Scholastic Corporation 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended August 31, 2009 (First Quarter of Fiscal 2010). Scholastic Corporation operates in four segments: Children's Book Publishing and Distribution, Educational Publishing, International, and Media, Licensing and Advertising. The business is highly seasonal, with the first quarter typically being the smallest revenue period due to schools not being in session.
Key Financial Metrics
| Metric | Q1 2010 (Aug 31, 2009) | Q1 2009 (Aug 31, 2008) |
|---|---|---|
| Revenues | $315.6 million | $276.4 million |
| Operating Loss | $(35.3) million | $(62.3) million |
| Net Loss | $(23.0) million | $(49.1) million |
| Diluted EPS (Net Loss) | $(0.63) | $(1.30) |
| Cash and Equivalents | $54.2 million | $31.7 million |
| Total Debt | $290.6 million | $430.2 million |
| Operating Cash Flow | $(58.3) million (Used) | $(141.0) million (Used) |
Margins: Cost of goods sold decreased to 49.5% of revenue (from 52.8% prior year). Selling, general, and administrative (SG&A) expenses decreased to 55.0% of revenue (from 62.5% prior year).
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 14.2% ($39.2 million) driven by a 29.2% increase in Educational Publishing and a 24.7% increase in Children's Book Publishing and Distribution.
- Profitability Improvement: The operating loss narrowed significantly by $27.0 million, and the net loss decreased by $26.1 million compared to the prior year quarter.
- Segment Performance:
- Educational Publishing: Recorded a record quarter with operating income of $41.3 million (up from $21.5 million), driven by a >50% increase in technology sales due to federal stimulus funds and new product adoptions.
- Children's Book Publishing: Trade sales rose 25% driven by The 39 Clues and Harry Potter releases.
- International: Revenues declined 10.1% primarily due to unfavorable foreign currency exchange rates ($7.6 million impact).
- Discontinued Operations: Generated earnings of $1.6 million, a significant improvement from a $6.2 million loss in the prior year, reflecting favorable receivable collections and lower charges.
- Debt Reduction: Total debt decreased by $139.6 million year-over-year due to term loan repayments and open market repurchases of 5% Notes.
Guidance, Outlook, and Risks
- Outlook: Management states the company is on plan to achieve significantly higher earnings and free cash flow in Fiscal 2010. The goal is to achieve 9% operating margins if the high end of the guidance range is reached.
- Cost Management: The company continues to aggressively manage costs, with SG&A expenses remaining generally flat despite revenue growth. Severance expenses were $4.3 million as cost reduction plans continued.
- Risks and Contingencies:
- UK Operations: The company continues to experience difficulties in UK operations and expects to restructure them in the current fiscal year. A goodwill impairment of $17.0 million was recognized in the prior fiscal year related to UK operations.
- Seasonality: The company typically experiences operating losses in the first and third quarters.
- Liquidity: While cash balances declined $89.4 million due to seasonal working capital needs, the company maintains sufficient liquidity with $325.0 million available under its revolving credit facility.
Investor Verification Checklist
- UK Restructuring: Verify the timeline and expected costs for the restructuring of UK operations mentioned in the outlook.
- Stimulus Funding Impact: Assess the sustainability of the 50%+ growth in education technology sales driven by federal stimulus funds.
- Debt Covenants: Confirm continued compliance with interest coverage and leverage ratio tests under the Loan Agreement.
- Discontinued Operations: Monitor the realization of cash proceeds from the sale of discontinued assets (e.g., Maumelle and Danbury facilities).
- Share Repurchases: Note that the current share repurchase program is virtually completed with only $0.1 million remaining authorized.