Scholastic Corporation 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended February 28, 2009, and the nine months ended on that date. Scholastic Corporation operates in four segments: Children's Book Publishing and Distribution, Educational Publishing, Media, Licensing and Advertising, and International. The company is highly seasonal, with revenues typically lower in the first and third fiscal quarters. The reporting period includes significant restructuring activities, including the divestiture of non-core businesses and the shutdown of the direct-to-home continuity business in the United Kingdom.
Key Financial Metrics
| Metric | Three Months Ended Feb 28, 2009 | Nine Months Ended Feb 28, 2009 |
|---|---|---|
| Revenues | $424.9 million | $1,359.0 million |
| Operating Income (Loss) | $(22.6) million | $22.9 million |
| Net Loss | $(36.0) million | $(42.0) million |
| Diluted EPS (Net Loss) | $(0.98) | $(1.12) |
| Cash and Cash Equivalents | $37.0 million | (Balance Sheet Item) |
| Total Debt | $315.3 million | (Balance Sheet Item) |
| Operating Cash Flow (9 months) | N/A | $34.1 million |
Note: Net Loss includes discontinued operations. Loss from continuing operations for the quarter was $35.1 million.
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 3.5% ($15.5 million) in the quarter and 17.3% ($285.2 million) for the nine months compared to the prior year. The nine-month decline was primarily driven by the absence of Harry Potter and the Deathly Hallows revenues from the prior year and a $21.8 million negative impact from foreign exchange rates in the quarter.
- Operating Loss: The company reported an operating loss of $22.6 million for the quarter, compared to operating income of $4.2 million in the prior year quarter. This shift was driven by a $17.0 million goodwill impairment charge in the U.K., a $13.5 million loss on investments in the U.K., and increased severance costs.
- Discontinued Operations: Loss from discontinued operations improved significantly to $0.9 million in the quarter (vs. $77.9 million loss in the prior year) due to the sale of the Quality Education Data (QED) business, which generated a $21.9 million pre-tax profit.
- Cost Reductions: Severance expense increased to $5.8 million in the quarter (vs. $1.8 million prior year) as part of cost reduction plans totaling $35 million in annualized reductions in the first half of the year, with an additional $20 million planned for the second half.
Guidance, Outlook, and Risks
- Impairment Charges: The company recognized a $17.0 million goodwill impairment charge related to U.K. operations and a $13.5 million unrealized loss on U.K. investments. Management stated that the decline in share price is a function of capital market conditions and not indicative of long-term cash flows, but they will continue to monitor assets for further impairment.
- Strategic Focus: Scholastic is exiting unprofitable, non-core businesses, including the DTH business in the U.K. and Canada, and the Maumelle facility. The company aims to achieve 9% to 10% operating margins.
- Liquidity and Credit: As of February 28, 2009, the company had $37.0 million in cash and $325.0 million available under its revolving credit facility. However, credit ratings were downgraded to "BB-" by S&P and "Ba2" by Moody's in March 2009, though the outlook remains "Stable."
- Dividends and Buybacks: The Board declared a quarterly dividend of $0.075 per share. The company continues to repurchase shares under authorized programs, having spent $31.6 million on repurchases in the nine-month period.
- Risks: Key risks include foreign currency exchange fluctuations, the seasonality of the business, and the potential for further asset impairments if market conditions deteriorate.
Investor Verification Checklist
- U.K. Operations: Verify the sustainability of the U.K. business model following the goodwill impairment and investment losses.
- Discontinued Operations: Confirm the final proceeds and tax implications from the sale of the QED business and the divestiture of the DTH business in Canada.
- Cost Reduction Execution: Monitor the realization of the planned $20 million in additional cost reductions for the second half of the fiscal year.
- Liquidity Position: Track cash burn rates and the utilization of the $325 million revolving credit facility given the credit rating downgrade.
- Seasonality: Assess whether the second and fourth quarters will generate sufficient cash flow to offset the typical first and third-quarter losses.