Scholastic Corporation — Q1 FY2022 10-Q
Reporting period: Three months ended August 31, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. The quarter is seasonally weak, as school-based channels are typically limited while schools are not in session.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Revenue | $259.8 | $215.2 |
| Operating loss | $32.0 | $57.0 |
| Net loss attributable to Scholastic | $24.2 | $39.8 |
| Diluted loss per share | $0.70 | $1.16 |
| Operating cash flow | $63.6 provided | $26.0 used |
| Cash and cash equivalents | $308.6 | $355.5 at August 31, 2020 |
| Total debt | $89.5 | $219.9 at August 31, 2020 |
Revenue increased 20.7% year over year. Cost of goods sold was 51.3% of revenue versus 53.4%, implying gross margins of 48.7% and 46.6%, respectively. Operating loss margin improved to approximately 12.3% from 26.5%. The tax benefit was $8.9; the effective tax rate was 26.7%, compared with 23.2%.
Cash from operations improved by $89.6 year over year, principally reflecting a $63.1 federal tax refund, $6.6 of insurance recoveries, and lower inventory purchases. Investing activities used $14.5, including $10.2 of property, plant and equipment additions and $4.3 of prepublication expenditures. Financing activities used $105.6, including repayment of $100.0 of U.S. revolver borrowings and $5.2 of dividends. Cash decreased $57.9 during the quarter.
Segments and changes versus prior year
- Children’s Book Publishing and Distribution: Revenue rose to $115.8 from $92.3; operating loss narrowed to $21.7 from $29.0. Trade sales, book fairs and book clubs increased.
- Education Solutions: Revenue increased to $80.1 from $53.6, and operating results shifted to income of $7.3 from a loss of $2.4. Growth included instructional programs, summer learning products, classroom collections and digital products.
- International: Revenue fell to $63.9 from $69.3; results shifted to a $1.7 operating loss from $4.8 income. COVID-related restrictions in Australia and New Zealand and weaker Asia direct-to-home sales weighed on results; favorable foreign exchange added $3.6 to reported revenue.
- Overhead: Expense declined to $15.9 from $30.4, mainly due to lower restructuring costs and the $6.6 insurance recovery.
Consolidated operating loss improved with higher sales and prior-year restructuring benefits. The prior-year quarter included a $6.6 gain on the sale of the Danbury facility, which did not recur. SG&A rose $1.9, partly reflecting the absence of prior-year furloughs and reduced workweeks; COVID-related government subsidies also declined.
The company reclassified certain editorial costs from cost of goods sold to SG&A in prior periods. It said the classification errors were not material and the adjustment had no effect on total expenses, operating income or net income.
Liquidity, debt and capital
At August 31, 2021, current assets were $958.1 and current liabilities were $661.6. Total debt was $89.5, all classified as current; this included $75.0 outstanding under the U.S. revolving facility. The company repaid $100.0 of that facility during the quarter. Cash was $308.6, and reported availability under its U.S., UK and short-term credit facilities was approximately $205.9 in total.
The amended U.S. credit agreement has a $250.0 commitment and matures January 5, 2022. It includes a minimum $200.0 consolidated-liquidity covenant; the company reported compliance and said it intends to amend and extend the facility before maturity. The company declared a $0.15-per-share dividend payable December 15, 2021. No common-share repurchases were made during the quarter.
Outlook, risks and unusual items
- Management expected sequential improvement in school-based channels as schools reopened, with book fair bookings improving and current fall bookings substantially ahead of the prior spring season. It anticipated potential benefit from federal education stimulus spending. No quantified full-year revenue or earnings guidance was provided.
- Management cited inflation in paper, freight and other costs, supply-chain disruption and possible labor shortages as risks to costs and revenue fulfillment. COVID-related restrictions and uncertainty about in-person, remote or hybrid instruction remained risks, especially for international operations.
- The quarter included a $63.1 federal tax refund, primarily from carrying back U.S. net operating losses. This materially supported operating cash flow and is not recurring operating performance.
- A $20.0 legal settlement related to intellectual property from a formerly owned business was accrued in fiscal 2021 and paid in September 2021. Scholastic received $6.6 of insurance recoveries in Q1 FY2022 and said further recoveries were expected but could not yet be estimated.
- The company said it expected sufficient liquidity for anticipated operating and financing needs. Its highly seasonal business typically experiences negative cash flows from June through October and borrowing needs historically peak around September or October.
Important facts for investors to verify
- Progress and terms of the planned extension of the U.S. credit facility before its January 2022 maturity, including covenant compliance and liquidity.
- Whether school reopening translates into sustained book fair, book club and education-channel growth across the fiscal year.
- How inflation, freight and paper costs, supply constraints, labor availability and COVID-related disruptions affect margins and fulfillment.
- The composition and sustainability of operating cash flow, particularly the effect of the one-time tax refund and insurance recovery.
- Timing and amount of any further insurance recoveries related to the $20.0 settlement.