Scholastic Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended November 30, 2014; unaudited. Dollar amounts are in millions except per-share data. Scholastic publishes children’s books and educational materials and provides educational technology, media, and international products. Results are seasonal: school-based book clubs and fairs typically contribute most in the second and fourth fiscal quarters.
Financial performance
| Metric | Three months ended Nov. 30, 2014 | Prior-year quarter | Six months ended Nov. 30, 2014 | Prior-year period |
|---|---|---|---|---|
| Revenue | $665.6 | $623.2 | $949.4 | $899.5 |
| Operating income | $112.8 | $94.7 | $59.4 | $48.8 |
| Continuing-operations earnings | $68.6 | $58.3 | $34.6 | $28.2 |
| Net income | $68.5 | $58.3 | $34.4 | $28.4 |
| Diluted EPS | $2.05 | $1.80 | $1.04 | $0.88 |
| Operating margin | 17.0% | 15.2% | 6.3% | 5.4% |
Quarterly revenue rose 7%; six-month revenue rose about 6%. Cost of goods sold was 43.4% of quarterly revenue versus 42.5% a year earlier, and 46.2% of six-month revenue versus 44.8%. Management attributed the higher ratios mainly to a greater mix of print materials and services, lower-margin media products in Australia, and higher amortization.
Cash flow and liquidity: Operating cash flow was $90.9 for the six months, compared with $81.5 a year earlier. Investing activities used $37.4, versus $45.6; financing activities used $30.7, versus $5.6. Cash increased to $42.9 at November 30, 2014 from $20.9 at May 31, 2014. Current assets were $810.5 and current liabilities $546.3.
Debt: Total debt was $104.2, including $95.0 outstanding under a $425.0 revolving credit facility and $9.2 of local-currency lines of credit. The facility matures December 5, 2017; approximately $330.0 remained available under it. The company reported compliance with its debt covenants. Net interest expense for the quarter was $1.0, down from $2.1.
Dividends declared were $0.15 per share for the quarter. The company repurchased $3.5 of stock in the six-month period and had $9.9 remaining under its repurchase authorization.
Material changes and segment trends
- Children’s Book Publishing and Distribution: Revenue increased 14% in the quarter and 12% for six months. School book-club and book-fair channels strengthened following marketing initiatives; Minecraft handbook sales were $33.6 for the quarter. Segment operating income was $108.3 for the quarter and $47.8 for six months, compared with $68.9 and $7.4, respectively, in the prior periods. Prior-year results included a $13.4 goodwill impairment.
- Educational Technology and Services: Revenue declined 16% in the quarter and 10% for six months; quarterly segment operating loss was $1.2. Lower sales of Read 180 and System 44 and the absence of prior-year product-launch demand were key factors.
- Classroom and Supplemental Materials Publishing: Revenue increased 6% in the quarter and 9% for six months, supported by classroom books and magazines; segment operating income also improved.
- Media, Licensing and Advertising: Revenue increased 6% in the quarter and 4% for six months, helped by programming, but the six-month operating loss widened to $4.2 amid higher content amortization.
- International: Quarterly revenue decreased 2%, with foreign-exchange declines outweighing local-currency growth; six-month revenue increased 2%. Segment operating income declined in both periods, reflecting Canadian weakness, investment in Asia, currency effects, and a higher mix of lower-margin media products.
Outlook, risks, and unusual items
- Management said book-club and book-fair momentum remained strong, the educational-technology pipeline was improving, and Scholastic remained on track to release MATH 180 Course 2 in the fourth quarter of fiscal 2015. It expected increased purchases of reading and math intervention programs; no quantified revenue or earnings guidance was provided.
- Management expected a full-year effective tax rate of approximately 40.3%, excluding discrete items. The six-month effective tax rate was 40.4%.
- Current-quarter unusual items included a $2.9 impairment charge for the planned closure of a New York retail store, a $3.7 pension settlement charge, $0.9 of severance costs, and a $0.6 gain on sale of an investment. The prior-year quarter included $13.4 of goodwill impairment and $5.5 of severance and other cost-reduction costs.
- Risks include seasonality and working-capital swings, foreign-exchange exposure, variable interest rates, educational-technology product timing and school funding, and ongoing tax audits. The company reported that reasonably possible losses from routine litigation were not expected to materially affect its financial position or results. It did not expect additional material liability from the Grolier UK pension-plan matter.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether book-club and book-fair growth and the strong Minecraft contribution can be sustained.
- Whether educational-technology demand and the product pipeline recover, and whether MATH 180 Course 2 launches as planned.
- How margins respond to product mix, promotional spending, content amortization, and international currency movements.
- Seasonal cash needs, cash conversion, and available borrowing capacity under the revolving facility and other credit lines.
- Potential outcomes of tax examinations, pension matters, and other contingencies, as well as the company’s ability to maintain covenant compliance.