Scholastic Posts 10% Increase In Annual Income

July 27, 2006
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July 27 – August 3, 2006 Edition

Scholastic Posts

10% Increase

In Annual Income

NEW YORK, NY/7/20/06—Scholastic Corporation (NASDAQ: SCHL) has announced its results for the fiscal 2006 fourth quarter and full year and its outlook for fiscal 2007.

For the fiscal year ended May 31, 2006, revenue increased 10% to $2,283.8 million, from $2,079.9 million in the prior year. Net income increased to $68.6 million or $1.66 per diluted share, from $64.3 million or $1.58 per diluted share in the prior year. For the fiscal fourth quarter, revenue was $601.0 million versus $592.1 million, and net income was $38.4 million or $0.91 per diluted share, compared to $43.1 million or $1.03 per diluted share in the prior year period.

The Company generated Free cash flow (as defined) of $79.1 million in fiscal 2006.

Richard Robinson, Chairman, CEO and President of Scholastic, commented, “Challenges in fiscal 2006 included higher operating costs and softer than expected revenues, particularly in School Book Clubs, as well as increased costs to support growth in Educational Publishing and to carry out our turn-around plan in the U.K. We believe we will see stronger results in these businesses in fiscal 2007. Meanwhile, other areas of the business exceeded expectations, with excellent results in Trade Publishing following the launch of Harry Potter and the Half-Blood Prince, and continued vitality in other best-selling series. We also had healthy growth in School Book Fairs.

“While our top near-term priority is to reduce costs, we are optimistic about the longer-term growth prospects for the Company. We are leveraging our publishing strength and global scale in children’s books, building on the leading position of READ 180® to develop our educational technology business, growing internationally and further expanding on our position as the world’s third largest Internet bookseller to reach more parents, children and educators with books and learning materials,” he continued.

The Company’s on-going actions to control costs and improve margins include (1) reducing overhead spending by $40 million annually by fiscal 2008; (2) simplifying School Book Clubs by reducing the number of club offers and the level of promotion spending; (3) using timely sales information to further improve product selection while streamlining operations in School Book Fairs; and (4) more tightly integrating editorial and marketing functions across its children’s book channels.

In fiscal 2007, the Company expects total revenues of approximately $2.1 to $2.2 billion, earnings of $1.55 to $1.85 per diluted share and Free cash flow of $75 to $85 million based on the following outlook:

1. In Children’s Book Publishing and Distribution, modest revenue growth and improved results in Trade Publishing (excluding Harry Potter® sales), School Book Fairs and Continuities. School Book Club results should improve, on a modest decline in revenue, based on growth in Scholastic core clubs and cost controls, including the strategic decision to discontinue the Troll™ and Trumpet™ book clubs. Overall segment revenue and profitability are expected to decline, based on lower Harry Potter sales compared to last year, when the Company released a new book in the series. Strong growth in Educational Publishing. Last year’s investment in sales and support should drive higher revenues from educational technology, as well as modest growth across the rest of the segment. Profits and operating margins should also benefit. Modest growth in International with higher profits and operating margins, in particular in the United Kingdom, and a modest decline in revenues and profits in Media, Licensing and Advertising. Significant progress toward the Company’s fiscal 2008 goal of reducing overhead spending by $40 million annually, with approximately two thirds of the savings expected to be realized in fiscal 2007. Severance and transition expenses related to Company-wide margin improvement efforts, including its overhead cost reduction goals, of approximately $0.10 to $0.15 per diluted share after tax. Stock option expense as a result of the adoption of SFAS No. 123R of approximately $0.05 to $0.08 per diluted share after tax.

Fourth Quarter and Fiscal Year Results

Children’s Book Publishing and Distribution. Segment revenue in the fourth quarter of fiscal 2006 totaled $333.6 million, approximately level with $333.4 million in the prior year period. Solid growth in School Book Fairs and Continuities was offset by declines in School Book Club and Trade revenues. Segment operating profit in the fourth quarter was $48.5 million, down from $51.9 million in the prior year period, primarily reflecting lower revenues and higher expenses in School Book Clubs, partially offset by improved profits in Trade and School Book Fairs.

For the fiscal year, segment revenues were $1,304.0 million, up 13% from $1,152.5 million in the prior year reflecting higher Harry Potter revenue of approximately $195 million, principally associated with Harry Potter and the Half-Blood Prince, compared to $20 million in the prior year. School Book Fair revenue rose due to higher revenue per fair. Revenue in both School Book Clubs and Continuities declined. Segment operating profit for the year was $114.2 million, up from $93.5 million in the prior year, primarily reflecting higher Harry Potter sales, partially offset by lower results in School Book Clubs.

Educational Publishing. Segment revenue in the fourth quarter was $115.1 million, up 2% from $112.6 million in the prior year period, primarily from higher sales of educational technology, partially offset by lower library publishing revenue. Segment operating profit was $24.0 million, down $5.8 million from the prior year period. This decline reflected a write-down of certain reference set assets, based on the Company’s decision not to update print versions of these products, and higher bad debt expense associated with the bankruptcy of a customer.

For the fiscal year, segment revenues were $416.1 million, up 3% from $404.6 million in the prior year, primarily reflecting increased educational technology revenue, partially offset by lower library publishing revenue. Segment operating profit in the year was $69.6 million, down $8.9 million from the prior year, primarily due to the cost of additional sales and technical support staff to service a larger educational technology customer base and the effect of the write-down of print reference assets and of higher bad debt.

International. Segment revenue in the fourth quarter rose 7% (6% in local currencies) to $117.1 million from $109.7 million in the prior year period, primarily reflecting growth in the United Kingdom, Canada and Asia. Operating profit in the segment rose 18% to $13.1 million from $11.1 million a year ago, primarily due to improved results in Canada and the United Kingdom. For the fiscal year, segment revenues were $412.1 million, up 6% (5% in local currencies) from $389.7 million in the prior year, due to growth in Asia, Australia, and Canada, partially offset by lower revenues in the United Kingdom. Segment operating profit in the year was $22.7 million, down 25% from $30.3 million in the prior year, principally because of lower results in the United Kingdom, where the Company has invested in a turnaround plan.

About Scholastic

Scholastic Corporation (NASDAQ: SCHL) is the world’s largest publisher and distributor of children’s books and a leader in educational technology. 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, school-based book fairs, and school-based and direct-to-home continuity programs; retail stores, schools, libraries and television networks; and the Company’s Internet site, scholastic.com.

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