Scholastic Corporation — Q1 FY2019 10-Q
Reporting period: Three months ended August 31, 2018. The quarter is seasonally weak: schools are generally not in session, and the company typically reports an operating loss in its first and third fiscal quarters. Financial statements are unaudited.
Financial performance
Unless stated otherwise, amounts are in millions of dollars. The company adopted Topic 606 on June 1, 2018 using the modified retrospective method, so prior-year results were not restated.
| Metric | Q1 FY2019 | Prior-year quarter | Comparison |
|---|---|---|---|
| Revenue | $218.4 reported; $205.9 excluding Topic 606 adoption effects | $189.2 | Adjusted revenue increased $16.7, or 8.8% |
| Operating loss | $83.8 reported; $89.0 adjusted | $101.8 | Adjusted loss improved $12.8; prior year included $6.7 of impairment charges |
| Net loss | $61.3 reported; $65.1 adjusted | $63.7 | Adjusted loss increased $1.4 |
| Loss per diluted share | $1.75 reported; $1.86 adjusted | $1.81 | Adjusted loss per share increased $0.05 |
| Cost of goods sold | $121.2 adjusted, or 58.9% of revenue | $115.6, or 61.1% | Improved primarily from higher revenue and fixed-cost absorption |
| Operating cash flow | $(89.0) | $(92.4) | Cash use decreased $3.4 |
| Investing cash flow | $(37.4) | $(38.8) | Cash use decreased $1.4 |
Topic 606 increased reported quarterly revenue by $12.5 and operating income by $5.2 versus amounts without adoption; it also reduced the reported net loss by $3.8. These effects primarily reflect timing of book-fair incentive-credit revenue and direct-response advertising expense and may reverse in future quarters.
Revenue by segment, adjusted for Topic 606: Children’s Book Publishing and Distribution revenue was $81.3, up $14.5; Education revenue was $50.3, up $5.3; and International revenue was $74.3, down $3.1. Adjusted segment operating losses were $54.2, $11.8, and $2.1, respectively.
Balance sheet and liquidity: At August 31, 2018, cash and cash equivalents were $269.8, total assets $1,899.6, and stockholders’ equity $1,209.4. Debt was $15.7, all under short-term local-currency credit lines; there were no borrowings under the $375.0 revolving loan facility. The company reported $28.1 of availability under short-term credit facilities, in addition to the revolving facility. Cash declined $122.1 from May 31, reflecting the seasonal cash cycle. Inventory rose to $402.3 from $294.9 at May 31, primarily as the company prepared for the school selling season.
Changes and management commentary
- Adjusted revenue growth was led by trade publishing, including Dog Man: Lord of the Fleas and other frontlist and backlist titles. Education sales also grew; International revenue declined, including a $1.7 foreign-exchange headwind.
- Adjusted operating loss improved year over year, with stronger revenue and no repeat of the prior-year headquarters-related impairment. Depreciation and amortization increased to $13.2 from $9.2, mainly due to technology investments and headquarters upgrades.
- Management is investing in print and digital core education products ahead of the planned launch of Scholastic Literacy later in the fiscal year, and expects a new CRM platform to improve sales productivity and customer analytics. Supply-chain initiatives are beginning to help offset paper and printing inflation.
- Management stated it expects sufficient liquidity for operations, planned capital expenditures, dividends, debt service, and other needs. It gave no specific revenue or earnings guidance in this filing. The expected full-year effective tax rate, including discrete items, was approximately 28.1%.
Risks, contingencies, and notable items
- The business is highly seasonal, and management cautions that actual results may differ from forward-looking statements due to business, cost, market, and other risks.
- Following the Supreme Court’s Wayfair decision, the company may need to collect and remit sales taxes in additional states. The company had not recorded significant related expenses as of August 31, 2018; state enforcement and possible retroactive application remain uncertain.
- Wisconsin assessed Scholastic Book Fairs $5.4, excluding penalties and interest, for sales taxes for fiscal years 2003–2014. The company is litigating and has not accrued a liability; it says it believes the assessments are not merited, but an adverse outcome is possible.
- Topic 606 reduced opening retained earnings by $46.5 at adoption. The quarter-end balance sheet included a $45.4 expected-returns liability and $3.5 return asset.
Important facts for investors to verify
- Reconcile reported results with the Topic 606-adjusted comparisons; the filing says prior-year results are not comparable under the new accounting method.
- Track whether book-fair incentive-credit timing effects reverse in later quarters and how that affects revenue and margins.
- Monitor seasonal inventory, cash use, and borrowing needs through the school selling season.
- Follow state sales-tax implementation and the Wisconsin assessment litigation, including any changes in recorded exposure.