Scholastic Corporation — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended November 30, 2013; fiscal 2014. The unaudited results are seasonal: school-based book fairs, book clubs and magazines generally generate higher revenue in the second and fourth quarters.
Financial results and liquidity
| Metric | Three months ended Nov. 30, 2013 | Prior-year quarter | Six months ended Nov. 30, 2013 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $623.2 million | $613.5 million | $899.5 million | $906.9 million |
| Operating income | $94.7 million | $102.0 million | $48.8 million | $55.0 million |
| Net income | $58.3 million | $61.8 million | $28.4 million | $29.7 million |
| Diluted EPS from continuing operations | $1.80 | $1.91 | $0.87 | $0.95 |
| Cash from operations | Not provided for the quarter | Not provided for the quarter | $81.5 million | $127.4 million |
- Quarterly cost of goods sold was 42.5% of revenue, versus 42.7%; for the six months it was 44.8%, versus 45.5%. The filing attributes the six-month gross-margin improvement partly to a greater contribution from higher-margin educational technology products.
- Quarterly operating margin was approximately 15.2%, versus 16.6%; six-month operating margin was approximately 5.4%, versus 6.1%. The $13.4 million goodwill impairment and severance costs affected current-period results.
- Cash and equivalents were $117.2 million at November 30, 2013, compared with $87.4 million at May 31, 2013 and $257.3 million a year earlier. Six-month operating cash flow fell $45.9 million year over year; management cited prior-year collections associated with Hunger Games sales as a significant comparison factor.
- At November 30, current assets were $876.1 million and current liabilities $544.2 million. Inventory was $342.3 million and accounts receivable $286.4 million. These balances reflect the seasonal business cycle.
- Total debt was $9.6 million, all short-term; there were no borrowings under the $425 million revolving credit facility. The Company also reported $58.0 million of capital lease obligations. It was in compliance with facility covenants.
- Six-month investing cash outflow was $45.6 million and financing cash outflow was $5.6 million. Dividends declared were $0.15 per share for the quarter; $6.2 million of shares were repurchased during the six months.
Changes versus the prior comparable period
- Quarterly revenue grew 1.6%, while six-month revenue declined 0.8%. Quarterly growth reflected educational technology launches, book fairs and Hunger Games-related trade sales; six-month results were pressured by lower Hunger Games sales and foreign exchange.
- Educational Technology and Services revenue rose 16.7% for the quarter and 17.8% for the six months. Classroom and Supplemental Materials Publishing revenue increased 11.1% and 6.4%, respectively.
- International revenue declined 5.6% for the quarter and 8.4% for the six months; foreign exchange reduced revenue by $7.5 million and $11.9 million, respectively. Media, Licensing and Advertising revenue also fell, and the segment posted operating losses in both current periods.
- Quarterly and six-month interest expense declined to $2.1 million and $4.0 million, respectively, following repayment of the Company’s 5% Notes in April 2013.
Outlook, commentary, risks and unusual items
- Management reaffirmed fiscal 2014 revenue guidance of approximately $1.8 billion and diluted EPS from continuing operations of $1.40–$1.80, before one-time cost-reduction items and non-cash, non-operating items. The expected fiscal 2014 effective tax rate is approximately 40%.
- Management cited strong demand for new educational programs, classroom book collections and magazines, and described the combination of the educational technology and classroom materials sales operations as intended to broaden school offerings. It also noted Asian revenue growth, partly offset by foreign-exchange impacts in International.
- The quarter included a $13.4 million goodwill impairment for the Children’s Book Publishing and Distribution book-club reporting unit after revised revenue expectations. Management said the unit’s fair value was approximately $13.0 million below its $66.9 million carrying value and indicated final impairment testing could result in all of that unit’s goodwill being impaired.
- Cost-saving initiatives generated $7.5 million of severance expense for the six months; $5.5 million was recognized in the second quarter. Ordinary litigation was not expected to have a material adverse effect, and the Company did not expect additional material liability from settling a UK pension-plan matter.
- Subsequent to quarter-end, Scholastic accepted an offer to buy its New York headquarters property for $255 million in cash, with no financing contingency. It planned to use existing cash and revolving-credit availability; closing was expected by February 3, 2014, subject to a possible extension.
- Foreign-exchange movements, title release timing, seasonal working-capital needs, product demand and the execution of new educational offerings are among the risks relevant to results. Management cautioned that forward-looking statements are subject to risks and uncertainties.
Investor verification priorities
- Track book-club revenue and the final goodwill impairment outcome, given the revised outlook and potential full impairment of the reporting unit’s goodwill.
- Verify completion, funding and liquidity effects of the $255 million headquarters purchase, including use of cash and revolving-credit availability.
- Assess whether educational technology and classroom materials growth continues and offsets weakness in International and Media, Licensing and Advertising.
- Compare operating cash flow and working-capital movements, particularly receivables, inventory and deferred revenue, with the prior-year seasonal cycle.
- Monitor progress against fiscal 2014 revenue and EPS guidance, including the stated exclusions, severance costs and tax-rate assumption.