Scholastic Corporation 10-Q Summary
Business Context and Reporting Period
This filing covers the quarterly period ended November 30, 2009 (Fiscal Q2 2010) and the six months ended November 30, 2009. Scholastic Corporation operates in four segments: Children's Book Publishing and Distribution, Educational Publishing, International, and Media, Licensing and Advertising. The business is highly seasonal, with revenues typically peaking in the second and fourth fiscal quarters.
Key Financial Metrics
| Metric ($ millions) | Q2 2009 | Q2 2008 | 6 Months 2009 | 6 Months 2008 |
|---|---|---|---|---|
| Revenues | $660.1 | $653.3 | $975.7 | $929.7 |
| Operating Income | $105.6 | $108.0 | $70.3 | $45.7 |
| Net Income | $55.5 | $43.1 | $32.5 | $(6.0) |
| Diluted EPS | $1.51 | $1.15 | $0.88 | $(0.16) |
| Cash & Equivalents | $178.3 | $29.8 | $178.3 | $31.8 |
| Total Debt | $279.6 | $389.0 | $279.6 | $389.0 |
| Operating Cash Flow (6mo) | $103.0 (vs. $(63.3) prior year) |
Material Changes vs. Prior Period
- Revenue Growth: Q2 revenue increased 1.0% year-over-year, driven by a 35% surge in the Educational Publishing segment (primarily educational technology sales). This was partially offset by declines in the Children's Book Publishing segment due to reduced promotion spending and a late school year start.
- Profitability: Operating income for the six-month period improved significantly to $70.3 million from $45.7 million, despite a $40.1 million non-cash asset impairment charge. Net income turned positive ($32.5 million) compared to a net loss of $6.0 million in the prior year.
- Asset Impairments: The company recorded $40.1 million in asset impairments, primarily a $36.3 million charge in Educational Publishing related to consolidating library print publishing activities and a $3.8 million charge in the UK related to a customer list.
- Balance Sheet Strength: Cash and cash equivalents increased by $148.5 million compared to November 2008, while total debt decreased by $109.4 million due to strong operating cash flows and debt repayments.
Guidance, Outlook, and Risks
- Outlook: Management expects to achieve 9% operating margins for fiscal 2010 if the upper end of the plan is met. Strong first-half profit improvement is expected to continue at a lower rate in the second half due to increased employee benefits and higher medical expenses.
- Segment Drivers: Educational technology growth is expected to slow in the second half as the first half benefited from specific California adoptions (READ180 and System 44). The company plans to restructure UK operations to reduce losses.
- Risks: Key risks include the seasonality of the business, credit risk in the book club segment (though bad debt expense decreased), and foreign currency fluctuations. The company is currently under IRS and state tax examinations.
- Capital Allocation: A new $20.0 million share repurchase program was authorized in December 2009. A quarterly dividend of $0.075 per share was declared.
Investor Verification Checklist
- Asset Impairment Details: Verify the long-term impact of the $40.1 million impairment charge on future operating margins, specifically regarding the consolidation of library publishing.
- Educational Tech Sustainability: Assess whether the 35% revenue growth in Educational Publishing is sustainable without the one-time California stimulus adoptions.
- UK Restructuring: Monitor the execution of the UK restructuring plan and its effect on reducing losses in the International segment.
- Working Capital Trends: Confirm that the significant improvement in accounts payable and inventory management is a structural change rather than a timing anomaly.
- Debt Covenants: Verify continued compliance with debt covenants, particularly the leverage ratio, given the recent debt reduction.