“We executed successfully against our annual operating plan in the first fiscal quarter of 2022, leveraging the momentum and strong results achieved in the last three months of the prior fiscal year, with our strategic growth platforms in Trade and Education Solutions performing ahead of plan,” said Peter Warwick, President and Chief Executive Officer. “Although the first quarter is typically a quiet quarter with most schools closed for summer recess, all of the Company’s major domestic businesses realized solid double-digit top-line growth year-over-year, while the international businesses, primarily Australia and New Zealand, were adversely affected by new COVID restrictions.”

 

“We are seeing increased bookings of our premium case book fairs when compared to both prior year and this past spring season. Although still well below pre-COVID levels, the current back-to-school period looks favorable as students return to in-classroom instruction this fall. With schools re-opening their doors, we also saw higher sales of both curriculum and supplemental reading materials, such as our classroom libraries and leveled bookrooms. Subscriptions to the Company’s education digital programs, including BookFlix^®, Scholastic Literacy Pro^®, and Scholastic F.I.R.S.T.^® also continued to grow in the period. In trade publishing, we ended the quarter with 16 of the top 25 children’s fiction books on the Publishers’ Weekly Bestseller List — a testament to the deep commitment we have to creating titles and series that resonate with children and parents from all backgrounds and with varied interests. And, we are excited about our new fall frontlist that includes Cat Kid Comic Club^®: Perspectives, the second title in the bestselling series by Dav Pilkey, as well as J.K. Rowling’s The Christmas Pig.”

 

Mr. Warwick concluded, “We remain optimistic for continued growth through the post-COVID recovery and expect strong operating leverage and free cash flow generation given the success of our recent cost savings initiatives and solid execution, even as we are seeing inflationary pressures in our supply chain and labor pools. I am confident that we remain on a path to generate sustainable value for all of our stakeholders in the current fiscal year and beyond.” 

 

 

Consolidated revenues increased 21% to $259.8 million in the first quarter versus the prior year period, primarily driven by the U.S. trade and education channels. Trade publishing revenues grew on the strength of the Company’s series publishing and strong backlist titles. Higher sales in the education channels were driven by the Company’s new early childhood program, PreK On My Way^TM, and summer learning product offerings bolstered by federal government funding for K-12 schools in the U.S. Partially offsetting the revenue improvements was a reduction in sales in the International segment as certain countries around the world continue to struggle with the pandemic-related disruptions in their local markets.  

 

 

First quarter operating loss improved 44% to $32.0 million versus the prior year period. The first quarter’s improved operating loss was directly attributable to the higher sales volume as the Company is beginning to recover from the pandemic, coupled with the continued benefits of the restructuring program executed in the prior fiscal year, as well as the proceeds from first tier insurance coverage related to the settlement of an intellectual property legal matter, partially offset by the prior period employee furlough and reduced work week programs which did not reoccur in the current period. Excluding one-time items in both periods, the Company had operating loss of $36.2 million in the first quarter of 2022, versus $45.0 million in the first quarter of 2021.

 

 

Net cash provided by operating activities was $63.6 million in the first quarter compared to net cash used in operating activities of $26.0 million in the prior year period, an increase of $89.6 million. The Company had free cash flow (a non-GAAP liquidity measure defined in the accompanying tables and reconciled to net cash provided) of $49.1 million in the first quarter compared to a free cash use of $34.9 million in the prior year period. As of August 31, 2021, the Company's cash and cash equivalents exceeded total debt by $219.1 million, compared to $135.6 million a year ago. 

 

The higher net cash position and the $84.0 million increase in free cash flow was primarily driven by the receipt of a $63.1 million federal income tax refund, higher customer remittances, and a $6.6 million insurance reimbursement related to the settlement of an intellectual property matter. The $20.0 million settlement was accrued for in the prior fiscal year and paid in September 2021. The Company is still in the process of filing claims with secondary and tertiary insurance carriers for the remaining settlement amount. 

 

During the quarter, the Company paid down $100.0 million of the outstanding borrowings under its domestic revolving credit facility, resulting in $75.0 million in outstanding revolving credit loans at quarter-end. The Company will continue to evaluate its borrowing position and capital allocations based on the performance of the school-based channels during the course of the current fiscal year.  The Company is also in dialogue with its banks on the renewal of its multi-year domestic committed credit facility, which is scheduled to mature on January 5, 2022.

 

 

Loss before taxes for the first quarter was $33.3 million, compared to a loss before taxes of $51.8 million in the prior year period, an $18.5 million improvement. Adjusted EBITDA (a non-GAAP performance measure defined in the accompanying tables and reconciled to earnings (loss) before taxes) for the first quarter was a loss of $13.0 million, compared to a loss of $15.9 million in the prior year period. Adjusted EBITDA improved over the prior period due to the increase in revenues, which was partially offset by a $6.6 million benefit from the sale of the Danbury, CT facility in the prior year period. 

 

 

The Company is currently experiencing strong demand for its products and programs as schools begin to re-open this fall with rising book club sponsorship and increased book fair bookings and expects  sequential improvements in its school-based distribution channels in each quarter of the current fiscal year. The Company is well-positioned to meet expected demand in these channels, especially in its book fairs businesses in the U.S., Canada and UK. Scholastic’s properties and titles continue to lead the market and occupy spots on the New York Times bestsellers list and are being leveraged for streaming services such as the recent announcement of Puppy Place, a live-action series based on the Company’s best-selling books, premiering on October 15th on AppleTV+. In the education solutions channel, the Company continues to closely monitor how federal stimulus funds will impact the overall K?12 education landscape and expects to benefit from a portion of this new spending. Internationally, the Company expects the lockdowns in Australia to lift and continues to explore growth through the expansion of Scholastic’s range of English language learning digital product offerings in Asia.

 

The Company faces certain headwinds in fiscal 2022 with higher labor costs, the discontinuation of certain COVID-related government subsidies and inflationary pressures that could impact paper, freight and other operating costs. Supply chain issues and potential labor shortages could adversely impact operating income through higher costs and/or revenue shortfalls. The Company is taking actions, when available, to help mitigate these potential increases and still expects stronger operating leverage and positive free cash flows. Additionally, the Company continues to identify further opportunities for incremental cost savings through process improvements and automation, consolidation of functions, and increased utilization of the Company’s international shared services resources.

 

 

All comparisons detailed in this section refer to operating results for the first quarter ended August 31, 2021 versus the first quarter ended August 31, 2020.  

 

 

First quarter segment revenues were $115.8 million, an increase of $23.5 million, or 25%, versus the prior year period primarily driven by trade channel sales. Marketing and publicity activities drove higher sales of Harry Potter^® box sets and limited edition foil covers for Dog Man^®. New releases from the Company’s popular series, The Baby-sitters Club^® Graphix^TM and Baby-sitters Little Sisters^® Graphix, Five Nights at Freddy’s^TM, The Bad Guys^TM, and Nat Enough^TM coupled with the continued success of Alan Gratz’s Refugee and Ground Zero and Pam Munoz Ryan’s Esperanza Rising also resulted in increased sales. The Company’s specialty products performed well both from the Klutz^® division and the Make Believe Ideas^TM business, which included the launch of a plush product line, Sensory Snuggables^TM. The fully illustrated MinaLima edition of Harry Potter continued to perform well with the second book to be released at the end of October and The Official Harry Potter Baking book was a bestseller. While the first quarter is not traditionally a significant quarter for the Company’s school-based distribution channels, the book clubs channel experienced an increase in the number of teacher sponsors and the book fairs channel had higher revenue per fair when compared to the prior period. 

 

 

First quarter segment revenues were $80.1 million, an increase of $26.5 million, or 49%, versus the prior year period. Demand for the Company’s summer learning product offerings drove an increase in revenues as educators tried to help students recover lost ground before starting the new school year. In addition, the Company experienced higher sales for its supplemental and core instruction products, especially in the new early childhood program, PreK On My Way, as more schools began to open for in-classroom learning. Digital product subscriptions increased when compared to the prior year period, continuing to support the trend digital solutions will play in the education market. Although not yet at pre-COVID levels, the Company’s classroom magazine products experienced improvement with a 13% increase in subscriptions which will benefit the Company in future quarters. The first quarter was also positively impacted by the consolidation of the multiple education channels into a single Education Solutions segment allowing the Company to be well positioned to meet the needs of an ever changing market.

 

 

First quarter segment revenues were $63.9 million, a decrease of $5.4 million, or 8%, versus the prior year period. The decrease was primarily driven by lower revenues in Australia, where lockdowns due to the COVID variant caused interruptions to in-classroom learning that were not seen in the same period of the previous year. Revenues also decreased in Canada, New Zealand and in the direct sales business in Asia due to the continued impact the pandemic has had around the world. The Company expects many of the tightest restrictions to begin to loosen in the second fiscal quarter. Operating loss was impacted by lower government subsidies related to COVID-related governmental retention programs in Canada, the UK, Australia and New Zealand which decreased by $4.3 million. New education regulations in China are expected to impact the Company’s revenue related to its franchise-based tutorial center programs and education business. Management will continue to monitor changes in this market place and seek to appropriately adapt its offerings in the context of such regulations.