Scholastic Corp. 10-Q Summary: Period Ended February 28, 2001
Business Context and Reporting Period
This Form 10-Q covers the quarterly and nine-month periods ended February 28, 2001, for Scholastic Corporation, a global children's publishing and media company. The reporting period includes the consolidated results of Grolier Incorporated, acquired on June 22, 2000, for $400 million. The Company's business is highly seasonal, correlating with the school year. A 2-for-1 stock split was effective January 16, 2001, and all per-share data has been adjusted accordingly.
Key Financial Metrics
| Metric (in millions) | 3 Months Ended Feb 28, 2001 | 9 Months Ended Feb 28, 2001 |
|---|---|---|
| Revenues | $433.0 | $1,463.4 |
| Operating Income | $16.3 | $110.9 |
| Net Income | $3.7 | $49.4 |
| Diluted EPS | $0.10 | $1.34 |
| Operating Margin | 3.8% | 7.6% |
| Cash from Operations (9mo) | $135.4 | |
| Total Debt | $619.1 | |
| Cash and Equivalents | $11.9 |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 37% for the quarter and 45% for the nine-month period compared to the prior year. This growth was driven by the inclusion of Grolier (contributing $100.0 million in the quarter and $276.4 million year-to-date) and strong performance in the Children's Book Publishing and Distribution segment.
- Profitability: Operating income more than doubled for the quarter ($16.3 million vs. $7.7 million) and increased 143% for the nine-month period ($110.9 million vs. $45.6 million). The prior year nine-month results included an $8.5 million non-recurring litigation charge.
- Debt Levels: Total debt increased significantly to $619.1 million from $302.4 million in the prior year, primarily due to the $400 million acquisition financing for Grolier. Approximately 62% of total debt bears variable interest rates.
- Segment Performance: The Children's Book Publishing segment saw revenue grow 36% (quarter) and 47% (nine months). The Educational Publishing segment revenue grew 46% (quarter) and 51% (nine months), though it remained in an operating loss position.
Guidance, Outlook, and Risks
- Strategic Shift and Charges: On April 16, 2001, management announced a strategic decision to discontinue updates to "Scholastic Literacy Place" to focus on reading improvement materials. This will result in a one-time pre-tax charge of $65.0 million to $70.0 million in the fourth quarter ending May 31, 2001.
- Liquidity: Management believes existing cash, operating cash flows, and available credit facilities (Loan Agreement and Revolver) are sufficient to finance working capital needs through the next fiscal year. The Company has a $400 million shelf registration (Form S-3) effective to refinance Grolier acquisition costs.
- Market Risks: The Company faces interest rate risk, with $384.2 million in variable-rate debt. A 15% change in interest rates would impact pre-tax results by approximately $4.3 million annually. Foreign currency fluctuations are present but not considered a significant risk.
- Contingencies: The Company is involved in litigation regarding the "Goosebumps" series with Parachute Press, Inc., and a securities class action appeal. Management does not believe these will have a material adverse effect on financial condition.
Investor Verification Checklist
- Verify the impact of the upcoming $65-$70 million charge related to the discontinuation of "Scholastic Literacy Place" on Q4 2001 earnings.
- Monitor the refinancing of the $350 million "Grolier Facility," which is a one-year loan maturing in June 2001.
- Assess the sustainability of operating margins given the integration costs of Grolier and increased promotional spending.
- Review the status of the "Goosebumps" litigation and the securities class action appeal for potential reserve adjustments.
- Confirm the Company's ability to maintain debt covenants given the increased leverage from the acquisition.