Scholastic Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended May 31, 2019. The filing includes fourth-quarter results, but reports the full fiscal year; “2018 Q4” in the request metadata does not match the filing period.
Business context
Scholastic publishes and distributes children’s books, educational materials and children’s media. Its three reportable segments are Children’s Book Publishing and Distribution, Education, and International. School-based book clubs and book fairs are important channels, and the business is seasonal.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $1,653.9 million | $1,628.4 million |
| Operating income | $25.0 million | $55.6 million |
| Net income (loss) | $15.6 million | $(5.0) million |
| Diluted EPS | $0.43 | $(0.14) |
| Cash from operations | $116.4 million | $141.5 million |
| Cash and cash equivalents at year-end | $334.1 million | $391.9 million |
- Reported revenue rose 1.6%; excluding the effect of adopting ASC 606, comparable revenue was $1,666.7 million, up 2.4%.
- Reported operating margin was approximately 1.5%, versus 3.4% in FY2018. Comparable FY2019 operating income excluding ASC 606 was $32.7 million, or approximately 2.0% of comparable revenue.
- Cost of goods sold was 47.1% of reported revenue, compared with 45.7% in FY2018; comparable FY2019 cost of goods sold was 47.0% of revenue. Higher royalties, paper and printing costs contributed to the increase.
- Capital expenditures were $95.0 million; prepublication and production expenditures were $38.1 million. Cash used in investing activities was $147.3 million.
- At May 31, 2019, working capital was $419.1 million, down from $512.5 million. Current assets were $960.6 million and current liabilities $541.5 million.
- Total debt was $7.3 million, all short-term; there were no borrowings under the $375 million revolving loan facility. Capital lease obligations totaled $10.1 million.
Segments and changes versus prior year
- Children’s Book Publishing and Distribution: Revenue was $990.3 million as reported; comparable revenue was $1,002.6 million, up $32.4 million. Trade sales were stronger, led by Dog Man and other titles. Book-club and book-fair sales declined. Comparable segment operating income fell to $91.3 million from $105.8 million, pressured by sales-tax program costs, royalties, labor and promotions.
- Education: Revenue rose 3.0% to $297.4 million, supported by instructional products. Comparable operating income declined to $29.5 million from $33.9 million as Scholastic Literacy launch and digital-product costs increased.
- International: Revenue was $366.2 million as reported; comparable revenue was $366.7 million, down 0.8%. Local-currency revenue increased $12.5 million but was more than offset by $15.4 million of unfavorable foreign exchange. Comparable operating income declined to $14.2 million from $17.7 million.
- Cash from operations decreased $25.1 million, mainly due to higher inventory purchases and royalty payments. Cash fell by $57.8 million over the year.
Outlook, risks and unusual items
- For FY2020, management expected revenue growth, driven by trade publishing, franchises, licensing and merchandising, the Make Believe Ideas acquisition, and Education. It expected lower school-channel revenue during online-ordering transitions and changes to the book-fair experience.
- Management cited cost pressures from paper and print suppliers, tariffs, labor, fuel and postage; the 2020 Plan is intended to produce savings, selective pricing and operational efficiencies. Depreciation and amortization were expected to rise due to recent investments.
- The June 2018 Wayfair decision required sales-tax collection in additional states. Scholastic said the change adversely affected book-club activity and revenue per event; outcomes, including potential retroactive assessments, remained uncertain. The company recorded an $8.1 million expense to settle legacy Wisconsin sales-tax assessments.
- ASC 606 adoption deferred some book-fair incentive revenue and changed return and advertising-cost accounting. It reduced opening retained earnings by $47.0 million. For FY2019, it reduced reported operating income by $7.7 million relative to the company’s comparable presentation; reported diluted EPS was $0.43 versus $0.59 excluding the adoption impact.
- Other notable items included $10.6 million of severance expense, $0.9 million of asset impairments, and a $1.0 million foreign-currency translation charge related to the Make Believe Ideas acquisition. FY2018 included a $57.3 million pension settlement charge.
- Key risks include competition in school channels and publishing, execution of digital and core-literacy products, changing customer purchasing patterns, foreign exchange, cost inflation, cybersecurity and privacy obligations, and dependence on successful titles. The Robinson family controls most voting power through Class A shares.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile reported FY2019 results with the ASC 606 comparable figures, particularly revenue, operating income, EPS and the $47.0 million opening retained-earnings adjustment.
- Track whether book-club sales and participation recover as tax collection and online-ordering changes take effect, and monitor any state claims relating to retroactive sales taxes.
- Assess whether trade publishing and Scholastic Literacy growth can offset pressure in school channels and the rising cost base.
- Review cash conversion and inventory levels, capital spending, and the company’s seasonal borrowing needs against available liquidity.
- Evaluate the returns and integration of Make Believe Ideas and other strategic investments, along with the stated FY2020 outlook and cost-saving plan.