Scholastic Corporation — FY2020 Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2020. The filing also provides fourth-quarter results; this is an annual report, not a standalone 2019 Q4 filing. Amounts below are in millions of dollars unless noted.
Business context
Scholastic publishes and distributes children’s books and provides print and digital educational materials and children’s media. Its three reporting segments are Children’s Book Publishing and Distribution, Education, and International. The business is seasonal and relies substantially on school-based book clubs, book fairs, and education sales.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $1,487.1 | $1,653.9 |
| Operating income (loss) | $(88.5) | $25.0 |
| Net income (loss) | $(43.7) | $15.6 |
| Diluted EPS | $(1.27) | $0.43 |
| Cash from operating activities | $2.1 | $116.4 |
| Cash and cash equivalents at year-end | $393.8 | $334.1 |
| Total debt | $218.5 | $7.3 |
| Working capital | $533.8 | $419.1 |
Revenue fell 10.1%. Cost of goods sold was 50.5% of revenue, versus 47.2% a year earlier; operating margin was approximately negative 6.0%, and net margin approximately negative 2.9%. The company recorded a $46.0 income tax benefit, primarily reflecting U.S. net operating losses expected to be carried back.
- Children’s Book Publishing and Distribution: Revenue of $875.4, down $114.9; operating income of $23.6, down from $82.9. School-channel declines outweighed trade growth.
- Education: Revenue of $287.3, down $10.1; operating income of $29.9, compared with $30.6.
- International: Revenue of $324.4, down $41.8; operating loss of $6.5, compared with income of $13.8.
Fourth-quarter revenue was $284.0, compared with $470.7 in FY2019 Q4. The company reported a fourth-quarter net loss of $13.0, versus net income of $17.9.
Cash, debt, and liquidity
Operating cash flow fell to $2.1, from $116.4, as lower sales and a $79.8 increase in income tax receivable weighed on cash generation; spending reductions and lower inventory purchases partly offset the decline. Investing activities used $95.7, primarily for capital expenditures of $62.7 and prepublication and production spending of $28.5. Financing activities provided $154.1, including $200.0 borrowed under the revolving credit facility in Q4 as a precautionary measure. The company ended the year with $393.8 of cash and $218.5 of total debt.
Management reported approximately $175.0 of availability under its principal loan agreements and $38.6 under short-term credit facilities at May 31, 2020. It stated that liquidity was sufficient for anticipated needs, while expecting lower operating cash flow in FY2021. The company was in compliance with its debt covenants. The quarterly dividend remained $0.15 per share; the FY2020 dividend declared was $0.60 per share. Share repurchases were suspended in early March after $35.5 of FY2020 repurchases.
Material changes, outlook, and risks
- COVID-19 school closures caused the cancellation of nearly all Q4 physical book fairs, reduced book-club participation, and delayed education purchases. International school channels and certain Asian direct-sales and learning-center operations were also disrupted.
- Domestic trade revenue increased $56.5, helped by best-selling titles, including The Ballad of Songbirds and Snakes, partly offsetting school-channel losses. The company cited online trade sales as a partial buffer to bookstore closures.
- A $40.0 non-cash inventory write-down followed changes to North American purchasing and inventory practices; it reduced FY2020 basic and diluted EPS by $0.84. Total asset impairments and write-downs were $40.6. Severance expense was $17.2, including $13.1 related to cost-reduction and restructuring programs.
- Other unusual items included $1.5 for an alleged patent-infringement settlement and $2.4 for photo copyright settlements. Management said ordinary-course claims and lawsuits were not expected to have a material adverse effect, after accrued amounts.
- Management anticipated a slower-than-normal start to the 2020–21 school year, with in-person, remote, or hybrid learning models. It expected demand for books delivered to schools or homes and digital education tools, but gave no quantified revenue or earnings guidance. Cost reductions and operational flexibility were intended to address uncertain volumes.
- Key risks include the duration and effects of the pandemic, school reopening patterns and school budgets, the ability to adapt school-channel models, trade-customer concentration, competition, digital execution, bad debts and returns, shipping and paper costs, foreign exchange, and technology-system implementation. One trade customer represented 36% of trade revenue and 8% of total revenue.
The financial statements received an unqualified audit opinion, and the auditor also gave an unqualified opinion on internal control over financial reporting. The auditor identified revenue allocation for book-fair incentive credits as a critical audit matter, involving estimates of credit value and redemption patterns.
Important facts for investors to verify
- Whether school-channel revenues and participation recovered after FY2020, and whether alternative or virtual book-fair models gained traction.
- Whether the $40.0 inventory write-down and changed purchasing practices lead to durable cost savings without constraining sales.
- How operating cash flow, working capital, tax refunds or carrybacks, and revolving-credit debt evolved after May 31, 2020.
- Whether management’s liquidity and cost-reduction plans supported the dividend and debt repayment amid continuing pandemic uncertainty.
- Whether customer bad debts, product returns, inventory obsolescence, and the book-fair incentive-credit estimates remained within expectations.
- Whether the Education reporting unit with $66.7 of goodwill, whose fair value management said reasonably exceeded carrying value, required reassessment if school-market conditions remained adverse.