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| SCHL > SEC Filings for SCHL > Form 10-Q on 2-Jan-2013 | All Recent SEC Filings |
2-Jan-2013
Quarterly Report
Overview and Outlook
Revenues for the quarter ended November 30, 2012 decreased by $69.1 million, or 10.1%, to $616.2 million, compared to $685.3 million in the prior fiscal year quarter. Net income for the quarter ended November 30, 2012 was $61.8 million, compared to $82.8 million in the prior fiscal year period. Consolidated earnings per diluted share were $1.89, compared to $2.60 per diluted share in the prior year period.
The results for the quarter ended November 30, 2012 primarily reflect lower sales of higher margin educational technology products, which were affected by lower spending by school districts in the quarter, lower than anticipated sales of The Hunger Games trilogy and lower revenue in Children's Book Clubs, as well as increased investments in ecommerce and ebook initiatives compared to the prior year period.
The Company is implementing cost savings initiatives to offset pressures on operating income. With these cost savings actions, strong cash position and recently amended long-term credit agreement, the Company believes it has ample flexibility to continue investments in technology-based learning products, ebooks and ecommerce, as well as the continued expansion of publishing and product development in southeast Asia.
As previously announced, for fiscal 2013 the Company now expects total revenue of approximately $1.8 billion to $1.9 billion and earnings per diluted share from continuing operations in the range of $1.40 to $1.60, before the impact of one-time items associated with cost reduction programs and non-cash, non-operating items.
Results of Continuing Operations and Discontinued Operations
Revenues for the quarter ended November 30, 2012 decreased by $69.1 million, or 10.1%, to $616.2 million, compared to $685.3 million in the prior fiscal year quarter. This was due to lower revenues in the Children's Book Publishing and Distributionsegment, the Educational Technology and Services segment, the Media, Licensing and Advertising segment, the Classroom and Supplemental Materialssegment and the International segment of $42.9 million, $13.2 million, $7.1 million, $5.5 million and $0.4 million, respectively. Revenues for the six months ended November 30, 2012 decreased by $93.5 million, or 9.3%, to $909.8 million, compared to $1,003.3 million in the prior year fiscal period, primarily due to lower revenues in the Children's Book Publishing and Distribution segment, the Educational Technology and Services segment, the Classroom and Supplemental Materialssegment and the Media, Licensing and Advertising segment of $49.3 million, $29.8 million, $13.3 million and $3.2 million, respectively. This was partially offset by increased revenues in the International segment of $2.1 million.
Cost of goods sold as a percentage of revenue for the quarter ended November 30, 2012 increased to 42.7%, compared to 41.7% in the prior fiscal year quarter. Cost of goods sold as a percentage of revenue for the six months ended November 30, 2012 increased to 45.6%, compared to 44.5% in the prior fiscal year period. The percentage increases in both periods were related to certain fixed costs over a lower revenue base and, to a lesser extent, unfavorable product mix.
Components of Cost of goods sold for the three and six months ended November 30, 2012 and 2011 are as follows:
--------------------------------- -- ------------------------------------- -- ------------------------------------- -
Three months ended November 30, Six months ended November 30,
2012 2011 2012 2011
--------------------------------- -- ---------------- --- ---------------- -- ---------------- --- ---------------- -
Product, service and production
costs $ 154.7 $ 168.2 $ 227.3 $ 247.7
Royalty costs 28.2 34.2 51.4 57.1
Prepublication and production
amortization 12.3 12.6 23.9 24.4
Postage, freight, shipping,
fulfillment and all other costs 68.2 70.7 111.9 116.9
--------------------------------- -- --- ------------ --- --- ------------ -- --- ------------ --- --- ------------ -
Total $ 263.4 $ 285.7 $ 414.5 $ 446.1
--------------------------------- -- --- ------------ --- --- ------------ -- --- ------------ --- --- ------------ -
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SCHOLASTIC CORPORATION
Item 2. MD&A
Selling, general and administrative expenses decreased by $2.7 million to $235.2 million in the quarter, compared to $237.9 million in the prior fiscal year quarter. Selling, general and administrative expenses for the six months ended November 30, 2012 decreased by $4.5 million to $409.1 million, compared to $413.6 million in the prior fiscal year period. The decreases in both periods were primarily related to lower employee-related expenses, partially offset by increased promotional spending in the Children's Book Publishing and Distributionsegment.
In the prior fiscal year period, the Company recognized a loss on leases of $6.2 million for certain leased properties in lower Manhattan. The fair value of the net rents to be received under sublease arrangements is less than the Company's lease commitments for these properties over the remaining term of the leases and, accordingly, the Company recognized this loss in the three and six months ended November 30, 2011.
Net interest expense decreased to $3.7 million in the quarter ended November 30, 2012, compared to $3.9 million in the prior fiscal year quarter, related to lower average borrowings. For the six months ended November 30, 2012, net interest expense decreased to $7.4 million, compared to $7.8 million in the prior fiscal year period, also related to lower average borrowings.
The loss from discontinued operations, net of tax, was $0.1 million, or less than $0.01 per share, for the quarter ended November 30, 2012, compared to $0.5 million, or $0.02 per share, in the prior fiscal year quarter. Loss from discontinued operations for the six months ended November 30, 2012 was $0.2 million, or $0.01 per share, compared to $2.5 million, or $0.08 per share, for the prior fiscal period. The decrease in such loss reflects asset impairments recognized in the Company's toy catalog business which was discontinued in the quarter ended August 31, 2011.
Results of Continuing Operations
Children's Book Publishing and Distribution
Three months ended Six months ended
($ amounts November 30, November 30, $ % November 30, November 30, $ %
in millions) 2012 2011 change change 2012 2011 change change
------------ - -------------- -- -------------- - ------- - ------- - -------------- - ------------- - ------- - ------- -
Revenues $ 350.1 $ 393.0 $ (42.9 ) -10.9 % $ 421.2 $ 470.5 $ (49.3 ) -10.5 %
Operating
income
(loss) 68.9 108.7 (39.8 ) -36.6 % 13.7 58.5 (44.8 ) -76.6 %
------------ - --- ---------- -- ---- --------- - - ----- - - ----- - --- ---------- - -- ---------- - - ----- - - ----- -
Operating
margin 19.7 % 27.7 % 3.3 % 12.4 %
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Revenues in the Children's Book Publishing and Distribution segment for the quarter ended November 30, 2012 decreased by $42.9 million, or 10.9%, to $350.1 million, compared to $393.0 million in the prior fiscal year quarter. Revenues for the six months ended November 30, 2012 decreased by $49.3 million, or 10.5%, to $421.2 million, compared to $470.5 million in the prior fiscal year period. These decreases were related to declines in the Company's book clubs business, due to lower revenue per order, as well as school closings after Superstorm Sandy, and lower revenues in the Company's trade business, reflecting lower sales of The Hunger Games trilogy compared to the trilogy's strong results in the comparable prior year periods. This was partially offset by a modest increase in the Company's book fairs business.
Segment operating income for the quarter ended November 30, 2012 decreased by $39.8 million, or 36.6%, to $68.9 million, compared to $108.7 million in the prior fiscal year quarter. Segment operating income for the six months ended November 30, 2012 decreased by $44.8 million, or 76.6%, to $13.7 million, compared to $58.5 million in the prior fiscal year period. The decreases in both periods were principally related to the lower revenues discussed above, as well as increased promotional expenses in the book clubs business and the Company's continued investment in its digital initiatives.
SCHOLASTIC CORPORATION
Item 2. MD&A
----------------------
Educational Technology and Services
Three months ended Six months ended
($ amounts November 30, November 30, $ % November 30, November 30, $ %
in millions) 2012 2011 change change 2012 2011 change change
------------ - -------------- -- -------------- - ------- - ------- - -------------- - ------------- - ------- - ------- -
Revenues $ 52.2 $ 65.4 $ (13.2 ) -20.2 % $ 132.2 $ 162.0 $ (29.8 ) -18.4 %
Operating
income
(loss) 5.3 14.6 (9.3 ) -63.7 % 30.1 53.4 (23.3 ) -43.6 %
------------ - --- ---------- -- --- ---------- - - ----- - - ----- - --- ---------- - -- ---------- - - ----- - - ----- -
Operating
margin 10.2 % 22.3 % 22.8 % 33.0 %
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Revenues in the Educational Technology and Services segment for the quarter ended November 30, 2012 decreased by $13.2 million, or 20.2%, to $52.2 million, compared to $65.4 million in the prior year fiscal quarter. Revenues for the six months ended November 30, 2012 decreased by $29.8 million, or 18.4%, to $132.2 million, compared to $162.0 million in the prior fiscal year period. These decreases were primarily related to decreased sales of educational technology products due to lower spending by school districts, as well as a significant sale of adoption product in Texas in the prior year period. In addition, the prior year periods benefited from higher revenues related to the launch of READ180 Next Generation.
Segment operating income for the quarter ended November 30, 2012 decreased by $9.3 million, or 63.7%, to $5.3 million, compared to $14.6 million in the prior year fiscal quarter. Segment operating income for the six months ended November 30, 2012 decreased by $23.3 million, or 43.6%, to $30.1 million, compared to $53.4 million in the prior fiscal year period. The decreases in both periods were primarily related to the lower revenues from sales of higher margin educational technology products.
Classroom and Supplemental Materials Publishing
Three months ended Six months ended
($ amounts November 30, November 30, $ % November 30, November 30, $ %
in millions) 2012 2011 change change 2012 2011 change change
------------ - -------------- -- -------------- - ------- - ------- - ------------- -- ------------- - ------- - ------- -
Revenues $ 53.2 $ 58.7 $ (5.5 ) -9.4 % $ 91.1 $ 104.4 $ (13.3 ) -12.7 %
Operating
income
(loss) 7.4 10.3 (2.9 ) -28.2 % 4.8 12.4 (7.6 ) -61.3 %
------------ - --- ---------- -- --- ---------- - -- ---- - - ----- - --- --------- -- -- ---------- - - ----- - - ----- -
Operating
margin 13.9 % 17.5 % 5.3 % 11.9 %
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Revenues in the Classroom and Supplemental Materials Publishing segment for the quarter ended November 30, 2012 decreased by $5.5 million, or 9.4%, to $53.2 million, compared to $58.7 million in the prior fiscal year quarter. Revenues for the six months ended November 30, 2012 decreased by $13.3 million, or 12.7%, to $91.1 million, compared to $104.4 million in the prior fiscal year period. The decreases in both fiscal periods were primarily related to the loss of revenue from significant non-recurring contracts with Reading is Fundamental, which were in place in the prior year period, partially offset by increased revenue in the Company's classroom magazine business.
Segment operating income for the quarter ended November 30, 2012 decreased by $2.9 million, or 28.2%, to $7.4 million, compared to $10.3 million in the prior fiscal year quarter. Segment operating income for the six months ended November 30, 2012 decreased by $7.6 million, or 61.3%, to $4.8 million, compared to $12.4 million in the prior fiscal year period. The decreases in both fiscal periods were principally related to the revenue decrease noted above.
SCHOLASTIC CORPORATION
Item 2. MD&A
----------------------
International
Three months ended Six months ended
($ amounts November 30, November 30, $ % November 30, November 30, $ %
in millions) 2012 2011 change change 2012 2011 change change
------------ - -------------- -- -------------- - ------- - ------- - -------------- - ------------- - -------- - -------- -
Revenues $ 143.7 $ 144.1 $ (0.4 ) -0.3 % $ 233.9 $ 231.8 $ 2.1 0.9 %
Operating
income
(loss) 24.7 26.6 (1.9 ) -7.1 % 27.5 26.5 1.0 3.8 %
------------ - --- ---------- -- ---- --------- - -- ---- - -- ---- - --- ---------- - -- ---------- - -- ----- - -- ----- -
Operating
margin 17.2 % 18.5 % 11.8 % 11.4 %
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Revenues in the International segment for the quarter ended November 30, 2012 decreased by $0.4 million to $143.7 million, compared to $144.1 million in the prior fiscal year quarter, principally due to lower revenues in Canada of $5.7 million, primarily in the book clubs business, partially offset by increased revenues in the UK of $1.2 million, as well as the favorable impact of foreign exchange rates of $1.8 million. Revenues for the six months ended November 30, 2012 increased by $2.1 million to $233.9 million, compared to $231.8 million in the prior fiscal year period. This increase was primarily related to increased revenues in the Company's UK trade business, partially offset by lower revenues in the Company's Canadian book clubs business, as well as the negative impact of foreign currency exchange rates.
Segment operating income for the quarter ended November 30, 2012 decreased by $1.9 million, or 7.1%, to $24.7 million, compared to $26.6 million in the prior fiscal year quarter, primarily due to lower results in the Company's Canadian business, as well as the negative impact of foreign currency exchange rates, partially offset by improved results in the Company's UK business. Segment operating income for the six months ended November 30, 2012 increased by $1.0 million, or 3.8%, to $27.5 million, compared to $26.5 million in the prior fiscal year period. This increase was related to the higher revenues in the UK, partially offset by the negative effect of foreign currency exchange rates.
SCHOLASTIC CORPORATION
Item 2. MD&A
----------------------
Media, Licensing and Advertising
Three months ended Six months ended
($ amounts November 30, November 30, $ % November 30, November 30, $ %
in millions) 2012 2011 change change 2012 2011 change change
------------ - -------------- -- -------------- - ------- - ------- - ------------- -- ------------- - ------- - ------- -
Revenues $ 17.0 $ 24.1 $ (7.1 ) -29.5 % $ 31.4 $ 34.6 $ (3.2 ) -9.2 %
Operating
income
(loss) 1.4 2.5 (1.1 ) -44.0 % 1.4 (2.1 ) 3.5 *
------------ - --- ---------- -- --- ---------- - -- ---- - - ----- - --- --------- -- ---- -------- - -- ---- - -- ---- -
Operating
margin 8.2 % 10.4 % 4.5 % *
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* Not meaningful
Revenues in the Media, Licensing and Advertisingsegment for the quarter ended November 30, 2012 decreased by $7.1 million, or 29.5%, to $17.0 million, compared to $24.1 million in the prior fiscal year quarter. The decrease in revenues was primarily due to lower advertising revenues and reduced production revenues, as well as lower sales of console products. Revenues for the six months ended November 30, 2012 decreased by $3.2 million, or 9.2%, to $31.4 million, compared to $34.6 million in the prior fiscal year period. This decrease was primarily related to the planned reduction in custom publishing and reduced production revenues, partially offset by increased revenue from sales of audio books.
Segment operating income for the quarter ended November 30, 2012 decreased by $1.1 million, or 44.0%, to $1.4 million, compared to $2.5 million in the prior fiscal year quarter. The decrease was primarily related to the lower revenues noted above, partially offset by $1.3 million of settlement income. Segment operating income for the six months ended November 30, 2012 was $1.4 million, compared to an operating loss of $2.1 million in the prior fiscal year period. The improvement is related to the higher audio book revenues noted above, as well as the $1.3 million settlement income noted above.
Overhead
Corporate overhead for the quarter ended November 30, 2012 decreased by $15.9 million to $6.8 million, compared to $22.7 million in the prior fiscal year quarter, primarily related to lower employee-related expenses. Corporate overhead for the six months ended November 30, 2012 decreased by $17.8 million to $24.1 million, compared to $41.9 million in the prior fiscal year period, primarily related to lower employee-related costs, partially offset by increased consulting costs.
SCHOLASTIC CORPORATION
Item 2. MD&A
Seasonality
The Company's school-based book clubs, school-based book fairs and most of its magazines operate on a school-year basis; therefore, the Company's business is highly seasonal. As a result, the Company's revenues in the first and third quarters of the fiscal year generally are lower than its revenues in the other two fiscal quarters. Typically, school-based book club and book fair revenues are greatest in the second and fourth quarters of the fiscal year, while revenues from the sale of instructional materials and educational technology products and services are highest in the first and fourth quarters. The Company generally experiences a loss from operations in the first and third quarters of each fiscal year. Trade sales can vary throughout the year due to varying release dates of published titles.
SCHOLASTIC CORPORATION
Item 2. MD&A
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $257.3 million at November 30, 2012, compared to $194.9 million at May 31, 2012 and $114.0 million at November 30, 2011.
Cash provided by operating activities was $127.4 million for the six months ended November 30, 2012, compared to $107.8 million in the prior fiscal year period, representing an increase in cash provided by operating activities of $19.6 million.
Primary drivers of the improvement include:
• $118.0 million increase in net receivable collections largely attributable to fourth quarter 2012 sales performance in the Company's Children's Book Publishing and Distribution segment (primarily The Hunger Games trilogy) and increased deferred revenue.
• $76.2 million cash improvement related to favorable accounts payable management, lower inventory purchases and timing of payments.
Partially offset by:
• Lower net income of $26.0 million for the six months ended November 30, 2012 compared to the six months ended November 30, 2011.
• Lower accrued royalty impact of $56.8 million in the current six month fiscal period driven by the current year payout of royalties primarily associated with prior year sales of The Hunger Games trilogy.
• Lower accrued expenses of $94.3 million driven by first quarter employee incentive compensation payments related to the prior fiscal year's results and higher tax payments in the current fiscal year.
Cash used in investing activities was $63.1 million for the six months ended November 30, 2012, compared to $46.2 million in the prior year fiscal year period, representing an increase of $16.9 million. The Company continues to invest in its ongoing digital initiatives.
Cash used in financing activities was $3.4 million for the six months ended November 30, 2012, compared to $51.8 million for the prior fiscal year period, primarily reflecting Term Loan payments in the prior fiscal year period under the Company's Loan Agreement discussed below and lower borrowings under lines of credit, as well as increased dividends, offset partially by an increase in proceeds pursuant to stock based compensation plans.
Due to the seasonal nature of its business as discussed under "Seasonality" above, the Company usually experiences negative cash flows in the June through October time period. As a result of the Company's business cycle, borrowings have historically increased during June, July and August, have generally peaked in September or October, and have been at their lowest point in May.
The Company's operating philosophy is to use cash provided from operating activities to create value by paying down debt, reinvesting in existing businesses and, from time to time, making acquisitions that will complement its portfolio of businesses, as well as engaging in shareholder enhancement initiatives, such as share repurchases or dividend declarations. The Company believes that funds generated by its operations and funds available under its current credit facilities, after the anticipated use of the credit facility to satisfy its repayment obligations in respect of the 5% Notes due in fiscal 2013, will be sufficient to finance its short-and long-term capital requirements.
The Company has maintained, and expects to maintain for the foreseeable future, sufficient liquidity to fund on-going operations, including pension contributions, dividends, currently authorized common share repurchases, debt service, planned capital expenditures and other investments. As of November 30, 2012, the Company's primary sources of liquidity consisted of cash and cash equivalents of $257.3 million, cash from operations and borrowings available under the Revolving Loan (as described under "Financing" below) totaling $325.0 million (which was increased to $425.0 million effective December 5, 2012), less the amount anticipated to be utilized to satisfy the outstanding 5% Notes. The Company may at any time, but in any event not more than once in any calendar year, request that the aggregate availability of credit under the Revolving Loan be increased by an amount of $10.0 million or an integral multiple of $10.0 million (but not to exceed $150.0 million). Accordingly, the Company believes these sources of liquidity are sufficient to finance its on-going operating needs, as well as its financing and investing activities.
SCHOLASTIC CORPORATION
Item 2. MD&A
The Company's credit rating from Standard & Poor's Rating Services is "BB-" and its credit rating from Moody's Investors Service is "Ba1." Both Moody's Investors Service and Standard and Poor's Rating Services have rated the outlook for the Company as "Stable." The Company is currently compliant with its debt covenants and expects to remain compliant for the foreseeable future. The Company's interest rates for the Loan Agreement are associated with certain leverage ratios, and, accordingly, a change in the Company's credit rating does not result in an increase in interest costs under the Company's Loan Agreement.
Effective December 5, 2012, as discussed below, the Company amended its existing revolving credit facility, which was scheduled to mature on June 1, 2014, to extend the maturity date to December 5, 2017. The Company intends to draw on this credit facility to satisfy its repayment obligations in respect of the 5% Notes due April 2013.
Financing
Loan Agreement
On June 1, 2007, Scholastic Corporation and Scholastic Inc. (each, a "Borrower" and together, the "Borrowers") entered into a $525.0 million credit facility with certain banks (the "Loan Agreement"), consisting of a $325.0 million revolving credit component (the "Revolving Loan") and a $200.0 million amortizing term loan component (the "Term Loan"), with the ability to increase the aggregate Revolving Loan commitments of the lenders by up to an additional $150.0 million. The Loan Agreement was amended on August 16, 2010, on October 25, 2011 and most recently on December 5, 2012. The amendment on October 25, 2011 extended the maturity of the Revolving Loan facility to June 1, 2014 from June 1, 2012 and provided for the repayment of the outstanding balance of the Term Loan on October 25, 2011. The amendment on December 5, 2012 (i) increased the Revolving Loan from $325.0 million to $425.0 million (with the continued ability to increase the aggregate Revolving Loan commitments of the lenders by . . .
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