The Company calculates its interim income tax provision in accordance with Accounting Principles Board Opinion No. 28, “Interim Financial Reporting,” and FASB Interpretation No. 18, “Accounting for Income Taxes in Interim Periods” (“FIN 18”). In calculating the provision for income taxes on an interim basis, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances known and applies that rate to its ordinary year to date earnings or losses. The Company’s effective tax rate is based on expected income and statutory tax rates and factors into consideration permanent differences between financial statement and tax return income applicable to the Company in the various jurisdictions in which the Company operates. The effect of discrete items, such as changes in estimates, changes in enacted tax laws or rates or tax status, and unusual or infrequently occurring events, is recognized in the interim period in which the discrete item occurs. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the result of new judicial interpretations or regulatory or tax law changes.
The Company anticipates a full fiscal year tax rate of approximately 43% for continuing operations for the current fiscal year exclusive of expected discrete items. Inclusive of discrete items, the Company expects a full year effective tax rate of approximately 77%. The Company’s expected full year effective tax rate excluding discrete items exceeds statutory rates primarily as a result of net operating losses experienced in foreign operations, primarily in the United Kingdom, for which the Company does not expect to realize future tax benefits. Accordingly, valuation allowances are provided for the net operating loss carry forwards of these operations. The high expected full year tax rate inclusive of discrete items is primarily due to goodwill impairments and losses on investments occurring in the current quarter in the United Kingdom, where the Company does not expect to realize any associated tax benefits for these charges. Due to the seasonality of the Company’s operations and discrete items, current period effective tax rates are not meaningful.
In the current year, the Company completed the sale of the DTH business (see Note 3, “Discontinued Operations”). In fiscal 2008, the Company recognized significant pretax losses and deferred tax benefits associated with this transaction. The Company expects to realize a significant portion of these deferred tax assets in the current fiscal year, reducing the Company’s domestic taxable income to levels significantly below the expected pretax income levels. Accordingly, the Company expects reduced federal and state tax payments in the current fiscal year as a result of the realization of these deferred tax assets, and expects a significant reduction in deferred tax assets at the end of the current fiscal year. The Company expects to realize future tax benefits on all domestic net operating losses generated in the current fiscal year.
The Company recognizes tax benefits of uncertain tax positions in accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). The Company does not currently anticipate a material change to its unrecognized tax benefits within twelve months of February 28, 2009; however, actual developments can change these expectations, including settlement of audits.
The Corporation, including its domestic subsidiaries, files a consolidated U.S. income tax return, and also files tax returns in various states and other local jurisdictions. Also, certain subsidiaries of the Corporation file income tax returns in foreign jurisdictions. The Company is routinely audited by various tax authorities. The Company believes it is no longer subject to an income tax assessment by the United States Internal Revenue Service (“IRS”) for the years ended on or before May 31, 2003 due to the expiration of the statute of limitations. The Company has been selected for audit by the IRS for its fiscal years ended May 2004, 2005 and 2006. The Company is also currently under audit by both New York State and New York City for its fiscal years ended May 2002, 2003 and 2004. It is possible that federal, state and foreign tax examinations will be settled during the next twelve months. If any of these tax examinations are concluded within that period, the Company will make any necessary adjustments to its unrecognized tax benefits.
On October 10, 2008, the Company agreed to purchase 100,000 shares of Common Stock from Richard Robinson, Chairman of the Board, President and Chief Executive Officer of the Company, at a price of $20.59 per share, or an aggregate purchase price of $2.1, pursuant to the Company’s previously announced stock repurchase program which had been approved by the Board in May 2008. The purchase price was determined with reference to the last transaction price reported on NASDAQ immediately prior to the purchase. The closing price of the Common Stock on NASDAQ on October 10, 2008 was $23.11 per share. The shares became available for sale due to Mr. Robinson, as a result of current market conditions, being required to sell the shares in order to protect the collateral value underlying a personal loan with a bank secured by the shares. The aforementioned transaction was approved by the Board and Audit Committee.
On March 26, 2009, the Company announced that the Board had declared a quarterly dividend of $0.075 per share to be paid on June 15, 2009 to shareholders of record of the Corporation’s Common Stock and Class A Stock on April 30, 2009.
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SCHOLASTIC CORPORATION |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) |
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Overview and Outlook
The Company incurred a loss from continuing operations, net of tax, for the quarter ended February 28, 2009 of $35.1 million compared to a loss of $1.4 million in the quarter ended February 29, 2008. The loss from continuing operations in the current fiscal quarter was higher primarily due to a $17.0 million charge for goodwill impairment relating to the Company’s operations in the U.K., a $13.5 million charge for unrealized losses on investments in the U.K., one-time expenses of $4.8 million associated with the Company’s cost reduction plans, higher promotional costs in the Book Clubs channel and lower results from the Company’s operations in the U.K.
During the third quarter of fiscal 2009, the Company maintained a strong balance sheet and free cash flow. Additionally, in the face of continued declines in consumer retail spending, the Company successfully sustained revenues last quarter in its market-leading children’s book and educational technology businesses. In theChildren’s Books Publishing and Distribution segment, revenue increased benefiting from strong Trade performance, including the ground-breaking multiplatform series The 39 Clues, as well as solid order volumes in School Book Clubs and higher revenue per fair in School Book Fairs. In Education, double-digit growth in sales of educational technology was led by the Company’s reading intervention programs, including the market-leading READ 180® and the newly launched product-line extension, System 44™, partially offset by lower library publishing revenues.
The Company continued working towards its goal of 9 to 10% operating margins and has implemented additional cost reduction plans in the second half of fiscal 2009 of $20 million, eliminating management bonuses and curtailing discretionary spending, including consulting, travel and entertainment, training and sales conferences, which follows $35 million in annualized reductions in the first half of the year. The Company also intends to continue to review existing unprofitable businesses to determine whether the Company should exit such businesses.
At February 28, 2009, the total market value of the Company’s outstanding Common and Class A shares was less than the carrying value of the Company’s net assets. The Company concluded that goodwill associated with the Company’s United Kingdom operations was impaired as of February 28, 2009, and recognized a goodwill impairment of $17.0 million. Operating results in the United Kingdom have declined in recent periods, as previously reported. No other reporting units have carrying values that exceeded estimated fair values as of February 28, 2009. Also in the United Kingdom, the Company recognized an unrealized loss on investments in a book distribution business and related entities of $13.5 million in the current quarter. The Company continues to have significant available liquidity and capital resources, and believes that the long term prospects of its businesses remain unchanged. The Company believes that the recent decline in the market value of the Company’s outstanding shares is not indicative of the Company’s expected long-term cash flows of its core businesses, and is a function of the current condition of the capital markets. Accordingly, the Company does not believe that the recent decline in share price is reflective of declines in its businesses. However, the Company will continue to monitor its asset base for further indicators of impairment.
The Company sold its DTH Business in August 2008, ceased operations in its direct-to-home business located in the United Kingdom as of February 28, 2009, expects to complete the divestiture of its direct-to-home continuities business in Canada and sell the Maumelle facility in the current fiscal year. In addition to the foregoing, during the six months ended February 28, 2009, the Company determined to exit certain other unprofitable, non-core businesses or operations as detailed in Note 2, “Discontinued Operations,” which operations have been or are in the process of being sold or shut down. Also, in a separate transaction during the three months ended February 28, 2009, the Company sold Quality Education Data (“QED”), a non-core business which markets databases serving the school market, for proceeds of $29.0, resulting in a pre-tax profit of $21.9.The Company took the foregoing actions as part of its plan to improve short-term and long-term profitability, and focus on its core businesses. The loss from discontinued operations, net of tax, for the quarter ended February 28, 2009 was $0.9 million, compared to a loss of $77.9 million for the quarter ended February 29, 2008. The current year quarter reflects the sale of a non-core business which resulted in the above mentioned gain, while the prior year reflects asset write-downs related to the Company’s decision to exit the Direct to Home continuities business.
The Board of Directors has declared a quarterly cash dividend of $0.075 per share on the Corporation’s Class A and Common Stock for the fourth quarter of fiscal 2009. Additionally, the Corporation continues to repurchase shares of its Common Stock from time to time under current programs approved by the Board.
Results of Continuing Operations
Revenues for the quarter ended February 28, 2009 decreased by $15.5 million, or 3.5%, to $424.9 million, compared to $440.4 million in the prior fiscal year quarter. This was due to a $21.8 million impact resulting from foreign exchange in the quarter, partially offset by higher revenues in theChildren’s Book Publishing and Distribution segment of $5.0 million. For the nine months ended February 28, 2009, revenues decreased by $285.2 million, or 17.3%, to $1,359.0 million, compared to $1,644.2 million in the prior fiscal year period, primarily due to lower revenues from theChildren’s Book Publishing and Distribution segment, which in the prior year benefited from the July 2007 release ofHarry Potter and the Deathly Hallows.
Cost of goods sold as a percentage of revenue for the quarter ended February 28, 2009 increased to 50.4%, compared to 49.0% in the prior fiscal year quarter, primarily due to increased revenues in the current quarter associated with the release of J.K. Rowling’sThe Tales of Beedle the Bard that do not have a correlating impact on operating income, as profits fromThe Tales of Beedle the Bard benefit Ms. Rowling’s charity. For the nine months ended February 28, 2009, cost of goods sold decreased to $643.2 million, or 47.3% of revenues, compared to $800.3 million, or 48.7% of revenues, in the prior fiscal year period, primarily due to higher costs related to the Harry Potter release in the prior fiscal year period.
Selling, general and administrative expenses decreased $7.2 million to $193.7 million for the quarter ended February 28, 2009, compared to $200.9 million in the prior fiscal year quarter. Selling, general and administrative expenses as a percentage of revenue remained flat at 45.6% for both fiscal year periods. This decrease was due to lower employee related costs related to cost reduction plans. For the nine months ended February 28, 2009, selling, general and administrative expenses as a percentage of revenues increased to 44.1% from 38.0% in the prior fiscal year period, primarily due to the prior year benefit of Harry Potter revenues without a corresponding increase in expense and the current year acceleration of restricted stock units.
Bad debt expense decreased to $2.4 million for the quarter ended February 28, 2009, compared to $3.1 million in the prior fiscal year quarter. For the nine months ended February 28, 2009, bad debt expense increased to $11.1 million from $8.3 million in the prior fiscal year period due to increased bad debt reserves in theChildren’sBook Publishing and Distribution segment, primarily for the Trade channel.
Severance expense increased to $5.8 million, or 1.4% of revenues, including $4.8 million related to the Company’s cost reduction actions, for the quarter ended February 28, 2009, compared to $1.8 million, or 0.4% of revenues, in the prior fiscal year quarter. For the nine months ended February 28, 2009, severance expense increased to $19.8 million, or 1.5% of revenues, from $5.2 million, or 0.3% of revenues, in the prior fiscal year period. These increases were primarily the result of expenses incurred related to cost reduction plans.
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SCHOLASTIC CORPORATION |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) |
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In the quarter ended February 28, 2009, the Company recorded a non-cash charge for impairment of goodwill in its U.K. business of $17.0 million.
The resulting operating loss for the quarter ended February 28, 2009 was $22.6 million, compared to operating income of $4.2 million in the prior fiscal year quarter, primarily due to the non-cash charge associated with the Company’s U.K. goodwill impairment, higher severance and related expenses associated with the Company’s cost reduction plans and unfavorable foreign exchange rates. For the nine months ended February 28, 2009, operating income decreased to $22.9 million, compared to $160.6 million in the prior year, primarily due to lower Harry Potter revenues and profits, higher severance expense, and the U.K. goodwill impairment in the current period.
Net interest expense decreased to $5.6 million in the quarter ended February 28, 2009, compared to $6.0 million in the prior fiscal year quarter. For the nine months ended February 28, 2009, net interest expense decreased by $5.9 million to $18.5 million as compared to $24.4 million in the prior fiscal year period, driven by lower borrowing levels and favorable interest rates.
In the quarter ended February 28, 2009, the Company recorded non-cash unrealized losses on investments in a U.K. book distribution business and related entities of $13.5 million.
The loss from continuing operations was $35.1 million, or $0.95 per diluted share, for the quarter ended February 28, 2009, compared to a loss of $1.4 million, or $0.03 per diluted share, in the prior fiscal year quarter. For the nine months ended February 28, 2009, the loss from continuing operations was $19.4 million, or $0.52 per diluted share, compared to earnings from continuing operations of $86.3 million, or $2.19 per diluted share, in the prior fiscal year period.
The loss from discontinued operations, net of tax, was $0.9 million, or $0.03 per diluted share, for the quarter ended February 28, 2009, compared to a loss of $77.9 million, or $2.03 per diluted share, in the prior fiscal year quarter. For the nine months ended February 28, 2009, the loss from discontinued operations, net of tax, was $22.6 million, or $0.60 per diluted share, compared to a loss of $92.8 million, or $2.35 per diluted share, in the prior fiscal year period.
The net loss was $36.0 million, or $0.98 per diluted share, for the quarter ended February 28, 2009, compared to $79.3 million, or $2.06 per diluted share, in the prior fiscal year quarter. For the nine months ended February 28, 2009, the net loss was $42.0 million, or $1.12 per diluted share, compared to $6.5 million, or $0.16 per diluted share, in the prior fiscal year period.
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SCHOLASTIC CORPORATION |
Item 2. MD&A |
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Results of Continuing Operations - Segments
Children’s Book Publishing and Distribution
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($ amounts in millions) | | February 28, | | February 29, | | February 28, | | February 29, | |
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Revenues | | $ | 223.3 | | $ | 218.3 | | $ | 664.2 | | $ | 898.8 | |
Operating income | | | 12.6 | | | 14.0 | | | 57.3 | | | 137.7 | |
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Operating margin | | | 5.6 | % | | 6.4 | % | | 8.6 | % | | 15.3 | % |
Revenues in theChildren’s Book Publishing and Distribution segment for the quarter ended February 28, 2009 increased by $5.0 million, or 2.3%, to $223.3 million, compared to $218.3 million in the prior fiscal year quarter. This improvement was due to an increase in revenues in the Company’s trade business related to higher front list revenues from the release ofThe Tales of Beedle the Bard andThe 39 Clues in the current period partially offset by lower revenues in school book clubs and school book fairs. The higher revenues in the current quarter associated with the release ofThe Tales of Beedle the Bard do not have a correlating impact on operating income, as profits fromThe Tales of Beedle the Bard benefit charity. The revenue decline in school book clubs was primarily due to lower revenue per order partially offset by an increase in order volume. The decline in school book fairs was primarily due to lower revenue from clearance sales. Revenues for the nine months ended February 28, 2009 decreased by $234.6 million to $664.2 million, compared to $898.8 million in the prior fiscal year period. This decrease was due to the unprecedented success ofHarry Potter and the Deathly Hallows, the seventh and final book in the series, in the prior year, which included approximately $260 million of Harry Potter revenues.
Segment operating income for the quarter ended February 28, 2009 decreased by $1.4 million, or 10.0%, to $12.6 million, compared to $14.0 million in the prior fiscal year quarter, principally due to increased promotional costs in school book clubs and higher royalty expense in the Company’s trade business, partially offset by improved results in school book fairs. Segment operating income for the nine months ended February 28, 2009 declined by $80.4 million to $57.3 million, compared to $137.7 million in the prior fiscal year period, primarily due to lower operating results in the Company’s trade business related to the prior year’s release ofHarry Potter and the Deathly Hallows.
Educational Publishing
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| | Three months ended | | Nine months ended | |
($ amounts in millions) | | February 28, | | February 29, | | February 28, | | February 29, | |
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Revenues | | $ | 74.7 | | $ | 76.5 | | $ | 280.8 | | $ | 300.4 | |
Operating income (loss) | | | 0.9 | | | (0.2 | ) | | 36.2 | | | 43.4 | |
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Operating margin | | | 1.2 | % | | | * | | 12.9 | % | | 14.4 | % |
* Not meaningful
Revenues in theEducational Publishingsegment for the quarter ended February 28, 2009 decreased by $1.8 million, or 2.4%, to $74.7 million, compared to $76.5 million in the prior fiscal year quarter. The revenue decline was due to lower classroom and library publishing revenues, partially offset by higher sales of technology products. Technology products were positively impacted by the release of System 44 in the current quarter. Segment revenues for the nine months ended February 28, 2009 decreased by $19.6 million, or 6.5%, to $280.8 million, compared to $300.4 million in the prior fiscal year period. This decrease was principally driven by lower revenues from sales of technology products, primarily due to lower sales of READ180in the first quarter of fiscal 2009.
Segment operating income for the quarter ended February 28, 2009 increased to $0.9 million, as compared to an operating loss of $0.2 million in the prior fiscal year quarter, principally driven by lower selling expenses, more than offsetting the impact of lower revenues in the current fiscal year quarter. Segment operating income for the nine months ended February 28, 2009 decreased by $7.2 million, or 16.6%, to $36.2 million, compared to $43.4 million in the prior fiscal year period. This decrease is primarily due to lower revenues partially offset by lower selling expenses.
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SCHOLASTIC CORPORATION |
Item 2. MD&A |
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Media, Licensing and Advertising
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($ amounts in millions) | | February 28, | | February 29, | | February 28, | | February 29, | |
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Revenues | | $ | 38.4 | | $ | 38.6 | | $ | 114.9 | | $ | 104.9 | |
Operating income | | | 1.4 | | | 1.7 | | | 6.4 | | | 5.4 | |
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Operating margin | | | 3.6 | % | | 4.4 | % | | 5.6 | % | | 5.1 | % |
Revenues in the Media, Licensing and Advertising segment for the quarter ended February 28, 2009 slightly decreased to $38.4 million, compared to $38.6 million in the prior fiscal year quarter, primarily due to lower revenues in Back To Basics Toys®, the Company’s catalog toy business. Segment revenues for the nine months ended February 28, 2009 increased by $10.0 million, or 9.5%, to $114.9 million, compared to $104.9 million in the prior fiscal year period, primarily due to higher revenues from sales of software and interactive products, as well as higher advertising revenue in the custom publishing business.,
Segment operating income for the quarter ended February 28, 2009 decreased to $1.4 million, compared to $1.7 million in the prior fiscal year quarter, primarily due to the lower revenues. Segment operating income for the nine months ended February 28, 2009 increased by $1.0 million, or 18.5%, to $6.4 million, compared to $5.4 million in the prior fiscal year period, primarily due to the higher revenues, partially offset by higher prepublication expense amortization on new interactive product lines.
International
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($ amounts in millions) | | February 28, | | February 29, | | February 28, | | February 29, | |
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Revenues | | $ | 88.5 | | $ | 107.0 | | $ | 299.1 | | $ | 340.1 | |
Operating (loss) income | | | (13.9 | ) | | 5.7 | | | (3.4 | ) | | 29.7 | |
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Operating margin | | | | * | | 5.3 | % | | | * | | 8.7 | % |
* Not meaningful
Revenues in the Internationalsegment for the quarter ended February 28, 2009 decreased by $18.5 million, or 17.3%, to $88.5 million, compared to $107.0 million in the prior fiscal year quarter, due to the unfavorable impact of foreign currency exchange rates of $21.8 million. Segment revenues for the nine months ended February 28, 2009 decreased by $41.0 million, or 12.1%, to $299.1 million, compared to $340.1 million in the prior fiscal year period, primarily due to the unfavorable impact of foreign currency exchange rates of $40.3 million.
Segment operating loss for the quarter ended February 28, 2009 was $13.9 million, compared to operating income of $5.7 million in the prior fiscal year quarter, due to lower operating income in the United Kingdom including a non-cash charge for impairment of goodwill of $17.0 million. Segment operating loss for the nine months ended February 28, 2009 was $3.4 million, compared to operating income of $29.7 million in the prior fiscal year period. This decrease was primarily due to lower operating income in the United Kingdom, including the non-cash goodwill impairment charge of $17.0 million.
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SCHOLASTIC CORPORATION |
Item 2. MD&A |
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Results of Discontinued Operations
As previously announced, the Company sold its DTH business in August 2008, has shut down its SC business effective May 31, 2008, ceased operation in its direct-to-home continuity business located in the United Kingdom and intends to sell its Maumelle facility. Additionally, the Company intends to complete the divestiture of its direct-to-home business located in Canada in fiscal 2009. In addition to the foregoing, during the six months ended February 28, 2009, the Company determined to exit certain other unprofitable, non-core businesses or operations as detailed in Note 2, “Discontinued Operations,” which operations have been or are in the process of being sold or shut down. Also, in a separate transaction during the three months ended February 28, 2009, the Company sold Quality Education Data (“QED”), a non-core business which markets databases serving the school market. The results of operations associated with these businesses are presented as discontinued operations for accounting purposes in the fiscal 2009 and prior year periods. During the three months ended February 28, 2009, the Company recognized impairment and other charges related to discontinued operations, net of tax, of $12.5 million.
The loss from discontinued operations, net of tax, was $0.9 million for the quarter ended February 28, 2009, compared to $77.9 million in the prior fiscal year quarter. The loss from discontinued operations, net of tax, was $22.6 million for the nine months ended February 28, 2009, compared to $92.8 million in the prior fiscal year. The higher losses in the previous year period are primarily due to the DTH business.
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 are highest in the first and fourth quarters. The Company historically has experienced a loss from operations in the first and third quarters of each fiscal year.
Liquidity and Capital Resources
The Company’s cash and cash equivalents totaled $37.0 million at February 28, 2009, compared to $117.3 million at May 31, 2008 and $191.7 million at February 29, 2008. Cash from discontinued operations was $1.6 million at February 28, 2009, $3.1 million at May 31, 2008 and $9.4 million at February 29, 2008.
Cash provided by operating activities was $34.1 million for the nine months ended February 28, 2009, compared to $303.7 million in the prior fiscal year period. The net decrease of $269.6 million is primarily due to higher revenues related to Harry Potter realized in the prior year nine month period, for which related royalty payments were paid by the Company subsequent to February 29, 2008, in addition to lower accounts payable and accrued expenses in the current nine month period.
Cash used in investing activities decreased by $34.7 million for the nine months ended February 28, 2009, primarily related to proceeds from the sale of QED and proceeds from the sale of the DTH business totaling $33.0 million.
Cash used in financing activities was $71.8 million for the nine months ended February 28, 2009, compared to $42.6 million for the prior fiscal year period, representing a $29.2 million increase year over year. The change is primarily due to lower borrowings under the Term Loan in the current year period of $200.0 million offset by lower common stock repurchases in the current year of $173.8 million.
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. In the current fiscal year, borrowings peaked in October 2008, and have declined in the second half of the fiscal year. The Company expects to realize the benefit of deferred tax assets related to the DTH business divestiture in the current fiscal year. Accordingly, net tax payments will be lower than historical levels in the current fiscal year.
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 will be sufficient to finance its short-and long-term capital requirements for the foreseeable future.
In the current fiscal year, the Company expects higher uses of cash than in previous years for severance payments and dividends while continuing modest discretionary common share repurchases under its current repurchase program. Despite the current economic conditions and the aforementioned uses of cash expected in the current fiscal year, the Company has maintained, and expects to maintain for the foreseeable future sufficient liquidity to fund ongoing operations (including severance payments and pension contributions), dividends, authorized common share repurchases, debt service, planned capital expenditures and other investments. As of February 28, 2009, the Company’s primary sources of liquidity consisted of cash and cash equivalents of $37.0 million, cash from operations, and borrowings remaining available under the Revolving Loan (as described under “Financing” below) totaling $325.0 million. Approximately 53% of the Company’s outstanding debt is not due until fiscal year 2013, and the remaining 47% is spread ratably over each preceding period. 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 ongoing operating needs, and its financing and investing activities.
In March 2009, the Company’s credit rating was reduced to “BB-” by Standard & Poor’s Rating Services and “Ba2” by Moody’s Investors Service. Both agencies have rated the outlook for the Company as “Stable”. The Company believes that existing committed credit lines, cash from operations and other sources of cash are sufficient to meet the Company’s liquidity needs for the near term, as 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.
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SCHOLASTIC CORPORATION |
Item 2. MD&A |
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Financing
On June 1, 2007, Scholastic Corporation and Scholastic Inc. (each, a “Borrower” and together, the “Borrowers”) elected to replace the Company’s then-existing credit facilities with a new $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”). The Loan Agreement is a contractually committed unsecured credit facility that is scheduled to expire on June 1, 2012. The $325.0 million Revolving Loan component allows the Company to borrow, repay or prepay and reborrow at any time prior to the stated maturity date, and the proceeds may be used for general corporate purposes, including financing for acquisitions and share repurchases. The Loan Agreement also provides for an increase in the aggregate Revolving Loan commitments of the lenders of up to an additional $150.0 million. The $200.0 million Term Loan component was established in order to fund the reacquisition by the Corporation of shares of its Common Stock pursuant to an Accelerated Share Repurchase Agreement and was fully drawn on June 28, 2007 in connection with that transaction. The Term Loan, which may be prepaid at any time without penalty, requires quarterly principal payments of $10.7 million, with the first payment made on December 31, 2007, and a final payment of $7.4 million due on June 1, 2012. Interest on both the Term Loan and Revolving Loan is due and payable in arrears on the last day of the interest period (defined as the period commencing on the date of the advance and ending on the last day of the period selected by the Borrower at the time each advance is made). At the election of the Borrower, the interest rate charged for each loan made under the Loan Agreement is based on (1) a rate equal to the higher of (a) the prime rate or (b) the prevailing Federal Funds rate plus 0.500% or (2) an adjusted LIBOR rate plus an applicable margin, ranging from 0.500% to 1.250% based on the Company’s prevailing consolidated debt to total capital ratio. As of February 28, 2009, the applicable margin on the Term Loan was 0.875% and the applicable margin on the Revolving Loan was 0.700%. The Loan Agreement also provides for the payment of a facility fee ranging from 0.125% to 0.250% per annum on the Revolving Loan only, which at February 28, 2009 was 0.175%. As of February 28, 2009, the term loan had an outstanding balance of $146.5 million at an interest rate of 1.4%.; at May 31, 2008 the Term Loan had an outstanding balance of $178.6 million at an interest rate of 3.8%; and at February 29, 2008, the Term Loan had an outstanding balance of $189.3 million at an interest rate of 4.0%. There were no outstanding borrowings under the Revolving Loan as of February 28, 2009, May 31, 2008 and February 29, 2008. As of February 28, 2009 there was $0.5 million of outstanding standby letters of credit issued under the Loan Agreement. The Loan Agreement contains certain covenants, including interest coverage and leverage ratio tests and certain limitations on the amount of dividends and other distributions, and at February 28, 2009 the Company was in compliance with these covenants.
During the fourth quarter of fiscal 2008, the Company renewed unsecured money market bid rate credit lines totaling $50.0 million that were originally entered into during the fourth quarter of fiscal 2007. As of February 28, 2009, the Company’s credit lines under these facilities aggregate $45.0 million. There were no outstanding borrowings under these credit lines at February 28, 2009, May 31, 2008 and February 29, 2008. On March 20, 2009, the Company’s aggregate credit lines available under these facilities were reduced to $20 million, resulting from a lender’s cancellation of its $25.0 million line. All loans made under these credit lines are at the sole discretion of the lender and at an interest rate and term, not to exceed 364 days, agreed to at the time each loan is made. These credit lines are typically available for loans up to 364 days and may be renewed, if requested by the Company, at the sole option of the lender.
As of February 28, 2009, the Company had various local currency credit lines, with maximum available borrowings in amounts equivalent to $35.9 million, underwritten by banks primarily in the United States, Canada and the United Kingdom. These credit lines are typically available for overdraft borrowings or loans up to 364 days and may be renewed, if requested by the Company, at the sole option of the lender. There were borrowings outstanding under these facilities equivalent to $9.8 million at February 28, 2009 at a weighted average interest rate of 3.8%, compared to the equivalent of $11.8 million at May 31, 2008 at a weighted average interest rate of 6.4% and to the equivalent of $10.7 million at February 29, 2008 at a weighted average interest rate of 7.5%. In December 2008, the Company recapitalized its United Kingdom operations via a cash contribution from the Company’s domestic operations, due to the cancellation of the local currency credit line in the United Kingdom.
At February 28, 2009, the Company had open standby letters of credit of $7.6 million issued under certain credit lines, as compared to $8.4 million as of May 31, 2008 and February 29, 2008. These letters of credit are scheduled to expire within one year; however, the Company expects that substantially all of these letters of credit will be renewed, at similar terms, prior to expiration.
The Company’s total debt obligations were $315.3 million at February 28, 2009, $349.7 million at May 31, 2008 and $373.6 million at February 29, 2008. The lower level of debt at February 28, 2009 as compared to May 31, 2008 and February 29, 2008 was primarily due to the repayments made on the Term Loan and a repurchase of the Company’s 5% Notes on the open market.
For a more complete description of the Company’s debt obligations, see Note 4 of Notes to Condensed Consolidated Financial Statements – Unaudited in Item 1, “Financial Statements.”
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SCHOLASTIC CORPORATION |
Item 2. MD&A |
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New Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141 (revised), “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer accounts for business combinations. SFAS 141R includes guidance for the recognition and measurement of the identifiable assets acquired, the liabilities assumed, and any noncontrolling or minority interest in the acquiree. It also provides guidance for the measurement of goodwill, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies and acquisition-related transaction costs, and the recognition of changes in the acquirer’s income tax valuation allowance. SFAS 141R applies prospectively and is effective for business combinations made by the Company beginning June 1, 2009.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to establish accounting and reporting standards for any noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a noncontrolling interest in a subsidiary should be reported as a component of equity in the consolidated financial statements and requires disclosure, on the face of the consolidated statement of operations, of the amounts of consolidated net income attributable to the parent and to the noncontrolled interest. SFAS 160 is effective for the Company beginning June 1, 2009 and is to be applied prospectively, except for the presentation and disclosure requirements, which upon adoption will be applied retrospectively for all periods presented. The Company is currently evaluating the impact, if any, that SFAS 160 will have on its consolidated financial position, results of operations and cash flows.
In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FAS 142-3”). FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” FAS 142-3 is effective for fiscal years beginning after December 15, 2008 and early adoption is prohibited. The Company is currently evaluating the impact, if any, that FAS 142-3 will have on its consolidated financial position, results of operations and cash flows.
In June 2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP 03-6-1”), which classifies unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents as participating securities and requires them to be included in the computation of earnings per share pursuant to the two-class method described in SFAS No. 128, “Earnings per Share.” FSP 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. It requires all prior period earnings per share data presented to be adjusted retrospectively. The Company is currently evaluating the effect, if any, that the adoption of FSP 03-6-1 will have on its consolidated financial position, results of operations and cash flows.
Recently Adopted Accounting Pronouncements
In September 2008, the FASB issued FSP No. 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161” (“FSP 133-1”). FSP 133-1 requires more extensive disclosure regarding potential adverse effects of changes in credit risk on the financial position, financial performance, and cash flows of sellers of credit derivatives. FSP 133-1 also amends FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others,” to require additional disclosure about the current status of the payment or performance risk of a guarantee. FSP 133-1 also clarifies the effective date of FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” by stating that the disclosures required should be provided for any reporting period (annual or quarterly interim) beginning after November 15, 2008.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and states that a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. In February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” and FSP No. FAS 157-2, “Effective Date of FASB Statement No. 157.” Collectively, these Staff Positions allow a one-year deferral of adoption of SFAS 157 for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis and amend SFAS 157 to exclude FASB Statement No. 13 and its related interpretive accounting pronouncements that address leasing transactions.
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SCHOLASTIC CORPORATION |
Item 2. MD&A |
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The Company adopted SFAS 157 beginning June 1, 2008, except for nonfinancial assets and liabilities measured at fair value on a non-recurring basis, which will be effective for the Company beginning June 1, 2009. The impact of the adoption on June 1, 2008 was not material to the Company’s condensed consolidated financial statements. The Company is currently evaluating the impact that the adoption of the deferred portion of SFAS 157 will have on its consolidated financial position, results of operations and cash flows.
SFAS 157 establishes a three-level hierarchy for fair value measurements to prioritize the inputs used in the valuation techniques to derive fair values. The basis for fair value measurements for each level within the hierarchy is described below with Level 1 having the highest priority and Level 3 having the lowest.
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
Level 3: Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
The Company’s assets and liabilities measured at fair value on a recurring basis subject to the presentation requirements of SFAS 157 at February 28, 2009 consisted of cash and cash equivalents and foreign currency forward contracts, neither of which were material as of the reporting date. Cash and cash equivalents are comprised of bank deposits and short-term investments, such as money market funds, the fair value of which is based on quoted market prices, a Level 1 fair value measure. The fair values of foreign currency forward contracts, used by the Company to manage foreign exchange impact to the financial statements, are based on quotations from financial institutions, a Level 2 fair value measure.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”), to provide companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS 159 is to reduce both the complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS 159 was effective for the Company beginning June 1, 2008. The Company has not elected to measure any financial assets and financial liabilities at fair value which were not previously required to be measured at fair value. Therefore, the adoption of this standard has had no impact on the Company’s consolidated financial position, results of operations and cash flows.
Since the date of the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2008, as amended (the “Annual Report”), there have been no material changes to the Company’s critical accounting policies and estimates.
Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements are subject to various risks and uncertainties, including the conditions of the children’s book and educational materials markets and acceptance of the Company’s products within those markets, and other risks and factors identified in this Report, in the Annual Report and from time to time in the Company’s other filings with the Securities and Exchange Commission (the “SEC”). Actual results could differ materially from those currently anticipated.
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SCHOLASTIC CORPORATION |
Item 3. Quantitative and Qualitative Disclosures about Market Risk |
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The Company conducts its business in various foreign countries, and as such, its cash flows and earnings are subject to fluctuations from changes in foreign currency exchange rates. The Company manages its exposures to this market risk through internally established procedures and, when deemed appropriate, through the use of short-term forward exchange contracts. All foreign exchange hedging transactions are supported by an identifiable commitment or a forecasted transaction. The Company does not enter into derivative transactions or use other financial instruments for trading or speculative purposes.
Market risks relating to the Company’s operations result primarily from changes in interest rates, which are managed through the mix of variable-rate versus fixed-rate borrowings. Additionally, financial instruments, including swap agreements, have been used to manage interest rate exposures. Approximately 50% of the Company’s debt at February 28, 2009 bore interest at a variable rate and was sensitive to changes in interest rates, compared to approximately 55% at May 31, 2008 and approximately 54% at February 29, 2008. The decrease in variable-rate debt as of February 28, 2009 compared to May 31, 2008 and February 29, 2008 was primarily due to repayments made on the Term Loan and a repurchase of 5% Notes on the open market. The Company is subject to the risk that market interest rates and its cost of borrowing will increase and thereby increase the interest charged under its variable-rate debt.
Additional information relating to the Company’s outstanding financial instruments is included in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The following table sets forth information about the Company’s debt instruments as of February 28, 2009 (see Note 4 of Notes to Condensed Consolidated Financial Statements - Unaudited in Item 1, “Financial Statements”):
| | | | | | | | | | | | | | | | | | | | | | |
($ amounts in millions) | | Fiscal Year Maturity | |
|
| | 2009 | | 2010 | | 2011 | | 2012 | | 2013 | | Thereafter | | Total | |
|
| | | | | | | | | | | | | | | | | | | | | | |
Debt Obligations | | | | | | | | | | | | | | | | | | | | | | |
Lines of Credit | | $ | 9.8 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 9.8 | |
Average interest rate | | | 3.8 | % | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Long-term debt including current | | | | | | | | | | | | | | | | | | | | | | |
Fixed-rate debt | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 160.0 | | $ | — | | $ | 160.0 | |
Interest rate | | | | | | | | | | | | | | | 5.0 | % | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Variable rate debt | | $ | 10.7 | | $ | 42.8 | | $ | 42.8 | | $ | 42.8 | | $ | 7.4 | (1) | $ | — | | $ | 146.5 | |
Interest rate(2) | | | 1.4 | % | | 1.4 | % | | 1.4 | % | | 1.4 | % | | 1.4 | % | | | | | | |
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(1) | Represents the final payment under the Term Loan, which has a final maturity of June 1, 2012 but may be repaid at any time. |
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(2) | Represents the interest rate under the Term Loan at February 28, 2009; the interest rate is subject to change over the life of the Term Loan. |
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SCHOLASTIC CORPORATION |
Item 4. Controls and Procedures |
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The Chief Executive Officer and the Chief Financial Officer of the Corporation, after conducting an evaluation, together with other members of the Company’s management, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures as of February 28, 2009, have concluded that the Corporation’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Corporation in its reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and accumulated and communicated to members of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. There was no change in the Corporation’s internal control over financial reporting that occurred during the quarter ended February 28, 2009 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
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PART II – OTHER INFORMATION |
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SCHOLASTIC CORPORATION |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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The following table provides information with respect to repurchases of shares of Common Stock by the Corporation during the nine months ended February 28, 2009:
Issuer Purchases of Equity Securities
(Dollars in millions except per share amounts)
| | | | | | | | | | | | | | | | | |
|
Period | | Total number of
shares purchased | | Average price paid
per share | | Total number of shares
purchased as part of publicly
announced plans or
programs | | Maximum number of shares
(or approximate dollar
value) that may yet be
purchased under the plans
or programs | |
|
| | | | | | | | | | | | | | | | | |
June 1, 2008 through
June 30, 2008 | | 151,075 | | | | $ | 28.95 | | | 151,075 | | | | $ | 15.6 | (1) | |
| | | | | | | | | | | | | | | | | |
July 1, 2008 through
July 31, 2008 | | 100,713 | | | | $ | 27.36 | | | 100,713 | | | | $ | 12.9 | (1) | |
| | | | | | | | | | | | | | | | | |
August 1, 2008 through August 31, 2008 | | 171,792 | | | | $ | 26.36 | | | 171,792 | | | | $ | 8.3 | (1) | |
| | | | | | | | | | | | | | | | | |
September 1, 2008 through September 30, 2008 | | 33,508 | | | | $ | 25.58 | | | 33,508 | | | | $ | 7.4 | (1) | |
| | | | | | | | | | | | | | | | | |
October 1, 2008 through October 31, 2008 | | 345,380 | | | | $ | 21.67 | | | 345,380 | | | | $ | — | (1) | |
| | | | | | | | | | | | | | | | | |
November 1, 2008 through November 30, 2008 | | 6,407 | | | | $ | 13.28 | | | 6,407 | | | | $ | 9.9 | (1) | |
| | | | | | | | | | | | | | | | | |
December 1, 2008 through December 31, 2008 | | 426,979 | | | | $ | 13.83 | | | 426,979 | | | | $ | 4.0 | (1) | |
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January 1, 2009 through January 31, 2009 | | 314,600 | | | | $ | 12.61 | | | 314,600 | | | | $ | — | (1) | |
| | | | | | | | | | | | | | | | | |
February 1, 2009 through February 28, 2009 | | 154,066 | | | | $ | 10.89 | | | 154,066 | | | | $ | 3.4 | (1) | |
| | | | | | | | | | | | | | | | | |
Total | | 1,704,520 | | | | $ | 18.56 | | | 1,704,520 | | | | $ | 3.4 | (1) | |
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(1) | On May 28, 2008, the Company announced that its Board of Directors had authorized a new program to purchase up to $20.0 million of Common Stock, from time to time as conditions allow, on the open market or through negotiated private transactions. On November 20, 2008 and February 4, 2009, the Board of Directors authorized further programs to repurchase up to an additional $10.0 million and $5.0 million, respectively, of its Common Stock, which will be funded with available cash and pursuant to which the Company may purchase shares from time to time as conditions allow on the open market. |
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SCHOLASTIC CORPORATION |
Item 6. Exhibits |
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Exhibits: | |
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31.1 | Certification of the Chief Executive Officer of Scholastic Corporation filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 | Certification of the Chief Financial Officer of Scholastic Corporation filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32 | Certifications of the Chief Executive Officer and Chief Financial Officer of Scholastic Corporation furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SCHOLASTIC CORPORATION |
SIGNATURES |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | |
| | SCHOLASTIC CORPORATION |
| | (Registrant) |
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Date: April 9, 2009 | By: | /s/ Richard Robinson |
| |
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| | Richard Robinson |
| | Chairman of the Board, |
| | President and Chief |
| | Executive Officer |
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| | |
| | |
Date: April 9, 2009 | | /s/ Maureen O’Connell |
| |
|
| | |
| | Maureen O’Connell |
| | Executive Vice President, |
| | Chief Administrative Officer |
| | and Chief Financial Officer |
| | (Principal Financial Officer) |
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SCHOLASTIC CORPORATION |
QUARTERLY REPORT ON FORM 10-Q, DATED FEBRUARY 28, 2009 |
Exhibits Index |
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Exhibit
Number | | Description of Document |
| |
|
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| 31.1 | | Certification of the Chief Executive Officer of Scholastic Corporation filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| 31.2 | | Certification of the Chief Financial Officer of Scholastic Corporation filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| 32 | | Certifications of the Chief Executive Officer and Chief Financial Officer of Scholastic Corporation furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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