Press Release: Scholastic Reports Fiscal 2015 Second Quarter Results
New York - December 18, 2014 - Scholastic Corporation (NASDAQ: SCHL), the global children's publishing, education and media company, today reported financial results for the Company's fiscal 2015 second quarter ended November 30, 2014.
Revenue in the second quarter was $665.6 million, compared to $623.2 million a year ago, an increase of 7%. The Company reported second quarter earnings per diluted share of $2.05, versus $1.80 in the prior year period. Results for the second quarter of the current fiscal year include one-time expenses of $0.12 per diluted share, which are detailed below. The prior year period included one-time expenses of $0.35 per diluted share. Excluding one-time items, second quarter earnings per diluted share were $2.17 versus $2.15 in the prior year period.
Second quarter results were largely driven by strong sales in children's books, especially in the Company's school-based distribution channels, and continued growth in classroom books and magazines. These gains were partially offset by the adverse effect of foreign exchange on the Company's international business and higher planned investment in technology infrastructure, as well as lower sales of the Company's educational technology products and reduced revenues in Canada. The operating income increase in children's books was also affected by a favorable comparison as a result of a one-time impairment charge taken in the prior year period and lower levels of investment in Storia® in the current quarter.
During the second quarter, the Company generated free cash flow (as defined) of $125.7 million, compared to $129.4 million in the prior year period. At quarter-end, the Company's net debt (as defined) was $61.3 million. A year ago, cash and cash equivalents exceeded the Company's total debt by $107.6 million, prior to the Company's strategic purchase of its headquarters location in New York City in February 2014. In the second quarter, Scholastic repaid $94.7 million of debt, distributed $5.1 million in dividends to its shareholders, and repurchased $3.5 million of its common stock in open-market transactions.
"Scholastic had a solid quarter of revenue growth with significant gains in our Club and Fair school distribution channels, reflecting the success of the new marketing strategies implemented by Clubs in the second half of last year, as well as in classroom books. With Clubs leading the way on a 33% revenue gain, Children's Book Publishing and Distribution saw 14% sales growth in the quarter. The growth in these channels shows that educators and families are continuing to emphasize independent reading as an important way to drive children's motivation, thinking skills, and testing results," commented Richard Robinson, Chairman, President and Chief Executive Officer. "Classroom magazines' print and online offerings also continued to perform well, bringing Common Core-connected non-fiction into the classroom. Despite lower sales of core educational technology products in the quarter in comparison to last year, we are encouraged by an improving pipeline that we believe will lead to increased purchases of reading and math intervention programs, which are effective in raising student achievement. In addition, we remain on track for the release of MATH 180® Course 2, which is concentrated on algebra readiness, in the fourth quarter of the fiscal year."
Non-recurring items reflected in the Company's pre-tax results for the second quarter include a non-cash settlement charge of $3.7 million related to the Company's defined benefit pension plan as a result of bulk lump sum payments made to certain participants during the quarter, $2.9 million related to the planned closure of its retail store in Manhattan, $0.9 million of one-time severance charges associated with the Company's cost savings initiatives, and a $0.6 million gain on the sale of an investment.
Scholastic affirmed its fiscal 2015 outlook for total revenue of approximately $1.9 billion and earnings per diluted share from continuing operations in the range of $1.80 to $2.00, 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 $65 to $85 million.
Second Quarter Results
Children's Book Publishing and Distribution. Segment revenue in the second quarter was $402.6 million, compared to $352.1 million in the prior year period, an increase of $50.5 million, or 14%. In School Book Clubs, higher engagement levels of both teachers and parents, evidenced by a higher number of orders, drove a $32.2 million, or 33%, increase in revenues to $129.6 million, compared to $97.4 million in the prior year period. In School Book Fairs, revenue increased by 8% to $217.4 million, reflecting higher revenue per fair and an increase in the number of fairs held, as compared to $202.2 million in the prior year period. In Trade, sales of the successful Minecraft handbook series helped drive a 6% increase in revenues. Overall segment operating income improved by $39.4 million, or 57%, to $108.3 million versus $68.9 million in the prior year period as a result of the higher sales volume, together with lower investment in Storia in the current quarter. This favorable comparison also benefitted from an impairment charge of $13.4 million related to goodwill from legacy acquisitions taken in the prior year period.
Educational Technology and Services. Segment revenue in the quarter fell by 16% to $50.9 million, compared to $60.9 million in the prior year period. Lower sales of educational technology products in the current quarter were partially offset by gains in technology support and product dependent services, as well as in Math Solutions which was up 9% compared to the prior year period. Sales of the Company's flagship READ 180® product improved as the quarter progressed. Segment operating income declined by $8.1 million to a loss of $1.2 million, compared to operating profit of $6.9 million in the prior year period, due to lower revenues from higher margin educational technology programs.
Classroom and Supplemental Materials Publishing. Segment revenue in the quarter increased 6% to $64.8 million, compared to $60.9 million in the prior year period, as a result of higher sales of guided reading and other classroom book collections and higher circulation in classroom magazines. Segment operating income was $12.7 million, versus $11.6 million in the prior year period, an increase of 9%, primarily due to higher circulation in classroom magazines.
International. Segment revenue in the quarter was $132.8 million, versus $135.6 million in the prior year period, primarily due to unfavorable foreign exchange translation of $5.4 million as the result of a strengthening U.S. dollar. Higher local currency sales in the United Kingdom, Australia, the Asia-Pacific region and Export were partially offset by lower revenues in Canada due largely to the effect of a teachers' strike in British Columbia early in the quarter. In the United Kingdom, the Company's Chicken House imprint continued to perform well on the strength of its frontlist, including the top-selling The Maze Runner by James Dashner. Segment operating income was $19.9 million, compared to $22.2 million in the prior year period, primarily the result of the lower sales in Canada, as well as increased investment spending on new products and infrastructure.
Media, Licensing and Advertising. Segment revenue in the quarter was $14.5 million, compared to $13.7 million in the prior year period, an increase of 6%, primarily as a result of higher sales of both the Company's evergreen programming library of television shows to streaming platforms and original animated programs for the PBS and Sprout networks, partially offset by lower consumer magazines revenue. Segment operating loss was $0.7 million, compared to a loss of $1.3 million in the prior period, largely as a result of the higher programming revenues.
Other Financial Results. Corporate overhead in the second quarter was $18.7 million, excluding one-time items of $7.5 million, compared to $8.1 million in the prior year period, after excluding $5.5 million in one-time items. This increase was primarily due to higher investment in information technology in the current quarter, as well as higher depreciation expense related to the purchase of the Company's headquarters building.
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 third quarter of fiscal 2015. The dividend is payable on March 16, 2015 to shareholders of record as of the close of business on January 30, 2015.
Real Estate Update
The Company previously announced that it is reconfiguring the ground floor of its headquarters location at 557 Broadway in an effort to maximize the value of the retail component of the building. As a result, the Company stated it would close its retail store in the SoHo neighborhood of New York City by mid-January 2015.
Defined Benefit Pension Plan
During the quarter, the Company offered certain former employees the option of receiving one-time lump sum payments from the plan, and recorded a non-cash pre-tax settlement charge of $3.7 million in connection with these payments. The settlement charge accelerates the recognition of unrecognized pension benefit costs that would have been incurred in subsequent periods.
For the first half of fiscal 2015, revenue was $949.4 million, compared to $899.5 million in the prior year period, an increase of $49.9 million, or 6%. Earnings per diluted share in the first half of the fiscal year were $1.04, compared to $0.88 a year ago, including one-time charges of $0.14 and $0.39 per diluted share, respectively. The higher revenues are mainly attributable to stronger performance of the Company's book clubs and book fairs, and also in classroom books, all evidence of a greater focus on the impact of independent reading on improved student performance, as well as increased circulation of classroom magazines, whose print and digital offerings are a low-cost supplement to address Common Core's requirement for non-fiction reading. This was partially offset by lower sales and profits in the Company's Educational Technology and Services operations and the impact of foreign exchange on the Company's international operations. On a year-to-date basis, the Company generated free cash flow of $48.8 million, compared to $35.6 million in the previous year.
To supplement our financial statements presented in accordance with GAAP, we include certain non-GAAP calculations and presentations. Please refer to the non-GAAP financial tables attached to this press release for supporting details on special one-time items and other financial measures included in this release. This information should be considered as supplemental in nature and not as a substitute for the related financial information prepared in accordance with GAAP.
The Company will hold a conference call to discuss its results at 8:30 am ET today, December 18, 2014. Scholastic's Chairman, President and CEO, Richard Robinson, and Executive Vice President, CAO and CFO, 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, January 2, 2015 by dialing (855) 859-2056 from within the U.S. or +1 (404) 537-3406 internationally, and entering access code 28249755.
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.
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.