Scholastic Corporation — Q2 FY2021 Form 10-Q
Reporting period: Quarter and six months ended November 30, 2020. Amounts are in millions of dollars except per-share data. The company’s fiscal year ends May 31.
Business context and results
COVID-19 disrupted school-based sales, especially in-person book fairs, during a seasonally important quarter. Growth in trade books and selected Education products partly offset declines. Results compare with the prior-year quarter and six-month period.
| Metric | Three months 2020 | Three months 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $406.2 | $597.2 | $621.4 | $829.8 |
| Operating income (loss) | $48.8 | $105.1 | $(8.2) | $17.7 |
| Net income (loss) attributable to Scholastic | $35.1 | $71.0 | $(4.7) | $12.5 |
| Diluted EPS | $1.02 | $2.02 | $(0.14) | $0.35 |
| Operating cash flow | Not stated separately | Not stated separately | $20.1 | $14.3 |
Financial position, margins and cash flow
- Cost of goods sold was 49.1% of revenue for the quarter versus 44.3% a year earlier, and 51.9% for the six months versus 48.4%. Corresponding gross margins were 50.9%, 55.7%, 48.1% and 51.6%, respectively. The mix shift away from book fairs, higher-royalty trade titles and school-channel shipping costs weighed on margins.
- Operating margin was approximately 12.0% for the quarter versus 17.6%; for six months it was approximately negative 1.3% versus 2.1%.
- Six-month investing cash outflow was $24.1, compared with $48.4; financing cash outflow was $36.2, compared with $22.1. Cash declined $37.2 from fiscal-year start to $356.6 at November 30, 2020.
- Cash was $356.6; total debt was $194.8, including $175.0 under the U.S. revolving loan and $19.8 of current debt and credit-line borrowings. Total debt was $16.1 at November 30, 2019. The company repaid $25.0 of U.S. loan borrowings during the quarter.
- Current assets were $1,111.1 and current liabilities $606.6 at November 30, 2020. Management reported $49.6 of availability under the amended U.S. and UK loan agreements and $34.4 under short-term credit facilities, net of borrowings and commitments, as of that date.
Material changes and segment trends
- Quarterly revenue fell $191.0, chiefly because Children’s Book Publishing and Distribution revenue declined $173.3 (41.9%), with book fair revenue down $176.4. Trade revenue in that segment rose $22.1 on new releases and backlist titles.
- Education quarterly revenue decreased $2.4; six-month revenue increased $2.8. Higher digital, take-home reading-pack and teaching-resource sales helped offset the wind-down of custom publishing magazines and weaker traditional school sales. Segment operating income improved to $11.9 for the quarter and $9.7 for six months.
- International revenue declined $15.3 for the quarter and $19.2 for six months. Cost reductions and government employee-retention subsidies helped lift segment operating income to $19.2 and $24.4, respectively.
- Company-wide SG&A fell $73.6 for the quarter and $115.2 for six months, reflecting cost savings, lower spending and subsidies. Severance expense rose to $5.3 for the quarter and $17.3 for six months, largely related to restructuring.
Outlook, risks and unusual items
- Management expects continued COVID-19 effects and lower book fair revenue in the third quarter, with uncertain school instruction patterns. It expects additional second-half savings and continued support from trade and Education performance and scheduled book releases; no numerical earnings or revenue guidance is provided.
- On December 16, 2020, after quarter-end, the company amended its U.S. credit agreement to address potential covenant noncompliance arising from temporary COVID-19 impacts. Maximum commitments fell from $375.0 to $250.0; access is partly conditional, certain covenant thresholds were adjusted or suspended, and new restrictions apply to liquidity, dividends, acquisitions and other restricted payments. The amendment requires minimum consolidated liquidity of $200.0 for specified availability.
- COVID-19, school-channel demand, seasonality, foreign exchange and variable interest rates are key risks. The company said it believed available liquidity was sufficient for anticipated needs, while noting pandemic uncertainty.
- A $6.6 gain on sale of the Danbury facility was recorded in the first quarter; sale proceeds were $12.3. In the second quarter, a plan change for certain postretirement benefits reduced the obligation by $7.6 and improved accumulated other comprehensive loss by $7.6.
- The quarterly dividend remained $0.15 per share. Share repurchases were suspended because of COVID-19 uncertainty. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether school reopening and instruction patterns support a recovery in book fairs and other school-based channels.
- Performance of trade and Education sales, and whether cost reductions can offset continued revenue and margin pressure.
- Compliance with the amended loan agreement’s liquidity and other covenants, actual borrowing availability, and debt repayment needs.
- The duration of government subsidies, restructuring costs and other COVID-related savings or expenses.
- Whether returns, receivable-credit-loss estimates and inventory levels remain appropriate as demand patterns change.