SCHOLASTIC CORP (SCHL)

Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

The Company categorizes its businesses into four reportable segments: Children’s Book Publishing and Distribution; Education Solutions; Entertainment; 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, 2025 increased by $35.8 million, or 2.3%, to $1,625.5 million, compared to $1,589.7 million in the prior fiscal year. The Company reported net loss per basic and diluted share of Class A and Common Stock of $0.07 for the fiscal year ended May 31, 2025, compared to net income per basic and diluted share of Class A and Common Stock of $0.41 and $0.40, respectively, in the prior fiscal year.

During fiscal 2025, the Company successfully integrated 9 Story into its Entertainment segment, which significantly contributed to the Company's revenue growth year over year. Fiscal 2025 results also reflected new releases in the Company's bestselling series, including Sunrise on the Reaping, the latest installment in Suzanne Collins’ Hunger Games series and Dav Pilkey's Dog Man #13: Big Jim Begins, which benefited the Company's trade channels globally and helped to offset softness in the overall retail market. Education Solutions continued to be negatively impacted by the continuing headwinds in the supplemental curriculum market and the Company is repositioning the business focused on long-term growth and improved profitability under its new leadership. Operating income in fiscal 2025 was $15.8 million compared to $14.5 million in the prior fiscal year, representing an increase of $1.3 million, as the Company successfully executed on a cost management strategy.

Outlook

During fiscal 2026, the Company expects to continue to expand the reach and monetization of Scholastic’s intellectual property, which includes the release of the next title in the best-selling Dog Man series and a growing slate of content development and production commitments. While there continues to be significant near-term uncertainty about school funding, the Company is focusing its product development and go-to-market strategies in Education Solutions to better align with the evolving needs of educators, schools, and families. The Company has also made progress on its strategic and operational initiatives, which include streamlining the Company's organizational structure, strengthening leadership, reducing costs and evaluating options to optimize its real estate assets, all of which are intended to enhance the Company's ability to drive long-term growth and deliver greater value to shareholders.

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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; recoverability of investment in film and television programs; 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, 2025 of approximately $5.0 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, 2025 of approximately $3.5 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.

Business combinations:

The Company allocates the purchase price in a business combination to the underlying tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values, with any excess recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates, estimated useful lives and market multiples, among other items.

With respect to the 9 Story acquisition, the Company was required to make significant judgments and estimates, particularly in the identification and valuation of identifiable intangible assets. The Company utilized a third-party valuation specialist in determining the fair values. The assets acquired primarily include intellectual property ("IP") related to 9 Story's existing and recognized program titles, customer contracts/relationships related to licensing, distribution and service arrangements, and the trade names associated with 9 Story and Brown Bag Films, its animation studio. The intellectual property and customer contracts/relationships were valued using the multi-period excess earnings valuation method and the tradename was valued using the relief-from-royalty valuation method. The significant underlying assumptions used in these methods included the projected revenue and revenue attributable to the individual intangible assets, as well as the discount and royalty rate. These assumptions are inherently subjective and sensitive to changes in market conditions and the future performance of the acquired business. Refer to Note 11, "Acquisitions," of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data” for further details regarding this acquisition.

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

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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 seven 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.

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

(1) Represents percentage of total revenues.

(2) The Entertainment segment includes the operations of Scholastic Entertainment Inc. ("SEI"), which were included in the Children’s Book Publishing and Distribution segment in prior periods, and 9 Story, as acquired on June 20, 2024. The financial results for SEI for the prior fiscal year presented have been reclassified to Entertainment to reflect this change.

(3) Represents rental income related to leased space in the Company's headquarters which was not allocated to a segment.

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Results of Operations – Consolidated

The section below is a discussion of the Company's fiscal year 2025 results compared to fiscal year 2024. A discussion of the Company's fiscal year 2024 results compared to fiscal year 2023 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, 2024, filed as part of the Company's Form 10-K dated July 19, 2024.

Fiscal 2025 compared to fiscal 2024

Revenues from operations for the fiscal year ended May 31, 2025 increased by $35.8 million, or 2.3%, to $1,625.5 million, compared to $1,589.7 million in the prior fiscal year. Children’s Book Publishing and Distribution, Entertainment and International segment revenues increased $10.6 million, $59.1 million and $6.0 million, respectively, partially offset by lower revenues from the Education Solutions segment of $41.4 million.

Children’s Book Publishing and Distribution segment revenues increased $10.6 million, primarily driven by the school reading events business on higher fair count in the book fairs channel and higher revenue per sponsor in the book clubs channel. Trade channel revenues were relatively consistent with the prior year as increased sales from the Hunger Games and Dog Man series, driven by the latest releases, Sunrise on the Reaping and Dog Man #13: Big Jim Begins, respectively, were largely offset by lower sales of backlist titles reflecting continued softness in the retail book market.

Education Solutions segment revenues decreased $41.4 million, primarily driven by the continued impact of market conditions as school districts focus on adopting and implementing new evidence-based core programs and decrease spending on supplemental materials.

Entertainment segment revenues increased $59.1 million, reflecting the addition of 9 Story.

International segment revenues increased $6.0 million, primarily driven by increased revenues from the Company's Major Markets, which benefited from the new releases in the Hunger Games and Dog Man series. International segment revenues were also impacted by unfavorable foreign currency exchange of $1.6 million.

Components of Cost of goods sold for fiscal years 2025 and 2024 are as follows:

Cost of goods sold as a percentage of revenue for the fiscal year ended May 31, 2025 was 44.2%, compared to 44.4% in the prior fiscal year. Cost of goods sold benefited from favorable product mix in the trade channels, driven in particular by the higher priced hardcover sales of Sunrise on the Reaping. This was largely offset by higher royalty costs as a result of an increase in the mix of higher-royalty bearing titles sold in the fiscal year ended May 31, 2025 and the addition of production costs as a result of the 9 Story acquisition. The Company expects cost of good sold to increase in fiscal 2026 due to the newly imposed tariffs.

Selling, general and administrative expenses for the fiscal year ended May 31, 2025 were $822.3 million, compared to $803.0 million in the prior fiscal year. The $19.3 million increase was primarily attributable to the addition of 9 Story, which resulted in higher operating expenses in the period ended May 31, 2025, partially offset by lower commission expense and external labor costs within Education Solutions. In addition, amortization expense related to cloud computing arrangements for the fiscal year ended May 31, 2025 increased by $2.5 million compared to the prior fiscal year as a result of new assets placed into service.

Depreciation and amortization expenses for the fiscal year ended May 31, 2025 were $65.7 million, compared to $57.1 million in the prior fiscal year. The $8.6 million increase in Depreciation and amortization was primarily driven by the intangible assets acquired as a result of the 9 Story acquisition. The Company also continues to shift spending to cloud

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computing arrangements in which the amortization expense is included in Selling, general and administrative expenses rather than Depreciation and amortization.

Asset impairments and write downs for the fiscal year ended May 31, 2025 were $2.9 million, compared to $10.0 million in the prior year. In fiscal 2025, the Company recognized asset impairments of $1.2 million related to certain digital products in Children's Book Publishing and Distribution and Education Solutions, $1.1 million related to certain inventory and other assets in Asia, and $0.6 million related to the early exit of leased office space in the U.S., Canada and Ireland. In fiscal 2024, the Company recognized asset impairments of $6.1 million related to certain education products as a result of the shift to evidence-based approaches to literacy instruction in the education market and $3.9 million related to the early exit of leased office space in the U.S. and Canada.

Interest income for the fiscal year ended May 31, 2025 was $2.2 million, compared to $4.6 million in the prior fiscal year. The decrease in interest income was attributable to lower average short term 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, 2025 was $18.2 million, compared to $1.9 million in the prior fiscal year. The increase in interest expense was due to borrowings under the U.S. Credit Agreement incurred during the first quarter of fiscal 2025 to fund the 9 Story acquisition. The Company expects to maintain these borrowings into the next fiscal year resulting in comparable to slightly higher interest expense in fiscal 2026. Any potential asset monetization strategies executed by the Company could result in repayments of the outstanding borrowings and reduce interest expense.

The Company’s effective tax rate for the fiscal year ended May 31, 2025 was (46.2)%, compared to 25.3% in the prior fiscal year. The effective tax rate varies from the statutory rate primarily due to expected state and local income taxes and non-deductible compensation for covered executive employees. The tax provision on the global consolidated loss before income taxes was due to the Company's domestic taxable income generating tax expense.

Net loss for fiscal 2025 was $1.9 million compared to net income of $12.1 million in fiscal 2024, a decrease of $14.0 million. The basic and diluted loss per share of Class A Stock and Common Stock was $0.07 in fiscal 2025, compared to basic and diluted income per share of Class A Stock and Common Stock of $0.41 and $0.40, respectively, in fiscal 2024. Outstanding shares decreased 11% from 28.2 million to 25.0 million as of May 31, 2025 which is expected to benefit earnings per share calculations in fiscal 2026.

Results of Operations – Segments

CHILDREN’S BOOK PUBLISHING AND DISTRIBUTION

* Other operating expenses include selling, general and administrative expenses and depreciation and amortization.

Fiscal 2025 compared to fiscal 2024

Revenues for the fiscal year ended May 31, 2025 increased by $10.6 million to $963.9 million, compared to $953.3 million in the prior fiscal year. The increase in segment revenues was primarily driven by increased revenues from School Reading Events of $8.2 million. Book fairs channel revenues increased $6.7 million, driven by higher fair count, partially offset by slightly lower revenue per fair as compared to the prior year. Book clubs channel revenues increased $1.5 million as a result of higher revenue per sponsor and an increase in events. Trade channel revenues were relatively consistent with the prior year, increasing $2.4 million, or 1%, as increased sales from the Hunger Games and Dog Man series, driven by the latest releases, Sunrise on the Reaping and Dog Man #13: Big Jim Begins, respectively, were largely offset by lower sales of backlist titles reflecting continued softness in the retail book market. The retail book

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market is expected to remain soft in fiscal 2026 and, similar to fiscal 2025, the Company is anticipating its proprietary school market channels to outpace this softness.

Cost of goods sold for the fiscal year ended May 31, 2025 was $410.2 million, or 42.6% of revenues, compared to $412.0 million, or 43.2% of revenues, in the prior fiscal year. The improvement in Cost of goods sold as a percentage of revenues was primarily attributable to the mix of product sold in the trade channel in fiscal 2025, driven in particular by the higher priced hardcover sales of Sunrise on the Reaping, partially offset by higher royalty costs as a result of an increase in the mix of higher-royalty bearing titles sold in the fiscal year ended May 31, 2025. In addition, the book fairs channel had lower excess inventory reserves as a result of better inventory utilization. The Company expects an increase in cost of product as a result of increased tariffs, especially in the book fairs channel beginning in the peak selling season in the upcoming second fiscal quarter.

Other operating expenses were $422.4 million for the fiscal year ended May 31, 2025, compared to $417.5 million in the prior fiscal year. The $4.9 million increase in Other operating expenses was primarily attributable to the book fairs channel to support the increased fair count, in addition to inflationary pressures.

Asset impairments were $0.6 million for the fiscal year ended May 31, 2025, compared to $0.5 million in the prior fiscal year. In fiscal 2025, the Company recognized an asset impairment of $0.6 million related to certain digital products. In fiscal 2024, the Company early exited leased office space, as a result of which the Company recognized an impairment expense of $0.5 million, primarily related to the right-of-use asset associated with the operating lease.

Segment operating income for the fiscal year ended May 31, 2025 was $130.7 million, compared to $123.3 million in the prior fiscal year. The $7.4 million increase in operating income was attributable to higher revenues, primarily from School Reading Events, driven by higher fair count in the book fairs channel, coupled with favorable cost of product in the trade channel driven by higher margins on Sunrise on the Reaping. This was partially offset by increased operating costs in the book fairs channel to support the increased fair count.

EDUCATION SOLUTIONS

* Other operating expenses include selling, general and administrative expenses and depreciation and amortization.

Fiscal 2025 compared to fiscal 2024

Revenues for the fiscal year ended May 31, 2025 decreased by $41.4 million to $309.8 million, compared to $351.2 million in the prior fiscal year. The decrease in segment revenues was primarily driven by the continued impact of market conditions as school districts focus on adopting and implementing new evidence-based core programs and decrease spending on supplemental materials. In addition, subscription revenues from Magazines+ and revenues from community literacy programs decreased from the prior fiscal year. Partially offsetting the decline, the segment benefited from increased revenues from sponsored programs as a result of an increase in participants and increased sales of the Company's Ready4ReadingTM phonics curriculum. The Company expects the revenues to remain consistent in fiscal 2026 due to the on-going headwinds in the education market.

Cost of goods sold for the fiscal year ended May 31, 2025 was $122.8 million, or 39.6% of revenue, compared to $137.6 million, or 39.2% of revenue, in the prior fiscal year. Cost of goods sold as a percentage of revenues was impacted by higher outbound freight costs related to sponsored programs, which was largely offset by lower prepublication amortization as a result of the impairment of certain education products in fiscal 2024.

Other operating expenses were $180.1 million for the fiscal year ended May 31, 2025, compared to $191.7 million in the prior fiscal year. The $11.6 million decrease in Other operating expenses was primarily attributable to lower commission expense driven by the lower revenues, in addition to lower external labor and marketing costs.

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Asset impairments were $0.6 million for the fiscal year ended May 31, 2025, compared to $6.1 million in the prior fiscal year. In fiscal 2025, the Company recognized an asset impairment of $0.6 million related to certain digital products. In fiscal 2024, the Company recognized an asset impairment of $6.1 million related to certain education products that were not aligned with evidence-based approaches to literacy instruction.

Segment operating income for the fiscal year ended May 31, 2025 was $6.3 million, compared to $15.8 million in the prior fiscal year. The $9.5 million decrease in operating income was attributable to lower revenues, primarily due to continued market conditions which resulted in decreased spending on supplemental materials. This was partially offset by lower external labor and marketing costs and lower impairment expense in the fiscal year ended May 31, 2025.

ENTERTAINMENT

* Other operating expenses include selling, general and administrative expenses and depreciation and amortization.

NM Not meaningful

The Entertainment segment includes the operations of 9 Story, as acquired on June 20, 2024, and Scholastic Entertainment Inc. ("SEI"). SEI was reported in the Children's Book Publishing and Distribution segment in prior periods. The financial results for SEI for fiscal 2024 have been reclassified to Entertainment to reflect this change. Refer to Note 11, "Acquisitions," of Notes to the Consolidated Financial Statements in Item 8, "Consolidated Financial Statements and Supplementary Data" for further details regarding the acquisition of 9 Story.

Revenues for the fiscal year ended May 31, 2025 were $61.0 million compared to $1.9 million in the prior fiscal year period. The increase reflected the addition of 9 Story from the date of acquisition on June 20, 2024 through May 31, 2025 in which a majority of the revenues were driven by production revenue related to episodic deliveries, production services provided to third parties and, to a lesser extent, revenues from royalties and distribution. Entertainment revenues have been negatively impacted by delays in production greenlights from major platforms which are expected to improve in fiscal 2026.

Cost of goods sold for the fiscal year ended May 31, 2025 was $33.4 million, or 54.8% of revenues. Cost of goods sold primarily consists of production costs and amortization, participation expenses and interest on film related obligations.

Other operating expenses for the fiscal year ended May 31, 2025 were $39.2 million, which included costs of $3.0 million related to the 9 Story acquisition and severance expense of $1.4 million related to cost-saving initiatives. Other operating expenses for the fiscal year ended May 31, 2024 were $13.0 million, which included transaction costs of $9.3 million related to the 9 Story acquisition.

Asset impairments for the fiscal year ended May 31, 2025 were $0.5 million. The Company early exited certain leased office space as a result of which the Company recognized an impairment expense of $0.5 million in fiscal 2025, primarily related to the right-of-use asset associated with the operating leases.

Segment operating loss for the fiscal year ended May 31, 2025 was $12.1 million compared to $11.2 million in the prior fiscal year.

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INTERNATIONAL

* Other operating expenses include selling, general and administrative expenses and depreciation and amortization.

NM Not meaningful

Fiscal 2025 compared to fiscal 2024

Revenues for the fiscal year ended May 31, 2025 increased by $6.0 million to $279.6 million compared to $273.6 million in the prior fiscal year. Local currency revenues in the Company's ongoing foreign operations increased $7.6 million when compared to the prior fiscal year, excluding unfavorable foreign exchange impact of $1.6 million. In the UK, local currency revenues increased $8.4 million, driven by higher trade channel sales which benefited from several current year releases including the latest Hunger Games title, Sunrise of the Reaping, Jonty Gentoo: The Adventures of a Penguin by Julia Donaldson and Axel Scheffler and Dog Man #13: Big Jim Begins by Dav Pilkey, in addition to higher book fairs channel sales driven by higher fair count. In Canada, local currency revenues increased $4.2 million, primarily driven by higher sales from the trade channel, which benefited from the new releases in the Hunger Games and Dog Man series and lower sales returns from its major customers, coupled with higher sales from the book clubs channel. In Australia and New Zealand, local currency revenues increased $1.9 million, driven by increased sales of education products in New Zealand and higher trade channel sales in both markets, partially offset by lower school channel revenues in Australia. The increase in revenues from the Major Markets was partly offset by lower local currency revenues in Asia of $5.5 million. This was primarily attributable to lower sales within the trade and education channels, partially offset by growth in India. Export channel sales also decreased $1.4 million as compared to the prior fiscal year.

Cost of goods sold for the fiscal year ended May 31, 2025 was $159.3 million, or 57.0% of revenues, compared to $162.2 million, or 59.3% of revenues, in the prior fiscal year. Cost of goods sold as a percentage of revenues decreased as a result of the mix of product sold in Canada and the U.K. in fiscal 2025, driven in particular by the higher priced hardcover sales of Sunrise on the Reaping. This was partially offset by increased fulfillment costs in Australia on lower revenues.

Other operating expenses were $120.2 million for the fiscal year ended May 31, 2025, compared to $117.2 million in the prior fiscal year. Other operating expenses increased $3.0 million primarily due to higher general overhead costs in the Major Markets, partially offset by lower costs in Asia driven by operational efficiencies as a result of the Company's reorganization efforts. In the fiscal year ended May 31, 2025, the Company incurred severance expense from its cost-saving initiatives and reorganization efforts in Asia, Canada and Australia of $2.8 million, compared to $2.7 million in the prior fiscal year related to reorganization efforts in Canada and its exit from the franchise business in China.

Asset impairments and write downs were $1.1 million for the fiscal years ended May 31, 2025 and 2024. In fiscal 2025, the Company recognized an asset impairment of $1.1 million related to certain inventory and other assets that were not recoverable as a result of the reorganization in China. In fiscal 2024, the Company early exited 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 of $1.1 million related to the right-of-use assets associated with the operating leases.

Segment operating loss for the fiscal year ended May 31, 2025 was $1.0 million, compared to $6.9 million in the prior fiscal year. The $5.9 million improvement was primarily attributable to higher revenues in the Major Markets, coupled with favorable cost of product in the trade channels driven by higher margins on Sunrise on the Reaping. In addition, operating efficiencies in Canada and Asia drove improved profitability, coupled with lower trade sales returns in Canada. This improvement was partially offset by increased general overhead costs in the Major Markets in the fiscal year ended May 31, 2025.

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Overhead

Fiscal 2025 compared to fiscal 2024

Unallocated overhead expense for the fiscal year ended May 31, 2025 increased by $1.6 million to $108.1 million, compared to $106.5 million in the prior fiscal year. The increase was primarily attributable to higher employee-related expenses driven by higher medical costs. This was partly offset by lower severance expense of $0.6 million related to the Company's cost-savings initiatives and lower impairment expense of $2.2 million. The Company early exited certain leased office space as part of the Company's efforts to rightsize office space in fiscal years 2025 and 2024, resulting in an impairment expense of $0.1 million and $2.3 million, respectively, related to the right-of-use assets associated with the operating leases. In addition, the Company recognized higher rental income of $1.5 million as a result of a new tenant leasing space in the Company's headquarters.

Liquidity and Capital Resources

Fiscal 2025 compared to fiscal 2024

Cash provided by operating activities was $124.2 million for the fiscal year ended May 31, 2025, compared to cash provided by operating activities of $154.6 million for the prior fiscal year, representing a decrease in cash provided by operating activities of $30.4 million. The decrease in cash provided was primarily driven by lower customer remittances, increased inventory purchases and royalty advance payments, as well as increased medical claim payments, interest payments related to the Company's borrowings and higher spending in Entertainment due to the acquisition of 9 Story in fiscal 2025. This was partially offset by lower tax payments and lower discretionary spending in the fiscal year ended May 31, 2025.

Cash used in investing activities was $252.9 million for the fiscal year ended May 31, 2025, compared to cash used in investing activities of $89.7 million for the prior fiscal year, representing an increase in cash used in investing activities of $163.2 million. The increase in cash used was driven by the cash paid for the 9 Story acquisition of $176.2 million, net of cash acquired, during the fiscal year ended May 31, 2025, as compared to the prior fiscal year in which the Company acquired certain amortizable intangible assets related to educational programs and a U.S.-based children's book publishing business for $6.0 million and purchased the remaining noncontrolling interest related to Make Believe Ideas Limited for $2.1 million. This was partially offset by lower capital expenditures of $6.2 million.

Cash provided by financing activities was $137.3 million for the fiscal year ended May 31, 2025, compared to cash used in financing activities of $176.1 million for the prior fiscal year, representing an increase in cash provided by financing activities of $313.4 million. The increase in cash provided was primarily attributable to net borrowings of $250 million under the U.S. Credit Agreement incurred during fiscal 2025 to fund the 9 Story acquisition. In addition, the Company repurchased common stock of $70.0 million, compared to repurchases of $158.2 million in the prior fiscal year, which also resulted in lower dividends of $2.1 million. This was partially offset by $18.3 million of net repayments of film related obligations in the fiscal year ended May 31, 2025.

Cash Position

The Company’s cash and cash equivalents totaled $124.0 million at May 31, 2025 and $113.7 million at May 31, 2024. Cash and cash equivalents held by the Company’s U.S. operations totaled $48.7 million at May 31, 2025 and $54.9 million at May 31, 2024.

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 2025, the Company repurchased $70.0 million of its common stock on the open market. See Note 15, "Treasury Stock," 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, $70.0 million remained available for future purchases of common shares as of May 31, 2025.

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, 2025, the Company’s primary sources of liquidity consisted of cash and cash equivalents of $124.0 million, cash from

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operations and the Company's U.S. Credit Agreement. The Company expects the U.S. Credit Agreement to provide it with an appropriate level of flexibility to strategically manage its business operations. The U.S. Credit Agreement has a borrowing limit of $400 million and a maturity date of November 26, 2029. See Note 5, "Debt," of Notes to the Consolidated Financial Statements in Item 8, "Consolidated Financial Statements and Supplementary Data" for more information regarding the U.S. Credit Agreement. As of May 31, 2025, the Company's U.S. Credit Agreement, less borrowings of $250.0 million and commitments of $0.4 million, had $149.6 million of availability. Additionally, the Company has short-term credit facilities of $32.0 million, less current borrowings of $6.2 million and commitments of $3.6 million, resulting in $22.2 million of current availability under these facilities at May 31, 2025. 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, 2025, the Company’s contractual cash obligations by future period (see Notes 5, 6, 10 and 16 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data”):

(1) Film related obligations are due on demand. Outstanding borrowings are presented by fiscal year maturity based on expected repayment dates per loan agreements.

(2) Includes principal and interest.

(3) Excludes expected Medicare Part D subsidy receipts.

Financing

Loan Agreement

The Company is party to the U.S. Credit Agreement and certain credit lines with various banks, including those related to film related obligations. 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.”

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. See Note 11, "Acquisitions," of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data.”

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

(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:

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

* Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization.

NM Not meaningful

27

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

* 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

* 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”):

(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.”

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, 2023 increased by $61.1 million, or 3.7%, to $1,704.0 million, compared to $1,642.9 million in the prior fiscal year. The Company reported net income per basic and diluted share of Class A and Common Stock of $2.56 and $2.49, respectively, for the fiscal year ended May 31, 2023, compared to $2.33 and $2.27, respectively, in the prior fiscal year.

The Children's Book Publishing and Distribution segment revenues increased 29%, outperforming the continued softness in retail, primarily from the book fairs channel due to higher fair count, which approximated 85% of pre-pandemic levels, and improved revenue per fair. The Education Solutions segment experienced an overall reduction in schools' purchasing levels when compared to the prior year when schools were refilling classrooms with in-person learning materials as pandemic restrictions were fully lifted. Although sales were lower in certain instructional products and programs, the Company's diversified portfolio of products met the needs of customers through customized product offers and state sponsored programs. Internationally, local currency revenues increased in the Major Markets as the book fairs channels continued to recover from the pandemic, which offset the lower revenues from the disposition of the direct sales business in Asia.

Operating income in fiscal 2023 was $106.3 million compared to $97.4 million in the prior fiscal year, representing an improvement of $8.9 million, primarily driven by the book fairs channel which continues to benefit from top-line growth and operational efficiencies. In addition, the Company realized improved operating margin in Asia attributable to the exit from the direct sales business, which generated losses in the prior year. The Company continues to benefit from the operational efficiencies achieved since the pandemic.

Outlook

The Company previously announced the combination of its book fairs and book clubs channels into an integrated school reading events business which the Company expects will provide multiple opportunities to grow Scholastic's reach, serve its customers better and improve efficiencies within the Children’s Books Publishing and Distribution segment. The Company expects fair count to increase to approximately 90% of pre-pandemic levels with modest growth in revenue per fair. In the Education Solutions segment, the Company expects to continue to invest in new products and capabilities to grow its digital and print literacy solutions and expects the segment to benefit from continued growth in state-sponsored programs in the second half of fiscal 2024. Internationally, the Company expects to benefit from the continued recovery in the Major Markets and in Asia, as well as the reorganization in Canada. The Company also plans to invest in process improvements in its manufacturing and distribution functions, which should result in improved efficiencies going forward, and continue to utilize positive cash flows to increase shareholder value.

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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, 2023 of approximately $3.0 million and approximately $3.2 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, 2023 of approximately $4.2 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 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

(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, pretax severance and related charges of $6.2 and pretax branch consolidation costs of $0.5.

(3) 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.

(4) 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.

(5) In fiscal 2022, the Company recognized a benefit for income taxes in respect to one-time pretax charges of $1.3.

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Results of Operations – Consolidated

The section below is a discussion of the Company's fiscal year 2023 results compared to fiscal year 2022. A detailed discussion of the Company's fiscal year 2021 results and year-over-year comparisons between fiscal years 2022 and 2021 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, 2022, filed as part of the Company's Form 10-K dated July 22, 2022.

Fiscal 2023 compared to fiscal 2022

Revenues from operations for the fiscal year ended May 31, 2023 increased by $61.1 million, or 3.7%, to $1,704.0 million, compared to $1,642.9 million in the prior fiscal year. Children’s Book Publishing and Distribution segment revenues increased $91.5 million, partially offset by lower revenues from the Education Solutions segment and International segment of $7.0 million and $23.4 million, respectively.

Within the Children’s Book Publishing and Distribution segment, revenues in the book fairs channel increased $123.4 million primarily on higher fair count. Increased redemptions of book fair incentive program credits compared to the prior year and an improvement in revenue per fair also drove higher revenues. Lower book clubs channel revenues of $8.6 million were due to lower sponsor participation and fewer events. To address the continued decline, the Company has combined the U.S.-based book clubs and book fairs businesses into an integrated school reading events business subsequent to year-end. The integration is expected to create synergies in operations and a coordinated go-to-market strategy to result in additional opportunities and improved efficiencies. Trade channel revenues decreased $23.3 million, primarily driven by the industry-wide decline in retail market sales, partially offset by higher media channel revenues as the Company completed the delivery of episodes associated with the production of the "Eva the Owlet" animated series.

Within the Education Solutions segment, decreased revenues of $7.0 million were driven by an overall reduction in schools' purchasing levels when compared to the prior year when schools were refilling classrooms with in-person learning materials as pandemic restrictions were fully lifted. Demand for certain of the Company's instructional products and programs, including Scholastic Bookroom, Guided Reading and Scholastic Literacy was lower as customer purchasing shifted to the Company's more customized products and digital and print literacy solutions. This was partially offset by increased revenues from sponsored programs, which had a full year of shipments in fiscal 2023 compared to a partial year in fiscal 2022. The Company sells to non-school customers through its community and state-sponsored programs and the related sales increased in fiscal 2023.

Revenues in the International segment decreased $23.4 million primarily attributable to unfavorable foreign currency exchange of $23.0 million and the disposition of the direct sales business resulting in $15.0 million in lower revenues. Excluding the foregoing, revenues increased $14.6 million primarily driven by the Major Markets as the book fairs channels continued to recover from the pandemic.

Components of Cost of goods sold for fiscal years 2023 and 2022 are as follows:

Cost of goods sold as a percentage of revenue for the fiscal year ended May 31, 2023 was 46.2%, compared to 46.6% in the prior fiscal year. Cost of goods sold benefited from increased sales volume in the U.S. book fairs channel, which also resulted in lower royalty costs as a percentage of revenue. Traditionally, the book fairs channel has a higher mix of non-royalty bearing titles. This was partially offset by higher excess and obsolete inventory due to the softness in the global retail channels. The Company also incurred higher production costs related to the "Eva the Owlet" animated series in fiscal 2023 and higher print costs, primarily in the U.S. trade channel, as well as an increase in inbound and outbound freight costs in the U.S. and in the Major Markets. As of the end of fiscal 2023, inbound freight costs have returned to pre-pandemic levels, however, there remains uncertainty regarding potential shipping courier union strikes

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which could result in increased freight costs for the Company in the near future and impact the Company's ability to ship product to customers.

Selling, general and administrative expenses for the fiscal year ended May 31, 2023 were $756.6 million, compared to $722.8 million in the prior fiscal year. The $33.8 million increase was primarily due to higher spending in the U.S. book fairs channel as a result of the increased fair count resulting in higher labor and other overhead costs, including fuel charges, marketing expenses and bank fees, as well as increased rent for warehouse space. In addition, the Company incurred higher employee-related costs in the Education Solutions segment associated with increased spending on strategic initiatives such as the integration efforts related to the Learning Ovations acquisition and the launch of Ready4Reading, as well as higher labor and marketing costs to support the growth in sponsored programs. The increase was also attributable to the prior year receipt of insurance recoveries of $6.6 million related to the intellectual property legal settlement accrued in fiscal 2021. Partially offsetting this increase the Company had lower severance expense from its restructuring programs of $6.2 million, recognized higher COVID-related governmental employee retention credits of $2.1 million received in fiscal 2023, incurred lower costs in Asia as a result of the disposition of the direct sales business of approximately $12.6 million, benefited from an insurance recovery of $5.0 million in fiscal 2023 related to photo litigation settlements and also benefited from a favorable settlement of $1.8 million related to legacy sales tax matters. Additionally, bad debt expense was favorable as the prior fiscal year was negatively impacted by a discrete systems issue in the book clubs channel which resulted in $6.6 million of higher uncollectible receivable balances. The Company expects to incur severance costs in the first quarter of fiscal 2024 related to restructuring programs in Canada as well as in the U.S. as a result of combining the book clubs and book fairs businesses into an integrated school reading events business.

Depreciation and amortization expenses for the fiscal year ended May 31, 2023 were $54.7 million, compared to $56.8 million in the prior fiscal year. The $2.1 million decrease primarily related to the Company's shift to cloud computing arrangements (e.g. software as a service) which resulted in capitalized software being amortized through Selling, general and administrative expenses rather than Depreciation and amortization. Amortization of capitalized cloud software increased $2.4 million when compared to the prior fiscal year which offset the decrease in Depreciation and amortization. Management expects Depreciation and amortization expense to increase as the Company's capitalized spending has and will continue to increase into the next fiscal year.

Asset impairments and write downs for the fiscal year ended May 31, 2022 were $0.4 million due to the impairment of right-of-use assets associated with certain operating leases as part of the book fairs warehouse consolidation effort.

Interest income for the fiscal year ended May 31, 2023 was $7.2 million, compared to $0.5 million in the prior fiscal year. $4.7 million of the increase was driven by overall higher average investment balances as compared to the prior fiscal year, coupled with higher interest rates in fiscal 2023. The Company invests excess cash in short term investments which earn competitive interest rates that change directionally in relation to the Federal Funds rate. In addition, the Company recognized $2.0 million of interest income related to tax refunds received during fiscal 2023 that will not repeat in the next fiscal year. Interest expense for the fiscal year ended May 31, 2023 was $1.4 million, compared to $2.9 million in the prior fiscal year. The decrease in interest expense was due to lower average debt borrowings as compared to the prior fiscal year as the outstanding borrowings on the U.S. credit agreement were paid down during fiscal 2022, resulting in no outstanding borrowings as of the beginning of fiscal 2023.

Gain (loss) on assets held for sale for the fiscal year ended May 31, 2022 was a loss of $15.1 million related to the Company's exit of the direct sales business in Asia as it was no longer a part of the strategic growth plan for the Company. The exit resulted in the sale of remaining assets, primarily accounts receivable and inventory, and the assets were written down to their recoverable value which equated to the selling price. The loss on assets held for sale included 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. In the prior fiscal year, the Company sold its UK distribution facility located in Witney and its facility located in Lake Mary, Florida, resulting in a recognized gain on sale of $3.5 million and $6.2 million, respectively.

The Company’s effective tax rate for the fiscal year ended May 31, 2023 was a 23.0% tax provision, compared to 9.7% 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 2023 was $86.5 million compared to $81.0 million in fiscal 2022, an increase of $5.5 million. The basic and diluted income per share of Class A Stock and Common Stock was $2.56 and $2.49, respectively, in fiscal 2023, compared to basic and diluted income per share of Class A Stock and Common Stock of $2.33 and $2.27,

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respectively, in fiscal 2022. Outstanding shares decreased 7% from 34.2 million to 31.7 million as of May 31, 2023 which will benefit earnings per share calculations in fiscal 2024.

Net income attributable to noncontrolling interest for fiscal 2023 and fiscal 2022 was $0.2 million and $0.1 million, respectively.

Results of Operations – Segments

CHILDREN’S BOOK PUBLISHING AND DISTRIBUTION

* Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization.

NM Not meaningful

Fiscal 2023 compared to fiscal 2022

Revenues for the fiscal year ended May 31, 2023 increased by $91.5 million to $1,038.0 million, compared to $946.5 million in the prior fiscal year. The increase in segment revenues was driven by the book fairs channel with an increase of $123.4 million, or 29%, exceeding pre-pandemic revenues for this channel. The increased revenues were driven by a 15% increase in fair count, coupled with higher revenue per fair and a year-over-year increase in redemptions of book fair incentive program credits. Revenues from the book clubs channel decreased $8.6 million as a result of the multi-year trend of lower sponsor participation and fewer events held in fiscal 2023. To address this continued decline, the Company has combined the U.S.-based book clubs and book fairs businesses into an integrated school reading events business and expects the synergies in operations and a coordinated go-to-market strategy to result in additional opportunities and improved efficiencies. Trade channel revenues decreased $23.3 million primarily reflecting the industry-wide decline in retail market sales driving overall lower revenues. The prior fiscal year also included the release of J.K. Rowling's The Christmas Pig as well as limited edition foil cover versions of titles in Dav Pilkey's Dog Man series which helped lift overall sales across the series. During fiscal 2023, the trade channel released numerous best-sellers, including Dog Man #11: Twenty Thousand Fleas Under the Sea, Cat Kid Comic Club: Collaborations, Harry Potter and the Order of the Phoenix: The Illustrated Edition, Wings of Fire Graphix #6: Moon Rising, The Baby-Sitters Club Graphic Novel #13: Mary Anne's Bad Luck Mystery and Nick and Charlie: A Heartstopper Novella. In addition, the Company completed the delivery of episodes associated with the production of the animated series "Eva the Owlet". The unfavorable economic trends in the retail book markets could continue to negatively impact the trade channel in fiscal 2024.

Cost of goods sold for the fiscal year ended May 31, 2023 was $481.7 million, or 46.4% of revenues, compared to $450.3 million, or 47.6% of revenues, in the prior fiscal year. The decrease in Cost of goods sold as a percentage of revenues was primarily driven by increased sales volume in the book fairs channel, which also resulted in lower royalty costs as a percentage of revenue. Traditionally, the book fairs channel has a higher mix of non-royalty bearing titles. The favorability was partially offset by increased product costs in the trade channel due to higher print and inbound freight costs driven by the continued impact of inflationary pressures and higher production costs related to the production of the "Eva the Owlet" animated series in the media business. Cost of goods sold benefited from lower excess and obsolete inventory in the book fairs channel in fiscal 2023 as a result of better utilization of aged inventory. This was substantially offset by higher excess and obsolete inventory in the trade channel due to the softness in the retail market and in the book clubs channel which expects to reduce offerings in fiscal 2024 as part of its integration into the school reading events business. As of the end of fiscal 2023, inbound freight costs have returned to pre-pandemic levels, however, there remains uncertainty regarding potential shipping courier union strikes which could result in increased freight costs for the Company in the near future.

Other operating expenses were $412.9 million for the fiscal year ended May 31, 2023, compared to $380.5 million in the prior fiscal year. The $32.4 million increase was primarily due to increased labor and other overhead costs in the book fairs channel, including fuel charges, marketing expenses and bank fees, as a result of the increased fair count in

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fiscal 2023, as well as increased rent for warehouse space. The higher labor costs were partially offset by a COVID-related governmental employee retention credit of $3.3 million received and recognized in fiscal 2023. In addition, bad debt expense was favorable as the prior fiscal year was negatively impacted by a discrete systems issue in the book clubs channel which resulted in $6.6 million of higher uncollectible receivable balances.

Asset impairments were $0.4 million for the fiscal year ended May 31, 2022. In the prior fiscal year, the Company recorded an impairment of right-of-use assets associated with certain operating leases as part of the book fairs warehouse consolidation effort.

Segment operating income for the fiscal year ended May 31, 2023 was $143.4 million, compared to $115.3 million in the prior fiscal year. The $28.1 million increase was primarily driven by the continued improvement in the book fairs channel, which resulted in a $123.4 million increase in revenue primarily on higher fair count. The book fairs channel continued to drive an increase in revenue per fair by approximately 5% which benefited operating income due to the fixed distribution costs on a delivered fair. In addition, the production and delivery of the "Eva the Owlet" animated series drove additional profit contribution in fiscal 2023. Operating income was negatively impacted by a decrease in trade channel revenue reflecting the industry-wide decline in retail market sales, and continued inflationary pressures driving higher print and inbound freight costs, primarily in the trade channel. As of the end of fiscal 2023, inbound freight costs have returned to pre-pandemic levels, however, there remains uncertainty regarding potential shipping courier union strikes which could result in increased freight costs for the Company in the near future. Lower participation levels in the book clubs channel was also unfavorable to operating income in the current fiscal year. The Company has combined the U.S.-based book clubs and book fairs businesses into an integrated school reading events business subsequent to year-end. The integration is expected to create synergies in operations and a coordinated go-to-market strategy to result in additional opportunities and improved efficiencies.

EDUCATION SOLUTIONS

* Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization.

Fiscal 2023 compared to fiscal 2022

Revenues for the fiscal year ended May 31, 2023 decreased by $7.0 million to $386.6 million, compared to $393.6 million in the prior fiscal year. The decrease in segment revenues was largely driven by an overall reduction in schools' purchasing levels when compared to the prior year when schools were refilling classrooms with in-person learning materials as pandemic restrictions were being lifted. Demand for certain of the Company's instructional products and programs, including Scholastic Bookroom, Guided Reading and Scholastic Literacy, as well as early childhood programs and summer learning product offerings was lower, due in part to customer purchasing shifting to the Company's more customized products and digital and print literacy solutions. Changes to the methods in which schools approach literacy instruction also contributed to the decline in certain offerings and the Company's new K-3 phonic program, Ready4ReadingTM, is expected to align with the modified instruction methods. The decrease in revenues related to instructional products and programs was also due to the timing of revenues in fiscal 2022, which benefited from shipments, primarily consisting of summer learning products, that shifted from the fourth quarter of fiscal 2021 due to supply chain constraints at that time. During the fourth quarter of fiscal 2022, orders were shipped more timely with fewer sales shifting into the first quarter of fiscal 2023. The segment also had lower sales of Rising Voices Library® products, professional books and teaching resource products. Cultural awareness products like Rising Voices Library continue to be requested by customers and are subject to fluctuations based on large district sales. The Company continues to actively market these products and make additional investments and improvements in accordance with market demand. The overall decrease in segment revenues was partly offset by revenues from sponsored programs, which had a full year of shipments in fiscal 2023 compared to a partial year in fiscal 2022 and the addition of another state program in fiscal 2023. Additionally, the segment benefited from increased revenues from traditional classroom book collections and Grab and Go reading packs as well as products from the Scholastic Family and Community Engagement (FACE)TM initiative, in which a renewed focus helped to increase offerings and expand into new school districts. Revenues from Magazines+ remained relatively consistent with the prior fiscal year and digital subscription revenues modestly increased year over year.

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Cost of goods sold for the fiscal year ended May 31, 2023 was $143.0 million, or 37.0% of revenue, compared to $142.4 million, or 36.2% 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, including higher inbound freight costs, in addition to increased postage and outbound freight costs, as the Company continued to be impacted by inflationary pressures. In fiscal 2022, the segment benefited from sales of inventory purchased prior to the cost increases. As of the end of fiscal 2023, inbound freight costs have returned to pre-pandemic levels, however, there remains uncertainty regarding potential shipping courier union strikes which could result in increased freight costs for the Company in the near future.

Other operating expenses were $185.2 million for the fiscal year ended May 31, 2023, compared to $169.4 million in the prior fiscal year. The $15.8 million increase in Other operating expenses was primarily related to higher spending associated with the integration efforts related to the Learning Ovations acquisition which approximated $3 million and the launch of Ready4Reading as well as the growth within sponsored programs, partially offset by lower bonuses and commissions. In addition, the segment incurred higher marketing costs associated with sponsored programs and continued to incur costs related to strategic initiatives related to the Company's digital and print literacy offerings.

Segment operating income for the fiscal year ended May 31, 2023 was $58.4 million, compared to $81.8 million in the prior fiscal year. The $23.4 million decrease was attributable to lower revenues, primarily from instructional products and programs, coupled with increased employee-related costs and increased spending associated with growth initiatives.

INTERNATIONAL

* Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization.

NM Not meaningful

Fiscal 2023 compared to fiscal 2022

Revenues for the fiscal year ended May 31, 2023 decreased by $23.4 million to $279.4 million compared to $302.8 million in the prior fiscal year. Local currency revenues in the Company's ongoing foreign operations increased $14.6 million when compared to the prior fiscal year, which excluded $15.0 million in lower revenues from the disposition of the direct sales business and unfavorable foreign exchange impact of $23.0 million. In the Asia channel, excluding the lower revenues from the disposition of the direct sales business, local currency revenues increased $2.1 million primarily attributable to higher revenues in India from the book fairs and trade channels. In Australia and New Zealand, local currency revenues increased $7.3 million, driven by increased sales in the trade and book fairs channels as the prior year was negatively impacted by additional lockdowns imposed by the COVID variant. In the UK, local currency revenues increased $4.5 million largely driven by the continued recovery in the book fairs channel which resulted in a 70% increase in fair count as compared to the prior fiscal year, in addition to increased book clubs channel revenues. This was partially offset by lower education and magazine channel revenues as well as marginally lower revenues in the trade channel due to softness in the retail market which was partially offset by new releases in fiscal 2023 including The Baddies by Julia Donaldson and Dog Man® #11: Twenty Thousand Fleas Under the Sea by Dav Pilkey. In Canada, local currency revenues increased $1.4 million primarily driven by the book fairs channel which continued to recover from the pandemic, resulting in a 37% increase in fair count and higher revenue per fair, largely offset by lower trade channel revenues due to an industry wide decline in the retail market and lower sales in the book clubs channel due to lower sponsor participation. Export sales decreased $0.7 million primarily due to lower distributor sales.

Cost of goods sold for the fiscal year ended May 31, 2023 was $169.7 million, or 60.7% of revenues, compared to $169.8 million, or 56.1% of revenues, in the prior fiscal year. The increase in Cost of goods sold as a percentage of revenues was driven by continued inflationary pressures in the Major Markets which resulted in an overall increase in product costs due to higher inbound freight costs as well as higher outbound postage and freight costs. Certain foreign operations, primarily Canada, purchase inventory in U.S. dollars and the strengthening of the U.S. dollar

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unfavorably impacted Cost of goods sold. Fulfillment costs also increased, primarily in Canada, driven by higher labor costs. In addition, higher excess and obsolete inventory in Canada was due to lower inventory utilization in the trade channel, which was partially offset by lower excess and obsolete inventory in Asia as a result of the exit of the direct sales business.

Other operating expenses were $113.3 million for the fiscal year ended May 31, 2023, compared to $129.7 million in the prior fiscal year. In local currencies, Other operating expenses decreased $8.3 million coupled with unfavorable foreign exchange impact of $8.1 million. Approximately $12.6 million of the decrease related to the disposition of the direct sales business in Asia driving lower employee-related expenses, general overhead costs and bad debt expense. In addition, the segment incurred severance expense of $1.2 million related to restructuring programs and UK branch consolidation costs of $0.5 million in the prior fiscal year, both of which did not reoccur in fiscal 2023. Partially offsetting this decrease, Other operating expenses were impacted by higher employee-related expenses due to the increased volume in the book fairs channels and the discontinuation of government subsidies related to COVID-related governmental retention programs in which $1.2 million was recognized in the prior fiscal year.

Segment operating loss for the fiscal year ended May 31, 2023 was $3.6 million, compared to operating income of $3.3 million in the prior fiscal year. Operating loss increased $6.9 million, primarily driven by cost pressures in Canada related to the impact of the weakening Canadian dollar on inventory purchases which are primarily denominated in U.S. dollars, higher excess and obsolete inventory due to the softness in the retail market, coupled with higher freight and fulfillment labor costs which, in addition to Canada, also impacted the other Major Markets due to continued inflationary pressures. This was partially offset by improved operating margin in Asia of $4.6 million attributable to the exit from the direct sales business, which generated losses in the prior period. The Company expects to incur severance costs in the first quarter of fiscal 2024 related to restructuring programs in Canada as efforts are being made to utilize efficiencies across North American operations.

Overhead

Fiscal 2023 compared to fiscal 2022

Unallocated overhead expense for the fiscal year ended May 31, 2023 decreased by $11.1 million to $91.9 million, compared to $103.0 million in the prior fiscal year. The decrease was primarily attributable to $5.0 million of insurance recoveries received and recognized in fiscal 2023 related to photo litigation settlements paid in prior periods and a $1.8 million benefit related to the favorable settlement of certain legacy sales tax matters. In addition, the Company incurred lower unallocated employee-related costs, including lower severance and related charges from the Company's restructuring programs of $5.0 million. This was partially offset by $6.6 million of insurance recoveries received and recognized in the prior fiscal year related to the intellectual property legal settlement accrued in fiscal 2021.

Liquidity and Capital Resources

Fiscal 2023 compared to fiscal 2022

Cash provided by operating activities was $148.9 million for the fiscal year ended May 31, 2023, compared to cash provided by operating activities of $226.0 million for the prior fiscal year, representing a decrease in cash provided by operating activities of $77.1 million. The decrease in cash was primarily driven by higher inventory purchases of approximately $110 million. In the first half of the fiscal year, the Company increased purchases by approximately $140 million to mitigate long lead times related to global supply chain challenges. The Company expects to return to historical purchasing patterns as lead times have returned to pre-pandemic levels, however, due to the continued growth of the book fairs business, working capital requirements are expected to remain elevated. The decrease was also attributable to lower net refunds from income taxes of $51.3 million relative to the prior fiscal year, increased spending on general expenses in the book fairs channel to support the increased fair count and lower cash remittances related to book fairs incentive credits. This was partially offset by higher customer remittances on receivable balances in fiscal 2023 of approximately $62.6 million.

Cash used in investing activities was $99.6 million for the fiscal year ended May 31, 2023, compared to cash used in investing activities of $43.2 million for the prior fiscal year, representing an increase in cash used in investing activities of $56.4 million. The increase in cash used was driven by higher capital expenditures of $20.0 million, primarily for new equipment at the Company's Jefferson City, Missouri distribution facility and in the book fairs warehouses to meet expected demand, payments related to the Learning Ovations acquisition of $10.7 million, and increased prepublication spending of $9.7 million associated with product development in Education Solutions. In addition, the

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prior fiscal year included net proceeds of $10.4 million from the sale of the U.S. Lake Mary facility and $5.6 million from the sale of the UK distribution facility located in Witney.

Cash used by financing activities was $139.5 million for the fiscal year ended May 31, 2023, compared to cash used in financing activities of $229.2 million for the prior fiscal year. The decrease in cash used in financing activities of $89.7 million was primarily related to repayments of borrowings under the U.S. credit agreement of $175.0 million during the prior fiscal year, coupled with an increase in net proceeds from stock option exercises of $10.5 million. Partially offsetting this decrease, the Company repurchased $132.1 million of common stock, compared to repurchases of $33.4 million in the prior fiscal year, and paid higher dividends of $4.9 million as part of the Company's shareholder enhancement initiatives. As a result, outstanding shares decreased 7% from 34.2 million to 31.7 million as of May 31, 2023 which will benefit earnings per share calculations in fiscal 2024.

Cash Position

The Company’s cash and cash equivalents totaled $224.5 million at May 31, 2023 and $316.6 million at May 31, 2022. Cash and cash equivalents held by the Company’s U.S. operations totaled $174.6 million at May 31, 2023 and $275.5 million at May 31, 2022.

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 2023, the Company repurchased $135.1 million of its common stock, which included shares repurchased through a modified Dutch auction tender offer and open-market repurchases. See Note 14, "Treasury Stock," of Notes to the Consolidated Financial Statements in Item 8, "Consolidated Financial Statements and Supplementary Data" for further details regarding the modified Dutch auction tender offer. Under the Company's open-market buy-back program, $21.6 million remained available for future purchases of common shares as of May 31, 2023. Subsequent to May 31, 2023, the Board authorized an increase of $100.0 million for common stock repurchases, resulting in a current Board authorization of $119.2 million, which includes the remaining amount from the previous Board authorization less share repurchases of $2.4 million subsequent to May 31, 2023.

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, 2023, the Company’s primary sources of liquidity consisted of cash and cash equivalents of $224.5 million, cash from operations and the Company's U.S. credit agreement. The Company expects the U.S. credit agreement to provide it with an appropriate level of flexibility to strategically manage its business operations. The Company's U.S. credit agreement, less commitments of $0.4 million, has $299.6 million of availability. Additionally, the Company has short-term credit facilities of $34.5 million, less current borrowings of $6.0 million and commitments of $3.4 million, resulting in $25.1 million of current availability under these facilities at May 31, 2023. Accordingly, the Company believes these sources of liquidity are sufficient to finance its currently anticipated ongoing operating needs, as well as its financing and investing activities.

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The following table summarizes, as of May 31, 2023, 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”):

(1) Includes principal and interest.

(2) Excludes expected Medicare Part D subsidy receipts.

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 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, 2023. On February 28, 2023, the Company entered into the First and Second Amendments to the U.S. credit agreement which adjusted the credit spread adjustment for SOFR (the secured overnight financing rate as administered by the Federal Reserve Bank of New York) to 0.10% and transitioned the reference rate from LIBOR (the London interbank offered rate) to SOFR. Reference is made to Note 1 and Note 5 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data for further details.

The Company is party to other loan agreements, notes or other documents or instruments which previously referenced USD LIBOR as the benchmark interest rate index used to set the borrowing rate on certain short-term and variable-rate loans or advances. As of May 31, 2023, the Company has effectively replaced USD LIBOR with alternative reference rates in all financial contracts. The Company does not believe that the change in reference rates has or will have any material effect on its ability to access the credit markets under its existing financing agreements, or its ability to modify or amend financial contracts, if required.

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. See Note 10, "Acquisitions", of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data.”

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

(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:

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:

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

* 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

* 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

* 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”):

(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.