Scholastic Corp. 10-Q Summary: Period Ended November 30, 1998
Business Context and Reporting Period
Scholastic Corporation is a global children's publishing and media company operating in the U.S., U.K., Canada, Australia, New Zealand, Mexico, Hong Kong, and India. The company distributes books, magazines, and educational materials directly to schools and consumers. This report covers the quarterly and six-month periods ended November 30, 1998 (Fiscal Year 1999).
Key Financial Metrics
| Metric | Three Months Ended Nov 30, 1998 | Six Months Ended Nov 30, 1998 |
|---|---|---|
| Revenues | $403.2 million | $553.4 million |
| Net Income | $31.7 million | $14.2 million |
| Diluted EPS | $1.81 | $0.86 |
| Operating Income | $56.6 million | $32.8 million |
| Operating Margin | 14.0% | 5.9% |
| Cash and Equivalents | $3.6 million (as of Nov 30, 1998) | |
| Long-Term Debt | $286.8 million (as of Nov 30, 1998) | |
| Working Capital | $247.9 million (Current Assets $499.5M - Current Liab $251.6M) |
Material Changes vs. Prior Period
- Revenue Growth: Quarterly revenue increased 14% to $403.2 million, driven by a 23% rise in domestic book publishing and a 20% increase in book club and fair revenues. Six-month revenue grew 6% to $553.4 million.
- Profitability: Quarterly operating income rose 19% to $56.6 million. Net income increased 22% to $31.7 million for the quarter. Six-month net income grew 11% to $14.2 million.
- Expense Trends: Cost of goods sold as a percentage of revenue decreased by 3.0% due to product mix changes and improved purchasing. Selling, general, and administrative (SG&A) expenses increased by 3.0% of revenue, attributed to the Pages Book Fairs acquisition, Year 2000 readiness costs, and higher operational activity.
- Cash Flow: Net cash provided by operating activities was $3.2 million for the six months ended Nov 30, 1998, compared to $5.1 million in the prior year. Net cash used in investing activities increased to $63.1 million, primarily due to prepublication costs and the Pages Acquisition.
Outlook, Risks, and Management Commentary
- Seasonality: The business is highly seasonal, with lower revenues in the first and third quarters. The company typically experiences negative cash flow from June through September due to inventory buildup for the school year.
- Year 2000 (Y2K) Readiness: Management estimates total Y2K program costs between $10.0 million and $12.0 million, with $4.3 million incurred to date. The company anticipates substantial completion by August 31, 1999. While no material adverse effect is expected, risks remain regarding third-party supplier compliance.
- Legal Contingencies:
- Securities Litigation: A consolidated class action regarding alleged misstatements about the "Goosebumps" series was dismissed by the court on December 14, 1998, though plaintiffs were granted leave to amend and re-file. Scholastic believes the claims are without merit.
- Parachute Press Litigation: Ongoing dispute regarding "Goosebumps" licensing rights. Parachute seeks approximately $36.1 million in damages; Scholastic seeks repayment of advances. Management does not believe this will have a material adverse effect.
- Liquidity: The company maintains credit facilities totaling up to $170.0 million (expandable to $195.0 million). Borrowings outstanding under these facilities were $48.4 million as of November 30, 1998. Management expects existing cash and credit lines to be sufficient for working capital needs.
Investor Verification Checklist
- Verify the status of the amended securities litigation complaint following the December 14, 1998 dismissal.
- Monitor the progress and cost overruns of the Year 2000 remediation program, specifically regarding third-party supplier compliance.
- Review the impact of the Pages Book Fairs acquisition on future operating margins and SG&A expenses.
- Assess the resolution of the Parachute Press litigation and potential financial exposure regarding the "Goosebumps" franchise.
- Track the company's ability to refinance or extend its credit facilities expiring in May 2000.