SCHL

Scholastic Corporation 10-K Summary: Fiscal Year Ended May 31, 2003

Business Context and Reporting Period

Scholastic Corporation is a global children's publishing and media company, operating as the world's largest publisher and distributor of children's books. The company distributes products through school-based book clubs, book fairs, continuity programs, retail stores, and television networks. This report covers the fiscal year ended May 31, 2003. The company categorizes its operations into four segments: Children's Book Publishing and Distribution, Educational Publishing, Media, Licensing and Advertising, and International.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 2.2% to $1,958.3 million, driven by growth in the Children's Book Publishing ($21.3M increase), International ($17.3M increase), and Educational Publishing ($9.0M increase) segments. This was partially offset by a decline in Media, Licensing and Advertising revenues.
• Profitability Decline: Operating income decreased 36.4% to $118.7 million. The primary driver was a $41.3 million decline in operating profit within the Children's Book Publishing segment, largely due to a $30 million drop in Harry Potter trade revenues and a $10.9 million special severance charge.
• Expense Increases: Selling, general, and administrative (SG&A) expenses rose to 42.2% of revenues (from 40.3% in 2002) due to higher health care costs, systems costs, and acquisition-related expenses. Bad debt expense increased to $72.3 million (3.7% of revenues) as the continuity business grew.
• Debt Restructuring: In April 2003, the company issued $175 million of 5% Notes due 2013. Proceeds were used to retire the Grolier Facility and reduce borrowings under the Loan Agreement and Revolver.

Guidance, Outlook, and Risks

• Workforce Reduction: On May 28, 2003, the company announced a global workforce reduction of approximately 400 positions (4%), resulting in a $10.9 million pre-tax charge. Management expects to realize over $15 million in salary-related savings in fiscal 2004.
• Seasonality: The business is highly seasonal, with revenues typically lowest in the first and third quarters. The company experiences negative cash flow from June through October, requiring seasonal borrowings that peak in September or October.
• Key Risks: Management highlighted risks including the ability to produce successful products, competition from other publishers and internet companies, volatility in paper prices and postage rates, and the impact of rising interest rates on variable-rate debt.
• Outlook: The company believes its existing cash position, operating cash flow, and available credit facilities are sufficient to finance working capital requirements for the next fiscal year.

Investor Verification Checklist

• Harry Potter Dependency: Verify the extent of revenue concentration in Harry Potter titles and the sustainability of trade revenues without this specific franchise.
• Severance Savings Realization: Monitor fiscal 2004 results to confirm the realization of the projected $15 million in salary savings from the workforce reduction.
• Continuity Business Health: Review bad debt trends in the direct-to-home continuity segment, which has higher bad debt ratios and contributed to the increase in overall bad debt expense.
• Debt Maturity Profile: Confirm the repayment plan for the $125 million of 7% Notes due in December 2003, which the company intends to refinance using existing credit facilities.
• Acquisition Integration: Assess the performance of fiscal 2002 acquisitions (e.g., Klutz, Baby's First Book Club) which contributed $58 million in incremental revenue in 2003.