Of all the creative excuses that companies tend to come up with when earnings disappoint, or when earnings are restated, the one that Scholastic (SCHL) came up with in the 10K it filed yesterday is definitely up there:

The decline in profitability of the DTH business was primarily a result of the federal Do Not Call legislation, which negatively impacted the business’ marketing programs. Accordingly, the Company determined that all $92.4 of goodwill ($61.0 after recognition of deferred tax benefits) attributable to the DTH reporting unit was impaired as of May 31, 2005.

Of course, more important than the excuse is the actual outcome of restating earnings back to May 2005, which doesn’t seem to have gotten much attention in the press release, news reports or conference call. Indeed, the whole footnote — #2, if you want to read it directly — seems like a great exercise in accouting and legal-speak meant to make the restatement less clear, instead of more. Based on my reading of the footnote, the company’s Direct to Home business, which it is currently negotiating to sell, was incorrectly lumped into another unit of the company, which prompted the restatement. If you review the conference call transcript, two different executives describe the Direct to Home unit as either “an important source of margin growth for the company” or “unprofitable”.

There was one other interesting (and overly legalistic) disclosure in the filing. At the end of a long list of risk factors that include everything from exchange rates to the weather, the lawyers throw this little pearl at the end: “These factors should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by the Company prior to the date hereof. The Company disclaims any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.”

One wonders what Harry Potter would have to say about that!

This entry was posted Thursday, July 31st, 2008 at 9:59 am written by Michelle Leder and is filed under Buried treasure, Earnings quality with the following tags: 10-Ks, earnings restatements. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.