Scholastic Corporation — Q1 FY2012 Form 10-Q
Reporting period: Three months ended August 31, 2011; comparisons are with the three months ended August 31, 2010 unless otherwise stated. Scholastic noted that Q1 is typically its smallest revenue quarter and generally produces an operating loss because most schools are not in session. Amounts are in millions except per-share data.
Financial results and liquidity
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Revenue | $318.0 | $290.4 |
| Operating loss | $(33.2) | $(46.3) |
| Loss from continuing operations | $(25.1) | $(33.9) |
| Net loss | $(27.1) | $(35.2) |
| Basic and diluted net loss per share | $(0.87) | $(0.98) |
| Cash used in operating activities | $(49.3) | $(73.1) |
- Revenue increased 9.5%. Cost of goods sold was 50.4% of revenue, compared with 50.7%; SG&A was 53.8% of revenue, compared with 58.5%.
- Operating cash use from continuing operations was $49.6, versus $67.4. Investing cash use was $18.7, versus $24.8; financing cash use was $4.0, versus $23.4. Cash declined $71.6 during the quarter to $33.7.
- At August 31, 2011, total debt was $200.0, down from $242.3 a year earlier. This included $47.4 of current debt and $152.6 of long-term debt. The company had $39.5 outstanding under its term loan and no revolving-loan borrowings.
- The $325.0 revolving facility was available, subject to its terms, and scheduled to expire June 1, 2012. The company reported compliance with debt covenants. It also had $7.9 drawn on international credit lines.
- Current assets were $839.7 and current liabilities were $528.6 at quarter-end. Inventory was $422.8, up from $308.7 at May 31, 2011, consistent with the seasonal build for the school year.
Material changes and segment performance
- Educational Technology and Services revenue rose 17.7% to $96.6; operating income increased to $38.8 from $30.2. Management cited READ 180 Next Generation, along with strength in math, early learning and services.
- Classroom and Supplemental Materials Publishing revenue increased 25.2% to $45.7, and the segment moved to $2.1 of operating income from a $1.7 loss, primarily on classroom-book sales.
- Children’s Book Publishing and Distribution revenue increased 6.2% to $77.3; operating loss narrowed to $49.8 from $51.6. Trade sales benefited from The Hunger Games trilogy and Harry Potter titles.
- International revenue increased 7.1% to $87.7, including a favorable $9.8 foreign-exchange effect; operating loss narrowed to $0.1 from $2.2.
- Media, Licensing and Advertising revenue fell 37.4% to $10.7, and operating loss widened to $5.0 from $2.2. The filing attributes the decline to fewer custom marketing programs and higher nonrecurring production revenue in the prior-year quarter.
- The company reorganized its reporting into five segments and recast prior-period segment data. The direct-to-home toy catalog business ceased operations and was classified as discontinued; discontinued operations recorded a $2.0 after-tax loss, including a $0.9 asset impairment.
Outlook, commentary and risks
- Management maintained its FY2012 outlook of approximately $1.9 billion in revenue and diluted EPS from continuing operations of $1.75–$2.10, before one-time cost-reduction items and noncash, non-operating items.
- Scholastic said its children’s e-reading app and online store remained on schedule for rollout later in the fiscal year. It planned to fund digital initiatives partly through cost reductions, including a voluntary retirement program.
- Q1 severance expense was $3.3, including $2.1 related to the voluntary retirement program. Management expected an additional $8–$13 of severance costs during the remainder of FY2012.
- The company expected an approximately 45% full-year effective tax rate, above statutory rates primarily because it did not expect to realize tax benefits from certain foreign net operating losses.
- Management cited seasonal negative cash flow, foreign-exchange exposure and the risk of higher borrowing costs on variable-rate debt. About 25% of debt bore variable interest at quarter-end. The filing also warns that actual results may differ from forward-looking statements due to market, product-acceptance, digital-strategy, cost, working-capital and financing risks.
- A previously disclosed securities class action was dismissed; the appeal period expired without an appeal, and the action was terminated in the company’s favor.
Key facts for investors to verify
- Whether revenue and earnings growth, particularly in education technology, persist beyond the seasonally important first quarter.
- Execution and costs of the planned digital initiatives, and whether the stated revenue and EPS outlook remains achievable after severance and other excluded items.
- Liquidity and refinancing plans for the revolving facility scheduled to expire June 1, 2012, alongside seasonal cash needs and debt maturities.
- Inventory levels, operating cash conversion and the expected full-year tax rate.
- Foreign-exchange effects and performance in the weaker Media, Licensing and Advertising segment.