Scholastic Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended May 31, 2012. The filing also reports fourth-quarter results; the metadata’s “2011 Q4” does not match the fiscal year covered by this 10-K.
Business context
Scholastic is a global children’s publishing, education and media company. Its five reporting segments are Children’s Book Publishing and Distribution; Educational Technology and Services; Classroom and Supplemental Materials Publishing; Media, Licensing and Advertising; and International. Results are seasonal, with book fairs and clubs and educational product sales concentrated in particular quarters.
Financial performance
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $2,148.8 million | $1,887.9 million |
| Operating income / margin | $186.3 million / 8.7% | $104.0 million / 5.5% |
| Continuing-operations earnings | $108.7 million | $45.5 million |
| Net income | $102.4 million | $39.4 million |
| Diluted EPS | $3.21 | $1.16 |
| Operating cash flow | $260.2 million | $228.4 million |
| Cash and cash equivalents | $194.9 million | $105.3 million |
| Total debt | $159.3 million | $203.4 million |
| Working capital | $448.9 million | $335.4 million |
| Dividends declared per share | $0.45 | $0.35 |
Revenue rose 13.8%; operating income increased 79%. Cost of goods sold was 46.0% of revenue versus 46.3%, while SG&A was 40.5% versus 43.8%. The effective tax rate fell to 36.3% from 46.1%, primarily reflecting reversals of valuation allowances as profitability improved. Cash used in investing was $121.3 million; cash used in financing was $47.4 million.
Fourth-quarter revenue was $678.5 million, compared with $545.3 million in the prior-year quarter. Fourth-quarter continuing-operations earnings were $60.4 million versus $26.3 million; net income was $57.0 million versus $24.8 million.
Segment trends and material changes
- Children’s Book Publishing and Distribution: Revenue grew 20.5% to $1,111.3 million and operating income rose to $153.0 million from $78.1 million. Trade revenue surged on Hunger Games print and ebook sales; book-fair revenue also grew. Book-club revenue declined $34.7 million to $263.5 million.
- Educational Technology and Services: Revenue increased 10.4% to $254.7 million and operating income rose to $49.2 million, supported by READ 180 Next Generation.
- Classroom and Supplemental Materials Publishing: Revenue increased 5.6% to $208.2 million; operating income was $18.3 million versus $13.6 million. Weekly Reader was acquired during the year.
- Media, Licensing and Advertising: Revenue decreased 8.6% to $85.0 million; the segment posted a $4.7 million operating loss, including an impairment of a production property.
- International: Revenue rose 10.0% to $489.6 million and operating income increased to $57.6 million, benefiting from Hunger Games sales, currency effects and stronger markets including the UK, Canada and Australia.
Liquidity, debt and capital allocation
At year-end, cash was $194.9 million against total debt of $159.3 million. The $325 million revolving facility had no borrowings outstanding and matures June 1, 2014. The company expects to use the facility to repay its $152.8 million carrying value of 5% Notes due April 2013; it reported covenant compliance and said available liquidity was sufficient for operating and financing needs. Seasonal borrowing needs typically rise during June–October.
Fiscal 2012 included $13.1 million of open-market share repurchases and $14.3 million of dividends paid. The board had $31.4 million remaining under its repurchase authorization. Pension-plan contributions of $10.6 million were expected in fiscal 2013.
Outlook, risks and unusual items
- Management’s fiscal 2013 goal was to sustain operating momentum while investing for growth. It expected lower Hunger Games sales to weigh on Children’s Book segment profits, with new trade releases and modest book-fair growth providing only a partial offset.
- Educational Technology revenue was expected to be approximately level, with slightly lower profits; International revenue was expected to decline from FY2012, partly offset by improvement in the UK and growth in Asia. Planned products for fiscal 2014 included MATH 180, iREAD and a next-generation System 44.
- Management cautioned that unusually high trade sales late in FY2012 made the returns reserve less certain; actual returns in the first half of FY2013 could change the estimate. A one-percentage-point change in the estimated return rate would affect FY2012 operating income by about $2.0 million.
- Notable charges included a $17.9 million increase in inventory-obsolescence reserves, $19.7 million of sales-tax assessment accruals in two jurisdictions, $9.3 million of voluntary-retirement severance, $6.2 million for Manhattan subleases and $4.9 million for impairment of publishing-related intangible assets.
- Other risks include dependence on bestselling titles and school-based channels, evolving digital and ebook markets, school funding and procurement, competition, paper/shipping costs, foreign exchange, data privacy and cybersecurity, and family control through Class A voting stock. Pending ordinary-course litigation was not expected to have a material adverse effect; a UK pension-plan liability could not be estimated.
Most important facts for investors to verify
- Whether trade-book returns and receivable collections developed as expected after year-end, given the late-year sales surge and increased receivables.
- Whether FY2013 results matched management’s expected decline in Hunger Games-related sales and segment profits.
- The final cost and funding of repayment or refinancing of the 5% Notes due April 2013, and continued compliance with credit covenants.
- Any changes to the $19.7 million sales-tax accrual, tax examinations and $38.7 million of unrecognized tax benefits.
- Progress, spending and commercial adoption of Storia and planned education technology products.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.