SCHOLASTIC CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) Selling, general and administrative expenses for the nine months ended February 28, 2023 increased to $554.4 million, compared to $512.7 million in the prior fiscal year period. The $41.7 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 digital literacy platform integration efforts related to the Learning Ovations acquisition and the upcoming launch of Ready4Reading. The increase was also driven by the $6.6 million of insurance recoveries received in the period ended February 28, 2022 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 $5.7 million, recognized a COVID-related governmental employee retention credit in the book fairs channel in the period ended February 28, 2023 and incurred overall lower costs in Asia during the period ended February 28, 2023 as a result of the disposition of the direct sales business. The Company also received and recognized insurance recoveries of $5.0 million in the period ended February 28, 2023 related to photo litigation settlements paid in prior periods and recognized a benefit related to the favorable settlement of certain legacy sales tax matters. Depreciation and amortization expenses in the three and nine months ended February 28, 2023 were $13.5 million and $41.0 million, respectively, compared to $13.6 million and $43.0 million, respectively, in the prior fiscal year period. The decrease in depreciation and amortization expenses in the three and nine months ended February 28, 2023 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 $0.1 million and $1.8 million for the three and nine months ended February 28, 2023, 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 February 28, 2023. Management expects the Company to continue to utilize more cloud-based software tools. Interest income in the three and nine months ended February 28, 2023 was $1.7 million and $3.4 million, respectively, compared to less than $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 nine months ended February 28, 2023 was $0.3 million and $1.1 million, respectively, compared to $0.4 million and $2.6 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 nine months ended February 28, 2022 was $6.2 million. In the prior year period, the Company sold a 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 nine months ended February 28, 2023 was 26.3% and 36.3%, respectively, compared to 23.7% and 19.7%, respectively, for the prior fiscal year periods. The interim effective tax rate for the nine months ended February 28, 2023 varied from the prior fiscal year period primarily due to a GILTI inclusion in the period ended February 28, 2023 and the release of reserves related to the IRS examination recognized in the prior period. The interim effective tax rate for the nine months ended February 28, 2023 varied from the statutory rate due to tax shortfalls related to vested option cancellations in the first quarter of fiscal 2023. Net loss attributable to Scholastic Corporation for the quarter ended February 28, 2023 increased by $3.9 million to $19.2 million, compared to $15.3 million in the prior fiscal year quarter. Loss per basic and diluted share of Class A and Common Stock was $0.57 and $0.57, respectively, for the fiscal quarter ended February 28, 2023, compared to $0.44 and $0.44, respectively, in the prior fiscal year quarter. Net income attributable to Scholastic Corporation for the nine months ended February 28, 2023 decreased by $18.2 million to $10.6 million, compared to $28.8 million in the prior fiscal year period. Earnings per basic and diluted share of Class A and Common Stock was $0.31 and $0.30, respectively, for the nine months ended February 28, 2023, compared to $0.83 and $0.80, respectively, in the prior fiscal year period. 25 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) Net loss attributable to noncontrolling interest for the quarter ended February 28, 2023 was $0.1 million compared to Net income attributable to noncontrolling interest of $0.2 million in the prior fiscal year quarter. Net income attributable to noncontrolling interest for the nine months ended February 28, 2023 and February 28, 2022 was $0.1 million. Children’s Book Publishing and Distribution Three months ended February 28, Nine months ended February 28, $ % $ % ($ amounts in millions) 2023 2022 Change Change 2023 2022 Change Change Revenues $ 204.0 $ 201.0 $ 3.0 1.5 % $ 747.0 $ 669.3 $ 77.7 11.6 % Cost of goods sold 103.7 102.5 1.2 1.2 % 361.4 325.4 36.0 11.1 % Other operating expenses (1) 98.4 93.5 4.9 5.2 % 300.6 275.4 25.2 9.2 % Operating income (loss) $ 1.9 $ 5.0 $ (3.1) (62.0) % $ 85.0 $ 68.5 $ 16.5 24.1 % Operating margin 0.9 % 2.5 % 11.4 % 10.2 % (1) Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization. Revenues for the quarter ended February 28, 2023 increased by $3.0 million to $204.0 million, compared to $201.0 million in the prior fiscal year quarter. The increase in segment revenues was driven by higher book fairs channel revenues of $27.5 million, partially offset by lower revenues in the book clubs and trade channels of $12.8 million and $11.7 million, respectively. The improvement in the book fairs channel resulted from increased fair count, coupled with higher revenue per fair and increased redemptions of book fair incentive program credits. In the book clubs channel, decreased revenues resulted from the timing of revenues in the prior year, in which the discrete systems issue in the second quarter caused a backlog and shifted approximately $18 million of revenues into the third quarter of the prior fiscal year, coupled with a continued decline in order volumes. The trade channel continued to be impacted by the industry-wide decline in retail market sales, contributing to lower backlist sales as compared to the prior fiscal year quarter. In the quarter ended February 28, 2023, the trade channel released several new bestselling titles including Wings of Fire TM Graphix TM #6: Moon Rising , The Baby-sitters Club ® Graphix TM #13: Mary Anne’s Bad Luck Mystery and Nick and Charlie , a Heartstopper TM novella, and benefited from increased media revenue as the Company continued to deliver episodes associated with the production of the animated series "Eva the Owlet" TM as well as increased sales in the Make Believe Ideas TM business. Revenues for the nine months ended February 28, 2023 increased by $77.7 million to $747.0 million, compared to $669.3 million in the prior fiscal year period. The increase in segment revenues was driven by higher book fairs channel revenues of $104.4 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. Partially offsetting the improvement in the book fairs channel, the book clubs and trade channels experienced lower revenues of $7.6 million and $19.1 million, respectively. In the book clubs channel, decreased revenues resulted from the multi-year trend of lower sponsor participation and fewer events held in the period ended February 28, 2023. The trade channel was impacted by 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 February 28, 2023, the trade channel released new titles in its bestselling series including the illustrated edition of Harry Potter and the Order of the Phoenix, Cat Kid Comic Club ® : Collaborations by Dav Pilkey and Wings of Fire TM Graphix TM #6: Moon Rising, and benefited from increased media revenue as the Company continued to deliver episodes associated with the production of the animated series "Eva the Owlet" TM . The unfavorable economic trends in the retail book markets could continue to negatively impact the trade channel. Cost of goods sold for the quarter ended February 28, 2023 was $103.7 million, or 50.8% of revenues, compared to $102.5 million, or 51.0% of revenues, in the prior fiscal year quarter. Cost of goods sold for the nine months ended February 28, 2023 was $361.4, or 48.4% of revenues, compared to $325.4, or 48.6% of revenues, in the prior fiscal year period. The segment benefited from lower royalty costs as a percentage of revenues driven by the increased sales volume in the book fairs channel, which traditionally has a higher mix of non-royalty bearing titles, substantially offset by increased product costs due to higher print and inbound freight costs which continue to be impacted by inflationary pressures. Other operating expenses for the quarter ended February 28, 2023 increased to $98.4 million, compared to $93.5 million in the prior fiscal year quarter. Other operating expenses increased $4.9 million primarily driven by higher marketing expenses in the book fairs channel associated with the increased fair count. In addition, 26 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) increased labor costs, largely in the book fairs channel to support the increased fair count, were partially offset by a COVID-related governmental employee retention credit recognized in the quarter ended February 28, 2023. Other operating expenses for the nine months ended February 28, 2023 increased to $300.6 million, compared to $275.4 million in the prior fiscal year period. Other operating expenses increased $25.2 million primarily attributable to increased 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. The higher labor costs were partially offset by a COVID-related governmental employee retention credit recognized in the quarter ended February 28, 2023. In addition, the book fairs channel incurred higher fuel charges, marketing expenses and bank fees as a result of the increased fair count as well as increased rent for warehouse space. Segment operating income for the quarter ended February 28, 2023 was $1.9 million, compared to $5.0 million in the prior fiscal year quarter. The $3.1 million decrease in operating income was attributable to the rising costs associated with freight, paper and labor, which continue to be impacted by inflationary pressures. In addition, increased margins from the book fairs channel were offset by lower revenues in the trade and book clubs channels. Segment operating income for the nine months ended February 28, 2023 was $85.0 million, compared to $68.5 million in the prior fiscal year period. The $16.5 million increase in operating income was driven by higher revenues from the book fairs channel as fair count and revenue per fair continued to exceed the prior period, partially offset by the rising costs associated with freight, paper, labor and fuel, which continue to be impacted by inflationary pressures. In addition, increased margins from the book fairs channel were offset by lower revenues in the trade and book clubs channels. Education Solutions Three months ended February 28, Nine months ended February 28, $ % $ % ($ amounts in millions) 2023 2022 Change Change 2023 2022 Change Change Revenues $ 70.0 $ 77.2 $ (7.2) (9.3) % $ 223.2 $ 236.8 $ (13.6) (5.7) % Cost of goods sold 25.8 26.1 (0.3) (1.1) % 84.8 86.4 (1.6) (1.9) % Other operating expenses (1) 43.5 38.0 5.5 14.5 % 135.0 114.4 20.6 18.0 % Operating income (loss) $ 0.7 $ 13.1 $ (12.4) (94.7) % $ 3.4 $ 36.0 $ (32.6) (90.6) % Operating margin 1.0 % 17.0 % 1.5 % 15.2 % (1) Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization. Revenues for the quarter ended February 28, 2023 decreased by $7.2 million to $70.0 million, compared to $77.2 million in the prior fiscal year quarter. The decrease in segment revenues was primarily driven by lower sales of instructional products and programs, largely from the Scholastic Bookroom and Guided Reading offerings, which were impacted by purchasing delays and changes to the methods in which schools approach literacy instruction, as well as lower revenues from Scholastic Literacy Partners, a program that partners with mission-driven organizations to support literacy by increasing children's access to books. Partially offsetting this decrease, the segment had increased sales of products from the Scholastic Family and Community Engagement (FACE) TM initiative. Revenues from Magazines+ TM , digital subscription products and sponsored programs remained relatively consistent with the prior fiscal year quarter. The delays in school and school districts’ purchasing of instructional materials could continue into the fourth quarter and impact the education channel. Revenues for the nine months ended February 28, 2023 decreased by $13.6 million to $223.2 million, compared to $236.8 million in the prior fiscal year period. The decrease in segment revenues was largely driven by lower sales of instructional products and programs, primarily early childhood programs, summer learning product offerings, and offerings from the Company's Scholastic Bookroom, Guided Reading and Scholastic Literacy products. A substantial portion of the decrease related to instructional products and programs was due to the timing of revenues in the prior fiscal year period, which benefited from shipments, primarily consisting 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. Purchasing delays by school and district administrators and changes to the methods in which schools approach literacy instruction also contributed to the lower revenues from 27 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) instructional products and programs. In addition, the segment had lower sales of Rising Voices Library ® products, 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 February 28, 2023 was $25.8 million, or 36.9% of revenues, compared to $26.1 million, or 33.8% of revenues, in the prior fiscal year quarter. The increase in Cost of goods sold as a percentage of revenues was primarily attributable to higher inventory reserves due to lower utilization of aged inventory, coupled with increased postage and outbound freight costs as the Company continues to be impacted by inflationary pressures. Cost of goods sold for the nine months ended February 28, 2023 was $84.8 million, or 38.0% of revenues, compared to $86.4 million, or 36.5% 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 period ended February 28, 2023 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. The segment also recognized higher inventory reserves due to lower utilization of aged inventory. Other operating expenses for the quarter ended February 28, 2023 were $43.5 million, compared to $38.0 million in the prior fiscal year quarter, resulting in an increase of $5.5 million. The increase in Other operating expenses was primarily related to higher employee-related costs associated with digital literacy platform integration efforts related to the Learning Ovations acquisition and the upcoming launch of Ready4Reading. Other operating expenses for the nine months ended February 28, 2023 increased to $135.0 million, compared to $114.4 million in the prior fiscal year period. Other operating expenses increased $20.6 million primarily due to higher employee-related costs associated with digital literacy platform integration efforts related to the Learning Ovations acquisition and the upcoming launch of Ready4Reading, as well as increased marketing costs associated with sponsored programs. 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 February 28, 2023 was $0.7 million, compared to income of $13.1 million in the prior fiscal year quarter. The $12.4 million decrease was driven by lower sales of instructional products and programs due to purchasing delays by school and district administrators and changes to the methods for literacy instruction. The Company's continued strategic investments in the segment, which included digital literacy platform integration efforts related to the Learning Ovations acquisition and the upcoming launch of Ready4Reading, coupled with the continued impact of inflationary pressures on freight costs and higher inventory reserves also contributed to the overall decrease in operating income. Segment operating income for the nine months ended February 28, 2023 was $3.4 million, compared to $36.0 million in the prior fiscal year period. The $32.6 million decrease was driven by the decrease in segment revenues, primarily attributable to lower sales of instructional products and programs due to purchasing delays by school and district administrators and changes to the methods for literacy instruction, coupled with the shift of revenues in the prior fiscal year period. In addition, the Company's continued strategic investments in the segment, in addition to the continued impact of inflationary pressures on product costs and freight and higher inventory reserves contributed to the overall decrease in operating income. 28 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) 2023 2022 Change Change 2023 2022 Change Change Revenues $ 50.9 $ 66.3 $ (15.4) (23.2) % $ 205.5 $ 222.4 $ (16.9) (7.6) % Cost of goods sold 33.7 38.3 (4.6) (12.0) % 127.0 125.4 1.6 1.3 % Other operating expenses (1) 26.2 33.0 (6.8) (20.6) % 84.3 95.0 (10.7) (11.3) % Operating income (loss) $ (9.0) $ (5.0) $ (4.0) (80.0) % $ (5.8) $ 2.0 $ (7.8) NM Operating margin — % — % — % 0.9 % (1) Other operating expenses include selling, general and administrative expenses, bad debt expenses, severance and depreciation and amortization. NM Not meaningful Revenues for the quarter ended February 28, 2023 decreased by $15.4 million to $50.9 million, compared to $66.3 million in the prior fiscal year quarter. Local currency revenues across the Company's foreign operations decreased by $11.9 million, coupled with an unfavorable foreign exchange impact of $3.5 million. Local currency revenues in Asia decreased $6.6 million primarily attributable to the disposition of the direct sales business, coupled with lower sales from the trade and Asia export channels. In Canada, local currency revenues decreased $2.6 million due to lower trade channel sales as a result of an industry wide decline in retail sales, coupled with lower book clubs sales, which when combined more than offset the continued improvement in the book fairs channel. In Australia and New Zealand, local currency revenues decreased $1.6 million, primarily driven by lower sales in the book clubs and trade channels, while revenues in the book fairs channels remained relatively consistent with the prior fiscal year quarter. In the UK, local currency revenues decreased $0.3 million due to lower sales in the trade channel, which more than offset higher sales in the book fairs channel driven by increased fair count and revenue per fair. Export channel sales also decreased $0.8 million as compared to the prior fiscal year quarter. Revenues for the nine months ended February 28, 2023 decreased by $16.9 million to $205.5 million, compared to $222.4 million in the prior fiscal year period. Local currency revenues across the Company's foreign operations increased by $1.4 million, which were more than offset by unfavorable foreign exchange of $18.3 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 $10.0 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 $2.8 million driven by higher sales in the book fairs channel which benefited from increased fair count and revenue per fair, partially offset by lower sales in the trade channel despite year-over-year revenue growth for the bestselling title Heartstoppers TM by Alice Oseman. In Canada, local currency revenues were relatively consistent with the prior period, increasing $0.2 million. The Canadian book fair channel continued to recover resulting in revenue growth over the prior period, which was substantially offset by lower trade channel sales as a result of an industry wide decline in the retail market, in addition to lower sales in the book clubs channel. The increase in segment revenues from the Company's Major Markets was substantially offset by lower local currency revenues in Asia of $11.5 million primarily attributable to the disposition of the direct sales business as well as lower sales from the Asia export and trade channels. Export channel sales remained relatively consistent with the prior year, decreasing $0.1 million in local currency. Cost of goods sold for the quarter ended February 28, 2023 was $33.7 million, or 66.2% of revenues, compared to $38.3 million, or 57.8% of revenues, in the prior fiscal year quarter. The increase in Cost of goods sold as a percentage of revenue was impacted by continued inflationary pressures driving an increase in product costs, primarily in Canada and the UK, as a result of higher inbound freight costs as well as increased fulfillment costs due to increased labor costs, primarily in Canada. Cost of goods sold for the nine months ended February 28, 2023 was $127.0 million, or 61.8% of revenues, compared to $125.4 million, or 56.4% of revenues, in the prior fiscal year period. The increase in Cost of goods sold as a percentage of revenue was impacted by continued inflationary pressures driving an overall increase in product costs as a result of higher inbound freight costs as well as higher outbound postage and freight costs. Fulfillment costs also increased due to higher labor costs, primarily in Canada. In addition, certain foreign operations, primarily Canada, purchase inventory in U.S. dollars and the strengthening of the U.S. dollar unfavorably impacted Cost of goods sold. 29 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 February 28, 2023 were $26.2 million, compared to $33.0 million in the prior fiscal year quarter. Other operating expenses decreased $6.8 million primarily driven by lower employee-related expenses, general overhead costs and bad debt expense in Asia as a result of the disposition of the direct sales business. In addition, the UK recognized branch consolidation costs of $0.3 million in the quarter ended February 28, 2022 which did not reoccur in the current year. Other operating expenses for the nine months ended February 28, 2023 were $84.3 million, compared to $95.0 million in the prior fiscal year period. Other operating expenses decreased $10.7 million primarily driven by lower employee-related expenses, general overhead costs and bad debt expense in Asia as a result of the disposition of the direct sales business. In addition, the segment incurred severance expense of $0.7 million related to restructuring programs and UK branch consolidation costs of $0.4 million in the period ended February 28, 2022, both of which did not reoccur in the current year. The discontinuation of government subsidies related to COVID-related governmental retention programs partially offset the decrease in Other operating expenses in which $1.4 million was recognized in the period ended February 28, 2022. Segment operating loss for the quarter ended February 28, 2023 was $9.0 million, compared to $5.0 million in the prior fiscal year quarter. The decrease was primarily driven by lower revenues in the trade market, primarily in Canada and the UK, as a result of an industry wide decline in the retail market, coupled with higher Cost of goods sold due to the impact of inflationary pressures on product and fulfillment costs. This was partially offset by improved operating margin in Asia as the Company has exited the direct sales business, which generated losses in the prior period. Segment operating loss for the nine months ended February 28, 2023 was $5.8 million, compared to operating income of $2.0 million in the prior fiscal year period. 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 of approximately $3.0 million attributable to the exit from the direct sales business, which generated losses in the prior period. Overhead Unallocated overhead expense for the quarter ended February 28, 2023 decreased by $11.3 million to $21.3 million, from $32.6 million in the prior year quarter. The decrease was primarily attributable to insurance recoveries received and recognized in the quarter ended February 28, 2023 related to photo litigation settlements paid in prior periods and a benefit related to the favorable settlement of certain legacy sales tax matters. In addition, the Company recognized severance and related charges from its restructuring programs of $2.4 million in the prior fiscal year quarter which did not reoccur in the quarter ended February 28, 2023. Unallocated overhead expense for the nine months ended February 28, 2023 decreased by $6.3 million to $68.3 million, from $74.6 million in the prior fiscal year period. The decrease was primarily attributable to insurance recoveries received and recognized in the quarter ended February 28, 2023 related to photo litigation settlements paid in prior periods and a benefit related to the favorable settlement of certain legacy sales tax matters, as well as lower severance and related charges from the Company's restructuring programs of $5.0 million. This was partially offset by $6.6 million of insurance recoveries received and recognized in the period ended February 28, 2022 related to the intellectual property legal settlement accrued in fiscal 2021. 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. 30 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 $28.9 million for the nine months ended February 28, 2023, compared to cash provided by operating activities of $178.5 million for the prior fiscal year period, representing a decrease in cash provided by operating activities of $149.6 million. The decrease in cash provided was primarily driven by increased inventory purchases of approximately $114.0 million to mitigate long lead times related to continuing global supply chain challenges in order 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, increased spending on general expenses in the book fairs channel to support the increased fair count and lower cash remittances related to book fairs incentive credits and digital subscriptions. This was partially offset by higher customer remittances on receivable balances in the period ended February 28, 2023 of approximately $80.0 million. Cash used in investing activities was $65.3 million for the nine months ended February 28, 2023, compared to $30.5 million in the prior fiscal year period, representing an increase in cash used in investing activities of $34.8 million. The increase in cash used was driven by payments related to the Learning Ovations acquisition of $10.7 million, higher capital expenditures of $8.8 million, primarily for new equipment at the Company's Jefferson City, Missouri distribution facility and book fairs warehouses to meet expected demand, as well as increased prepublication spending of $4.8 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 $79.3 million for the nine months ended February 28, 2023, compared to cash used in financing activities of $202.9 million for the prior fiscal year period, representing a decrease in cash used in financing activities of $123.6 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 $8.8 million in the period ended February 28, 2023. Partially offsetting this decrease, the Company repurchased $75.9 million of common stock, which included shares repurchased through a modified Dutch auction tender offer, during the second quarter of fiscal 2023, compared to common stock repurchases of $19.5 million in the prior fiscal year period. Cash Position The Company’s cash and cash equivalents totaled $198.8 million at February 28, 2023, $316.6 million at May 31, 2022 and $308.9 million at February 28, 2022. Cash and cash equivalents held by the Company’s U.S. operations totaled $166.0 million at February 28, 2023, $275.5 million at May 31, 2022 and $266.5 million at February 28, 2022. 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. During the nine months ended February 28, 2023, the Company repurchased $78.0 million of its common stock, which included shares repurchased through a modified Dutch auction tender offer during the second quarter of fiscal 2023 and open-market repurchases. Under the Company's open-market buy-back program, $28.2 million remained available for future purchases of common shares as of February 28, 2023. Subsequent to February 28, 2023, the Board authorized an increase of $50.0 million for common stock repurchases, resulting in a current Board authorization of $75.2 million, which includes the remaining amount from the previous Board authorization less share repurchases of $3.0 million subsequent to February 28, 2023. 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 February 28, 2023, the Company’s primary sources of liquidity consisted of cash and cash equivalents of $198.8 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 $34.3 million, less current borrowings of 31 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) $5.2 million and commitments of $3.7 million, resulting in $25.4 million of current availability under these facilities at February 28, 2023. 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 February 28, 2023. On February 28, 2023, the Company entered into the First and Second Amendments to the U.S. credit agreement which adjusted the credit spread adjustment for SOFR (the secured overnight financing rate as administered by the Federal Reserve Bank of New York) to 0.10% and transitioned the reference rate from LIBOR (the London interbank offered rate) to SOFR. Reference is made to Note 1 and Note 5 of Notes to Condensed Consolidated Financial Statements - unaudited in Item 1, “Financial Statements for further details. The Company is party to other loan agreements, notes or other documents or instruments which reference 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 otherwise requires. The markets have provided several replacements for USD LIBOR, including the Bloomberg Short-Term Bank Yield Index (BSBY) and the ARRC’s 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. 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. 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