Scholastic Corporation — Q2 FY2012 Form 10-Q
Reporting period: Quarter and six months ended November 30, 2011. Amounts are in millions of dollars except per-share data. Results are highly seasonal; book clubs and fairs generally generate higher revenue in the second and fourth fiscal quarters.
Financial performance
| Metric | Three months ended Nov. 30, 2011 | Prior-year quarter | Six months ended Nov. 30, 2011 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $685.3 | $667.9 | $1,003.3 | $958.3 |
| Operating income | $140.0 | $129.1 | $106.8 | $82.8 |
| Net income | $82.8 | $74.9 | $55.7 | $39.7 |
| Diluted EPS, continuing operations | $2.62 | $2.20 | $1.83 | $1.21 |
| Diluted EPS, net income | $2.60 | $2.14 | $1.75 | $1.11 |
- Quarter revenue rose 2.6%; operating income increased 8.4% and net income increased 10.5%. Operating margin was approximately 20.4%, versus 19.3%.
- Six-month revenue increased 4.7%; operating income rose 29.0% and net income rose 40.3%. Operating margin was approximately 10.6%, versus 8.6%.
- Cost of goods sold was 41.7% of revenue for the quarter and 44.5% for the six months, down from 43.6% and 45.8%, respectively. Management cited favorable product mix and lower postage costs, partly offset by higher royalties.
- Six-month operating cash flow was $107.8, compared with $83.5 a year earlier; continuing-operations operating cash flow was $109.1. Investing cash use was $46.2 and financing cash use was $51.8. Cash increased $8.7 to $114.0 during the six months.
- At November 30, cash was $114.0, current assets were $889.8 and current liabilities were $501.1. Total debt was $158.4, down from $203.4 at May 31, 2011; it included $152.7 of long-term debt and $5.7 of local-currency credit-line borrowings. The $325.0 revolving facility had no advances outstanding. Capital lease obligations were $56.1.
Business changes and segment results
- Educational Technology and Services led growth: quarterly revenue rose 33.2% to $65.4 and operating income increased to $14.6 from $3.4. Six-month revenue rose 23.5% to $162.0 and operating income was $53.4, versus $33.6. Management attributed strength principally to READ 180 Next Generation, System 44, math and early-learning products, and services.
- Children’s Book Publishing and Distribution quarterly revenue was $388.6, up 0.3%; operating income rose 11.6% to $108.6. Trade titles and The Hunger Games, including ebooks, contributed; book-club revenue was pressured by lower revenue per order.
- Classroom and Supplemental Materials quarterly revenue increased 11.8% to $58.7 and operating income rose to $10.3 from $7.6, reflecting higher book and magazine sales.
- International quarterly revenue declined 1.2% to $144.1, while operating income increased to $26.6 from $25.3. Six-month revenue and profit benefited from foreign exchange; local-currency sales in Australia and New Zealand weakened.
- Media, Licensing and Advertising revenue fell 13.9% to $28.5 for the quarter and 21.8% to $39.2 for the six months. Six-month operating results shifted to a $2.4 loss from $3.0 income, primarily reflecting a planned reduction in custom marketing programs.
- Scholastic ceased its direct-to-home toy catalog business in the first quarter and classified it as discontinued operations. The six-month discontinued-operations loss was $2.5, versus $3.5 in the prior year.
Outlook, management commentary and risks
- Management maintained its expectation of approximately $1.9 billion in full-year revenue and diluted EPS from continuing operations of $1.75–$2.10, before one-time cost-reduction items or non-cash, non-operating items.
- The company is preparing to introduce a children’s ereading app and ebookstore in school channels in the second half of the fiscal year. Management said cost reductions in non-digital areas help offset investment in digital initiatives.
- Unusual costs included a $6.2 loss on lower-than-committed sublease rents for lower Manhattan properties, with subleases expected to reduce net rental costs by approximately $15 through 2018, and $8.3 of six-month severance expense, including $6.8 for a voluntary retirement program.
- The company estimated a 45% effective tax rate for FY2012, citing foreign net operating losses, mainly in the UK, for which it does not expect to realize tax benefits. The six-month effective rate was 41.2%.
- Debt maturities include $152.7 of 5% notes due in 2013; the revolving credit facility was extended to June 1, 2014. The company reported compliance with debt covenants and said available cash, operating funds and credit facilities should meet foreseeable needs. It had $38.9 remaining under share-repurchase authorizations.
- Key risks include seasonal working-capital swings, inventory and demand management, foreign-exchange exposure, interest-rate changes on variable-rate debt, acceptance of digital products, education-market conditions and government education spending. The company reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the full-year revenue and EPS outlook is achieved, including the effect of one-time cost-reduction items.
- Whether READ 180 and other education products sustain growth, and whether digital investment produces expected returns.
- Progress in Media, Licensing and Advertising after the planned reduction in custom marketing programs, and any remaining costs or proceeds related to discontinued operations.
- Cash conversion and seasonal inventory needs; inventory increased $83.5 during the six-month period.
- Repayment or refinancing of the 5% notes due in 2013, continued covenant compliance, and the company’s capacity to fund capital needs, dividends and repurchases.
- Potential changes in the estimated tax rate, foreign-currency effects, and outcomes of the disclosed IRS, New York State and New York City tax audits.