Scholastic Corporation — FY2014 Form 10-K
Business context and reporting period. Scholastic is a global children’s publishing, education and media company, with U.S. school book clubs and book fairs among its core distribution channels. This 10-K reports the fiscal year ended May 31, 2014; the filing also provides unaudited fourth-quarter FY2014 results. Amounts are in U.S. dollars.
Financial performance
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $1,822.3 million | $1,792.4 million |
| Gross margin | 53.6% | 53.7% |
| Operating income / margin | $63.1 million / 3.5% | $67.9 million / 3.8% |
| Continuing-operations income | $44.3 million | $35.8 million |
| Net income | $44.4 million | $31.1 million |
| Diluted EPS | $1.36 | $0.95 |
| Cash from operating activities | $156.8 million | $189.1 million |
Revenue increased 1.7%. SG&A declined modestly to $812.5 million, while cost of goods sold was $846.0 million. The effective tax rate fell to 12.1% from 33.0%, principally due to a $13.8 million benefit from an IRS settlement; accordingly, the improvement in earnings partly reflects a tax benefit rather than stronger operating income.
FY2014 fourth-quarter revenue was $549.3 million, continuing-operations income was $28.2 million and net income was $28.1 million; diluted net EPS was $0.85.
Segment trends
- Children’s Book Publishing and Distribution: revenue rose 3.1% to $873.5 million, led by book clubs and fairs. Operating income was $22.8 million, including $28.0 million of impairment charges; reported margin was 2.6%.
- Educational Technology and Services: revenue increased 9.2% to $248.7 million and operating income rose to $39.6 million. New MATH 180, iRead and Common Core Code X offerings contributed $28.3 million in increased revenue.
- Classroom and Supplemental Materials Publishing: revenue grew 5.3% to $229.6 million; operating income rose to $37.5 million, supported by classroom magazine circulation and summer reading programs.
- Media, Licensing and Advertising: revenue declined 4.3% to $56.2 million; the segment reported a $0.7 million operating loss, versus $4.7 million of income. Lower Hunger Games audio and Leapster sales were partly offset by programming distribution agreements.
- International: revenue declined 6.1% to $414.3 million and operating income fell 22.6% to $30.8 million. Foreign-exchange effects reduced revenue by $24.2 million; Asian markets grew.
Cash, debt and liquidity
Cash and cash equivalents were $20.9 million at May 31, 2014, down from $87.4 million a year earlier; working capital was $233.7 million, down from $299.5 million. Operating cash flow was $156.8 million. Investing used $345.7 million, including $253.9 million to purchase the company’s New York headquarters building. Financing provided $122.5 million, including $120.0 million of net borrowing under the credit agreement.
Total debt was $135.8 million: $120.0 million under the revolving Loan Agreement and $15.8 million in short-term borrowings. The Loan Agreement facility is $425.0 million and matures December 5, 2017; the company reported compliance with its covenants. Management cited approximately $305.0 million of available funding under the Loan Agreement, in addition to cash and operating cash flow, and also disclosed short-term credit facilities. The company said liquidity was sufficient for its expected operating and financing needs.
FY2014 dividends declared were $0.575 per share, up from $0.50; the board declared a $0.15 per-share FY2015 first-quarter dividend. The company repurchased $6.2 million of shares during FY2014, with $13.4 million remaining under the authorization.
Changes, outlook and notable items
- Results improved from FY2013, but operating income declined by $4.8 million despite modest revenue growth. Prior-year comparisons were affected by exceptionally strong Hunger Games sales in FY2012 and FY2013.
- The company recorded $28.0 million of lease and asset impairment charges in FY2014: $14.6 million related to Storia operating-system-specific apps being discontinued and $13.4 million for book-club goodwill. It also recorded $5.8 million of investment losses and $11.3 million of severance expense.
- Scholastic planned to discontinue support for consumer Storia apps and redirect development toward a cross-platform streaming application initially focused on classrooms. Success of this transition was uncertain.
- Management expected FY2015 revenue growth and improved profitability across most businesses, without providing numerical guidance. It anticipated continued education-technology growth, modest growth from repositioned book clubs, higher revenue per book fair, and International growth partly offset by investment in Asian products and sales capacity. Management expected Hunger Games trilogy sales to decline in FY2015, while anticipating continued Minecraft title demand.
- Key risks include seasonal school-channel demand and working-capital swings; competition and changing digital purchasing patterns; school funding constraints; execution risk in education technology and the Storia transition; foreign currency and variable-rate borrowing exposure; and privacy, cybersecurity, content-rights and supply-cost risks. The Robinson family controls the Class A voting stock and can elect most directors.
- Management and the independent auditor concluded that internal control over financial reporting was effective; the auditor issued an unqualified opinion on the financial statements. The company reported ordinary-course litigation and did not expect reasonably possible losses to materially affect its consolidated financial position or results.
Important facts for investors to verify
- How much of FY2014 earnings growth came from the one-time IRS settlement benefit, and what tax rate is appropriate for future periods.
- Whether book-club participation, ordering and profitability can recover sustainably, given the $13.4 million goodwill impairment and prior revisions to the unit’s outlook.
- Whether the Storia streaming strategy gains classroom adoption, and whether further app-related impairment or costs arise.
- Whether education-technology launches and the sales-force build-out translate into recurring revenue and margins, particularly as consulting revenue declined.
- Liquidity and seasonal borrowing needs after the headquarters purchase, including variable-rate debt costs, covenant headroom and repayment or refinancing of the $120.0 million facility borrowing due in 2017.
- Exposure to currency movements, the outlook for Hunger Games-related sales, and the company’s ability to meet its $375.9 million of minimum print-quantity commitments.