Scholastic Corporation — Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended August 31, 2012, Scholastic’s first quarter of fiscal 2013. The unaudited results are seasonal: the company generally records operating losses in the first and third fiscal quarters because many schools are not in session. Amounts below are in millions of dollars, except per-share data.
Financial performance and liquidity
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Revenue | $293.6 | $318.0 |
| Operating income (loss) | $(47.5) | $(33.2) |
| Continuing-operations income (loss) | $(32.0) | $(25.1) |
| Net income (loss) | $(32.1) | $(27.1) |
| Diluted EPS | $(1.02) | $(0.87) |
| Cash from operating activities | $34.2 | $(49.3) |
- Revenue fell $24.4, or 7.7%. Cost of goods sold was 51.5% of revenue, versus 50.4%; gross margin was therefore approximately 48.5%, versus 49.6%. Operating margin was approximately negative 16.2%, versus negative 10.4%.
- Cash and cash equivalents were $193.1 at quarter-end. Current assets were $977.3 and current liabilities $584.3. Operating cash flow improved by $83.5 year over year, principally from higher collections and favorable payable and inventory-payment timing; working-capital movements were significant.
- Total debt was $153.4, including $152.8 of long-term debt; stockholders’ equity was $805.7. The company had no borrowings under its $325.0 revolving facility and reported covenant compliance.
- Net interest expense was $3.7, compared with $3.9. The declared dividend per share was $0.125, versus $0.10 in the prior-year quarter.
Material changes versus the prior comparable period
- Educational Technology and Services revenue declined 17.2% to $80.0 and operating income fell to $24.8 from $38.8, reflecting slower school-district spending, weaker sales of higher-margin curriculum products, and difficult comparisons with prior-year product launches.
- Classroom and Supplemental Materials Publishing revenue fell 17.1% to $37.9; the segment recorded a $2.6 operating loss versus $2.1 of income. The prior-year quarter benefited from new launches and federally funded Reading Is Fundamental contracts.
- Children’s Book Publishing and Distribution revenue declined 8.3% to $71.1 and its operating loss widened to $55.2 from $50.2, partly due to lower Harry Potter sales and continued digital investment. International revenue increased 2.9% to $90.2, and Media, Licensing and Advertising revenue rose 37.1% to $14.4, with Hunger Games sales cited as a contributor.
- The discontinued-operations loss narrowed to $0.1 from $2.0, when the prior-year period included an impairment charge.
Outlook, commentary, risks and contingencies
- Management maintained fiscal 2013 guidance of revenue of approximately $1.9–$2.0 billion and diluted EPS from continuing operations of $2.20–$2.40, before one-time cost-reduction items or non-cash, non-operating items.
- Scholastic was preparing the broad launch of Storia, its children’s e-reading app and e-book system, and said it remained on schedule to introduce MATH 180 and System 44 Next Generation, among other products, in fiscal 2014.
- Management cited uncertain federal budgets and Common Core standards as factors weighing on school spending. Foreign-exchange movements also affected results; the International segment reported a $4.4 adverse currency impact.
- The company intends to use its revolving credit facility to repay the 5% notes due April 2013. It said available liquidity and operating cash generation should support its needs, but this plan depends on access to the facility. Ratings were BB- from S&P and Ba1 from Moody’s, both with stable outlooks.
- Risks include seasonality, changes in school-district spending, foreign-currency and interest-rate exposure, and uncertain outcomes of tax examinations. The company was also evaluating potential liability for a UK pension plan associated with discontinued operations and said it could not estimate a reasonably possible range. It did not expect ordinary-course litigation losses to materially affect results or financial position.
- The company expected a fiscal 2013 annual effective tax rate of approximately 39.8%. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether fiscal 2013 revenue and EPS guidance remains achievable given the first-quarter declines, school-spending uncertainty and seasonal concentration of sales.
- Progress and commercial results from Storia and the planned fiscal 2014 education-product launches, including their investment and operating-cost effects.
- Repayment or refinancing of the $152.8 million 5% notes due April 2013, and continued compliance with credit-facility covenants.
- Whether the strong year-over-year operating cash-flow comparison persists beyond the reported working-capital timing effects.
- Any developments in the UK pension-plan assessment, ongoing tax audits, or other contingencies that could change the company’s estimated obligations.