Scholastic Corporation — Q1 FY2015 10-Q
Reporting period: Three months ended August 31, 2014. Scholastic publishes and distributes children’s books, educational materials and technology, and media products. The filing is unaudited. The business is highly seasonal: the company typically reports operating losses in its first and third fiscal quarters.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Revenue | $283.8 million | $276.3 million |
| Operating loss | $53.4 million | $45.9 million |
| Continuing-operations loss | $34.0 million | $30.1 million |
| Net loss | $34.1 million | $29.9 million |
| Diluted loss per share | $1.05 | $0.94 |
| Cash used in operating activities | $55.8 million | $70.8 million |
- Revenue rose 3% year over year, but operating costs increased faster. Cost of goods sold was 52.9% of revenue, versus 49.9%, reducing gross margin to 47.1% from 50.1%.
- Operating loss widened by $7.5 million, or 16%. The filing attributes this mainly to weaker Educational Technology and Services results, higher amortization on newer products and programming, and higher losses in some international markets.
- Segment revenue and operating income (loss): Children’s Book Publishing and Distribution, $54.7 million and $(60.5) million; Educational Technology and Services, $89.4 million and $30.3 million; Classroom and Supplemental Materials Publishing, $42.8 million and $(0.5) million; Media, Licensing and Advertising, $10.6 million and $(3.9) million; International, $86.3 million and $(1.9) million. Prior-year segment results are discussed below.
- Cash and equivalents were $15.4 million at quarter-end. Total debt was $198.9 million, up from $135.8 million at May 31, 2014, including $185.0 million under the revolving loan facility. The company reported $239.0 million of availability under that facility and $54.3 million of short-term credit facilities, net of borrowings.
- Current-quarter investing cash outflow was $21.7 million; financing cash inflow was $72.0 million. Financing included $65.0 million of net borrowing under the credit agreement and $59.7 million of line-of-credit borrowings, partly offset by repayments.
- Dividends declared were $0.15 per share, versus $0.125 a year earlier. Stockholders’ equity was $892.7 million at August 31, 2014, compared with $827.9 million a year earlier.
Changes, outlook and risks
- International revenue increased 9.7%, and Classroom and Supplemental Materials revenue rose 13.2%, reflecting strength in guided reading, classroom book collections and international channels. Children’s Book Publishing revenue was broadly flat; school book clubs and fairs grew 20% combined, although these channels are seasonally small in Q1.
- Educational Technology revenue declined 5.7% and segment operating income fell $5.9 million, primarily against a strong prior-year comparison that included new product launches and a significant New York City curriculum delivery. Math products partially offset lower reading-program sales.
- Management provided no specific revenue or earnings forecast in this filing. It expected a full-year effective tax rate of approximately 41%, excluding discrete items. Management said it expected liquidity to be sufficient for operations, working capital, debt service, dividends, planned capital expenditures and other investments.
- Q1 results included $1.2 million of severance costs, compared with $2.0 million in the prior-year quarter. Net interest expense declined to $0.9 million from $1.9 million, following settlement of capital leases related to the 555 Broadway property purchase.
- Seasonal inventory building contributed to operating cash use; inventory purchases and related liabilities are expected to affect cash flows as the school year progresses. Variable-rate debt exposes the company to rising interest rates; foreign operations and foreign-currency exposures also create risk. The company used currency forwards as economic hedges.
- The company was in compliance with its credit-facility covenants at quarter-end. It said ordinary-course legal claims were not expected to have a material adverse effect. It did not expect additional material liability from a UK pension-plan settlement issue. Tax audits were ongoing, including federal and New York examinations.
- The company continued monitoring goodwill and intangible assets for impairment indicators; no Q1 goodwill impairment charge was reported. A previously impaired UK investment interest was sold on September 12, 2014 for approximately $0.7 million.
Important facts for investors to verify
- Whether revenue growth in guided reading, classroom books, math products, and international channels continues, and whether reading-intervention sales stabilize.
- Whether higher product amortization, cost of goods sold, and international operating costs moderate, supporting margin recovery.
- How seasonal inventory, payables and deferred revenue affect operating cash flow and borrowing needs in subsequent quarters.
- Debt levels, variable interest rates, facility availability, and ongoing compliance with credit covenants.
- Actual full-year tax rate versus management’s approximately 41% expectation, and any material developments in tax audits, contingencies or impairment assessments.