SCHOLASTIC CORP (SCHL) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The Company categorizes its businesses into three reportable segments: Children’s Book Publishing and Distribution; Education Solutions; and International.
The following discussion and analysis of the Company’s financial position and results of operations should be read in conjunction with the Company’s Consolidated Financial Statements and the related Notes included in Item 8, “Consolidated Financial Statements and Supplementary Data.”
Overview and Outlook
Revenues from operations for the fiscal year ended May 31, 2022 increased by $342.6 million, or 26.3%, to $1,642.9 million, compared to $1,300.3 million in the prior fiscal year. The Company reported net income per basic and diluted share of Class A and Common Stock of $2.33 and $2.27, respectively, for the fiscal year ended May 31, 2022, compared to net loss per basic and diluted share of $0.32 and $0.32, respectively, in the prior fiscal year.
The Children's Book Publishing and Distribution segment drove a majority of the revenue increase, primarily within the book fairs channel based on reaching 72% of pre-pandemic in-person fair count and historically high revenue-per-fair levels. The Education Solutions segment experienced overall higher demand for the Company's educational products driving higher sales of the Company’s culturally-responsive products such as Rising Voices Library®, early childhood products such as PreK On My WayTM, summer reading programs and Scholastic LiteracyTM. In addition, the New Worlds Reading Initiative, a state-driven program in Florida which commenced in fiscal 2022, contributed to the increase in revenues and exceeded its enrollment target in the first year of a five-year contract. In the International segment, revenues increased in Canada and the UK, primarily in the book fairs channel, as recovery from the pandemic continued. However, pandemic-related restrictions continued to impact the direct sales business in Asia and sales in Australia and New Zealand resulting in an overall decline in segment revenues. The Company has entered into a plan to exit and sell the direct sales business in Asia as it is no longer a strategic fit in the Company's future growth strategy.
Operating income in fiscal 2022 was $97.4 million compared to an operating loss of $22.7 million in the prior fiscal year, representing an improvement of $120.1 million. The majority of the improvement year-over-year was attributable to the recovery of the book fairs business and increased demand for educational product offerings. The book fairs business benefited from higher revenue-per-fair levels on fixed distribution costs resulting in enhanced fair profitability. In addition, the Company had overall lower selling, general and administrative expenses as a percentage of revenue indicative of the effectiveness of the Company’s cost saving initiatives and improved operational efficiencies.
Outlook
In fiscal 2023, the Company expects the overall demand for independent reading resources at home and in school to remain strong and management plans to focus on the allocation of investments designed to produce the best returns by focusing on the value of the Company’s intellectual property, expanding its education solutions channel and, where appropriate, adjusting product pricing.
In the book fairs channel, the Company will focus on increasing fair count, anticipating 85% of pre-pandemic levels, while maintaining strong revenue per fair and continuing to leverage improved distribution efficiencies and sales and marketing efforts. Labor and system issues in the book clubs channel have been mitigated and higher operating incomes are expected on improved customer confidence. The Company also expects continued growth in the trade channel from new releases in fiscal year 2023 from some of the most popular best-selling series and authors. In media for fiscal 2023, Disney+ has announced a live-action Goosebumps series and AppleTV+® will release an animated series "Eva the Owlet"TM based on the Owl DiariesTM books. The Company anticipates higher sales of its educational products from continued government-related funding programs, as well as improvements in Education Solutions’ sales and marketing efforts. The Company will enter its second year of the New Worlds Reading Initiative program which will begin in August. The Company will also increase spending to improve cross-selling initiatives and data-driven selling opportunities intended to benefit future periods, but which will negatively impact operating income in fiscal 2023. Internationally, the Company is expecting modest improvement in operating profits as the major markets continue to recover from the impacts of the global pandemic and Asia benefits from the Company’s strategic exit of the low-margin, direct-sales business. Overhead costs are expected to increase next year due to higher salary related costs as a result of continuing inflationary pressures and an increase in spending on transformative and digital service costs as the Company invests in future growth opportunities. The Company will continue to explore further opportunities for cost savings with process improvements and automation, product rationalization and overall improvements in resource allocation.
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Critical Accounting Policies and Estimates
General:
The Company’s discussion and analysis of its financial condition and results of operations is based upon its Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements involves the use of estimates and assumptions by management, which affects the amounts reported in the Consolidated Financial Statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, future expectations and various other assumptions believed to be reasonable under the circumstances, all of which are necessary in order to form a basis for determining the carrying values of assets and liabilities. Actual results may differ from those estimates and assumptions. On an on-going basis, the Company evaluates the adequacy of its reserves and the estimates used in calculations, including, but not limited to: collectability of accounts receivable; variable consideration related to anticipated returns; allocation of transaction price to contractual performance obligations; amortization periods; stock-based compensation expense; pension and other postretirement obligations; tax rates; recoverability of inventories; deferred income taxes and tax reserves; the timing and amount of future income taxes and related deductions; recoverability of prepublication costs; royalty advance reserves; customer reward programs; and the impairment assessment of long-lived assets, goodwill and other intangibles. For a complete description of the Company’s significant accounting policies, see Note 1, "Description of Business, Basis of Presentation and Summary of Significant Accounting Policies" of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data.” The following policies and account descriptions include all those identified by the Company as critical to its business operations and the understanding of its results of operations:
Revenue recognition:
The Company has identified the allocation of the transaction price to contractual performance obligations related to revenues within the school-based book fairs channel, as described below, as a critical accounting estimate.
Revenues associated with school-based book fairs relate to the sale of children's books and other products to book fair sponsors. In addition, the Company employs an incentive program to encourage the sponsorship of book fairs and increase the number of fairs held each school year. The Company identifies two potential performance obligations within its school-based book fair contracts, which include the fulfillment of book fairs product and the fulfillment of product upon the redemption of incentive program credits by customers. The Company allocates the transaction price to each performance obligation and recognizes revenue at a point in time. The Company utilizes certain estimates based on historical experience, redemption patterns and future expectations related to the participation in the incentive program to determine the relative fair value of each performance obligation when allocating the transaction price. Changes in these estimates could impact the timing of the recognition of revenue. Revenue allocated to the book fairs product is recognized at the point at which product is delivered to the customer and control is transferred. The revenue allocated to the incentive program credits is recognized upon redemption of incentive credits and the transfer of control of the redeemed product. Incentive credits are generally redeemed within 12 months of issuance. Payment for school-based book fairs product is due at the completion of a customer's fair. Revenues associated with virtual fairs are recognized upon shipment of the products and related incentive program credits are expensed upon issuance.
Estimated returns:
For sales that include a right of return, the Company will estimate the transaction price and record revenues as variable consideration based on the amounts the Company expects to ultimately be entitled. In order to determine estimated returns, the Company utilizes historical return rates, sales patterns, types of products and expectations and recognizes a corresponding reduction to Revenues and Cost of goods sold. Management also considers patterns of sales and returns in the months preceding the fiscal year, as well as actual returns received subsequent to the fiscal year, available customer and market specific data and other return rate information that management believes is relevant. In addition, a refund liability is recorded within Other accrued expenses for the consideration to which the Company believes it will not ultimately be entitled and a return asset is recorded within Prepaid expenses and other current assets for the expected inventory to be returned. Actual returns could differ from the Company's estimate. A one percentage point change in the estimated reserve for returns rate would have resulted in an increase or decrease in operating income for the year ended May 31, 2022 of approximately $3.3 million and approximately $3.1 million, respectively.
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Inventories:
Inventories, consisting principally of books, are stated at the lower of cost, using the first-in, first-out method, or net realizable value. The Company records a reserve for excess and obsolete inventory based upon a calculation using the expected future sales of existing inventory driven by estimates around forecasted purchases, inventory consumption costs, and the sell-through rate of current fiscal year purchases. In accordance with the Company's inventory retention policy, expected future sales of existing inventory are compared against historical usage by channel for reasonableness and any specifically identified excess or obsolete inventory, due to an anticipated lack of demand, will also be reserved. The impact of a one percentage point change in the obsolescence reserve rate would have resulted in an increase or decrease in operating income for the year ended May 31, 2022 of approximately $3.7 million.
Royalty advances:
Royalty advances are initially capitalized and subsequently expensed as related revenues are earned or when the Company determines future recovery through earndowns is not probable. The Company has a long history of providing authors with royalty advances, and it tracks each advance earned with respect to the sale of the related publication. Historically, the longer the unearned portion of the advance remains outstanding, the less likely it is that the Company will recover the advance through the sale of the publication, as the related royalties earned are applied first against the remaining unearned portion of the advance. The Company applies this historical experience to its existing outstanding royalty advances to estimate the likelihood of recovery. Additionally, the Company’s editorial staff regularly reviews its portfolio of royalty advances to determine if individual royalty advances are not recoverable through earndowns for discrete reasons, such as the death of an author prior to completion of a title or titles, a Company decision to not publish a title, poor market demand or other relevant factors that could impact recoverability.
Evaluation of Goodwill impairment:
Goodwill is not amortized and is reviewed for impairment annually or more frequently if impairment indicators arise.
The Company compares the estimated fair values of its identified reporting units to the carrying values of their net assets. The Company first performs a qualitative assessment to determine whether it is more likely than not that the fair values of its identified reporting units are less than their carrying values. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company performs the quantitative goodwill impairment test. The Company measures goodwill impairment by the amount the carrying value exceeds the fair value of a reporting unit. For each of the reporting units, the estimated fair value is determined utilizing the expected present value of the projected future cash flows of the reporting unit, in addition to comparisons to similar companies. The Company reviews its definition of reporting units annually or more frequently if conditions indicate that the reporting units may change. The Company evaluates its operating segments to determine if there are components one level below the operating segment level. A component is present if discrete financial information is available and segment management regularly reviews the operating results of the business. If an operating segment only contains a single component, that component is determined to be a reporting unit for goodwill impairment testing purposes. If an operating segment contains multiple components, the Company evaluates the economic characteristics of these components. Any components within an operating segment that share similar economic characteristics are aggregated and deemed to be a reporting unit for goodwill impairment testing purposes. Components within the same operating segment that do not share similar economic characteristics are deemed to be individual reporting units for goodwill impairment testing purposes.
The Company has six reporting units with goodwill subject to impairment testing. The determination of the fair value of the Company’s reporting units involves a number of assumptions, including the estimates of future cash flows, discount rates and market-based multiples, among others, each of which is subject to change. Accordingly, it is possible that changes in assumptions and the performance of certain reporting units could lead to impairments in future periods, which may be material.
Income taxes:
The Company uses the asset and liability method of accounting for income taxes. Under this method, for purposes of determining taxable income, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of such assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to be realized.
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The Company believes that its taxable earnings, during the periods when the temporary differences giving rise to deferred tax assets become deductible or when tax benefit carryforwards may be utilized, should be sufficient to realize the related future income tax benefits. For those jurisdictions where the expiration date of the tax benefit carryforwards or the projected taxable earnings indicate that realization is not likely, the Company establishes a valuation allowance.
In assessing the need for a valuation allowance, the Company estimates future taxable earnings, with consideration for the feasibility of on-going tax planning strategies and the realizability of tax benefit carryforwards, to determine which deferred tax assets are more likely than not to be realized in the future. Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates and future taxable earnings. In the event that actual results differ from these estimates in future periods, the Company may need to adjust the valuation allowance.
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Results of Operations - Consolidated
| (Amounts in millions, except per share data) For fiscal years ended May 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||||||
| $ | % (1) | $ | % (1) | |||||||||
| Revenues: | ||||||||||||
| Children’s Book Publishing and Distribution | $ | 946.5 | 57.6 | $ | 675.0 | 51.9 | ||||||
| Education Solutions | 393.6 | 24.0 | 312.3 | 24.0 | ||||||||
| International | 302.8 | 18.4 | 313.0 | 24.1 | ||||||||
| Total revenues | 1,642.9 | 100.0 | 1,300.3 | 100.0 | ||||||||
| Cost of goods sold | 765.5 | 46.6 | 628.7 | 48.4 | ||||||||
| Selling, general and administrative expenses (2) | 722.8 | 44.0 | 622.7 | 47.9 | ||||||||
| Depreciation and amortization | 56.8 | 3.5 | 60.5 | 4.6 | ||||||||
| Asset impairments and write downs (3) | 0.4 | 0.0 | 11.1 | 0.8 | ||||||||
| Operating income (loss) | 97.4 | 5.9 | (22.7) | (1.7) | ||||||||
| Interest income | 0.5 | 0.1 | 0.4 | 0.0 | ||||||||
| Interest expense | (2.9) | (0.2) | (6.2) | (0.5) | ||||||||
| Other components of net periodic benefit (cost) | 0.1 | 0.0 | (0.1) | (0.0) | ||||||||
| Gain (loss) on assets held for sale (4) | (15.1) | (0.9) | — | — | ||||||||
| Gain (loss) on sale of assets and other (5) | 9.7 | 0.6 | 10.4 | 0.8 | ||||||||
| Earnings (loss) before income taxes | 89.7 | 5.5 | (18.2) | (1.4) | ||||||||
| Provision (benefit) for income taxes (6) | 8.7 | 0.5 | (7.3) | (0.6) | ||||||||
| Net income (loss) | $ | 81.0 | 4.9 | $ | (10.9) | (0.8) | ||||||
| Less: Net income (loss) attributable to noncontrolling interest | 0.1 | 0.0 | 0.1 | 0.0 | ||||||||
| Net income (loss) attributable to Scholastic Corporation | $ | 80.9 | 4.9 | $ | (11.0) | (0.8) | ||||||
| Basic and diluted earnings (loss) per share of Class A and Common Stock | ||||||||||||
| Basic | $ | 2.33 | $ | (0.32) | ||||||||
| Diluted | $ | 2.27 | $ | (0.32) |
(1) Represents percentage of total revenues.
(2) In fiscal 2022, the Company recognized $6.6 of pretax insurance proceeds related to an intellectual property legal settlement accrued in fiscal 2021 and pretax branch consolidation costs of $0.5. In fiscal 2022 and 2021, the Company recognized pretax severance and related charges of $6.2 and $23.1, respectively, related to cost reduction and restructuring programs. In fiscal 2021, the Company recognized a pretax mediation-assisted settlement of $20.0 regarding certain licenses and trademarks related to intellectual property used in formerly owned products and pretax branch consolidation and other business rationalization costs of $7.5.
(3) In fiscal 2021, the Company recognized a pretax impairment charge of $8.5 related to its plan to cease use of certain leased office space in New York City and consolidate into its company-owned New York headquarters building and a pretax impairment charge of $2.6 related to its plan to permanently close 13 of its 54 book fair warehouses in the U.S. as part of a branch consolidation project.
(4) In fiscal 2022, the Company recognized pretax loss on assets held for sale related to the Company's plan to exit the direct sales business in Asia of $15.1.
(5) In fiscal 2022, the Company recognized a pretax gain of $3.5 on the sale of its UK distribution center located in Witney and a pretax gain of $6.2 on the sale of its Lake Mary facility. In fiscal 2021, the Company recognized a pretax gain of $3.8 on the sale of its UK distribution center located in Southam and a pretax gain of $6.6 on the sale of its Danbury facility.
(6) In fiscal 2022 and 2021, the Company recognized a benefit for income taxes in respect to one-time pretax charges of $1.3 and $15.5, respectively.
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Results of Operations – Consolidated
The section below is a discussion of the Company's fiscal year 2022 results compared to fiscal year 2021. A detailed discussion of the Company's fiscal year 2020 results and year-over-year comparisons between fiscal years 2021 and 2020 that are not included in this Form 10-K can be found in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the year ended May 31, 2021, filed as part of the Company's Form 10-K dated July 23, 2021.
Certain prior period results were adjusted to conform to the current period presentation. See Note 1, "Description of the Business" of Notes to the Consolidated Financial Statements in Item 8, "Consolidated Financial Statements and Supplementary Data" for further details regarding the prior period adjustment. The adjustment resulted in a reclassification of Cost of goods sold and Selling, general and administrative expenses related to certain editorial costs. There was no other impact to the financial statements. The impact the adjustments had on the segment results are shown below:
| Children's Book Publishing and Distribution | Education Solutions | International | Overhead | Fiscal Year Ended May 31, 2021 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cost of goods sold: | |||||||||||||||
| As previously reported | $ | 344.0 | $ | 108.4 | $ | 173.2 | $ | 40.9 | $ | 666.5 | |||||
| Adjustment | 10.1 | 1.3 | (5.3) | (43.9) | (37.8) | ||||||||||
| As adjusted | $ | 354.1 | $ | 109.7 | $ | 167.9 | $ | (3.0) | $ | 628.7 | |||||
| Selling, general and administrative expenses: | |||||||||||||||
| As previously reported | $ | 277.8 | $ | 134.4 | $ | 120.2 | $ | 52.5 | $ | 584.9 | |||||
| Adjustment | 5.0 | 1.6 | (2.2) | 33.4 | 37.8 | ||||||||||
| As adjusted | $ | 282.8 | $ | 136.0 | $ | 118.0 | $ | 85.9 | $ | 622.7 |
Fiscal 2022 compared to fiscal 2021
Revenues from operations for the fiscal year ended May 31, 2022 increased by $342.6 million, or 26.3%, to $1,642.9 million, compared to $1,300.3 million in the prior fiscal year. Children’s Book Publishing and Distribution segment and Education Solutions segment revenues increased $271.5 million and $81.3 million, respectively, partially offset by lower International segment revenues of $10.2 million.
Within the Children’s Book Publishing and Distribution segment, revenues from the book fairs channel increased $265.4 million with the return of in-person fairs as pandemic related restrictions were lifted in most U.S. schools, coupled with a significant increase in revenue-per-fair levels. Trade channel revenues increased $25.1 million, primarily driven by backlist titles as demand for the Company's best-selling series remained strong, partially offset by lower book clubs channel revenues of $19.0 million due, in part, to shipping delays experienced in the second fiscal year quarter caused by system and labor issues and the residual effects of such issues.
Within the Education Solutions segment, increased revenues of $81.3 million were driven by higher demand of most of the Company's educational products, particularly cultural awareness products such as Rising Voices Library, early childhood programs including PreK On My Way and comprehensive programs such as Scholastic Literacy, as well as community engagement and summer reading programs.
Local currency revenues in the International segment decreased $11.0 million as pandemic related restrictions continued to impact the direct sales business in Asia and sales in Australia and New Zealand. Canada revenues improved in all channels and UK sales increased as recovery from the pandemic continued. Both improvements were led by their respective book fairs channels. The International segment revenues also benefited from favorable foreign currency exchange of $0.8 million. In the fourth fiscal year quarter, the Company entered into a plan to exit and sell the direct sales business in Asia as it is no longer a strategic fit in the Company's future growth strategy.
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Components of Cost of goods sold for fiscal years 2022 and 2021 are as follows:
| ($ amounts in millions) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | % of revenue | 2021 | % of revenue | ||||||||
| Product, service, production costs and inventory reserves | $ | 448.8 | 27.3 | % | $ | 352.7 | 27.1 | % | |||
| Royalty costs | 139.1 | 8.5 | 121.7 | 9.4 | |||||||
| Prepublication and production amortization | 27.4 | 1.7 | 26.6 | 2.1 | |||||||
| Postage, freight, shipping, fulfillment and all other costs | 150.2 | 9.1 | 127.7 | 9.8 | |||||||
| Total cost of goods sold | $ | 765.5 | 46.6 | % | $ | 628.7 | 48.4 | % |
Cost of goods sold as a percentage of revenue for the fiscal year ended May 31, 2022 was 46.6%, compared to 48.4% in the prior fiscal year. The decrease in Cost of goods sold as a percentage of revenue was primarily driven by the 26% increase in the U.S. book fair channel's revenue-per-fair levels, which resulted in lower shipping and packing costs and associated lower fulfillment costs as a percentage of revenues, as more books were sold at each fair. Overall higher book fairs revenues, when compared to prior year, also favorably impacted royalty costs and certain fixed costs as a percentage of revenue. Book fairs inventory reserves decreased in fiscal 2022, also favorably impacting Cost of goods sold as a percentage of revenues, due to the prior year's excess inventory levels caused by the pandemic related shut-downs of U.S. schools. These decreases were partially offset by a 1.3% increase in product, service and production costs related to inflationary pressures on printing, paper, transportation and labor costs. The increase was primarily in the trade channel, which had quicker inventory turnover during the pandemic-related school shut-downs, while the other channels benefited from sales of inventory purchased prior to the increased product costs. Management anticipates that newly purchased inventory sold in fiscal 2023 through these channels, coupled with more consistent inventory reserve levels, will result in higher Cost of goods sold as a percentage of revenues in fiscal 2023.
Selling, general and administrative expenses for the fiscal year ended May 31, 2022 were $722.8 million, compared to $622.7 million in the prior fiscal year. The $100.1 million increase is due in part to $98.6 million in higher employee related costs as a result of increased headcount, primarily in the book fairs channel, as higher demand resulted in an increase in labor and warehouse-related costs, as well as increased bonuses and commissions and outside services, primarily related to distribution. In addition, increased volumes in the other U.S. channels similarly impacted costs in the Company's Missouri distribution facility. Selling, general and administrative expenses were also unfavorably impacted by $18.6 million in lower government subsidies and a $10.0 million increase in bad debt expense, $6.6 million of which related to the book clubs channel due to the second fiscal quarter shipping delays caused by system issues. These increases were partially offset by lower severance and related charges from cost reduction and restructuring programs of $16.9 million, decreased branch consolidation costs of $7.0 million and lower litigation-related costs of $26.6 million, as the prior fiscal year included a $20.0 million mediation-assisted settlement regarding certain licenses and trademarks related to intellectual property used in formerly owned products with $6.6 million in insurance recoveries being received in the current fiscal year.
Depreciation and amortization expenses for the fiscal year ended May 31, 2022 were $56.8 million, compared to $60.5 million in the prior fiscal year. The $3.7 million decrease primarily relates to the Company's shift to cloud computing arrangements (e.g. software as a service) which results in capitalized software being amortized through Selling, general and administrative expenses rather than Depreciation and amortization. Amortization of capitalized cloud software increased $3.2 million when compared to the prior fiscal year which partially offset the decrease in Depreciation and amortization. Management expects this trend to continue as more cloud based software tools are utilized by the Company,
Asset impairments and write downs for the fiscal year ended May 31, 2022 were $0.4 million, compared to $11.1 million in the prior fiscal year. In the prior fiscal year, the Company recorded an impairment of right-of-use assets associated with operating leases, as part of the Company's plan to cease use of certain office space in New York City and permanently close 13 of its 54 U.S. book fair warehouses in the amount of $9.6 million. The Company also recorded an impairment of $1.5 million in respect to other long-lived assets, primarily leasehold improvements, related to these leases in the prior fiscal year.
Interest income for the fiscal year ended May 31, 2022 was $0.5 million, relatively consistent when compared to $0.4 million in the prior fiscal year, as investment balances and activities did not significantly change. Interest expense for the fiscal year ended May 31, 2022 was $2.9 million, compared to $6.2 million in the prior fiscal year. The decrease was primarily due to the decreased debt borrowings.
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Gain (loss) on assets held for sale for the fiscal year ended May 31, 2022 was a loss of $15.1 million related to the Company's plan to exit the direct sales business in Asia as it is no longer a part of the strategic growth plan for the Company. The plan is expected to result in the sale of remaining assets, primarily accounts receivable and inventory. The assets have been written down to their recoverable value which equates to the selling price. The loss on assets held for sale includes accrued exit costs.
Gain (loss) on sale of assets and other for the fiscal year ended May 31, 2022 was a gain of $9.7 million, compared to a gain of $10.4 million in the prior fiscal year. In the current fiscal year, the Company sold its UK distribution facility located in Witney and its U.S. Lake Mary facility, resulting in a recognized gain on sale of $3.5 million and $6.2 million, respectively. In the prior fiscal year, the Company sold its Danbury, Connecticut facility and the UK distribution center located in Southam, resulting in a recognized gain on sale of $6.6 million and $3.8 million, respectively.
The Company’s effective tax rate for the fiscal year ended May 31, 2022 was a 9.7% tax provision, compared to a 40.1% tax benefit in the prior fiscal year. The 2022 fiscal year tax provision benefited from the release of uncertain tax positions resulting from the effective settlement of the IRS examination from the 2015-2020 tax years.
Net income for fiscal 2022 was $81.0 million compared to a net loss $10.9 million in fiscal 2021, an improvement of $91.9 million. The basic and diluted income per share of Class A Stock and Common Stock was $2.33 and $2.27, respectively, in fiscal 2022, compared to basic and diluted loss per share of Class A Stock and Common Stock of $0.32 and $0.32, respectively, in fiscal 2021.
Net income attributable to noncontrolling interest for fiscal 2022 and fiscal 2021 was $0.1 million.
Results of Operations – Segments
CHILDREN’S BOOK PUBLISHING AND DISTRIBUTION
| ($ amounts in millions) | 2022 compared to 2021 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | $ change | % change | |||||||||||
| Revenues | $ | 946.5 | $ | 675.0 | $ | 271.5 | 40.2 | % | ||||||
| Cost of goods sold | 450.3 | 354.1 | 96.2 | 27.2 | ||||||||||
| Other operating expenses * | 380.5 | 309.4 | 71.1 | 23.0 | ||||||||||
| Asset impairments and write downs | 0.4 | 2.6 | (2.2) | (84.6) | ||||||||||
| Operating income (loss) | $ | 115.3 | $ | 8.9 | $ | 106.4 | NM | |||||||
| Operating margin | 12.2 | % | 1.3 | % |
* Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization.
NM Not meaningful
Fiscal 2022 compared to fiscal 2021
Revenues for the fiscal year ended May 31, 2022 increased by $271.5 million to $946.5 million, compared to $675.0 million in the prior fiscal year. The increase was primarily driven by the recovery of the book fairs channel resulting from the lifting of pandemic-related restrictions in U.S. schools and the return to in-person learning. The book fairs channel revenues increased $265.4 million with a 26% increase in revenue-per-fair levels when compared to prior year on approximately 72% of pre-pandemic fair count. During the fiscal year, the book fairs channel capitalized on the previous fiscal year's warehouse consolidation in order to optimize its marketing and sales efforts through simplifying its overhead structure resulting in improved fair performance. The prioritization of fairs based on inventory levels and peak volumes and the addition of over 700 sponsor fairs also contributed to the increase in revenues. Sponsor fairs are funded by an appropriate corporate, non-profit and/or district partner that provides a free book fair for a school that would not otherwise be able to host one. Trade channel revenues increased $25.1 million over the prior year's strong front list showing that included the release of Cat Kid Comic Club and two new Dog Man titles from Dav Pilkey, as well as JK Rowling's The Ickabog. While fiscal 2022 again included a front list with bestsellers such as JK Rowling's The Christmas Pig, and Dav Pilkey’s Cat Kid Comic Club: Perspectives and Cat Kid Comic Club: On Purpose, performance was also strongly driven by backlist titles, where the Company's top selling series continue to see high demand including, Harry Potter, Dog Man, Wings of Fire, The Bad Guys, The Baby-Sitters Club Graphix®, Five Nights at Freddy'sTM and HeartstopperTM. Revenues from the book club channel decreased $19.0 million as a result of the shipping delays experienced in the second fiscal quarter caused by system and labor issues and the residual effects of such issues.
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Cost of goods sold for the fiscal year ended May 31, 2022 was $450.3 million, or 47.6% of revenues, compared to $354.1 million, or 52.5% of revenues, in the prior fiscal year. The decrease in Cost of goods sold as a percentage of revenue was primarily driven by the 26% increase in the U.S. book fairs channel's revenue-per-fair levels which resulted in lower fulfillment costs as a percentage of revenues as more books sold at each fair resulted in lower shipping and packing costs. Overall higher book fairs revenues, when compared to prior year, also favorably impacted royalty costs and other fixed costs as a percentage of revenue. Book fairs inventory reserves decreased in the current year, also favorably impacting Cost of goods sold as a percentage of revenues, due to the prior year's excess inventory levels caused by the pandemic related shut-downs of U.S. schools. This was partially offset by a 2.1% increase in product, service, and production costs from inflationary pressures, primarily in the trade channel. The U.S. book fairs channel mitigated some of the impact of higher product costs as certain inventory purchases were made before the product cost increases. Management anticipates that newly purchased inventory sold in fiscal 2023 through these channels, coupled with more consistent inventory reserve levels, will result in higher Cost of goods sold as a percentage of revenues in the next fiscal year.
Other operating expenses were $380.5 million for the fiscal year ended May 31, 2022, compared to $309.4 million in the prior fiscal year. The $71.1 million increase was primarily due to $59.2 million in higher employee related costs as a result of increased headcount, primarily in the book fairs channel, as higher demand resulted in an increase in labor and warehouse-related costs, as well as increased bonuses and commissions and use of outside services, primarily related to distribution. Other operating expenses were unfavorably impacted by a $6.7 million reduction in government subsidies and higher bad debt expense of $8.4 million, of which $6.6 million was related to the book clubs channel due to the fiscal 2022 second quarter system issues, partially offset by lower branch consolidation costs of $2.8 million related to the prior fiscal year's consolidation efforts.
Asset impairments were $0.4 million for the fiscal year ended May 31, 2022, compared to $2.6 million in the prior fiscal year, The $2.2 million decrease was primarily driven by the prior fiscal year's lease impairment resulting from the Company's plan to permanently close 13 of its 54 book fairs warehouses in the U.S. as part of the branch consolidation project which resulted in the recognition of an impairment expense of $2.6 million.
Segment operating income for the fiscal year ended May 31, 2022 was $115.3 million, compared to $8.9 million in the prior fiscal year. The increase was primarily driven by the recovery of the U.S. book fairs channel and the 26% increase in revenue-per-fair levels which benefited operating income as more books sold at each fair resulted in lower shipping and packing costs, as well as higher revenues in the trade channel. Operating income was negatively impacted by the book club channel's shipping delays caused by system and labor issues, resulting in lower revenues, higher postage and fulfillment costs, increased customer service headcount and increased bad debt expense. The Company does not expect the book club shipping issues to reoccur in fiscal 2023 and anticipates increasing fair count to 85% of pre-pandemic levels while maintaining a strong revenue-per-fair level.
EDUCATION SOLUTIONS
| ($ amounts in millions) | 2022 compared to 2021 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | $ change | % change | ||||||||||
| Revenues | $ | 393.6 | $ | 312.3 | $ | 81.3 | 26.0 | % | |||||
| Cost of goods sold | 142.4 | 109.7 | 32.7 | 29.8 | |||||||||
| Other operating expenses * | 169.4 | 144.9 | 24.5 | 16.9 | |||||||||
| Operating income (loss) | $ | 81.8 | $ | 57.7 | $ | 24.1 | 41.8 | % | |||||
| Operating margin | 20.8 | % | 18.5 | % |
* Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization.
Fiscal 2022 compared to fiscal 2021
Revenues for the fiscal year ended May 31, 2022 increased by $81.3 million to $393.6 million, compared to $312.3 million in the prior fiscal year. Increased revenues were primarily driven by the overall demand for educational materials that address the literacy learning gaps created during the pandemic. The primary drivers of the increase were the Rising Voices product, which provides culturally relevant texts, as well as PreK On My Way and Scholastic Literacy, which represent comprehensive literacy programs that contain both physical and digital content. Classroom collections and Scholastic Bookroom products also significantly increased when compared to prior fiscal year and Scholastic Magazines+ returned to pre-pandemic levels with a 9% increase in revenues when compared to the prior fiscal year. Deferred revenues related to digital products increased 64% when compared to the prior fiscal year as the Company improved sales efforts and product offerings. The New Worlds Reading Initiative, a state driven program in
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Florida, contributed to the increase in revenues and is part of the Company's sponsored program revenues, new in the current fiscal year. Summer reading related products increased significantly this fiscal year due in part to increased demand. In addition, due to the impact of the pandemic, certain prior year orders were subject to delayed shipping resulting in the orders being recognized in fiscal 2022. Sales of teaching resource materials were lower than prior fiscal year, with less remote and hybrid learning in the current fiscal year. Demand in fiscal 2022 benefited, in part, from government financed programs such as ESSER, the Elementary and Secondary School Emergency Relief Fund, which provides direct funding to states and districts. The Company expects demand to remain strong as there is a renewed focus on the important benefits that independent reading and book ownership have on the development of children and overall literacy levels.
Cost of goods sold for the fiscal year ended May 31, 2022 was $142.4 million, or 36.2% of revenue, compared to $109.7 million, or 35.1% of revenue, in the prior fiscal year. The increase in Cost of goods sold as a percentage of revenues was primarily driven by an increase of approximately 1.0% in product, service and production costs from inflationary pressures. The education channel benefited from sales of inventory purchased prior to the cost increases and therefore management anticipates that newly purchased inventory sold in fiscal 2023 will result in higher Cost of goods sold as a percentage of revenues in fiscal 2023.
Other operating expenses were $169.4 million for the fiscal year ended May 31, 2022, compared to $144.9 million in the prior fiscal year. The $24.5 million increase included $13.1 million in higher employee related costs, including bonuses and commissions, as well as increased marketing costs associated with the New Worlds Reading Initiative, the state driven program new in the current fiscal year.
Segment operating income for the fiscal year ended May 31, 2022 was $81.8 million, compared to $57.7 million in the prior fiscal year. The $24.1 million increase was attributable to the higher revenues partially offset by the increase in employee related costs. The Company expects modest growth in operating income in fiscal year 2023 as increased spending associated with growth initiatives will result in higher costs.
INTERNATIONAL
| ($ amounts in millions) | 2022 compared to 2021 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | $ change | % change | ||||||||||
| Revenues | $ | 302.8 | $ | 313.0 | $ | (10.2) | (3.3) | % | |||||
| Cost of goods sold | 169.8 | 167.9 | 1.9 | 1.1 | |||||||||
| Other operating expenses * | 129.7 | 123.9 | 5.8 | 4.7% | |||||||||
| Operating income (loss) | $ | 3.3 | $ | 21.2 | $ | (17.9) | (84.4)% | ||||||
| Operating margin | 1.1 | % | 6.8 | % |
* Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization.
Fiscal 2022 compared to fiscal 2021
Revenues for the fiscal year ended May 31, 2022 decreased by $10.2 million to $302.8 million compared to $313.0 million in the prior fiscal year, including the benefit of favorable foreign exchange of $0.8 million. Total local currency revenues in the Company's foreign operations decreased $11.0 million when compared to the prior fiscal year. In the Asia and export channels, local currency revenues decreased $19.4 million as the local markets continued to be impacted by COVID-related shutdowns and restrictive regulations in China, resulting in lower revenue in the direct sales business in Asia as well as lower trade and school channel sales. The Company has announced a plan to exit and sell the direct sales business in Asia, which generated revenues of $17.2 million in fiscal 2022 and $32.2 million in fiscal 2021, as it is no longer a strategic fit for future growth initiatives. Australia and New Zealand were negatively impacted by the timing of COVID related shut-downs which occurred later than in other markets, resulting in a decrease in local currency revenues of $9.0 million. In Canada, revenues in all channels increased when compared to the prior fiscal year with local currency revenues increasing $15.2 million. The book fairs channel was the primary driver with higher fair count and increased revenue-per-fair levels when compared to the prior fiscal year. In the UK, local currency revenues increased $2.2 million primarily driven by the book fairs channel which recovered on increased fair count with schools opening for in-person class and a 23% increase in revenue per fair when compared to the prior fiscal year, partially offset by lower book club and trade channel revenues.
Cost of goods sold for the fiscal year ended May 31, 2022 was $169.8 million, or 56.1% of revenues, compared to $167.9 million, or 53.6% of revenues, in the prior fiscal year. The increase in Cost of goods sold as a percentage of revenues was primarily driven by the Asia channel which was significantly impacted by pandemic related shut-downs
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and increasing inventory cost from inflationary pressures coupled with higher inventory reserves on excess inventory levels. As previously mentioned, the Company has announced a plan to exit and sell the direct sales business in Asia. The increase was partially offset in Canada and the UK as inventory reserves were lower than in the prior fiscal year which was impacted by excess inventory from the closure of schools for in-person learning.
Other operating expenses were $129.7 million for the fiscal year ended May 31, 2022, compared to $123.9 million in the prior fiscal year. In local currencies, Other operating expenses increased $6.8 million, primarily driven by lower government subsidies of $10.0 million and higher bad debt expenses of $2.4 million, primarily driven by the continued impact the pandemic had on the direct sales business in Asia, partially offset by lower branch consolidation costs of $4.1 million and $1.4 million in lower severance expenses related to cost reduction and restructuring programs. In local currencies, Other operating expenses were also impacted by favorable foreign currency exchange of $1.0 million.
Segment operating income for the fiscal year ended May 31, 2022 was $3.3 million, compared to $21.2 million in the prior fiscal year. Operating income decreased $17.9 million, primarily due to the negative impact COVID related shutdowns and restrictive regulations in China had in the Asia channel and the lack of pandemic related government subsidies of $10.0 million. Higher operating income in Canada was offset by lower operating income in Australia and New Zealand. The Company anticipates that the sales channels in the UK, Australia and New Zealand will recover in fiscal 2023 and also expects to finalize the exit and sale of the direct sales business in Asia.
Overhead
Fiscal 2022 compared to fiscal 2021
Unallocated overhead expense for fiscal 2022 decreased by $7.5 million to $103.0 million, compared to $110.5 million in the prior fiscal year. The decrease was primarily related to lower litigation related costs of $26.6 million from the prior fiscal year's $20.0 million mediation-assisted settlement regarding certain licenses and trademarks related to intellectual property used in formerly owned products with the $6.6 million in insurance recoveries also being received in the 2022 fiscal year. In addition, lower severance and related charges from cost reduction and restructuring programs of $15.5 million and lower asset impairments of $8.5 million, due to prior fiscal year's lease impairment associated with the Company's efforts to consolidate office space in New York City, contributed to the overall decrease. Partially offsetting the decrease were $33.1 million in higher employee related costs which included bonuses and commissions and unallocated employee-related expenses at the Company’s Jefferson City, Missouri distribution facility. Overhead expenses were also negatively impacted by lower pandemic related government subsidies of $1.9 million.
Liquidity and Capital Resources
Fiscal 2022 compared to fiscal 2021
Cash provided by operating activities was $226.0 million for the fiscal year ended May 31, 2022, compared to cash provided by operating activities of $71.0 million for the prior fiscal year, representing an increase in cash provided by operating activities of $155.0 million. The increase was primarily driven by $390.0 million in higher customer collections on the overall increase in revenues primarily from the book fairs channel, as well as $54.0 million in higher net federal tax refunds. This was partially offset by higher inventory purchases of $112.4 million, increased payroll related payments, higher postage and freight charges, and a $13.4 million net settlement of an intellectual property litigation matter.
Cash used in investing activities was $43.2 million for the fiscal year ended May 31, 2022, compared to cash used in investing activities of $50.5 million for the prior fiscal year, representing a decrease in cash used in investing activities of $7.3 million. The decrease in cash used was primarily driven by lower property, plant and equipment spending and lower prepublication and production spending of $5.2 million and $3.5 million, respectively, as the Company continued to limit spending to strategic investments in key growth areas of the business and in technology, both internal and customer-facing, to allow it to operate with greater efficiency. Lower capitalized software spending within Property, plant and equipment was partially offset by higher spending on capitalized cloud computing arrangements recognized in Other assets as the Company continues to shift to cloud based systems. The Company also received $1.4 million less in proceeds from the sale of assets relating to the current fiscal year sale of the U.S. Lake Mary facility and the UK distribution facility located in Witney, resulting in proceeds of $10.4 million and $5.6 million, respectively, and the prior fiscal year sale of the Danbury, Connecticut facility and the UK distribution center located in Southam, resulting in proceeds of $12.3 million and $5.1 million, respectively.
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Cash used by financing activities was $229.2 million for the fiscal year ended May 31, 2022, compared to cash used in financing activities of $52.3 million for the prior fiscal year. The increase in cash used in financing activities of $176.9 million was primarily related to repayments of borrowings under the U.S. credit agreement of $175.0 million. In addition, the Company reacquired $33.4 million of common stock with no such repurchases in the prior fiscal year period during which the repurchase program was suspended. The increase in cash used was partially offset by an increase in net proceeds from stock option exercises of $9.8 million.
Cash Position
The Company’s cash and cash equivalents totaled $316.6 million at May 31, 2022 and $366.5 million at May 31, 2021. Cash and cash equivalents held by the Company’s U.S. operations totaled $275.5 million at May 31, 2022 and $318.0 million at May 31, 2021.
Due to the seasonal nature of its business as discussed under “Seasonality” above, the Company usually experiences negative cash flows in the June through October time period. As a result of the Company’s business cycle, borrowings have historically increased during June, July and August, have generally peaked in September or October, and have been at their lowest point in May. As a precautionary measure in the context of the COVID-19 pandemic, the Company had accessed its committed bank credit facility in the fourth quarter of fiscal 2020 by taking a U.S. dollar LIBOR-based advance for $200.0 million. The Company has repaid this borrowing and there are no outstanding borrowings under the U.S. credit agreement as of May 31, 2022.
On October 27, 2021, the U.S. credit agreement was amended and restated, which, among other things, increased the borrowing limit from $250.0 million to $300.0 million and extended the maturity to October 27, 2026. See Note 5, "Debt" of Notes to the Consolidated Financial Statements in Item 8, "Consolidated Financial Statements and Supplementary Data" for more information concerning the U.S. credit agreement.
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. The Company has lifted the temporary suspension of its open-market buy-back program under which $33.9 million remained available for future purchases of common shares as of May 31, 2022. During the fiscal year ended May 31, 2022, the Company repurchased $33.4 million of common stock, which included privately negotiated transactions for 300,000 shares with a related party and 190,290 shares with a third party, both at a discount to market price. See Note 20, "Related Party Transactions" of Notes to the Consolidated Financial Statements in Item 8, "Consolidated Financial Statements and Supplementary Data" for further details regarding the related party share repurchase.
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 May 31, 2022, the Company’s primary sources of liquidity consisted of cash and cash equivalents of $316.6 million, cash from operations, and the Company's U.S. loan agreements. As indicated above, the U.S. credit agreement was amended and restated on October 27, 2021, which increased the borrowing limit from $250.0 million to $300.0 million. The Company expects the U.S. credit agreement to provide it with an appropriate level of flexibility to strategically manage its business operations. Additionally, the Company has short-term credit facilities of $37.3 million, less current borrowings of $6.5 million and commitments of $3.7 million, resulting in $27.1 million of current availability at May 31, 2022. Accordingly, the Company believes these sources of liquidity are sufficient to finance its currently anticipated ongoing operating needs, as well as its financing and investing activities.
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The following table summarizes, as of May 31, 2022, the Company’s contractual cash obligations by future period (see Notes 5, 6, 9 and 14 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data”):
| $ amounts in millions | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Payments Due By Period | ||||||||||||||||||
| Contractual Obligations | 1 Year or Less | Years 2-3 | Years 4-5 | After Year 5 | Total | |||||||||||||
| Minimum print quantities | $ | 2.4 | $ | 1.6 | $ | — | $ | — | $ | 4.0 | ||||||||
| Royalty advances | 18.4 | 9.1 | 0.6 | 0.1 | 28.2 | |||||||||||||
| Lines of credit and short-term debt | 6.5 | — | — | — | 6.5 | |||||||||||||
| Capital leases (1) | 2.6 | 4.0 | 2.3 | 1.0 | 9.9 | |||||||||||||
| Operating leases | 23.8 | 36.7 | 17.1 | 28.3 | 105.9 | |||||||||||||
| Pension and postretirement plans (2) | 2.1 | 4.9 | 4.8 | 11.2 | 23.0 | |||||||||||||
| Total | $ | 55.8 | $ | 56.3 | $ | 24.8 | $ | 40.6 | $ | 177.5 |
(1) Includes principal and interest.
(2) Excludes expected Medicare Part D subsidy receipts.
Financing
Loan Agreement
The Company is party to the Loan Agreement, as well as certain credit lines with various banks. For a more complete description of the Loan Agreement, as well as the Company's other debt obligations, reference is made to Note 5 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data.”
Acquisitions
In the ordinary course of business, the Company explores domestic and international expansion opportunities, including potential niche and strategic acquisitions. As part of this process, the Company engages with interested parties in discussions concerning possible transactions. The Company will continue to evaluate such expansion opportunities and prospects.