Scholastic Corporation — Form 10-Q Summary
Period: Fiscal third quarter ended February 29, 2020, with year-to-date results for the nine months then ended. The request metadata says “2019 Q3,” but the filing covers fiscal 2020 Q3. Amounts are in millions of dollars except per-share data; interim statements are unaudited.
Business context and results
Scholastic operates Children’s Book Publishing and Distribution, Education, and International businesses. Its school-related operations are seasonal, and the company generally incurs operating losses in the first and third fiscal quarters.
| Metric | Three months ended Feb. 29, 2020 | Prior-year quarter | Nine months ended Feb. 29, 2020 | Prior-year period |
|---|---|---|---|---|
| Revenue | $373.3 | $360.1 | $1,203.1 | $1,183.2 |
| Operating income (loss) | $(60.0) | $(21.4) | $(42.3) | $(7.0) |
| Net income (loss) | $(43.3) | $(12.6) | $(30.7) | $(2.3) |
| Diluted EPS | $(1.25) | $(0.36) | $(0.89) | $(0.07) |
| Operating cash flow | Not presented separately | Not presented separately | $44.0 | $60.5 |
Quarterly cost of goods sold was 49.0% of revenue, implying a 51.0% gross margin, versus 49.1% and 50.9% a year earlier. For the nine months, cost of goods sold was 48.6% of revenue, implying a 51.4% gross margin, compared with 47.7% and 52.3%. The filing does not present a separately labeled operating-margin figure for the consolidated company; operating loss was $60.0 million for the quarter and $42.3 million year to date.
Material changes and unusual items
- Revenue rose 3.7% in the quarter. Trade sales and Education grew, while book-club sales fell; International revenue declined, including effects from school-channel weakness in Canada and COVID-related disruption in Asia.
- Education revenue increased $14.0 million in the quarter, primarily from classroom collections and core instruction products, including a large district sale. Children’s Book Publishing and Distribution revenue increased $2.2 million; International revenue decreased $3.0 million.
- A $40.0 million noncash write-down of excess inventory and related author advances and prepublication costs was recorded in the quarter. The filing attributes it to revised North American purchasing, product-offering, and inventory-retention policies; it reduced quarterly and year-to-date EPS by $0.84.
- Quarterly operating loss also reflected higher costs and charges, including depreciation and amortization and legal settlements. Photo-copyright settlements totaled $2.4 million, with $1.4 million accrued at quarter-end; a $1.5 million alleged patent-infringement settlement had been accrued earlier in the fiscal year and subsequently concluded.
- For the nine months, the International segment’s operating income fell to $4.3 million from $8.0 million. Education returned to operating income of $2.6 million from a $6.3 million loss; Children’s segment operating income increased to $70.1 million from $64.7 million.
Cash, debt, and liquidity
- Cash and equivalents were $263.8 million at February 29, 2020, down from $334.1 million at May 31, 2019. Nine-month cash decreased $70.3 million.
- Nine-month operating cash flow was $44.0 million, down from $60.5 million. Investing used $74.4 million and financing used $39.7 million. Financing outflows included $32.2 million of share repurchases and $15.7 million of dividends.
- Total debt was $16.1 million: $9.7 million under local-currency credit lines and $6.4 million of UK term loans. No borrowings were outstanding under the $375 million U.S. revolving loan agreement. The filing reports $379.6 million of availability under U.S. and UK loan agreements and $35.9 million under short-term credit facilities, after specified borrowings and commitments.
- Current assets were $941.2 million and current liabilities $630.3 million. The company said it expected to maintain sufficient liquidity for operations and obligations, while noting that COVID-19 developments could affect its financial position.
Outlook, risks, and other disclosures
Management expected COVID-19-related school closures to make fourth-quarter revenue materially lower in the seasonally important period, with materially reduced revenue and profits, particularly in school markets. Potential impacts included canceled book fairs, reduced book-club participation, weaker Education orders, and disruption to international operations. Management described cost-control actions, including reduced discretionary spending and inventory purchases, staffing reductions, and temporary branch closures. It also expected increased fourth-quarter working-capital cash use tied to the planned release of The Ballad of Songbirds and Snakes. No quantified earnings or revenue guidance was provided.
Other risks include tariffs, foreign-exchange and variable-interest-rate exposure, sales-tax matters, and potential bad-debt increases. The company stated it was in compliance with its credit-facility covenants and did not expect pending ordinary-course legal matters to have a material adverse effect. A $0.15-per-share dividend was declared for the fiscal fourth quarter. On March 18, 2020, the board authorized an additional $50.0 million for share repurchases.
Investor verification priorities
- Confirm the full financial impact of COVID-19 school closures, including book fairs, book clubs, Education orders, and cash collections.
- Assess whether the inventory write-down and revised purchasing policies produce the projected lower obsolescence and warehouse costs.
- Review the drivers and durability of cash-flow declines, planned working-capital needs, and reported borrowing availability.
- Track tariff effects, International performance, and the contribution of the large Education district sale and MBI consolidation.
- Verify subsequent developments in legal and sales-tax contingencies, the dividend, and the expanded repurchase authorization.