New York – December 17, 2020 – Scholastic Corporation (NASDAQ: SCHL), the global children’s publishing, education and media company, today reported financial results for the Company’s fiscal second quarter ended November 30, 2020. Scholastic’s school-based distribution channels, particularly its book fairs businesses in the U.S., U.K. and Canada, continued to see significant pressure on revenues due to COVID-impacted delays in school openings and disruptions in school instruction patterns and schedules in the Company’s important back-to-school second quarter. Scholastic’s other major businesses performed well and showed significant improvements in operating income year-over-year.
Chairman’s Commentary
“While fiscal second quarter book fairs’ revenues were adversely impacted by COVID, all of Scholastic’s other major businesses, in the U.S. and internationally, showed major improvements in operating income, year-over-year. These gains, along with a reduction in overhead expense, helped to lessen the impact of the lower fairs’ revenues on Scholastic’s profitability and cash position. Trade’s strong fall frontlist, including the NY Times #1 Bestseller, The Ickabog® by J.K. Rowling, helped propel a 21% increase in trade sales and we ended the quarter with an impressive showing of 10 of our children’s titles on the incredibly competitive Amazon Best Books of 2020 list,” said Richard Robinson, Chairman, President and Chief Executive Officer. We continued to take major steps to reduce our operating costs, right-size our employee base, and match our inventory purchases to customer demand. If school operations stabilize and business conditions improve in the second half, as expected, the Company’s new lower cost structure should result in higher profit margins and increased cash flow.”
Mr. Robinson continued, “During the quarter, both the economy and our educational systems continued to be upended by the devastating pandemic and schools faced daily challenges in meeting the needs of their students with only one-third of all schools open for in-person learning. As a trusted partner to educators and families all over the world, the passion and commitment of our employees has provided innovative, practical literacy solutions to these partners struggling to keep their children learning and safe. With increased interest in our take-home reading packs, easy-to-use digital programs, including our new “digital-only” classroom magazines, virtual book fairs and ship-to-home options for clubs and fairs, we were able to help teachers and schools to overcome these obstacles, even as our own top line was significantly impacted by the absence of traditional school-based in-person book fairs, here and abroad.”
Mr. Robinson concluded, “Getting all children back into the classroom in the new calendar year, especially for grades K-5, is a top priority of educators across the country and, as they do, Scholastic will be there with our best-selling content, our safe and easy book fairs, and our breakthrough print and digital literacy programs, along with our unyielding commitment to teachers and parents to turn around learning loss and the potential impact on student achievement from months spent away from the classroom.”
Revenues
Second quarter revenue was $406.2 million, a decrease of 32% compared to $597.2 million in the second quarter of 2020, predominantly due to lower sales in the Company’s book fairs operations as schools were unable to host premium in-person book fairs as a result of coronavirus concerns and restrictions. Although book clubs missed its September targets as school opening dates were delayed due to COVID, sales grew stronger in subsequent months as teacher and student engagement increased significantly over the course of the quarter. Trade publishing revenues remained very strong in the period, driven by bestsellers like Dav Pilkey’s Dog Man: Grime and Punishment and J. K. Rowling’s The Ickabog, as well as best-selling series and a growing evergreen backlist of cherished titles, while Education saw increased district sales of its Grab and Go reading packs, mass market gains for workbooks, and improved digital subscription revenues, including sales of Scholastic Literacy Pro®, the Company’s classroom management tool for independent reading.
Income
Operating income in the second quarter was $48.8 million, compared to operating income of $105.1 million a year ago. During the quarter, the Company continued to take aggressive actions to pare its operating costs resulting in a $69.5 million reduction in selling, general and administrative expenses, or 33% below the prior year period. Excluding one-time items in both periods, operating income in the second quarter was $54.3 million, as compared to $107.0 million in the second quarter of the prior fiscal year.
Net income for the current period was $35.1 million, compared to net income in the prior year period of $71.0 million, a reduction of 51%. Earnings per diluted share in the second fiscal quarter was $1.02 compared to earnings per diluted share of $2.02 in the prior year period. Excluding one-time items, second quarter 2021 earnings per diluted share was $1.15, compared to earnings per diluted share of $2.06 in the second quarter of 2020.
Capital Position and Liquidity
Net cash provided by operating activities was $46.1 million in the current fiscal quarter compared to net cash provided by operating activities of $111.9 million in the second quarter of fiscal 2020. The Company had free cash flow (a non-GAAP liquidity measure defined in the accompanying tables and reconciled to net cash provided) of $30.9 million in the current quarter, compared to free cash flow of $87.7 million a year ago. The Company’s cost savings initiatives continued to drive overall lower net spending levels as the Company re-aligned its operations and staffing levels to adapt to lower COVID-related customer demand in its book fairs channel in the current quarter.
At quarter-end, the Company's cash and cash equivalents exceeded total debt by $161.8 million, compared to $261.7 million a year ago. Net cash balances increased by $26.2 million from prior quarter-end. The Company continues to believe that it has sufficient cash reserves to support its FY2021 business plan and has successfully amended its committed credit facility to ensure continued access to necessary liquidity, if needed, throughout the on-going COVID crisis.
Capital expenditures in the second quarter were $10.2 million, significantly below the current period’s depreciation and amortization expense and prior year period outlays of $17.2 million. Capital expenditures in the period were concentrated on targeted enhancements to the Company’s technology platforms and digital services, as well for the relocation and consolidation of certain distribution, warehousing and back-office operations. A number of these investments will serve to lower the Company’s fixed costs of operations in future periods.
The Company also distributed $5.1 million in dividends in the second quarter.
Earnings before taxes for the quarter ended November 30, 2020 was $47.6 million compared to earnings before taxes of $104.9 million in the second quarter of the prior fiscal year. Adjusted EBITDA (a non-GAAP performance measure defined in the accompanying tables and reconciled to earnings (loss) before taxes) for the second fiscal quarter of 2021 was a gain of $77.7 million, compared to a gain of $129.3 million in the second quarter of 2020.
Fiscal 2021 Outlook
Scholastic believes that returning all children to the classroom will be a top priority for school districts in the new calendar year, setting the stage for higher levels of engagement and providing motivation for schools to host in-person book fairs and increase their purchases of classroom book collections and other instructional resources. The Company is cautiously optimistic that, after a ramp-up period in the third fiscal quarter, it should see improved results, especially in its book fairs operations, in the fourth quarter of the fiscal year as schools successfully re-adjust to in-person learning. And, for those districts continuing to operate in some form of remote learning or hybrid model, the Company’s expanded offering of digital subscription programs should continue to see higher sales.
A strong second half pipeline of new releases will continue to position the trade business for growth, and Scholastic’s growing media and entertainment business, through its production partnerships and the licensing of Scholastic’s content and characters, should continue to complement the Company’s book sales. The Company has met its previously announced $100 million cost savings target and has identified opportunities for additional savings in the second half of the fiscal year. These cost-cutting actions, along with continued strong performance in the Company’s trade and education businesses, in the U.S. and internationally, should help mitigate the impact of lower expected book fairs revenues in the third quarter.
Although the Company remains optimistic about the prospects of returning children to classrooms and the passage of a COVID stimulus package for schools, given the on-going variability in school instruction patterns and schedules and the possibility of new COVID outbreaks and their potential impact on schools, Scholastic is not providing a financial outlook for fiscal year 2021.
Segment Results
All comparisons detailed in this section refer to operating results for the second quarter ended November 30, 2020 versus the second quarter ended November 30, 2019.
Second quarter segment revenues fell $173.3 million, or 42%, to $240.3 million, driven by a decline in book fairs held as schools hosted a much reduced number of in-person fairs on-site due to COVID, even as many school customers converted their cancelled fairs to the Company’s new on-line book fair model. Book club’s revenues finished the quarter strong with direct ship-to-home order fulfillment after a slow start in the early back-to-school period. Trade enjoyed a very strong quarter with improved sales levels across all categories – frontlist, backlist, digital, audio, co-editions, and its Klutz® line of book-based activity kits. Major revenue drivers in the period included Dog Man: Grime and Punishment, J.K. Rowling’s The Ickabog, a NY Times #1 Bestseller, and All Because You Matter by Tami Charles, as well as new title releases in best-selling series including The Bad Guys in The One?! (The Bad Guys™ #12), Pig the Slob (Pig the Pug), and Logan Likes Mary Anne! (The Baby-Sitters Club Graphic Novel #8). Segment operating income was $37.7 million, $71.9 million, or 66%, below the prior year period’s level, reflecting the sharp decline in book fair revenues, partially offset by cost savings and other restructuring activities that helped to reduce the Segment’s cost of operations in the current quarter.
For the current fiscal quarter, segment revenue was $67.5 million, compared to $69.9 million a year ago, a 3% decrease, predominantly due to lower custom publishing revenues, as expected, as the Company winds down that line of business. While the segment also saw lower sales of its traditional classroom book collections and magazines as many school districts chose to operate remotely, full or part-time, sales of the Company’s Grab and Go take-home book packs to school districts and community-based services were robust in the current quarter. Additionally, the Company’s line of workbooks and early readers saw increased sales in all channels, with a strong pipeline of orders for the second half of the fiscal year, and digital subscription products, including Scholastic Literacy Pro, F.I.R.S.T.® and BookFlix®, realized a 30% increase in revenues in the aggregate and a 43% increase in bookings, where additional revenue will be recognized in future periods as product is delivered. Segment operating income was $11.9 million, a $5.7 million, or 92%, improvement versus the prior year period due to product mix and lower operating costs in the current quarter.
