What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-09-22 compared with 2023-03-24 · 123 added, 177 removed, 58 unchanged (84% of the section changed)

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.

Overview and Outlook

Revenues for the first quarter ended August 31, 2023 were $228.5 million, compared to $262.9 million in the prior fiscal year quarter, a decrease of $34.4 million or 13%.

The Company reported net loss per diluted share of Class A and Common Stock of $2.35 in the first quarter of fiscal 2024, compared to a net loss per diluted share of $1.33 in the prior fiscal year quarter.

First quarter results reflect the Company's implementation of its newly integrated school reading events strategy while investing in other areas of its business for long-term growth.

Within the Children's Book Publishing and Distribution segment, the trade channel was impacted by the overall softness in the retail book market resulting in lower backlist sales, partly offset by multiple frontlist bestsellers.

In Education Solutions , revenues were lower year-over-year, primarily reflecting the shifting seasonality of this business to the fourth fiscal quarter, as well as the timing of revenues from state-sponsored programs.

The International segment was also impacted by softness in the retail market which resulted in lower trade channel revenues in major markets.

The Company is well-positioned to meet the demand for the current back-to-school season with a fair count goal of 90% of pre-pandemic levels.

The integrated school reading events business has completed its reorganization and begun to implement new customer-centric strategies.

Although the trade channel may continue to be impacted by softness in the retail book market, it is expected to benefit from the release of new titles from the Dog Man ® , Cat Kid Comic Club ® , and Heartstopper TM series, The Harry Potter Wizarding Almanac and the new Goosebumps ® TV series on Disney+ ® and Hulu ® .

Within Education Solutions , while the Company expects the continuance of the revenue shift trend centered on the fourth fiscal quarter, it continues to be well-positioned to meet the customized needs of educators throughout the year.

In addition, the segment is expected to benefit from the actions completed to streamline the organization and adjust the operating model under new leadership.

Internationally, the Company expects the recently completed reorganization in Canada to drive greater operating efficiencies across North American operations.

Results of Operations

Revenues for the quarter ended August 31, 2023 decreased by $34.4 million to $228.5 million, compared to $262.9 million in the prior fiscal year quarter.

The Children's Book Publishing and Distribution segment revenues decreased by $21.9 million, primarily driven by lower trade channel revenues which reflect the overall softness in the retail book market resulting in lower backlist sales.

In the Education Solutions segment, revenues decreased by $7.2 million primarily due to the timing of revenues from sponsored programs and summer reading offerings.

In local currency, the International segment revenues decreased by $6.4 million, reflecting lower sales in Asia as a result of the disposition of the direct sales business, coupled with lower sales in Canada and Australia, primarily from the trade channels, which similar to the U.S., continued to be impacted by the softness in the retail market.

International segment revenues were also impacted by unfavorable foreign exchange of $1.4 million in the quarter ended August 31, 2023.

Components of Cost of goods sold for the three months ended August 31, 2023 and August 31, 2022 are as follows:

Three months ended

August 31, August 31,

($ amounts in millions) $ % of Revenue $ % of Revenue

Product, service and production costs and inventory reserves $ 72.8 31.8 % $ 82.4 31.4 %

Royalty costs 23.5 10.3 % 27.4 10.4 %

Prepublication amortization 7.0 3.1 % 6.4 2.4 %

Postage, freight, shipping, fulfillment and other 26.7 11.7 % 28.3 10.8 %

Total $ 130.0 56.9 % $ 144.5 55.0 %

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.

Cost of goods sold for the quarter ended August 31, 2023 was $130.0 million, or 56.9% of revenues, compared to $144.5 million, or 55.0% 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 prepublication amortization as a result of the release of Ready4Reading TM at the end of fiscal 2023 as well as higher fulfillment costs in Canada and the UK as a result of increased labor costs.

Product costs were marginally unfavorable as a result of the higher costs associated with delivering professional learning services within Education Solutions , which were partially offset by lower production costs and favorable product mix in the domestic trade channel.

Selling, general and administrative expenses for the quarter ended August 31, 2023 increased to $184.2 million, compared to $162.8 million in the prior fiscal year quarter.

The $21.4 million increase was primarily attributable to higher labor and equipment costs in the U.S.

book fairs channel to support the expected increase in fair count for fiscal 2024, in addition to higher severance expense from the Company's restructuring programs of $6.3 million related to reorganization efforts and cost-saving initiatives in the school reading events business, Education Solutions and in Canada.

In addition, the Company continued to spend on investments in long-term growth opportunities within the Education Solutions segment.

Depreciation and amortization expenses for the quarter ended August 31, 2023 were $13.4 million compared to $13.7 million in the prior fiscal year quarter.

The Company continues to shift spending to 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 for the quarter ended August 31, 2023 was relatively consistent with the prior year period.

There were no significant assets placed into service during the quarter ended August 31, 2023.

Interest income for the quarter ended August 31, 2023 was $1.7 million compared to $0.6 million in the prior fiscal year quarter.

The $1.1 million increase was attributable to higher interest rates earned in the quarter ended August 31, 2023.

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 for the quarter ended August 31, 2023 was $0.3 million compared to $0.4 million in the prior fiscal year quarter.

There were no significant changes in average debt borrowings compared to the prior fiscal year quarter.

The Company's interim effective tax rate, inclusive of discrete items, for the quarter ended August 31, 2023 was 24.3%, compared to 21.6% for the prior fiscal year period.

Net loss attributable to Scholastic Corporation for the quarter ended August 31, 2023 increased by $28.7 million to $74.2 million, compared to $45.5 million in the prior fiscal year quarter.

Loss per basic and diluted share of Class A and Common Stock was $2.35 and $2.35, respectively, for the fiscal quarter ended August 31, 2023, compared to $1.33 and $1.33, respectively, in the prior fiscal year quarter.

Net income attributable to noncontrolling interest for the quarter ended August 31, 2022 was $0.1 million.

Children’s Book Publishing and Distribution

Three months ended February 28, Nine months ended February 28,

Three months ended August 31,

($ amounts in millions)

2023 2022 Change Change 2023 2022 Change Change

2023 2022 Change Change

Revenues $ 102.8 $ 124.7 $ (21.9) (17.6) %

3 unchanged sentences

Operating income (loss) $ (41.5) $ (30.1) $ (11.4) (37.9) %

Operating margin 0.9 % 2.5 % 11.4 % 10.2 %

Operating margin NM NM

(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.

NM Not meaningful

Revenues for the quarter ended August 31, 2023 decreased by $21.9 million to $102.8 million, compared to $124.7 million in the prior fiscal year quarter.

Trade channel revenues decreased $17.2 million reflecting the overall softness in the retail book market, driving lower revenues for backlist titles and offsetting strong sales from frontlist bestsellers including This Winter by Alice Oseman, The Bad Guys in Let the Games Begin!

(The Bad Guys ® #17) by Aaron Blabey, The Official Harry Potter Cookbook, and The Ballad of Songbirds and Snakes by

SCHOLASTIC CORPORATION

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.

Suzanne Collins in paperback.

If the retail book market remains soft, the trade channel could continue to be negatively impacted during the remainder of fiscal 2024.

In addition, lower media revenues contributed to the revenue decrease as the Company completed the delivery of episodes associated with the production of the animated series "Eva the Owlet" TM in fiscal 2023.

Revenues from school reading events decreased $4.7 million primarily due to lower redemptions of book fair incentive program credits.

Revenues from school reading events are generally not significant in the first fiscal quarter as most schools are not in session.

Cost of goods sold for the quarter ended August 31, 2023 was $63.3 million, or 61.6% of revenues, compared to $77.1 million, or 61.8% of revenues, in the prior fiscal year quarter.

Cost of goods sold benefited from the mix of product sold in the quarter ended August 31, 2023 as compared to the prior fiscal year quarter, coupled with lower production costs.

Other operating expenses for the quarter ended August 31, 2023 increased to $81.0 million, compared to $77.7 million in the prior fiscal year quarter.

Other operating expenses increased $3.3 million primarily driven by higher labor and equipment costs in the book fairs channel to support the expected increase in fair count for fiscal 2024, coupled with increased rent for warehouse space.

This was partially offset by lower book clubs kit costs as a result of a change in the timing of the distribution of kits to schools.

Segment operating loss for the quarter ended August 31, 2023 was $41.5 million, compared to $30.1 million in the prior fiscal year quarter.

The $11.4 million increase in operating loss was primarily attributable to lower trade channel revenues reflecting the continued softness in the retail market, coupled with lower redemptions of book fair incentive program credits.

In addition, the segment incurred higher labor and equipment costs in the book fairs channel to support the expected increase in fair count for fiscal 2024.

Education Solutions

Three months ended February 28, Nine months ended February 28,

($ amounts in millions) 2023 2022 Change Change 2023 2022 Change Change

Three months ended August 31,

($ amounts in millions) 2023 2022 Change Change

Revenues $ 66.0 $ 73.2 $ (7.2) (9.8) %

2 unchanged sentences

52.1 47.1 5.0 10.6 %

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 %

Operating income (loss) $ (18.7) $ (4.3) $ (14.4) NM

Operating margin NM NM

(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

SCHOLASTIC CORPORATION

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.

NM Not meaningful

Revenues for the quarter ended August 31, 2023 decreased by $7.2 million to $66.0 million, compared to $73.2 million in the prior fiscal year quarter.

The decrease in segment revenues was primarily driven by timing of revenues from sponsored programs and summer learning product offerings as the Company continues to experience a shift in sales into the fourth fiscal quarter.

Partially offsetting the lower revenues, the segment benefited from increased revenues from the Scholastic Family and Community Engagement (FACE) TM and Literacy Partners initiatives as a result of continued growth in the funding for community and government programs to support childhood literacy, as well as higher revenues from professional learning services delivered during the quarter ended August 31, 2023.

Cost of goods sold for the quarter ended August 31, 2023 was $32.6 million, or 49.4% of revenues, compared to $30.4 million, or 41.5% 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 prepublication amortization as result of the release of Ready4Reading TM at the end of fiscal 2023.

In addition, the segment incurred higher product costs associated with the delivery of professional learning services during the quarter ended August 31, 2023.

Other operating expenses for the quarter ended August 31, 2023 were $52.1 million, compared to $47.1 million in the prior fiscal year quarter, resulting in an increase of $5.0 million.

The increase in Other operating expenses was primarily attributable to higher labor and outside service costs as a result of increased spending on investments in long-term growth opportunities.

SCHOLASTIC CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)

Segment operating loss for the quarter ended August 31, 2023 was $18.7 million, compared to $4.3 million in the prior fiscal year quarter.

The $14.4 million increase in operating loss was primarily driven by the timing of revenues related to sponsored programs and summer learning product offerings, coupled with higher cost of product due to the mix of product sold during the quarter ended August 31, 2023 and higher prepublication amortization.

In addition, increased spending on investments in growth opportunities, which is expected to continue during fiscal 2024, contributed to the increase in operating loss.

International

Three months ended February 28, Nine months ended February 28,

($ amounts in millions) 2023 2022 Change Change 2023 2022 Change Change

Three months ended August 31,

($ amounts in millions) 2023 2022 Change Change

Revenues $ 57.2 $ 65.0 $ (7.8) (12.0) %

2 unchanged sentences

29.5 29.0 0.5 1.7 %

Operating income (loss) $ (9.0) $ (5.0) $ (4.0) (80.0) % $ (5.8) $ 2.0 $ (7.8) NM

Operating margin — % — % — % 0.9 %

Operating income (loss) $ (8.2) $ (3.5) $ (4.7) (134.3) %

Operating margin NM NM

(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.

Revenues for the quarter ended August 31, 2023 decreased by $7.8 million to $57.2 million, compared to $65.0 million in the prior fiscal year quarter.

Local currency revenues across the Company's ongoing foreign operations decreased by $4.8 million, excluding $1.6 million in lower revenues from the disposition of the direct sales business and unfavorable foreign exchange impact of $1.4 million.

In Canada, local currency revenues decreased $2.7 million primarily due to lower trade channel sales reflecting the softness in the retail book market, coupled with lower revenues from the book clubs channel.

The Company has completed the reorganization of book clubs operations in Canada which is expected to drive greater efficiencies.

Local currency revenues in Asia decreased $0.7 million primarily due to lower sales from the trade and Asia export channels as a result of the timing of orders in the prior fiscal year quarter in which shipments shifted in from the fourth quarter of fiscal 2022.

In Australia and New Zealand, local currency revenues decreased $1.8 million, primarily driven by lower sales in the Australian trade channel due to the continued softness in the retail market and timing of new releases, partially offset by higher revenues from the book fairs channel driven by higher fair count as the pandemic recovery continued.

In the UK, local currency revenues increased $0.2 million, primarily driven by higher revenues from the book fairs channel as a result of increased redemptions of incentive credits, partially offset by lower sales in the trade channel.

Export channel sales also increased $0.2 million as compared to the prior fiscal year quarter.

Cost of goods sold for the quarter ended August 31, 2023 was $35.9 million, or 62.8% of revenues, compared to $39.5 million, or 60.8% of revenues, in the prior fiscal year quarter.

The increase in Cost of goods sold as a percentage of revenue was attributable to higher fulfillment costs, primarily in Canada and the UK, due to increased labor costs.

Other operating expenses for the quarter ended August 31, 2023 were $29.5 million, compared to $29.0 million in the prior fiscal year quarter.

Other operating expenses increased $0.5 million primarily driven by severance expense from restructuring programs within the book clubs channel in Canada of $1.2 million in the quarter ended August 31, 2023, partially offset by favorable foreign exchange impact of $0.6 million.

Segment operating loss for the quarter ended August 31, 2023 was $8.2 million, compared to $3.5 million in the prior fiscal year quarter.

The $4.7 million increase in operating loss was primarily driven by lower trade channel revenues in Canada and Australia, coupled with higher fulfillment costs due to increased labor costs in Canada and the UK.

In addition, the segment incurred severance expense from restructuring programs in Canada which are expected to drive greater operating efficiencies across North American operations.

SCHOLASTIC CORPORATION

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.

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.

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.

Unallocated overhead expense for the quarter ended August 31, 2023 increased by $10.5 million to $30.7 million, from $20.2 million in the prior year quarter.

The increase was primarily attributable to higher employee-related costs, which included severance expense from its restructuring programs of $5.1 million related to the reorganization efforts and cost-saving initiatives in the school reading events division and Education Solutions as well as higher medical expense.

This was partially offset by higher rental income of $1.0 million as a result of a new tenant leasing space in the Company's headquarters.

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;

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Trade sales can vary throughout the year due to varying release dates of published titles.

SCHOLASTIC CORPORATION

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 used by operating activities was $38.1 million for the three months ended August 31, 2023, compared to cash used by operating activities of $60.3 million for the prior fiscal year period, representing a decrease in cash used by operating activities of $22.2 million.

The decrease in cash used was primarily driven by lower inventory purchases as lead times have returned to pre-pandemic levels resulting in a return to historical purchasing patterns.

This was partially offset by lower customer remittances on receivable balances in the quarter ended August 31, 2023.

The Company also paid higher severance in the quarter ended August 31, 2023 and increased spending on growth initiatives in Education Solutions as well as increased general expenses in the book fairs channel to support the expected increased fair count for fiscal 2024.

Cash used in investing activities was $21.8 million for the three months ended August 31, 2023, compared to cash used in investing activities of $16.2 million in the prior fiscal year period, representing an increase in cash used in investing activities of $5.6 million.

The increase in cash used was driven by higher capital expenditures of $2.9 million, primarily for new point-of-sale and fleet equipment for the book fairs channel, as well as increased prepublication spending of $0.6 million associated with digital product development in Education Solutions .

In addition, the Company acquired the remaining shares of Make Believe Ideas Limited for $2.1 million during the quarter ended August 31, 2023.

Cash used in financing activities was $39.3 million for the three months ended August 31, 2023, compared to cash provided by financing activities of $1.6 million for the prior fiscal year period, representing an increase in cash used in financing activities of $40.9 million.

The increase in cash used was attributable to common stock repurchases of $35.9 million, compared to repurchases of $4.7 million in the prior fiscal year quarter, a decrease in net proceeds from stock option exercises of $8.3 million in the period ended August 31, 2023 and higher dividend payments of $1.4 million.

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.

The Company’s cash and cash equivalents totaled $125.8 million at August 31, 2023, $224.5 million at May 31, 2023 and $239.7 million at August 31, 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.

operations totaled $90.1 million at August 31, 2023, $174.6 million at May 31, 2023 and $202.2 million at August 31, 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.

Under the Company's open-market buy-back program, $85.7 million remained available for future purchases of common shares as of August 31, 2023.

SCHOLASTIC CORPORATION

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 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.

As of August 31, 2023, the Company’s primary sources of liquidity consisted of cash and cash equivalents of $125.8 million, cash from operations and the Company's U.S.

credit agreement.

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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

SCHOLASTIC CORPORATION

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.

Additionally, the Company has short-term credit facilities of $34.7 million, less current borrowings of $5.9 million and commitments of $3.4 million, resulting in $25.4 million of current availability under these facilities at August 31, 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.

1 unchanged sentence

credit agreement and certain credit lines with various banks as described in Note 4 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.

credit agreement as of August 31, 2023.

New Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis