SCHL

Scholastic Corporation 10-K Summary: Fiscal Year Ended May 31, 2010

Business Context and Reporting Period

Scholastic Corporation is a global children's publishing, education, and media company. It is the world's largest publisher and distributor of children's books and a leading provider of educational technology. The company operates through four segments: Children's Book Publishing and Distribution, Educational Publishing, Media, Licensing and Advertising, and International. This report covers the fiscal year ended May 31, 2010.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 3.4% to $1,912.9 million, driven primarily by a 24.0% increase in the Educational Publishing segment ($476.5 million) due to higher sales of educational technology products (READ 180, System 44) and federal stimulus funding. This offset a 3.2% decline in the Children's Book Publishing and Distribution segment.
• Profitability: Operating income more than doubled to $128.4 million, excluding one-time non-cash charges of $55.3 million (impairments, restructuring, and sales tax settlements). Net income turned positive at $56.1 million compared to a net loss of $14.3 million in 2009.
• Segment Performance: The International segment saw revenue rise 3.3% to $412.0 million, aided by favorable foreign exchange rates. The Media, Licensing and Advertising segment reported an operating loss of $4.2 million, primarily due to impairment charges related to its direct-to-home toy catalog business.
• Balance Sheet: Total debt decreased by approximately $51 million due to term loan repayments and open market repurchases of 5% Notes. Cash provided by operating activities improved significantly to $275.8 million.

Guidance, Outlook, and Risks

• Outlook: Management plans to sustain fiscal 2010 operating income levels while investing approximately $20 million in digital opportunities (ebooks, ecommerce) for fiscal 2011. Revenue in Educational Publishing is expected to be in line with fiscal 2010, despite anticipated lower federal stimulus benefits. The company expects solid growth in Children's Book Publishing and Distribution driven by school book clubs and fairs.
• Risks: Key risks include the company's heavy reliance on school-based book clubs and fairs, competition in educational technology, and the impact of state and federal education funding levels. The company also faces risks related to the development of the children's ebook market and potential disruptions from severe weather events.
• Unusual Items: Fiscal 2010 included a $43.1 million asset impairment charge (primarily related to library business intangibles and prepublication costs), a $4.7 million UK restructuring charge, and a $7.5 million sales tax settlement charge.

Investor Verification Checklist

• Impairment Charges: Verify the details of the $43.1 million impairment charge and its impact on future asset bases, particularly in the Educational Publishing segment.
• Stimulus Funding Dependency: Assess the sustainability of Educational Publishing revenue growth given the expected reduction in federal stimulus funding for fiscal 2011.
• Digital Strategy Execution: Monitor the $20 million planned investment in digital initiatives and the company's ability to capture market share in the developing children's ebook sector.
• Discontinued Operations: Review the status of the sale of the Maumelle and Danbury facilities and the finalization of discontinued operations losses.
• Debt Covenants: Confirm continued compliance with debt covenants, specifically interest coverage and leverage ratios, as the company manages its $252.8 million debt load.