Scholastic Corporation — Q2 FY2024 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended November 30, 2023. Scholastic operates in Children’s Book Publishing and Distribution, Education Solutions, and International. Its school-related businesses are seasonal, with revenues generally stronger in the second and fourth fiscal quarters.
Financial performance
| Metric | Three months ended Nov. 30, 2023 | Three months ended Nov. 30, 2022 | Six months ended Nov. 30, 2023 | Six months ended Nov. 30, 2022 |
|---|---|---|---|---|
| Revenue | $562.6 million | $587.9 million | $791.1 million | $850.8 million |
| Operating income | $101.3 million | $100.1 million | $2.2 million | $42.0 million |
| Net income attributable to Scholastic | $76.9 million | $75.3 million | $2.7 million | $29.8 million |
| Diluted EPS | $2.45 | $2.12 | $0.09 | $0.84 |
| Operating cash flow | Not separately provided | Not separately provided | $71.6 million | $21.3 million |
Margins: Cost of goods sold was 41.6% of revenue in Q2 versus 44.3% a year earlier, implying gross margins of 58.4% and 55.7%, respectively. For the six-month period, cost of goods sold was 46.0% versus 47.6% of revenue, implying gross margins of 54.0% and 52.4%. Consolidated operating margin was approximately 18.0% in Q2 versus 17.0%; for the six months it was approximately 0.3% versus 4.9%.
Liquidity and debt at Nov. 30, 2023: Cash and cash equivalents were $149.5 million, down from $224.5 million at May 31, 2023. Current assets were $840.6 million and current liabilities $636.7 million. Debt was $6.3 million, all short-term; there were no borrowings under the $300 million U.S. revolving credit facility, with $299.6 million available after commitments. The company reported compliance with its credit covenants.
Cash flows for six months: Operating activities provided $71.6 million; investing activities used $49.1 million; financing activities used $97.8 million. Cash declined by $75.0 million to $149.5 million. Operating cash flow improved mainly because inventory purchases were about $80 million lower as purchasing patterns and lead times normalized. Financing outflows included $90.2 million of common-stock repurchases and $12.8 million of dividends.
Material changes and drivers
- Q2 revenue declined $25.3 million, or 4%, year over year; six-month revenue declined $59.7 million, or 7%.
- Children’s Book Publishing and Distribution revenue fell 6% in Q2, chiefly as the company reduced unprofitable book-club offers and events during a repositioning. Book-fair revenue increased modestly; trade sales excluding media increased 3% in Q2.
- Education Solutions revenue rose 1% in Q2 but fell 4% for the six months. Lower supplemental instructional-material sales and timing shifts in summer-learning revenue weighed on the period.
- International revenue decreased 4% in Q2 and 7% for the six months. Softer retail markets in Australia, New Zealand and Canada were partly offset by UK book-fair and trade growth.
- Q2 operating income and net income increased modestly, while six-month operating income and net income declined substantially. Lower six-month revenue and higher selling, general and administrative expenses contributed; six-month SG&A rose $20.9 million, including restructuring-related severance.
- Lower printing, freight and production costs, plus a more favorable royalty mix, improved cost of goods sold as a percentage of revenue. Six-month share repurchases were materially higher than in the prior-year period.
Outlook, risks and notable items
- Management said Q2 profit growth was below expectations and expects lower participation and spending in school reading events to continue through the remainder of the school year. No quantified full-year earnings or revenue guidance is provided in the filing text.
- Management expects trade-channel performance to benefit from new releases, including Dog Man and Heartstopper titles. Favorable cost-of-goods-sold trends are expected to continue into the second half; Education Solutions’ higher operating-cost levels are also expected to continue as it invests in growth initiatives.
- The company said it expects sufficient liquidity for operations, working capital, planned investment, dividends and repurchases. It declared a $0.20-per-share dividend payable March 15, 2024, and the Board increased the share-repurchase authorization after quarter-end, leaving $100 million of current authorization.
- Risks highlighted include changing educational purchasing patterns and funding, state curriculum and literacy-instruction changes, potential school-content restrictions or cancellations affecting book fairs, and execution of the book-club repositioning and integration with book fairs. Foreign-exchange and variable-interest-rate exposures are also discussed.
- Six-month results included restructuring-related severance; the filing describes $6.3 million associated with programs across school reading events, Education Solutions and Canada, and separately identifies $5.1 million of first-quarter severance in unallocated overhead. The filing reports no goodwill or intangible-asset impairment charges in the periods presented.
- Various ordinary-course claims and lawsuits are pending; management does not expect reasonably possible losses to materially adversely affect financial position or results. Potential additional insurance recoveries related to a prior intellectual-property settlement remain uncertain.
Most important facts for investors to verify
- Whether the book-club reset stabilizes participation and revenue without further weakening school reading-event results.
- Whether book-fair growth, trade releases and Education Solutions investments offset continued softness in educational materials and international retail markets.
- Whether cost savings and lower product costs persist, while planned facility, labor and growth spending remains elevated.
- Cash generation and working-capital trends through the seasonally important second half, especially as repurchases and dividends reduce cash.
- Potential effects of school-content policies, curriculum changes, funding shifts and customer purchasing patterns on sales and fair participation.