Scholastic Corporation — Form 10-Q summary
Reporting period: First quarter of fiscal 2018, the three months ended August 31, 2017; comparisons are with the three months ended August 31, 2016. Dollar amounts are in millions unless stated otherwise. The unaudited filing describes a highly seasonal business that typically reports operating losses in the first and third fiscal quarters.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $189.2 | $282.7 |
| Operating loss | $101.8 | $62.5 |
| Net loss | $63.7 | $39.6 |
| Basic and diluted loss per share | $1.81 | $1.15 |
| Cash used in operating activities | $92.4 | $105.5, including discontinued operations |
| Cash used in investing activities | $38.8 | $12.4 |
- Revenue fell $93.5, or about 33%. Cost of goods sold was 61.1% of revenue versus 60.0% a year earlier; lower sales increased the burden of fixed costs, partly offset by lower royalties.
- Selling, general and administrative expense declined to $158.8 from $166.0, but included $1.6 of higher severance expense. A $6.7 impairment charge related to abandoned legacy headquarters improvements contributed to the operating loss.
- Net interest income was $0.3, compared with net interest expense of $0.3. The effective tax rate was 37.3%; the reported tax benefit was $37.9.
- Cash and cash equivalents were $311.9 at August 31, down from $444.1 at May 31, 2017. Operating cash use improved from the prior-year period, primarily due to more favorable working-capital movements, including receivable collections.
- Investing cash use rose, including $32.7 of property and equipment additions, as spending increased on strategic technology and headquarters renovation projects.
- Total debt was $12.0, all under short-term local-currency credit lines; there were no borrowings under the $375.0 revolving facility. The company reported compliance with its credit covenants. It cited approximately $375.0 of revolving credit capacity and $32.3 of availability under short-term credit facilities after borrowings and commitments.
- At August 31, current assets were $956.8 and current liabilities were $450.9. Inventory was $386.5, up from $282.5 at May 31, consistent with the seasonal cycle.
Segment results and material changes
- Children’s Book Publishing and Distribution: Revenue was $66.8, down $71.0 (51.5%); operating loss widened to $58.9 from $36.2. The main driver was lower trade sales following the prior-year release-period success of Harry Potter and the Cursed Child. Book club and book fair revenue was relatively flat.
- Education: Revenue was $45.0, down $10.2 (18.5%); operating loss widened to $12.5 from $4.4. The decline chiefly reflected timing of customized curriculum orders and the absence of prior-year election-related magazine materials; higher employee costs also weighed on results.
- International: Revenue was $77.4, down $12.3 (13.7%); the segment moved from $4.2 operating income to a $2.8 operating loss. Lower Harry Potter-related sales in Canada and export channels were key factors. Favorable foreign-exchange translation added $0.6 to reported revenue. The company also cited its exit from low-margin software distribution in Australia.
- Quarterly dividends declared were $0.15 per share, unchanged from the prior-year quarter. The company repurchased 119,446 shares for approximately $4.7; $33.9 remained under its repurchase authorization.
Outlook, risks and unusual items
- Management said it expected first-quarter revenue declines, particularly in Children’s Book Publishing and International, following the prior year’s Harry Potter and the Cursed Child sales. It expects Education to meet its revenue plan for the fiscal year despite first-quarter timing effects. No consolidated revenue or earnings guidance was provided in the filing.
- The Scholastic 2020 plan aims to grow operating profits over the next three fiscal years through technology-enabled sales, marketing, inventory, supply-chain and distribution improvements. Oracle ERP and transportation-management deployments were expected during the fiscal year; a new CRM system was expected in June 2018. Management expects related technology costs to continue and additional headquarters-renovation impairment charges may arise.
- Management expected a full-year effective tax rate of approximately 40.4%, inclusive of discrete items.
- The company was assessing possible effects of Hurricanes Harvey and Irma on sales through school and retail closures. It reported minimal apparent facility and asset damage based on information then available and did not anticipate a significant effect on ongoing liquidity, while noting sales could be affected.
- Wisconsin assessed Scholastic Book Fairs for $5.4 of sales taxes, excluding penalties and interest, for fiscal years 2004–2014. The company is litigating and has not accrued the assessment; it said an adverse outcome remained reasonably possible.
- The company expected to complete termination of its frozen U.S. pension plan in fiscal 2018. If current-year lump-sum payments exceed $3.0, it may recognize a settlement charge; $0.6 had been paid in the quarter.
- The company was evaluating adoption of the new revenue standard, expected in fiscal 2019, and anticipated changes to the timing of recognition for certain school-channel incentive-program revenue.
Key facts for investors to verify
- Whether revenue and segment profitability recover as comparisons with the prior-year Harry Potter release ease, and whether Education’s full-year revenue plan is achieved.
- How seasonal inventory, working capital and cash use develop through the school-year sales cycle.
- The scale and timing of technology and headquarters-renovation spending, future impairment charges, and measurable progress toward the Scholastic 2020 profit-growth objective.
- Developments in the Wisconsin sales-tax litigation, pension-plan termination and hurricane-related sales effects.
- The eventual impact of the revenue-standard adoption on school-channel incentive-program revenue timing.