Business context and reporting period
Scholastic Corporation’s unaudited Form 10-Q covers the third quarter and first nine months of fiscal 2015, ended February 28, 2015. This corresponds to the filing’s stated period, notwithstanding the request metadata’s “2014 Q3” label. The company publishes and distributes children’s books and educational materials, provides educational technology and services, and operates media and international businesses. Results are seasonal: first- and third-quarter operating losses are typical.
Financial performance
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Revenue | $382.1 million | $373.5 million | $1,331.5 million | $1,273.0 million |
| Operating income (loss) | $(35.2) million | $(34.3) million | $24.2 million | $14.5 million |
| Net income (loss) | $(22.1) million | $(12.1) million | $12.3 million | $16.3 million |
| Diluted EPS | $(0.68) | $(0.38) | $0.37 | $0.50 |
Quarterly revenue increased 2%, but the operating loss widened and net loss increased by $10.0 million. For the nine-month period, revenue rose about 5%, while net income declined. Cost of goods sold rose to 52.3% of quarterly revenue from 51.1%, and to 48.0% of nine-month revenue from 46.6%; higher-cost product mix and Canadian warehouse optimization costs contributed. Quarterly SG&A was $205.8 million versus $202.9 million; nine-month SG&A was $627.5 million versus $605.7 million.
Segment trends: Children’s Book Publishing and Distribution revenue rose 6.8% in the quarter and 10.6% year to date; nine-month operating income was $45.6 million versus a prior-year loss of $3.2 million, including the absence of the prior-year $13.4 million goodwill impairment. Classroom and Supplemental Materials revenue increased 6.7% quarterly and 8.3% year to date. Educational Technology and Services revenue fell 4.2% quarterly and 8.8% year to date, with nine-month operating income declining to $16.7 million from $32.4 million. International quarterly revenue declined 5.2%, partly due to currency translation; nine-month revenue was approximately flat. Media, Licensing and Advertising reported a $6.2 million nine-month operating loss versus $5.2 million.
Cash flow, debt and liquidity
For the first nine months, operating cash flow was $108.9 million, compared with $85.3 million; investing cash outflow was $60.0 million, compared with $320.3 million, largely because the prior-year period included the headquarters building purchase. Financing cash outflow was $53.9 million versus $170.1 million of financing inflow in the prior year, reflecting net debt repayments. Cash at February 28, 2015 was $14.6 million, down from $20.9 million at May 31, 2014.
Total debt was $84.1 million, down from $135.8 million at May 31, 2014 and $179.7 million a year earlier; this comprised $65.0 million under the revolving loan and $19.1 million of short-term borrowings. The company reported approximately $360.0 million of availability under its revolving loan and $25.3 million of availability under short-term credit facilities. It was in compliance with loan covenants. Management said liquidity was sufficient for operations and planned obligations. Dividends declared were $0.15 per share for the quarter; the board also declared a $0.15-per-share fourth-quarter dividend payable June 15, 2015.
Outlook, commentary and risks
Management cited continued strength in school-based book channels, including book-club marketing initiatives, and growth in classroom books and magazines. Educational technology sales were weaker against prior-year product launches. No specific revenue or earnings forecast is provided. The company expected a full-year effective tax rate of approximately 41.7%, exclusive of discrete items; its interim tax rate for the first nine months was 43.7%.
Quarterly results included $2.9 million of severance costs, $1.5 million of Canadian warehouse-related asset write-downs, and a $0.6 million pension settlement charge. The nine-month period also included a $2.9 million impairment related to closing a New York retail store and $4.3 million of pension settlement expense. The prior-year quarter benefited from a $13.8 million tax-audit settlement and included a $4.7 million investment impairment. Foreign-exchange movements reduced reported international revenue; variable-rate debt exposes the company to higher interest rates. The filing also discusses normal-course litigation, tax examinations, and a UK pension-plan matter; management did not expect these matters to have a material adverse effect based on information available.
Investor verification points
- Verify whether growth in school-channel book sales and classroom materials persists, including the sustainability of demand for Minecraft titles.
- Track margins and costs, particularly educational technology product mix, Canadian warehouse optimization, promotional spending, and overhead investment.
- Assess the recovery or continued weakness in Educational Technology and Services and Media, Licensing and Advertising.
- Monitor seasonal working-capital needs, inventory levels, cash generation, debt repayment, and available credit capacity.
- Review the effective tax rate against management’s estimate and monitor foreign-exchange exposure, pension settlement costs, and disclosed tax and legal contingencies.