Scholastic Corporation — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2016, ended February 29, 2016. The request metadata says “2015 Q3,” but the filing identifies the period as fiscal 2016 Q3.
Business context and reporting period
Scholastic publishes and distributes children’s books and educational materials through its Children’s Book Publishing and Distribution, Education, and International segments. Its school-based businesses are seasonal; the company generally incurs operating losses in the first and third fiscal quarters. The financial statements are unaudited.
Financial results and liquidity
| Metric | Three months ended Feb. 29, 2016 | Prior-year quarter | Nine months ended Feb. 29, 2016 | Prior-year period |
|---|---|---|---|---|
| Revenue | $366.0 million | $346.5 million | $1,159.0 million | $1,148.1 million |
| Operating income (loss) | $(16.4) million | $(24.7) million | $9.2 million | $(0.6) million |
| Continuing-operations income (loss) | $(7.2) million | $(15.7) million | $9.1 million | $(2.0) million |
| Net income (loss) | $(9.0) million | $(22.1) million | $6.5 million | $12.3 million |
| Diluted EPS | $(0.26) | $(0.68) | $0.19 | $0.37 |
- Quarterly revenue increased 5.6%; the operating loss narrowed by $8.3 million. Nine-month revenue increased 1.0%, and continuing operations moved from a loss to a profit.
- Cost of goods sold was 48.6% of revenue in the quarter versus 50.2% a year earlier; for nine months it was 47.4% versus 47.5%. SG&A was $188.3 million for the quarter and $563.0 million year to date.
- Quarterly segment revenue rose in Children’s Book Publishing and Distribution ($220.2 million, up $14.0 million) and Education ($63.5 million, up $9.3 million). International revenue was $82.3 million, down $3.8 million as foreign-exchange translation outweighed local-currency growth.
- Cash and cash equivalents were $351.9 million at February 29, 2016, compared with $506.8 million at May 31, 2015. Current assets were $1,055.5 million and current liabilities $467.5 million.
- Nine-month operating cash flow was $(151.6) million, versus $108.9 million provided in the prior-year period. Management attributed the decline chiefly to approximately $186 million of income-tax payments related to the prior-year sale of the Ed Tech business, as well as lower cash flow from discontinued operations. Investing cash flow was $(26.3) million; financing cash flow was $24.2 million.
- Total debt was $8.2 million, all short-term local-currency credit-line borrowings; there were no borrowings under the $425 million revolving facility. The company reported covenant compliance. Liquidity included $351.9 million cash, approximately $425 million of revolving-facility availability, and $34.6 million availability under short-term facilities.
Material changes, outlook, and risks
- Management attributed the quarter’s sales growth primarily to Harry Potter and other trade titles, stronger book-club orders, and classroom books and magazines. It cited a pipeline of new trade titles, including Harry Potter and the Cursed Child, and described Education as a growth area. No quantified revenue or earnings guidance was provided.
- Nine-month international revenue declined $32.3 million, primarily from $37.9 million of unfavorable foreign-exchange translation, despite $5.6 million of local-currency growth. A stronger U.S. dollar also raised the relative cost of U.S.-sourced products for international operations.
- The company recorded $6.9 million of impairment charges on legacy prepublication assets—$3.7 million in Children’s Book Publishing and Distribution and $3.2 million in Education—after forecasting significant revenue declines for the affected products.
- Discontinued operations generated a $2.6 million nine-month loss, including a $2.9 million pretax working-capital adjustment on the Ed Tech sale. The filing reports $17.2 million released from escrow during the period; $17.3 million remained in restricted cash at quarter-end.
- The nine-month tax rate was 14.2%, favorably affected by an IRS settlement that led to recognition of $4.5 million of previously unrecognized tax positions, including interest. Management expected a full-year effective tax rate of approximately 37%, inclusive of discrete items; the estimated annual rate excluding specified items was approximately 40.1%.
- Management said it expected sufficient liquidity for operations, dividends, debt service, planned capital expenditures, and authorized repurchases. It also expected increased investment in technology transformation. Construction at the New York headquarters began in March 2016; certain existing improvements will be abandoned.
- Key risks include seasonality and working-capital swings, foreign-exchange and variable-rate borrowing exposure, tax examinations and sales-tax contingencies, and the risk that actual results differ from forward-looking statements. The company said ordinary-course litigation was not expected to have a material adverse effect.
- The board declared a $0.15-per-share fourth-quarter dividend, payable June 15, 2016. A proposed $200 million Dutch-auction tender offer was terminated in January 2016 after a market-index decline triggered a termination condition; $52.9 million remained under existing repurchase authorizations at quarter-end.
Important facts for investors to verify
- Whether operating performance and cash generation improve after the seasonally weak third quarter, particularly given the substantial tax-related cash outflow.
- Sales and margins in book fairs, book clubs, Education, and International, including the effects of title performance, school calendars, and currency movements.
- Whether the impaired legacy assets, planned technology spending, and headquarters construction lead to further charges or materially different cash requirements.
- Remaining Ed Tech escrow releases and any further sale-related working-capital adjustments or tax-audit outcomes.
- Available liquidity and compliance with revolving-credit covenants as seasonal borrowing needs change.