Scholastic Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended November 30, 2015 (fiscal 2016). Dollar amounts are in millions except per-share data. The company’s business is highly seasonal, with school-based sales concentrated in the second and fourth fiscal quarters.
Financial performance
| Metric | Three months ended Nov. 30, 2015 | Six months ended Nov. 30, 2015 |
|---|---|---|
| Revenue | $601.8; prior year $611.1 | $793.0; prior year $801.6 |
| Operating income | $105.1; prior year $110.9 | $25.6; prior year $24.1 |
| Continuing-operations earnings | $65.2; diluted EPS $1.85 | $16.3; diluted EPS $0.47 |
| Net income | $64.9; diluted EPS $1.84 | $15.5; diluted EPS $0.44 |
| Cash from operating activities | Six-month use: $178.0, versus $90.9 provided in the prior-year period |
Margins and segments: Consolidated cost of goods sold was 42.7% of revenue for the quarter (42.2% prior year) and 46.9% for six months (46.3% prior year). For the quarter, Children’s Book Publishing and Distribution revenue was $414.0 and segment operating income $108.9; Education revenue was $72.1 and operating income $11.9; International revenue was $115.7 and operating income $11.5. International operating margin fell to 9.9% from 14.9%. Six-month segment operating income was $51.4, $9.1, and $8.8, respectively.
Balance sheet and liquidity at Nov. 30, 2015: Cash and equivalents were $360.9, plus $24.7 of restricted escrow cash. Total assets were $1,823.2; stockholders’ equity was $1,248.1. Debt was $12.0, all short-term local-currency lines of credit; there were no borrowings under the $425.0 revolving credit facility. The company reported $35.2 available under short-term facilities, in addition to revolving-facility availability. It said liquidity was sufficient for operations, planned investment, dividends, pension contributions, debt service and contemplated share repurchases.
Dividends declared were $0.15 per share for the quarter. Capital and prepublication spending totaled $23.4 for the six months; segment expenditures for long-lived assets, including royalty advances, were $40.2.
Material changes and management commentary
- Quarter revenue declined $9.3 year over year, mainly from $17.2 of unfavorable foreign-exchange impact in International and $6.7 lower Canadian local-currency revenue following an Ontario school labor action. The dispute was settled, but management did not expect to recover all lost Canadian book-club and book-fair sales.
- U.S. book fairs and trade publishing performed well; book-fair revenue rose $13.9 in the quarter, and Education revenue increased with higher magazine circulation and digital/custom publishing. Later school openings weighed on domestic book clubs. Minecraft handbook sales across children’s publishing channels fell to $10.6 in the quarter from $33.6.
- International revenue and segment income declined, affected by the stronger U.S. dollar, Canadian sales weakness and the associated fixed-cost impact. Foreign-exchange translation reduced revenue by $17.2 for the quarter and $28.9 for six months.
- Quarter continuing-operations earnings declined to $65.2 from $67.6. Six-month continuing-operations earnings improved to $16.3 from $13.7, while six-month net income fell to $15.5 from $34.4, chiefly because the prior-year period included earnings from the Ed Tech business, sold in May 2015 and reported as discontinued operations.
- Operating cash use reflected approximately $186 of income-tax payments related to the prior-year Ed Tech sale gain, as well as seasonal working-capital needs. Management noted that cash use is typical in the June–October period.
Outlook, risks and unusual items
- Management expected a full-year effective tax rate, inclusive of discrete items, of approximately 42.9%. No specific revenue or earnings guidance was provided in the filing text.
- Management expected increased investment during fiscal 2016 as it transforms technology solutions, including enterprise customer/content systems and migration to cloud-based SaaS.
- On December 16, 2015, the board approved a modified Dutch Auction tender offer to buy up to $200.0 of common shares, at a price range to be determined. A separate $50.0 repurchase authorization had been added in July; no shares were repurchased in the first six months.
- The company acquired UK book-fair provider Troubadour, Limited in September for approximately $3.2; the transaction was not considered material. It also recognized a $2.2 pretax gain from selling a China cost-method investment during the quarter.
- Foreign-currency movements and variable-rate borrowing costs are identified market risks. The company used foreign-currency forward contracts with $32.3 notional value at quarter-end. It reported compliance with credit-facility covenants.
- Various ordinary-course claims and lawsuits were pending; management did not expect reasonably possible losses to materially adversely affect financial position or results. The company was also under IRS and New York City tax audits. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Investor verification priorities
- Assess whether Canadian school-channel sales recover after the labor settlement and whether currency pressure continues to constrain International margins.
- Track seasonal working-capital movements, tax payments related to the Ed Tech sale, and the conversion of cash balances into operating cash flow.
- Review the final terms, pricing and funding of the proposed tender offer, alongside the dividend and repurchase authorizations.
- Monitor strategic technology spending, cost savings, and resulting operating expenses and margins.
- Separate ongoing results from discontinued-operation comparisons, especially when evaluating prior-year earnings and cash flows.