Scholastic Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended May 31, 2011. The filing is an annual report, not a standalone 2010 Q4 filing; fourth-quarter figures are included below. Amounts are in millions except per-share data.
Business context
Scholastic is a global children’s publishing, education and media company. Its four reportable segments are Children’s Book Publishing and Distribution, Educational Publishing, Media, Licensing and Advertising, and International. The business is highly seasonal, with book clubs and fairs typically strongest in the second quarter and educational products strongest in the first quarter.
Financial performance
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $1,906.1 | $1,912.9 |
| Operating income | $100.7 | $128.4 |
| Operating margin | 5.3% | 6.7% |
| Continuing-operations earnings | $43.6 | $58.7 |
| Net income | $39.4 | $56.1 |
| Diluted EPS | $1.16 | $1.52 |
| Cash provided by operating activities | $228.4 | $275.8 |
| Cash and cash equivalents at year-end | $105.3 | $244.1 |
| Total debt, excluding capital leases | $203.4 | $252.8 |
| Working capital | $335.4 | $493.6 |
Revenue was nearly flat, down $6.8 (0.4%). Operating income fell $27.7 (21.6%); management cited lower education-technology sales following the prior year’s federal stimulus funding, higher product and shipping costs, increased promotional and digital spending, and higher bad-debt expense. Cost of goods sold rose to 46.5% of revenue from 44.9%; SG&A rose to 43.8% from 42.0%. The effective tax rate was 46.2%, versus 47.4%.
Fourth quarter: Revenue was $545.8 versus $538.4 in Q4 FY2010. Continuing-operations earnings were $26.2 versus $30.8; net income was $24.8 versus $29.2. Diluted net EPS was $0.78 versus $0.79.
Segments and material changes
- Children’s books: Revenue rose to $922.0 from $910.6, while operating income declined to $78.1 from $117.9 and margin to 8.5% from 12.9%. Trade sales benefited from ebooks and bestselling series; book-club revenue declined, while book-fair revenue increased modestly.
- Educational Publishing: Revenue fell to $428.0 from $476.5 and operating income to $51.6 from $67.2. The comparison reflected reduced education funding and prior-year federal stimulus benefits. Fourth-quarter sales benefited from READ 180 Next Generation and other technology products.
- Media, Licensing and Advertising: Revenue declined to $111.2 from $113.8; operating loss improved to $1.2 from $4.2, partly because the prior year included a toy-catalog impairment.
- International: Revenue rose to $444.9 from $412.0, including a $23.9 favorable currency effect. Operating income increased to $38.3 from $30.0, with stronger results in Australia.
FY2011 included a $3.4 impairment charge, a $3.5 incremental bad-debt charge tied to one customer’s bankruptcy, $3.0 of UK restructuring costs, and a $3.6 investment impairment loss. The prior year included $43.1 of impairment charges. Scholastic acquired Math Solutions for $8.2 net of cash acquired and purchased its headquarters land for $24.3. It also completed a $156.0 tender offer for 5.2 million shares and repurchased additional shares for approximately $9.7.
Cash, debt and liquidity
Operating cash flow declined $47.4 to $228.4. Investing activities used $141.1, including the headquarters land purchase and Math Solutions acquisition; financing activities used $230.5, primarily reflecting share repurchases, dividends and debt repayments. Cash ended the year at $105.3. Total debt was $203.4, plus $55.5 of capital-lease obligations. The company had no Revolving Loan borrowings and reported $325.0 of availability under its revolving facility. The existing $325.0 revolving facility was scheduled to mature June 1, 2012; management expected to replace it before maturity. The company reported compliance with debt covenants and believed available liquidity was sufficient for its needs.
Cash returned to shareholders included FY2011 dividends of $0.35 per share, up from $0.30, and the share repurchases noted above. The board declared a $0.10-per-share FY2012 first-quarter dividend after year-end.
Outlook, risks and contingencies
For FY2012, management planned to improve margins and operating profits, while continuing digital investment and cost reduction. It anticipated strong Educational Publishing growth, driven by READ 180 Next Generation, renewals and a larger customer base; book-fair growth was expected to offset modestly lower trade sales, with book-club revenue expected to hold level. Management expected modest International revenue growth and higher margins, and continued strong cash flow from working-capital discipline. These are expectations, not quantified guidance.
Key risks include constrained school budgets and uncertain education funding; competition and changing customer preferences; execution and profitability of digital, ebook and technology initiatives; dependence on school participation and creative talent; privacy and cybersecurity exposure; increases in paper, shipping, fuel and employee costs; foreign exchange and political risks; weather disruptions; and estimates affecting returns, receivables, inventory, pension obligations, taxes and impairment testing. The Robinson family’s Class A shares control most voting rights and can elect up to four-fifths of the board.
A proposed securities class-action amendment alleging fraud concerning 2005 statements was awaiting court decision; the company denied the allegations and said it was vigorously defending the matter. Other ordinary-course claims were not expected to materially affect financial position or results. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether education funding and READ 180 Next Generation adoption sustain the expected Educational Publishing recovery.
- Whether digital and promotional investment can improve children’s-book results without further margin pressure.
- Progress in refinancing the revolving credit facility before its June 2012 maturity, and ongoing covenant compliance.
- Cash conversion, working-capital needs and the effect of seasonal borrowing on liquidity.
- Potential changes in the securities litigation, tax examinations and significant accounting estimates or impairments.
- The impact of concentrated family voting control on shareholder rights and corporate decisions.