Scholastic Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the three months ended August 31, 2016. The unaudited filing compares results with the quarter ended August 31, 2015. Scholastic’s school-oriented businesses are highly seasonal; the first quarter typically incurs an operating loss as school-based revenue is limited.
Financial results
- Revenue: $282.7 million, up $91.5 million (47.9%) year over year. The release of Harry Potter and the Cursed Child: Parts One and Two was the principal driver.
- Profitability: Operating loss was $63.1 million, versus $79.5 million. Continuing-operations loss was $39.5 million, versus $48.9 million; net loss was $39.6 million, or $1.15 per diluted share, versus $49.4 million, or $1.48 per share.
- Costs and margins: Cost of goods sold was 60.0% of revenue, compared with 59.9%. Higher royalties on Harry Potter sales pressured the rate, partly offset by favorable fixed-cost leverage and lower fulfillment and shipping costs. SG&A rose to $166.6 million from $145.7 million, reflecting employee costs and strategic technology spending.
- Segments: Children’s Book Publishing and Distribution revenue rose to $137.8 million from $67.7 million, and its operating loss narrowed to $36.2 million from $56.0 million. Education revenue increased to $55.2 million from $50.4 million, while its operating loss was $4.4 million versus $4.3 million. International revenue increased to $89.7 million from $73.1 million, and the segment moved to $3.9 million of operating income from a $2.7 million loss.
- Cash flow: Operating cash use was $105.5 million, compared with $291.7 million in the prior-year quarter; the improvement was primarily due to approximately $186 million of lower tax payments related to the prior-year Ed Tech sale. Investing cash use was $12.4 million; financing provided $5.8 million. Cash declined $112.1 million during the quarter.
- Liquidity and debt: Cash and equivalents were $287.6 million at August 31, down from $399.7 million at May 31, 2016. Debt was $12.1 million, consisting of short-term credit-line borrowings; no borrowings were outstanding under the $425.0 million revolving facility. The company reported $30.7 million of availability under short-term facilities, net of borrowings and commitments, and said it expected liquidity to be sufficient for ongoing needs.
- Other metrics: Quarterly dividends declared were $0.15 per share. The quarter’s effective tax rate was 37.7%; management expected a full-year rate of approximately 42%, inclusive of discrete items.
Changes, outlook and risks
- Management said all three segments posted year-over-year revenue gains. It expected the most significant portion of Harry Potter and the Cursed Child sales in Q1 and anticipated the late-Q2 release of Fantastic Beasts and Where to Find Them and related licensed publishing.
- Education growth included double-digit growth in customized curriculum solutions. Management also highlighted continued investment in technology systems, premium retail space and headquarters modernization; it expected higher strategic investment spending in the current and future fiscal years.
- Management cited increased employee-related costs, including wage increases for U.S. hourly workers, as a source of modestly higher future costs. International bad-debt expense increased, particularly in Thailand, due to economic conditions.
- The Board approved termination of the frozen U.S. Pension Plan. Regulatory approvals are required, and the process is expected to take 18–24 months. If lump-sum payments exceed $3.2 million in the fiscal year, the company expects to recognize a settlement charge; $0.7 million of such payments had been made in Q1.
- Foreign-exchange exposure and variable-rate borrowing costs are identified market risks. The company uses foreign-currency forward contracts as economic hedges; their notional value was $30.8 million at quarter-end. The filing also notes ongoing tax examinations and ordinary-course legal claims, which management did not expect to have a material adverse effect. A $5.0 million Ed Tech-sale escrow balance remained restricted and subject to release absent disputes.
Investor verification points
- Assess how much of the revenue and earnings improvement depended on the Harry Potter release, and whether subsequent title sales sustain performance.
- Track seasonal working-capital needs, cash use and borrowing levels as school-year activity ramps up.
- Monitor execution and returns from technology and facilities investments, alongside rising employee costs.
- Verify the full-year tax-rate outlook, pension-termination costs and any settlement charge.
- Review foreign-exchange and international credit risks, the remaining escrow release, and compliance with credit-facility covenants.