Summary of ARISTOTLE CORP - Yahoo! Finance

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

This discussion and analysis of financial condition and results of operations reviews the results of operations of the Company, on a consolidated basis, for the three and six months ended June 30, 2009, as compared to the three and six months ended June 30, 2008. This discussion and analysis of financial condition and results of operations has been derived from, and should be read in conjunction with, the unaudited Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements contained herein.

The Company is a leading manufacturer and global distributor of educational, health, medical technology and agricultural products, primarily offered through 50 separate catalogs.

The following is a summary of key events for the three and six months ended June 30, 2009:

decrease in net sales of 9.5% and 8.9% in the three and six months ended June 30, 2009, respectively, as compared to the same periods in 2008;

decrease in gross profit of 8.0% and 6.8% in the three and six months ended June 30, 2009, respectively, as compared to the same periods in 2008;

decrease in earnings before income taxes of 19.9% and 19.0% in the three and six months ended June 30, 2009, respectively, as compared to the same periods in 2008;

incremental increase in Federal income tax expense of $1.8 million as a result of a partial disallowance of the Company's historical Federal net operating tax losses pursuant to a settlement of an IRS audit;

decrease in net earnings of 45.1% and 33.1% in the three and six months ended June 30, 2009, respectively, as compared to the same periods in 2008; as a percentage of net sales, net earnings amounted to 7.2% in the second quarter of 2009, compared to 11.7% in the same period in 2008; as a percentage of net sales, net earnings amounted to 8.0% in the six months ended June 30, 2009, compared to 10.9% in the same period in 2008;

decrease in diluted earnings per common share to $.19 in the six months ended June 30, 2009, as compared to $.41 in the same six month period of 2008; diluted earnings per common share of $.08 in the three months ended June 30, 2009, as compared to $.25 for the same period in 2008;

semi-annual dividend payments on March 31, 2009 totaling $4.3 million on the Company's Series I Preferred Stock and Series J Preferred Stock.

A key strength of the Company's business is its ability to generate cash consistently. The Board of Directors and management use cash generated as a measure of the Company's performance. The Company uses the cash generated from operations to strengthen the balance sheet, including making investments in marketable securities and limited partnerships and reducing liabilities such as pension and debt obligations, paying dividends on its preferred stocks and completing prudent acquisition opportunities. The Company's management believes that examining the ability to generate cash provides investors with additional insight into the Company's performance.

The following table sets forth selected financial data (i) as a percentage of net sales for the three and six months ended June 30, 2009 and 2008 and (ii) the percentage change in those reported items from the comparable period in 2007:

                                         Three Months Ended June 30,         Six Months Ended June 30,
                                       2009        2008        % Change    2009       2008       % Change

Net sales                               100.0 %      100.0  %     (9.5) %   100.0 %    100.0  %     (8.9) %
Cost of sales                            60.0         60.7       (10.4)      59.7       60.6       (10.2)
               Gross profit              40.0         39.3        (8.0)      40.3       39.4        (6.8)

Selling and administrative expense       23.3         20.8          1.8      24.5       22.0          1.4
               Earnings from
               operations                16.7         18.5       (18.9)      15.8       17.4       (17.1)

Other (expense) income:
   Interest expense                      (.8)         (.5)         52.6      (.6)       (.5)          9.8
   Other, net                              .7           .6        (6.8)        .3         .5       (52.4)
                                         (.1)          .1           ***      (.3)          -          ***
               Earnings before income
               taxes                     16.6         18.6       (19.9)      15.5       17.4       (19.0)

Income taxes:
         Current                          9.2          7.1         18.6       7.4        5.9         14.4
         Deferred                          .2            -          ***       0.1        0.6       (90.9)
                                          9.4          7.1         21.9       7.5        6.5          4.3
               Net earnings               7.2 %       11.7  %    (45.1) %     8.0 %     10.9  %    (33.1) %

***

Not meaningful

FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS

The Company is subject to seasonal influences with peak levels occurring in the second and third quarters of the fiscal year primarily due to increased educational shipments coinciding with the start of new school years in the Fall.
As a result, the Company typically recognizes approximately 60% of its annual net earnings in the second and third quarters of its fiscal year. Inventory levels increase in March through June in anticipation of the peak shipping season. The majority of shipments are made between June and August and the majority of cash receipts are collected from August through October.

Quarterly results may also be materially affected by the timing of acquisitions, the timing and magnitude of costs related to such acquisitions, variations in costs of products sold, the mix of products sold and general economic conditions. Results for any fiscal quarter are not indicative of the results for any subsequent fiscal quarter or for a full fiscal year.

RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2009 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 2008

Net Sales

Net sales for the second quarter of 2009 decreased 9.5% to $51.4 million from $56.8 million for the comparable period in 2008. The decrease in sales is primarily attributable to recessionary national, state and local economies, particularly as they affect state education budgets. Shipments originating in the U.S. to international accounts increased 6.6% compared to the same period last year, primarily in the Company's medical simulators and training manikins.

Net sales in the educational segment, totaling $43.2 million, decreased 10.5% in the second quarter of 2009 from $48.3 million in the comparable period in 2008.
The decline in educational sales is directly related to the unstable conditions of state budgets, which are the primary sources of funding for K-12 schools.
Expected educational funding through the federal stimulus plan has not as yet provided meaningful assistance to the Company's educational accounts. The commercial segment recorded net sales of $8.2

million in the second quarter of 2009, decreasing 3.4% from the second quarter of 2008. The decline in commercial sales is attributable to the impact of the negative U.S. general economic climate across most product lines.

Gross Profit

Gross profit for the second quarter of 2009 decreased 8.0% to $20.6 million from $22.3 million for the comparable period in 2008. The decrease in gross profit for the second quarter of 2009 is primarily attributable to the 9.5% decrease in net sales. The gross profit margin increased to 40.0% in the second quarter of 2009 from 39.3% in the comparable period in 2008. The gross profit margin improvement is attributed to the stability in the Company's proprietary product lines, which have higher gross profit margins than other products in both domestic and international markets, and effective efforts to control transportation costs.

The educational segment gross profit for the second quarter of 2009 decreased 8.7% to $18.0 million from $19.7 million for the comparable period in 2008. The educational segment gross profit margin was 41.7% in the second quarters of 2009 compared to 40.9% in the second quarter of 2008. The commercial segment gross profit for the second quarter of 2009 decreased .5% to $3.4 million from $3.5 million for the comparable period in 2008. The commercial segment yielded a gross profit margin of 41.8% in the second quarter of 2009 as compared to 40.5% in the second quarter of 2008. The increase in the commercial segment gross profit margin is attributed to favorable mix of proprietary sales which have higher gross margins.

Other cost of sales, which the Company does not allocate by segment, including freight costs incurred in the procurement of inventories and shipment of customer orders, increased less than $.1 million in the second quarter of 2009 compared to 2008.

Selling and Administrative Expenses

Selling and administrative expenses for the second quarter of 2009 increased 1.8% to $12.0 million from $11.8 million in the comparable period in 2008. As a percent of net sales, selling and administrative expenses amounted to 23.3% and 20.8% for the second quarters of 2009 and 2008, respectively. Selling and administrative expenses include advertising and catalog costs, warehouse and shipping activities, customer service and general administrative functions.
Selling and administrative expenses for the second quarter of 2009 were primarily impacted by: (i) a decrease in salaries and wages of $.5 million, or 7.4%, as a result of changes in the number of employees due to sales declines;
(ii) an increase in group health care costs of $.3 million; and (iii) an increase in catalog and advertising costs of 2.8% or $.1 million. Selling and administrative expenses for the second quarter of 2008 were reduced by an insurance recovery of $.7 million.

The Company recorded $0 and less than $.1 million in compensation expense for each of the second quarters of 2009 and 2008, respectively, related to grants of stock options to certain employees and directors.

The Company incurred expenses of $.3 million to Geneve for certain administrative services for each of the quarters ended June 30, 2009 and 2008.

Interest Expense

Interest expense for the second quarter of 2009 increased 52.6% to $435 thousand from $285 thousand for the second quarter of 2008. The increase in interest expense is principally due to the estimated interest due of $239 thousand related to the settlement of the IRS audit (see "Income Tax Provision" below), offset by a decrease in the average effective interest rate on outstanding debt under the Company's primary line of credit to 2.6% during the second quarter of 2009 compared to 3.8% during the second quarter of 2008. Interest expense of $.1 million in each of the second quarters of 2009 and 2008 relates to other long-term accruals established in the fourth quarter of 2006 in connection with the transfer of ownership of certain assets.

Weighted average interest rates related to the Company's credit agreements were 2.4%, 3.0% and 4.2% at June 30, 2009, December 31, 2008 and June 30, 2008, respectively.

Income Tax Provision

Aristotle and its qualifying domestic subsidiaries are included in the Federal income tax return and certain state income tax returns of Geneve. The provision for income taxes for the Company is determined on a separate return basis in accordance with the terms of a tax sharing agreement with Geneve, and payments for current Federal and certain state income taxes are made to Geneve.

The income tax provision for the second quarter of 2009 was $4.9 million versus $4.0 million for the comparable period in 2008. These tax provisions reflect effective tax rates of 57.2% and 37.6% for the second quarters of 2009 and 2008, respectively. For each of the second quarters of 2009 and 2008, the difference between the Federal statutory income tax rate of 35% and the effective income tax rate results principally from state income taxes, net of the Federal tax benefit, certain manufacturing tax credits provided by Section 199 of the Internal Revenue Code, and the differential between the Federal tax rate and the tax rates in the foreign jurisdictions in which the Company operates. In addition, pursuant to a settlement with the IRS, the tax provision for the second quarter of 2009 includes additional taxes of $.5 million and $1.3 million for the 2006 and 2007 tax years, respectively, related to a partial disallowance of the Company's historical Federal net operating tax losses that were utilized.
No additional taxes were due for any years prior to 2006.

RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2009 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2008

Net Sales

Net sales for the six months ended June 30, 2009 decreased 8.9% to $97.7 million from $107.2 million for the comparable period in 2008. The decrease in sales is primarily attributable to recessionary national, state and local economies, which have impacted sales volumes throughout the first six months of 2009.
Shipments originating in the U.S to international accounts increased 6.8% compared to the same period last year.

Net sales in the educational segment were $81.8 million for the six months ended June 30, 2009, decreasing 9.2% from $90.0 million in the comparable period in 2008. The commercial segment recorded net sales of $15.9 million in the six months ended June 30, 2009, decreasing 7.2% from $17.2 million in the comparable period in 2008. Sales declines in both the educational and commercial segments relate to continuing negative U.S. general economic conditions affecting most product lines, which have affected revenues throughout 2009. Expected educational funding through the federal stimulus plan has not as yet provided meaningful assistance to the Company's educational accounts during the first 6 months of 2009.

Gross Profit

Gross profit for the six months ended June 30, 2009 decreased 6.8% to $39.4 million from $42.2 million for the comparable period in 2008. The decrease in gross profit for the six months ended June 30, 2009 is primarily attributable to the 8.9% decrease in net sales. The gross profit margin increased to 40.3% in the six months ended June 30, 2009 from 39.4% in the comparable period in 2008.
The increase in consolidated gross margin is attributed to the stable sales of the Company's proprietary product lines, which have higher gross margins, and the Company's management of transportation costs.

The educational segment gross profit for the six months ended June 30, 2009 decreased 8.0% to $34.1 million from $37.1 million for the comparable period in 2008. The educational segment gross profit margin in the six months ended June 30, 2009 was 41.7% compared to 41.2% for the same period of 2008. The improvement in educational gross profit margin is attributed to shifts in the product mix. The commercial segment gross profit for the six months ended June 30, 2009 decreased 2.8% to $6.8 million from $7.0 million for the comparable period in 2008. The commercial segment gross profit margin increased to 42.5% in the six months ended June 30, 2009, as compared to 40.6% in the six months ended June 30, 2008. The increase in the commercial segment gross profit margin is primarily attributable to an increase in the sales mix of certain proprietary commercial products, which have higher gross margins.

Other cost of sales, which the Company does not allocate by segment, including freight costs incurred in the procurement of inventories and shipment of customer orders, declined $.3 million in the six months ended June 30, 2009 compared to 2008 primarily as a result of long term efforts to control net shipping costs, including: (i) the consolidation of in-bound and out-bound shipments; and (ii) the negotiation of favorable shipping contract terms.

Selling and Administrative Expenses

Selling and administrative expenses for the six months ended June 30, 2009 increased 1.4% to $23.9 million from $23.6 million in the comparable period in 2008. As a percent of net sales, selling and administrative expenses amounted to 24.5% for the six months ended June 30, 2009 as compared to 22.0% in the comparable period of 2008. Selling and administrative expenses include advertising and catalog costs, warehouse and shipping activities, customer service and general administrative functions. Selling and administrative expenses for the six months ended June 30, 2009 were primarily impacted by: (i) a decrease in salaries

and wages of $.7 million, or 6.0%, as a result of changes in the number of employees due to sales declines; (ii) an increase in group health care costs by $.5 million; and (iii) an increase in catalog and advertising costs of 5.1% or $.3 million. Selling and administrative expenses for the six months ended June 30, 2008 were reduced by an insurance recovery of $.7 million.

The Company recorded $0 and less than $.1 million in compensation expense for each of the six months ended June 30, 2009 and 2008 related to grants of stock options to certain employees and directors.

The Company incurred expenses of $.5 to Geneve for certain administrative services for each of the six months ended June 30, 2009 and 2008.

Interest Expense

Interest expense for the six months ended June 30, 2009 increased to $629 thousand from $573 thousand for the comparable period in 2008. The increase in interest expense is principally due to the estimated interest due of $239 thousand related to the settlement of the IRS audit of the Company's tax returns for the years 2004 through 2007, offset by a decrease in the average effective interest rate on outstanding debt under the Company's primary line of credit to 2.6% during the first six months of 2009, compared to 4.3% during the first six months of 2008. Interest expense of $.2 million in each of the six months ended June 30, 2009 and 2008 relates to other long-term accruals established in the fourth quarter of 2006 in connection with the transfer of ownership of certain assets.

Weighted average interest rates related to the Company's credit agreements were 2.4%, 3.0% and 4.2% at June 30, 2009, December 31, 2008 and June 30, 2008, respectively.

Income Tax Provision

The income tax provision for the six months ended June 30, 2009 was $7.3 million versus $7.0 million for the comparable period in 2008. These tax provisions reflect effective tax rates of 48.4% and 37.6% for the six months ended June 30, 2009 and 2008, respectively. For each of the six months ended June 30, 2009 and 2008, the difference between the Federal statutory income tax rate of 35% and the effective income tax rate results principally from state income taxes, net of the Federal tax benefit, certain manufacturing tax credits provided by
Section 199 of the Internal Revenue Code, and the differential between the Federal tax rate and the tax rates in the foreign jurisdictions in which the Company operates. In addition, pursuant to a settlement with the IRS, the tax provision for the first six months of 2009 includes additional taxes of $.5 million and $1.3 million for the 2006 and 2007 tax years, respectively, related to a partial disallowance of the Company's historical Federal net operating tax losses that were utilized. No additional taxes were due for any years prior to 2006.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2009, the Company had working capital of $80.3 million, increasing from $76.2 million at December 31, 2008. At June 30, 2008, the Company had working capital of $85.7 million. Cash and cash equivalents increased $7.6 million in the six months ended June 30, 2009, ending the period at $22.9 million. The increase in the generation of cash and cash equivalents during the six months ended June 30, 2009 as compared to the same period in 2008 is primarily due to the following:

The Company generated cash of $12.0 million from operations during the six months ended June 30, 2009, compared to $7.5 million for the comparable period of 2008. The increase in cash generated from operations in the six months ended June 30, 2009 compared to the same period in 2008 was principally the result of:
(i) a $4.3 million lower investment in inventory; and (ii) lower investments in other working capital items, offset by a $3.8 million decline in net earnings.

The changes in current assets and liabilities are typical for the first six months of the fiscal year as the Company is preparing for its peak business cycle, which occurs during the second and third quarters of the fiscal year.
For more information on the seasonality of the Company's business, please refer to the "Fluctuations in Quarterly Results of Operations" section above.

The Company generated cash of $.1 million from investing activities in the six months ended June 30, 2009, compared to a $5.3 million use of cash for the comparable period in 2009. In the six months ended June 30, 2009, the Company used $.6 million to fund the purchase of fixed assets, and generated $.7 million from the sale of marketable securities. In the six months ended June 30, 2008, the Company used $2.2 million to fund the purchase of fixed assets, including $1.2 million for renovations of an existing facility.

During the six months ended June 30, 2009 and 2008, the Company invested $0 and $.5 million, respectively, in marketable securities (see Note 6 of the Notes to Condensed Consolidated Financial Statements included in Item 1 of this Form 10-Q). Also during these comparable six month periods, the Company invested $0 and $3.0 million, respectively, in limited partnerships (see Note 7 of the Notes to Condensed Consolidated Financial Statements included in Item 1 of this Form 10-Q).

Financing activities used cash of $4.4 million and $1.3 million in the six months ended June 30, 2009 and 2008, respectively. In the six months ended June 30, 2009, the Company reduced long-term debt by $.1 million. In the six months ended June 30, 2008, net proceeds from borrowings under the Company's primary credit facility of $2.8 million were needed for seasonal working capital requirements, including the payment of Preferred Stock cash dividends on March 31, 2008.

Proceeds from the exercise of stock options were $0 and less than $.1 million in the six months ended June 30, 2009 and 2008, respectively.

The Company paid dividends of $4.3 million in each of the six months ended June 30, 2009 and 2008 on its Series I Preferred Stock and Series J Preferred Stock.

On October 15, 2003, the Company entered into a five-year, non-amortizing, $45.0 million Revolving Credit Facility. The Revolving Credit Facility provides the Company with seasonal working capital, letters of credit and funds for appropriate acquisitions of businesses similar in nature to the Company's current business segments. This debt carries a variable rate of interest that is based on Prime or LIBOR rates plus applicable margins. On February 26, 2008, the Company and its primary lenders executed an amendment to the Revolving Credit Facility. The primary provisions of the amendment: (i) extend the term of the Revolving Credit Facility from October 15, 2008 to January 31, 2013; (ii) provide the Company the option to expand the capacity of the facility from $45.0 million to $60.0 million during the term of the agreement; (iii) relieve the Company of certain monthly reporting obligations; (iv) modify the pricing structure to provide interest rates more favorable to the Company; and (v) update certain financial covenants to standards relevant to the Company's current financial condition. At June 30, 2009, the weighted average interest rate on this debt was 1.3%. The Revolving Credit Facility currently has a committed weighted average rate of interest (including applicable margins) of approximately 1.3%. Such rate commitments expire on various dates through August 27, 2009. Subsequent to that date, the rate commitments will be renewed at interest rates based on the then-current LIBOR rates. The Company's Revolving Credit Facility is collateralized by certain accounts receivable, inventories and property, plant and equipment, and shares of a certain subsidiary's outstanding capital stock and ownership interests of certain of the Company's limited liability subsidiaries. The Revolving Credit Facility contains various financial and operating covenants, including, among other things, requirements to maintain certain financial ratios and restrictions on additional indebtedness, common stock dividend payments, capital disposals and intercompany management fees. The Company was in compliance with all financial covenants as of June 30, 2009.

In 2009, capital expenditures to replace and upgrade existing equipment and install new equipment and fixtures to provide additional operating efficiencies are expected to approximate $1.7 million.

Capital resources in the future are expected to be used for the development of catalogs and product lines, to acquire additional businesses and for other investing activities. The Company anticipates that there will be sufficient financial resources to meet projected working capital and other cash requirements for at least the next twelve months. Management of the Company believes it has sufficient capacity to maintain current operations and support a sustained level of future growth.

INFLATION

Inflation has had only a minor effect on the Company's operating results and its sources of liquidity. Inflation, including as it related to the increased cost of fuel and plastic materials, did not significantly impact the Company's operating results and its sources of liquidity in each of the three and six months ended June 30, 2009 and 2008.

SIGNIFICANT ACCOUNTING POLICIES

The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and notes thereto. Actual results could differ from those estimates. The Company believes the following accounting policies affect the more significant judgments and estimates used in the preparation of the Condensed Consolidated Financial Statements:

Prepaid Catalog Costs and Amortization - The Company accumulates all direct costs, less applicable vendor rebates, incurred in the development, production and circulation of catalogs on the Condensed Consolidated Balance Sheets until the related catalog is mailed, at which time such catalog costs are amortized into selling and administrative expense over the estimated sales realization cycle of one year, using the ratio of current period revenues to the total of current and future period revenues for each catalog.

Deferred Income Taxes - The Company accounts for income taxes under the asset and liability method, wherein deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Goodwill - The Company evaluates goodwill for impairment at least annually, or more frequently if events or circumstances indicate that the assets may be impaired, by applying a fair value based test and, if impairment occurs, the amount of impaired goodwill is written off immediately. The Company evaluates goodwill for impairment based on the expected future cash flows or earnings . . .