Scholastic Corporation — Q1 FY2016 Form 10-Q
Reporting period: Three months ended August 31, 2015. Scholastic publishes children’s books and educational materials through its Children’s Book Publishing and Distribution, Education, and International segments. The business is highly seasonal; the first quarter typically has lower school-channel sales and an operating loss.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Revenue | $191.2 million | $190.5 million |
| Operating loss | $79.5 million | $86.8 million |
| Continuing-operations loss | $48.9 million; $1.46 per share | $53.9 million; $1.67 per share |
| Net loss | $49.4 million; $1.48 per share | $34.1 million; $1.05 per share |
| Cash used in operating activities | $291.7 million | $55.8 million |
- Cost of goods sold was $114.5 million, or 59.9% of revenue, versus $113.4 million, or 59.5%; the filing attributes the higher rate mainly to international markets using U.S.-sourced product.
- SG&A declined to $145.7 million from $150.8 million. Depreciation and amortization declined to $10.5 million from $13.1 million. Net interest expense was $0.1 million versus $0.9 million.
- Cash and cash equivalents were $250.3 million at quarter-end, down from $506.8 million at May 31, 2015. Total assets were $1.707 billion and stockholders’ equity was $1.180 billion.
- Total debt was $5.7 million, all short-term lines of credit; there were no borrowings under the $425 million revolving facility. Short-term credit availability, after borrowings and commitments, was $38.1 million. The company reported compliance with its loan covenants.
- Quarterly dividends declared were $0.15 per share.
Changes and operating drivers
- Revenue rose $0.7 million. Children’s Book Publishing and Distribution revenue increased 15.4% to $68.1 million, supported by trade sales; Education revenue increased 6.8% to $50.0 million. International revenue fell 13.7% to $73.1 million, largely reflecting $11.7 million of unfavorable currency translation; local-currency revenue was flat.
- Segment operating losses were $57.5 million in Children’s Book Publishing and Distribution, $2.8 million in Education, and $2.7 million in International. The first two segments typically incur first-quarter losses because school-channel activity is limited while costs are incurred ahead of the school year.
- Continuing-operations loss improved by $5.0 million, but net loss worsened by $15.3 million year over year. The main comparison item was discontinued operations: the prior-year quarter included $19.8 million of earnings, principally from the Ed Tech business, sold at the end of FY2015; the current quarter recorded a $0.5 million discontinued-operations loss.
- Operating cash use increased substantially. Net income-tax payments exceeded the prior-year quarter by $155.3 million, primarily due to approximately $186 million of tax payments related to the gain on the Ed Tech sale. Inventory build and other working-capital changes also affected cash use.
Outlook, risks, and unusual items
- Management said it expects sufficient liquidity for operations, working capital, pension contributions, dividends, authorized repurchases, capital spending, and other investments. It expects increased investment in technology solutions.
- Management expects a full-year effective tax rate of approximately 43%, inclusive of discrete items; the quarter’s interim effective rate was 38.6%.
- Q1 SG&A included $1.4 million of severance expenses and $1.0 million for a book-fairs warehouse optimization project. Management also cited accelerated strategic technology spending.
- The Ed Tech sale closed May 29, 2015 for consideration of $577.7 million, including $34.5 million held in escrow; $2.5 million of escrow was released during the quarter. The company continues to provide transition services to the buyer.
- Key exposures include seasonal cash-flow needs, foreign-exchange fluctuations, variable-rate borrowing costs, and execution of technology and cost-reduction initiatives. The company uses foreign-currency contracts as economic hedges; their notional value was $16.2 million at August 31, 2015.
- The filing says ordinary-course claims and lawsuits are not expected to have a material adverse effect. The company was undergoing IRS audits for fiscal 2011–2013 and New York City audits for fiscal 2008–2010; sales-tax examinations were also ongoing.
- Potential unusual future expense: if U.S. pension-plan lump-sum requests exceed $4.6 million in the fiscal year, the company expects to recognize a settlement charge related to those payments.
Important facts for investors to verify
- How much of the quarter’s cash decline and operating cash use reflects one-time tax payments tied to the Ed Tech sale, and how working-capital needs evolve through the seasonal peak.
- Whether international revenue and profitability improve when measured in local currency, given the reported foreign-exchange impact.
- The timing and release conditions for the remaining Ed Tech sale escrow and the net economics of transition services.
- Progress and expected costs of technology investment, warehouse optimization, and cost-reduction programs.
- Developments in tax examinations, sales-tax contingencies, and pension lump-sum requests; the filing does not quantify potential outcomes for these matters.