Scholastic Corporation — Q1 Fiscal 2021 Form 10-Q
Reporting period: Three months ended August 31, 2020; comparisons are with the three months ended August 31, 2019. Amounts are in millions of dollars except per-share data. Scholastic’s business is seasonal, and first-quarter results typically reflect lower school-channel activity.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Revenue | $215.2 | $232.6 |
| Operating loss | $57.0 | $87.4 |
| Net loss | $39.8 | $58.5 |
| Diluted loss per share | $1.16 | $1.68 |
| Cash used in operating activities | $26.0 | $97.6 |
| Cash and cash equivalents, period end | $355.5 | $199.4 |
| Total debt, period end | $219.9 | $13.0 |
Cost of goods sold was $123.2, or 57.2% of revenue, versus $137.1, or 58.9%, a year earlier. Selling, general and administrative expense fell to $121.5 from $163.1; severance rose to $12.0 from $4.4. Net interest expense was $1.2, compared with net interest income of $0.7. The effective tax rate was 23.2%, versus 32.8%.
Current assets were $1,055.2 and current liabilities $563.5 at August 31, 2020. The company reported $200.0 outstanding under its U.S. revolving facility and $19.9 of current debt and credit lines. Management reported $174.6 of availability under its primary U.S. and U.K. loan agreements, net of borrowings and commitments, plus $42.8 of availability under short-term credit facilities.
Material changes and drivers
- Revenue declined $17.4, primarily because COVID-19 delayed school reopenings and reduced school-based book fairs and clubs. Children’s Book Publishing and Distribution revenue fell $18.7 to $90.9; International revenue fell $3.9 to $70.7.
- Education revenue increased $5.2 to $53.6, driven by digital products, instructional programs, teaching resources and take-home reading packs.
- Operating loss improved by $30.4. Management attributed the improvement principally to cost-saving actions, lower employee and distribution costs, and stronger Education results; lower sales continued to weigh on performance.
- Operating cash use improved by $71.6 year over year, reflecting cost controls and working-capital changes. Cash fell $38.3 during the quarter from $393.8 at May 31, 2020.
- Investing cash use was $8.9, including $12.3 of net proceeds from the Danbury facility sale. The sale generated a $6.6 gain. Financing cash use was $5.3; the company made no share repurchases, compared with $12.6 in the prior-year quarter.
Outlook, risks and unusual items
- Management said COVID-19 effects on school reopening schedules and school-channel demand remained uncertain. It expected the traditionally profitable second quarter ending November 30, 2020 to be negatively affected; no quantified earnings or revenue guidance was provided.
- The company expected cost-saving programs to mitigate lower book fair and book club revenue, with a substantial portion intended to create lasting cost-structure improvements. Short-term employee furlough and reduced-work-week programs were discontinued as of Q2 FY2021.
- Management said it expected sufficient liquidity for ongoing operations and planned needs, taking COVID-19 into account. The $200.0 U.S. facility borrowing was drawn in Q4 FY2020 as a precaution, rather than for an immediate working-capital need. The company was in compliance with debt covenants at quarter-end.
- COVID-19 may continue to adversely affect operating results and financial condition. The filing cited uncertainty in school reopening patterns, possible effects of government or customer actions, seasonal cash needs, and variable-rate borrowing and foreign-exchange risks.
- Other notable items: $12.0 of severance related to cost-reduction and restructuring programs; the Danbury facility sale and gain; and a planned sale of U.K. distribution centers, with completion expected within one year and a gain anticipated. No impairment charges were reported for goodwill or other intangibles.
- The board declared a $0.15-per-share quarterly dividend payable December 15, 2020. The share-repurchase program remained suspended due to COVID-19 uncertainty.
Investor verification points
- Track school reopening conditions and their effect on book fairs, book clubs, Education sales and the traditionally stronger second quarter.
- Assess whether cost savings are sustainable and whether operating performance can improve as sales recover; distinguish recurring results from severance and the Danbury sale gain.
- Monitor operating cash flow, seasonal working-capital needs, cash balances, debt maturities and facility availability, including covenant compliance.
- Review the expected timing and proceeds of the U.K. distribution-center sale and the operating and capital costs of consolidating into the new facility.
- Check subsequent filings for changes to COVID-19 assumptions, liquidity plans, dividends, and any material legal, tax or contingency developments.