Scholastic Corporation — Q1 fiscal 2020 10-Q
Reporting period: Three months ended August 31, 2019. Amounts are in millions of dollars except per-share data. The quarter is typically seasonally weak because schools are not in session; Scholastic generally reports operating losses in its first and third fiscal quarters.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $232.6 | $218.4 |
| Operating loss | $(87.4) | $(83.8) |
| Net loss | $(58.5) | $(61.3) |
| Diluted loss per share | $(1.68) | $(1.75) |
| Cash used in operating activities | $(97.6) | $(89.0) |
- Revenue increased $14.2, or about 6.5%, led by trade publishing. Cost of goods sold rose to $137.1 from $125.3; as a share of revenue, it increased to 58.9% from 57.4%, implying gross margin declined to 41.1% from 42.6%.
- Operating expenses increased: SG&A was $167.5 versus $163.7, and depreciation and amortization was $15.4 versus $13.2. The operating loss widened, despite the smaller net loss; net loss improved by $2.8.
- Effective tax rate was 32.8%, compared with 26.5% in the prior-year quarter. Management expects a full-year rate of approximately 32.7%, excluding discrete items.
- Cash and equivalents were $199.4 at quarter-end, down from $334.1 at May 31, 2019 and $269.8 a year earlier. Investing activities used $24.3, while financing activities used $12.3.
- Working-capital demands included an $85.3 cash outflow from inventory and a $29.1 cash outflow from income tax receivable. Management attributed increased operating cash use year over year primarily to higher customer receivables from trade revenue.
- At August 31, debt was $13.0, all under short-term local-currency lines; there were no borrowings under the $375.0 revolving loan agreement. Cash plus available short-term facilities and revolving credit supported management’s view that liquidity was sufficient for ongoing needs.
Segments and material changes
- Children’s Book Publishing and Distribution: Revenue rose to $109.6 from $95.7, principally on successful trade titles, including Dog Man: For Whom the Ball Rolls and Wings of Fire: The Poison Jungle. Operating loss improved to $41.7 from $46.0. Book club revenue declined; book fair revenue increased.
- Education: Revenue edged up to $48.4 from $47.9, with initial Scholastic Literacy sales and higher professional learning and dealer-trade teaching-resource sales. Operating loss improved to $13.4 from $14.9.
- International: Revenue was $74.6 versus $74.8. Local-currency revenue increased $2.4, offset by $2.6 of unfavorable foreign exchange. Operating loss widened to $3.7 from $2.0, partly due to higher employee costs and lower equity-method investment income.
- Unallocated overhead expense increased $7.7 to $28.6, reflecting technology and data-analytics initiatives, related depreciation, higher severance, and a $1.5 patent-claim settlement accrual.
- Scholastic adopted lease accounting Topic 842 in fiscal Q1, recording operating lease right-of-use assets of $81.7 and operating lease liabilities of $85.2 at August 31, 2019. Prior-year balance-sheet amounts were not restated.
- The company repurchased $12.6 of common stock and paid $5.3 in dividends. It had $40.2 remaining under its repurchase authorization. Treasury stock purchases reduced cash and equity.
Outlook, risks and contingencies
- Management said the digital transformation of book clubs is on track and expects to operate approximately 120,000 U.S. book fairs in fiscal 2020. It also cited ongoing cost-management and technology-informed process-improvement efforts intended to improve operating margins. No specific revenue or earnings guidance was provided.
- Seasonality is significant: school-based book club, book fair and much Education activity is concentrated around the school year, and trade sales vary with title release timing. Management expects negative cash flows during the June–October period.
- Risks include foreign-exchange exposure, variable-rate borrowing costs, sales-tax compliance and potential related litigation. Following the Wayfair decision, the school book club channel was remitting sales tax in 43 states, compared with 11 a year earlier; state-by-state retroactive application remains uncertain.
- Various ordinary-course claims and lawsuits are pending. A $1.5 accrual was recorded for an alleged patent-infringement claim settlement, expected to be finalized in fiscal Q2; the company stated that other probable or reasonably possible claims were not expected to have a material adverse effect.
- The board declared a $0.15-per-share quarterly dividend for fiscal Q2, payable December 16, 2019 to holders of record October 31, 2019.
Key facts for investors to verify
- Whether higher trade sales and new Education products can offset rising paper, printing, product and prepublication costs and support margin recovery.
- How seasonal working-capital needs affect cash, inventory and borrowing through the remainder of the school-year cycle.
- Progress and costs of the book-club digital transformation, technology initiatives and planned book fair volume.
- Updates on the patent settlement, sales-tax exposure and any changes in credit availability or covenant compliance.
- Performance by segment, including International results after currency effects and Education revenue from Scholastic Literacy.