Scholastic Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended May 31, 2017. Although the request metadata refers to “2016 Q4,” this filing reports the full fiscal year 2017, with quarterly results also presented.
Business context
Scholastic publishes and distributes children’s books, educational materials and children’s media through three segments: Children’s Book Publishing and Distribution, Education, and International. Its largest segment includes U.S. school book clubs and fairs and trade publishing. Operations are seasonal, with losses generally in the first and third fiscal quarters.
Key financial results
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $1,741.6 million | $1,672.8 million |
| Operating income / margin | $88.9 million / 5.1% | $67.6 million / 4.0% |
| Continuing-operations earnings | $52.5 million | $44.0 million |
| Diluted EPS from continuing operations | $1.48 | $1.26 |
| Net income | $52.3 million | $40.5 million |
| Operating cash flow | $141.4 million | $(78.9) million |
| Cash and cash equivalents at year-end | $444.1 million | $399.7 million |
| Total debt | $6.2 million | $6.3 million |
| Working capital | $583.4 million | $571.8 million |
Revenue increased 4.1%. Cost of goods sold rose to 46.8% of revenue from 45.6%, lowering the gross margin to 53.2% from 54.4%. Net interest expense was approximately $1.0 million. The effective tax rate rose to 40.3% from 36.0%.
- Children’s Book Publishing and Distribution: Revenue of $1,052.1 million, up 5.1%; operating income of $143.1 million, up 18.7%. Trade sales rose sharply on Harry Potter titles, while book-club and book-fair revenue declined.
- Education: Revenue of $312.7 million, up 4.3%; operating income of $50.7 million, up 18.5%. Growth included literacy programs, summer reading and professional services.
- International: Revenue of $376.8 million, up 1.2%; operating income of $18.7 million, versus $11.4 million. Local-currency growth was partly offset by $9.5 million of unfavorable foreign exchange.
Changes, liquidity and capital allocation
Operating cash flow improved substantially from the prior-year outflow, primarily because FY2016 included approximately $186 million in income-tax payments related to the sale of the former educational technology and services business. Investing activities used $92.8 million, including increased spending on headquarters renovations and technology. The company reported $65.7 million of property, plant and equipment additions and $26.9 million of prepublication and production expenditures.
There were no borrowings under the $375 million revolving facility at year-end; the company had $6.2 million outstanding under short-term credit lines and $37.3 million of availability under those facilities. Total stockholders’ equity was $1,307.9 million. FY2017 dividends declared were $0.60 per share, and the company repurchased approximately $6.9 million of common stock.
Outlook, risks and unusual items
- Management expected FY2018 results to be lower, particularly following the exceptional FY2017 Harry Potter publishing performance and amid continued technology spending.
- The three-year “Scholastic 2020” plan targets operating-income growth in subsequent years through cost reduction, process simplification, improved data analytics and more efficient marketing and sales. The filing provides no specific numerical earnings guidance.
- Management anticipated moderate growth in book clubs and fairs and Education, while International revenue was expected to be broadly level with FY2017. Trade sales were expected to return to more normal levels absent the prior-year Harry Potter releases.
- The company planned to complete the U.S. defined-benefit pension plan termination in FY2018. Benefit distributions and annuity purchases were expected to trigger recognition of accumulated actuarial losses; the final amount is not stated here.
- FY2017 included $14.9 million in severance expense and $6.8 million in asset impairments, including website-development and legacy prepublication assets. The company also incurred $0.5 million of exit costs while leaving a low-margin Australian software distribution business.
- Risks include dependence on successful titles and school channels, competition and changing digital purchasing patterns, execution of major technology and systems projects, foreign-exchange exposure, school funding and customer budgets, privacy/cybersecurity, paper and distribution costs, weather disruptions, and real-estate renovation and leasing risks.
- Scholastic disclosed a $5.4 million Wisconsin sales-tax assessment, excluding penalties and interest, which it is contesting and for which it has not recorded a liability. It stated that other ordinary-course claims were not expected to have a material adverse effect.
- Robinson family ownership of all Class A shares concentrates voting control; common shareholders generally have limited voting rights. The auditors gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether FY2018 trade revenue and earnings normalized as expected after the Harry Potter-driven FY2017 comparison.
- Whether book-club sponsor participation and book-fair counts stabilize, and whether revenue-per-fair and margin initiatives deliver results.
- Progress, costs and potential disruptions from the Scholastic 2020 plan, enterprise technology upgrades and headquarters renovation.
- The cash cost and accounting impact of the U.S. pension-plan termination, including settlement losses and benefit distributions.
- Developments in the Wisconsin sales-tax litigation and other tax contingencies, as well as foreign-exchange movements.