Scholastic Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended November 30, 2017. Amounts are in millions of dollars, except per-share data. The company’s school-oriented businesses are highly seasonal; first- and third-quarter results are typically weaker.
Financial performance
| Metric | Three months ended Nov. 30, 2017 | Prior-year quarter | Six months ended Nov. 30, 2017 | Prior-year period |
|---|---|---|---|---|
| Revenue | $598.3 | $623.1 | $787.5 | $905.8 |
| Operating income | $107.2 | $112.1 | $5.4 | $49.6 |
| Net income (loss) | $57.1 | $67.9 | $(6.6) | $28.3 |
| Diluted EPS | $1.60 | $1.92 | $(0.19) | $0.80 |
| Cost of goods sold as % of revenue | 42.4% | 43.5% | 46.9% | 48.7% |
| Operating cash flow | Not presented quarterly | $28.4 | $74.2 |
Quarterly operating income and net income declined year over year. The six-month operating and net results were sharply lower, with the company reporting a net loss. Lower royalty costs on fewer Harry Potter-related sales and favorable book-fair product mix reduced cost of goods sold as a share of revenue.
Segments and material changes
- Children’s Book Publishing and Distribution: Quarterly revenue was $411.8, down $20.7; operating income was $115.1, down $6.0. Six-month revenue was $478.6, down $91.7, and operating income was $56.2, down $28.7. Prior-year Harry Potter releases drove much of the comparison; Dog Man and other titles partly offset the trade-channel decline. Book-fair revenue improved, while book-club revenue fell.
- Education: Quarterly revenue was $70.9, nearly flat, while operating income fell to $3.8 from $8.7. Six-month revenue declined to $115.9 from $126.3, and the segment recorded an $8.7 operating loss versus $4.3 income. Lower curriculum orders and increased sales-force investment weighed on results.
- International: Quarterly revenue was $115.6, down $3.9, and operating income was $14.7, down $2.0. Six-month revenue was $193.0, down $16.2, and operating income was $11.9, down $9.0. Lower Harry Potter-related sales were partly offset by favorable currency translation; the company also exited low-margin software distribution in Australia.
Cash, debt and liquidity
- Cash and cash equivalents were $387.8 at November 30, 2017, versus $444.1 at May 31, 2017. The six-month cash decrease was $56.3.
- Operating cash flow was $28.4, compared with $74.2 a year earlier. Investing activities used $68.9, including $54.0 of property, plant and equipment additions; financing activities used $15.9.
- Total debt was $11.3, consisting of short-term lines of credit; there were no borrowings under the $375.0 revolving facility. The company reported $39.7 of availability under short-term credit facilities and said its liquidity was sufficient for operating needs and planned commitments.
- The company declared a quarterly dividend of $0.15 per share. It repurchased $13.3 of common stock during the six months; $25.3 remained under the board’s repurchase authorization.
Outlook, risks and unusual items
- Management said second-quarter results were expected to be lower following the prior year’s successful Harry Potter releases. It expects expanded Education sales efforts to support higher revenue beginning in the fourth quarter, and expects strategic technology investments to contribute to sales and profitability in fiscal 2019 and beyond. These are forward-looking expectations, not guarantees.
- Management expected a full-year effective tax rate of approximately 40%, inclusive of discrete items. The company was evaluating the forthcoming revenue-recognition standard and anticipated changes to the timing of some school-channel incentive-program revenue.
- A $15.4 pretax charge arose from partial settlement of the U.S. Pension Plan. Management expected to settle remaining obligations in the third fiscal quarter, which would result in an additional settlement charge; it expected the plan termination to be completed by May 31, 2018.
- A $6.7 impairment charge related to abandoned building improvements during the New York headquarters renovation. Further charges may arise as renovation phases result in additional abandonment of legacy improvements. Higher capital spending on technology and headquarters projects was expected to continue during the fiscal year.
- Scholastic disclosed a $5.4 Wisconsin sales-tax assessment, excluding penalties and interest, for fiscal years 2004–2014. The company is litigating and has not accrued a liability; it said an adverse outcome is reasonably possible but not assured. Foreign-exchange movements, variable borrowing rates, seasonal cash needs and ordinary-course claims are additional risks.
Important facts for investors to verify
- Whether trade-title sales and school-channel performance can offset comparisons against the prior year’s Harry Potter releases.
- Progress and costs of the Education sales-force expansion, technology transformation and headquarters renovation.
- The amount and timing of the expected additional pension settlement charge and completion of the plan termination.
- Cash-flow conversion, seasonal working-capital needs, capital spending and continued use of repurchases and dividends.
- Developments in the Wisconsin sales-tax litigation and the eventual effect of adopting the new revenue-recognition standard.