Scholastic Corporation — FY2018 Form 10-K Summary
Business context and reporting period. Scholastic publishes and distributes children’s books, educational materials and children’s media through school book clubs and fairs, trade, education and international businesses. This annual report covers the fiscal year ended May 31, 2018; it also reports fiscal fourth-quarter results. Amounts below are in U.S. dollars.
Financial results and liquidity
- Revenue: $1.628 billion, down 6.5% from $1.742 billion in FY2017. Children’s Book Publishing and Distribution generated $961.5 million; Education, $297.3 million; International, $369.6 million.
- Profit and margins: Operating income was $55.6 million, versus $89.2 million; operating margin fell to 3.4% from 5.1%. The company reported a $5.0 million net loss, or $0.14 per diluted share, compared with net income of $52.3 million, or $1.47 per diluted share. Results included a $57.3 million non-cash charge from settling the U.S. defined-benefit pension plan.
- Cash flow: Operating cash flow was $141.5 million, essentially unchanged from $141.4 million. Investing activities used $162.0 million, principally reflecting capital spending on headquarters renovations and technology; financing activities used $32.0 million. Cash declined $52.2 million during the year.
- Balance sheet and liquidity: Cash and cash equivalents were $391.9 million, down from $444.1 million. Working capital was $512.5 million. Reported debt was $7.9 million, all short-term; there were no borrowings under the $375 million revolving loan facility. The company also reported $7.5 million of capital-lease obligations. It stated that liquidity was sufficient for operations and planned investments.
- Capital returns: FY2018 dividends declared totaled $0.60 per share. The company repurchased approximately $27.2 million of common stock and had $61.4 million remaining under repurchase authorizations at year-end.
- Fiscal Q4 context: Revenue was $496.2 million versus $499.6 million in FY2017 Q4. Continuing-operations earnings were $50.8 million versus $39.6 million.
Material changes versus FY2017
- Children’s Book Publishing and Distribution revenue fell 8.6% to $961.5 million, and segment operating income declined to $105.6 million from $143.1 million. Lower Harry Potter-related sales drove much of the year-over-year decline after FY2017’s release-related strength; book fairs revenue increased, while book clubs revenue decreased.
- Education revenue fell 4.9% to $297.3 million, and operating income declined to $34.1 million from $50.7 million. Lower sales of leveled bookroom and guided-reading products and higher sales-force costs weighed on results.
- International revenue fell 1.9% to $369.6 million. Local-currency revenue decreased $19.5 million, partly offset by $12.3 million of favorable foreign-exchange effects. Segment operating income was $17.7 million, down from $19.7 million.
- Cost of goods sold improved to 45.7% of revenue from 46.8%, largely due to lower royalties on Harry Potter titles. However, lower revenue and the pension settlement contributed to reduced operating and net results.
- Cash from operations remained stable, while investing cash outflow rose to $162.0 million from $92.8 million, reflecting higher headquarters and technology spending.
Outlook, commentary and risks
- Management expects operating income to grow over the next three fiscal years through targeted revenue growth and cost reductions under its “Scholastic 2020” plan. It cited trade and education as expected growth areas; sales from the new pre-K–6 Scholastic Literacy core program are expected to begin in FY2020.
- FY2019 priorities include launching customer relationship management tools, continuing technology and supply-chain modernization, and completing headquarters retail-space work. Management expects ongoing technology investment to affect FY2019 cash flow and earnings, and additional depreciation as assets enter service. Paper price increases were also anticipated for FY2019.
- Key risks include dependence on successful titles and author relationships; competition and changing customer preferences; execution of digital, curriculum and technology initiatives; school funding and purchasing patterns; paper, labor, shipping and other cost inflation; foreign-exchange and international risks; and cybersecurity and children’s privacy compliance.
- The June 2018 Wayfair decision may require sales-tax collection in additional states, particularly for book-club and online sales. The company said the effect, including possible retroactive exposure, could not yet be estimated. Separately, Wisconsin assessed Scholastic Book Fairs $5.4 million, excluding penalties and interest, for prior-period sales taxes. Scholastic contests the assessment and has not recorded a liability; it acknowledged that an adverse outcome is possible.
- The company completed termination of its U.S. pension plan, funded through plan assets, and reported no additional sponsor funding cost for the settlement. Ordinary-course claims and litigation were not expected to materially affect consolidated results or financial position, according to management.
- The auditor issued an unqualified opinion on the financial statements and an unqualified opinion on internal control over financial reporting.
Important facts for investors to verify
- How much of the FY2018 earnings decline was attributable to the $57.3 million pension settlement, and how operating performance progresses without that unusual charge.
- Whether trade and education revenue growth materializes, including adoption and sales of Scholastic Literacy, and whether the book-club and book-fair channels stabilize.
- Progress, cost and timing of the Scholastic 2020 technology and supply-chain initiatives, including FY2019 spending and expected savings.
- States’ implementation of Wayfair, any retroactive sales-tax claims, and the outcome of the Wisconsin assessment litigation.
- Whether cash generation can support planned capital investment, dividends and repurchases while maintaining the company’s stated liquidity position.