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ABCD > SEC Filings for ABCD > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for CAMBIUM LEARNING GROUP, INC.

Form 10-Q for CAMBIUM LEARNING GROUP, INC.


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This section should be read in conjunction with the audited Consolidated Financial Statements of Cambium Learning Group, Inc. and its subsidiaries (the "Company," "we," "us," or "our") and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011.

Cautionary Note Regarding Forward-looking Statements.

This report contains forward-looking statements within the meaning of the federal securities laws that involve risks and uncertainties, and which are based on beliefs, expectations, estimates, projections, forecasts, plans, anticipations, targets, outlooks, initiatives, visions, objectives, strategies, opportunities, drivers and intents of our management. Such statements are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this report, including statements regarding our future financial position, economic performance and results of operations, as well as our business strategy, objectives of management for future operations, and the information set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements.

Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as "believes," "expects," "estimates," "projects," "forecasts," "plans," "anticipates," "targets," "outlooks," "initiatives," "visions," "objectives," "strategies," "opportunities," "drivers," "intends," "scheduled to," "seeks," "may," "will," or "should," or the negative of those terms, or other variations of those terms or comparable language, or by discussions of strategy, plans, targets, models or intentions. Forward-looking statements speak only as of the date they are made, and except for our ongoing obligations under the federal securities laws, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements. Accordingly, you are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Although we believe that the expectations reflected in such forward-looking statements are reasonable as of the date made, expectations may prove to have been materially different from the results expressed or implied by such forward-looking statements, as it is impossible for us to anticipate all factors that could affect our actual results. These risks and uncertainties include, but are not limited to, those described in "Risk Factors" in Part II, Item 1A and elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2011, and those described from time to time in our future reports filed with the SEC. Unless otherwise required by law, we also disclaim any obligation to update our view of any such risks or uncertainties or to announce publicly the results of any revisions to the forward-looking statements made in this report.

Our Company

We are one of the largest providers of proprietary intervention curricula, educational technologies, professional services and other research-based education solutions for students in the Pre-K through 12th grade education market in the United States. The intervention market, where we focus, provides supplemental education solutions to at-risk and special education students. We offer a distinctive, blended intervention solution that combines different forms of instruction techniques, including textbooks, education games, data management, teacher training and student centric e-learning solutions. We believe that our approach builds a more comprehensive and effective instructional model that combines teacher-led instruction and student directed technology and that this approach sets us apart from our competitors and yields better student outcomes for at-risk students.

Our mission is to deliver educational solutions, primarily focused on reading and math, which enable the most challenged learners to reach grade level academic standards. We take a holistic approach to learning and our intervention solutions address both the behavioral and cognitive needs of the students we serve. We believe our specific focus on the Pre-K through 12th grade intervention market compared to those companies focused primarily on the core education market gives us a competitive edge relative to our peers. Further, our products and services are highly results-oriented and enable school districts across the country to improve student performance and better satisfy rigorous accountability standards.

Our research-based intervention programs have demonstrated consistent success with at-risk and special education student populations and have established us as one of the most readily recognized companies focused on serving this market. We operate in three reportable business segments: Voyager Learning, a comprehensive intervention business; Sopris Learning, a supplemental solutions education business; and Cambium Learning Technologies ("CLT"), a technology-based education business.

Unallocated shared services, such as accounting, legal, human resources and corporate related items, are recorded in a "Shared Services" category. Depreciation and amortization expense, goodwill impairment, interest income and expense, other income and expense, and taxes are included in this category.


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Overview

Our customers fund their operations with state and local funding which is primarily determined by sales and property taxes. However, programs and funding sources used to procure our products draw both from federal funding sources and state and local sources. Regardless of the source of the funds used by our customers, funding levels in general have a direct impact on our customer's ability to purchase our products. The primary federal funding programs used by customers for our products are Title 1 and IDEA. Both of these funding programs have consistently risen over the long term since their inception. In 2010 and 2011, these two key funding sources received a substantial boost from the ARRA stimulus program. These ARRA funds expired in September 2011.

We expected and have experienced declines in overall available funding for 2012 compared to 2011 due to continued strain on state budgets and the expiration of ARRA without a corresponding increase in any other major funding source. Based on the most recently submitted federal budgets, federal funding for Title 1 and IDEA, without the ARRA funds, was proposed at substantially the same level as 2011. Race to the Top, President Obama's signature school reform program, has requested $850 million under the budget proposal. A large portion of that sum would go to early learning and focus on helping states and local districts support reforms and innovations to close achievement gaps and increase student achievement. At the state and local funding level we expected and have experienced challenges similar to 2011 as states continue to face fiscal challenges and constraints. However, trends emerging from state governors' reports indicate fewer and more modest anticipated declines in K-12 education funding versus cuts in 2010 and 2011.

In light of the funding environment, as expected, the first nine months of 2012 proved challenging in replicating the order volume achieved in the first nine months of 2011 when ARRA funding was still in place. We saw order volume declination in each of our three operating segments; however, we did see improvement in our Learning A-Z product line within the CLT segment and our service offerings within the Voyager Learning segment led by our school turnaround product line. These pockets of growth are promising, but have been insufficient in offsetting the declines in overall product sales.

While the funding environment continues to pose challenges, we are optimistic that the efficacy of our solutions, the need for our products in the education market, and our product diversification will strengthen our ability to sustain market share in a troubled market and, further, capture market share as the market recovers.

Management will continue to invest in the following activities to encourage revenue growth in the fourth quarter of 2012:

We will continue to focus on sales force effectiveness to increase our success rate in closing significant opportunities.

All segments will continue investments in the development and sales and marketing of online and technology enabled solutions.

Voyager Learning will continue to expand its service offerings with particular focus on school turnaround solutions.

We have launched and will continue to invest in initiatives to gain traction in the e-commerce marketplace.

To build a platform for long-term revenue growth we will focus on the following:

We will invest in product development, particularly on technology enabled and online solutions. We expect the technology solutions to focus especially on student-directed learning as well as mastery-based or competency-based solutions.

We will optimize our sales force using our Customer Relationship Management (CRM) system and other tools to enhance and sustain productivity and increase overall channels to market.

We will continue our strategy to achieve growth through selective acquisitions, and in particular we will target technology-centric, adaptive, student-directed offerings. Execution of this strategy is likely to occur in fiscal year 2013 and beyond.

Additional investments in online and e-marketing will increase the productivity of our sales and marketing efforts across all business segments.

In order to align our organization to our strategic goals and to provide savings as a means to fund the initiatives listed above, we have embarked on a series of reengineering and restructuring initiatives. The majority of the costs for these initiatives are expected to be incurred by the end of 2012 and the cost savings benefits will begin in 2012 and will provide their full benefit in 2013. Reengineering and restructuring activities are expected to include:

Obtaining new leadership and employee skill sets that support our transformation to focus more heavily on technology solutions and services and other strategic objectives;


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Outsourcing warehouse operations to a third party logistics provider, which will allow us to take advantage of a lower and more variable cost structure for our print based products, as well as locate operations closer to the geographic center of our nationwide customer base;

Rationalizing facilities space by consolidating facilities and subleasing entire or partial facilities where feasible;

Assessing and implementing projects to improve cost efficiencies and enhance the customer experience throughout the order to cash, service delivery, and procurement processes;

Reduction of job positions that do not support the Company's key strategic goals; and

Other reductions and costs as needed to improve our cost structure.

Based on plans enacted to date, the total expense for all reengineering and restructuring initiatives from the fourth quarter of 2011 through the end of 2012 is expected to be approximately $8.0 million, including both cash and non-cash items, and capital expenditures are expected to be between $0.7 and $0.8 million. The annual cost savings expected to be realized from all reengineering and restructuring activities is now $6.0 million in 2012 and the actions taken so far are estimated to yield 2013 savings of $11.0 million. The Company further expects to continue on this path to ultimately secure annualized savings of $15.0 million, a part of which is intended to be reinvested in critical growth areas.


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Third Quarter of Fiscal 2012 Compared to the Third Quarter of Fiscal 2011



(in thousands)                                                 Quarter Ended                                 Year Over Year Change
                                            September 30, 2012               September 30, 2011             Favorable/(Unfavorable)
                                                           % of                             % of
                                          Amount         Revenues          Amount         Revenues              $                %
Net revenues:
Voyager Learning                        $   25,321            55.1 %     $   31,080            58.7 %     $      (5,759 )        (18.5 )%
Sopris Learning                              7,636            16.6 %          9,556            18.1 %            (1,920 )        (20.1 )%
Cambium Learning Technologies               13,001            28.3 %         12,270            23.2 %               731            6.0 %

Total net revenues                          45,958           100.0 %         52,906           100.0 %            (6,948 )        (13.1 )%

Cost of revenues:
Voyager Learning                            10,717            23.3 %         11,745            22.2 %             1,028            8.8 %
Sopris Learning                              2,352             5.1 %          3,276             6.2 %               924           28.2 %
Cambium Learning Technologies                1,111             2.4 %          1,217             2.3 %               106            8.7 %
Shared Services                                 94             0.2 %             80             0.2 %               (14 )        (17.5 )%
Amortization expense                         7,035            15.3 %          6,962            13.2 %               (73 )         (1.0 )%

Total cost of revenues                      21,309            46.4 %         23,280            44.0 %             1,971            8.5 %
Research and development expense             2,622             5.7 %          2,199             4.2 %              (423 )        (19.2 )%
Sales and marketing expense                 11,331            24.7 %         11,817            22.3 %               486            4.1 %
General and administrative expense           4,837            10.5 %          4,795             9.1 %               (42 )         (0.9 )%
Shipping costs                               1,204             2.6 %            844             1.6 %              (360 )        (42.7 )%
Depreciation and amortization expense        1,592             3.5 %          1,858             3.5 %               266           14.3 %
Embezzlement and related expense
(recoveries)                                   493             1.1 %            (56 )          (0.1 )%             (549 )       (980.4 )%
Impairment of long-lived assets                236             0.5 %             -              0.0 %              (236 )       (100.0 )%

Income before interest, other income
(expense) and income taxes                   2,334             5.1 %          8,169            15.4 %            (5,835 )        (71.4 )%
Net interest expense                        (4,628 )         (10.1 )%        (4,950 )          (9.4 )%              322            6.5 %
Other income, net                              163             0.4 %             -              0.0 %               163          100.0 %
Income tax expense                            (104 )          (0.2 )%          (155 )          (0.3 )%               51           32.9 %

Net (loss) income                       $   (2,235 )          (4.9 )%    $    3,064             5.8 %     $      (5,299 )       (172.9 )%

Net Revenues.

Our total net revenues decreased $6.9 million, or 13.1%, to $46.0 million in the third quarter of 2012 compared to the same period in 2011. This decrease in net revenue was driven by order volume declines in our Voyager Learning and Sopris Learning segments primarily as a result of a reduction in funding available to our customers.

Voyager Learning. The Voyager Learning segment's net revenues decreased $5.8 million, or 18.5%, to $25.3 million in the third quarter of 2012 compared to the same period in 2011 due to a decline in order volume. Additionally, as the Voyager Learning segment continues to develop online and technology-based products, a larger portion of the sales are deferred and recognized over a subscription period.

Sopris Learning. The Sopris Learning segment's net revenues decreased $1.9 million, or 20.1%, to $7.6 million in the third quarter of 2012 compared to the same period in 2011, which is attributable to reduced order volumes.

Cambium Learning Technologies. The CLT segment's net revenues increased $0.7 million, or 6.0%, to $13.0 million in the third quarter of 2012 compared to the same period in 2011 due to increased order volume in our online products partially offset by a decline in our perpetual license software and hardware product lines.

Cost of Revenues.

Cost of revenues includes expenses to print, purchase, handle and warehouse our products, as well as order processing and royalty costs, and to provide services and support to customers. Cost of revenues, excluding amortization, decreased $2.0 million, or 12.5%, to $14.3 million in the third quarter of 2012 compared to the same period in 2011 primarily due to a reduction in order volume.

Voyager Learning. Cost of revenues for the Voyager Learning segment decreased $1.0 million, or 8.8%, to $10.7 million in the third quarter of 2012 compared to the same period in 2011 primarily due to a reduction in order volume. Although cost of revenues declined compared to the third quarter of 2011, the reduction was not as significant as the decline in net revenues due to several factors: a significant portion of our cost of revenues are fixed costs versus variable costs and our sales mix shifted toward higher cost service offerings.


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Sopris Learning. Cost of revenues for the Sopris Learning segment decreased by $0.9 million, or 28.2%, to $2.4 million in the third quarter of 2012 compared to the same period in 2011 primarily due to a reduction in order volume.

Cambium Learning Technologies. Cost of revenues for the CLT segment decreased by $0.1 million, or 8.7%, to $1.1 million in the third quarter of 2012 compared to the same period in 2011 primarily due to a decline in order volume in our perpetual license software and hardware product lines.

Shared Services. Cost of revenues for Shared Services for the third quarter of 2012 of $0.1 million relate to our reengineering and restructuring initiative. The charges incurred in the third quarter of 2011 of $0.1 million primarily related to the costs incurred to maintain our customer-facing software applications.

Amortization Expense.

Amortization expense included in cost of revenues includes amortization for acquired pre-publication costs and technology, acquired publishing rights, and developed pre-publication and technology. Amortization for the third quarter of 2012 increased $0.1 million compared to the third quarter of 2011, or 1.0%, primarily due to the fact that amortization on newly developed pre-publication and technology more than offset the decline in intangible asset amortization as a result of using accelerated methodologies.

Research and Development Expense.

Research and development expenditures include costs to research, evaluate and develop educational products, net of capitalization. Research and development expense recognized in the third quarter of 2012 increased $0.4 million, or 19.2%, from the third quarter of 2011 to $2.6 million. Although revenues declined from the third quarter of 2011, we have increased our research and development spending to increase the flow of new and enhanced products.

Sales and Marketing Expense.

Sales and marketing expenditures include all costs to maintain our various sales channels, including the salaries and commissions paid to our sales force, and costs related to our advertising and marketing efforts. Sales and marketing expense for the third quarter of 2012 decreased $0.5 million, or 4.1%, from the third quarter of 2011 to $11.3 million. This decrease is primarily due to reduced employee and contractor related costs and product samples. We have significantly increased the selling and marketing in the Learning A-Z and ExploreLearning product lines while decreasing expenditures in other areas to offset the increase.

General and Administrative Expense.

General and administrative expenses were $4.8 million in the third quarter of 2012 and 2011. The 2012 charges include reengineering and restructuring initiative expenses of $0.2 million and CVR expense of $0.1 million. The decline in general and administrative expenses is primarily due to cost containment initiatives implemented by the Company through the reengineering and restructuring plan.

Shipping and Handling Costs.

Shipping and handling costs recognized in the third quarter of 2012 increased $0.4 million, or 42.7%, from the third quarter of 2011 to $1.2 million. Costs can be impacted by geographical mix, carrier selection and timing. We will continue to work with our newly activated third party provider to ensure costs are as economical as possible and it is our expectation that we will gain efficiency in this area.

Impairment of Long-Lived Assets.

The impairment expense recorded in the third quarter of $0.2 million relates to charges from the impairment of warehouse equipment in connection with our reengineering and restructuring initiative.

Net Interest Expense.

Net interest expense decreased by $0.3 million, or 6.5%, to $4.6 million in the third quarter of 2012 compared to the same period in 2011 primarily due to an increase in interest income on state tax receivables and a decline in interest expense associated with capital leases.

Income Tax Provision.

We recorded income tax expense of $0.1 million during the third quarter of 2012 and $0.2 million during the third quarter of 2011 for state income tax expense in states where the Company cannot file on a unitary basis. We did not record a Federal or state income tax benefit for consolidated losses incurred during either period because realization of the tax benefits from the losses is not assured beyond a reasonable doubt given the Company's recent history of cumulative losses. Therefore the increases in net deferred tax assets in the periods were offset by increases in the valuation allowance.


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First Nine Months of Fiscal 2012 Compared to the First Nine Months of Fiscal 2011

(in thousands)                                              Nine Months Ended                               Year Over Year Change
                                           September 30, 2012               September 30, 2011             Favorable/(Unfavorable)
                                                          % of                             % of
                                         Amount         Revenues          Amount         Revenues              $                %
Net revenues:
Voyager Learning                       $   58,579            51.3 %     $   81,026            57.6 %     $     (22,447 )        (27.7 )%
Sopris Learning                            17,495            15.3 %         22,111            15.7 %            (4,616 )        (20.9 )%
Cambium Learning Technologies              38,168            33.4 %         37,655            26.7 %               513            1.4 %

Total net revenues                        114,242           100.0 %        140,792           100.0 %           (26,550 )        (18.9 )%

Cost of revenues:
Voyager Learning                           28,693            25.1 %         33,685            23.9 %             4,992           14.8 %
Sopris Learning                             6,012             5.3 %          7,514             5.3 %             1,502           20.0 %
Cambium Learning Technologies               3,608             3.2 %          3,672             2.6 %                64            1.7 %
Shared Services                             1,524             1.3 %            233             0.2 %            (1,291 )       (554.1 )%
Amortization expense                       19,984            17.5 %         20,424            14.5 %               440            2.2 %

Total cost of revenues                     59,821            52.4 %         65,528            46.5 %             5,707            8.7 %
Research and development expense            8,606             7.5 %          7,093             5.0 %            (1,513 )        (21.3 )%
Sales and marketing expense                35,268            30.9 %         35,594            25.3 %               326            0.9 %
General and administrative expense         15,643            13.7 %         16,136            11.5 %               493            3.1 %
Shipping costs                              2,485             2.2 %          1,995             1.4 %              (490 )        (24.6 )%
Depreciation and amortization
expense                                     4,842             4.2 %          5,342             3.8 %               500            9.4 %
Goodwill impairment                        14,700            12.9 %             -              0.0 %           (14,700 )       (100.0 )%
Embezzlement and related expense
(recoveries)                                  452             0.4 %         (2,452 )          (1.7 )%           (2,904 )       (118.4 )%
Impairment of long-lived assets             3,347             2.9 %             -              0.0 %            (3,347 )       (100.0 )%

Income (loss) before interest, other
income (expense) and income taxes         (30,922 )         (27.1 )%        11,556             8.2 %           (42,478 )       (367.6 )%
Net interest expense                      (14,032 )         (12.3 )%       (14,237 )         (10.1 )%              205            1.4 %
Other income, net                             236             0.2 %            365             0.3 %              (129 )        (35.3 )%
Income tax expense                           (258 )          (0.2 )%          (570 )          (0.4 )%              312           54.7 %

Net loss                               $  (44,976 )         (39.4 )%    $   (2,886 )          (2.0 )%    $     (42,090 )      (1458.4 )%

Net Revenues.

Our total net revenues decreased $26.6 million, or 18.9%, to $114.2 million in the first nine months of 2012 compared to the same period in 2011 due to a decline in order volume in each of our business units primarily as a result of a reduction in funding available to our customers.

Voyager Learning. The Voyager Learning segment's net revenues decreased $22.4 million, or 27.7%, to $58.6 million in the first nine months of 2012 compared to the same period in 2011 due to a decline in order volume. Additionally, as the Voyager Learning segment continues to develop online and technology-based products, a larger portion of the sales are deferred and recognized over a subscription period.

Sopris Learning. The Sopris Learning segment's net revenues decreased $4.6 million, or 20.9%, to $17.5 million in the first nine months of 2012 . . .

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