SCHL

Scholastic Corp. 10-Q Summary: Period Ended November 30, 2000

Business Context and Reporting Period

This Form 10-Q covers the quarterly and six-month periods ended November 30, 2000, for Scholastic Corporation, a global children's publishing and media company. The reporting period is significantly impacted by the acquisition of Grolier Incorporated on June 22, 2000, for $400 million in cash. The company's business is highly seasonal, correlating with the school year, with the second quarter typically representing peak revenue for school book clubs and fairs.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 31% for the quarter and 49% for the six-month period compared to the prior year. This growth was driven by the inclusion of Grolier operations and strong performance in the Children's Book Publishing and Distribution segment (up 27% for the quarter, 52% for six months).
• Profitability: Net income rose 36% for the quarter and 158% for the six-month period. Operating profit improved 42% for the quarter and 150% for the six-month period. Excluding a $8.5 million non-recurring litigation charge in the prior year, operating profit growth was even more pronounced.
• Cost Structure: Cost of goods sold as a percentage of sales improved (decreased) from 47.0% to 42.6% for the quarter, aided by higher-margin trade sales and lower return reserves. However, Selling, General, and Administrative (SG&A) expenses as a percentage of sales increased due to goodwill amortization from the Grolier acquisition and higher promotional spending.
• Balance Sheet: Total assets increased from $1,046.1 million (Nov 1999) to $1,664.9 million (Nov 2000), primarily due to the acquisition. Long-term debt surged from $312.9 million to $649.6 million to finance the Grolier purchase.

Outlook, Risks, and Unusual Items

• Acquisition Integration: The company is integrating Grolier's operations, which are reported across Children's Book Publishing, Educational Publishing, and International segments. Pro forma results indicate the acquisition was accretive to earnings.
• Stock Split: A 2-for-1 stock split was approved on December 14, 2000, effective January 16, 2001. All per-share data in this filing is pre-split.
• Litigation: The company is involved in ongoing litigation with Parachute Press, Inc. regarding the "Goosebumps" series. The company does not believe this will have a material adverse effect. A prior-year non-recurring charge of $8.5 million related to a separate lawsuit regarding stock appreciation rights was recorded in the prior period.
• Market Risk: Approximately 65% of the company's debt bears variable interest rates. A 15% change in interest rates would impact pre-tax results by approximately $4.9 million annually.
• Seasonality: The company expects continued seasonal fluctuations, with cash outflows typically occurring in the first half of the fiscal year to fund inventory and operations before peak sales.

Investor Verification Checklist

• Debt Servicing: Verify the company's ability to service the increased debt load ($675.8 million) resulting from the Grolier acquisition, particularly given the variable interest rate exposure.
• Return Reserves: Monitor the company's estimates for sales returns in the Trade segment, as adjustments here significantly impact net income (a $5.2 million adjustment occurred in the current quarter).
• Integration Synergies: Assess whether the projected revenue and margin benefits from the Grolier acquisition are being realized in subsequent quarters.
• Litigation Exposure: Track the status of the Parachute Press litigation and the appeal regarding the prior-year stock appreciation rights lawsuit.
• Cash Flow: Confirm that operating cash flows remain sufficient to cover working capital needs and debt obligations during the seasonal cash burn periods.