SCHOLASTIC CORP (SCHL) FY 2024 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
Overview
Revenues from operations for the fiscal year ended May 31, 2024 decreased by $114.3 million, or 6.7%, to $1,589.7 million, compared to $1,704.0 million in the prior fiscal year. The Company reported net income per basic and diluted share of Class A and Common Stock of $0.41 and $0.40, respectively, for the fiscal year ended May 31, 2024, compared to $2.56 and $2.49, respectively, in the prior fiscal year.
The Children's Book Publishing and Distribution segment continued its efforts to reposition the book clubs business to a smaller, more profitable core, which drove a large majority of the segment's decline in revenues. The Company's trade publishing business, however, outperformed the prior year revenues despite modest declines in the retail book market, driven by several new releases from the Company's bestselling series including Hunger Games, Dog Man, Cat Kid Comic Club, Heartstopper, Harry Potter, and Wings of Fire. The Education Solutions segment was impacted by market conditions which drove a decline in supplemental curriculum purchases by schools. Education Solutions continues to make progress in its efforts to develop new literacy products, leveraging the Company’s engaging content and strong brand. International segment revenues were lower in Asia and Australia due to softness in the trade channel in these regions, partially offset by revenue growth in the UK trade channel. The Company took steps to manage and align operating expenses in response, while continuing to invest in long-term growth opportunities, however, these factors caused lower revenues and operating profits.
Operating income in fiscal 2024 was $14.5 million compared to $106.3 million in the prior fiscal year, representing a decrease of $91.8 million. Operating income was impacted by lower revenue per fair in the U.S. book fairs channel, which due to the fixed costs associated with delivering a fair, had a significant impact on operating margins. The decrease was also attributable to restructuring and cost-savings initiatives implemented in fiscal 2024 and costs associated with the early exit of certain leased space, all of which is expected to drive greater operational efficiencies, as well as planned investment costs related to the 9 Story Acquisition and growth initiatives within Education Solutions.
Outlook
On June 20, 2024, the Company completed the 9 Story Acquisition, gaining production, distribution and licensing capabilities, an extensive children’s content library, and a highly talented team. The combined business has already begun and will continue executing on an expanded development and production slate, updating franchise and licensing plans for key Scholastic brands, and planning to leverage 9 Story’s strong YouTube presence and expertise across the Company’s content. The Company will also remain focused on realizing its substantial multi-year opportunity to address the large, broader market for trusted children’s books, reading and media. Though the external environment will continue to pressure results in fiscal 2025, the Company expects to begin seeing the benefit of its strategic investments, especially in children’s intellectual property, as it pursues accelerated growth and margin targets for the next three to five years with continued investment in its key growth initiatives.
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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 ongoing 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 estimates the transaction price and records 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, 2024 of approximately $4.3 million.
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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, 2024 of approximately $3.6 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, illustrators, licensors and other publishers 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 five 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 ongoing 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, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||||||
| $ | % (1) | $ | % (1) | |||||||||
| Revenues: | ||||||||||||
| Children’s Book Publishing and Distribution | $ | 955.2 | 60.1 | $ | 1,038.0 | 60.9 | ||||||
| Education Solutions | 351.2 | 22.1 | 386.6 | 22.7 | ||||||||
| International | 273.6 | 17.2 | 279.4 | 16.4 | ||||||||
| Other (2) | 9.7 | 0.6 | — | — | ||||||||
| Total revenues | 1,589.7 | 100.0 | 1,704.0 | 100.0 | ||||||||
| Cost of goods sold | 705.1 | 44.4 | 786.4 | 46.2 | ||||||||
| Selling, general and administrative expenses (3) | 803.0 | 50.5 | 756.6 | 44.4 | ||||||||
| Depreciation and amortization | 57.1 | 3.6 | 54.7 | 3.2 | ||||||||
| Asset impairments and write downs (4) | 10.0 | 0.6 | — | — | ||||||||
| Operating income (loss) | 14.5 | 0.9 | 106.3 | 6.2 | ||||||||
| Interest income | 4.6 | 0.3 | 7.2 | 0.5 | ||||||||
| Interest expense | (1.9) | (0.1) | (1.4) | (0.1) | ||||||||
| Other components of net periodic benefit (cost) | (1.0) | (0.1) | 0.3 | 0.0 | ||||||||
| Earnings (loss) before income taxes | 16.2 | 1.0 | 112.4 | 6.6 | ||||||||
| Provision (benefit) for income taxes (5) | 4.1 | 0.2 | 25.9 | 1.5 | ||||||||
| Net income (loss) | $ | 12.1 | 0.8 | $ | 86.5 | 5.1 | ||||||
| Less: Net income (loss) attributable to noncontrolling interest | — | — | 0.2 | 0.0 | ||||||||
| Net income (loss) attributable to Scholastic Corporation | $ | 12.1 | 0.8 | $ | 86.3 | 5.1 | ||||||
| Basic and diluted earnings (loss) per share of Class A and Common Stock | ||||||||||||
| Basic | $ | 0.41 | $ | 2.56 | ||||||||
| Diluted | $ | 0.40 | $ | 2.49 |
(1) Represents percentage of total revenues.
(2) Represents rental income related to leased space in the Company's headquarters which was not allocated to a segment. Rental income of $7.1 was recognized as a reduction to Selling, general and administrative expenses for the fiscal year ended May 31, 2023.
(3) In fiscal 2024, the Company recognized pretax costs related to its planned investment in 9 Story Media Group Inc. of $9.3 and pretax expense of $10.9, primarily severance related to restructuring and cost-savings initiatives.
(4) In fiscal 2024, the Company recognized pretax asset impairment of $6.1 related to certain education products and $3.9 related to the early exit of certain leased office space in the U.S. and Canada.
(5) In fiscal 2024, the Company recognized a benefit of $7.7 for income taxes in respect to one-time pretax items.
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Results of Operations – Consolidated
The section below is a discussion of the Company's fiscal year 2024 results compared to fiscal year 2023. A discussion of the Company's fiscal year 2023 results compared to fiscal year 2022 is not included in this Form 10-K and can be found in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the year ended May 31, 2023, filed as part of the Company's Form 10-K dated July 21, 2023.
Fiscal 2024 compared to fiscal 2023
Revenues from operations for the fiscal year ended May 31, 2024 decreased by $114.3 million, or 6.7%, to $1,589.7 million, compared to $1,704.0 million in the prior fiscal year. Children’s Book Publishing and Distribution, Education Solutions and International segment revenues decreased $82.8 million, $35.4 million and $5.8 million, respectively.
Within the Children’s Book Publishing and Distribution segment, decreased revenues of $82.8 million were primarily driven by a $55.1 million decline in the book clubs channel sales as efforts to reposition the business to a smaller, more profitable core resulted in a lower number of sponsors and fewer events. Book fairs channel revenues were also lower by $11.5 million primarily due to lower revenue per fair. Excluding entertainment revenues, which benefited from the prior year release of the animated series "Eva the Owlet"TM, trade channel revenues increased $0.9 million, despite modest declines in the retail book market.
Within the Education Solutions segment, decreased revenues of $35.4 million were driven by lower sales of supplemental instructional materials and summer reading products as well as lower revenues from the Magazines+ business. The segment was impacted by market conditions, including declining spending on supplemental curriculum materials, especially those not explicitly aligned with science-based approaches to literacy, as well as increased competition in this segment of the market. The Company continues to adapt its products to align with the prevailing approaches to literacy instruction.
Revenues in the International segment decreased $5.8 million due to lower sales from the trade and education channels in Asia, coupled with lower trade channel sales in Australia, partially offset by increased revenues in the UK from the trade and book fairs channels. International segment revenues were also impacted by unfavorable foreign currency exchange of $1.1 million.
Components of Cost of goods sold for fiscal years 2024 and 2023 are as follows:
| ($ amounts in millions) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | % of revenue | 2023 | % of revenue | ||||||||
| Product, service, production costs and inventory reserves | $ | 417.2 | 26.3 | % | $ | 475.2 | 27.9 | % | |||
| Royalty costs | 118.9 | 7.5 | 132.8 | 7.8 | |||||||
| Prepublication amortization | 27.3 | 1.7 | 26.0 | 1.5 | |||||||
| Postage, freight, shipping, fulfillment and all other costs | 141.7 | 8.9 | 152.4 | 9.0 | |||||||
| Total cost of goods sold | $ | 705.1 | 44.4 | % | $ | 786.4 | 46.2 | % |
Cost of goods sold as a percentage of revenue for the fiscal year ended May 31, 2024 was 44.4%, compared to 46.2% in the prior fiscal year. The improvement in Cost of goods sold as a percentage of revenues was primarily attributable to favorable product expenses due to lower printing and inbound freight costs and decreased production costs due to the prior year release of "Eva the Owlet," in addition to lower royalties as a result of a higher mix of lower-royalty bearing titles sold in the period ended May 31, 2024, primarily in the U.S. trade and book fairs channels. This was partially offset by higher prepublication amortization as a result of the release of Ready4Reading at the end of fiscal 2023. Inbound freight costs have returned to pre-pandemic levels, however, there remains uncertainty regarding increases to inbound shipping costs due to supply chain disruptions, which could result in increased product costs in the near future.
Selling, general and administrative expenses for the fiscal year ended May 31, 2024 were $803.0 million, compared to $756.6 million in the prior fiscal year. The $46.4 million increase was primarily due to costs of $10.9 million related to restructuring and cost-savings initiatives, primarily severance expense, in the U.S., Canada and Asia, $9.3 million of costs associated with the planned investment in 9 Story, as well as higher labor and equipment costs and rent for warehouse space in the U.S. book fairs channel. Additionally, in the prior year the Company benefited from COVID-related subsidies of $3.3 million, an insurance recovery of $5.0 million related to photo litigation settlements accrued and paid in prior periods, and a favorable settlement of $1.8 million related to legacy sales tax matters, all of which did
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not repeat in fiscal 2024. These increases were partially offset by lower promotional spending, primarily in the U.S. book clubs and education channels.
Depreciation and amortization expenses for the fiscal year ended May 31, 2024 were $57.1 million, compared to $54.7 million in the prior fiscal year. The $2.4 million increase was primarily driven by certain assets related to the Company's technology systems placed into service during the year ended May 31, 2024. The Company continues to 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 $1.1 million when compared to the prior fiscal year as a result of new assets placed into service.
Asset impairments and write downs for the fiscal year ended May 31, 2024 were $10.0 million. The Company recognized an asset impairment of $6.1 million related to certain education products as a result of the shift to science of reading based approaches to literacy instruction in the education market. In addition, the Company ceased use of certain leased office space in the U.S. and Canada as part of the Company's efforts to rightsize its real estate footprint to reduce occupancy costs, resulting in an impairment expense of $3.9 million related to the right-of-use assets associated with the operating leases.
Interest income for the fiscal year ended May 31, 2024 was $4.6 million, compared to $7.2 million in the prior fiscal year. Approximately $2.0 million of the decrease related to interest income on tax refunds received during fiscal 2023 that did not repeat in fiscal 2024. The remaining decrease in interest income was due to lower average investment balances as compared to the prior fiscal year. 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 fiscal year ended May 31, 2024 was $1.9 million, compared to $1.4 million in the prior fiscal year. The increase in interest expense was due to higher average debt borrowings as compared to the prior fiscal year. Interest expense is expected to significantly increase in fiscal 2025 as a result of additional borrowings associated with the 9 Story Acquisition.
The Company’s effective tax rate for the fiscal year ended May 31, 2024 was a 25.3% tax provision, compared to 23.0% in the prior fiscal year. The fiscal 2024 tax provision was impacted by a permanent item for transaction costs related to the 9 Story Acquisition, partially offset by lower state income taxes due to utilizing net operating losses from prior periods.
Net income for fiscal 2024 was $12.1 million compared to $86.5 million in fiscal 2023, a decrease of $74.4 million. The basic and diluted income per share of Class A Stock and Common Stock was $0.41 and $0.40, respectively, in fiscal 2024, compared to basic and diluted income per share of Class A Stock and Common Stock of $2.56 and $2.49, respectively, in fiscal 2023. Outstanding shares decreased 11% from 31.7 million to 28.2 million as of May 31, 2024 which is expected to benefit earnings per share calculations in fiscal 2025.
Net income attributable to noncontrolling interest for fiscal 2023 was $0.2 million.
Results of Operations – Segments
CHILDREN’S BOOK PUBLISHING AND DISTRIBUTION
| ($ amounts in millions) | 2024 compared to 2023 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ change | % change | |||||||||||
| Revenues | $ | 955.2 | $ | 1,038.0 | $ | (82.8) | (8.0) | % | ||||||
| Cost of goods sold | 412.1 | 481.7 | (69.6) | (14.4) | ||||||||||
| Other operating expenses * | 430.5 | 412.9 | 17.6 | 4.3 | ||||||||||
| Asset impairments and write downs | 0.5 | — | 0.5 | NM | ||||||||||
| Operating income (loss) | $ | 112.1 | $ | 143.4 | $ | (31.3) | (21.8) | % | ||||||
| Operating margin | 11.7 | % | 13.8 | % |
* Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization.
NM Not meaningful
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Fiscal 2024 compared to fiscal 2023
Revenues for the fiscal year ended May 31, 2024 decreased by $82.8 million to $955.2 million, compared to $1,038.0 million in the prior fiscal year. Revenues from school reading events decreased $66.6 million primarily due to lower revenues of $55.1 million from the book clubs channel as efforts to reposition the business to a smaller, more profitable core resulted in a lower number of sponsors and fewer events. Revenues from the book fairs channel decreased $11.5 million due to lower revenue per fair, partially offset by increased fair count. Trade channel revenues decreased $16.2 million as compared to the prior year. Excluding entertainment revenues, which benefited from the prior year release of the animated series "Eva the Owlet", trade channel revenues increased $0.9 million, despite modest declines in the retail book market. The trade channel benefited from sales of the new paperback edition of The Ballad of Songbirds and Snakes in connection with Lionsgate's theatrical release in November 2023 and a related increase in sales of titles from the original Hunger Games trilogy as well as strong sales from numerous best-selling new releases including Dog Man #12: The Scarlett Shedder, Cat Kid Comic Club #5: Influencers, Heartstopper #5, the interactive edition of Harry Potter and the Prisoner of Azkaban, Wings of Fire Graphix #7: Winter Turning, The Baby-Sitters Club Graphic Novel #15: Claudia and the Bad Joke, Amulet #9: Waverider, and Heroes: A Novel of Pearl Harbor.
Cost of goods sold for the fiscal year ended May 31, 2024 was $412.1 million, or 43.1% of revenues, compared to $481.7 million, or 46.4% of revenues, in the prior fiscal year. The improvement in Cost of goods sold as a percentage of revenues was primarily attributable to favorable product costs due to lower printing and inbound freight costs as well as favorable royalty costs as a result of a higher mix of lower-royalty bearing titles sold in the trade and book fairs channels in the year ended May 31, 2024 and lower production costs in the media business.
Other operating expenses were $430.5 million for the fiscal year ended May 31, 2024, compared to $412.9 million in the prior fiscal year. The $17.6 million increase in Other operating expenses was primarily due to $9.3 million of costs associated with the planned investment in 9 Story, coupled with higher labor costs, equipment costs and rent for warehouse space in the book fairs channel to support the increased fair count and a prior year COVID-related governmental employee retention credit of approximately $3.3 million that did not repeat in fiscal 2024. These increases were partially offset by a lower cost base in book clubs, reflecting lower promotional spending related to book clubs kits as a result of a change in the frequency of the distribution of kits to schools.
Asset impairments were $0.5 million for the fiscal year ended May 31, 2024. The Company committed to a plan to cease use of a leased sales office space with minimal use by employees due to a hybrid work environment, as a result of which the Company recognized an impairment expense of $0.5 million, primarily related to the right-of-use asset.
Segment operating income for the fiscal year ended May 31, 2024 was $112.1 million, compared to $143.4 million in the prior fiscal year. The $31.3 million decrease in operating income was attributable to lower revenue per fair in the book fairs channel, which, due to the fixed costs associated with delivering a fair, has a significant impact on operating margins. In addition, the Company incurred costs related to the planned investment in 9 Story as well as higher planned book fairs channel spending around growth initiatives impacting facility, technology and labor costs, which were partially offset by decreased promotional spending in the book clubs channel.
EDUCATION SOLUTIONS
| ($ amounts in millions) | 2024 compared to 2023 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ change | % change | ||||||||||
| Revenues | $ | 351.2 | $ | 386.6 | $ | (35.4) | (9.2) | % | |||||
| Cost of goods sold | 137.6 | 143.0 | (5.4) | (3.8) | |||||||||
| Other operating expenses * | 191.7 | 185.2 | 6.5 | 3.5 | |||||||||
| Asset impairments | 6.1 | — | 6.1 | NM | |||||||||
| Operating income (loss) | $ | 15.8 | $ | 58.4 | $ | (42.6) | (72.9) | % | |||||
| Operating margin | 4.5 | % | 15.1 | % |
* Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization.
NM Not meaningful
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Fiscal 2024 compared to fiscal 2023
Revenues for the fiscal year ended May 31, 2024 decreased by $35.4 million to $351.2 million, compared to $386.6 million in the prior fiscal year. The decrease in segment revenues was driven by lower sales of supplemental instructional materials and summer reading products as well as lower revenues from the Magazines+ business. The segment was impacted by market conditions, including declining spending on supplemental curriculum materials, especially those not explicitly aligned with science-based approaches to literacy, as well as increased competition in this segment of the market. The Company continues to adapt its products to align with the prevailing approaches to literacy instruction and expects this trend to continue into fiscal 2025. Partially offsetting the lower revenues, the segment benefited from increased revenues from its literacy initiatives, such as the Scholastic Family and Community Engagement (FACE)TM initiative, as a result of continued growth in the funding for community and extended learning programs to support childhood literacy. Revenues from sponsored programs modestly increased year over year and digital subscription revenues remained relatively consistent with the prior fiscal year.
Cost of goods sold for the fiscal year ended May 31, 2024 was $137.6 million, or 39.2% of revenue, compared to $143.0 million, or 37.0% of revenue, in the prior fiscal year. The increase in Cost of goods sold as a percentage of revenues was primarily attributable to higher product costs associated with the mix of product sold during the period ended May 31, 2024, primarily related to literacy initiatives and summer reading products, coupled with increased fulfillment costs. In addition, the segment incurred higher prepublication amortization as result of the release of Ready4ReadingTM at the end of fiscal 2023.
Other operating expenses were $191.7 million for the fiscal year ended May 31, 2024, compared to $185.2 million in the prior fiscal year. The $6.5 million increase in Other operating expenses was primarily attributable to higher costs as a result of increased spending on investments in long-term growth opportunities and higher labor costs, partially offset by lower spending on promotional materials.
Asset impairments were $6.1 million for the fiscal year ended May 31, 2024. The Company recognized an asset impairment of $6.1 million related to certain education products that were not aligned with the science of reading based approach to literacy instruction.
Segment operating income for the fiscal year ended May 31, 2024 was $15.8 million, compared to $58.4 million in the prior fiscal year. The $42.6 million decrease in operating income was attributable to lower revenues, primarily from supplemental instructional materials and summer reading products, coupled with unfavorable cost of product due to product mix and higher prepublication amortization, increased spending on investments in growth opportunities and the impairment of certain education products.
INTERNATIONAL
| ($ amounts in millions) | 2024 compared to 2023 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ change | % change | ||||||||||
| Revenues | $ | 273.6 | $ | 279.4 | $ | (5.8) | (2.1) | % | |||||
| Cost of goods sold | 162.2 | 169.7 | (7.5) | (4.4) | |||||||||
| Other operating expenses * | 117.2 | 113.3 | 3.9 | 3.4 | |||||||||
| Asset impairments and write downs | 1.1 | — | 1.1 | NM | |||||||||
| Operating income (loss) | $ | (6.9) | $ | (3.6) | $ | (3.3) | (91.7)% | ||||||
| Operating margin | NM | NM |
* Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization.
NM Not meaningful
Fiscal 2024 compared to fiscal 2023
Revenues for the fiscal year ended May 31, 2024 decreased by $5.8 million to $273.6 million compared to $279.4 million in the prior fiscal year. Local currency revenues in the Company's ongoing foreign operations decreased $4.7 million when compared to the prior fiscal year, excluding unfavorable foreign exchange impact of $1.1 million. In the Asia channel, local currency revenues decreased $4.6 million primarily attributable to $1.6 million of lower revenues due to the disposition of the direct sales business in Asia coupled with lower sales from the trade and education channels. In Australia and New Zealand, local currency revenues decreased $4.7 million, driven by lower sales in the trade channel in Australia due to the continued softness in the retail market. In Canada, local currency revenues decreased $0.8 million, primarily due to lower book clubs and trade channel revenues, largely offset by increased
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book fairs channel revenues driven by higher revenue per fair and increased redemptions of book fairs incentive credits. The segment revenue decline was partially offset by an increase in local currency revenues in the UK of $4.8 million, primarily driven by higher revenues from the trade and book fairs channels. The UK trade channel benefited from the success of the Dav Pilkey’s Dog Man series. Export channel sales also increased $0.6 million as compared to the prior fiscal year.
Cost of goods sold for the fiscal year ended May 31, 2024 was $162.2 million, or 59.3% of revenues, compared to $169.7 million, or 60.7% of revenues, in the prior fiscal year. The improvement in Cost of goods sold as a percentage of revenues was primarily attributable to overall favorable product costs due to lower print and inbound freight costs, partially offset by higher royalty costs in the UK as a result of increased sales for higher-royalty bearing titles in the year ended May 31, 2024.
Other operating expenses were $117.2 million for the fiscal year ended May 31, 2024, compared to $113.3 million in the prior fiscal year. Other operating expenses increased $3.9 million primarily driven by $2.7 million of costs related to restructuring programs, primarily severance expense, within the book clubs channel in Canada and related to the restructuring of the franchise business in China, coupled with lower equity investment income.
Asset impairments and write downs were $1.1 million for the fiscal year ended May 31, 2024. The Company ceased use of certain leased office space in Canada as part of the Company's efforts to rightsize its real estate footprint to reduce occupancy costs, resulting in an impairment expense related to the right-of-use assets associated with the operating leases.
Segment operating loss for the fiscal year ended May 31, 2024 was $6.9 million, compared to $3.6 million in the prior fiscal year. The $3.3 million increase in operating loss was primarily driven by lower revenues in Australia, reflecting the continued softness in the retail market, and lower revenues in Asia, coupled with higher severance expense from restructuring programs in Canada and Asia and the impairment related to the early exit of leased office space in Canada.
Overhead
Fiscal 2024 compared to fiscal 2023
Unallocated overhead expense for the fiscal year ended May 31, 2024 increased by $14.6 million to $106.5 million, compared to $91.9 million in the prior fiscal year. The increase was primarily attributable to higher employee-related costs, which included severance expense from restructuring programs of $8.2 million related to the reorganization efforts and cost-saving initiatives in the school reading events division and Education Solutions, an insurance recovery of $5.0 million received in fiscal 2023 related to photo litigation settlements accrued and paid in prior periods, and a favorable settlement of $1.8 million related to legacy sales tax matters that benefited the prior year. In addition, the Company ceased use of certain leased office space as part of the Company's efforts to rightsize office space, resulting in an impairment expense of $2.3 million related to the right-of-use assets associated with the operating leases. This was partially offset by higher rental income of $2.6 million as a result of the new tenant leasing space in the Company's headquarters.
Liquidity and Capital Resources
Fiscal 2024 compared to fiscal 2023
Cash provided by operating activities was $154.6 million for the fiscal year ended May 31, 2024, compared to cash provided by operating activities of $148.9 million for the prior fiscal year, representing an increase in cash provided by operating activities of $5.7 million. The increase in cash was primarily driven by approximately $162 million in lower domestic inventory purchases as lead times have returned to pre-pandemic levels resulting in a return to historical purchasing patterns, which also reflected lower inbound freight and manufacturing costs. This was substantially offset by lower customer remittances on receivable balances, increased spending associated with the planned investment in 9 Story and on growth initiatives in Education Solutions, higher planned spending related to facilities and labor in the book fairs channel, and higher severance paid in fiscal 2024. The Company expects cash provided by operating activities to be impacted by higher anticipated inventory purchases in fiscal 2025, primarily related to the U.S. book fairs channel.
Cash used in investing activities was $89.7 million for the fiscal year ended May 31, 2024, compared to cash used in investing activities of $99.6 million for the prior fiscal year, representing a decrease in cash used in investing activities
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of $9.9 million. The decrease in cash used was driven by lower capital expenditures of $3.6 million, primarily related to spending on technology systems, and lower prepublication spending of $4.1 million associated with product development in Education Solutions. This was partially offset by lower acquisition‑related payments in fiscal 2024 which included the acquisition of the remaining shares of Make Believe Ideas Limited for $2.1 million and certain amortizable intangible assets related to educational programs for $5.8 million, compared to the acquisition of Learning Ovations for $10.7 million in the prior year.
Cash used by financing activities was $176.1 million for the fiscal year ended May 31, 2024, compared to cash used in financing activities of $139.5 million for the prior fiscal year. The increase in cash used in financing activities of $36.6 million was primarily attributable to common stock purchases of $158.2 million, compared to repurchases of $132.1 million in the prior fiscal year, and a decrease in net proceeds from stock option exercises of $11.6 million, partially offset by lower dividend payments of $0.9 million.
Cash Position
The Company’s cash and cash equivalents totaled $113.7 million at May 31, 2024 and $224.5 million at May 31, 2023. Cash and cash equivalents held by the Company’s U.S. operations totaled $54.9 million at May 31, 2024 and $174.6 million at May 31, 2023.
The Company’s operating philosophy is to use cash provided by operating activities to create value by paying down debt, reinvesting in existing businesses and, from time to time, making acquisitions that will complement its portfolio of businesses or acquiring other strategic assets, as well as engaging in shareholder enhancement initiatives, such as share repurchases or dividend declarations. During fiscal 2024, the Company repurchased $156.8 million of its common stock, which included open-market repurchases and shares repurchased through a privately negotiated transaction for 400,000 shares with a related party at a discount to market price. See Note 14, "Treasury Stock," and Note 21, "Related Party Transactions," of Notes to the Consolidated Financial Statements in Item 8, "Consolidated Financial Statements and Supplementary Data" for further details. Under the Company's open-market buy-back program, $86.6 million remained available for future purchases of common shares as of May 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 May 31, 2024, the Company’s primary sources of liquidity consisted of cash and cash equivalents of $113.7 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. Subsequent to May 31, 2024, the Company borrowed $200.0 million under the U.S. credit agreement, primarily to fund the 9 Story Acquisition, resulting in approximately $100.0 million of current availability. Additionally, the Company has short-term credit facilities of $26.2 million, less current borrowings of $6.0 million and commitments of $3.6 million, resulting in $16.6 million of current availability under these facilities at May 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.
The following table summarizes, as of May 31, 2024, the Company’s contractual cash obligations by future period (see Notes 5, 6, 9 and 15 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 | $ | 0.7 | $ | 0.2 | $ | — | $ | — | $ | 0.9 | ||||||||
| Royalty advances | 34.6 | 9.1 | 1.8 | 0.9 | 46.4 | |||||||||||||
| Lines of credit and short-term debt | 6.0 | — | — | — | 6.0 | |||||||||||||
| Finance leases (1) | 1.9 | 2.9 | 1.7 | 0.4 | 6.9 | |||||||||||||
| Operating leases | 28.0 | 46.7 | 29.0 | 28.6 | 132.3 | |||||||||||||
| Pension and postretirement plans (2) | 2.5 | 4.6 | 4.5 | 10.9 | 22.5 | |||||||||||||
| Total | $ | 73.7 | $ | 63.5 | $ | 37.0 | $ | 40.8 | $ | 215.0 |
(1) Includes principal and interest.
(2) Excludes expected Medicare Part D subsidy receipts.
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Financing
Loan Agreement
The Company is party to the U.S. credit agreement, as well as certain credit lines with various banks. For a more complete description of the U.S. credit agreement, as well as the Company's other debt obligations, reference is made to Note 5, "Debt," of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data.” The Company had no outstanding borrowings under the U.S. credit agreement as of May 31, 2024. Subsequent to May 31, 2024, the Company borrowed $200.0 million under the U.S. credit agreement primarily to fund the 9 Story Acquisition. The interest rate is floating and is based on the 1-month Term SOFR, plus the applicable margin per the agreement. Interest expense related to these borrowings is expected to be approximately $13 to $14 million in fiscal 2025. Reference is made to Note 1, Note 5 and Note 22 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data" for further details.
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. Subsequent to May 31, 2024, the Company completed the 9 Story Acquisition. See Note 10, "Acquisitions," and Note 22, "Subsequent Events," of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data.”