Scholastic Corporation 10-K Summary: Fiscal Year Ended May 31, 2009
Business Context and Reporting Period
This Form 10-K covers Scholastic Corporation for the fiscal year ended May 31, 2009. Scholastic is the world's largest publisher and distributor of children's books and a leading developer of educational technology. The company operates through four reportable segments: Children's Book Publishing and Distribution, Educational Publishing, Media, Licensing and Advertising, and International. During the fiscal year, the company classified several businesses as discontinued operations, including domestic, Canadian, and UK continuities businesses, as well as operations in Argentina, Mexico, and Puerto Rico.
Key Financial Metrics
| Metric | Fiscal 2009 | Fiscal 2008 |
|---|---|---|
| Total Revenues | $1,849.3 million | $2,159.1 million |
| Operating Income | $70.4 million | $213.4 million |
| Net (Loss) Income | $(14.3) million | $(17.2) million |
| Earnings from Continuing Operations | $13.2 million | $117.3 million |
| Loss from Discontinued Operations | $(27.5) million | $(134.5) million |
| Cash and Cash Equivalents | $143.6 million | $116.1 million |
| Total Debt | $303.7 million | $349.7 million |
| Working Capital | $412.4 million | $475.9 million |
| Operating Margin | 3.8% | 9.9% |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 14.3% to $1.85 billion. The primary driver was a $247.9 million drop in the Children's Book Publishing and Distribution segment, largely due to the absence of the prior year's record-breaking release of Harry Potter and the Deathly Hallows. Additionally, the International segment faced a $62.5 million unfavorable foreign currency exchange impact.
- Profitability Compression: Operating income fell 67.0% to $70.4 million. This was driven by lower revenues and increased expenses, including a $17.0 million goodwill impairment charge related to UK operations, a $13.5 million loss on UK investments, and $26.5 million in severance costs associated with workforce reduction programs.
- Discontinued Operations: The loss from discontinued operations improved significantly to $27.5 million from $134.5 million in the prior year, as the previous year included substantial asset write-downs related to the decision to sell or shut down specific businesses.
- Segment Performance:
- Children's Book Publishing: Revenues down 21.3%; Operating income down 48.7%.
- Educational Publishing: Revenues down 5.6% due to reduced public funding; Operating income down 15.3%.
- Media, Licensing and Advertising: Revenues up 8.4%; Operating income up 65.8%.
- International: Revenues down 11.3%; Operating income down 82.7% due to UK impairment and currency headwinds.
Guidance, Outlook, and Risks
Outlook: Management set a goal for fiscal 2010 to add $30 million to $70 million in operating income to its base, targeting a 9% operating margin if the high end of the range is achieved. Profit improvement is expected to come from pricing adjustments in book publishing, incremental sales in educational publishing driven by the American Recovery and Reinvestment Act, and continued cost reductions.
Liquidity: The company maintains sufficient liquidity with $143.6 million in cash and $325.0 million available under its revolving credit facility. Credit ratings were downgraded to "BB-" by S&P and "Ba2" by Moody's in March 2009, but the outlook remains "Stable."
Risks and Contingencies:
- Legal Proceedings: The company is defending a consolidated class action lawsuit alleging securities fraud regarding statements made between March 2005 and March 2006. The company believes the allegations are without merit.
- Market Risks: Significant exposure to foreign currency exchange rates and interest rate fluctuations. Approximately 48% of debt bears variable interest rates.
- Operational Risks: Dependence on school budgets, which are subject to funding shortfalls; competition in educational technology; and the need to adapt to digital technologies.
Investor Verification Checklist
- Harry Potter Impact: Verify the extent to which future revenue projections rely on new blockbuster titles to replace the revenue gap left by the Harry Potter series conclusion.
- UK Operations: Review the specific financial health of the UK subsidiary, which triggered a $17.0 million goodwill impairment and a $13.5 million investment loss.
- Discontinued Operations: Confirm the timeline and expected proceeds from the sale of the Maumelle and Danbury facilities and other discontinued businesses.
- Debt Covenants: Monitor compliance with debt covenants, particularly interest coverage and leverage ratios, given the recent credit rating downgrade.
- Government Funding: Assess the realization of expected sales growth in the Educational Publishing segment tied to federal stimulus funding (American Recovery and Reinvestment Act).