Scholastic Corporation — Q1 FY2014 Form 10-Q
Reporting period: Three months ended August 31, 2013. Scholastic’s fiscal year ends May 31. The quarter is seasonally weak: school-based book fairs and clubs generally have limited activity, and the company typically records an operating loss in its first quarter. Dollar amounts are in millions except per-share data.
Financial performance and liquidity
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Revenue | $276.3 | $293.4 |
| Operating loss | $(45.9) | $(47.0) |
| Net loss | $(29.9) | $(32.1) |
| Loss per diluted share | $(0.94) | $(1.02) |
| Cash from (used in) operating activities | $(70.8) | $34.2 |
| Cash from (used in) investing activities | $(24.0) | $(30.3) |
| Cash from (used in) financing activities | $24.0 | $(6.7) |
- Cost of goods sold was 49.9% of revenue, versus 51.4% a year earlier; the improved mix reflected a larger share of higher-margin Educational Technology and Services revenue. SG&A fell to $168.4 from $173.5. The filing does not state a consolidated gross-profit margin or adjusted earnings measure.
- Cash and equivalents were $15.8 at August 31, down from $87.4 at May 31, 2013 and $193.1 a year earlier. Current assets were $788.7 and current liabilities $525.3 at quarter-end.
- Total debt was $29.2, all current, versus $2.0 at May 31, 2013 and $153.4 at August 31, 2012. The company had $15.0 outstanding under its $425.0 revolving facility and reported covenant compliance. It cited about $410.0 of unused revolving capacity and $35.6 of short-term credit facilities, net of borrowings.
- The quarterly dividend was $0.125 per share. After quarter-end, the board declared a $0.15 per-share dividend for the second quarter of FY2014, payable December 16, 2013.
Material changes and segment results
- Revenue declined $17.1, or about 5.8%, mainly because Hunger Games-related sales were $26.2 lower year over year. New Educational Technology products contributed $15.1 of increased revenue; lower-margin Australian software sales and unfavorable foreign exchange also reduced revenue.
- Educational Technology and Services revenue rose 18.5% to $94.8 and operating income increased to $36.2 from $24.8, with a 38.2% operating margin versus 31.0%.
- Children’s Book Publishing and Distribution revenue fell 23.0% to $54.6, primarily due to lower Hunger Games sales; its operating loss widened to $61.5 from $54.9. International revenue declined 12.7% to $78.7 and the segment moved from $2.8 income to a $0.7 loss. Media, Licensing and Advertising revenue fell 27.8% to $10.4 and the segment moved from $0.2 income to a $1.9 loss.
- Classroom and Supplemental Materials Publishing revenue was essentially unchanged at $37.8; its operating loss narrowed to $1.6 from $2.6.
- Net interest expense decreased to $1.9 from $3.7, following the April 2013 maturity of the company’s 5% notes. The current-quarter tax benefit was $17.7; the company reported a 37.0% effective tax rate for the quarter.
Outlook, risks, and unusual items
- Management maintained its FY2014 outlook for revenue of approximately $1.8 billion and diluted EPS from continuing operations of $1.40–$1.80, before one-time cost-reduction items or non-cash, non-operating items. It expected an approximately 40% full-year effective tax rate.
- Management said demand for new instructional technology and guided-reading products was strong and expected Common Core implementation to support a prolonged purchasing period. It also said Hunger Games sales were within expectations and anticipated interest ahead of the Catching Fire film release.
- Operating cash flow was affected by seasonal inventory build: inventory-related cash use exceeded $100 in the quarter. Management also noted that the prior-year comparison included substantial collections following strong Hunger Games sales in the prior fourth quarter. Negative cash flow during the June–October period is typical for the company.
- The quarter included $2.0 of severance expense as part of cost-saving initiatives, including $0.6 in International operations. The company continued to monitor its book-club reporting unit’s goodwill because its valuation depends substantially on the Storia ereading app; management reported no impairment indicators in the quarter but warned future impairment was possible if Storia underperformed and the company could not adjust its strategy.
- Other disclosed exposures include foreign-currency fluctuations, ongoing tax audits and ordinary-course litigation. Management did not expect reasonably possible losses from disclosed litigation to materially harm financial position or results; it also did not expect a material additional liability from the Grolier UK pension-plan settlement issue.
Investor verification points
- Track whether new education products sustain revenue growth and margins, and whether Common Core-related purchasing develops as management expects.
- Assess the trajectory of Hunger Games-related sales and the performance of book fairs and clubs as the school-year selling seasons progress.
- Monitor cash conversion, inventory buildup, seasonal borrowing, cash balances and access to revolving and short-term facilities.
- Review Storia adoption and any subsequent goodwill impairment indicators, as well as severance spending and cost-saving results.
- Check actual FY2014 revenue, EPS and tax-rate results against management’s stated outlook, and follow tax examinations and pension-plan developments.