to the growth in new software
sales in 2001.
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Balance Sheet Review
As of March 31, 2002, WRC Media Inc.'s cash balance was $7.0 million (which
included $2.0 million of cash restricted to fund WRC Media's unrestricted
subsidiary) and consolidated debt was $285.4 million. During the three months
ended March 31, 2002, WRC Media made scheduled principal payments of $1.4
million on its senior credit facilities and as of March 31, 2002 there were $7
million in outstanding advances under our revolving credit facility. Capital
expenditures (not including prepublication costs) for the three months ended
March 31, 2002 were approximately $500 thousand.
Net Free cash flow was $7.2 million ahead of budget and consolidated debt of
$285.4 million was $5.0 million under budget - primarily as a result of:
o Higher EBITDA combined with
o Effective working capital management
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Outlook
We will continue to strive for above market growth in both core revenues and
EBITDA in 2002. In the short run, our top-line performance will continue to come
under pressure as a result of the current funding environment. Nevertheless, all
of our sales and marketing efforts are geared to immediately seize the
opportunities presented under the provisions of the "No Child Left Behind Act"
as well as the new guidelines of the Elementary and Secondary Education Act -
especially our divisions which emphasize reading, test prep and assessment. WRC
has created a complete solution comprised of supplemental education materials
from across the company to meet the requirements of the new ESEA legislation and
funding opportunities. WRC has conducted an ESEA Campaign - which has included
mailings to 12,000 superintendents, assistant superintendents and federal
program directors. This campaign also included ESEA seminars held throughout the
continental U.S (where WRC was the only corporate sponsor with co-sponsors AASA
and NAFEPA). At these seminars, we promoted how WRC's Literacy for Success
intermediate reading solution meets the new guidelines that schools must adhere
to under the new ESEA reauthorization.
We continue to make sound prudent investments in all of our businesses - in the
first and second quarters of 2002 - investing heavily in new textbooks and test
development at AGS; launching new World Almanac and Weekly Reader library
imprints; increasing research and implementing a product redesign as part of the
100th anniversary of Weekly Reader; and new comprehensive software releases at
CompassLearning. Our spring of 2002 educational publishing efforts will continue
to focus on increasing our investment in supplemental materials (including books
for school libraries), reading improvement materials, classroom magazines and
reference materials. We expect this investment to payoff in the second half of
2002 coinciding with the new school year. Our efforts in the reading improvement
market have considerable promise, in our view. The market for reading
improvement is extensive and will benefit from the passage of the new education
act.
At AGS, 2002 product releases include:
1. Nine textbook revisions (including 4 Math textbooks, 4 English and Reading
textbooks and a U.S. Gov't Spanish textbook revision)
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2. The full year launch of GRADE--AGS's GROUP READING ASSESSMENT AND
DIAGNOSTIC EVALUATION which was released in the 2nd half of 2001 as well
as
3. The full year launch of our Performance Power software (which we acquired
through the Lindy acquisition) and release of v.6.0 in the second half.
As a result of this significant pipeline of new products, we believe AGS is on
track to achieve their financial goals and objectives.
At Compass, the new software sales pipeline remains robust. It is our strategy
to capitalize on the changing mix of education funding and buyer uncertainty by
providing a product and service solution, both web and server delivered - that
is scalable to the customer's needs - and able to capture all levels of
available funding. Second, we are developing a comprehensive state wide model
proposal - for electronic and print delivery - both to prepare students for
"high stakes" tests and insure corrective instruction for all early readers. If
successful, this will provide a significant revenue stream, plus an ongoing
trail of opportunity within our installed schools base.
The strategic focus in 2002 at World Almanac will be to grow our direct sales
channels through increased catalog product selection and expansion of our
telemarketing and inside sales operations. Another major focus by World Almanac
will be continuing our major web growth initiative through expansion of our Web
reference offerings and digitizing/loading Facts On File News Archives. At
Gareth Stevens, the launch of the new Weekly Reader library imprint should
contribute to our overall growth plans.
At Weekly Reader, we have an enhanced 2002 circulation strategy to reverse the
decline in circulation Weekly Reader has experienced over the last few years.
This strategy will emphasize increased mailings and improved mailing list
segmentation tactics rather than past years focus on premium discounts. We have
developed a multi-pronged strategy to focus on dealing with the highly
competitive periodicals market, including testing an inside sales effort and
exploring bulk sales opportunities. Early indications of these efforts are very
positive - year-over-year spring subscriptions are up approximately 15%. In
addition, our strategy includes a continued focus on Weekly Reader's ancillary
businesses - licensing and custom publishing. Weekly Reader licensing revenue
more than tripled last year - increasing to approximately $3.4 million versus
$950 thousand a year ago. We believe Weekly Reader can continue this impressive
growth through new licensing opportunities in 2002, including expansion of our
relationship with the QVC network. In 2001 we essentially sold the Weekly Reader
Book Club over one day on QVC in November 2001 - in 2002 we are increasing our
exposure on QVC - to include the kickoff of Weekly Reader's 100th anniversary
celebration on May 20th as well as continuing the fall promotion. Weekly
Reader's custom publishing subsidiary - Lifetime Learning may have a challenging
year as we are seeing signs of continued weakness in its 2002 pipeline resulting
from the advertising recession in the marketplace.
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In summary, while our current market outlook is for continued pressure on
top-line revenue in the second quarter, our outlook for the second half
indicates growth in both revenues and EBITDA in all of our core businesses. I am
cautiously optimistic about our prospects for 2002 - and I fully expect the
investments we are making in the first half of 2002 will payoff in terms of
significant growth of the top line and bottom line in the second half of 2002
similar to the growth trend we experienced in 2001.
This concludes our prepared remarks. We'll now open this up for questions, and
provide any additional information you may need.
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