Scholastic Corp. 10-Q Summary: Period Ended November 30, 1997
Business Context and Reporting Period
This Form 10-Q covers the quarterly and six-month periods ended November 30, 1997, for Scholastic Corporation, a leading publisher and distributor of children's books and educational materials. The company operates globally with a business cycle closely tied to the school year. The financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended Nov 30, 1997 | Six Months Ended Nov 30, 1997 |
|---|---|---|
| Revenues | $354.8 million | $521.4 million |
| Operating Income | $47.6 million | $31.4 million |
| Net Income | $26.0 million | $12.8 million |
| Diluted EPS | $1.51 | $0.79 |
| Cash and Equivalents | $4.3 million (Nov 30, 1997) | N/A |
| Long-Term Debt | $322.2 million (Nov 30, 1997) | N/A |
| Operating Cash Flow | N/A | $5.1 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 4% year-over-year for both the quarter and the six-month period. Domestic book publishing rose 5%, driven by book clubs and new trade properties (Animorphs, Dear America), partially offset by declines in Goosebumps sales. International revenues grew 10%.
- Profitability Decline: Operating income fell 27% for the quarter and 32% for the six months compared to the prior year. Net income dropped 32% for the quarter and 48% for the six months.
- Margin Pressure: Cost of goods sold as a percentage of revenue increased due to a sales mix shift toward lower-margin items. Selling, general, and administrative expenses rose as a percentage of revenue due to increased promotion costs and the impact of the Red House acquisition.
- Debt Position: Long-term debt increased to $322.2 million from $252.4 million in the prior year, reflecting new borrowings and the issuance of $125 million in 7.0% Notes in December 1996.
Outlook, Risks, and Unusual Items
- Subsequent Event: Effective January 1, 1998, the company sold its SOHO Group (including Home Office Computing magazine) for approximately $19.0 million, expecting a pre-tax gain of $10.0 million. Proceeds were used to reduce debt.
- Litigation: The company is defending against a consolidated class action lawsuit alleging securities law violations regarding misleading statements about Goosebumps sales prior to February 1997. Management believes the suit is without merit. A separate dispute with Parachute Press is ongoing but not expected to be material.
- Liquidity: Management believes existing cash, operating funds, and available credit lines ($135 million Loan Agreement and $35 million Revolver) are sufficient for foreseeable working capital needs.
- Accounting Changes: The company is preparing to adopt SFAS 128 (Earnings per Share) and SFAS 131 (Segment Reporting) in future periods, which will alter presentation but is not expected to materially affect results.
Investor Verification Checklist
- Verify the sustainability of revenue growth in domestic book clubs and trade properties independent of Goosebumps licensing.
- Monitor the status and potential financial impact of the consolidated class action lawsuit regarding Goosebumps sales disclosures.
- Confirm the execution of the SOHO Group sale and the realization of the estimated $10.0 million pre-tax gain.
- Assess the company's ability to service increased debt levels ($322.2 million long-term) given the decline in operating income.
- Review future inventory levels and return rates, as these are significant estimates affecting financial statements.