Scholastic Corporation — Fiscal 2014 Third-Quarter 10-Q
Reporting period: Quarter and nine months ended February 28, 2014. Amounts are in millions except per-share data. The filing describes a highly seasonal business, with operating losses generally occurring in the first and third fiscal quarters.
Financial performance
| Metric | Quarter ended Feb. 28, 2014 | Prior-year quarter | Nine months ended Feb. 28, 2014 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $373.5 | $378.6 | $1,273.0 | $1,285.5 |
| Operating income (loss) | $(34.3) | $(27.4) | $14.5 | $27.6 |
| Net income (loss) | $(12.1) | $(20.1) | $16.3 | $9.6 |
| Diluted EPS | $(0.38) | $(0.63) | $0.50 | $0.29 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $85.3 | $107.7 |
Quarterly cost of goods sold was 51.1% of revenue versus 50.2% a year earlier; for the nine-month period it was 46.6% versus 46.9%. The operating loss widened in the quarter, while nine-month operating income declined, including a $13.4 goodwill impairment. The quarterly net loss was smaller mainly because a favorable IRS settlement generated $13.8 of recognized tax benefits.
Material changes and business drivers
- Quarter revenue declined $5.1, principally due to a $6.0 decline in Educational Technology and Services and a $3.4 decline in International revenue. Children’s Book Publishing and Distribution increased $2.5, and Classroom and Supplemental Materials Publishing increased $1.3.
- For the nine months, lower Hunger Games-related sales, unfavorable foreign exchange effects of $18.6, and the absence of $7.8 in low-margin Australian software sales weighed on revenue. Growth in new education products MATH 180, iRead and Common Core Code X contributed $23.4; book fairs and classroom magazine circulation also grew.
- Educational Technology and Services revenue fell 14.4% in the quarter as sales-force integration temporarily disrupted selling activity; revenue rose 10.1% for the nine-month period, supported by new product launches. Management said the sales-force integration was intended to improve the combined educational offering.
- The Children’s Book Publishing and Distribution segment recorded a $13.4 goodwill impairment after revised expectations for its book-club reporting unit. The company also recognized a $4.7 impairment on a UK-based minority investment.
- Quarterly SG&A increased $3.4 to $202.9, with higher bad debt and incentive compensation partly offset by lower salaries and severance. Nine-month SG&A was essentially flat at $605.7; cost savings and lower promotional spending were offset by higher incentive compensation and $9.2 of severance costs.
Cash, debt and liquidity
- Cash and equivalents were $22.0 at February 28, 2014, down from $87.4 at May 31, 2013 and $196.7 a year earlier. Nine-month operating cash flow was $85.3, down $22.4 year over year.
- Investing activities used $320.3, primarily reflecting the $253.9 purchase of the company’s New York headquarters. Financing activities provided $170.1, including $175.0 borrowed under the revolving credit facility.
- Total debt was $179.7, including $175.0 of revolving-loan borrowings and $4.7 of local-currency lines of credit. The revolving facility matures December 2017; its reported interest rate was 1.3%. The headquarters purchase replaced a capital lease, and management expected the prospective net interest effect to be minimal.
- The company reported approximately $250.0 of remaining availability under its revolving loan and $44.3 of short-term credit facilities net of current borrowings. It stated that available liquidity was sufficient for ongoing needs. The company was in compliance with debt covenants at quarter-end.
- Current assets were $711.5 and current liabilities $470.0. Inventories were $335.6, up from $278.1 at May 31, 2013. The filing attributes working-capital movements partly to seasonal business patterns.
Outlook, risks and unusual items
- Management maintained fiscal 2014 revenue guidance of approximately $1.8 billion and diluted EPS from continuing operations of $1.40–$1.80, before one-time cost-reduction items and non-cash, non-operating items.
- Management cited the company’s school-district relationships and expanded reading and math offerings as positioning it to provide customized education solutions. It also highlighted continued efforts to improve book-club and book-fair marketing and to grow digital and educational products.
- Key uncertainties include seasonality, execution of the education sales-force integration, foreign-exchange exposure, variable interest rates on borrowings, product demand and title-release timing. Management cautioned that actual results may differ materially from forward-looking statements.
- The filing reports ordinary-course claims and lawsuits, but management did not expect reasonably possible losses to materially affect financial position or results. It also did not expect additional material liability from the Grolier UK pension-plan settlement process.
- A $0.15-per-share dividend was declared on March 19, 2014, payable June 16, 2014. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Verify the assumptions underlying the $1.40–$1.80 EPS outlook, particularly the treatment of one-time and non-cash items.
- Track Educational Technology and Services sales after the sales-force integration and assess whether new products sustain nine-month growth.
- Monitor book-club performance and the reporting unit’s outlook following the full $13.4 goodwill impairment.
- Assess liquidity and seasonal borrowing needs after the headquarters purchase, including variable-rate debt and cash levels.
- Review the $4.7 UK investment impairment, foreign-exchange exposure, and progress on the Grolier pension matter.