Scholastic Corporation — Q1 FY2023 10-Q
Reporting period: Three months ended August 31, 2022; comparisons are with the three months ended August 31, 2021. The quarter is seasonally weak: school-based book and education channels are generally quieter while schools are not in session.
Financial performance
- Revenue: $262.9 million, up $3.1 million (1.2%). Children’s Book Publishing and Distribution revenue rose to $124.7 million from $115.8 million; Education Solutions fell to $73.2 million from $80.1 million; International increased to $65.0 million from $63.9 million.
- Profitability: Operating loss was $58.1 million versus $32.0 million; net loss attributable to Scholastic was $45.5 million versus $24.2 million. Diluted loss per share was $1.33 versus $0.70. Gross margin was approximately 45.0%, down from 48.7%; operating margin was approximately negative 22.1%, versus negative 12.3%.
- Costs: Cost of goods sold increased to $144.5 million, or 55.0% of revenue, from $133.3 million, or 51.3%. SG&A rose $19.2 million to $162.8 million. Management cited inflation-driven freight, printing and labor costs, strategic spending, and the absence of prior-year insurance recoveries.
- Cash flow: Operating cash use was $60.3 million versus cash provided of $63.6 million. Investing cash use was $16.2 million; financing provided $1.6 million. Cash declined to $239.7 million from $316.6 million at May 31, 2022.
- Debt and liquidity: Debt was $6.3 million, all short-term, with no borrowings under the $300 million U.S. revolving credit agreement. The company reported $299.6 million available under that agreement and $26.4 million of current availability under other facilities. It was in compliance with credit covenants.
- Balance sheet and shareholder returns: Current assets were $991.5 million and current liabilities $668.3 million. The company repurchased $4.7 million of common stock and paid dividends of $0.20 per share during the quarter.
Changes and drivers
- Book Fairs revenue increased $12.3 million, largely from greater redemption of incentive credits as fairs recovered; lower Trade sales partly offset the gain.
- Education Solutions operating results shifted to a $4.3 million loss from $7.3 million of income, reflecting shipment timing, higher expenses and marketing costs; New Worlds Reading Initiative contributed $9.2 million of revenue.
- International revenue increased modestly in reported dollars, but unfavorable foreign exchange reduced revenue by $4.7 million. Higher sales in Australia, New Zealand and Canada were partly offset by lower Asia sales following the direct-sales business disposition.
- Operating cash flow was pressured by inventory purchases, which management said were increased to address long lead times and expected demand. The prior-year comparison also included a $63.1 million federal tax refund and $6.6 million of insurance recoveries.
Outlook, risks and unusual items
- Management expects Book Fairs to reach 85% of pre-pandemic fair-count levels and anticipates Trade benefits from new releases. Education Solutions will integrate Learning Ovations; potential literacy-funding benefits are expected mainly in the fourth fiscal quarter.
- Management expects International improvement from Australia and the exit of the low-margin Asia direct-sales business, partly offset by inflation in the UK, slow recovery in Asia, reduced government subsidies and foreign-currency effects from a strong U.S. dollar.
- Inflationary freight, printing, paper and labor costs are expected to continue pressuring costs during the rest of FY2023. The company also cited foreign-exchange exposure and variable-rate borrowing risk.
- On September 1, 2022, Scholastic acquired Learning Ovations, a literacy technology business, for a base purchase price of $11.0 million, subject to adjustments. A subsequent quarterly dividend of $0.20 per share was declared.
- Normal-course legal claims are pending; the company said reasonably possible losses are not expected to materially affect its financial position or results. Additional insurance recoveries related to a prior intellectual-property settlement remain uncertain.
Investor verification priorities
- Track whether book-fair recovery and anticipated new releases translate into revenue and improved operating margins.
- Monitor freight, printing, paper and labor inflation, and whether cost pressures ease as management expects.
- Assess inventory levels, seasonal working-capital needs and cash generation after the first-quarter cash outflow.
- Verify Education Solutions shipment timing, New Worlds Reading performance and the integration and contribution of Learning Ovations.
- Monitor foreign-exchange impacts, Asia recovery, credit-facility availability and any developments in legal or tax contingencies.