Business context and reporting period
Scholastic Corporation’s unaudited Form 10-Q covers the quarter and nine months ended February 28, 2018 (the third quarter of fiscal 2018). This differs from the request metadata’s “2017 Q3.” The company reports Children’s Book Publishing and Distribution, Education, and International segments. Results are seasonal: the first and third fiscal quarters generally produce lower revenue and operating losses.
Financial performance
Dollar amounts are in millions, except per-share data. Quarter and nine-month comparisons are with the periods ended February 28, 2017.
| Metric | Quarter | Nine months |
|---|---|---|
| Revenue | $344.7 vs. $336.2 | $1,132.2 vs. $1,242.0 |
| Operating income (loss) | $(23.7) vs. $(24.7) | $(18.3) vs. $24.9 |
| Net income (loss) | $(49.2) vs. $(15.4) | $(55.8) vs. $12.9 |
| Diluted EPS | $(1.41) vs. $(0.44) | $(1.59) vs. $0.36 |
| Operating cash flow | Not reported separately | $64.9 vs. $113.4 |
Quarterly revenue increased 2.5%; nine-month revenue fell 8.8%. Gross margin was approximately 51.7% for the quarter (52.3% prior year) and 52.7% for nine months (51.6% prior year), based on reported revenue and cost of goods sold. Nine-month SG&A declined to $572.0 from $587.2.
- Segments: Quarterly revenue increased across all segments. Children’s Book Publishing and Distribution reported a $0.9 operating loss versus $6.3 income; Education reported a $0.2 loss versus $3.5 income; International reported $0.7 income versus a $3.7 loss. For nine months, segment operating income was $55.3 in Children’s Book Publishing and Distribution (down from $91.2), while Education swung to an $8.9 loss from $7.8 income and International income declined to $12.6 from $17.2.
- Cash, liquidity and debt: Cash was $362.6 at February 28, 2018, down from $444.1 at May 31, 2017. Current assets were $1,005.6 and current liabilities $499.6. Debt was $7.7, all short-term local-currency borrowings; no borrowings were outstanding on the $375.0 revolving facility. Management reported covenant compliance and approximately $36.8 of availability under short-term credit facilities after borrowings and commitments.
- Cash uses: Nine-month investing cash outflow was $116.8, including $92.4 of property, plant and equipment additions and $22.4 of prepublication and production expenditures. Financing cash outflow was $30.2, including $15.8 of dividends and $23.8 of common-stock repurchases.
- Margins and balance sheet items: Quarterly cost of goods sold was 48.3% of revenue versus 47.7%; the nine-month ratio improved to 47.3% from 48.4%. Asset impairments were $4.3 for the quarter and $11.0 for nine months. The quarterly dividend declared was $0.15 per share.
Material changes, outlook and risks
- The largest unusual item was a $55.0 pretax U.S. pension settlement charge ($39.6 in the quarter). The company purchased group annuity contracts for $86.3, funded from pension-plan assets, and said the settlement required no additional cost to the company as plan sponsor. The charge materially affected reported earnings.
- Nine-month revenue declined primarily because prior-year sales included stronger Harry Potter-related titles, including Fantastic Beasts and Where to Find Them and Harry Potter and the Cursed Child. In the current quarter, management cited growth in trade publishing, book fairs, Education and International markets. Severe weather disruptions in the southern U.S. reduced book club and book fair sales by an estimated $4 million.
- Management attributed margin pressure to planned expansion of Education sales teams, book-fair point-of-sale system licensing costs, and comparison with a favorable prior-year book-club inventory adjustment. The Education sales-force investment is expected to continue. Headquarters renovation and technology investment also increased depreciation and capital spending; additional depreciation and technology costs are expected.
- Management said prospects for profitability and cash flow should improve as headquarters work is completed and with the launch of 20th-anniversary Harry Potter marketing and new core literacy instructional programs for sale in fiscal 2019. No quantified earnings or revenue guidance is provided.
- The company expects sufficient liquidity for operations, planned capital expenditures, dividends, pension contributions and authorized repurchases. It noted that seasonal operations can produce negative cash flow from June through October and historically increase borrowing needs during the summer and early fall.
- The Tax Cuts and Jobs Act led to an $8.3 deferred-tax remeasurement expense; estimates remain provisional, and the company was still evaluating potential GILTI tax effects. Wisconsin assessed Scholastic Book Fairs $5.4, excluding penalties and interest, for sales taxes; the company is litigating, has not accrued a liability, and says an adverse outcome is reasonably possible. Management did not expect other ordinary-course claims and lawsuits to materially harm financial position or results.
- On March 21, 2018, after quarter-end, the Board authorized an additional $50.0 of repurchases, bringing stated aggregate authorization to $61.4. The company also declared a $0.15 fourth-quarter dividend payable June 15, 2018.
Most important facts for investors to verify
- Confirm that the intended period is fiscal 2018 Q3, ended February 28, 2018, rather than “2017 Q3.”
- Assess underlying operating performance separately from the $55.0 pension settlement charge, $11.0 of impairments, and $8.3 tax remeasurement.
- Track whether the planned Education sales investment, new literacy programs and headquarters projects translate into improved margins and cash flow, given lower nine-month revenue and operating cash flow.
- Monitor seasonal working-capital needs, capital spending, cash balances, and the use of credit facilities and share-repurchase authorization.
- Follow resolution of the Wisconsin sales-tax dispute and the final accounting effects of tax reform and adoption of the new revenue standard, which Scholastic expected could change recognition timing for certain school-channel incentive revenue.