SCHOLASTIC CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) the prior fiscal year quarter. The Company also incurred higher severance expense and related charges from its restructuring programs, which increased by $1.7 million to $2.5 million compared to $0.8 million in the prior fiscal year quarter and recognized lower equity investment income, partially offset by lower branch consolidation costs in the quarter ended February 28, 2022, which decreased by $0.3 million. Selling, general and administrative expenses for the nine months ended February 28, 2022 increased to $512.7 million, compared to $433.8 million in the prior fiscal year period. The $78.9 million increase was primarily attributable to higher employee related costs as a result of higher headcount in the book fairs warehouses to meet the increased demand, coupled with higher labor costs across the Company due in part to the employee furlough and reduced work week programs in the first fiscal quarter of the prior fiscal year, which did not reoccur in the current fiscal year. In addition, the Company incurred higher warehouse-related costs, as certain book fair distribution facilities were temporarily closed in the prior fiscal year period, and recognized lower subsidies from COVID-related governmental retention programs in the current period, which decreased by $15.4 million to $1.4 million as compared to $16.8 million in the prior fiscal year period, as well as lower equity investment income. Partially offsetting the foregoing, the Company received $6.6 million of insurance recoveries in the period ended February 28, 2022 related to an intellectual property legal settlement accrued in fiscal 2021 and recognized lower severance expense, which included charges of $5.7 million and $18.0 million for the nine months ended February 28, 2022 and February 28, 2021, respectively, related to cost-reduction and restructuring programs, in addition to lower branch consolidation costs of $0.5 million in the nine months ended February 28, 2022. Depreciation and amortization expenses in the three and nine months ended February 28, 2022 were $13.6 million and $43.0 million, respectively, compared to $14.7 million and $46.0 million, respectively, in the prior fiscal year period. The decrease in depreciation and amortization expenses in the three and nine month periods was primarily attributable to a shift towards spending in cloud computing arrangements in which the amortization expense is included in Selling, general and administrative expenses. Capital spending is lower in the current fiscal year as the Company continues to focus on strategic investments in key growth areas of the business and in technology, both internal and customer-facing, to allow it to operate with greater efficiency. Asset impairments and write downs in the three and nine months ended February 28, 2021 were $10.9 million. In the fiscal quarter ended February 28, 2021, the Company committed to a plan to cease use of its leased office space in New York City and consolidate into the company-owned New York headquarters and permanently close 12 of its 54 U.S. book fairs warehouses as part of a branch consolidation project. As a result, the Company recorded an impairment of the ROU assets associated with operating leases in the amount of $9.4 million and an impairment of $1.5 million of other long-lived assets, primarily leasehold improvements, in the fiscal 2021 periods. Net interest expense in the quarter ended February 28, 2022 was $0.4 million compared to $1.7 million in the prior fiscal year quarter. Net interest expense in the nine months ended February 28, 2022 was $2.2 million compared to $4.1 million in the prior fiscal year period. The decreases in net interest expense were due to the lower average debt borrowings as compared to the prior fiscal year periods. The Company repaid the $175.0 million of borrowings during the first and second quarters of fiscal 2022, resulting in no outstanding borrowings under the U.S. credit agreement as of February 28, 2022. Gain (loss) on sale of assets and other in the quarter ended February 28, 2021 was $3.8 million, as the Company sold the UK distribution center located in Southam and recognized a gain on sale. Gain (loss) on sale of assets and other in the nine months ended February 28, 2022 was $6.2 million compared to $10.4 million in the prior fiscal year period. The Company sold the Lake Mary facility in the period ended February 28, 2022, as part of an initiative to rightsize its real estate footprint to reduce occupancy costs, which resulted in the gain on sale. In the period ended February 28, 2021, the Company sold the facility located in Danbury, Connecticut and the UK distribution center located in Southam, recognizing a gain on sale of $6.6 million and $3.8 million, respectively. The Company’s effective tax rate for the quarter ended February 28, 2022 was 23.7%, compared to 36.4% in the prior fiscal year quarter. The Company's effective tax rate for the nine months ended February 28, 2022 was 19.7% compared to 29.0% in the prior fiscal year period. The decrease in the interim effective tax rate for the nine months ended February 28, 2022 is primarily due to the release of an uncertain tax position in the current fiscal year related to an effective settlement recognized as part of an ongoing IRS audit. 26 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) Net loss attributable to Scholastic Corporation for the quarter ended February 28, 2022 increased by $1.4 million to $15.3 million, compared to $13.9 million in the prior fiscal year quarter. Loss per basic and diluted share of Class A and Common Stock was $0.44 and $0.44, respectively, for the fiscal quarter ended February 28, 2022, compared to loss per basic and diluted share of Class A and Common Stock of $0.41 and $0.41, respectively, in the prior fiscal year quarter. Net income attributable to Scholastic Corporation for the nine months ended February 28, 2022 increased by $47.4 million to $28.8 million, compared to a net loss of $18.6 million in the prior fiscal year period. Earnings per basic and diluted share of Class A and Common Stock was $0.83 and $0.80, respectively, for the nine months ended February 28, 2022, compared to loss per basic and diluted share of Class A and Common Stock of $0.54 and $0.54, respectively, in the prior fiscal year period. Net income attributable to noncontrolling interest for the quarter ended February 28, 2022 was $0.2 million compared to Net loss attributable to noncontrolling interest of $0.1 million in the prior fiscal year quarter. Net income attributable to noncontrolling interest for the nine months ended February 28, 2022 was $0.1 million compared to less than $0.1 million in the prior fiscal year period. Children’s Book Publishing and Distribution Three months ended February 28, Nine months ended February 28, $ % $ % ($ amounts in millions) 2022 2021 Change Change 2022 2021 Change Change Revenues $ 201.0 $ 142.9 $ 58.1 40.7 % $ 669.3 $ 479.2 $ 190.1 39.7 % Cost of goods sold 102.5 78.6 23.9 30.4 % 325.4 256.3 69.1 27.0 % Other operating expenses (1) 93.5 69.5 24.0 34.5 % 275.4 221.7 53.7 24.2 % Asset impairments — 2.4 (2.4) NM — 2.4 (2.4) NM Operating income (loss) $ 5.0 $ (7.6) $ 12.6 165.8 % $ 68.5 $ (1.2) $ 69.7 NM Operating margin 2.5 % — % 10.2 % — % (1) Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization. NM Not meaningful Revenues for the quarter ended February 28, 2022 increased by $58.1 million to $201.0 million, compared to $142.9 million in the prior fiscal year quarter. The increase in segment revenues was primarily driven by higher book fairs channel revenues of $49.0 million resulting from increased fair count and higher revenue per fair as schools reopened and resumed in-person learning. Book clubs channel revenues increased $5.4 million as a result of the Company's focus on clearing the backlog that arose during the second quarter. In the trade channel, revenues increased $3.7 million primarily due to increased sales of backlist titles and box sets from best-selling series, coupled with new releases from the Company's popular series, including Cat Kid Comic Club ® , Wings of Fire TM , The Baby-sitters Club ® Graphix TM , Baby-sitters Little Sisters ® Graphix TM , and Five Nights at Freddy’s TM . Revenues for the nine months ended February 28, 2022 increased by $190.1 million to $669.3 million, compared to $479.2 million in the prior fiscal year period. The increase in segment revenues was primarily driven by higher book fairs channel revenues of $180.3 million resulting from increased fair count and higher revenue per fair as schools reopened and resumed in-person learning, particularly in the second and third quarters. Trade channel revenues increased $18.5 million primarily due to increased sales of backlist titles and box sets from best-selling series, including Dog Man and Harry Potter . New releases in the period ended February 28, 2022 included J.K. Rowling’s The Christmas Pig, Dav Pilkey's Cat Kid Comic Club ® : Perspectives , and Tui T. Sutherland’s Wings of Fire TM : The Brightest Night (Graphic Novel #5) , as well as new releases from the Company's best-selling series, including The Baby-sitters Club ® Graphix TM , Baby-sitters Little Sisters ® Graphix TM , Five Nights at Freddy’s TM , The Bad Guys TM and I Survived. In addition, sales increased for specialty products within the Company's Klutz division, as well as the Make Believe Ideas TM business, which benefited from the launch of the plush product line, Sensory Snuggables TM , and the improvement of the U.S. school-based channels in the second and third quarters. The revenue increase was partially offset by lower book clubs channel revenues of $8.7 million due to industry-wide labor shortages in the second quarter and a systems issue in the Company's fulfillment operations. Cost of goods sold for the quarter ended February 28, 2022 was $102.5 million, or 51.0% of revenues, compared to $78.6 million, or 55.0% of revenues, in the prior fiscal year quarter. Cost of goods sold for the nine months 27 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) ended February 28, 2022 was $325.4 million, or 48.6% of revenues, compared to $256.3 million, or 53.5% of revenues, in the prior fiscal year period. The decrease in Cost of goods sold as a percentage of revenue for the three and nine months ended February 28, 2022 was primarily driven by lower royalty costs due to the increased book fairs channel revenues which have a higher mix of non-royalty bearing titles, partially offset by the increases in paper, printing and freight costs. Other operating expenses for the quarter ended February 28, 2022 increased to $93.5 million, compared to $69.5 million in the prior fiscal year quarter. The $24.0 million increase was primarily attributable to higher employee-related costs, largely in the book fairs channel, as the Company increased headcount at the warehouses to meet the increased demand, coupled with higher costs due to labor shortages. In addition, the Company incurred higher warehouse-related costs, as certain book fair distribution facilities were temporarily closed in the prior fiscal year quarter, and recognized lower subsidies from COVID-related governmental retention programs in the quarter ended February 28, 2022. Other operating expenses for the nine months ended February 28, 2022 increased to $275.4 million, compared to $221.7 million in the prior fiscal year period. The $53.7 million increase was primarily attributable to higher employee-related costs as the prior fiscal year period benefited from the employee furlough and reduced work week programs in the first quarter of the period, coupled with higher labor costs due to increased headcount at the warehouses to meet the increased demand and higher costs due to labor shortages. In addition, the Company incurred higher warehouse-related costs, as certain book fair distribution facilities were temporarily closed in the prior fiscal year period, and recognized lower subsidies from COVID-related governmental retention programs in the period ended February 28, 2022. Asset impairments for the three and nine months ended February 28, 2021 were $2.4 million. In the prior fiscal year quarter, the Company committed to a plan to permanently close 12 of its 54 book fairs warehouses in the U.S. as part of the branch consolidation project, as a result of which the Company recognized an impairment expense of $2.4 million in the third quarter of fiscal 2021, primarily related to the ROU assets associated with these warehouse operating leases. Segment operating income for the quarter ended February 28, 2022 was $5.0 million, compared to operating loss of $7.6 million in the prior fiscal year quarter. The $12.6 million improvement was primarily driven by the increased revenues in the book fairs channel as schools reopened, partially offset by increased costs related to labor, freight, paper and printing. Segment operating income for the nine months ended February 28, 2022 was $68.5 million, compared to operating loss of $1.2 million in the prior fiscal year period. The $69.7 million improvement was primarily driven by the increased revenues in the book fairs channel as schools have reopened, coupled with increased trade channel revenues. The prior year's cost saving initiatives were partially offset by increased costs related to labor, freight, paper and printing, which the Company expects to continue to negatively impact the business. Education Solutions Three months ended February 28, Nine months ended February 28, $ % $ % ($ amounts in millions) 2022 2021 Change Change 2022 2021 Change Change Revenues $ 77.2 $ 66.3 $ 10.9 16.4 % $ 236.8 $ 187.4 $ 49.4 26.4 % Cost of goods sold 26.1 21.0 5.1 24.3 % 86.4 65.3 21.1 32.3 % Other operating expenses (1) 38.0 35.6 2.4 6.7 % 114.4 104.5 9.9 9.5 % Operating income (loss) $ 13.1 $ 9.7 $ 3.4 35.1 % $ 36.0 $ 17.6 $ 18.4 104.5 % Operating margin 17.0 % 14.6 % 15.2 % 9.4 % (1) Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization. Revenues for the quarter ended February 28, 2022 increased to $77.2 million, compared to $66.3 million in the prior fiscal year quarter, resulting in an increase of $10.9 million. The increase in segment revenues was primarily driven by revenues from the newly launched New Worlds Reading Initiative with University of Florida’s Lastinger Center for Learning of $5.7 million. In addition, increased revenues were driven by higher sales of instructional products and programs, primarily Scholastic Bookroom, and professional learning services, coupled with increased circulation revenue from the Magazines+ business. The revenue increase was partially offset by lower 28 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) revenues from the Company's teaching resources business, which benefited in the prior fiscal year quarter as parents used these products to supplement remote and hybrid learning resulting from COVID-19. Revenues for the nine months ended February 28, 2022 increased to $236.8 million, compared to $187.4 million in the prior fiscal year period, resulting in an increase of $49.4 million. The increase in segment revenues was primarily driven by higher sales of instructional products and programs, including the recently launched early childhood curriculum program PreK On My Way , Scholastic Bookroom , the Company's summer learning product offerings, and Scholastic Literacy . Increased revenues were also driven by the Company’s new Rising Voices Library offering, which meets the increasing demand for culturally responsive content and instruction, and the newly launched New Worlds Reading Initiative with University of Florida’s Lastinger Center for Learning. In addition, increased circulation revenue from the Magazines+ business and increased sales of professional learning services and the Company's digital products, primarily Scholastic Literacy Pro ® and Scholastic F.I.R.S.T. ® , contributed to the increase in segment revenues. The revenue increase was partially offset by lower revenues from the Company's teaching resources business, which benefited in the prior fiscal year period as parents used these products to supplement remote and hybrid learning resulting from COVID-19, and lower revenues from the custom publishing business which was phased out in the prior fiscal year. Cost of goods sold for the quarter ended February 28, 2022 was $26.1 million, or 33.8% of revenues, compared to $21.0 million, or 31.7% of revenues, in the prior fiscal year quarter. The increase in Cost of goods sold as a percentage of revenues in the third quarter was primarily attributable to the higher product cost associated with Scholastic Bookroom products and delivery of professional learning services, which have increased sales in the current quarter, coupled with increased paper, printing and freight costs. Cost of goods sold for the nine months ended February 28, 2022 was $86.4 million, or 36.5% of revenues, compared to $65.3 million, or 34.8% of revenues, in the prior fiscal year period. The increase in Cost of goods sold as a percentage of revenues in the period was primarily attributable to the higher product cost associated with Scholastic Bookroom products and delivery of professional learning services, which have increased sales in the period, coupled with increased paper, printing and freight costs. In addition, higher royalty costs associated with Scholastic Literacy Pro digital products and the Company's summer learning product offerings contributed to the increase, partially offset by the benefit from higher revenue per unit shipped. Other operating expenses for the quarter ended February 28, 2022 were $38.0 million, compared to $35.6 million in the prior fiscal year quarter. The increase in Other operating expenses was primarily related to higher employee-related costs due to inflationary pressures on labor costs. Other operating expenses for the nine months ended February 28, 2022 increased to $114.4 million, compared to $104.5 million in the prior fiscal year period. The increase in Other operating expenses was primarily related to higher employee-related costs as the prior fiscal year period benefited from employee furlough and reduced work week programs in the first quarter of that period that did not reoccur in the period ended February 28, 2022, in addition to inflationary pressures on labor costs. Segment operating income for the quarter ended February 28, 2022 was $13.1 million, compared to $9.7 million in the prior fiscal year quarter. The $3.4 million improvement was primarily driven by increased revenues from the newly launched New Worlds Reading Initiative in Florida, coupled with higher sales of instructional products and programs and professional learning services, as well as increased circulation revenue from the Magazines+ business. The revenue increase was partially offset by increased costs related to labor, freight, paper and printing, which the Company expects to continue to impact the business. Segment operating income for the nine months ended February 28, 2022 was $36.0 million, compared to $17.6 million in the prior fiscal year period. The $18.4 million improvement was primarily driven by higher revenues as a result of increased sales of instructional products and programs, professional learning services and digital products, as well as higher circulation revenue from the Magazines+ business. In addition, increased revenues were driven by the Company's new Rising Voices Library offering and the newly launched New Worlds Reading Initiative in Florida. The revenue increase was partially offset by increased costs related to labor, freight, paper and printing, which the Company expects to continue to impact the business. 29 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) International Three months ended February 28, Nine months ended February 28, $ % $ % ($ amounts in millions) 2022 2021 Change Change 2022 2021 Change Change Revenues $ 66.3 $ 68.3 $ (2.0) (2.9) % $ 222.4 $ 232.3 $ (9.9) (4.3) % Cost of goods sold 38.3 38.0 0.3 0.8 % 125.4 123.6 1.8 1.5 % Other operating expenses (1) 33.0 31.3 1.7 5.4 % 95.0 87.0 8.0 9.2 % Operating income (loss) $ (5.0) $ (1.0) $ (4.0) NM $ 2.0 $ 21.7 $ (19.7) (90.8) % Operating margin — % — % 0.9 % 9.3 % (1) Other operating expenses include selling, general and administrative expenses, bad debt expenses, severance and depreciation and amortization. Revenues for the quarter ended February 28, 2022 decreased to $66.3 million, compared to $68.3 million in the prior fiscal year quarter. Local currency revenues across the Company's foreign operations decreased by $0.4 million, coupled with an unfavorable foreign exchange impact of $1.6 million. The decrease in segment revenues was primarily driven by lower local currency revenues in Asia of $3.7 million as the local markets continued to be impacted by COVID related shutdowns and recently adopted restrictive regulations in China, resulting in lower direct-to-home sales as well as lower trade and school channel sales. In addition, export channel revenues decreased by $0.4 million as compared to the prior fiscal year quarter. The decrease in segment revenues was partially offset by higher revenues in Canada, the UK and Australia and New Zealand. In Canada, local currency revenues increased $3.0 million driven by increased sales across all channels as it continues to recover from the pandemic. In the UK, local currency revenues increased by $0.4 million primarily driven by the pandemic recovery in the book fairs channel. Australia and New Zealand local currency revenues increased by $0.3 million primarily in the Australian book fairs channel as additional lockdowns imposed by the COVID variant began to lift. Revenues for the nine months ended February 28, 2022 decreased to $222.4 million, compared to $232.3 million in the prior fiscal year period. Local currency revenues across the Company's foreign operations decreased by $14.7 million, partially offset by a favorable foreign exchange impact of $4.8 million. In Asia, local currency revenues decreased $14.2 million as the local markets continued to be impacted by COVID related shutdowns and the restrictive regulations in China, resulting in lower direct-to-home sales as well as lower trade and school channel sales. Australia and New Zealand local currency revenues decreased $8.9 million across all channels, due to additional lockdowns imposed by the COVID variant in the current fiscal year which began to be lifted during the third quarter. In the UK, local currency revenues decreased by $0.9 million primarily due to lower trade and book clubs channel sales and increased book fair incentive program credits as issuances outpaced redemptions, which more than offset the increased sales in the book fairs channel resulting from the increased demand as schools reopened. In addition, export channel revenues decreased $1.2 million as compared to the prior fiscal year period. The decrease in segment revenues was partially offset by higher local currency revenues in Canada of $10.5 million driven by increased sales across all channels, particularly in the book fairs and book clubs channels as schools reopened. Cost of goods sold for the quarter ended February 28, 2022 was $38.3 million, or 57.8% of revenues, compared to $38.0 million, or 55.6% of revenues, in the prior fiscal year quarter. Cost of goods sold for the nine months ended February 28, 2022 was $125.4 million, or 56.4% of revenues, compared to $123.6 million, or 53.2% of revenue, in the prior fiscal year period. The increase in Cost of goods sold as a percentage of revenue in the three and nine months ended February 28, 2022 was driven by higher fulfillment costs, primarily in Australia, New Zealand and the UK, coupled with higher freight costs across all locations. Other operating expenses for the quarter ended February 28, 2022 were $33.0 million, compared to $31.3 million in the prior fiscal year quarter. Other operating expenses increased $1.7 million primarily driven by lower government subsidies related to COVID-related governmental retention programs in Canada, the UK, Australia and New Zealand, which decreased by $2.4 million as compared to the prior fiscal year quarter, as well as lower equity investment income. In addition, the UK recognized branch consolidation costs of $0.3 million in the quarter ended February 28, 2022. Other operating expenses for the nine months ended February 28, 2022 were $95.0 million, compared to $87.0 million in the prior fiscal year period. Other operating expenses increased $8.0 million primarily driven by lower government subsidies related to COVID-related governmental retention programs in Canada, the UK, Australia 30 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and New Zealand, which decreased by $8.9 million to $1.4 million as compared to $10.3 million in the prior fiscal year period, as well as lower equity investment income. In addition, the Company incurred higher employee-related expenses as the prior fiscal year period benefited from employee furlough and reduced work week programs in the first quarter of that period that did not reoccur in the period ended February 28, 2022. This increase was partially offset by lower severance expense related to restructuring programs, which decreased by $1.8 million to $0.7 million, compared to $2.5 million in the prior fiscal year quarter. Segment operating loss for the quarter ended February 28, 2022 was $5.0 million, compared to $1.0 million in the prior fiscal year quarter. The decrease was primarily driven by lower revenues in Asia, coupled with lower subsidies from COVID-related governmental employee retention programs and higher freight costs. Segment operating income for the nine months ended February 28, 2022 was $2.0 million, compared to $21.7 million in the prior fiscal year period. The decreases was primarily driven by lower revenues across all locations except Canada, coupled with higher freight costs and lower subsidies from COVID-related governmental employee retention programs. The Company expects increased costs related to labor, freight, paper and printing to continue to negatively impact the business. Overhead Unallocated overhead expense for the quarter ended February 28, 2022 increased by $7.3 million to $32.6 million, from $25.3 million in the prior fiscal year quarter. The increase was primarily attributable to higher unallocated employee-related expenses at the Company’s Jefferson City, Missouri distribution facility, in addition to higher severance expense and related charges from the Company's restructuring programs, which increased by $1.8 million to $2.4 million compared to $0.6 million in the prior fiscal year quarter. This was partially offset by the $8.5 million asset impairment related to the leased office space in New York City in connection with the consolidation into the company-owned New York City headquarters that occurred in the prior fiscal year quarter. Unallocated overhead expense for the nine months ended February 28, 2022 increased by $4.1 million to $74.6 million, from $70.5 million in the prior fiscal year period. The increase was primarily attributable to higher employee-related expenses due to unallocated expenses at the Company’s Jefferson City, Missouri distribution facility as well as the prior fiscal year employee furlough and reduced work week programs and the COVID-related governmental employee retention credit, which resulted in lower employee-related expenses and did not reoccur in the period ended February 28, 2022. The increase was partially offset by lower severance expense and related charges from the Company's restructuring programs, which decreased by $10.5 million to $5.0 million compared to $15.5 million in the prior fiscal year period, coupled with $6.6 million of insurance recoveries received in the period ended February 28, 2022 related to an intellectual property legal settlement accrued in fiscal 2021. The prior fiscal year quarter also included the $8.5 million asset impairment related to the leased office space in New York City in connection with the consolidation into the company-owned New York headquarters. Seasonality The Company’s Children’s Book Publishing and Distribution school-based book club and book fair channels and most of its Education Solutions businesses operate on a school-year basis; therefore, the Company’s business is highly seasonal. As a result, the Company’s revenues in the first and third quarters of the fiscal year generally are lower than its revenues in the other two fiscal quarters. Typically, school-based channels and magazine revenues are minimal in the first quarter of the fiscal year as schools are not in session. Education channel revenues are generally higher in the first and fourth quarters. Trade sales can vary throughout the year due to varying release dates of published titles. Presently, there remain uncertainties concerning the timing of and any patterns which may emerge with respect to school instruction, whether in-school, remote or hybrid for the school year, and the nature and continuing magnitude of the negative impact of COVID-19 into and beyond the fourth quarter of fiscal 2022. 31 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) Liquidity and Capital Resources Cash provided by operating activities was $178.5 million for the nine months ended February 28, 2022, compared to $36.5 million for the prior fiscal year period, representing an increase in cash provided by operating activities of $142.0 million. The increase in cash provided was primarily driven by the increase in revenues, primarily in the book fairs channel and the Education Solutions segment, resulting in higher cash collections, in addition to the federal income tax refund of $63.1 million and insurance recoveries of $6.6 million related to the intellectual property legal settlement, both received in the first fiscal year quarter. This was partially offset by the $20.0 million payment for the intellectual property legal settlement accrued in fiscal 2021, higher employee related costs due to inflationary pressures, and higher inventory purchases. Due to supply chain difficulties, the Company is currently ordering inventory in advance of anticipated demands, allowing for longer manufacturing and transportation lead times. Cash used in investing activities was $30.5 million for the nine months ended February 28, 2022, compared to cash used in investing activities of $34.9 million in the prior fiscal year period, representing a decrease in cash used in investing activities of $4.4 million. The decrease in cash used was driven by lower capital expenditures of $9.1 million as the Company continued to limit spending to strategic investments in key growth areas of the business and in technology, both internal and customer-facing, to allow it to operate with greater efficiency. This was partially offset by net proceeds from the sale of the Lake Mary facility of $10.4 million in the period ended February 28, 2022 which were lower than the aggregate net proceeds from the sales of the Danbury and Southam facilities of $17.4 million which benefited the prior fiscal year period. Cash used in financing activities was $202.9 million for the nine months ended February 28, 2022, compared to cash used in financing activities of $46.2 million for the prior fiscal year period, representing an increase in cash used in financing activities of $156.7 million. The increase in cash used is primarily related to repayments of borrowings under the U.S. credit agreement of $175.0 million during the nine months ended February 28, 2022, which resulted in no outstanding borrowings as of February 28, 2022. In addition, the Company reacquired $19.5 million of common stock with no such repurchases in the prior fiscal year period during which the repurchase program was suspended. The increase in cash used was partially offset by net proceeds from stock option exercises of $9.6 million in the current fiscal year period. Cash Position The Company’s cash and cash equivalents totaled $308.9 million at February 28, 2022, $366.5 million at May 31, 2021 and $353.2 million at February 28, 2021. Cash and cash equivalents held by the Company’s U.S. operations totaled $266.5 million at February 28, 2022, $318.0 million at May 31, 2021 and $305.9 million at February 28, 2021. Due to the seasonal nature of its business as discussed under “Seasonality”, the Company usually experiences negative cash flows in the June through October time period. As a result of the Company’s business cycle, borrowings have historically increased during June, July and August, have generally peaked in September or October, and have been at their lowest point in May. As a precautionary measure in the context of the COVID-19 pandemic, the Company had accessed its committed bank credit facility in the fourth quarter of fiscal 2020 by taking a U.S. dollar LIBOR-based advance for $200.0 million. The Company has repaid these borrowings and there are no outstanding borrowings under the U.S. credit agreement as of February 28, 2022. On October 27, 2021, the U.S. credit agreement was amended and restated, which, among other things, increased the borrowing limit from $250.0 million to $300.0 million and extended the maturity to October 27, 2026. See Note 5 of Notes to the Financial Statements - Unaudited in Item 1, "Financial Statements," for more information concerning the U.S. credit agreement. The Company’s operating philosophy is to use cash provided by operating activities to create value by paying down debt, reinvesting in existing businesses and, from time to time, making acquisitions that will complement its portfolio of businesses or acquiring other strategic assets, as well as engaging in shareholder enhancement initiatives, such as share repurchases or dividend declarations. The Company has lifted the temporary suspension of its open-market buy-back program under which $47.7 million remained available for future purchases of common shares as of February 28, 2022. During the nine months ended February 28, 2022, the Company repurchased $19.5 million of common stock, which includes a privately negotiated transaction with a related 32 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) party for 300,000 shares at a discount to market price. See Note 18 of Notes to the Financial Statements - Unaudited in Item 1, "Financial Statements," for more information concerning the related party transaction. The Company has maintained, and expects to maintain for the foreseeable future, sufficient liquidity to fund ongoing operations, including working capital requirements, pension contributions, postretirement benefits, debt service, planned capital expenditures and other investments, as well as dividends and share repurchases as appropriate in the context of COVID-19 considerations. As of February 28, 2022, the Company’s primary sources of liquidity consisted of cash and cash equivalents of $308.9 million, cash from operations and the Company's U.S. credit agreement and UK loan agreements. As indicated above, the U.S. credit agreement was amended and restated on October 27, 2021, which increased the borrowing limit from $250.0 million to $300.0 million. The Company expects the U.S. credit agreement to provide it with an appropriate level of flexibility to strategically manage its business operations. The Company's U.S. credit agreement and its loan agreements in the UK total $306.9 million, less borrowings of $6.9 million and commitments of $0.4 million, resulting in $299.6 million of availability. Additionally, the Company has short-term credit facilities of $37.7 million, less current borrowings of $6.8 million and commitments of $3.9 million, resulting in $27.0 million of current availability under these facilities at February 28, 2022. Accordingly, the Company believes these sources of liquidity are sufficient to finance its currently anticipated ongoing operating needs, as well as its financing and investing activities, taking COVID-19 into consideration. Financing The Company is party to the U.S. credit agreement, the UK loan agreements and certain credit lines with various banks as described in Note 5 of Notes to Condensed Consolidated Financial Statements - unaudited in Item 1, “Financial Statements." The Company had no outstanding borrowings under the U.S. credit agreement as of February 28, 2022. As indicated above, on October 27, 2021, the Company amended and restated the U.S. credit agreement, which included an increase in the maximum commitments and extension of the maturity date. On September 23, 2019, Scholastic Limited UK entered into a term loan agreement to borrow £2.0 million to fund a land purchase in connection with the construction of the new UK facility in Warwickshire. The loan has a maturity date of July 31, 2022. As of February 28, 2022, the Company had $2.7 million outstanding on the loan. On January 24, 2020, Scholastic Limited UK entered into a term loan facility to fund the construction of the new UK facility in Warwickshire. As of February 28, 2022 the borrowing limit was £3.2 million. The loan has a maturity date of July 31, 2022. As of February 28, 2022, the Company had $4.2 million outstanding on the loan and no remaining available credit under this facility. The Company is party to loan agreements, notes or other documents or instruments which reference the London Interbank Offered Rate, or LIBOR, as the benchmark interest rate index used to set the borrowing rate on certain short-term and variable-rate loans or advances. The ICE Benchmark Administration (IBA) ceased the publication of 1-week and 2-month USD LIBORs effective December 31, 2021 and will cease overnight, 1-month, 3-month, 6-month and 12-month LIBORs effective June 30, 2023. The Company is working with its financial institutions to replace USD LIBOR with alternative reference rates in financial contracts as they mature, or as the Company requires. The markets have provided several replacements for USD LIBOR, including the Bloomberg Short-Term Bank Yield Index (BSBY) and the ARRC’s Secured Overnight Financing Rate (SOFR), either of which will be made available to the Company by its agent banks as a substitute for USD LIBOR. The Company does not believe that the change in reference rates will have any material effect on its ability to access the credit markets under its existing financing agreements, or its ability to modify or amend financial contracts, if required. 33 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) New Accounting Pronouncements Reference is made to Note 1 of Notes to Financial Statements - unaudited in Item 1, “Financial Statements,” for information concerning recent accounting pronouncements since the filing of the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2021. 34 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) Forward Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements. Additional written and oral forward-looking statements may be made by the Company from time to time in Securities and Exchange Commission ("SEC") filings and otherwise. The Company cautions readers that results or expectations expressed by forward-looking statements, including, without limitation, those relating to the Company’s future business prospects and strategic plans, ecommerce and digital initiatives, new product introductions, strategies, new education standards, goals, revenues, improved efficiencies, general operating costs, including transportation and labor costs, manufacturing costs, medical costs, potential cost savings, merit pay, operating margins, working capital, liquidity, capital needs, the cost and timing of capital projects, interest costs, cash flows and income, are subject to risks and uncertainties, including, in particular, how the foregoing may be affected by developments in the context of the current COVID-19 pandemic and measures or responses of governmental authorities, school administrators, business suppliers or customers, which may have an impact on the Company's operations and could cause actual results to differ materially from those indicated in the forward-looking statements, due to factors including those noted in the Annual Report and this Quarterly Report and other risks and factors identified from time to time in the Company’s filings with the SEC. The Company disclaims any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise. 35 SCHOLASTIC CORPORATION