Scholastic Corporation — Form 10-Q Summary
Reporting period: Third quarter and nine months ended February 28, 2013. Financial statements are unaudited. Amounts are in millions of dollars unless otherwise noted. Scholastic’s school-based businesses are seasonal; the third quarter is typically a lower-revenue period and often produces an operating loss.
Financial performance
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Revenue | $380.5 | $467.0 | $1,290.3 | $1,470.3 |
| Operating income (loss) | $(27.7) | $(11.9) | $25.7 | $94.9 |
| Continuing-operations income (loss) | $(20.1) | $(9.9) | $9.8 | $48.3 |
| Net income (loss) | $(20.1) | $(10.3) | $9.6 | $45.4 |
| Diluted EPS | $(0.63) | $(0.33) | $0.29 | $1.43 |
- Revenue declined 18.5% in the quarter and 12.2% year to date. The quarter’s decline was concentrated in Children’s Book Publishing and Distribution, whose revenue fell $79.4, chiefly because sales of The Hunger Games trilogy were much lower than in the prior-year period. Book-club sales also weakened.
- Consolidated cost of goods sold was 50.2% of quarterly revenue, versus 47.0% a year earlier; for the nine months it was 46.9%, versus 45.3%. Management cited higher free-book and fulfillment costs in book clubs and unfavorable product mix for the quarterly increase.
- Quarterly SG&A fell $41.9 to $200.6; nine-month SG&A fell $46.4 to $609.7, primarily reflecting lower sales-tax and employee-related expenses. Current-year SG&A included $3.0 of severance costs related to cost-saving initiatives.
- Segment results were mixed. For the quarter, Children’s Book Publishing and Distribution recorded a $10.1 operating loss, while Educational Technology and Services recorded a $3.5 loss and Classroom and Supplemental Materials Publishing a $0.2 loss. International earned $2.0; Media, Licensing and Advertising lost $2.3. Year-to-date operating income fell notably in Children’s Book Publishing and Distribution ($3.6 versus $70.7) and Educational Technology and Services ($26.6 versus $47.5).
Cash flow, liquidity and debt
- Nine-month operating cash flow was $107.2, down from $132.8; continuing-operations operating cash flow was $107.9. Investing activities used $94.9, including $51.3 for prepublication and production expenditures and $43.5 for property and equipment. Financing activities used $11.5. Cash increased $1.8 to $196.7 from May 31, 2012.
- At February 28, 2013, total debt was $154.8, including $153.0 of long-term debt and $1.8 of local-currency lines of credit. The company had no borrowings under its revolving facility and reported $425.0 of revolving commitments. Its $5% notes mature April 15, 2013; Scholastic said it intended to draw on the revolver to repay them.
- A December 2012 amendment increased the revolving facility to $425.0 and extended its maturity to December 5, 2017. The company reported compliance with debt covenants and said available liquidity was sufficient for operating and capital needs. Ratings were BB- from S&P and Ba1 from Moody’s, both with stable outlooks.
- The declared dividend was $0.125 per share for the quarter. Nine-month dividends paid were $11.9. Scholastic repurchased about 0.2 million shares for $5.8 during the nine months; $25.6 remained under the Board’s authorization at period-end.
Outlook, risks and notable items
- Fiscal 2013 guidance was approximately $1.75–$1.80 billion in revenue and diluted continuing-operations EPS of $1.10–$1.30, before one-time cost-reduction items and non-cash, non-operating items. Management expected further cost-saving actions in the fourth quarter.
- Management attributed weaker results mainly to lower-than-expected Hunger Games sales, lower book-club revenue and planned increased investment in digital initiatives. It noted that cost reductions partly offset these pressures.
- Operating cash flow was affected by royalty payments relating to prior-year Hunger Games sales and by employee incentive-compensation payments. The business’s seasonality can also produce negative cash flows in June through October and increase borrowing needs.
- The company expected a fiscal 2013 effective tax rate of approximately 38%. It paid $15.3 to settle sales-tax audits with two jurisdictions; other sales-tax examinations and assessments were ongoing. The IRS and New York tax authorities were auditing prior fiscal years.
- Scholastic reported impairment indicators for a reporting unit but, based on its valuation at January 31, 2013, estimated fair value exceeded carrying value by more than 20%. Valuation depended on assumptions including discounted cash flows, a 16% discount rate and a 4.5-times EBITDA multiple.
- Various ordinary-course claims and lawsuits were not expected to have a material adverse effect, according to the company. It also did not expect a material additional liability from settling a UK subsidiary’s pension plan. Forward-looking results remain subject to business, market, currency, interest-rate and other risks described in the filing and prior SEC filings.
Important facts for investors to verify
- Whether revenue and profitability recover in the fourth quarter, particularly in trade books and book clubs, and whether the full-year guidance is achieved.
- Execution and timing of the remaining cost-saving measures, and the total related charges, including the additional fourth-quarter costs management anticipated.
- Repayment of the April 2013 notes using the revolving facility, and the resulting debt, interest expense and covenant headroom.
- Whether operating cash flow and working capital improve, given seasonal borrowing needs and the timing of royalty, inventory and incentive-compensation payments.
- Developments in tax audits and assessments, the UK pension-plan settlement, and the assumptions supporting the reporting-unit valuation and impairment conclusion.