Scholastic Corporation — Form 10-Q Summary
Business context and reporting period. This filing covers the fiscal third quarter and nine months ended February 28, 2023 (fiscal 2023; the filing is sometimes identified by calendar-year quarter). Scholastic operates in Children’s Book Publishing and Distribution, Education Solutions, and International. The business is highly seasonal, with education and school-channel revenues generally stronger in the fourth fiscal quarter. Figures are in millions of dollars except per-share data.
Key financial results
| Metric | Three months ended Feb. 28 | Nine months ended Feb. 28 |
|---|---|---|
| Revenue | $324.9, down 6% from $344.5 | $1,175.7, up 4% from $1,128.5 |
| Operating income (loss) | $(27.7), versus $(19.5) | $14.3, versus $31.9 |
| Net income (loss) attributable to Scholastic | $(19.2), versus $(15.3) | $10.6, versus $28.8 |
| Diluted EPS | $(0.57), versus $(0.44) | $0.30, versus $0.80 |
| Cost of goods sold as a share of revenue | 49.6%, versus 49.2% | 48.1%, versus 47.9% |
| Cash from operating activities | Not separately reported for the quarter | $28.9, versus $178.5 |
- Segment trends: Quarterly Children’s Book Publishing and Distribution revenue rose 1.5% to $204.0, but operating income fell to $1.9 from $5.0. Education Solutions revenue declined 9.3% to $70.0 and operating income fell to $0.7 from $13.1. International revenue declined 23.2% to $50.9 and its operating loss widened to $9.0 from $5.0.
- For the nine months, Children’s Book Publishing and Distribution revenue increased 11.6% to $747.0 and operating income rose to $85.0 from $68.5. Education Solutions revenue fell 5.7% to $223.2 and operating income fell to $3.4 from $36.0. International revenue fell 7.6% to $205.5 and recorded an operating loss of $5.8, versus income of $2.0.
- Cash, liquidity, and debt: Cash was $198.8 at February 28, 2023, down from $316.6 at May 31, 2022. Operating cash flow was pressured by inventory purchases; inventory rose to $367.5 from $281.4 at fiscal year-end. Investing used $65.3 and financing used $79.3 over nine months. Debt was $5.2, all short-term; there were no borrowings under the $300.0 U.S. revolving facility, with $299.6 available after commitments. Management said liquidity was sufficient for anticipated needs. The company was in compliance with credit covenants.
- Stockholders’ equity was $1,149.9 at February 28, 2023, compared with $1,218.4 at May 31, 2022. The company repurchased $78.0 of common stock during the nine-month period and paid $18.9 in dividends.
Material changes and management commentary
- Quarterly revenue fell mainly because of softer children’s book retail demand and lower Education Solutions sales amid school purchasing delays and changes in literacy instruction. Stronger U.S. book-fair sales partly offset those declines. Nine-month revenue growth was led by book fairs, including higher fair counts, revenue per fair, and incentive-credit redemptions.
- Inflation in print, freight, labor, and other product costs, plus higher Education Solutions inventory reserves, weighed on margins. Management said higher-cost inventory bought to address long supply lead times was expected to affect fourth-quarter fiscal 2023 cost of goods sold and margins.
- Management expected book fairs to continue improving, particularly in the U.S. It also expected weak retail-book-market conditions to pressure trade sales and said school purchasing softness could continue. Education Solutions was integrating Learning Ovations and preparing to launch the Ready4Reading K–3 phonics program. International results faced economic weakness in the UK and Canada and unfavorable currency translation.
- Operating cash flow fell substantially year over year, primarily due to increased inventory purchases to mitigate supply-chain lead times and a $63.1 federal tax refund received in the prior-year period. Cash flow also reflected higher book-fair spending; stronger customer collections partly offset these pressures.
Risks, contingencies, and unusual items
- The company received $5.0 of insurance recoveries for previously paid photo-litigation settlements and recognized a benefit from a favorable settlement of legacy sales-tax matters in the third quarter. The filing says ordinary-course lawsuits are not expected to have a material adverse effect; additional insurance recoveries related to prior litigation were not quantifiable.
- The fiscal 2023 nine-month effective tax rate was 36.3%, versus 19.7% a year earlier, affected by a GILTI inclusion, prior-year release of IRS examination reserves, and tax shortfalls related to vested option cancellations. The IRS examination of fiscal 2015–2020 concluded without an impact to results; the company received a $9.8 refund, including interest.
- The company completed its exit from the Asia direct-sales business in the first quarter of fiscal 2023. In fiscal 2022 it had recorded a $15.1 loss related to the exit; the business had generated losses in the prior period.
- On February 28, 2023, the company amended its credit agreement to transition from LIBOR to SOFR. It reported no material effect expected on access to credit. Foreign exchange, variable interest rates, inflation, supply-chain costs, seasonality, and the timing of school purchasing remain relevant risks.
- After quarter-end, the Board declared a $0.20-per-share quarterly dividend and authorized an additional $50.0 for share repurchases. The resulting authorization was $75.2 after $3.0 of post-quarter repurchases.
Important facts for investors to verify
- Whether book-fair growth and revenue per fair continue to offset weaker trade and book-club demand.
- Whether school and district purchasing delays persist, and whether Education Solutions investments and Ready4Reading produce improved sales and profitability.
- The effect of higher-cost inventory, inflation, freight, labor, and inventory reserves on fourth-quarter margins and cash flow.
- Cash generation and liquidity after substantial inventory spending, dividends, and continued share repurchases.
- The magnitude of ongoing currency and economic pressures in International markets, and the sustainability of reported insurance and tax-related benefits.