Scholastic Corporation — Form 10-Q Summary
Period: Fiscal third quarter and nine months ended February 28, 2021; comparisons are to the periods ended February 29, 2020. The filing reports fiscal 2021, despite the request metadata’s “2020 Q3.” Amounts are in millions except per-share data.
Business context and results
Scholastic publishes and distributes children’s books and educational materials through school-based book clubs and fairs, trade sales, Education, and international operations. Results are highly seasonal. COVID-19 disruptions to in-person schooling continued to weigh particularly on book fairs.
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $277.5 | $373.3 | $898.9 | $1,203.1 |
| Operating income (loss) | $(24.2) | $(60.0) | $(32.4) | $(42.3) |
| Net income (loss) attributable to Scholastic | $(13.9) | $(43.3) | $(18.6) | $(30.8) |
| Diluted loss per share | $(0.41) | $(1.25) | $(0.54) | $(0.89) |
| Operating cash flow | Not separately stated | Not separately stated | $36.5 | $44.0 |
Quarterly revenue fell 25.7% year over year; nine-month revenue fell 25.3%. Cost of goods sold was 52.6% of revenue in Q3 and 52.1% year to date, versus 49.0% and 48.6%, respectively. The resulting gross margins were approximately 47.4% and 47.9%, versus 51.0% and 51.4%. Quarterly operating loss improved by $35.8, and nine-month operating loss improved by $9.9.
Segments and material changes
- Children’s Book Publishing and Distribution: Q3 revenue declined 35.8% to $141.3; nine-month revenue declined 36.4% to $472.5. Lower in-person book fairs drove the declines, partly offset by stronger trade sales. Segment operating result was a Q3 loss of $6.6 versus income of $2.2; nine-month income was $1.9 versus $70.1.
- Education: Q3 revenue decreased 10.8% to $66.3; nine-month revenue decreased 2.7% to $187.4. Digital subscriptions, teaching resources, and take-home reading products partly offset lower classroom magazine and custom publishing sales. Segment operating income rose to $10.1 in Q3 and $19.8 year to date.
- International: Q3 revenue declined 11.3% to $69.9; nine-month revenue declined 10.5% to $239.0. Favorable currency translation partly offset weaker school-based and direct-sales channels. Segment operating loss narrowed to $1.1 in Q3; nine-month operating income increased to $23.3.
Management attributed substantial expense reductions to COVID-related cost actions, restructuring, and government employee-retention subsidies. SG&A fell $61.3 in Q3 and $176.5 year to date. Management said a substantial portion of savings, excluding subsidies, is expected to create lasting cost improvements.
Cash, debt, liquidity, and unusual items
- Cash and cash equivalents were $353.2 at February 28, 2021, down from $393.8 at May 31, 2020. Nine-month operating cash flow was $36.5; investing cash outflow was $34.9 and financing cash outflow was $46.2. Cash decreased $40.6 over the period.
- Total debt was $190.7, comprising $175.0 under the U.S. revolving loan, $8.5 of international credit lines, and $7.2 of UK loans. All debt obligations were classified as current and had maturities of one year or less in the balance-sheet presentation. The U.S. facility matures January 5, 2022; UK term loans mature July 31, 2021.
- The amended U.S. credit facility reduced maximum commitments from $375.0 to $250.0; up to $225.0 is available pending satisfaction of specified covenants. It added a minimum $200.0 consolidated-liquidity covenant and temporarily suspended the minimum interest-coverage covenant through the fiscal quarter ending May 31, 2021. The company reported covenant compliance.
- Management reported $54.3 availability under the amended U.S. and UK loan agreements and $29.5 under short-term credit facilities, in addition to cash. It said these sources were sufficient for currently anticipated operating, investing, and financing needs, taking COVID-19 into account.
- Q3 included $10.9 of impairment charges: $8.5 related to exiting leased New York office space and $2.4 related to plans to close 12 of 54 U.S. book-fair warehouses. Prior-year Q3 included a $40.0 noncash inventory and related-asset write-down.
- The company recorded $10.4 in nine-month gains on sales of the Danbury facility and Southam distribution center ($6.6 and $3.8). It also recorded $18.3 of nine-month severance expense, including $18.0 for cost-reduction and restructuring programs.
Outlook, risks, and contingencies
Management expects continued COVID-19 effects on school instruction and lower school-channel receipts, particularly book fairs, in the fourth quarter of fiscal 2021. It plans to continue adjusting costs and consolidating the book-fair distribution network, while positioning to serve schools as in-person instruction resumes. Management cited scheduled spring releases and trade-channel growth opportunities, but provided no quantified revenue or earnings guidance.
Key uncertainties include the timing and format of school reopenings, the magnitude and duration of pandemic impacts, customer receipts, and variable-rate borrowing costs. The company said it knew of no COVID-related loss contingencies requiring recognition in Q3. Ordinary-course legal matters were not expected to have a material adverse effect. The share-repurchase program remained suspended; the Board declared a $0.15-per-share fourth-quarter dividend payable June 15, 2021.
Investor verification priorities
- Track school reopening patterns and in-person book-fair counts, the main drivers of revenue and segment performance.
- Verify that cost savings persist as government subsidies wind down, and assess the effect of higher freight, shipping, and royalty costs on margins.
- Monitor debt maturities, refinancing or extension of the U.S. facility before January 2022, UK loan repayments, and compliance with amended covenants.
- Review cash conversion and working-capital needs, including inventory, accrued royalties, and customer returns.
- Assess execution and costs of warehouse and office consolidations, along with any future impairments or asset-sale proceeds.