Scholastic Corporation (NASDAQ: SCHL) — FY2021 Form 10-K
Reporting period: Fiscal year ended May 31, 2021. Although the request refers to 2020 Q4, this filing is an annual report for FY2021; it also reports quarterly results, including Q4.
Business context
Scholastic publishes and distributes children’s books, educational materials and children’s media. Its three reporting segments are Children’s Book Publishing and Distribution, Education, and International. The fiscal year was materially affected by COVID-19-related school closures and remote or hybrid instruction, which disrupted school book fairs, book clubs and some education and international sales.
Financial results and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $1,300.3 million | $1,487.1 million |
| Operating income (loss) | $(22.7) million | $(88.5) million |
| Operating margin | (1.7)% | (6.0)% |
| Net income (loss) | $(10.9) million | $(43.7) million |
| Diluted loss per share | $(0.32) | $(1.27) |
| Cash provided by operating activities | $71.0 million | $2.1 million |
| Cash and cash equivalents at year-end | $366.5 million | $393.8 million |
Cost of goods sold was 51.3% of revenue, implying a 48.7% gross margin, versus 50.5% and 49.5%, respectively, in FY2020. Interest expense rose to $6.2 million from $3.0 million, mainly due to increased borrowings. Total debt was $190.2 million, including $175.0 million drawn under the U.S. revolving facility; $182.9 million was classified as current. The company reported $54.4 million of availability under U.S. and UK loan agreements and $26.8 million under short-term credit facilities. Current assets were $1,028.3 million and current liabilities were $695.5 million.
Material changes versus FY2020
- Revenue fell 12.6%, led by a $219.5 million decrease in U.S. book fair channel revenue as schools largely did not host in-person fairs. Children’s Book Publishing and Distribution revenue declined 24.1% to $664.7 million.
- Education revenue rose 8.7% to $312.3 million, supported by take-home reading packs, instructional programs, teaching resources and digital subscriptions.
- International revenue was nearly flat in reported dollars at $323.3 million; a $16.9 million favorable currency effect partly offset lower local-currency sales.
- Operating loss improved by $65.8 million, reflecting cost reductions and the absence of FY2020’s $40.0 million inventory write-down. Education operating income increased to $60.6 million from $29.9 million; International moved to $24.0 million of operating income from a $6.5 million loss. Children’s Book Publishing and Distribution operating income declined to $13.7 million from $23.6 million.
- Operating cash flow increased to $71.0 million. Investing activities used $50.5 million, while financing activities used $52.3 million; year-end cash decreased by $27.3 million.
Outlook, commentary, risks and unusual items
- Management reported improving trends in Q4 and expected recovery as students returned to classrooms and stores reopened, particularly in book fairs in the U.S., Canada and U.K. It anticipated stronger operating leverage and cash flow from a lower cost base, and cited further potential savings from process improvements, automation and consolidation. No numerical revenue or earnings guidance was provided.
- Management cautioned that COVID-19 effects remained uncertain. Renewed school closures, reduced in-person activities, changed buying patterns, constrained school budgets, shipping costs and supply-chain disruption could adversely affect results.
- FY2021 included a $20.0 million mediation-assisted intellectual-property settlement, $11.1 million of asset impairments related to office and warehouse consolidation, and $23.1 million of severance expense. The company also recorded $10.4 million of gains on sales of the Danbury facility and Southam distribution center. Potential insurance recoveries on the settlement were not yet determinable.
- The U.S. credit facility matures January 5, 2022. The company said it intended to extend it or arrange a new long-term facility before maturity; it reported covenant compliance at May 31, 2021. The amended facility includes liquidity and payment restrictions.
- Richard Robinson, longtime Chairman, President and CEO, died on June 5, 2021. Peter Warwick was named CEO effective August 1, 2021; Iole Lucchese was appointed Board Chair. Robinson’s estate held control of a majority of Class A shares, whose holders elect most directors and control most stockholder votes; the estate’s voting power was exercised by its special executor.
- The company declared a regular $0.15-per-share dividend for FY2022 Q1 and suspended share repurchases amid COVID-19 uncertainty. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; the filing identifies book-fair incentive-credit revenue allocation as a critical audit matter.
Important facts for investors to verify
- Whether school-based book fairs and book clubs recover, and whether virtual or home-delivery alternatives can sustain participation and margins.
- Progress on the U.S. credit facility extension or replacement before January 5, 2022, including availability, covenants and seasonal borrowing needs.
- Whether management’s recovery expectations and cost savings translate into durable revenue growth, positive operating income and cash flow.
- Final insurance recoveries, if any, for the $20.0 million settlement, and any developments in related legal or sales-tax contingencies.
- Effects of CEO succession and estate control of Class A voting shares on governance and future strategic decisions.