Scholastic Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended November 30, 2019. Dollar amounts are in millions except per-share data. The quarter was strong seasonally; Scholastic notes that its school-based businesses make results highly seasonal.
Financial performance
| Metric | Three months ended Nov. 30, 2019 | Prior-year quarter | Six months ended Nov. 30, 2019 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $597.2 | $604.7 | $829.8 | $823.1 |
| Operating income | $105.1 | $98.2 | $17.7 | $14.4 |
| Net income attributable to Scholastic | $71.0 | $71.6 | $12.5 | $10.3 |
| Diluted EPS | $2.02 | $1.99 | $0.35 | $0.29 |
| Operating margin | 17.6% | 16.2% | 2.1% | 1.7% |
| Cost of goods sold as % of revenue | 44.3% | 43.4% | 48.4% | 47.1% |
Quarterly revenue declined 1.2%, while operating income rose 7.0%; net income was slightly lower. Six-month revenue rose 0.8%, and net income increased. Higher cost of goods sold as a share of revenue, partly associated with consolidating Make Believe Ideas (MBI), was offset in part by lower selling, general and administrative costs.
Segments and material changes
- Children’s Book Publishing and Distribution: Revenue was $413.6 in the quarter, down $4.3, and $523.2 for six months, up $9.6. Lower book club sales were offset by trade growth, including MBI and popular titles, and higher book fair revenue. Segment operating income increased to $109.6 for the quarter and $67.9 for six months.
- Education: Revenue declined to $69.9 for the quarter and $118.3 for six months, mainly from lower custom publishing. Segment operating income was $6.2 for the quarter; the six-month operating loss widened to $7.2, partly due to amortization related to Scholastic Literacy digital subscriptions.
- International: Revenue was $113.7 for the quarter and $188.3 for six months. Local-currency revenue increased, but unfavorable foreign exchange reduced reported results. Segment operating income fell to $11.7 for the quarter and $8.0 for six months.
Management attributed book club weakness to fewer teacher sponsors, fewer events and the higher all-in cost to consumers following sales-tax collection. Book fairs benefited from improved selection and quality, e-Wallet expansion and cost control. Trade benefited from MBI consolidation and continued sales of best-selling titles.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $14.3, versus $39.5 a year earlier. Management cited higher royalty payments, accelerated vendor payments, and higher income-tax payments; lower inventory purchases partly offset the decline.
- Investing cash outflow was $48.4, compared with $72.5, reflecting lower spending on headquarters modernization, prepublication and technology projects, partly offset by UK warehouse-related spending.
- Financing cash outflow was $22.1, including $19.6 of share repurchases and $10.5 of dividends. Cash declined $56.3 during the six months to $277.8.
- At November 30, cash was $277.8; total debt was $16.1, comprising $13.5 of short-term lines of credit and $2.6 of UK term debt. No borrowings were outstanding under the U.S. revolving loan agreement. The UK loan funded land for a planned new facility and matures July 2021.
- Management reported approximately $377.6 of funding available under U.S. and UK loan agreements, plus $37.7 of current availability under short-term credit facilities, and said liquidity was sufficient for expected operating and investing needs. The filing also reports current assets of $1,022.6 and current liabilities of $650.7.
- Following adoption of lease accounting, the balance sheet included $79.5 of operating lease liabilities and $11.8 of finance lease liabilities. These are lease obligations, distinct from reported debt.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects an annual effective tax rate of approximately 32.4%, excluding discrete items, and expects net interest income to continue to decrease.
- Management warned that higher tariffs may increase cost of goods sold during the rest of fiscal 2020, particularly in domestic school-based channels. It is monitoring strategies to offset those costs.
- The company is highly seasonal and generally incurs operating losses in its first and third fiscal quarters; results should be assessed with that pattern in mind. Scholastic also said Scholastic Literacy revenue is likely to be recognized in the first fiscal quarter.
- International risks include foreign-exchange movements and a recently commenced Ontario teachers’ union work-to-rule campaign that could affect Canadian operations. Sales-tax compliance and possible state interpretations or litigation remain contingencies; the book club channel was remitting sales tax in 44 states and the District of Columbia.
- Unusual costs included a $1.5 accrual for an alleged patent-infringement settlement, subsequently concluded, and a $1.0 charge related to an intellectual-property agreement settlement. Severance costs also increased. The prior-year comparison included a $4.3 legacy sales-tax assessment charge.
- The Board declared a $0.15-per-share quarterly dividend payable March 16, 2020. The company repurchased $19.6 of shares during the six months and had $33.2 remaining under its authorization.
Key investor verification points
- Track whether book club sponsorship and sales recover, and whether book fair improvements and trade growth persist.
- Assess the effect of MBI consolidation, specialty-product manufacturing costs and tariffs on gross margins.
- Monitor operating cash conversion, seasonal working-capital needs, capital spending and cash after repurchases and dividends.
- Review foreign-exchange exposure, Canadian operating conditions, and remaining sales-tax compliance or litigation developments.
- Compare reported results with the seasonality of the business and confirm the timing and economics of Scholastic Literacy and UK facility investments.