Scholastic Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended May 31, 2016. Although the request metadata refers to “2015 Q4,” this filing is an annual report for FY2016; it also reports FY2016 fourth-quarter results. Amounts are in U.S. dollars unless stated otherwise.
Business context and reporting period
Scholastic publishes and distributes children’s books, educational materials and children’s media. Its three continuing-operation segments are Children’s Book Publishing and Distribution, Education, and International. The business is seasonal, with school-based activity concentrated outside the first and third fiscal quarters. The Educational Technology and Services business was sold in May 2015 and is reported as discontinued operations.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue from continuing operations | $1,672.8 million | $1,635.8 million |
| Operating income | $67.6 million; 4.0% margin | $32.9 million; 2.0% margin |
| Continuing-operations earnings | $44.0 million | $15.5 million |
| Diluted EPS from continuing operations | $1.26 | $0.46 |
| Net income | $40.5 million | $294.6 million |
| Cash and cash equivalents at year-end | $399.7 million | $506.8 million |
| Total debt | $6.3 million | $6.0 million |
| Working capital | $571.8 million | $562.9 million |
Revenue increased 2.3%. Cost of goods sold declined to 45.6% of revenue from 46.4%, while SG&A rose to 46.5% from 47.1%. FY2016 operating results included $11.9 million of severance and $14.4 million of asset impairments. The effective tax rate was 36.0%, compared with 48.2%.
- Children’s Book Publishing and Distribution: Revenue rose 4.6% to $1,002.5 million; segment operating income increased to $110.6 million from $85.6 million. Trade sales benefited from Harry Potter-related titles; book fair revenue rose with higher revenue per fair and a larger fair count. Minecraft handbook sales fell to $22.2 million from $57.1 million.
- Education: Revenue rose 8.0% to $298.1 million and operating income increased to $52.8 million from $48.4 million, supported by classroom books, guided reading programs and magazine circulation.
- International: Revenue fell 7.2% to $372.2 million and operating income declined to $11.4 million from $20.6 million. Local-currency revenue increased $14.2 million, but was more than offset by $43.2 million of adverse foreign-exchange translation.
FY2016 fourth-quarter revenue was $513.8 million and earnings from continuing operations were $34.9 million. The filing reports seasonality; quarterly results should be interpreted in that context.
Cash flow, liquidity and capital
Operating cash flow was negative $78.9 million, versus positive $166.9 million in FY2015. Continuing operations used $68.0 million of operating cash. The company attributed the decline primarily to approximately $186 million of tax payments related to the prior-year sale gain and cash use from discontinued operations. Investing activities used $39.5 million; financing activities provided $12.0 million. Cash declined by $107.1 million during the year.
At May 31, 2016, Scholastic had $399.7 million of cash, $6.3 million of short-term debt and no borrowings under its $425 million Loan Agreement. It reported approximately $425 million of available funding under that agreement and $37.1 million of availability under short-term credit facilities. The company said available liquidity was sufficient for operations and planned uses. Its business is seasonal and typically uses cash in the June-to-October period.
Capital expenditures were $35.6 million, in addition to $25.2 million of prepublication and production expenditures. Management expected higher capital spending, primarily for the New York headquarters renovation, and increased strategic technology investment. The company declared $0.60 per share in dividends for FY2016 and repurchased $14.4 million of common stock.
Material changes, outlook and risks
- Continuing-operations earnings and operating income improved substantially year over year, but reported net income fell from $294.6 million to $40.5 million because FY2015 included a $275.6 million after-tax gain associated with the Ed Tech sale. FY2016 discontinued operations recorded a $3.5 million loss.
- Management expected FY2017 strength in Children’s Books and Education, including revenue from new Harry Potter publications, and anticipated maintaining current revenue levels in school book clubs and fairs while emphasizing more profitable execution. International outlook included planned growth in trade publishing and education. No numerical revenue or earnings guidance was provided.
- Management expected the transition-services agreement with the Ed Tech buyer to end August 1, 2016. It cautioned that failure to reduce overhead previously allocated to that business could pressure earnings, and that the sale leaves the company less diversified.
- Other risks include foreign-exchange exposure, changing print and digital preferences, competition and school funding constraints, dependence on successful titles and school-channel participation, cyber and children’s privacy risks, technology-system implementation, paper and distribution costs, and weather-related disruption. The company also cited uncertainty following the UK’s Brexit vote.
- FY2016 unusual items included $7.5 million of impairment for building improvements abandoned during the headquarters renovation, $6.9 million of legacy prepublication-asset impairment, and a $2.2 million gain on sale of a China-based investment. The company settled certain IRS matters and recognized $4.9 million of previously unrecognized tax benefits.
- Subsequent to year-end, the board approved termination of the frozen U.S. Pension Plan, subject to regulatory approvals; the company expected the process to take 18–24 months. The Robinson family’s Class A shares retain control over most director elections and stockholder votes.
Most important facts for investors to verify
- Whether revenue growth and improved operating margins are sustainable, particularly in book fairs, trade publishing and Education.
- Whether FY2017 performance and the expected contribution from new Harry Potter titles matched management’s qualitative outlook.
- How operating cash flow develops after the unusually large tax payments, and whether seasonal borrowing needs remain modest.
- Progress, cost and timing of the headquarters renovation and enterprise technology upgrades, including any further impairment charges or operating disruption.
- Effects of foreign exchange, school-channel participation, the Ed Tech transition-services termination and overhead reductions on earnings and liquidity.
- Potential outcomes of tax examinations, legal claims and the proposed pension-plan termination; the filing says ordinary-course litigation is not expected to have a material adverse effect.