TMCnet News
BUREAU OF NATIONAL AFFAIRS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read along with the unaudited consolidated financial statements included in this Form 10-Q, as well as the Company's 2010 Annual Report on Form 10-K, which provides a more thorough discussion of the Company's business and operations. This interim report is intended to provide an update of the disclosures contained in the 2010 Annual Report on Form 10-K and, accordingly, disclosures which would substantially duplicate those contained therein have been omitted. Forward-Looking Statements This management discussion contains certain statements that are not statements of historical fact but are forward-looking statements. The use of such words as "believes," "expects," "estimates," "could," "should," "will," and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. Overview BNA operates in four business segments: legal, tax, and regulatory publishing; specialized business publishing; printing; and software. The legal, tax, and regulatory publishing segment, which generated 79 percent of consolidated 2010 revenues, provides legal and regulatory information in tax, labor, economic, health care, environment and safety, and other markets to business, professional, and academic users. Sales are made principally through field sales representatives. The specialized business publishing segment provides general business advisory information to primarily business users. The printing segment provides services to mid-Atlantic area customers, including the BNA publishing segments, other publishers, financial institutions, trade associations, educational institutions, professional societies, other nonprofit organizations, and governmental organizations. The software segment provides tax and financial planning software to accountants, lawyers, tax and financial planners, government agencies, corporations, and others. BNA's ongoing success is dependent upon: the quality of its products and services; its highly trained and experienced employees; its key relationships with suppliers; and the customers' need for ongoing information regarding changes and insights in legal, regulatory, tax, and business practices and trends. In addition to ongoing efforts to improve and provide more product offerings and to operate more efficiently, BNA has been engaged in several multi-year strategic initiatives related to its major publishing activities. Electronic products now make up more than 77 percent of the legal and regulatory subscription base. Their migration to a next generation web platform is now complete. Having all BNA products on one robust platform creates the opportunity to create new bundled products, sell into new markets, and enhance existing product offerings with tools and applications that will attract new customers and better retain existing ones. In addition, subsidiary company products are being moved to the next generation web platform, improving corporate wide efficiency and increasing our flexibility to combine and customize product offerings for new or more specialized markets. 17 -------------------------------------------------------------------------------- Table of Contents BNA's high-quality, proprietary content remains a competitive strength. And the continued expansion and improvement of our web platform has enabled us to enhance the value of that content and improve the sustainability of our offerings. By concentrating on improving and exploiting our web platform, and on creating new functionalities and tools to work with our highly regarded content, BNA has moved beyond being a content provider and has positioned itself as a technologically adept provider of information solutions to professional markets. Pursuant to this strategy, early in 2010, BNA acquired the remaining interest that it did not already own in Llesiant, a software company that had been working with BNA to create "BNA Convergence", a new search and delivery tool designed for the legal and corporate markets. This new tool allows law firms to search all their BNA content along with a large collection of third-party content, using Llesiant's taxonomy-based search engine. Results can be delivered in an increasing variety of formats. Having full control of Llesiant gives BNA the ability to direct the future development and enhancement of its technology to ensure that it best serves BNA's strategic needs. BNA's market-leading news services also are being continually improved, with a major upgrade affecting all of our current awareness services released in the first quarter of 2010. This upgrade included a new "Search My BNA" function that allows subscribers, for the first time, to search all of the BNA services they subscribe to with a single command. Most BNA notification services have now adopted a continual publishing model, where news stories are posted online throughout the publication cycle, often minutes after the news breaks. Using all of BNA's new capabilities, the Company has successfully launched a number of next generation web libraries for the legal market. These comprehensive Resource Centers focus on specific substantive practice areas and provide subject matter experts with a one-stop resource that includes all the primary and secondary information, news, analysis, and tools needed to serve their clients. In an effort to leverage BNA's strong tax brands, the Company has expanded its presence in the tax training business. In mid-2009, BNA acquired the assets of the Council for International Tax Education, Inc. (CITE) and the Alliance for Tax, Legal, and Accounting Seminars (ATLAS), both based in White Plains, New York. The firms, now combined and branded as BNA CITE, are leaders in the creation and delivery of international tax education for multinational companies, offering live instruction courses for legal and tax professionals and financial executives. In early 2011, BNA launched the first of a planned library of e-learning products for tax professionals. BNA pursues a web platform-neutral policy in its information content offerings, allowing customers to choose their format preference. BNA's products have been available for transactional access on the major legal online services-Lexis and Westlaw-for many years. BNA also sells subscriptions to subject libraries of BNA content on these networks, and these have been very popular with major law firms and law schools. In addition, BNA sells subscriptions to its tax products on Thomson Reuters' Checkpoint platform and Wolters Kluwer's IntelliConnect platform and licenses certain of its tax content to Intuit for sale in its Lacerte and ProSeries software applications. These networks and others, in addition to BNA's own online platform, DVD's and print products, provide customers with a variety of product delivery options. 18 -------------------------------------------------------------------------------- Table of Contents The economic downturn that began in the second half of 2008 had a disproportionately negative effect on several of BNA Subsidiaries, LLC's IOMA and Kennedy brand product lines. Consequently, BNA Subsidiaries, LLC's management began conducting a comprehensive review of its business operations and strategic alternatives, and in 2009, BNA Subsidiaries, LLC adopted and began to implement a strategic restructuring plan. As part of this plan, BNA Subsidiaries, LLC discontinued, transferred, or sold several products and product lines in an effort to create a more focused and profitable company that serves vertical industry markets with high quality information services. Further, BNA Subsidiaries, LLC made numerous facility and employment changes in New Hampshire and New Jersey, as a result of which, most of BNA Subsidiaries, LLC's remaining operating functions were consolidated in New Hampshire during 2010. Notwithstanding the implementation of the strategic restructuring plan, BNA Subsidiaries, LLC continued to experience financial losses and voluntarily filed a plan of reorganization under Chapter 11 of the Bankruptcy Code, in the fourth quarter of 2010. On March 30, 2011, BNA Subsidiaries, LLC emerged from Chapter 11 as a wholly-owned subsidiary, and was renamed Kennedy Information, LLC on that date. New and renewal sales of our core information services improved throughout 2010 and, as a result, BNA entered this year with much positive momentum. In the first half of 2011, the value of all of BNA's outstanding subscriptions continued to grow, presaging stronger subscription revenue as the year proceeds, and in addition, the Company paid off the last of its debt in early April. The strategy of aggresive investment in product, in infrasturcture, and in people will continue throughout the year to ensure that BNA is well positioned to meet the needs of recovering markets. Results of Operations Segment Information (in thousands of dollars) 12 Weeks Ended 24 Weeks Ended 6/18/2011 6/19/2010 6/18/2011 6/19/2010 Revenues from external customers: LTR $ 58,089 $ 58,185 $ 116,139 $ 117,225 SB 3,398 3,298 5,902 6,600 Printing 5,637 5,145 10,471 9,915 Software 7,396 7,268 15,167 14,913 Total $ 74,520 $ 73,896 $ 147,679 $ 148,653 Intersegment revenues: SB $ 5 $ 8 $ 11 $ 19 Printing $ 2,311 $ 2,334 $ 4,343 $ 4,492 Software $ 550 $ 564 $ 1,103 $ 1,124 Operating Profit: LTR $ 9,507 $ 11,989 $ 18,981 $ 19,352 SB 818 (965 ) 470 (2,141 ) Printing (13 ) (5 ) (250 ) (226 ) Software 2,997 2,887 6,663 5,875 Total $ 13,309 $ 13,906 $ 25,864 $ 22,860 19-------------------------------------------------------------------------------- Table of Contents Twenty-four weeks 2011 compared to twenty-four weeks 2010 Through the first half of 2011, consolidated revenues were down 0.7 percent. Printing segment revenues were up 2.8 percent and software segment revenues were up 1.5 percent, but LTR and SB publishing segment revenues were down. However, consolidated operating expenses were down 3.2 percent, leading to a 13.1 percent increase in operating profit. Net income for the first half of 2011 was $16.9 million compared to $15.0 million in 2010, and earnings per share were $.66 in 2011 versus $.57 in 2010. LTR publishing segment revenues were down 0.9 percent, or $1.1 million compared to the prior year. BNA Parent and Tax Management (TM) subscription, training, and royalty revenues were down $0.9 million, or 0.8 percent in the first half of 2011. Subscription revenue was up slightly, but third party online royalty revenues were down $1.4 million from 2010, which had included catch-up payments received in 2010, but earned in prior years. BNA Books revenues are behind last year; BNA International and Llesiant revenues were higher. Operating expenses were down 0.7 percent due to lower staffing expenses, and operating profit decreased 1.9 percent, to $19.0 million. The SB segment includes the operations of BNA Subsidiaries, LLC, which emerged from Chapter 11 bankruptcy on March 30, 2011. BNA Subsidiaries, LLC, was renamed Kennedy Information, LLC on that date. Segment revenues were down $0.1 million or 10.6 percent, operating expenses were down 38 percent, and the operating profit was $470,000 in the first half of 2011, compared to a $2.1 million operating loss for the same period of 2010. 2010 expenses included $1.4 million of restructuring expenses. Printing segment revenues were up 2.8 percent compared to 2010. Commercial sales were up 5.6 percent due to business from new customers and additional work from existing customers, and intersegment revenues were down 3.3 percent. Operating expenses were up 2.9 percent, reflecting higher variable costs. The operating loss was $250,000 in the first half of 2011, compared to an operating loss of $226,000 in 2010. Total revenues for the software segment (which combines the operations of STF Services Corporation and BNA Software, a division of Tax Management, Inc.) increased 1.5 percent compared to 2010, while expenses were down 5.5 percent. BNA Software revenues increased 5.1 percent in the first half of 2011, operating expenses were down 5.2 percent, and operating profit was $5.4 million in 2011 compared to $4.3 million in the same period of 2010. STF revenues were down 13.3 percent and operating expenses were down 6.8 percent, leading to a 19.5 percent decrease in operating profit. The total software segment's operating profit increased 13.4 percent to $6.7 million in 2011. Investment income declined due to lower yields and lower gains on sales of securities. Interest expense was lower due to lower term debt balances. The company's debt was paid off in early April. Other comprehensive income reflected a higher unrealized holding gain in 2011 and the after-tax amortization of the postretirement benefit obligation. Twelve weeks 2011 compared to twelve weeks 2010 For the second quarter only, consolidated revenues increased 0.8 percent from 2010. Printing segment revenues were up 6.3 percent and SB publishing revenues were up 3.0 percent. Software segment revenues were up 1.5 percent, reflecting higher BNA Software revenue. LTR publishing segment revenues were essentially even. BNA Parent and TM subscription, training, and royalty revenues were up 0.4 percent, Books division sales were down. Operating expenses were up 2.0 percent. Operating profit was down 4.3 percent and net income was down 1.7 percent. Earnings per share for the quarter were $.34 in 2011 and $.34 in 2010. 20 -------------------------------------------------------------------------------- Table of Contents Outlook Subscription revenue is still slightly behind in the first half of 2011, but it is improving and reflects the recent positive trends in new and renewal sales, especially in the Tax markets. Subscription revenue should continue to improve as the year continues. The changes in postretirement benefits implemented in 2010, which lowered benefit expenses both last year and this year, did not take effect until late in the first quarter of 2010. So as expected, benefit expenses are becoming more comparable to 2010 and profit comparisons will not be as strong as they were in the first quarter. Financial Position In the first half of 2011, customer cash receipts were down 6.0 percent and cash operating expenditures were up 0.2 percent, leading to $26.2 million in cash provided from operating activities, an 8.9 percent decrease compared to the same period of 2010. Cash used in investing activities was $12.3 million. Net capital expenditures were $1.5 million, and net cash used in securities investments totaled $10.8 million. Cash used in financing activities netted to $21.8 million. Capital stock repurchases were $4.7 million, and receipts for sales of capital stock to employees totaled $7.6 million. Debt principal repayments amounted to $13.0 million and the Company paid cash dividends of $5.9 million. With $135 million in cash and investment portfolios, the financial position and liquidity of the Company remains very strong. The cash flows from operations, along with existing financial reserves and proceeds from the sales of capital stock, have been sufficient in past years to meet all operational needs, new product introductions, debt repayments, pension contributions, most capital expenditures, and, in addition, provide funds for dividend payments and the repurchase of stock tendered by shareholders. Should more funding become necessary or desirable in the future, the Company believes that it has sufficient additional debt capacity based on its operating cash flows. |