Scholastic Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended November 30, 2010. Financial amounts are in millions of dollars except per-share data. The interim statements are unaudited. Scholastic operates in children’s book publishing and distribution, educational publishing, media/licensing/advertising, and international markets; results are seasonal, with school-based sales concentrated in the second and fourth fiscal quarters.
Financial performance
| Metric | Three months ended Nov. 30, 2010 | Prior year | Six months ended Nov. 30, 2010 | Prior year |
|---|---|---|---|---|
| Revenue | $675.7 | $660.1 | $966.6 | $975.7 |
| Operating income | $128.7 | $105.6 | $81.9 | $70.3 |
| Continuing-operations earnings | $76.9 | $56.8 | $42.7 | $32.2 |
| Net income | $74.9 | $55.5 | $39.7 | $32.5 |
| Diluted EPS, continuing operations | $2.19 | $1.54 | $1.19 | $0.88 |
| Total diluted EPS | $2.14 | $1.51 | $1.11 | $0.88 |
- Second-quarter revenue rose 2.4%; six-month revenue declined $9.1, chiefly because Educational Publishing sales fell.
- Cost of goods sold rose to 43.8% of revenue for the quarter from 41.4%, and to 45.9% for the six months from 44.3%, reflecting product, fulfillment and postage costs, including increased promotions. SG&A was 34.4% of quarterly revenue versus 33.4%, and 41.7% for the six months versus 40.2%, in part due to digital investment and promotions.
- Prior-year operating results included $40.1 of non-cash asset impairments. The absence of that charge materially affects comparisons, particularly the six-month operating-income increase.
- Segment trends: Children’s Book Publishing and Distribution revenue rose 5.0% for the quarter, but operating income fell to $97.3 from $107.8. Educational Publishing revenue declined 17.1% for the quarter and 18.8% for the six months; quarterly operating income recovered to $11.0 from a prior-year impairment-affected loss. International revenue rose 11.5% for the quarter and operating income rose to $25.3 from $14.8. Media, Licensing and Advertising revenue rose 8.2% for the quarter and operating income was $4.7 versus $2.6.
Cash flow, balance sheet and debt
- Six-month operating cash flow was $83.5, down from $105.8; continuing-operations operating cash flow was $82.0 versus $103.4. Investing used $81.1, compared with $39.1, including $24.3 for headquarters land, $9.2 of acquisition-related payments, and higher capital and prepublication spending. Financing used $195.4, largely reflecting the share tender offer.
- Cash and equivalents were $54.4 at November 30, versus $244.1 at May 31, 2010 and $178.3 a year earlier. The decline from May principally reflects the large share repurchase and investment outlays.
- Total debt was $231.2, down from $252.8 at May 31 and $279.6 a year earlier. This figure excludes separately reported capital lease obligations. The company had $71.6 outstanding on its term loan, no revolving-loan borrowings, and $7.2 of local-currency line borrowings. Approximately $325.0 was available under the revolving facility; the company reported compliance with its debt covenants.
- Current assets were $835.0 and current liabilities $513.0. The filing states that cash, operating cash generation and credit availability are expected to cover foreseeable operating and financing needs. Credit ratings were BB- (S&P, Stable outlook) and Ba2 (Moody’s, Positive outlook).
- Dividends declared were $0.075 per share for the quarter. A subsequent $0.10-per-share dividend was declared December 15, payable March 15, 2011.
Material changes, outlook and commentary
- Scholastic repurchased 5.20 million common shares through a modified Dutch auction at $30 per share, for $156.0 excluding fees—about 15.1% of shares outstanding at the stated comparison date. It also repurchased 388,426 shares on the open market for approximately $9.7 during the six months. The filing attributes about $0.15 of fiscal 2011 diluted EPS to the tender-offer repurchase; $44.5 remained authorized for future repurchases.
- On September 9, the company acquired Math Solutions for $8.0 net of cash, recognizing $6.9 of goodwill; purchase accounting was not complete. It also purchased its headquarters land for $24.3 and satisfied $1.3 of related capital-lease obligations.
- Management said results were positive but below the fiscal 2011 plan, citing lower school-district spending and lower-than-expected Book Clubs revenue. Educational technology sales were below the prior-year, stimulus-supported level, but more than 50% above the level two years earlier. Management expected higher service revenue and new products to support Education sales, and online ordering and increased promotion to support modest Book Clubs growth.
- Fiscal 2011 guidance: revenue of $1.9–$1.95 billion; diluted EPS from continuing operations of $1.80–$2.05 before one-time items; and free cash flow of $90–$100. EPS guidance includes the estimated $0.15-per-share tender-offer benefit. The expected full-year effective tax rate was approximately 43%.
- Digital initiatives include expanded online ordering and planned children’s eBook testing, with a spring beta launch and full rollout planned for the following fall. Increased promotional and technology spending weighed on costs and segment income.
- Risks and contingencies include seasonal working-capital swings, constrained school-district funding, foreign-exchange and variable-rate interest exposure, and potential changes in tax estimates. The company was defending a securities class action; the court dismissed the then-pending complaint in September 2010, but plaintiffs sought leave to file a further amended complaint. Damages sought were unspecified; the company said it considered the allegations without merit.
- Other notable items: discontinued operations produced losses of $2.0 for the quarter and $3.0 for the six months, including a Canadian pension-plan settlement charge. Management estimated approximately $6.0 in pension-plan contributions for fiscal 2011. The company was evaluating the impact of newly issued revenue-recognition guidance.
Investor verification points
- Confirm the drivers and persistence of lower Educational Publishing revenue and the funding environment, and whether management’s sales expectations were achieved.
- Assess Book Clubs promotional costs and digital investment against future revenue, margins and free-cash-flow guidance.
- Reconcile the $156.0 tender-offer outlay, reduced share count and stated $0.15 EPS benefit with year-end cash, debt and remaining buyback authorization.
- Monitor working-capital seasonality, inventory levels, liquidity, debt maturities and covenant headroom; the revolving facility was scheduled to expire June 1, 2012.
- Track completion of Math Solutions purchase accounting, the Canadian pension settlement, tax-audit outcomes and developments in the securities litigation.