Scholastic Announces Fiscal 2008 Third Quarter Results
Updating Outlook on Solid Performance of Core Businesses
Direct-to-Home Continuities Now Reported as Discontinued Operations
New York – March 27, 2008 – Scholastic Corporation (NASDAQ: SCHL), the global children’s publishing, education and media company, today announced its fiscal 2008 third quarter results.
For the quarter ended February 29, 2008, the Company reported revenue from continuing operations of $458.4 million, up from $446.0 million in the prior year quarter. Net loss from continuing operations was $4.6 million or $0.12 per share, compared to a net loss from continuing operations of $3.8 million or $0.09 per share in the prior year period. These results included an expense related to the termination of a sublease of $0.02 per share in the current quarter, and a gain of $0.04 per diluted share on the sale of an investment in the prior year. The fiscal third quarter is typically Scholastic’s second smallest revenue quarter.
“Scholastic’s core businesses performed solidly overall in the third quarter as we maintain our focus on improving profitability,” commented Richard Robinson, Chairman, CEO and President. “Margins increased in School Book Fairs, reflecting solid growth and lower spending, and in Clubs, where we continue to streamline promotion and fulfillment. In Educational Publishing, strong sales of print products contributed to improved results. Additionally, revenue and profit were up in the International segment. Looking ahead we expect the ongoing businesses to meet our fiscal 2008 goals and are on track to achieve 9 to 10% operating margins in fiscal 2010.”
The Company updated its fiscal 2008 outlook with respect to continuing operations for revenue of $2.2 to $2.3 billion and earnings of $2.50 to $2.85 per diluted share. Free cash flow, including both continuing and discontinued operations, is now forecast to be between $90 and $100 million.
Sale of Direct-to-Home Continuities / Discontinued Operations
Mr. Robinson added, “Last quarter we also moved forward with our plan to divest direct-to-home continuities, which we hope to substantially complete in the fourth quarter. While we are reporting a net loss on a GAAP basis because of resulting non-cash write-downs on discontinued operations, this action is an important catalyst to improve Scholastic’s profitability next year and beyond.”
As a result of this previously announced decision, the direct-to-home continuities business was reclassified as a discontinued operation for accounting purposes in the third quarter of fiscal 2008, as well as in prior periods. Loss from discontinued operations, net of tax, in the fiscal 2008 third quarter was $77.5 million or $2.02 per share, compared to a loss from discontinued operations, net of tax, of $3.9 million or $0.09 per share in the prior year period. The greater loss in the current year period reflects the non-cash write-down of deferred promotion, intangibles and other long-lived assets, as well as certain current assets, recorded following the decision to sell the direct-to-home continuities business. This write-down amounted to $72.7 million or $1.89 per share, net of tax.
Net Results
Including both continuing and discontinued operations, the net loss for the fiscal 2008 third quarter was $82.1 million or $2.14 per share, primarily reflecting the impact of the non-cash asset write-downs in the direct-to-home continuities business, versus a net loss of $7.7 million or $0.18 per share in the prior year period.
Segment Results
Children’s Book Publishing and Distribution. Segment revenue in the third quarter of fiscal 2008 was $229.7 million, down from $238.8 million in the prior year period. Segment operating income rose to $10.2 million in the quarter from $9.3 million a year ago. Results improved in School Book Fairs, where revenue increased solidly, due to both higher fair count and revenue per fair, and operating margins improved. Revenue in School Book Clubs declined, reflecting fewer orders, partially offset by higher revenue per order, following the elimination of less profitable mailings. Revenue and profit from School-Based Continuities were down as a result of lower enrollments. Revenue and profit increased in Trade Publishing, primarily reflecting continued strong sell-through of Harry Potter and the Deathly Hallows and of the Harry Potter® box-set. Sales of other front-list titles were also strong, with seven books and series on the New York Times best seller lists at quarter end, including Brian Selznick’s The Invention of Hugo Cabret (which last quarter also won the prestigious Caldecott Medal for most distinguished American children’s picture book); Moving Day, the first title in Meg Cabot’s “Allie Finkle’s Rules for Girls” series; Zen Ties, Jon Muth’s follow-up to his best-selling Zen Shorts; and Henry’s Freedom Box by Ellen Levine (which won a Caldecott Honor last quarter).
Educational Publishing. Segment revenue increased 5% to $78.1 million from $74.6 million in the prior year period, and segment operating loss improved to $0.6 million from a loss of $3.1 million in the year-ago period. These improvements primarily reflect growth in sales of print products. Revenue from education technology was flat in the quarter, while sales of Scholastic’s research-based reading intervention program READ 180® were up slightly.
International. Segment revenue rose 18% to $108.6 million from $91.8 million in the prior year period, while segment operating income improved to $5.3 million from $4.4 million a year ago. Favorable foreign exchange benefited revenue by $10.1 million. Revenue growth and profit improvement in the United Kingdom and Australia was partially offset by declines in Canada.
Media, Licensing and Advertising. Segment revenue rose 3% to $42.0 million from $40.8 million in the prior year period, and segment operating income was $2.2 million compared to $3.0 million in the year ago period. Higher sales primarily reflect strong growth at Back to Basics Toys and robust advertising sales at Parent & Child and other Scholastic consumer magazines.
Corporate Overhead. Corporate Overhead was $16.5 million, compared to $15.6 million in the prior year period, primarily reflecting higher stock-based compensation expense.
Year to Date and Other Financial Results
Revenue from continuing operations in the first nine months of fiscal 2008 rose 20% to $1,701.4 million from $1,421.5 million in the prior year period. Net income from continuing operations also increased to $78.8 million or $2.00 per diluted share from $29.7 million or $0.69 per diluted share in the first nine months of fiscal 2007. Results for the current year period included the expense related to the termination of a sublease of $0.01 per share, while the prior year period included the gain of $0.04 per diluted share on the sale of an investment. The higher revenue and net income in the first nine months of fiscal 2008 primarily reflect higher Harry Potter revenue and strong International results, partially offset by planned investment in Educational Publishing.
The adoption of FIN 48 (“Accounting for Uncertainty in Income Taxes”) effective June 1, 2007 resulted in additional tax expense of $0.01 per diluted share in the fiscal 2008 third quarter; together with a discrete tax item in connection with FAS 109 (“Accounting for Income Taxes”), it resulted in additional tax expense of $0.04 per diluted share in the first nine months of fiscal 2008. Stock-based compensation expense per diluted share was $0.04 in the third quarter and $0.08 in the first nine months of fiscal 2008. All of these expenses were recorded in continuing operations.
The year to date loss from discontinued operations, net of tax, was $88.1 million or $2.26 per share, compared to a loss from discontinued operations, net of tax, of $9.2 million or $0.22 per share in the first nine months of fiscal 2007. The loss in the current year period primarily reflects the non-cash write-down of assets, which amounted to $72.7 million or $1.87 per share, net of tax, in the period.
Including both continuing and discontinued operations, the Company’s net loss for the first nine months of fiscal 2008 was $9.3 million or $0.24 per share, compared to net income of $20.5 million or $0.48 per diluted share in the prior year period.
Free cash flow (as defined) in the first nine months of fiscal 2008 was $234.5 million, compared to a cash use of $18.3 million in the same period last year. This increase was principally driven by Harry Potter-related receipts and the favorable timing of associated accrued royalties, which will be paid on March 31, 2008. In the fiscal 2008 third quarter, free cash flow was $61.2 million compared to $26.0 million in the prior year period, principally reflecting strong Harry Potter-related receipts and improved working capital levels in the current quarter.
Net debt (as defined) was $175.2 million at quarter-end, down from $319.6 million a year earlier, reflecting strong free cash flow in the intervening twelve months. This was partially offset by additional debt incurred in the first quarter of fiscal 2008 to finance a $200 million accelerated share repurchase program.
In the third quarter of 2008, the Company acquired approximately 167,000 shares of its common stock for $5.4 million under its previously announced share repurchase program. Under this program, the Company may repurchase up to $20 million of its common stock, from time to time as conditions allow, on the open market or in negotiated private transactions.
Conference Call
The Company will hold a conference call to discuss its results at 8:00 am ET today, March 27, 2008. Scholastic’s Chairman, President and CEO, Richard Robinson, and Maureen O’Connell, Executive Vice President, CAO and CFO, 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 (888) 868-9079 from within the U.S. or +1 (973) 935-8510 internationally. Following the call, slides from the conference call will also be posted in the Investor Relations section of scholastic.com.
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 children’s media. Scholastic creates quality educational and entertaining materials and products for use in school and at home, including children's books, magazines, technology-based products, teacher materials, television programming, film, videos and toys. The Company distributes its products and services through a variety of channels, including proprietary school-based book clubs and school-based book fairs, retail stores, schools, libraries, television networks and the Company’s Internet Site, 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.