Scholastic Revenue Down Slightly in Third Quarter

For the three months ending February 28, Scholastic had $373.5 million in revenues and an operating income loss of $34.3 million in a quarter that typically shows a loss for the children’s media and educational technology company.

Revenues were down and losses widened for the company in the quarter, however, versus a year ago. In 2013, Scholastic had $378.6 million in revenue and an operating loss of $27.4 million.

The company blamed the results on lower educational technology sales. The trade publishing and distribution division saw modest increases in revenue, though the trade publishing numbers specifically were down slightly:

Children’s Book Publishing and Distribution. Segment revenue in the third quarter increased by 1% to $190.0 million, compared to $187.5 million in the prior year period. In School Book Fairs, revenue increased by 3%, reflecting higher revenue per fair compared to the prior year period, despite lower attendance in certain regions due to harsh weather conditions. In School Book Clubs, the successful implementation of new catalog mailing and incentive marketing strategies, along with our expanded line up of engaging titles, drove a 9% increase in revenues. Lower selling, general & administrative expenses compared to the prior year period also contributed to the improved operating performance in Clubs. In Trade, revenue declined 12% compared to the prior year period, which benefited from a favorable return reserve adjustment. Trade revenues reflected strong sales of popular new titles including Minecraft: Essential Handbook and LEGO®: The LEGO Movie, and the release of the second installment of the New York Times bestselling multiplatform SPIRIT ANIMALSTM series. Overall segment operating loss was $10.6 million compared to $9.9 million in the prior year period.

[Press Release]

Scholastic Reports Fiscal 2014 Third Quarter Results

Scholastic Corporation (NASDAQ: SCHL), the global children’s publishing, education and media company, today reported results for the fiscal 2014 third quarter ended February 28, 2014.

Revenue in the third quarter was $373.5 million, compared to $378.6 million a year ago. The Company reported a loss per share from continuing operations of $0.38, versus a loss of $0.62 in the prior year period. Consolidated loss per share was $0.38 in the quarter, compared to a loss of $0.63 a year ago. The decrease in net loss was solely the result of a favorable settlement of outstanding federal tax audits which resulted in a one-time tax benefit of $13.8 million, or $0.43 per share, in the current period. This one-time tax benefit was partially offset by one-time pre-tax expenses of $6.4 million, or $0.13 per share, which include an impairment charge of $4.7 million related to a minority equity investment in the UK and $1.7 million in severance costs primarily related to a voluntary retirement program for employees at the Company’s main distribution center.

Excluding one-time items, the loss per share from continuing operations was $0.68, compared to a loss of $0.56 a year ago, due to lower sales of the Company’s higher margin educational technology products in the third quarter, a seasonally lower revenue quarter for Scholastic that typically generates a net loss.

Third quarter operating results were largely driven by sales and profit improvement in book clubs, classroom magazines and media, but were more than offset by the lower educational technology sales. The Educational Technology and Services segment experienced softer sales, mainly due to the amount of sales force time and resources devoted to the previously announced integration of the educational technology and classroom and supplemental materials units during the quarter. The Company’s international operations showed improved sales performance when measured in local currencies.

During the third quarter, free cash use (as defined) was $17.0 million, compared to a use of $51.5 million in the prior year period. At quarter-end, net debt (as defined) was $157.7 million, as a result of the Company’s purchase of its 555 Broadway headquarters location in New York City, which closed at the end of the fiscal third quarter. A year ago, cash and cash equivalents exceeded the Company’s total debt by $41.9 million.

Richard Robinson, Chairman, President and Chief Executive Officer, said, “After a very strong first half, our education business was impacted in the third quarter by the combination of our educational technology and classroom and supplemental materials sales forces. The sales force integration is now largely complete and our team is fully focused on driving profitable sales in the fourth quarter and into the first quarter of next fiscal year. Scholastic’s expanded range of high-quality, effective programs for reading and math intervention, such as MATH 180TM, continue to deliver great results in the classroom. With our strong sales and services organizations, we are well-positioned to provide the customized solutions that help boost student achievement at a time when the Common Core State Standards are driving high expectations for schools.”

Mr. Robinson continued, “In our children’s book business, we had a solid third quarter, driven by higher revenues in our school book clubs and book fairs, as well as by popular new trade releases. We are noticing a broad trend of teachers incorporating more independent reading for pleasure into the classroom, which helps children develop higher level thinking skills while also providing an important balance to the complex informational texts required by new, rigorous standards. We are responding to this growing need with our robust line-up of appealing titles and classroom book sets.”

Scholastic affirmed its fiscal 2014 outlook for total revenue of approximately $1.8 billion and earnings per diluted share from continuing operations in the range of $1.40 to $1.80, before the impact of one-time items associated with cost reduction programs or non-cash, non-operating items. The Company continues to expect free cash flow in the range of $60 to $80 million.

Third Quarter Results

Children’s Book Publishing and Distribution. Segment revenue in the third quarter increased by 1% to $190.0 million, compared to $187.5 million in the prior year period. In School Book Fairs, revenue increased by 3%, reflecting higher revenue per fair compared to the prior year period, despite lower attendance in certain regions due to harsh weather conditions. In School Book Clubs, the successful implementation of new catalog mailing and incentive marketing strategies, along with our expanded line up of engaging titles, drove a 9% increase in revenues. Lower selling, general & administrative expenses compared to the prior year period also contributed to the improved operating performance in Clubs. In Trade, revenue declined 12% compared to the prior year period, which benefited from a favorable return reserve adjustment. Trade revenues reflected strong sales of popular new titles including Minecraft: Essential Handbook and LEGO®: The LEGO Movie, and the release of the second installment of the New York Times bestselling multiplatform SPIRIT ANIMALSTM series. Overall segment operating loss was $10.6 million compared to $9.9 million in the prior year period.

Educational Technology and Services. Segment revenue in the quarter decreased by 14% to $35.8 million, compared to $41.8 million in the prior year period, as the previously announced integration of the educational technology and classroom and supplemental materials units during the quarter contributed to decreased sales of READ 180®, the Company’s adaptive reading intervention program. This was partially offset by MATH 180 and iReadTM sales. Segment operating loss increased to $10.7 million, compared to $3.5 million in the prior year period, primarily due to lower READ 180 revenues, a high margin product, versus the prior year period and higher amortization of pre-publication expenses related to the five new products introduced earlier in the fiscal year.

Classroom and Supplemental Materials Publishing. Segment revenue in the quarter was $44.5 million, compared to $43.2 million in the prior year period, primarily driven by increased circulation for the Company’s classroom magazines. Segment operating income was $1.3 million, versus a loss of $0.2 million in the prior year period.

International. Segment revenue in the quarter decreased to $91.0 million, compared to $94.4 million in the prior year period, due to unfavorable foreign exchange rates. Excluding the impact of unfavorable foreign exchange of $6.7 million, trade revenues in the major markets, including the UK, Canada and Australia, increased, primarily due to higher sales of The Hunger Games trilogy and popular locally published titles and stronger direct sales business in Asia. Segment operating income was $0.1 million, compared to $2.0 million in the prior year period.

Media, Licensing and Advertising. Segment revenue in the quarter was $12.2 million, compared to $11.7 million in the prior year period, an increase of 4%, as a result of higher sales of Parent & Child magazine and revenue recognized from a new season of the Emmy-award winning series WordGirlTM for PBS, as well as programming library sales to Netflix and other streaming services. This was partially offset by lower sales of interactive products. Segment operating loss improved to $1.5 million from $2.2 million in the prior period.

Other Financial Results. Corporate overhead in the third quarter was $11.2 million, compared to $10.6 million in the prior year period, excluding one-time items relating to severance and restructuring expenses of $1.7 million and $3.0 million, respectively.

As previously announced, the Company’s Board of Directors declared a quarterly cash dividend of $0.15 per share on the Company’s Class A and Common Stock for the fourth quarter of fiscal 2014. The dividend is payable on June 16, 2014 to shareholders of record as of the close of business on April 30, 2014.

Headquarters Building Purchase

On February 28, 2014, Scholastic closed on the purchase of its headquarters property at 555 Broadway in New York City for a net price of approximately $255 million. The purchase had the effect of increasing the Company’s borrowings under its committed revolving credit facility by $175 million at quarter-end.

Maureen O’Connell, Chief Financial Officer and Chief Administrative Officer, said, “We are pleased to have completed the purchase of 555 Broadway, which we expect to be accretive to cash flow. We plan to repay the borrowings related to the purchase over time from operating funds and future proceeds from additional potential uses of this unique property in New York’s SoHo neighborhood, which includes valuable retail space as well as our offices.”

Year-to-Date Results

For the first nine months of fiscal 2014, revenue was $1,273.0 million, compared to $1,285.5 million in the prior year period. Earnings per diluted share from continuing operations in the same period was $0.50, compared to $0.34 a year ago, including one-time, mostly non-cash charges of $0.09 and $0.06, respectively. Excluding one-time items, the higher profitability in the current period was primarily due to increased sales of high margin educational technology products and classroom magazines, and improved results in children’s books. The consolidated diluted earnings per share was $0.50 in the current period, compared to $0.29 a year ago. On a year-to-date basis, the Company generated free cash flow of $18.6 million, compared to $12.9 million in the previous year.

Conference Call

The Company will hold a conference call to discuss its results at 8:30 am ET today, March 20, 2014. Scholastic’s Chairman, President and CEO, Richard Robinson, and Executive Vice President, CFO and CAO, Maureen O’Connell, will moderate the call.

The conference call and accompanying slides will be webcast and accessible through the Investor Relations section of Scholastic’s website, scholastic.com. Participation by telephone will be available by dialing (877) 654-5161 from within the U.S. or +1 (678) 894-3064 internationally. Shortly following the call, an archived webcast and accompanying slides from the conference call will also be posted at investor.scholastic.com. An audio-only replay of the call will be available until Friday, April 4, 2014 by dialing (855) 859-2056 from within the U.S. or +1 (404) 537-3406 internationally, and entering access code 2190661.

About Scholastic

Scholastic Corporation (NASDAQ: SCHL) is the world’s largest publisher and distributor of children’s books and a leader in educational technology and related services and children’s media. Scholastic creates quality books, print and technology-based learning materials and programs, magazines, multi-media and other products that help children learn both at school and at home. The Company distributes its products and services worldwide through a variety of channels, including school-based book clubs and book fairs, retail stores, schools, libraries, on-air, and online at www.scholastic.com.

Forward-Looking Statements

This news release contains certain forward-looking statements. Such forward-looking statements are subject to various risks and uncertainties, including the conditions of the children’s book and educational materials markets and acceptance of the Company’s products within those markets, and other risks and factors identified from time to time in the Company’s filings with the Securities and Exchange Commission. Actual results could differ materially from those currently anticipated.

One thought on “Scholastic Revenue Down Slightly in Third Quarter

  1. Michael W. Perry

    Scholastic might learn a lesson from the second chapter of Harper Lee’s classic To Kill in Mockingbird. Set in mid-1930s Alabama, it describes, from a child’s point of view the follies of the arrival of a then-new faddish way to teach reading–whole word–and its disastrous impact on children not as fortunate as Scout, who’s already learned to read thanks to her father’s informal point-and-read phonetics method.

    Despite (or perhaps because of) its obvious failing education schools clung to whole word until the 1990s. What finally did it in? Parents who’d grown tired of schools that couldn’t teach kids to read well and easily. Parents who got “Hooked on Phonics” and made sure that, like Scout, their kids started school knowing how to read. Unable to do badly what those kids could already do well, whole word was finally abandoned.

    Common Core contains similar follies, as parents and experts across the political spectrum are pointing out. It’s also ‘the law’ in 45 states, which means there’s an enormous market for ‘Hooked on Phonics’-like, counter-Common-Core training material that parents can use to make sure that before their child gets taught something badly (by Common Core), they learn it well by more sensible, well-established methods.

    If Scholastic or a similar publisher wants large and steady sales, they need to quickly develop such material and market them as well as ‘Hooked on Phonetics’ was marketed. Investment there will return far more than investing in yet-another, copy-cat Common Core set of books.

    Reply

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