Scholastic Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended May 31, 2015. Although the request identifies 2014 Q4, this filing reports FY2015; the unaudited quarterly data also provide fourth-quarter comparisons. Amounts are in U.S. dollars.
Business context
Scholastic publishes and distributes children’s books and educational materials through school book clubs and fairs, trade channels, its Education business, and international operations. Following the May 29, 2015 sale of its educational technology and services business and restructuring of media and entertainment operations, continuing operations comprise Children’s Book Publishing and Distribution, Education, and International.
Key financial results
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue from continuing operations | $1,635.8 million | $1,561.5 million |
| Operating income | $32.9 million | $10.4 million |
| Operating margin | 2.0% | 0.7% |
| Continuing-operations earnings | $15.5 million; diluted EPS $0.46 | $13.3 million; diluted EPS $0.41 |
| Discontinued-operations earnings, net of tax | $279.1 million | $31.1 million |
| Net income | $294.6 million; diluted EPS $8.80 | $44.4 million; diluted EPS $1.36 |
| Operating cash flow | $166.9 million | $156.8 million |
| Cash and cash equivalents at year-end | $506.8 million | $20.9 million |
| Total debt at year-end | $6.0 million | $135.8 million |
Revenue increased 4.8%. Cost of goods sold remained 46.4% of revenue; selling, general and administrative expense rose to $771.1 million from $727.3 million. Net income was dominated by the Ed Tech disposal: the sale generated a $454.0 million pretax gain and $275.6 million net gain as described in MD&A. The sale produced $577.7 million in proceeds, of which $34.5 million was held in escrow.
- Segment revenue: Children’s Book Publishing and Distribution $958.7 million (up 7.4%); Education $275.9 million (up 8.2%); International $401.2 million (down 3.0%).
- Segment operating income: Children’s Book Publishing and Distribution $85.6 million, with an 8.9% margin; Education $48.4 million, with a 17.5% margin; International $20.6 million, with a 5.1% margin. Corporate overhead was $121.7 million.
- Liquidity and debt: Working capital was $562.9 million. The company had no borrowings under its $425 million revolving Loan Agreement at year-end and reported $6.0 million of other short-term debt. It reported $38.4 million of availability under short-term credit facilities, net of borrowings and commitments.
- Capital returns: FY2015 dividends declared were $0.60 per share; share repurchases totaled approximately $3.5 million. The board later authorized an additional $50 million for repurchases, bringing reported authorization available to approximately $59.9 million.
Material changes and fourth-quarter comparison
- Continuing-operations earnings per diluted share rose to $0.46 from $0.41, while total diluted EPS rose sharply because of the disposal gain. The FY2015 effective tax rate on continuing operations was 48.2%; FY2014’s rate was unusually high at 678.3% on a small pretax loss and was affected by a $13.8 million IRS settlement benefit.
- Book club revenue rose $44.6 million and book fair revenue rose $25.1 million. Education benefited from classroom book and literacy initiatives and higher magazine circulation. International revenue was reduced by $19.7 million of unfavorable foreign-exchange translation, despite $7.5 million of local-currency revenue growth.
- Fourth-quarter revenue was $487.7 million versus $489.0 million a year earlier. Continuing-operations earnings were $17.5 million versus $22.0 million; discontinued-operations earnings were $264.8 million versus $6.1 million; and net income was $282.3 million versus $28.1 million.
- Operating cash flow increased to $166.9 million. Investing cash flow was $445.3 million, primarily reflecting proceeds from the Ed Tech sale; financing cash flow used $124.5 million, including repayment of $120.0 million under the Loan Agreement.
Outlook, risks and unusual items
- Management expected FY2016 growth from school-based book clubs and fairs, trade titles, classroom literacy products and magazines, and customized curriculum and professional learning. It anticipated continuing foreign-exchange headwinds from the stronger U.S. dollar. The filing provides no specific FY2016 revenue or earnings guidance.
- Management expected a substantial FY2016 tax payment related to the Ed Tech sale, but did not expect significant domestic borrowing for operating needs.
- The company is highly seasonal: school-channel sales are concentrated in the school year, and it typically incurs operating losses in the first and third fiscal quarters, with negative cash flow often occurring June through October.
- Following the Ed Tech sale, Scholastic is less diversified and more dependent on its remaining businesses. Transition services to the buyer are expected to last 6–24 months; failure to meet service obligations could expose the company to costs or penalties against escrow of up to $29.5 million.
- Other key risks include foreign exchange, competition and changing customer preferences, success of digital initiatives, school funding and participation, paper and distribution costs, cybersecurity and privacy compliance, and dependence on successful new titles. Normal-course legal matters were not expected to have a material adverse effect. The filing reported effective disclosure controls and effective internal control over financial reporting; the auditor issued unqualified opinions.
Important facts for investors to verify
- Separate recurring continuing-operations performance from the one-time Ed Tech disposal gain when assessing FY2015 earnings and EPS.
- Review the final sale working-capital adjustment, escrow release conditions, transition-services costs and the timing and size of the related FY2016 tax payment.
- Track continuing-business margins and overhead after the sale, especially whether book-club and book-fair gains can offset elevated corporate costs.
- Assess the durability of International results under currency pressure and the exposure of U.S. school channels to seasonality and school budgets.
- Monitor liquidity through the seasonal cash cycle, pension and other contractual commitments, and actual use of the expanded share-repurchase authorization.