Scholastic Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended May 31, 2013. The filing also reports the fourth quarter ended May 31, 2013. Scholastic is a global children’s publishing, education and media company; its five segments include U.S. book publishing and distribution, education businesses, media and international operations. Amounts below are in U.S. dollars.
Financial performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $1,792.4 million | $2,139.1 million |
| Operating income / margin | $67.9 million / 3.8% | $185.3 million / 8.7% |
| Continuing-operations earnings | $35.8 million; diluted EPS $1.10 | $108.1 million; diluted EPS $3.39 |
| Net income | $31.1 million; diluted EPS $0.95 | $102.4 million; diluted EPS $3.21 |
| Cash from operating activities | $189.1 million | $260.2 million |
| Cash and cash equivalents at year-end | $87.4 million | $194.9 million |
| Working capital | $299.5 million | $427.5 million |
| Total debt | $2.0 million | $159.3 million |
Cost of goods sold was 46.3% of revenue, versus 46.0% in FY2012, implying gross margins of 53.7% and 54.0%, respectively. Net interest expense was $14.5 million. The effective tax rate on continuing operations was 33.0%, down from 36.3%.
Fourth quarter: Revenue was $506.9 million versus $676.6 million in Q4 FY2012. Continuing-operations earnings were $24.8 million versus $60.3 million; net income was $21.5 million versus $57.0 million. The company’s school-year businesses make results seasonal, and it typically incurs operating losses in the first and third quarters.
Material changes and segment performance
- Annual revenue fell $346.7 million, or 16.2%, largely because sales of The Hunger Games trilogy were substantially lower than in FY2012. Children’s Book Publishing and Distribution revenue fell 23.8% to $846.9 million; segment operating income declined to $24.5 million from $152.2 million.
- Educational Technology and Services revenue declined 10.6% to $227.7 million and operating income fell to $29.5 million from $49.2 million, reflecting lower school-district spending and the prior year’s Texas adoption sale and READ 180 Next Generation launch.
- Classroom and Supplemental Materials revenue rose 4.7% to $218.0 million; operating income increased to $29.6 million from $18.3 million, supported by classroom magazine circulation and demand for Common Core-related content.
- International revenue decreased 9.9% to $441.1 million and operating income fell to $39.8 million from $57.6 million, including weaker results in Canada and Australia and adverse currency effects.
- Media, Licensing and Advertising revenue declined 22.0% to $58.7 million, but the segment returned to operating income of $4.7 million from a $4.9 million loss, helped by lower-margin console game reductions and lower prior-year amortization.
Cash, debt and capital allocation
Operating cash flow decreased $71.1 million, principally reflecting lower profitability after FY2012’s strong Hunger Games sales. Investing activities used $124.0 million, including continued spending on digital and information technology, product development and book-fair vehicles. Financing activities used $172.7 million, including repayment of the $153.0 million 5% Notes at maturity; the company drew and repaid its revolver in connection with that repayment.
At year-end, the $425 million revolving credit facility was undrawn and scheduled to mature December 5, 2017; the company reported covenant compliance. Capital lease obligations were $57.7 million. The company paid $0.50 per share in FY2013 dividends and repurchased 432,330 shares for approximately $11.8 million. It stated that cash generation and available credit were sufficient for expected operating and capital needs.
Outlook, risks and unusual items
- Management expected FY2014 growth to be supported by customized curriculum, professional development and five education technology launches: System 44 Next Generation, MATH 180, iRead, Common Core Code X and Read 180 for iPad. The filing gives no specific consolidated revenue or earnings guidance.
- Management expected children’s book revenue to decrease slightly in FY2014, as lower Hunger Games sales were expected to be partly offset by higher revenue per book fair and new trade titles; book-club revenue was expected to be flat. Planned Storia investment was expected to decline as platform development was substantially complete.
- Risks include continued volatility in hit-title sales; execution and monetization of digital and education products; school budget and procurement constraints; competition and changing customer preferences; paper, shipping and labor costs; foreign exchange and international exposure; privacy and cybersecurity; and weather-related school or distribution disruptions.
- Goodwill in the book-club reporting unit was $13.4 million. Its estimated fair value exceeded its $48.8 million carrying value at May 31, 2013, but declined year over year; the valuation depended partly on Storia projections, and the company warned that failure to meet those projections could lead to future impairment.
- FY2013 included $13.4 million of severance expense, including $9.6 million for cost-reduction initiatives, and $4.0 million of asset impairment charges. Discontinued operations generated a $4.7 million after-tax loss; the company discontinued a computer club and a subscription-based business and sold the Maumelle facility, recognizing a $1.1 million sale loss.
- Sales-tax examinations and assessments were ongoing; the company paid $15.3 million in FY2013 against prior assessments and said future developments could change accruals. Ordinary-course litigation was not expected to have a material adverse effect. The filing also disclosed $35.5 million of unrecognized tax benefits, excluding accrued interest and penalties, and stated the balance could change materially.
- Class A shareholders, including the Robinson family, control most voting rights and can elect up to four-fifths of the board. The filing reports unqualified audit opinions and effective internal control over financial reporting.
Investor verification priorities
- Track whether FY2014 education launches and customized curriculum sales deliver the growth management anticipated, particularly against school-budget constraints.
- Assess the pace of book-club and Storia performance, including the assumptions underpinning the book-club goodwill valuation.
- Separate recurring operating performance from the prior-year Hunger Games comparison, severance, impairments, discontinued operations and tax-related items.
- Verify cash conversion, seasonal borrowing needs, capital commitments and the capacity to sustain dividends and repurchases.
- Review subsequent developments in sales-tax and income-tax examinations, foreign exchange exposure, and the company’s data-security and privacy controls.