SCHOLASTIC CORPORATION Overview and Outlook
Revenues for the first quarter endedAugust 31, 2020 were$215.2 million , compared to$232.6 million in the prior fiscal year quarter, a decrease of$17.4 million . The Company reported a net loss per diluted share of Class A and Common Stock of$1.16 in the first quarter of fiscal 2021, compared to a net loss per diluted share of$1.68 in the prior fiscal year quarter. The Company has executed on its cost-saving programs implemented to help mitigate the impact of COVID-19, which improved the Company's quarterly operating loss and cash used in operating activities year-over-year and preserved the Company's capital position. Globally, best-selling titles within the trade channel continued to perform well in the fiscal quarter endedAugust 31, 2020 , including The Ballad of Songbirds and Snakes, which was released in the fourth quarter of fiscal 2020. In addition, the Company benefited from improved results across a number of education business lines, including digital product subscriptions, teaching resources, summer literacy camps and summer reading packs. There is still uncertainty surrounding the duration and continued severity of the COVID-19 pandemic and its forward impact on schools, and the Company has implemented cost-saving programs targeted to improve its operations which are expected to help mitigate lower revenue expectations for the book fairs and book clubs channels as schools adapt to COVID-19 disruptions and delays. A substantial portion of these cost-saving programs are also expected to bring permanent improvements to the Company's cost structure and provide opportunities for profitability as normal sales levels return. The trade channel is expected to benefit from new titles such asDav Pilkey's Dog Man: Grime and Punishment, which was released in September, andJ.K. Rowling's new title, The Ickabog®, which is targeted for release in November, as well as recently announced development deals for live-action feature films of book series, including Caster™, Goosebumps®, Animorphs®, and The Magic School Bus®.
Results of Operations - Consolidated
Revenues for the quarter endedAugust 31, 2020 decreased to$215.2 million , compared to$232.6 million in the prior fiscal year.The Children's Book Publishing and Distribution segment revenues decreased by$18.7 million , primarily driven by lower school-based channel revenues resulting from COVID-impacted delays in school re-openings. In the Education segment, revenues increased by$5.2 million , primarily due to higher sales of digital products in literacy programs and magazines and sales of take-home Grab and Go reading packs. In local currency, International segment revenues decreased by$4.3 million , primarily driven by lower revenues in the school-based channels inCanada and the direct sales channel inAsia due to the impact of COVID-19, partially offset by increased revenues in the trade channel across all international markets. International segment revenues were impacted by favorable foreign exchange of$0.4 million .
Components of Cost of goods sold for the three months ended
Three months ended
August 31, August 31,
2020 2019
($ amounts in millions) $ % of Revenue $ % of Revenue
Product, service and production costs $ 60.9 28.3 % $ 68.2 29.3 %
Royalty costs 23.4 10.9 % 22.3 9.6 %
Prepublication amortization 6.5 3.0 % 6.6 2.8 %
Postage, freight, shipping, fulfillment and
other 32.4 15.0 % 40.0 17.2 %
Total $ 123.2 57.2 % $ 137.1 58.9 %
Cost of goods sold for the quarter ended August 31, 2020 was $123.2 million , or
57.2% of revenues, compared to $137.1 million , or 58.9% of revenues, in the
prior fiscal year quarter. The decrease in Cost of goods sold as a percentage of
revenue was primarily driven by favorable product cost due to the sales mix
within the education business, partially offset by higher royalty costs due to
the product mix of titles sold within the trade channel in the quarter ended
August 31, 2020 .
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SCHOLASTIC CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A")
Selling, general and administrative expenses in the quarter ended August 31,
2020 decreased to $121.5 million , compared to $163.1 million in the prior fiscal
year quarter. The $41.6 million decrease was due to the Company's COVID-related
cost-saving initiatives, which included employee furlough and reduced work week
programs and restructuring resulting in lower employee-related expenses, reduced
technology-related spending, improvements in operating and financial processes,
and other efforts to lower the Company's overall cost base. A substantial
portion of these cost-saving programs are expected to bring permanent
improvements to the Company's cost structure to meet the current economic
environment and provide opportunities for profitability as normal sales levels
return. The employee short-term furlough and reduced work week programs have
been discontinued as of the second quarter of fiscal 2021.
Depreciation and amortization expenses in the quarter ended August 31, 2020 were
$15.5 million , which is comparable to $15.4 million in the prior fiscal year
quarter.
Severance expense in the quarter ended
Net interest expense in the quarter ended
The Company's effective tax rate for the quarter ended
Net loss for the quarter endedAugust 31, 2020 decreased by$18.7 million to$39.8 million , compared to Net loss of$58.5 million in the prior fiscal year quarter. Net loss per basic and diluted share of Class A and Common Stock was$1.16 and$1.16 , respectively, for the fiscal quarter endedAugust 31, 2020 , compared to a net loss per basic and diluted share of Class A and Common Stock of$1.68 and$1.68 , respectively, in the prior fiscal year quarter.
Results of Operations
Three months ended
August 31, August 31, $ %
($ amounts in millions) 2020 2019 change change
Revenues $ 90.9 $ 109.6 $ (18.7) (17.1) %
Cost of goods sold 54.6 65.5 (10.9) (16.6) %
Other operating expenses (1) 65.5 85.8 (20.3) (23.7) %
Operating income (loss) $ (29.2) $ (41.7) $ 12.5 30.0 %
Operating margin - % - %
(1) Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization.
Revenues for the quarter endedAugust 31, 2020 decreased by$18.7 million to$90.9 million , compared to$109.6 million in the prior fiscal year quarter. Book fairs channel revenues decreased$14.3 million , primarily driven by lower fair count, and book clubs channel revenues decreased$2.2 million due to declines in sponsor engagement, both largely attributable to COVID-impacted school re-openings. Trade channel revenues decreased by$2.2 million , primarily due to a shift in the timing of the release of a new title in the popular Dog Man® book series to the second quarter of fiscal 2021 compared to a first quarter release in the prior fiscal year quarter. 24 --------------------------------------------------------------------------------SCHOLASTIC CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") This decrease was partially offset by sales of frontlist titles including The Ballad of Songbirds and Snakes (A Hunger Games Novel),Logan Likes Mary Anne ! (The Baby-Sitters Club® Graphix #8), Captain Underpants and the Revolting Revenge of the Radioactive Robo-Boxers (Color Edition), The Bad Guys in the Dawn of the Underlord (The Bad Guys® #11), Karen's Roller Skates (Baby-Sitters Little Sister® Graphic Novel #2); Forget Me Nat (Nat Enough #2), and You Should See Me in a Crown by best-selling authorLeah Johnson , as well as increased sales of workbooks within the Company's Scholastic Early LearnersTM and BOB Books® lines and higher audio book sales. Cost of goods sold for the quarter endedAugust 31, 2020 was$54.6 million , or 60.1% of revenues, compared to$65.5 million , or 59.8% of revenues, in the prior fiscal year quarter. The increase in Cost of goods sold as a percentage of revenues was primarily driven by higher royalty costs associated with the product mix within the trade channel. Other operating expenses for the quarter endedAugust 31, 2020 decreased to$65.5 million , compared to$85.8 million in the prior fiscal year quarter. The decrease was attributable to cost-saving measures, which primarily resulted in a reduction in employee-related costs across all channels in the segment, as well as the temporary closure of book fair distribution facilities. Segment operating loss for the quarter endedAugust 31, 2020 was$29.2 million , compared to an operating loss of$41.7 million in the prior fiscal year quarter. The$12.5 million improvement was primarily driven by cost-saving measures, which resulted in a decrease in employee-related costs and warehouse and distribution center costs. The Company expects continued impact from COVID-19 and related school re-opening issues, and continues to monitor costs in the school channels, while simultaneously preparing itself to be in a position to respond to varied customer requirements which may emerge as a result of the pandemic. Education Three months ended August 31, August 31, $ % ($ amounts in millions) 2020 2019 change change Revenues $ 53.6 $ 48.4 $ 5.2 10.7 % Cost of goods sold 22.6 20.9 1.7 8.1 % Other operating expenses (1) 33.2 40.9 (7.7) (18.8) % Operating income (loss) $ (2.2) $ (13.4)$ 11.2 83.6 % Operating margin - % - %
(1) Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization.
Revenues for the quarter endedAugust 31, 2020 increased to$53.6 million , compared to$48.4 million in the prior fiscal year quarter. The$5.2 million increase was primarily due to higher sales of instructional programs, including programs provided through the Company's Summer LitCamp® partnership with BellXcell® Summer, as well as the Company's line of Grab and Go summer reading packs. Digital revenues also increased in the quarter endedAugust 31, 2020 , which included a large school district sale of Scholastic Literacy Pro® and F.I.R.S.T.®, digital programs for independent reading and foundational reading skills, respectively. The Company's teaching resources business revenues increased from sales of products such as First Little Readers™ packs and teaching guides and Jumbo and Summer Express activity books. Cost of goods sold for the quarter endedAugust 31, 2020 was$22.6 million , or 42.2% of revenues, compared to$20.9 million , or 43.2% of revenues, in the prior fiscal year quarter. The decrease in Cost of goods sold as a percentage of revenues was primarily due to favorable product mix from higher digital sales and take-home packs, partially offset by higher postage costs. Other operating expenses for the quarter endedAugust 31, 2020 decreased to$33.2 million , compared to$40.9 million in the prior fiscal year quarter. The$7.7 million decrease was primarily related to a decrease in employee-related costs as a result of cost-saving measures implemented to mitigate the impact of COVID-19. 25 --------------------------------------------------------------------------------SCHOLASTIC CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") Segment operating loss for the quarter endedAugust 31, 2020 was$2.2 million , compared to an operating loss of$13.4 million in the prior fiscal year quarter. The$11.2 million improvement was primarily driven by revenue increases in a number of education business lines, including digital product subscriptions, teaching resources, summer literacy camps and summer reading programs, coupled with cost-saving measures taken to mitigate the impact of COVID-19. International Three months ended August 31, August 31, $ % ($ amounts in millions) 2020 2019 change change Revenues $ 70.7 $ 74.6$ (3.9) (5.2) % Cost of goods sold 37.6 38.7 (1.1) (2.8) % Other operating expenses (1) 27.9 39.6 (11.7) (29.5) % Operating income (loss) $ 5.2 $ (3.7) $ 8.9 240.5 % Operating margin 7.4 % - %
(1) Other operating expenses include selling, general and administrative expenses, bad debt expenses, severance and depreciation and amortization.
Revenues for the quarter endedAugust 31, 2020 decreased to$70.7 million , compared to$74.6 million in the prior fiscal year quarter. Local currency revenues across the Company's foreign operations decreased by$4.3 million partially offset by favorable foreign exchange of$0.4 million . InCanada , local currency revenues decreased$1.5 million , primarily driven by lower school-based channel sales resulting from the impact of COVID-19, partially offset by increased sales of best-selling trade titles. In theUK , local currency revenues decreased$0.2 million , primarily due to lower volumes in the book fairs channel, partially offset by increased book clubs sales from parent-to-home orders and demand for digital product, as well as increased sales of the Hunger Games® titles within the trade channel.Australia and New Zealand local currency revenues increased$1.5 million , primarily on higher revenue from the trade and book clubs channels, partially offset by lower volumes in the book fairs channel. InAsia , local currency revenues decreased$4.9 million primarily related to lower revenues from the direct sales channel due in part to the adverse impact of COVID-19. In addition, revenues from the export and foreign rights channels increased a total of$0.8 million compared to the prior fiscal year quarter. Cost of goods sold for the quarter endedAugust 31, 2020 was$37.6 million , or 53.2% of revenues, compared to$38.7 million , or 51.9% of revenues, in the prior fiscal year quarter. The higher cost of goods sold as a percentage of revenue was driven by higher royalty costs due to a sales shift to trade titles with higher royalty rates. Other operating expenses for the quarter endedAugust 31, 2020 were$27.9 million , compared to$39.6 million in the prior fiscal year quarter. Other operating expenses decreased$11.7 million primarily driven by COVID-related governmental employee retention programs inAustralia ,Canada , and theUK , which are expected to cease in fiscal 2021, in addition to lower employee-related expenses as a result of cost-saving programs implemented by the Company. This decrease was partially offset by severance expense of$1.0 million in the quarter endedAugust 31, 2020 related to the cost-reduction measures. Segment operating income for the quarter endedAugust 31, 2020 was$5.2 million , compared to segment operating loss of$3.7 million in the prior fiscal year quarter. Total local currency operating results across the Company's foreign operations increased$8.7 million , primarily driven by COVID-related governmental employee retention programs and lower employee-related costs as a result of cost-saving measures, in addition to increased trade channel revenues, partially offset by lower revenues in the book fairs and direct sales channels.
Overhead
Unallocated overhead expense for the quarter endedAugust 31, 2020 increased by$2.2 million to$30.8 million , from$28.6 million in the prior fiscal year quarter. Severance expense, related to cost-reduction programs, increased by$8.2 million to$11.0 million , compared to$2.8 million in the prior fiscal year quarter. 26 --------------------------------------------------------------------------------SCHOLASTIC CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") The increase was partially offset by lower employee-related costs and technology-related spending in an effort to mitigate the impact on operating income of lower sales volumes due to COVID-19, as well as the absence of a$1.5 million settlement, without admission of liability, for an alleged patent infringement that occurred in the prior year fiscal quarter.
Seasonality
The Company'sChildren's Book Publishing and Distribution school-based book club and book fair channels and most of its Education businesses operate on a school-year basis; therefore, the Company's business is highly seasonal. As a result, the Company's revenues in the first and third quarters of the fiscal year generally are lower than its revenues in the other two fiscal quarters. Typically, school-based channels and magazine revenues are minimal in the first quarter of the fiscal year as schools are not in session. Trade sales can vary throughout the year due to varying release dates of published titles. While the Company generally experiences a loss from operations in the first and third quarters of each fiscal year, the second quarter of fiscal 2021, endingNovember 30, 2020 , which is traditionally an income quarter, is expected to be negatively impacted by the COVID-19 pandemic. Presently, there are many uncertainties concerning the timing of, and any patterns which may emerge from, school re-openings for the new school year, and the nature and continuing magnitude of the negative impact of COVID-19 into and beyond the second quarter of fiscal 2021 will depend on the actual timing and emerging patterns of such re-openings throughoutthe United States .
Liquidity and Capital Resources
Cash used by operating activities was$26.0 million for the three months endedAugust 31, 2020 , compared to cash used by operating activities of$97.6 million for the prior fiscal year quarter, representing a decrease in cash used by operating activities of$71.6 million . While there were lower revenues in the quarter endedAugust 31, 2020 , the cost-saving measures taken by the Company resulted in a decrease in cash used compared to the prior fiscal year quarter. The Company modified inventory procurement and other activities, which usually ramp up in advance of the back-to-school selling season, to adapt to the anticipated impact of the COVID-related delays in school re-openings. In addition, there was an overall reduction in general spending as part of the cost-saving programs, such as lower payroll spending due to employee furlough programs, lower spending on non-essential projects, and limitations on expenditures related to travel, events, and conferences. The Company intends to continue to limit spending in view of the economic uncertainty brought on by the global pandemic. Cash used in investing activities was$8.9 million for the three months endedAugust 31, 2020 , compared to cash used in investing activities of$24.3 million in the prior fiscal year quarter, representing a decrease in cash used in investing activities of$15.4 million . The decrease in cash used was primarily driven by the net proceeds from the sale of the Danbury facility of$12.3 million and the absence of theUK land acquisition of$3.3 million which occurred in the prior fiscal year quarter. The Company intends to continue to limit investment spending in view of the economic uncertainty brought on by the global pandemic. Cash used in financing activities was$5.3 million for the three months endedAugust 31, 2020 , compared to cash used in financing activities of$12.3 million for the prior fiscal year quarter, representing a decrease in cash used in financing activities of$7.0 million . The decrease in cash used is primarily related to the suspension of the Company's share buy back program pursuant to which$12.6 million of common stock was reacquired in the prior fiscal year quarter. This was partially offset by lower short-term credit facility net borrowings of$7.8 million .
Cash Position
The Company's cash and cash equivalents totaled$355.5 million atAugust 31, 2020 ,$393.8 million atMay 31, 2020 and$199.4 million atAugust 31, 2019 . Cash and cash equivalents held by the Company'sU.S. operations totaled$323.7 million atAugust 31, 2020 ,$364.2 million atMay 31, 2020 and$177.5 million atAugust 31, 2019 . 27 --------------------------------------------------------------------------------SCHOLASTIC CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") Due to the seasonal nature of its business as discussed under "Seasonality" above, the Company usually experiences negative cash flows in the June through October time period. As a result of the Company's business cycle, borrowings have historically increased during June, July and August, have generally peaked in September or October, and have been at their lowest point in May. The Company expects lower cash receipts from its school channel businesses in the second quarter of fiscal 2021 as a result of the effects of COVID-19 on school re-openings, resulting in lower book fairs and book clubs revenues. As a precautionary measure in the context of the COVID-19 pandemic, the Company accessed its$375.0 million committed bank credit facility in the fourth quarter of fiscal 2020 by taking aU.S. dollar LIBOR-based advance for$200.0 million , although there continues to be no immediate working capital requirement. The Company's operating philosophy is to use cash provided by operating activities to create value by paying down debt, reinvesting in existing businesses and, from time to time, making acquisitions that will complement its portfolio of businesses or acquiring other strategic assets, as well as engaging in shareholder enhancement initiatives, such as share repurchases or dividend declarations. The Company's open-market buy-back program continues to be suspended in the face of COVID-19 uncertainties. The Company has maintained, and expects to maintain for the foreseeable future, sufficient liquidity to fund ongoing operations, including working capital requirements, pension contributions, postretirement benefits, debt service, planned capital expenditures and other investments, as well as dividends and share repurchases as appropriate in the context of COVID-19 considerations. As ofAugust 31, 2020 , the Company's primary sources of liquidity consisted of cash and cash equivalents of$355.5 million , cash from operations and the Company's loan agreements in the US and theUK totaling$386.4 million , less borrowings of$211.4 million and commitments of$0.4 million , resulting in$174.6 million of availability. The Company may at any time, but in any event not more than once in any calendar year, request that the aggregate availability of credit under the US Loan Agreement be increased by an amount of$10.0 million or an integral multiple of$10.0 million (but not to exceed$150.0 million ). Additionally, the Company has short-term credit facilities of$55.2 million , less current borrowings of$8.5 million and commitments of$3.9 million , resulting in$42.8 million of current availability atAugust 31, 2020 . Accordingly, the Company believes these sources of liquidity are sufficient to finance its currently anticipated ongoing operating needs, as well as its financing and investing activities, taking COVID-19 into consideration.
Financing
The Company is party to the US andUK Loan Agreements and certain credit lines with various banks as described in Note 4 of Notes to Condensed Consolidated Financial Statements - unaudited in Item 1, "Financial Statements." The Company had$200.0 million in outstanding borrowings under the US Loan Agreement as ofAugust 31, 2020 . OnSeptember 23, 2019 , Scholastic LimitedUK entered into a term loan agreement to borrow £2.0 million to fund a land purchase in connection with the construction of the newUK facility. The loan has a maturity date ofJuly 31, 2021 . As ofAugust 31, 2020 , the Company had$2.7 million outstanding on the loan. OnJanuary 24, 2020 , Scholastic LimitedUK entered into a term loan facility with a borrowing limit of £6.6 million to fund the construction of the newUK facility. The loan has a maturity date ofJuly 31, 2021 . As ofAugust 31, 2020 , the Company had$8.7 million outstanding on the loan.
New Accounting Pronouncements
Reference is made to Note 1 of Notes to Financial Statements - unaudited in Item 1, "Financial Statements," for information concerning recent accounting pronouncements since the filing of the Company's Annual Report on Form 10-K for the fiscal year endedMay 31, 2020 . 28 --------------------------------------------------------------------------------SCHOLASTIC CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") Forward Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements. Additional written and oral forward-looking statements may be made by the Company from time to time inSecurities and Exchange Commission ("SEC") filings and otherwise. The Company cautions readers that results or expectations expressed by forward-looking statements, including, without limitation, those relating to the Company's future business prospects and strategic plans, ecommerce and digital initiatives, new product introductions, strategies, new education standards, goals, revenues, improved efficiencies, general costs, manufacturing costs, medical costs, potential cost savings, merit pay, operating margins, working capital, liquidity, capital needs, the cost and timing of capital projects, interest costs, cash flows and income, are subject to risks and uncertainties, including, in particular, how the foregoing may be affected by developments in the context of the current COVID-19 pandemic and measures or responses of governmental authorities, business suppliers or customers, which may have an impact on the Company's operations and could cause actual results to differ materially from those indicated in the forward-looking statements, due to factors including those noted in the Annual Report and this Quarterly Report and other risks and factors identified from time to time in the Company's filings with theSEC . The Company disclaims any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise. 29 --------------------------------------------------------------------------------
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