Scholastic Corporation — Q1 FY2011 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three months ended August 31, 2010, Scholastic’s first fiscal quarter. The business is highly seasonal: most school-based book club, book fair and magazine activity follows the school year, and the company typically reports operating losses in the first and third quarters. Amounts below are in millions of dollars except per-share data.
Financial performance and position
| Metric | Q1 FY2011 | Q1 FY2010 |
|---|---|---|
| Revenue | $290.9 | $315.6 |
| Operating loss | $(46.8) | $(35.3) |
| Loss from continuing operations | $(34.2) | $(24.6) |
| Net loss | $(35.2) | $(23.0) |
| Diluted loss per share | $(0.98) | $(0.63) |
| Net interest expense | $3.8 | $3.9 |
- Cost of goods sold was $147.7, or 50.8% of revenue, compared with $158.3, or 50.2%, a year earlier. SG&A was $170.6 (58.6% of revenue), versus $171.5 (54.3%). Severance expense was $2.1, down from $4.3; bad-debt expense rose to $2.9 from $2.1.
- Cash used in operating activities was $73.1, compared with $55.6. Cash used in investing activities was $24.8, versus $19.2; cash used in financing activities was $23.4, versus $13.2. Cash fell $119.9 during the quarter to $124.2.
- At August 31, 2010, total assets were $1,643.3, current assets $925.3 and current liabilities $487.3. Total debt was $242.3, including $50.5 classified as current; long-term debt was $191.8. These debt figures exclude capital lease obligations.
- The company declared dividends of $0.075 per common share, unchanged from the prior-year quarter.
Material changes and segment results
- Revenue declined $24.7, or 7.8%, year over year. Educational Publishing revenue fell $30.1 (20.2%), largely reflecting higher prior-year educational technology sales following initial federal education stimulus funding. Segment operating income declined to $28.5 from $41.3.
- Children’s Book Publishing and Distribution revenue decreased $3.4 (4.5%) to $72.8, while its operating loss widened to $51.6 from $47.5, reflecting digital, e-commerce and e-book investment and higher promotion spending. Trade sales benefited from Mockingjay and The 39 Clues; school-based activity was limited by the quarter’s timing.
- International revenue increased $6.3 (8.3%) to $81.9, including favorable foreign exchange and growth in Australia and Canada. Its operating loss was $2.2, compared with $1.9, partly due to $1.2 of UK restructuring expense.
- Media, Licensing and Advertising revenue rose $2.5 to $17.6, including $3.6 from a third-party film distribution agreement. Its operating loss narrowed to $2.9 from $3.7.
- Operating loss widened to $46.8 from $35.3. Discontinued operations produced a $1.0 loss, compared with $1.6 of income in the prior-year quarter; the prior period benefited from favorable receivable collections.
Outlook, liquidity and risks
- Management reaffirmed FY2011 guidance of approximately $1.9–$2.0 billion in revenue, diluted EPS from continuing operations of $1.95–$2.20 before specified one-time cost-reduction or non-cash, non-operating items, and free cash flow of approximately $90–$100 million.
- Management expects federal education funding to be lower overall but to benefit later quarters as Race to the Top and School Improvement Grants reach schools. Scholastic plans continued digital investment and anticipated launching a children’s e-book offering by fiscal year-end.
- Management said cash, operating cash generation and available credit were sufficient for foreseeable operating and capital needs. The $325.0 revolving facility had no borrowings outstanding; the company also had $124.2 in cash and $7.7 drawn on international credit lines. The company was in compliance with debt covenants at quarter-end.
- Cash-flow pressure reflected seasonal working-capital needs, including a $122.4 inventory increase and higher other current assets, partly offset by a $75.8 increase in accounts payable. Management noted that cash flows are usually negative from June through October.
- After quarter-end, the company commenced a Dutch-auction tender offer to repurchase up to $150 million of common shares at $27–$31 per share, initially using cash and potentially drawing on its credit facility. It also announced a $0.075-per-share dividend payable December 15, 2010.
- The company expects an approximately 43% full-year effective tax rate, primarily due to foreign net operating losses for which it does not expect to realize tax benefits. The quarter’s effective tax rate was 32.4%.
- Risks include seasonality and working-capital demands, reduced educational technology funding, foreign-exchange and variable-interest-rate exposure, uncertain tax examinations and the possibility that actual results differ materially from forward-looking statements. The company reported no material change in internal control over financial reporting and said disclosure controls were effective.
Key facts for investors to verify
- Whether the reaffirmed FY2011 revenue, EPS and free-cash-flow outlook remains achievable given the weak first-quarter results and seasonal cash use.
- The tender offer’s final participation, funding mix and effect on cash, debt, liquidity and share count.
- Whether expected federal education funding and later-quarter demand offset the decline in Educational Publishing sales.
- Inventory conversion, operating cash flow and seasonal borrowing needs in subsequent quarters.
- Progress and costs of digital and e-book investments, and any material developments in tax audits or debt-covenant compliance.