Scholastic Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended November 30, 2021; year-to-date comparisons are against the six months ended November 30, 2020. Fiscal 2022 ends May 31, 2022. Amounts are in millions except per-share data. Scholastic publishes and distributes children’s books and education products through its U.S. and international book, school, trade, and education channels. Results are unaudited and the business is highly seasonal.
Financial performance
| Metric | Three months ended Nov. 30, 2021 | Prior-year quarter | Six months ended Nov. 30, 2021 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $524.2 | $406.2 | $784.0 | $621.4 |
| Operating income (loss) | $83.4 | $48.8 | $51.4 | $(8.2) |
| Net income (loss) attributable to Scholastic | $68.3 | $35.1 | $44.1 | $(4.7) |
| Diluted EPS | $1.91 | $1.02 | $1.24 | $(0.14) |
| Operating margin | 15.9% | 12.0% | 6.6% | (1.3)% |
- Quarterly revenue increased 29% year over year; six-month revenue increased 26%. Second-quarter growth was led by U.S. Book Fairs, which benefited from schools reopening, more fairs, and higher revenue per fair. Education Solutions also grew, while International and U.S. Book Clubs were weaker.
- Second-quarter U.S. Book Fairs revenue rose $128.5; Book Clubs revenue fell $15.1 and trade revenue fell $4.9. Book Clubs demand was affected by fulfillment labor shortages and a systems issue that created a shipping backlog.
- Quarterly cost of goods sold was 45.4% of revenue versus 46.7% a year earlier; six-month ratio was 47.4% versus 49.0%. Lower royalty costs and improved volume mix helped offset higher paper, printing, freight, and labor costs.
- Quarterly SG&A increased to $188.3 from $151.9, mainly due to higher staffing and labor costs, fewer COVID-related government subsidies, and lower equity investment income; lower restructuring costs partly offset the increase.
- International operating income declined to $8.7 from $17.9 for the quarter and to $7.0 from $22.7 for the six-month period, reflecting pandemic-related restrictions, higher costs, and reduced subsidies. Education Solutions and Children’s Book Publishing and Distribution operating income improved.
Cash flow, balance sheet, and liquidity
- Six-month operating cash flow was $141.6, versus $20.1 in the prior-year period. The improvement included a $63.1 federal tax refund and $6.6 of insurance recoveries; working-capital movements also affected cash generation.
- Investing activities used $17.2, compared with $24.1 used a year earlier. Financing activities used $187.9, primarily reflecting $175.0 of U.S. credit-agreement repayments, plus dividends and $4.2 of share repurchases.
- Cash was $300.7 at November 30, 2021, down from $366.5 at May 31, 2021. Current assets were $1,027.5 and current liabilities were $671.7.
- Total debt was $14.3, all classified as current and with maturities of one year or less; the company had no borrowings under its U.S. revolving credit agreement. Its amended $300.0 revolving facility matures October 27, 2026. Management reported $299.6 availability under the U.S. facility and UK loan agreements, plus $32.8 availability under short-term credit facilities, after borrowings and letters of credit.
- The October 2021 credit-agreement amendment increased the facility limit from $250.0 to $300.0, extended maturity, removed a minimum liquidity covenant, and eliminated required securitization of inventory and receivables. The company reported compliance with its required financial covenants.
Outlook, risks, and unusual items
- Management expected U.S. Book Fairs momentum to continue into the spring, while monitoring COVID variants and schools’ ability to hold in-person fairs. It planned to address the Book Clubs shipment backlog and re-engage sponsors in the new calendar year.
- Management cited education opportunities from federal stimulus funding and a five-year Florida New Worlds Reading Initiative contract expected to begin shipping in December 2021. No quantified earnings or revenue guidance is provided in the filing text.
- Management expected inflation in paper, printing, freight, and labor—and ongoing warehouse labor shortages—to pressure costs through the remainder of fiscal 2022. Mitigation efforts include cost savings, process improvements, automation, vendor diversification, and pricing and product rationalization.
- COVID-related school interruptions, restrictions in China and other markets, supply-chain constraints, labor availability, and foreign-exchange movements could affect results. Management said it believed liquidity was sufficient for anticipated operating, financing, and investing needs.
- A $6.2 gain on the sale of the Lake Mary, Florida facility contributed to quarterly earnings. The company paid a previously accrued $20.0 intellectual-property settlement in September and received $6.6 in insurance recoveries; further recoveries were expected, but their amount was not yet determinable. The company also expected a gain on the sale of its UK Witney facility in fiscal fourth quarter.
- The board declared a $0.15-per-share quarterly dividend payable March 15, 2022. The company repurchased $4.2 of common stock during the six-month period; $63.1 remained authorized for future repurchases.
Investor verification points
- Whether Book Fairs’ reopening-driven growth persists and whether the Book Clubs backlog and fulfillment issues are resolved.
- How much inflation and labor constraints affect margins as higher-cost inventory is sold, and whether cost mitigation offsets those pressures.
- Whether COVID restrictions continue to weigh on International results, especially in Asia, Australia, and New Zealand.
- The sustainability of reported cash generation after excluding the federal tax refund and insurance recovery, and the company’s working-capital needs through seasonal periods.
- The timing and proceeds of the Witney facility sale, and any additional insurance recoveries related to the settlement.