SCHOLASTIC CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) program credits. In the Education Solutions segment, revenues decreased by $6.4 million primarily driven by lower sales of instructional products and programs, primarily early childhood programs and summer learning product offerings, as well as lower sales from the timing of new product launches such as Rising Voices Library ® , partially offset by revenues from sponsored programs and increased revenues from traditional classroom book collections. In local currency, the International segment revenues increased by $13.2 million primarily driven by increased revenues in the Company's Major Markets as a result of the recovery of the book fairs channel, partially offset by lower revenues in Asia as a result of the disposition of the direct sales business. International segment revenues were impacted by unfavorable foreign exchange of $14.7 million in the six months ended November 30, 2022. Components of Cost of goods sold for the three and six months ended November 30, 2022 and November 30, 2021 are as follows: Three months ended Six months ended November 30, November 30, November 30, November 30, 2022 2021 2022 2021 ($ amounts in millions) $ % of Revenue $ % of Revenue $ % of Revenue $ % of Revenue Product, service and production costs and inventory reserves $ 158.6 27.0 % $ 136.5 26.0 % $ 241.0 28.3 % $ 212.8 27.1 % Royalty costs 45.4 7.7 % 45.0 8.6 % 72.8 8.6 % 72.8 9.3 % Prepublication amortization 6.4 1.1 % 6.9 1.3 % 12.8 1.5 % 13.8 1.8 % Postage, freight, shipping, fulfillment and other 50.0 8.5 % 49.6 9.5 % 78.3 9.2 % 71.9 9.2 % Total $ 260.4 44.3 % $ 238.0 45.4 % $ 404.9 47.6 % $ 371.3 47.4 % Cost of goods sold for the quarter ended November 30, 2022 was $260.4 million, or 44.3% of revenues, compared to $238.0 million, or 45.4% of revenues, in the prior fiscal year quarter. The decrease in Cost of goods sold as a percentage of revenues was primarily driven by the increased sales volume in the book fairs channel, which traditionally has a higher mix of non-royalty bearing titles and lower fulfillment costs. This was partially offset by higher product costs, which includes higher inbound freight costs. Cost of goods sold for the six months ended November 30, 2022 was $404.9 million, or 47.6% of revenues, compared to $371.3 million, or 47.4% of revenues, in the prior fiscal year period. Cost of goods sold was impacted by higher inbound freight costs, resulting in an increase in product costs, due to inflationary pressures which was substantially offset by the increased sales volume in the book fairs channel, which traditionally has a higher mix of non-royalty bearing titles and lower fulfillment costs. Selling, general and administrative expenses for the quarter ended November 30, 2022 increased to $213.6 million, compared to $188.3 million in the prior fiscal year quarter. The $25.3 million increase was primarily attributable to higher employee-related costs, largely in the book fairs channel to support the increased fair count, as well as the investment in the Education Solutions segment which included additional workforce from the Learning Ovations acquisition. The increase was also driven by higher marketing costs associated with sponsored programs, partially offset by higher equity investment income and lower severance expense from the Company's restructuring programs of $0.8 million. Selling, general and administrative expenses for the six months ended November 30, 2022 increased to $376.4 million, compared to $331.9 million in the prior fiscal year period. The $44.5 million increase was primarily attributable to higher employee-related costs, largely in the book fairs channel to support the increased fair count, coupled with the investment in the Education Solutions segment which included additional workforce from the Learning Ovations acquisition and the discontinuation of international government subsidies related to COVID-related governmental retention programs. The increase was also driven by the $6.6 million of insurance recoveries received in the period ended November 30, 2021 related to the intellectual property legal settlement accrued in fiscal 2021 and higher marketing costs associated with sponsored programs. Partially offsetting this increase, the Company incurred lower severance expense from its restructuring programs of $3.2 million. 23 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) Depreciation and amortization expenses in the three and six months ended November 30, 2022 were $13.8 million and $27.5 million, respectively, compared to $14.5 million and $29.4 million, respectively, in the prior fiscal year period. The decrease in depreciation and amortization expenses in the three and six months ended November 30, 2022 was primarily attributable to a shift towards spending on cloud computing arrangements in which the amortization expense is included in Selling, general and administrative expenses rather than Depreciation and amortization. Amortization related to cloud computing arrangements increased $0.6 million and $1.7 million for the three and six months ended November 30, 2022, respectively, when compared to the prior period which substantially offset the decrease in Depreciation and amortization as there were no significant assets placed into service during the period ended November 30, 2022. Management expects this trend to continue as more cloud-based software tools are utilized by the Company. Interest income in the three and six months ended November 30, 2022 was $1.1 million and $1.7 million, respectively, compared to $0.1 million and $0.4 million, respectively, in the prior fiscal year period. The Company invests excess cash in short term investments which earn competitive interest rates that change directionally in relation to the Federal Funds rate. Interest expense in the three and six months ended November 30, 2022 was $0.4 million and $0.8 million, respectively, compared to $0.6 million and $2.2 million, respectively, in the prior fiscal year period. The decrease in interest expense was due to lower average debt borrowings as compared to the prior fiscal year period as the outstanding borrowings on the U.S. credit agreement were paid down during fiscal 2022, resulting in no outstanding borrowings as of the beginning of fiscal 2023. Gain (loss) on sale of assets and other in the three and six months ended November 30, 2021 was $6.2 million. In the prior year period, the Company sold the facility, which included office and warehouse space, located in Lake Mary, Florida, as part of an initiative to rightsize its real estate footprint to reduce occupancy costs, which resulted in a gain on sale. The Company's interim effective tax rate, inclusive of discrete items, for the three and six months ended November 30, 2022 was 25.3% and 30.2%, respectively, compared to 23.2% and 21.1%, respectively, for the prior fiscal year periods. The interim effective tax rate for the six months ended November 30, 2022 varied from the prior fiscal year period primarily due to tax shortfalls related to vested option cancellations in the current year period. Net income attributable to Scholastic Corporation for the quarter ended November 30, 2022 increased by $7.0 million to $75.3 million, compared to $68.3 million in the prior fiscal year quarter. Earnings per basic and diluted share of Class A and Common Stock was $2.17 and $2.12, respectively, for the fiscal quarter ended November 30, 2022, compared to $1.97 and $1.91, respectively, in the prior fiscal year quarter. Net income attributable to Scholastic Corporation for the six months ended November 30, 2022 decreased by $14.3 million to $29.8 million, compared to $44.1 million in the prior fiscal year period. Earnings per basic and diluted share of Class A and Common Stock was $0.86 and $0.84, respectively, for the six months ended November 30, 2022, compared to $1.27 and $1.24, respectively, in the prior fiscal year period. Net income attributable to noncontrolling interest for the quarter ended November 30, 2022 was $0.1 million compared to $0.1 million in the prior fiscal year quarter. Net income attributable to noncontrolling interest for the six months ended November 30, 2022 was $0.2 million compared to Net loss attributable to noncontrolling interest of $0.1 million in the prior fiscal year quarter. 24 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) Children’s Book Publishing and Distribution Three months ended November 30, Six months ended November 30, $ % $ % ($ amounts in millions) 2022 2021 Change Change 2022 2021 Change Change Revenues $ 418.3 $ 352.5 $ 65.8 18.7 % $ 543.0 $ 468.3 $ 74.7 16.0 % Cost of goods sold 180.6 156.8 23.8 15.2 % 257.7 222.9 34.8 15.6 % Other operating expenses (1) 124.5 110.5 14.0 12.7 % 202.2 181.9 20.3 11.2 % Operating income (loss) $ 113.2 $ 85.2 $ 28.0 32.9 % $ 83.1 $ 63.5 $ 19.6 30.9 % Operating margin 27.1 % 24.2 % 15.3 % 13.6 % (1) Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization. Revenues for the quarter ended November 30, 2022 increased by $65.8 million to $418.3 million, compared to $352.5 million in the prior fiscal year quarter. The increase in segment revenues was primarily driven by higher book fairs channel revenues of $64.6 million resulting from increased fair count, which continues to trend at 85% of pre-pandemic levels compared to 70% in the prior fiscal year quarter, coupled with higher revenue per fair. Book clubs channel revenues also increased $5.7 million as the prior fiscal year quarter was impacted by a discrete systems issue which caused a backlog and shifted revenues into the third quarter of the prior fiscal year. Trade channel revenues decreased $4.5 million due in part to the industry-wide decline in retail market sales, coupled with the release of The Christmas Pig by J.K. Rowling in the quarter ended November 30, 2021. In the quarter ended November 30, 2022, the trade channel released several New York Times bestsellers, including Two Degrees by Alan Gratz, The Three Billy Goats Gruff by Mac Barnett and Jon Klassen, I Was Born for This by Alice Oseman, and Cat Kid Comic Club ® : Collaborations by Dav Pilkey, as well as the illustrated edition of Harry Potter and the Order of the Phoenix . In addition, the trade channel benefited from increased media revenue as the Company continued to deliver episodes associated with the production of the animated series "Eva the Owlet" TM and from increased sales in the Make Believe Ideas TM business. Revenues for the six months ended November 30, 2022 increased by $74.7 million to $543.0 million, compared to $468.3 million in the prior fiscal year period. The increase in segment revenues was largely driven by higher book fairs channel revenues of $76.9 million resulting from increased fair count, which continued to trend at 85% of pre-pandemic levels compared to 70% in the prior fiscal year period, coupled with higher revenue per fair and increased redemptions of book fair incentive program credits during the summer months. In addition, book clubs channel revenues increased $5.2 million as the prior fiscal year period was impacted by the discrete systems issue which caused a backlog and shifted revenues into the third quarter of the prior fiscal year. Due to this shift in timing of revenues and lower sponsor participation, the Company does not expect book clubs channel revenues in the third quarter of fiscal 2023 to outpace the prior year period despite an improvement in revenue per event. Trade channel revenues decreased $7.4 million due in part to the industry-wide decline in retail market sales, coupled with the prior fiscal year period release of The Christmas Pig by J.K. Rowling and limited edition foil cover versions of titles in the Dog Man ® series. In the period ended November 30, 2022, the trade channel released the illustrated edition of Harry Potter and the Order of the Phoenix and Cat Kid Comic Club ® : Collaborations by Dav Pilkey. The trade channel also benefited from sales of backlist titles from the Company’s popular series, including Heartstopper TM , The Baby-sitters Club ® Graphix ® , The Bad Guys TM , Five Nights at Freddy’s TM , Dog Man ® , and Cat Kid Comic Club ® , as well as increased media revenue as the Company continued to deliver episodes associated with the production of the animated series "Eva the Owlet" TM , and increased sales in the Make Believe Ideas TM business. Cost of goods sold for the quarter ended November 30, 2022 was $180.6 million, or 43.2% of revenues, compared to $156.8 million, or 44.5% of revenues, in the prior fiscal year quarter. The decrease in Cost of goods sold as a percentage of revenue was primarily driven by the increased sales volume in the book fairs channel, which traditionally has a higher mix of non-royalty bearing titles and lower fulfillment costs. This was partially offset by increased product and freight costs due to continued inflationary pressures, particularly in the trade channel. Cost of goods sold for the six months ended November 30, 2022 was $257.7, or 47.5% of revenues, compared to $222.9, or 47.6% of revenues, in the prior fiscal year period. The segment benefited from lower royalty costs driven by the higher sales volumes in the book fairs channel, which traditionally has a higher mix of non-royalty bearing titles, offset by increased product and freight costs due to continued inflationary pressures, particularly in the trade channel. Other operating expenses for the quarter ended November 30, 2022 increased to $124.5 million, compared to $110.5 million in the prior fiscal year quarter, resulting in an increase of $14.0 million. Other operating expenses 25 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) for the six months ended November 30, 2022 increased to $202.2 million, compared to $181.9 million in the prior fiscal year period, resulting in an increase of $20.3 million. The increase in Other operating expense for the three and six months ended November 30, 2022 was primarily attributable to higher labor costs, largely in the book fairs channel to support the increased fair count, which is expected to continue to trend higher during the remainder of fiscal 2023. Labor costs were also impacted by inflationary pressures. Segment operating income for the quarter ended November 30, 2022 was $113.2 million, compared to $85.2 million in the prior fiscal year quarter, resulting in an increase of $28.0 million. Segment operating income for the six months ended November 30, 2022 was $83.1 million, compared to $63.5 million in the prior fiscal year period, resulting in an increase of $19.6 million. The increase in operating income for the three and six months ended November 30, 2022 was primarily driven by the continued recovery of the book fairs channel and the Company’s improved network optimization, warehouse efficiencies, and pricing initiatives, which more than offset the rising costs associated with freight, paper, and labor. Education Solutions Three months ended November 30, Six months ended November 30, $ % $ % ($ amounts in millions) 2022 2021 Change Change 2022 2021 Change Change Revenues $ 80.0 $ 79.5 $ 0.5 0.6 % $ 153.2 $ 159.6 $ (6.4) (4.0) % Cost of goods sold 28.6 27.5 1.1 4.0 % 59.0 60.3 (1.3) (2.2) % Other operating expenses (1) 44.4 36.4 8.0 22.0 % 91.5 76.4 15.1 19.8 % Operating income (loss) $ 7.0 $ 15.6 $ (8.6) (55.1) % $ 2.7 $ 22.9 $ (20.2) (88.2) % Operating margin 8.8 % 19.6 % 1.8 % 14.3 % (1) Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization. Revenues for the quarter ended November 30, 2022 were $80.0 million, which were approximately consistent with revenues of $79.5 million in the prior fiscal year quarter. The current fiscal year quarter benefited from revenues from sponsored programs , which did not commence shipping until the third quarter of the prior fiscal year, and higher sales of Grab and Go reading packs and products from the Scholastic Family and Community Engagement (FACE) TM initiative. Largely offsetting this increase, the segment had lower sales as a result of the timing of the Rising Voices Library ® product launch in the prior period. Revenues from Magazines+ and digital subscription products remained relatively consistent with the prior fiscal year quarter. Revenues for the six months ended November 30, 2022 decreased to $153.2 million, compared to $159.6 million in the prior fiscal year period, resulting in a decrease of $6.4 million. The decrease in segment revenues was primarily driven by lower sales of instructional products and programs, primarily early childhood programs and summer learning product offerings, as the prior fiscal year period benefited from shipments, which primarily consisted of summer learning products, that shifted from the fourth quarter of fiscal 2021 due to supply chain constraints at that time. During the fourth quarter of fiscal 2022, orders were shipped more timely with fewer sales shifting into the first quarter of fiscal 2023. In addition, the segment had lower revenues due to the timing of the Rising Voices Library ® product launch in the prior period as well as lower sales of professional books and teaching resource products. The overall decrease was partially offset by revenues from sponsored programs, which did not commence shipping until the third quarter of the prior fiscal year, and increased revenues from traditional classroom book collections, Grab and Go reading packs and products from the Scholastic Family and Community Engagement (FACE) TM initiative. Revenues from Magazines+ and digital subscription products remained relatively consistent with the prior fiscal year period. Cost of goods sold for the quarter ended November 30, 2022 was $28.6 million, or 35.8% of revenues, compared to $27.5 million, or 34.6% of revenues, in the prior fiscal year quarter. The increase in Cost of goods sold as a percentage of revenues was primarily attributable to the mix of products sold in the current quarter, which had higher product costs, including higher inbound freight costs as a result of inflationary pressures. Cost of goods sold for the six months ended November 30, 2022 was $59.0 million, or 38.5% of revenues, compared to $60.3 million, or 37.8% of revenues, in the prior fiscal year period. The increase in Cost of goods sold as a percentage of revenues was primarily attributable to the mix of products sold in the current period which had higher product costs, including higher inbound freight costs, in addition to increased postage and outbound freight costs, as the Company continues to be impacted by inflationary pressures. 26 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) Other operating expenses for the quarter ended November 30, 2022 were $44.4 million, compared to $36.4 million in the prior fiscal year quarter resulting, in an increase of $8.0 million. Other operating expenses for the six months ended November 30, 2022 increased to $91.5 million, compared to $76.4 million in the prior fiscal year period, resulting in an increase of $15.1 million. The increase in Other operating expenses for the three and six month periods ended November 30, 2022 was primarily related to increased marketing costs associated with sponsored programs , as well as higher employee-related costs associated with the continued investment in the Education Solutions segment which included additional workforce from the Learning Ovations acquisition. The Company continues to make strategic investments in the long-term go-to-market capabilities of this segment. Segment operating income for the quarter ended November 30, 2022 was $7.0 million, compared to income of $15.6 million in the prior fiscal year quarter. The $8.6 million decrease was primarily driven by the Company's continued strategic investments in the segment, which included the additional employee-related costs associated with the development team which joined the Company through the Learning Ovations acquisition, coupled with the continued impact of inflationary pressures on product costs and freight. Segment operating income for the six months ended November 30, 2022 was $2.7 million, compared to $22.9 million in the prior fiscal year period. The $20.2 million decrease was driven by the decrease in segment revenues, primarily attributable to lower sales of early childhood programs, summer learning product offerings and cultural awareness products, which was due in part to the shift of revenues in the prior fiscal year period, coupled with the Company's continued strategic investments in the segment and the continued impact of inflationary pressure on product costs and freight. International Three months ended November 30, Six months ended November 30, $ % $ % ($ amounts in millions) 2022 2021 Change Change 2022 2021 Change Change Revenues $ 89.6 $ 92.2 $ (2.6) (2.8) % $ 154.6 $ 156.1 $ (1.5) (1.0) % Cost of goods sold 53.8 51.0 2.8 5.5 % 93.3 87.1 6.2 7.1 % Other operating expenses (1) 29.1 32.5 (3.4) (10.5) % 58.1 62.0 (3.9) (6.3) % Operating income (loss) $ 6.7 $ 8.7 $ (2.0) (23.0) % $ 3.2 $ 7.0 $ (3.8) (54.3) % Operating margin 7.5 % 9.4 % 2.1 % 4.5 % (1) Other operating expenses include selling, general and administrative expenses, bad debt expenses, severance and depreciation and amortization. Revenues for the quarter ended November 30, 2022 decreased to $89.6 million, compared to $92.2 million in the prior fiscal year quarter. Local currency revenues across the Company's foreign operations increased by $7.5 million, offset by an unfavorable foreign exchange impact of $10.1 million. The increase in segment revenues was primarily driven by increased revenues in Australia, New Zealand and the UK. In Australia and New Zealand, local currency revenues increased $5.5 million driven by higher sales in the trade and book fairs channels, with the continued success of the Company's best-selling series including Pig the Pug , Bad Guys and Wonky Donkey . In the UK, local currency revenues increased $3.2 million driven by increased sales in the book fairs channel as well as higher trade channel sales of best-selling titles including the current quarter release of The Baddies by Julia Donaldson. Export channel sales also increased $0.9 million as compared to the prior fiscal year quarter. The increase in segment revenues was partially offset by lower local currency revenues in Canada of $1.1 million due to lower book clubs sales, coupled with lower trade channel sales as a result of an industry wide decline in retail sales, which more than offset the revenue increase in the book fairs channel. In addition, local currency revenues in Asia decreased $1.0 million primarily attributable to the disposition of the direct sales business. Revenues for the six months ended November 30, 2022 decreased to $154.6 million, compared to $156.1 million in the prior fiscal year period. Local currency revenues across the Company's foreign operations increased by $13.2 million, more than offset by unfavorable foreign exchange of $14.7 million. The increase in segment revenues was primarily driven by increased revenues in the Company's Major Markets. In Australia and New Zealand, local currency revenues increased $11.6 million as a result of increased sales in the trade and book fairs channels as the additional lockdowns imposed by the COVID variant negatively impacted the prior year period. In the UK, local currency revenues increased $3.1 million driven by increased sales in the book fairs channel as well as higher sales of best-selling titles in the trade channel including Heartstoppers TM by Alice Oseman and The 27 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) Baddies by Julia Donaldson. In Canada, local currency revenues increased $2.9 million driven by higher sales from the book fairs channel, partially offset by lower sales in the book clubs channel as well as lower trade channel sales as a result of an industry wide decline in the retail market. In addition, export channel sales increased $0.5 million as compared to the prior fiscal year period. The increase in segment revenues was partially offset by lower local currency revenues in Asia of $4.9 million primarily attributable to the disposition of the direct sales business. Cost of goods sold for the quarter ended November 30, 2022 was $53.8 million, or 60.0% of revenues, compared to $51.0 million, or 55.3% of revenues, in the prior fiscal year quarter. The increase in Cost of goods sold as a percentage of revenue was driven by an overall increase in product costs as a result of higher inbound freight costs due to inflationary pressures as well as increased fulfillment costs due to increased labor costs, primarily in Canada. Cost of goods sold for the six months ended November 30, 2022 was $93.3 million, or 60.3% of revenues, compared to $87.1 million, or 55.8% of revenue, in the prior fiscal year period. The increase in Cost of goods sold as a percentage of revenues was driven by an overall increase in product costs as a result of higher inbound freight costs and higher outbound postage and freight costs, both due to inflationary pressures. In addition, fulfillment costs increased due to higher labor costs, primarily in Canada. Other operating expenses for the quarter ended November 30, 2022 were $29.1 million, compared to $32.5 million in the prior fiscal year quarter. Other operating expenses decreased $3.4 million primarily driven by higher equity investment income in the quarter ended November 30, 2022, partially offset by lower severance expense related to restructuring programs. Other operating expenses for the six months ended November 30, 2022 were $58.1 million, compared to $62.0 million in the prior fiscal year period. Other operating expenses decreased $3.9 million impacted by a favorable foreign exchange of $5.0 million, resulting in a local currency increase of $1.1 million. This increase was primarily driven by increased employee-related expenses as a result of the discontinuation of government subsidies related to COVID-related governmental retention programs, partially offset by lower severance expense related to restructuring programs. Segment operating income for the quarter ended November 30, 2022 was $6.7 million, compared to $8.7 million in the prior fiscal year quarter. Total local currency operating results across the Company's foreign operations decreased $1.4 million for the quarter ended November 30, 2022, primarily driven by higher Cost of goods sold due to the impact of inflationary pressures on product and fulfillment costs as well as overall unfavorable economic conditions in Canada and the UK. This was partially offset by improved operating margin in Asia as the Company has exited the direct-to-consumer business in Asia, which generated losses in the prior period. Segment operating income for the six months ended November 30, 2022 was $3.2 million, compared to $7.0 million in the prior fiscal year period. Total local currency operating results across the Company's foreign operations decreased $3.2 million for the six months ended November 30, 2022. The decrease was primarily driven by higher Cost of goods sold due to the impact of inflationary pressures on product, freight and fulfillment costs as well as overall unfavorable economic conditions in Canada and the UK. This was partially offset by improved operating margin in Asia as the Company has exited the direct-to-consumer business in Asia, which generated losses in the prior period. Overhead Unallocated overhead expense for the quarter ended November 30, 2022 of $26.8 million was comparable to $26.1 million in the prior year quarter. Unallocated overhead expense for the six months ended November 30, 2022 increased by $5.0 million to $47.0 million, from $42.0 million in the prior fiscal year period. The increase was primarily attributable to $6.6 million of insurance recoveries received and recognized in the period ended November 30, 2021 related to the intellectual property legal settlement accrued in fiscal 2021, partially offset by lower severance expense from the Company's restructuring programs of $2.6 million. 28 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) 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 fourth quarter. Trade sales can vary throughout the year due to varying release dates of published titles. Liquidity and Capital Resources Cash provided by operating activities was $21.3 million for the six months ended November 30, 2022, compared to cash provided by operating activities of $141.6 million for the prior fiscal year period, representing a decrease in cash provided by operating activities of $120.3 million. The decrease in cash provided was primarily driven by increased inventory purchases of approximately $140.0 million to mitigate long lead times related to continuing global supply chain challenges and to meet expected demand. The decrease in cash provided was also impacted by the $63.1 million federal income tax refund in the prior period which was partially offset by higher customer remittances in the current period of approximately $110.0 million. Cash used in investing activities was $45.8 million for the six months ended November 30, 2022, compared to $17.2 million in the prior fiscal year period, representing an increase in cash used in investing activities of $28.6 million. The increase in cash used was driven by payments related to the Learning Ovations acquisition of $10.7 million, higher capital expenditures of $5.3 million, primarily for new equipment to meet the expected demand in the book fairs channel, and increased prepublication spending of $2.3 million associated with product development in Education Solutions . In addition, the prior period included the net proceeds from the sale of the Lake Mary facility of $10.4 million which occurred in the second quarter of fiscal 2022. Cash used in financing activities was $29.0 million for the six months ended November 30, 2022, compared to cash used in financing activities of $187.9 million for the prior fiscal year period, representing a decrease in cash used in financing activities of $158.9 million. The decrease in cash used was primarily related to repayments of borrowings under the U.S. credit agreement of $175.0 million during the prior period, coupled with an increase in net proceeds from stock option exercises of $12.3 million in the period ended November 30, 2022. Partially offsetting this decrease, the Company reacquired $29.7 million of common stock, which included shares repurchased through a modified Dutch auction tender offer, compared to $4.2 million in the prior fiscal year period. Cash Position The Company’s cash and cash equivalents totaled $261.1 million at November 30, 2022, $316.6 million at May 31, 2022 and $300.7 million at November 30, 2021. Cash and cash equivalents held by the Company’s U.S. operations totaled $228.7 million at November 30, 2022, $275.5 million at May 31, 2022 and $268.7 million at November 30, 2021. Due to the seasonal nature of its business as discussed under “Seasonality”, the Company usually experiences negative cash flows in the June through September time period. 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. Under the Company's open-market buy-back program, $26.2 million remained available for future purchases of common shares as of November 30, 2022. Subsequent to November 30, 2022, the Board authorized an increase of $48.8 million for Common share repurchases, resulting in a current Board authorization of $75.0 million, which includes the remaining amount from the previous Board authorization. During the six months ended November 30, 2022, the Company repurchased $31.1 million of its common stock, which included shares repurchased through a modified Dutch auction tender offer. 29 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) 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 of November 30, 2022, the Company’s primary sources of liquidity consisted of cash and cash equivalents of $261.1 million, cash from operations and the Company's U.S. credit agreement. 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, less commitments of $0.4 million, has $299.6 million of availability. Additionally, the Company has short-term credit facilities of $40.5 million, less current borrowings of $4.8 million and commitments of $3.7 million, resulting in $32.0 million of current availability under these facilities at November 30, 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. Financing The Company is party to the U.S. credit agreement 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 November 30, 2022. 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. 30 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, 2022. 31 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 and the extent such costs are impacted by inflationary pressures, 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, 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. 32 SCHOLASTIC CORPORATION