Scholastic Corporation — Q2 FY2023 Form 10-Q
Reporting period: Quarter and six months ended November 30, 2022. Fiscal 2023 ends May 31, 2023. Figures are unaudited and in millions of dollars except per-share data.
Financial performance
| Metric | Three months ended Nov. 30, 2022 | Prior-year quarter | Six months ended Nov. 30, 2022 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $587.9 | $524.2 | $850.8 | $784.0 |
| Operating income | $100.1 | $83.4 | $42.0 | $51.4 |
| Net income attributable to Scholastic | $75.3 | $68.3 | $29.8 | $44.1 |
| Diluted EPS | $2.12 | $1.91 | $0.84 | $1.24 |
| Operating cash flow | — | — | $21.3 | $141.6 |
Second-quarter operating margin was approximately 17.0%, versus 15.9% a year earlier; six-month margin was approximately 4.9%, versus 6.6%. Quarterly cost of goods sold declined to 44.3% of revenue from 45.4%, while six-month cost of goods sold rose slightly to 47.6% from 47.4%. The filing does not provide a consolidated net margin.
- Children’s Book Publishing and Distribution: Quarterly revenue rose 18.7% to $418.3 and operating income increased to $113.2 from $85.2. U.S. book fairs were the primary driver; fair count reached about 85% of pre-pandemic levels, versus 70% in the prior-year quarter.
- Education Solutions: Quarterly revenue was essentially flat at $80.0, but operating income fell to $7.0 from $15.6. Six-month revenue declined 4.0% and operating income fell to $2.7 from $22.9, reflecting weaker product sales, timing effects, inflation, and strategic investment costs.
- International: Quarterly revenue declined 2.8% to $89.6 and operating income fell to $6.7 from $8.7. Local-currency revenue increased, but unfavorable foreign exchange reduced reported quarterly revenue by $10.1; six-month FX impact was $14.7.
Liquidity, debt and capital allocation
Cash and cash equivalents were $261.1 at November 30, 2022, down from $316.6 at May 31, 2022. Current assets were $1,082.3 and current liabilities were $724.7. Total debt was $4.8, all short-term unsecured international borrowings; there were no borrowings under the $300 million U.S. revolving credit agreement. The company reported $299.6 of availability under that agreement and $32.0 of availability under short-term credit facilities. It was in compliance with its credit covenants.
Six-month operating cash flow was $21.3, down from $141.6. Management attributed the decline chiefly to approximately $140 million of additional inventory purchases to address supply-chain lead times and expected demand, and the prior-year period’s $63.1 federal tax refund; higher customer remittances partly offset these factors. Investing cash use was $45.8, including the Learning Ovations acquisition and capital spending. Financing cash use was $29.0, including $29.7 of share repurchases and $12.0 of dividends.
Changes, outlook and risks
- Second-quarter revenue increased 12% year over year, led by book fairs. Quarterly operating income rose 20%; management cited higher book-fair contribution, cost containment, pricing initiatives, and improved operating efficiency.
- Six-month earnings declined despite higher revenue. Comparisons included a prior-year $6.2 gain on a facility sale and $6.6 of insurance recoveries related to an earlier intellectual-property settlement. Current-period tax expense also reflected tax shortfalls related to vested option cancellations.
- In September 2022, Scholastic acquired literacy-technology company Learning Ovations for $11.1 net of cash acquired. The acquisition added $7.0 of goodwill and $4.1 of amortizable intangibles to Education Solutions. Management expects approximately $3 million of additional integration costs before the literacy assessment is integrated into its digital platform.
- Management expects U.S. book fairs to outperform FY2022, supported by higher fair counts and revenue per fair, and expects trade sales to benefit from new releases. Education Solutions will continue strategic investment. International growth and operating income face pressure from economic conditions in the UK and Canada; strong U.S. dollar translation is also expected to weigh on international results.
- Inflation in freight, product, paper and labor costs, supply-chain challenges, foreign-exchange movements, seasonal working-capital needs, and variability in trade releases are important risks. The business is highly seasonal, with generally lower first- and third-quarter revenue and stronger education-channel revenue in the fourth quarter.
- Normal-course legal claims are pending; the company does not expect reasonably possible losses to materially affect its financial position or results. Further insurance recoveries related to the earlier intellectual-property settlement remain uncertain. The Asia direct-sales business was disposed of in the first quarter of FY2023; a $15.1 impairment loss had been recorded in FY2022.
- After quarter-end, the board declared a $0.20-per-share quarterly dividend and increased the common-stock repurchase authorization to $75.0.
Important facts for investors to verify
- Whether book-fair attendance, fair count, and revenue per fair continue to improve, and how much quarterly growth reflects timing or incentive-credit redemptions.
- Whether Education Solutions can convert ongoing investment and Learning Ovations integration into improved revenue and margins, including the expected integration costs.
- Inventory levels, cash conversion, and working-capital requirements as the company builds stock for demand amid supply-chain constraints.
- The persistence of inflationary costs and the effect of foreign exchange and economic weakness on international operations.
- Cash deployment for repurchases and dividends, and whether liquidity remains adequate through seasonal cash-flow troughs.