Scholastic Corporation — Q3 FY2012 Form 10-Q
Reporting period: Quarter and nine months ended February 29, 2012. Financial statements are unaudited; amounts are in millions of dollars except per-share data. Scholastic’s fiscal year ends May 31. Its school-based businesses are seasonal, and it typically reports operating losses in the first and third quarters.
Financial performance
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Revenue | $467.0 | $384.3 | $1,470.3 | $1,342.6 |
| Operating income (loss) | $(11.9) | $(30.0) | $94.9 | $52.8 |
| Net income (loss) | $(10.3) | $(25.1) | $45.4 | $14.6 |
| Diluted EPS | $(0.33) | $(0.81) | $1.43 | $0.42 |
| Operating margin | (2.5%) | (7.8%) | 6.5% | 3.9% |
- Revenue increased 21.5% in the quarter and 9.5% year to date. Quarterly growth was led by Children’s Book Publishing and Distribution (+$73.0) and International (+$10.5); year-to-date growth was led by Children’s Book Publishing and Distribution (+$78.7) and Educational Technology and Services (+$32.6).
- Cost of goods sold fell to 47.0% of revenue in the quarter from 50.4%, and to 45.3% year to date from 47.1%. Management cited favorable product mix, higher-margin ebook sales and lower postage, partly offset by higher royalties.
- Q3 remained loss-making, but losses narrowed. Year-to-date operating income and earnings improved substantially. Higher trade and book-fair sales supported results; the quarter’s Children’s Book revenue was unusually strong ahead of the Hunger Games movie release.
- Segment highlights, nine months: Children’s Book operating income $70.6 versus $36.5; Educational Technology and Services $47.5 versus $29.4; International $30.8 versus $21.7; Classroom and Supplemental Materials $9.0 versus $7.4; Media, Licensing and Advertising loss $(3.2) versus $(0.6). Corporate overhead rose to $59.8 from $41.6.
- Quarterly SG&A was $235.5, or 50.4% of revenue, versus $198.1, or 51.5%; year-to-date SG&A was $636.1, or 43.3%, versus $597.2, or 44.5%. Increases included incentives, digital investment and sales-tax accruals. Bad-debt expense declined to $3.1 for the quarter and $7.8 year to date, partly reflecting the prior-year Borders-related charge.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $132.8, down from $154.9; continuing-operations cash flow was $134.1 versus $156.7. Inventory investment and slower receivable collections weighed on cash generation. Investing cash outflow was $78.0 versus $102.1; financing cash outflow was $47.6 versus $209.5.
- Cash at February 29 was $111.8, compared with $105.3 at May 31, 2011. Current assets were $921.7 and current liabilities $547.0 (current ratio approximately 1.69). Management said available cash, operating cash flow and committed credit were sufficient for foreseeable requirements.
- Total debt was $165.3, down from $203.4 at May 31, 2011 and $220.1 a year earlier; cash less reported debt was approximately $(53.5) net debt. Debt included $152.7 of 5% Notes due April 2013 and $12.6 of local-currency borrowings. The $325.0 revolving facility, extended to June 2014, had no advances outstanding; $1.4 of standby letters of credit were outstanding. The company reported compliance with debt covenants.
- Dividends paid during the nine months were $9.3. The quarterly dividend increased to $0.125 per share from $0.100 a year earlier. The board had $38.9 remaining under its share-repurchase authorization; no shares were repurchased in the quarter.
Outlook, risks and unusual items
- No specific earnings or revenue forecast is provided. Management expects liquidity to cover operating needs, debt service, dividends, planned capital spending and other investments, and expects to remain covenant-compliant. It expects approximately $8.4 of pension contributions for FY2012 and about $4.0 of additional acquisition-related payments in Q4.
- Management expects a FY2012 effective tax rate of approximately 42%, citing foreign tax losses, particularly in the UK, for which future tax benefits are not expected.
- Trade-channel sales lifted revenue, but management said collections would follow in Q4 and warned of temporary collection delays after bringing order processing, distribution coordination and cash collection in-house from a third party. It is closely managing retail customer credit.
- Unusual costs included $12.2 of year-to-date severance, including $9.3 related to a voluntary retirement program, and a $6.2 loss recorded in Q2 on lower-than-committed rents from lower Manhattan subleases through 2018. Q3 SG&A also included $19.7 of sales-tax assessment accruals. Following a March 19, 2012 adverse Connecticut Supreme Court decision, the company increased its February 29 sales-tax accrual by $11.6; it disagreed with the decision and was considering an appeal.
- The company ceased its direct-to-home toy catalog business in Q1 and classified it as discontinued operations. Discontinued-operations losses were $0.4 for Q3 and $2.9 year to date.
- Other risks include seasonal working-capital swings, foreign-exchange and variable-rate interest exposure, execution of digital initiatives, and tax assessments. The filing says ordinary-course litigation is not expected to have a material adverse effect. Moody’s upgraded its rating to Ba1 during the quarter; S&P rated the company BB-, and both outlooks were Stable.
- Growth in digital books included the phased introduction of Storia, a children’s ereading app and ebookstore. Scholastic also acquired Learners Publishing and Weekly Reader; purchase accounting for both was incomplete at filing, including expected identifiable intangibles for Weekly Reader.
Important facts for investors to verify
- Whether Q4 converts the strong trade-channel sales into cash as expected, given receivables increased and collections may slow during the in-house transition.
- The final exposure, payment timing and appeal outcome for the Connecticut and other sales-tax assessments, including the $11.6 accrual increase.
- Refinancing or repayment plans for the $152.7 of 5% Notes maturing in April 2013, and continued compliance with credit-facility covenants.
- Whether the quarter’s unusually strong Children’s Book sales, including Hunger Games-related demand, are sustained, and how book-club sponsor declines and lower Media custom-marketing revenue develop.
- Final purchase accounting and integration outcomes for Learners Publishing and Weekly Reader, and the cost and returns of digital investment and restructuring.