SCHOLASTIC CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) 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 Consolidated 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 $1.4 million in the quarter ended August 31, 2023. Components of Cost of goods sold for the three months ended August 31, 2023 and August 31, 2022 are as follows: Three months ended August 31, August 31, 2023 2022 ($ 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 % 18 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) 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 August 31, $ % ($ amounts in millions) 2023 2022 Change Change Revenues $ 102.8 $ 124.7 $ (21.9) (17.6) % Cost of goods sold 63.3 77.1 (13.8) (17.9) % Other operating expenses (1) 81.0 77.7 3.3 4.2 % Operating income (loss) $ (41.5) $ (30.1) $ (11.4) (37.9) % Operating margin NM NM (1) Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization. NM Not meaningful Revenues for the quarter ended 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 19 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) 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 August 31, $ % ($ amounts in millions) 2023 2022 Change Change Revenues $ 66.0 $ 73.2 $ (7.2) (9.8) % Cost of goods sold 32.6 30.4 2.2 7.2 % Other operating expenses (1) 52.1 47.1 5.0 10.6 % 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. 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. 20 SCHOLASTIC CORPORATION Item 2. 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 August 31, $ % ($ amounts in millions) 2023 2022 Change Change Revenues $ 57.2 $ 65.0 $ (7.8) (12.0) % Cost of goods sold 35.9 39.5 (3.6) (9.1) % Other operating expenses (1) 29.5 29.0 0.5 1.7 % 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 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. 21 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) Overhead 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. Seasonality The Company’s Children’s Book Publishing and Distribution school-based book club and book fair channels and most of its Education Solutions businesses operate on a school-year basis; therefore, the Company’s business is highly seasonal. As a result, the Company’s revenues in the first and third quarters of the fiscal year generally are lower than its revenues in the other two fiscal quarters. Typically, school-based channels and magazine revenues are minimal in the first quarter of the fiscal year as schools are not in session. Education channel revenues are generally higher in the fourth quarter. Trade sales can vary throughout the year due to varying release dates of published titles. Liquidity and Capital Resources Cash 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 $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 $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. 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. 22 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) The Company has maintained, and expects to maintain for the foreseeable future, sufficient liquidity to fund ongoing operations, including working capital requirements, pension contributions, postretirement benefits, debt service, planned capital expenditures and other investments, as well as dividends and share repurchases. As of 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. 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 $34.7 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. Financing The Company is party to the U.S. 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 August 31, 2023. 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, 2023. 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. 23 SCHOLASTIC CORPORATION