Scholastic Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended February 28, 2019 (fiscal year ends May 31). The filing reports unaudited results. Scholastic is highly seasonal, and it generally incurs operating losses in its first and third fiscal quarters.
Financial results and key metrics
- Revenue: Third-quarter reported revenue was $360.1 million, up 4.5% from $344.7 million. Excluding the effect of adopting ASC 606, comparable revenue was $350.7 million, up 1.7%. Nine-month reported revenue was $1,183.2 million, up 4.5%; comparable revenue was $1,172.1 million, up 3.5%.
- Profitability: Third-quarter net loss was $12.6 million, or $0.36 per diluted share, versus a $49.2 million loss, or $1.41 per share, a year earlier. Excluding ASC 606, the current-quarter loss was $18.1 million, or $0.52 per share. Nine-month net loss was $2.3 million, or $0.07 per share; excluding ASC 606, it was $7.5 million, or $0.22 per share.
- Operating performance: Reported operating loss was $21.4 million for the quarter and $7.0 million for nine months. On a comparable, ASC 606-excluded basis, operating losses were $28.9 million and $14.1 million, respectively. Comparable consolidated cost of goods sold increased to 49.9% of revenue for the quarter from 48.3%, and to 47.9% for nine months from 47.3%.
- Segments: Comparable third-quarter Children’s Book Publishing and Distribution revenue rose $8.2 million, led by trade titles; Education revenue increased $0.8 million; International revenue fell $3.0 million, including a $4.5 million adverse foreign-exchange impact. For nine months, comparable segment revenue changes were +$35.7 million for Children’s Books, +$8.3 million for Education and -$4.1 million for International.
- Cash flow: Nine-month operating cash flow was $60.5 million, down from $64.9 million. Investing activities used $103.8 million, including $71.0 million of property and equipment additions and $32.3 million of prepublication and production spending. Financing activities used $9.9 million. Cash declined $53.8 million from the fiscal-year opening balance.
- Liquidity and debt: Cash was $338.1 million at February 28, versus $391.9 million at May 31, 2018. Current assets were $1,097.0 million and current liabilities $696.1 million. Debt was $11.0 million, all short-term/local credit-line borrowings; there were no borrowings under the $375 million revolving facility. Management said liquidity was sufficient for ongoing needs.
- Other measures: Stockholders’ equity was $1,269.1 million. The company declared a quarterly dividend of $0.15 per share; $59.4 million remained under its share-repurchase authorization.
Material changes versus the prior comparable period
- ASC 606 adoption on June 1, 2018 reduced opening retained earnings by $46.5 million and changed the timing of book-fair incentive revenue, estimated returns accounting and advertising expense recognition. Prior-year periods were not restated, so reported comparisons are not fully like-for-like. For the quarter, ASC 606 reduced revenue by $9.4 million and net income by $5.5 million; for nine months, it reduced revenue by $11.1 million and net income by $5.2 million.
- Prior-year results included U.S. pension-plan settlement costs of $39.8 million for the quarter and $55.4 million for nine months, substantially contributing to the improvement in reported losses. The pension plan’s final remaining assets were transferred in December 2018.
- Comparable cost of goods sold rose as a share of revenue, reflecting higher royalties on bestselling titles, paper and printing costs, product mix and, in some markets, fulfillment costs. Depreciation and amortization also increased, principally due to technology investments and headquarters upgrades.
- Cash from operations was lower, primarily because customer receivables increased with trade-channel growth. Management said inventory was being increased and suppliers paid more quickly to address capacity constraints and longer lead times.
Outlook, commentary, risks and contingencies
- Management gave no specific consolidated revenue or earnings forecast in the provided filing. It expects a full-year effective tax rate of approximately 30%, excluding discrete items.
- Management reported a positive market response to Scholastic Literacy, a new core reading curriculum, which had competed successfully in several reading adoptions. Related revenue was expected to begin in fiscal 2020’s first quarter.
- Sales-tax compliance following the Wayfair decision is increasing costs; the school book club channel was remitting tax in 38 states and the District of Columbia. The company also disclosed a $5.4 million Wisconsin sales-tax assessment for prior years, excluding penalties and interest, and recorded a charge related to a proposed settlement; the filing does not state the charge amount clearly.
- Other disclosed pressures include higher labor, paper, printing and royalty costs, and unfavorable currency translation in International. Foreign-exchange changes and variable-rate borrowing costs are identified market risks.
- The company expects adoption of lease accounting in fiscal 2020 to significantly increase recognized assets and liabilities, while not significantly changing lease expense. It disclosed ordinary-course claims and lawsuits but did not expect reasonably possible losses to materially affect its financial position or results.
Important facts for investors to verify
- Assess earnings and year-over-year growth using the ASC 606-adjusted comparisons, while recognizing the accounting-policy change and the prior-year pension settlement charge.
- Track conversion of revenue growth into operating profit and cash, particularly receivables, inventory, supplier payment terms and the increased cost-of-goods-sold percentage.
- Monitor Scholastic Literacy adoption activity and timing of revenue recognition, as well as ongoing sales-tax compliance and the Wisconsin assessment resolution.
- Confirm subsequent liquidity, borrowing and capital-allocation trends, including dividends, repurchases and the impact of fiscal 2020 lease accounting.