UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
OR
( ) Transition Report Pursuant to Section 13 of 15(d) of the Securities Exchange
Act of 1934
For the period ended September 6, 2003 Commission file number 2-28286
The Bureau of National Affairs, Inc.
A Delaware Corporation 53-0040540
(I.R.S. Employer Identification No.)
1231 25th St., N. W., (202) 452-4200
Washington, D.C. 20037 (telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to the filing
requirements for the past 90 days. Yes ___X___ No ______
Indicate by check mark whether the registrant is an accelerated filer is an
accelerated filer (as defined in Rule 12b-2 of the Act). Yes ___X___ No ______
The number of shares outstanding of each of the issuer's classes of common
stock, as of September 6, 2003 was 15,177,120 Class A common shares, 18,326,493
Class B common shares, and 1,214,116 Class C common shares.
2
-2-
THE BUREAU OF NATIONAL AFFAIRS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE 36-WEEKS ENDED SEPTEMBER 6, 2003 and SEPTEMBER 7, 2002
(Unaudited)
(In thousands of dollars, except per share amounts)
36 Weeks Ended
--------------------------------
September 6, September 7,
2003 2002
--------------------------------
OPERATING REVENUES $ 210,521 $ 207,013
--------------------------------
OPERATING EXPENSES:
Editorial, production, and distribution 115,314 112,550
Selling 38,585 37,540
General and administrative 39,286 39,041
--------------------------------
TOTAL OPERATING EXPENSES 193,185 189,131
--------------------------------
OPERATING PROFIT 17,336 17,882
--------------------------------
NON-OPERATING INCOME:
Investment income 3,232 4,837
Interest expense (3,983) (4,159)
Other income (expense), net (15) 74
--------------------------------
TOTAL NON-OPERATING INCOME (EXPENSE) (766) 752
--------------------------------
INCOME BEFORE INCOME TAXES 16,570 18,634
PROVISION FOR INCOME TAXES 5,878 6,248
--------------------------------
INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 10,692 12,386
CUMULATIVE EFFECT OF ACCOUNTING CHANGE --- (4,440)
--------------------------------
NET INCOME 10,692 7,946
OTHER COMPREHENSIVE INCOME (EXPENSE) 953 (1,038)
--------------------------------
COMPREHENSIVE INCOME $ 11,645 $ 6,908
================================
EARNINGS PER SHARE:
INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE $ .31 $ .35
CUMULATIVE EFFECT OF ACCOUNTING CHANGE --- (.12)
--------------------------------
NET INCOME PER SHARE $ .31 $ .23
================================
WEIGHTED AVERAGE SHARES OUTSTANDING 34,845,399 35,691,390
================================
3
-3-
THE BUREAU OF NATIONAL AFFAIRS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE 12-WEEKS ENDED SEPTEMBER 6, 2003 and SEPTEMBER 7, 2002
(Unaudited)
(In thousands of dollars, except per share amounts)
12 Weeks Ended
--------------------------------
September 6, September 7,
2003 2002
--------------------------------
OPERATING REVENUES $ 74,936 $ 68,456
--------------------------------
OPERATING EXPENSES:
Editorial, production, and distribution 38,756 37,818
Selling 13,352 12,414
General and administrative 12,993 12,867
--------------------------------
TOTAL OPERATING EXPENSES 65,101 63,099
--------------------------------
OPERATING PROFIT 9,835 5,357
--------------------------------
NON-OPERATING INCOME:
Investment income 1,111 1,493
Interest expense (1,319) (1,354)
Other income (expense), net (16) 23
--------------------------------
TOTAL NON-OPERATING INCOME (EXPENSE) (224) 162
--------------------------------
INCOME BEFORE INCOME TAXES 9,611 5,519
PROVISION FOR INCOME TAXES 3,495 1,730
--------------------------------
NET INCOME 6,116 3,789
OTHER COMPREHENSIVE EXPENSE (848) (513)
--------------------------------
COMPREHENSIVE INCOME $ 5,268 $ 3,276
================================
EARNINGS PER SHARE $ .18 $ .11
================================
WEIGHTED AVERAGE SHARES OUTSTANDING 34,731,453 34,894,934
================================
4
-4-
THE BUREAU OF NATIONAL AFFAIRS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 6, 2003 AND DECEMBER 31, 2002
(In thousands of dollars)
September 6,
2003 December 31,
ASSETS (Unaudited) 2002
- ------------------------------------ --------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 26,327 $ 11,530
Short-term investments, at fair value 50,923 28,241
Receivables (net of allowance for
doubtful accounts of $1,371 in 2003
and $2,016 in 2002) 32,347 42,341
Inventories, at lower of average
cost or market 4,770 3,598
Prepaid expenses 4,328 3,843
Deferred selling expenses 4,763 5,824
Deferred income taxes 7,836 7,447
--------------------------------
Total current assets 131,294 102,824
MARKETABLE SECURITIES 66,974 84,220
PROPERTY AND EQUIPMENT - at cost:
Land 4,250 4,250
Building and improvements 51,572 51,105
Furniture, fixtures, and equipmet 48,696 50,801
--------------------------------
104,518 106,156
Less-Accumulated depreciation 73,402 72,947
--------------------------------
Net property and equipment 31,116 33,209
DEFERRED INCOME TAXES 23,925 22,648
GOODWILL 73,852 73,782
INTANGIBLE ASSETS 24,958 30,500
OTHER ASSETS 142 144
--------------------------------
Total assets $ 352,261 $ 347,327
================================
5
-5-
THE BUREAU OF NATIONAL AFFAIRS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 6, 2003 AND DECEMBER 31, 2002
(In thousands of dollars)
September 6,
2003 December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 2002
- ------------------------------------ --------------------------------
CURRENT LIABILITIES:
Accounts payable $ 13,101 $ 15,482
Employee compensation and
benefits payable 27,793 24,814
Income taxes payable 4,233 884
Deferred revenues 116,867 126,614
Current portion of long-term debt 5,000 5,000
--------------------------------
Total current liabilities 166,994 172,794
LONG TERM DEBT 75,000 75,000
POSTRETIREMENT BENEFITS, less current portion 67,924 61,460
OTHER LIABILITIES 6,771 6,614
--------------------------------
Total liabilities 316,689 315,868
--------------------------------
STOCKHOLDERS' EQUITY:
Capital stock, common, $1.00 par value-
Class A - Voting; Authorized 30,000,000
shares; issued 30,000,000 shares 30,000 30,000
Class B - Nonvoting; authorized
30,000,000 shares; issued 24,634,865
shares 24,635 24,635
Class C - Nonvoting; authorized
5,000,000 shares; issued 2,531,680 shares 2,532 2,532
Additional paid-in capital 9,200 5,863
Retained earnings 95,459 90,017
Treasury stock at cost 22,448,816 shares
in 2003 and 22,244,659 in 2002 (125,317) (119,698)
Elements of comprehensive income:
Net unrealized loss on marketable securities (869) (1,811)
Foreign currency translation adjustment (68) (79)
--------------------------------
Total stockholders' equity 35,572 31,459
--------------------------------
Total liabilities and stockholders' equity $ 352,261 $ 347,327
================================
6
-6-
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE 36-WEEKS ENDED SEPTEMBER 6, 2003 and SEPTEMBER 7, 2002
(Unaudited)
(In thousands of dollars)
36 Weeks Ended
--------------------------------
September 6, September 7,
2003 2002
--------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,692 $ 7,946
Items with different cash requirements
than reflected in net income--
Cumulative effect of accounting change --- 4,440
Depreciation and amortization 10,817 9,563
Gain on sales of securities (821) (1,544)
Gain (loss) on sales of assets 15 (74)
Others 64 (132)
Changes in operating assets and liabilities--
Receivables 10,638 16,720
Deferred revenues (9,747) (12,491)
Payables and accrued liabilities 3,215 3,907
Postretirement benefits 7,531 5,674
Deferred income taxes (2,178) (164)
Deferred selling expenses 1,061 468
Inventories (1,172) (1,286)
Other assets and liabilities--net (309) 818
--------------------------------
Net cash provided from operating activities 29,806 33,845
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures--
Capitalized software (2,169) (2,356)
Purchase of equipment and furnishings (563) (956)
Business purchase price adjustments (447) (753)
Building improvements (467) (66)
Proceeds from sales of property 2 6
--------------------------------
Net cash used for capital expenditures (3,644) (4,125)
--------------------------------
Securities investments--
Proceeds from sales and maturities 82,973 92,770
Purchases (86,806) (87,861)
--------------------------------
Net cash provided from (used for)
securities investments (3,833) 4,909
--------------------------------
Net cash provided from (used for)
investing activities (7,477) 784
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of capital stock to employees 5,129 3,981
Purchases of treasury stock (7,411) (30,189)
Dividends paid (5,250) (5,487)
Repayment of borrowings --- (4,000)
--------------------------------
Net cash used for financing activities (7,532) (35,695)
--------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14,797 (1,066)
CASH AND CASH EQUIVALENTS, beginning of period 11,530 23,972
--------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 26,327 $ 22,906
================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 4,198 $ 4,377
Income taxes paid 4,695 3,017
7
-7-
THE BUREAU OF NATIONAL AFFAIRS, INC.
Notes to Consolidated Financial Statements
September 6, 2003
(Unaudited)
NOTE 1: General
The information in this report has not been audited. Results for the
thirty-six weeks are not necessarily representative of the year because of the
seasonal nature of activities. The financial information furnished herein
reflects all adjustments, which include only normal, recurring adjustments that
are, in the opinion of management, necessary for a fair statement of the results
reported for the periods shown and has been prepared in conformity with
generally accepted accounting principles of the United States of America applied
on a consistent basis.
Notes contained in the 2002 Annual Report to security holders are hereby
incorporated by reference. Note disclosures which would substantially duplicate
those contained in the 2002 Annual Report to security holders have been omitted.
Certain prior year balances have been reclassified to conform to current year
presentation.
The reported amounts of some assets and liabilities, and the disclosures of
contingent assets and liabilities, result from management estimates and
assumptions which are required to prepare financial statements in conformity
with accounting principles generally accepted in the United States of America.
Estimates and assumptions are used for measuring such items as postretirement
benefits, deferred tax assets, the allowance for doubtful accounts, intangible
assets, and goodwill. Estimates and assumptions may also affect the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
NOTE 2: Inventories
Inventories consisted of the following (in thousands):
September 6, December
2003 31, 2002
-------------- -------------
Materials and supplies $ 2,304 $ 2,108
Work in process 1,348 277
Finished goods 1,118 1,213
-------------- -------------
Totals $ 4,770 $ 3,598
============== =============
NOTE 3: Stockholders' Equity
Treasury stock as of September 6, 2003 and December 31, 2002, respectively,
consisted of: Class A, 14,822,880 and 14,664,851 shares; Class B, 6,308,372 and
6,350,449 shares; and Class C, 1,317,564 and 1,229,359 shares.
8
-8-
NOTE 4: Segment Information
Segment operating information is presented below (in thousands of dollars):
12 Weeks Ended 36 Weeks Ended
9/6/2003 9/7/2002 9/6/2003 9/7/2002
-----------------------------------------------
Revenues from external customers:
Publishing $ 59,780 $ 59,130 $ 181,196 $ 180,375
Printing 5,371 4,771 13,972 13,770
Software 9,785 4,555 15,353 12,868
-----------------------------------------------
Total $ 74,936 $ 68,456 $ 210,521 $ 207,013
===============================================
Intersegment printing revenues $ 2,730 $ 3,189 $ 8,489 $ 9,902
===============================================
Intersegment software revenues $ 477 $ 421 $ 1,819 $ 1,965
===============================================
Operating profit:
Publishing $ 5,298 $ 4,842 $ 17,739 $ 17,005
Printing 127 353 (87) 717
Software 4,410 162 (316) 160
-----------------------------------------------
Total $ 9,835 $ 5,357 $ 17,336 $ 17,882
===============================================
NOTE 5: Subsequent Event
On September 11, 2003, the Board of Directors declared a dividend of $0.15
per share, payable October 2, 2003, to all holders of shares as of September 20,
2003.
NOTE 6: Goodwill and Intangible Assets
Goodwill assigned to the operating segments is as follows: Publishing
$49,998,000; Printing $917,000; and Software $22,937,000. Changes to goodwill
since December 31, 2002 were to record $70,000 in net purchase price
adjustments.
Intangible assets that continue to be subject to amortization were as
follows (in thousands of dollars):
September 6, 2003 December 31, 2002
------------------------------- ------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------------------------------ ------------------------------
Software $ 24,617 $ (12,876) $ 22,448 $ (8,630)
Customer Lists 14,730 (8,892) 14,730 (7,447)
Copyrights 9,145 (2,605) 9,145 (1,972)
Other 4,801 (3,962) 4,801 (2,575)
------------------------------- ------------------------------
Total $ 53,293 $ (28,335) $ 51,124 $ (20,624)
=============================== ==============================
Amortization expense for the above assets was $7,711,000 (including a
$1,803,000 accelerated amortization of a software asset and $617,000 for a
publishing asset) and $5,613,000 in the first three quarters of 2003 and 2002,
respectively.
9
-9-
PART I
Item 2. Management's Discussion and Analysis of Results of Operations
- ------- and Financial Position
----------------------
It is presumed that users of this interim report have read or have access
to the audited financial statements and management's discussion and analysis
contained in the 2002 Annual Report to security holders, hereby incorporated by
reference. This interim report is intended to provide an update of the
disclosures contained in the 2002 Annual Report to security holders and,
accordingly, disclosures which would substantially duplicate those contained
therein have been omitted.
FORWARD-LOOKING STATEMENTS
This management discussion contains and incorporates by reference 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," and "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.
RESULTS OF OPERATIONS
Although the business environment has progressed to a tepid-recovery level
recently, the weak economy has been the dominant factor affecting BNA's
financial results this year. It has adversely affected revenues, asset
valuations, and investment income. Nevertheless, BNA's consolidated revenues and
operating profit have held up relatively well, and comparisons with the prior
year significantly improved in the third quarter.
Thirty-six weeks 2003 compared to thirty-six weeks 2002
- -------------------------------------------------------
Consolidated revenues increased 1.7 percent to $210.5 million in the first three
quarters of 2003, while operating expenses were up 2.1 percent. As a result, the
consolidated operating profit was down 3.1 percent, reflecting lower Printing
and Software segment results. Net income before cumulative effect of accounting
change was $10.7 million for the first three quarters, a 13.7 percent decrease
from comparable 2002 results, and earnings per share were $.31 per share, down
from $.35.
Publishing segment revenues were up 0.5 percent compared to 2002. Parent and Tax
Management combined subscription and online revenues grew 1.8 percent, due
mainly to a sharp increase in online royalties resulting from new contractual
terms. All other publishing units had lower revenues due mostly to the weak
economy. Publishing operating expenses included substantially higher employee
benefit expenses and a second-quarter $1.6 million net charge for an early
retirement program, but up just 0.1 percent due to continuing cost reduction
efforts. Total operating profit for the Publishing segment was up 4.3 percent
compared to the same period last year.
Printing segment total revenues were down 5.1 percent compared to 2002,
reflecting a 1.5 percent increase in commercial revenues, but a 14.3 percent
decrease in intersegment revenues. The improved commercial sales recorded in
this quarter were due to delivering a large job earlier in 2003 than in 2002;
however, commercial sales continued to be hampered by a reduced demand for
financial printing and by pricing pressures caused by industry-wide excess
capacity. Intersegment revenues are expected to decline as Publishing segment
10
-10-
subscribers continue to migrate from print to electronic products. Operating
expenses were down 1.8 percent, reflecting lower variable costs and workforce
reductions. The Printing segment incurred an $87,000 operating loss in 2003
compared to a profit of $717,000 in 2002.
Software segment revenues, which a re seasonal in nature, increased 19.3 percent
compared to 2002 and operating expenses were up 23.3 percent. BNA Software,
which records the majority of its revenues and all of its profits in the second
half of the year, increased revenues by 59.5 percent mainly due to timing
differences. Renewal revenues included certain product updates that were shipped
in the third quarter of 2003; last year, these updates weren't shipped until the
fourth quarter. The carrying value of a BNA Software product was reduced in the
first quarter of 2003 based on lowered sales and cash flow expectations,
resulting in a $1.8 million writedown of development cost. Other expenses
increased due to higher selling and royalty expenses. BNA Software's seasonal
operating loss improved to $1.7 million compared to a $3.5 million loss in 2002.
STF records most of its revenues and profits in the first and fourth quarters.
STF revenues were down 24.9 percent due primarily to a $1.3 million customer
contract buyout received in 2002 and the absence of that customer in 2003.
Expenses increased 9.5 percent due mainly to higher staffing costs. As a result,
its operating profit dropped to $1.4 million compared to $3.7 million last year.
The total software segment had a $316,000 operating loss in 2003 compared to a
$160,000 profit in 2002.
Investment income and net other income fell $1.7 million due to lower investment
balances, lower market yields, and lower realized gains on sales. Interest
expense decreased $176,000 due to lower interest rates and lower outstanding
debt. Other comprehensive income reflected an unrealized holding gain in 2003
compared to a holding loss in 2002.
Twelve weeks ended Sept. 6, 2003 compared to twelve weeks ended Sept. 7, 2002.
- ------------------------------------------------------------------------------
For the third quarter only, consolidated revenues were up 9.5 percent, while
operating expenses were up 3.2 percent. The revenue and expense factors
mentioned above also affected third quarter comparisons, particularly the timing
of the Printing and Software revenues. Operating profit was up 84 percent for
the quarter, net income was up 61 percent, and earnings per share were up 63
percent.
Outlook
Revenues are now benefiting from the improved online contract terms negotiated
last year. Some of our businesses have begun to see marginal sales improvements
that we expect will gradually expand and strengthen. Expenses have been cut
where possible consistent with the goal of preserving short-term profits while
not jeopardizing long-term prospects, and that will continue. We had budgeted
for improved earnings this year and barring any fourth-quarter setbacks, we
still believe that is achievable. Although the slowly recovering economy will
have substantially less positive effect on 2003 earnings than we had once hoped,
we remain confident that the BNA businesses are well positioned to prosper in a
stronger economy.
FINANCIAL POSITION
Cash provided from operating activities was $29.8 million in the first
thirty-six weeks of 2003, an 11.9 percent decrease from the $33.8 million
provided from the first thirty-six weeks of 2002. Customer receipts were down
0.8 percent and operating expenditures increased 1.3 percent from 2002.
11
-11-
Cash used for investing activities was $7.5 million. Capital expenditures were
$3.7 million and cash used for the investment portfolio was $3.8 million. Sales
of capital stock to employees totaled $5.1 million and capital stock repurchases
amounted to $7.4 million. The Company paid dividends of $5.2 million.
With over $144 million in cash and investment portfolios and a $5 million loan
facility, the financial position and liquidity of the Company remains 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, 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 and real
estate equity.
Item 4. Controls and Procedures
- -----------------------------------
The Company carried out an evaluation, under the supervision and with the
participation of its management, including the Company's Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934), as of the end of the period covered by this
report. Based on this evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures are effective in timely alerting them to material information the
Company is required to disclose in its periodic SEC filings.
During the period covered by this report there have been no significant changes
in the Company's internal controls over financial reporting that have materially
affected, or were reasonably likely to materially affect, the Company's internal
control over financial reporting.
12
-12-
PART II
Item 1. Legal Proceedings
- ------- -----------------
There were no material legal proceedings during the first thirty-six weeks
of 2003.
Item 2. Change in Securities
- ------- --------------------
There were no changes in securities.
Item 3. Defaults upon Senior Securities
- ------- -------------------------------
There were no defaults upon senior securities.
Item 4. Submission of Matters to a Vote of Securities Holders
- ------ -----------------------------------------------------
There were no matters submitted to a vote of security holders.
Item 5. Other Information
- ------- -----------------
No other information is presented herein.
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
No reports were filed on Form 8-K during the quarter ended Sept. 6, 2003.
13
-13-
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.
The Bureau of National Affairs, Inc.
Registrant
10/14/2003 /s/Paul N. Wojcik
- --------- ----------------------------------
Date Paul N. Wojcik
President and Chief Executive Officer
10/14/2003 /s/George J. Korphage
- --------- ----------------------------------
Date George J. Korphage
Vice President and Chief Financial Officer