Scholastic Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended November 30, 2018 (fiscal 2019). Amounts are in millions of dollars except per-share data. The business is highly seasonal, with school-based activity concentrated in the second and fourth fiscal quarters.
Financial performance
| Metric | Three months ended Nov. 30, 2018 | Prior-year quarter | Six months ended Nov. 30, 2018 | Prior-year period |
|---|---|---|---|---|
| Revenue, reported | $604.7 | $598.3 | $823.1 | $787.5 |
| Revenue, adjusted for Topic 606 comparability | $615.5 | $598.3 | $821.4 | $787.5 |
| Operating income, reported | $98.2 | $107.2 | $14.4 | $5.4 |
| Operating income, adjusted for Topic 606 comparability | $103.8 | $107.2 | $14.8 | $5.4 |
| Net income (loss), reported | $71.6 | $57.1 | $10.3 | $(6.6) |
| Net income (loss), adjusted for Topic 606 comparability | $75.7 | $57.1 | $10.6 | $(6.6) |
| Diluted EPS, reported | $1.99 | $1.60 | $0.29 | $(0.19) |
| Diluted EPS, adjusted for Topic 606 comparability | $2.10 | $1.60 | $0.30 | $(0.19) |
Topic 606 was adopted June 1, 2018 using the modified retrospective method; prior periods were not restated. It reduced opening retained earnings by $46.5. The company’s comparable-period adjustments show the effects of changed timing for book-fair incentive revenue and magazine advertising expense.
- Quarter: On the adjusted basis, revenue rose 2.9%, while operating income declined 3.2%. Trade publishing gains were partly offset by higher royalty costs, employee expenses, sales-tax compliance costs and depreciation and amortization. Adjusted cost of goods sold increased to 43.1% of revenue from 42.4%.
- Six months: Adjusted revenue rose 4.3%; adjusted operating income was $14.8 versus $5.4, and adjusted net income was $10.6 versus a $6.6 loss. The prior-year period included a $6.7 asset impairment and a $15.4 pension settlement charge; these items make comparisons less directly indicative of underlying performance.
- Revenue mix: For the quarter, adjusted Children’s Book Publishing and Distribution revenue increased $12.7, Education rose $2.5, and International rose $2.0. For six months, adjusted Children’s Book Publishing and Distribution rose $27.5 and Education rose $7.5, while International declined $1.1, including a $6.3 adverse foreign-exchange impact.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $39.5, versus $28.4 a year earlier. Investing activities used $72.5, including $51.3 of property and equipment additions and $20.6 of prepublication and production spending. Financing activities were approximately break-even; dividends paid were $10.6.
- Cash and equivalents were $358.1 at November 30, compared with $391.9 at May 31. Accounts receivable was $377.3 and inventory was $365.6. Working-capital balances are affected by the seasonal business cycle.
- Total debt was $13.5, all short-term unsecured line borrowings; there were no borrowings under the $375.0 revolving Loan Agreement. The company reported $358.1 of cash and approximately $375.0 of Loan Agreement capacity. It also reported $36.6 available under short-term credit facilities after borrowings and commitments. The company was in compliance with loan covenants.
- Current liabilities included $187.2 of deferred revenue, up from $24.7 at May 31, 2018, reflecting in part Topic 606 book-fair incentive credits. The company recorded a $78.7 expected-returns liability and a $9.4 return asset.
- The quarterly dividend was $0.15 per share, unchanged from the prior-year quarter. No common-stock repurchases occurred during the six-month period; $61.4 remained under the repurchase authorization.
Outlook, commentary and risks
- Management said Education revenue was in line with expectations and cited momentum in classroom magazines, classroom libraries and professional learning. Scholastic Literacy, a new K–6 reading curriculum, was expected to launch in the second half of fiscal 2019. The technology transformation was described as on schedule, with new digital subscription offerings introduced and ERP implementation continuing.
- The filing provides no specific full-year revenue or earnings guidance. Management expected a fiscal-year effective tax rate of approximately 29.1%, excluding discrete items.
- Book-club sales-tax collection requirements following the Supreme Court’s Wayfair decision may raise costs and affect revenue, profits and cash flows; the company said implementation changes were expected to begin in the third fiscal quarter. The timing and customer response are uncertain. The company’s book-club channel was remitting sales taxes in 13 states, compared with nine a year earlier.
- Wisconsin assessed Scholastic Book Fairs $5.4, excluding penalties and interest, for sales taxes covering fiscal years 2003–2014. The company disputes the assessment but recorded a charge related to a proposed settlement; the charge amount is not clearly stated in the filing text.
- Foreign-exchange movements affect reported International results. The company uses foreign-currency contracts as economic hedges; open-contract notional value was $30.0. The company also noted ordinary-course litigation and sales-tax examinations, without expecting currently probable or reasonably possible litigation losses to materially harm consolidated results or financial position.
- Operating leases are expected to bring right-of-use assets and lease liabilities onto the balance sheet when the new lease standard is adopted in fiscal 2020; the impact was still under evaluation.
Most important facts for investors to verify
- Use the Topic 606-adjusted figures for period comparisons, and distinguish them from the reported GAAP results.
- Assess whether trade-title growth can offset higher royalty costs and whether segment profitability is sustainable beyond the seasonal second-quarter peak.
- Monitor sales-tax compliance costs, the Wisconsin assessment and any resulting customer or cash-flow effects.
- Track cash conversion and working-capital swings, especially receivables, inventory, deferred revenue and returns liabilities.
- Evaluate progress and spending on Scholastic Literacy and technology initiatives, and the eventual balance-sheet effect of lease-standard adoption.