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, 2024 were $237.2 million, compared to $228.5 million in the prior fiscal year quarter, an increase of $8.7 million or 4%. The Company reported net loss per diluted share of Class A and Common Stock of $2.21 in the first quarter of fiscal 2024, compared to a net loss per diluted share of $2.35 in the prior fiscal year quarter. First quarter results reflect the addition of 9 Story to the newly formed Entertainment segment, driving an overall increase in revenues. Within the Children's Book Publishing and Distribution segment, revenues increased on higher foreign rights sales, partly offset by lower frontlist sales compared to the prior year period when the Company released the paperback edition of the fourth book in the Hunger Games series, The Ballad of Songbirds and Snakes . Fiscal 2025 revenues are expected to benefit from new releases in the second half of the fiscal year, including the newest book in Dav Pilkey’s Dog Man ® series and the fifth book in Suzanne Collins’ Hunger Games series, Sunrise on the Reaping . Within Education Solutions, school districts continued to focus on adopting and implementing new core programs, driving lower sales of supplemental curriculum products, partly offset by increased sales to state-sponsored partners driven by the growing number of kids participating in these programs. Internationally, revenues were comparable to the prior year period as increased backlist sales in the U.K., were offset by revenue declines in Canada and the export channel. In fiscal 2025, the Company remains focused on expanding the reach and impact of its book fairs and book clubs, while innovating how it serves its school partners. Within Education Solutions , the Company continues to develop new structured literacy programs and supplemental products for schools, which are expected to launch next summer. The Company also continues to focus on advancing its strategy as a global children’s media and content company with the integration of 9 Story and growing its slate of media properties in development and production. Results of Operations Consolidated Revenues for the quarter ended August 31, 2024 increased by $8.7 million to $237.2 million, compared to $228.5 million in the prior fiscal year quarter. The increase in consolidated revenues was driven by the newly formed Entertainment segment, with revenues of $16.6 million, primarily reflecting the acquisition of 9 Story, which closed in June. The Children's Book Publishing and Distribution segment revenues increased by $3.0 million, primarily driven by increased foreign rights sales within the trade channel. In the Education Solutions segment, revenues decreased by $10.3 million primarily due to the continued decline in spending on supplemental materials, partially offset by increased revenues from sponsored programs. In local currency, the International segment revenues decreased by $0.2 million, primarily reflecting lower sales in Canada and export which offset higher revenues from the UK trade channel. International segment revenues were also impacted by unfavorable foreign exchange of $0.2 million in the quarter ended August 31, 2024. Components of Cost of goods sold for the three months ended August 31, 2024 and August 31, 2023 are as follows: Three months ended August 31, 2024 August 31, 2023 ($ amounts in millions) % of Revenue % of Revenue Product, service and production costs and inventory reserves $ 74.2 31.3 % $ 72.8 31.8 % Royalty costs 22.0 9.3 % 23.5 10.3 % Prepublication and production amortization 6.7 2.8 % 7.0 3.1 % Postage, freight, shipping, fulfillment and other 25.4 10.7 % 26.7 11.7 % Total $ 128.3 54.1 % $ 130.0 56.9 % 23 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, 2024 was $128.3 million, or 54.1% of revenues, compared to $130.0 million, or 56.9% of revenues, in the prior fiscal year quarter. Cost of goods sold benefited from favorable product mix in the U.S. trade channel which resulted in lower product costs, in addition to lower outbound freight and fulfillment costs, primarily in the U.S. book fairs channel, and lower royalty costs within Education Solutions . This was partially offset by higher product costs associated with the mix of products sold in Education Solutions relating to community facing programs and summer reading products, coupled with the addition of production costs as a result of the 9 Story acquisition. Selling, general and administrative expenses for the quarter ended August 31, 2024 decreased to $182.1 million, compared to $184.2 million in the prior fiscal year quarter. The $2.1 million decrease was primarily attributable to lower commission, external labor and marketing expenses in Education Solutions , coupled with lower severance expense from the Company's cost-saving initiatives. This was partially offset by higher operating expenses from the addition of 9 Story and higher labor costs in the U.S. book fairs channel due to inflationary pressures, as well as to support the expected volume of fairs for the fall season. Depreciation and amortization expenses for the quarter ended August 31, 2024 were $15.3 million compared to $13.4 million in the prior fiscal year quarter. The increase in Depreciation and amortization was primarily due to amortization expense on the intangible assets acquired as a result of the 9 Story acquisition. 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, 2024 increased by $0.6 million compared to the prior fiscal year quarter as a result of assets placed into service during fiscal 2024. Interest expense for the quarter ended August 31, 2024 was $3.8 million compared to $0.3 million in the prior fiscal year quarter. The $3.5 million increase in interest expense was due to borrowings under the U.S. credit agreement incurred during the first quarter of fiscal 2025 to fund the 9 Story acquisition. Interest expense is expected to increase by a similar amount each quarter for the remainder of the fiscal year. Interest income for the quarter ended August 31, 2024 was $0.8 million compared to $1.7 million in the prior fiscal year quarter. The $0.9 million decrease was attributable to lower average short term investment balances in the quarter ended August 31, 2024. The Company invests excess cash in short term investments which earn competitive interest rates that change directionally in relation to the Federal Funds rate. The Company's interim effective tax rate, inclusive of discrete items, for the quarter ended August 31, 2024 was 31.9%, compared to 24.3% for the prior fiscal year period. The interim effective tax rate for the three months ended August 31, 2024 varies from the statutory rate primarily due to expected state and local income tax and non-deductible compensation for covered executive employees. Net loss attributable to Scholastic Corporation for the quarter ended August 31, 2024 improved by $11.7 million to a loss of $62.5 million, compared to a loss of $74.2 million in the prior fiscal year quarter. Loss per basic and diluted share of Class A and Common Stock was $2.21 for the fiscal quarter ended August 31, 2024, compared to $2.35 in the prior fiscal year quarter. Children’s Book Publishing and Distribution Three months ended August 31, $ % ($ amounts in millions) 2024 2023 Change Change Revenues $ 105.4 $ 102.4 $ 3.0 2.9 % Cost of goods sold 58.9 63.3 (4.4) (7.0) % Other operating expenses (1) 83.1 80.1 3.0 3.7 % Operating income (loss) $ (36.6) $ (41.0) $ 4.4 10.7 % 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, 2024 increased by $3.0 million to $105.4 million, compared to $102.4 million in the prior fiscal year quarter. Revenues from school reading events increased $1.6 million, primarily within the book fairs channel. Revenues from school reading events are generally not significant in the first fiscal 24 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) quarter as most schools are not in session. Trade channel revenues increased $1.4 million reflecting increased foreign rights sales, offset by lower sales of frontlist titles as the retail bookselling market for juvenile titles was down slightly year-over-year and the prior year period benefited from the release of the paperback edition of The Ballad of Songbirds and Snakes ahead of the title’s movie release last fall. New releases in the quarter ended August 31, 2024 included the paperback release of J.K. Rowling's The Christmas Pig , The Baby-Sitter's Club #16: Kristy and the Walking Disaster , The Bad Guys #19: The Bad Guys in the Serpent and the Beast, Unico: Awakening (Volume 1): An Original Manga , and When We Flew Away by NYT bestselling author Alice Hoffman. Cost of goods sold for the quarter ended August 31, 2024 was $58.9 million, or 55.9% of revenues, compared to $63.3 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 trade channel in the quarter ended August 31, 2024, which included higher foreign rights sales, as compared to the prior fiscal year quarter, resulting in lower product costs. In addition, the segment benefited from lower outbound freight and fulfillment costs, primarily in the book fairs channel, coupled with lower print costs. Other operating expenses for the quarter ended August 31, 2024 were $83.1 million, compared to $80.1 million in the prior fiscal year quarter. Other operating expenses increased $3.0 million primarily driven by higher labor costs in the U.S. book fairs channel due to inflationary pressures and to support the expected volume of fairs for the fall season. Segment operating loss for the quarter ended August 31, 2024 was $36.6 million, compared to $41.0 million in the prior fiscal year quarter. The $4.4 million improvement was primarily attributable to the increased foreign rights sales, which have a higher profit margin than traditional trade sales. Education Solutions Three months ended August 31, $ % ($ amounts in millions) 2024 2023 Change Change Revenues $ 55.7 $ 66.0 $ (10.3) (15.6) % Cost of goods sold 27.4 32.6 (5.2) (16.0) % Other operating expenses (1) 45.3 52.1 (6.8) (13.1) % Operating income (loss) $ (17.0) $ (18.7) $ 1.7 9.1 % 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, 2024 decreased by $10.3 million to $55.7 million, compared to $66.0 million in the prior fiscal year quarter. The decrease in segment revenues was primarily driven by the continued impact of market conditions as school districts focus on adopting and implementing new core programs and spending on materials not aligned with Science of Reading based approaches to literacy continued to decline, in addition to the timing of sales from literacy initiatives. Partially offsetting the decline, the segment benefited from increased revenues from state-sponsored partners, driven by the growing number of kids participating in these programs, and increased sales from the Company’s Rising Voices Library ® offering. Cost of goods sold for the quarter ended August 31, 2024 was $27.4 million, or 49.2% of revenues, compared to $32.6 million, or 49.4% of revenues, in the prior fiscal year quarter. Cost of goods sold benefited from lower prepublication amortization as a result of the impairment of certain education products in fiscal 2024 and lower royalty costs driven by product mix. This was partially offset by higher product costs associated with the mix of products sold during the period ended August 31, 2024, primarily related to community facing programs and summer reading products. Other operating expenses for the quarter ended August 31, 2024 were $45.3 million, compared to $52.1 million in the prior fiscal year quarter, resulting in a decrease of $6.8 million. The decrease in Other operating expenses was primarily attributable to lower commission expense driven by the lower revenues, lower external labor costs as a result of the timing of work on new product launches and lower marketing expenses due to the timing of mailings for the magazines business. 25 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, 2024 was $17.0 million, compared to $18.7 million in the prior fiscal year quarter. The $1.7 million improvement was primarily driven by the increased sales from sponsored programs as increases in participation have a significant impact on profitability, as well as lower expenses driven by lower prepublication amortization, lower external labor costs and the timing of marketing mailings for the magazine business. Entertainment Three months ended August 31, $ % ($ amounts in millions) 2024 2023 Change Change Revenues $ 16.6 $ 0.4 $ 16.2 NM Cost of goods sold 8.3 0.0 8.3 NM Other operating expenses (1) 8.8 0.9 7.9 NM Operating income (loss) $ (0.5) $ (0.5) $ — — % 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 The Entertainment segment includes the operations of 9 Story Media Group Inc. ("9 Story") and Scholastic Entertainment Inc. ("SEI"). SEI was reported in the Children's Book Publishing and Distribution segment in prior periods. The financial results for SEI for the three months ended August 31, 2023 have been reclassified to Entertainment to reflect this change. Refer to Note 7 of Notes to Condensed Consolidated Financial Statements - unaudited in Item 1, “Financial Statements" for further details regarding the acquisition of 9 Story. Revenues for the quarter ended August 31, 2024 were $16.6 million, compared to $0.4 million in the prior fiscal year quarter. The $16.2 million increase reflected the addition of 9 Story from the date of acquisition on June 20, 2024 through August 31, 2024 in which a majority of the revenues were driven by production revenue related to episodic deliveries, production services provided to third parties and, to a lesser extent, revenues from royalties and distribution. Cost of goods sold for the quarter ended August 31, 2024 was $8.3 million, or 50.0% of revenues. Cost of goods sold primarily consists of production costs and amortization, participation expenses and interest on film related obligations. Other operating expenses for the quarter ended August 31, 2024 were $8.8 million, which included $1.7 million of transaction costs related to the 9 Story acquisition. Segment operating loss for the quarter ended August 31, 2024 was $0.5 million. International Three months ended August 31, $ % ($ amounts in millions) 2024 2023 Change Change Revenues $ 56.8 $ 57.2 $ (0.4) (0.7) % Cost of goods sold 35.3 35.9 (0.6) (1.7) % Other operating expenses (1) 29.8 29.5 0.3 1.0 % Operating income (loss) $ (8.3) $ (8.2) $ (0.1) (1.2) % 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, 2024 decreased by $0.4 million to $56.8 million, compared to $57.2 million in the prior fiscal year quarter. Local currency revenues across the Company's ongoing foreign operations decreased by $0.2 million, excluding unfavorable foreign exchange impact of $0.2 million. In the U.K., local currency revenues increased $1.1 million, primarily driven by the trade channel which benefited from 26 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) higher sales from backlist titles within the Dog Man and Hunger Games series. In Canada, local currency revenues decreased $0.5 million primarily driven by lower education channel sales due, in part, to lower school funding, coupled with lower sales from the book fairs channel. In Australia and New Zealand, local currency revenues decreased $0.2 million, driven by lower sales in New Zealand, primarily in the book clubs channel due to lower revenue per order and the timing of certain education orders, partially offset by higher revenues in Australia, primarily driven by increased sales from the book fairs and trade channels. Local currency revenues in Asia decreased $0.2 million primarily due to lower sales from the trade and education channels, partially offset by growth in India within the trade channel. Export channel sales also decreased $0.4 million as compared to the prior fiscal year quarter due to the timing of orders. Cost of goods sold for the quarter ended August 31, 2024 was $35.3 million, or 62.1% of revenues, which was comparable to $35.9 million, or 62.8% of revenues, in the prior fiscal year quarter. Other operating expenses for the quarter ended August 31, 2024 were $29.8 million, compared to $29.5 million in the prior fiscal year quarter. The Company benefited from lower employee related expenses as the prior fiscal year quarter included $1.2 million of severance expense related to reorganization efforts within the book clubs channel in Canada, which was offset by higher general overhead costs in the quarter ended August 31, 2024. Segment operating loss for the quarter ended August 31, 2024 was $8.3 million, which was comparable to $8.2 million in the prior fiscal year quarter. Overhead Unallocated overhead expense for the quarter ended August 31, 2024 decreased by $4.6 million to $26.1 million, from $30.7 million in the prior year quarter. The decrease was primarily attributable to lower severance expense from the Company's cost-saving initiatives in respect to which the Company incurred $1.2 million in the quarter ended August 31, 2024 compared to $5.1 million in the prior fiscal year quarter. In addition, revenue from rental income increased $0.2 million to $2.7 million for the quarter ended August 31, 2024, compared to $2.5 million in the prior fiscal year quarter, driven by 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 channel and Entertainment segment revenues can vary throughout the year due to the timing of published titles' release dates and program production deliveries and distribution license period start dates. 27 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) Liquidity and Capital Resources Cash used by operating activities was $41.9 million for the three months ended August 31, 2024, compared to cash used by operating activities of $38.1 million for the prior fiscal year period, representing an increase in cash used by operating activities of $3.8 million. The increase in cash used was primarily driven by lower customer remittances on receivable balances in the quarter ended August 31, 2024, substantially offset by lower severance payments and lower spending in Education Solutions related to commissions and external labor costs. Cash used in investing activities was $200.8 million for the three months ended August 31, 2024, compared to cash used in investing activities of $21.8 million in the prior fiscal year period, representing an increase in cash used in investing activities of $179.0 million. The increase in cash used was primarily due to the 9 Story acquisition for $176.4 million, net of cash acquired, during the three months ended August 31, 2024. In addition, the Company incurred higher capital expenditures of $5.7 million primarily related to spending on a new literacy platform within Education Solutions and expanding the available rental space in its headquarters. Cash provided by financing activities was $211.9 million for the three months ended August 31, 2024, compared to cash used in financing activities of $39.3 million for the prior fiscal year period, representing an increase in cash provided by financing activities of $251.2 million. The increase in cash provided was primarily attributable to borrowings of $225 million under the U.S. credit agreement incurred during the three months ended August 31, 2024 to fund the 9 Story acquisition. In addition, the Company repurchased common stock of $5.0 million, compared to repurchases of $35.9 million in the prior fiscal year quarter, and paid lower dividends of $0.8 million, partially offset by $2.4 million of net repayments of film related obligations in the three months ended August 31, 2024. Cash Position The Company’s cash and cash equivalents totaled $84.1 million at August 31, 2024, $113.7 million at May 31, 2024 and $125.8 million at August 31, 2023. Cash and cash equivalents held by the Company’s U.S. operations totaled $30.4 million at August 31, 2024, $54.9 million at May 31, 2024 and $90.1 million at August 31, 2023. 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, $81.6 million remained available for future purchases of common shares as of August 31, 2024. 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, 2024, the Company’s primary sources of liquidity consisted of cash and cash equivalents of $84.1 million, cash from operations and the Company's U.S. credit agreement. The Company is currently in the process of amending its U.S. credit agreement, increasing the borrowing capacity from $300 million to $400 million and extending the term an additional 5 years. 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 $74.6 million of availability. Additionally, the Company has short-term credit facilities of $24.0 million, less current borrowings of $6.1 million and commitments of $3.6 million, resulting in $14.3 million of current availability under these facilities at August 31, 2024. 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. 28 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) Financing The Company is party to the U.S. credit agreement and certain credit lines with various banks, including those related to film related obligations, as described in Note 4 of Notes to Condensed Consolidated Financial Statements - unaudited in Item 1, “Financial Statements." The Company had $225.0 million in outstanding borrowings under the U.S. credit agreement as of August 31, 2024. 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, 2024. 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, tax incentives, 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. 29 SCHOLASTIC CORPORATION