Scholastic Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended November 30, 2012. The statements are unaudited. Dollar amounts are in millions except per-share data. Scholastic’s business is highly seasonal, with school-based sales generally strongest in the second and fourth fiscal quarters.
Financial performance
| Metric | Three months ended Nov. 30, 2012 | Prior-year quarter | Six months ended Nov. 30, 2012 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $616.2 | $685.3 | $909.8 | $1,003.3 |
| Operating income | $100.9 | $140.0 | $53.4 | $106.8 |
| Net income | $61.8 | $82.8 | $29.7 | $55.7 |
| Diluted EPS | $1.89 | $2.60 | $0.91 | $1.75 |
| Cash provided by operating activities | Not separately stated | Not separately stated | $127.4 | $107.8 |
- Quarterly revenue fell 10.1%; six-month revenue fell 9.3%. Operating income and net income also declined in both comparisons. Consolidated operating margin was approximately 16.4% for the quarter versus 20.4% a year earlier, and 5.9% for six months versus 10.6%.
- Cost of goods sold was 42.7% of quarterly revenue versus 41.7%, and 45.6% for six months versus 44.5%. Management attributed the increases primarily to fixed costs spread over lower revenue and, to a lesser extent, unfavorable product mix.
- Cash and cash equivalents were $257.3 at November 30, 2012, versus $194.9 at May 31, 2012 and $114.0 a year earlier. Current assets were $1,015.7 and current liabilities $564.5 at November 30, 2012.
- Total debt was $153.6, comprising $152.9 of long-term debt and $0.7 of short-term borrowings. The $152.9 of 5% Notes mature April 15, 2013; the company intended to refinance them with its revolving facility. Less than 1% of debt bore variable interest at period-end.
- Six-month investing cash outflow was $63.1, including $32.6 of prepublication and production expenditures and $30.4 of capital expenditures. Financing cash outflow was $3.4; cash increased $62.4 during the period.
Changes versus prior period and segment results
- Children’s Book Publishing and Distribution: Quarterly revenue declined 10.9% to $350.1 and operating income declined 36.6% to $68.9. Six-month revenue fell 10.5% to $421.2 and operating income fell 76.6% to $13.7. The filing cites lower book-club revenue per order, school closures following Superstorm Sandy, and lower Hunger Games sales versus the prior-year hit, partly offset by modest book-fair growth.
- Educational Technology and Services: Quarterly revenue fell 20.2% to $52.2 and operating income fell 63.7% to $5.3. Six-month revenue fell 18.4% to $132.2 and operating income fell 43.6% to $30.1. Lower school-district spending, the absence of a prior-year Texas adoption sale, and prior-year READ180 Next Generation launch revenue were cited.
- Classroom and Supplemental Materials Publishing: Six-month revenue declined 12.7% to $91.1 and operating income declined 61.3% to $4.8, primarily reflecting the loss of nonrecurring Reading is Fundamental contracts, partly offset by classroom magazine growth.
- International: Six-month revenue rose 0.9% to $233.9 and operating income rose 3.8% to $27.5; quarterly revenue was nearly flat. UK trade growth was offset in part by weaker Canadian book clubs and foreign-exchange effects.
- Media, Licensing and Advertising: Six-month revenue declined 9.2% to $31.4, while operating income improved to $1.4 from a $2.1 loss. The improvement included higher audiobook revenue and $1.3 of settlement income; quarterly revenue fell 29.5%.
- Quarterly SG&A declined $2.7 to $235.2, mainly from lower employee-related costs, partly offset by increased promotional spending. Prior-year results included a $6.2 lease loss, absent in 2012. Discontinued-operations losses also narrowed.
Outlook, management commentary and risks
- For fiscal 2013, management expected revenue of approximately $1.8 billion to $1.9 billion and diluted EPS from continuing operations of $1.40 to $1.60, before one-time cost-reduction items and noncash, non-operating items.
- Management cited cost-saving initiatives and said cash, operations and credit availability provided flexibility to continue investments in technology-based learning products, ebooks, ecommerce, and publishing and product development in Southeast Asia.
- Cash from operations improved by $19.6 year over year, supported by receivable collections, deferred revenue, accounts-payable management and timing of inventory purchases and payments. Offsets included lower net income, royalty payments related primarily to prior-year Hunger Games sales, and employee incentive and tax payments.
- On December 5, 2012, the revolving facility was increased from $325 to $425 and extended to December 5, 2017, with a further potential increase of up to $150. Scholastic intended to use the facility to repay the 5% Notes. The company reported compliance with debt covenants at November 30, 2012.
- Other risks and uncertainties include highly seasonal operations, school-district spending, title performance, foreign exchange, and execution of digital and cost-saving initiatives. The filing also discusses ongoing tax examinations and a UK subsidiary pension matter for which the company could not estimate a reasonably possible liability range. Management said ordinary-course claims and lawsuits were not expected to have a material adverse effect.
- The company expected approximately $10.6 of pension contributions for fiscal 2013. It reported an expected annual effective tax rate of approximately 40%.
Important facts for investors to verify
- Whether fiscal 2013 revenue and EPS guidance was achieved, and whether any excluded cost-reduction or noncash items materially affected reported results.
- Whether the $152.9 of 5% Notes was repaid or refinanced as intended, and the resulting borrowing costs and covenant headroom under the amended facility.
- Whether declines in educational technology, book clubs and trade publishing stabilized, including the effects of district budgets, school closures and title comparisons.
- Whether higher operating cash flow was sustained after seasonal working-capital movements and royalty, incentive-compensation and tax payments.
- Developments in the unresolved UK pension-plan liability and ongoing tax examinations; the filing does not provide a clear estimate of the potential UK pension exposure.