SCHOLASTIC CORP (SCHL) FY 2026 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The Company categorizes its businesses into four reportable segments: Children’s Book Publishing and Distribution; Education; 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, 2026 decreased by $43.6 million, or 2.7%, to $1,581.9 million, compared to $1,625.5 million in the prior fiscal year. The Company reported net income per basic and diluted share of Class A and Common Stock of $2.39 and $2.34, respectively, for the fiscal year ended May 31, 2026, compared to net loss per basic and diluted share of Class A and Common Stock of $0.07 and $0.07, respectively, in the prior fiscal year.
Fiscal 2026 reflected the continued execution of the Company's multi-year transformation strategy, focused on strengthening its organizational structure, enhancing operating efficiency, optimizing its portfolio, and improving capital allocation. Growth in Book Fairs, driven by increases in both fair count and revenue per fair, as well as higher Entertainment revenues, substantially offset declines in trade channel revenues resulting from the challenging prior-year publishing comparisons and lower Education revenues attributable to the continued funding volatility. Despite the overall decline in revenues, operating income remained relatively consistent with the prior year as the Company continued to execute disciplined cost management initiatives and realize operational efficiencies. Additionally, following the completion of the sale-leaseback transactions, the Company returned more than $285 million of capital to shareholders through share repurchases, including a modified Dutch auction tender offer, and the payment of cash dividends.
Outlook
Looking ahead to fiscal 2027, the Company intends to focus its School Reading Events business on increasing fair count, while further simplifying the Book Clubs program and improving execution to enhance engagement with teachers and families. The Company also expects to benefit from a strong global publishing pipeline, including the release of the next title in the best-selling Dog Man series in November and new publishing related to the new Harry Potter series on HBO, as well as new titles in The Baby-Sitters Club, Wings of Fire, and I Survived franchises. In addition, a new Clifford the Big Red Dog animated series is expected to premiere on PBS KIDS in 2027. Within Education, school and district funding conditions are expected to remain volatile, particularly in supplemental curriculum. The Company intends to build on its core literacy strengths to position the business for a return to growth as its strategy advances and market conditions stabilize. Overall, the Company remains focused on executing its strategic priorities, maintaining disciplined cost management, and making targeted investments in areas with the greatest potential to drive long-term growth, strengthen engagement with children, families, and educators, and enhance 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: accounts receivable allowance for credit losses; variable consideration related to anticipated returns; allocation of transaction price to contractual performance obligations; pension and other postretirement obligations; inventory reserves; deferred income taxes and tax reserves; the timing and amount of future income taxes and related deductions; uncertain tax positions; expected economic life and recoverability of investment in film and television programs and prepublication costs; royalty advance reserves and royalty expense accruals; the impairment assessment of goodwill intangibles and other long-lived assets; and the incremental borrowing rate used to determine the present value of future lease payments and related lease liabilities. 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, 2026 of approximately $5.1 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, 2026 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.
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 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.
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The Company believes that its taxable earnings, during the periods when the temporary differences giving rise to deferred tax assets become deductible or when tax benefit carryforwards may be utilized, should be sufficient to realize the related future income tax benefits. For those jurisdictions where the expiration date of the tax benefit carryforwards or the projected taxable earnings indicate that realization is not likely, the Company establishes a valuation allowance.
In assessing the need for a valuation allowance, the Company estimates future taxable earnings, with consideration for the feasibility of ongoing tax planning strategies and the realizability of tax benefit carryforwards, to determine which deferred tax assets are more likely than not to be realized in the future. Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates and future taxable earnings. In the event that actual results differ from these estimates in future periods, the Company may need to adjust the valuation allowance.
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Results of Operations - Consolidated
| (Amounts in millions, except per share data) For fiscal years ended May 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2026 | 2025 | |||||||||||
| $ | % (1) | $ | % (1) | |||||||||
| Revenues: | ||||||||||||
| Children’s Book Publishing and Distribution | $ | 964.2 | 61.0 | $ | 963.9 | 59.3 | ||||||
| Education | 267.6 | 16.9 | 309.8 | 19.1 | ||||||||
| Entertainment | 65.7 | 4.2 | 61.0 | 3.8 | ||||||||
| International | 277.2 | 17.5 | 279.6 | 17.2 | ||||||||
| Other (2) | 7.2 | 0.4 | 11.2 | 0.6 | ||||||||
| Total revenues | 1,581.9 | 100.0 | 1,625.5 | 100.0 | ||||||||
| Cost of goods sold | 689.8 | 43.6 | 718.8 | 44.2 | ||||||||
| Selling, general and administrative expenses | 807.2 | 51.0 | 822.3 | 50.6 | ||||||||
| Depreciation and amortization | 58.8 | 3.7 | 65.7 | 4.0 | ||||||||
| Asset impairments and write downs | 10.9 | 0.7 | 2.9 | 0.2 | ||||||||
| Operating income (loss) | 15.2 | 1.0 | 15.8 | 1.0 | ||||||||
| Interest income | 2.9 | 0.2 | 2.2 | 0.1 | ||||||||
| Interest expense | (14.1) | (0.9) | (18.2) | (1.1) | ||||||||
| Other components of net periodic benefit (cost) | (1.3) | (0.1) | (1.1) | (0.1) | ||||||||
| Loss on sale of investments | (17.2) | (1.1) | — | — | ||||||||
| Gain on sale and leaseback transactions | 99.7 | 6.3 | — | — | ||||||||
| Earnings (loss) before income taxes | 85.2 | 5.4 | (1.3) | (0.1) | ||||||||
| Provision (benefit) for income taxes | 28.5 | 1.8 | 0.6 | 0.0 | ||||||||
| Net income (loss) | $ | 56.7 | 3.6 | $ | (1.9) | (0.1) | ||||||
| Basic and diluted earnings (loss) per share of Class A and Common Stock | ||||||||||||
| Basic | $ | 2.39 | $ | (0.07) | ||||||||
| Diluted | $ | 2.34 | $ | (0.07) |
(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. As a result of the sale and leaseback transactions completed during the third quarter of fiscal 2026, the Company no longer owns the underlying leasable space. Refer to Note 4, "Sale and Leaseback Transactions", and Note 11, "Leases", of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data” for further details.
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Results of Operations – Consolidated
The section below is a discussion of the Company's fiscal year 2026 results compared to fiscal year 2025. A discussion of the Company's fiscal year 2025 results compared to fiscal year 2024 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, 2025, filed as part of the Company's Form 10-K dated July 25, 2025.
Fiscal 2026 compared to fiscal 2025
Revenues from operations for the fiscal year ended May 31, 2026 decreased by $43.6 million, or 3%, to $1,581.9 million, compared to $1,625.5 million in the prior fiscal year.
Children’s Book Publishing and Distribution segment revenues were consistent with the prior fiscal year, increasing by $0.3 million. Increased revenues from School Reading Events, primarily driven by higher fair count, were substantially offset by lower trade channel revenues, as the prior year benefited from increased sales related to the release of Suzanne Collins’ Sunrise on the Reaping, as well as lower book clubs channel revenues due to reduced sponsor participation.
Education segment revenues decreased by $42.2 million, primarily driven by lower sales of supplemental curriculum products due to the continued challenging funding environment for schools and school districts, coupled with lower subscription revenues from Magazines+ and lower revenues from sponsored programs.
Entertainment segment revenues increased by $4.7 million, reflecting increased revenues from production services.
International segment revenues decreased by $2.4 million, primarily driven by lower trade channel revenues in Canada and the U.K., partially offset by increased trade and education sales in Asia and higher trade channel revenues in Australia, as well as favorable foreign currency exchange of $6.3 million.
Rental income, included in the Overhead segment, decreased by $4.0 million compared to the prior fiscal year, primarily as a result of the sale-leaseback of the Company’s headquarters in New York City in fiscal 2026, after which the Company no longer owned the underlying leasable space.
Components of Cost of goods sold for fiscal years 2026 and 2025 are as follows:
| ($ amounts in millions) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2026 | % of revenue | 2025 | % of revenue | ||||||||
| Product, service and production costs and inventory reserves | $ | 395.2 | 25.0 | % | $ | 419.1 | 25.8 | % | |||
| Royalty costs | 120.2 | 7.6 | 129.4 | 8.0 | |||||||
| Prepublication and production amortization | 33.5 | 2.1 | 31.9 | 2.0 | |||||||
| Postage, freight, shipping, fulfillment and all other costs | 140.9 | 8.9 | 138.4 | 8.4 | |||||||
| Total cost of goods sold | $ | 689.8 | 43.6 | % | $ | 718.8 | 44.2 | % |
Cost of goods sold as a percentage of revenues for the fiscal year ended May 31, 2026 was 43.6%, compared to 44.2% in the prior fiscal year. The decrease was primarily driven by lower product costs in the Education and International segments, reflecting the mix of products sold during the year ended May 31, 2026, as well as lower royalty costs in the U.S. trade channel due to a shift in sales mix toward titles with lower royalty rates. In addition, Cost of goods sold was favorably impacted by tariff mitigation actions and tariff refunds received during fiscal 2026. These improvements were partially offset by higher shipping and postage costs associated with sponsored programs in Education and higher fulfillment costs in Canada.
Selling, general and administrative expenses for the fiscal year ended May 31, 2026 were $807.2 million, compared to $822.3 million in the prior fiscal year. The $15.1 million decrease was primarily attributable to lower employee-related and external labor costs resulting from the Company's prior reorganization efforts and cost-saving initiatives, as well as reduced spending on general overhead expenses. These decreases were partially offset by higher severance expense of $4.6 million related to cost-saving initiatives in the year ended May 31, 2026 and higher rent expense of $8.4 million resulting from the sale and leaseback of the Company's New York City headquarters. The Company expects rental expense to increase in fiscal 2027 compared to fiscal 2026, primarily due to the recognition of a full year of expense associated with the Company's leased headquarters and primary distribution facilities.
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Depreciation and amortization expenses for the fiscal year ended May 31, 2026 were $58.8 million, compared to $65.7 million in the prior fiscal year. The $6.9 million decrease was primarily attributable to the sale of the Company's headquarters in New York City and distribution center in Jefferson City, Missouri during fiscal 2026.
Asset impairments and write downs for the fiscal year ended May 31, 2026 were $10.9 million, compared to $2.9 million in the prior year. In fiscal 2026, the Company recognized impairments of $4.3 million related to certain products within the Education segment and $5.2 million within the Entertainment segment, primarily related to certain film and television programs in development. In addition, the Company recognized impairments of $1.4 million within the Children's Book Publishing and Distribution segment related to a product that is no longer being sold and inventory destroyed in a warehouse fire. In fiscal 2025, the Company recognized impairments of $1.2 million related to certain digital products in Children's Book Publishing and Distribution and Education, $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.
Interest income for the fiscal year ended May 31, 2026 was $2.9 million, compared to $2.2 million in the prior fiscal year. The increase was attributable to higher average short term investment balances during the year ended May 31, 2026, primarily reflecting the net proceeds received from the sale and leaseback transactions. The Company invests excess cash in short term investments that earn competitive interest rates, which generally move in line with changes in the Federal Funds rate.
Interest expense for the fiscal year ended May 31, 2026 was $14.1 million, compared to $18.2 million in the prior fiscal year. The decrease was due to repayments of borrowings under the U.S. Credit Agreement during the year ended May 31, 2026.
Loss on sale of investments for the fiscal year ended May 31, 2026 was $17.2 million. During fiscal 2026, the Company sold its 26.2% equity interest in a U.K.-based children’s book publishing business, resulting in the loss.
Gain on sale and leaseback transactions for fiscal year ended May 31, 2026 was $99.7 million. During fiscal 2026, the Company completed sale and leaseback transactions related to its headquarters in New York City and primary distribution center in Jefferson City, Missouri, resulting in a pre-tax gain of $99.7 million.
The Company’s effective tax rate for the fiscal year ended May 31, 2026 was 33.4%, compared to 46.2% in the prior fiscal year. The Company's effective tax rate differed from the statutory rate primarily due to higher state and local income taxes attributable to the tax gain on the sale-leaseback transactions and non-deductible compensation for covered executive employees.
Net income for fiscal 2026 was $56.7 million compared to net loss of $1.9 million in fiscal 2025, an improvement of $58.6 million. The basic and diluted earnings per share of Class A Stock and Common Stock was $2.39 and $2.34, respectively, in fiscal 2026, compared to basic and diluted loss per share of Class A Stock and Common Stock of $0.07 and $0.07, respectively, in fiscal 2025. Outstanding shares decreased 25% from 25.0 million to 18.7 million as of May 31, 2026 which is expected to benefit earnings per share calculations in fiscal 2027.
Results of Operations – Segments
CHILDREN’S BOOK PUBLISHING AND DISTRIBUTION
| ($ amounts in millions) | 2026 compared to 2025 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2026 | 2025 | $ change | % change | |||||||||||
| Revenues | $ | 964.2 | $ | 963.9 | $ | 0.3 | 0.0 | % | ||||||
| Cost of goods sold | 393.5 | 410.2 | (16.7) | (4.1) | ||||||||||
| Other operating expenses * | 426.4 | 422.4 | 4.0 | 0.9 | ||||||||||
| Asset impairments and write downs | 1.4 | 0.6 | 0.8 | 133.3 | ||||||||||
| Operating income (loss) | $ | 142.9 | $ | 130.7 | $ | 12.2 | 9.3 | % | ||||||
| Operating margin | 14.8 | % | 13.6 | % |
* Other operating expenses include selling, general and administrative expenses and depreciation and amortization.
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Fiscal 2026 compared to fiscal 2025
Revenues for the fiscal year ended May 31, 2026 increased by $0.3 million to $964.2 million, compared to $963.9 million in the prior fiscal year. Higher revenues from School Reading Events of $20.6 million were substantially offset by a $20.3 million decrease in trade channel revenues. Within School Reading Events, book fairs channel revenues increased by $27.7 million, primarily driven by higher fair count as well as higher revenue per fair and increased redemptions of book fair incentive program credits. This increase was partially offset by lower book clubs channel revenues of $7.1 million primarily due to lower sponsor participation. Within the trade channel, the year-over-year revenue decline was attributable to elevated sales in the prior fiscal year following the release of Sunrise on the Reaping by Suzanne Collins. This decline was partially offset by higher sales of backlist titles from The Hunger Games and other bestselling series.
Cost of goods sold for the fiscal year ended May 31, 2026 was $393.5 million, or 40.8% of revenues, compared to $410.2 million, or 42.6% of revenues, in the prior fiscal year. The decrease in Cost of goods sold as a percentage of revenues was primarily attributable to lower royalty costs in the trade channel, driven by a shift in sales mix toward titles with lower royalty rates during the fiscal year ended May 31, 2026. In addition, Cost of goods sold was favorably impacted by improved inventory utilization in the book clubs channel, resulting in lower excess and obsolete inventory, as well as tariff mitigation actions and tariff refunds received during fiscal 2026.
Other operating expenses were $426.4 million for the fiscal year ended May 31, 2026, compared to $422.4 million in the prior fiscal year. The $4.0 million increase in Other operating expenses was primarily due to inflationary pressures on employee-related and general expenses, largely within the book fairs channel. The Company expects Other operating expenses to increase in fiscal 2027 compared to fiscal 2026, primarily due to the recognition of a full year of rental expense associated with the Company's leased headquarters and primary distribution facilities.
Asset impairments were $1.4 million for the fiscal year ended May 31, 2026, compared to $0.6 million in the prior fiscal year. In fiscal 2026, the Company recognized asset impairments of $0.8 million related to a certain product that is no longer being sold and $0.6 million related to inventory destroyed in a warehouse fire. In fiscal 2025, the Company recognized an asset impairment of $0.6 million related to certain digital products. Refer to Note 5, "Asset Write Down," of Notes to the Consolidated Financial Statements in Item 8, "Consolidated Financial Statements and Supplementary Data" for further details.
Segment operating income for the fiscal year ended May 31, 2026 was $142.9 million, compared to $130.7 million in the prior fiscal year. The $12.2 million increase in operating income was primarily attributable to favorable cost of goods sold, driven by lower royalty costs in the trade channel as well as improved inventory utilization in the book clubs channel, which resulted in lower excess and obsolete inventory. This was partially offset by higher employee-related and general expenses in the book fairs channel due to inflationary pressures.
EDUCATION
| ($ amounts in millions) | 2026 compared to 2025 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2026 | 2025 | $ change | % change | ||||||||||
| Revenues | $ | 267.6 | $ | 309.8 | $ | (42.2) | (13.6) | % | |||||
| Cost of goods sold | 104.1 | 122.8 | (18.7) | (15.2) | |||||||||
| Other operating expenses * | 163.3 | 180.1 | (16.8) | (9.3) | |||||||||
| Asset impairments | 4.3 | 0.6 | 3.7 | NM | |||||||||
| Operating income (loss) | $ | (4.1) | $ | 6.3 | $ | (10.4) | NM | ||||||
| Operating margin | NM | 2.0 | % |
* Other operating expenses include selling, general and administrative expenses and depreciation and amortization.
NM Not meaningful
Fiscal 2026 compared to fiscal 2025
Revenues for the fiscal year ended May 31, 2026 decreased by $42.2 million to $267.6 million, compared to $309.8 million in the prior fiscal year. The decrease in segment revenues was primarily driven by lower sales of supplemental curriculum products due to the continued challenging funding environment for schools and school districts, coupled with lower subscription revenues from Magazines+ and lower revenues from sponsored programs.
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Cost of goods sold for the fiscal year ended May 31, 2026 was $104.1 million, or 38.9% of revenues, compared to $122.8 million, or 39.6% of revenues, in the prior fiscal year. Cost of goods sold as a percentage of revenues benefited from lower product costs driven by the mix of products sold during the year ended May 31, 2026, combined with improved inventory utilization, resulting in lower excess and obsolete inventory. These benefits were partially offset by higher shipping and postage costs associated with sponsored programs.
Other operating expenses were $163.3 million for the fiscal year ended May 31, 2026, compared to $180.1 million in the prior fiscal year. The $16.8 million decrease in Other operating expenses was primarily attributable to lower employee-related and external labor costs, as well as reduced general overhead spending.
Asset impairments were $4.3 million for the fiscal year ended May 31, 2026, compared to $0.6 million in the prior fiscal year. In fiscal 2026, the Company recognized asset impairments of $4.3 million related to certain education products that were no longer being sold or developed. In fiscal 2025, the Company recognized asset impairments of $0.6 million related to certain digital products that were no longer being sold. Refer to Note 5, "Asset Write Down," of Notes to the Consolidated Financial Statements in Item 8, "Consolidated Financial Statements and Supplementary Data" for further details.
Segment operating loss for the fiscal year ended May 31, 2026 was $4.1 million, compared to operating income of $6.3 million in the prior fiscal year. The overall decline of $10.4 million was driven by lower revenues, primarily reflecting the continued challenging funding environment for schools and school districts, as well as asset impairment charges recognized during the year ended May 31, 2026. This decline was partially offset by lower employee-related and external labor costs, as well as reduced general overhead spending.
ENTERTAINMENT
| ($ amounts in millions) | 2026 compared to 2025 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2026 | 2025 | $ change | % change | ||||||||||
| Revenues | $ | 65.7 | $ | 61.0 | $ | 4.7 | 7.7 | % | |||||
| Cost of goods sold | 37.9 | 33.4 | 4.5 | 13.5 | |||||||||
| Other operating expenses * | 38.7 | 39.2 | (0.5) | (1.3) | |||||||||
| Asset impairments and write downs | 5.2 | 0.5 | 4.7 | NM | |||||||||
| Operating income (loss) | $ | (16.1) | $ | (12.1) | $ | (4.0) | (33.1) | % | |||||
| Operating margin | NM | NM |
* 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"). Refer to Note 12, "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, 2026 increased by $4.7 million to $65.7 million, compared to $61.0 million in the prior fiscal year period. The increase in segment revenues was primarily driven by higher revenues from production services.
Cost of goods sold for the fiscal year ended May 31, 2026 was $37.9 million, or 57.7% of revenues, compared to $33.4 million, or 54.8% of revenues, in the prior fiscal year. The increase was primarily driven by the revenue mix, with an increase in production services revenue, which generally carries higher associated costs.
Other operating expenses for the fiscal year ended May 31, 2026 were $38.7 million, compared to $39.2 million in the prior fiscal year. The $0.5 million decrease in Other operating expenses was primarily attributable to lower severance expense from cost-saving initiatives and the absence of acquisition-related costs incurred in the prior fiscal year in connection with the acquisition of 9 Story. These decreases were partially offset by increased employee-related costs.
Asset impairments and write downs for the fiscal year ended May 31, 2026 were $5.2 million, compared to $0.5 million in the prior fiscal year. During fiscal 2026, the Company recognized asset impairments of $4.9 million related to certain film and television programs in development and $0.3 million related to its ownership interest in a children's book publishing business located in the UK. During fiscal 2025, the Company early exited certain 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 leases. Refer to Note 5, "Asset Write Down," of Notes to the Consolidated Financial Statements in Item 8, "Consolidated Financial Statements and Supplementary Data" for further details.
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Segment operating loss for the fiscal year ended May 31, 2026 was $16.1 million compared to $12.1 million in the prior fiscal year. The $4.0 million increase in operating loss was primarily attributable to asset impairment charges recognized during the year ended May 31, 2026.
INTERNATIONAL
| ($ amounts in millions) | 2026 compared to 2025 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2026 | 2025 | $ change | % change | ||||||||||
| Revenues | $ | 277.2 | $ | 279.6 | $ | (2.4) | (0.9) | % | |||||
| Cost of goods sold | 155.0 | 159.3 | (4.3) | (2.7) | |||||||||
| Other operating expenses * | 115.8 | 120.2 | (4.4) | (3.7) | |||||||||
| Asset impairments and write downs | — | 1.1 | (1.1) | NM | |||||||||
| Operating income (loss) | $ | 6.4 | $ | (1.0) | $ | 7.4 | NM | ||||||
| Operating margin | 2.3 | % | NM |
* Other operating expenses include selling, general and administrative expenses and depreciation and amortization.
NM Not meaningful
Fiscal 2026 compared to fiscal 2025
Revenues for the fiscal year ended May 31, 2026 decreased by $2.4 million to $277.2 million compared to $279.6 million in the prior fiscal year. Local currency revenues in the Company's ongoing foreign operations decreased by $8.7 million, excluding a favorable foreign exchange impact of $6.3 million. In Canada, local currency revenues decreased by $6.2 million, primarily driven by lower trade, book clubs and education channel revenues. In the U.K., local currency revenues decreased by $5.0 million, primarily reflecting lower trade channel sales. The declines in trade channel revenues in both Canada and the U.K. were due, in part, to increased sales in the prior fiscal year associated with the release of Suzanne Collins' Sunrise on the Reaping. In Australia and New Zealand, local currency revenues decreased by $0.4 million, driven by lower education sales in New Zealand, which were largely offset by higher trade channel sales in Australia. Export channel sales also decreased by $0.5 million compared to the prior fiscal year. These declines were partially offset by a $3.4 million increase in local currency revenues in Asia, primarily driven by increased trade and education sales, including growth in India.
Cost of goods sold for the fiscal year ended May 31, 2026 was $155.0 million, or 55.9% of revenues, compared to $159.3 million, or 57.0% of revenues, in the prior fiscal year. Cost of goods sold as a percentage of revenues decreased primarily due to lower product costs driven by the mix of products sold in Australia, Canada and the U.K. during the year ended May 31, 2026, partially offset by higher fulfillment costs in Canada.
Other operating expenses were $115.8 million for the fiscal year ended May 31, 2026, compared to $120.2 million in the prior fiscal year. Other operating expenses decreased by $4.4 million, primarily due to lower employee-related costs in Asia, Canada, the U.K., and certain overhead functions resulting from operational efficiencies and prior cost-saving initiatives, including a $2.1 million decrease in severance expense related to such initiatives.
Asset impairments and write downs were $1.1 million for the fiscal years ended May 31, 2025. 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.
Segment operating income for the fiscal year ended May 31, 2026 was $6.4 million, compared to an operating loss of $1.0 million in the prior fiscal year. The $7.4 million improvement was primarily driven by lower employee-related costs, including lower severance expense, primarily in Asia, resulting from operational efficiencies and prior cost-saving initiatives, as well as improved margins in Australia, reflecting lower product costs due to the mix of products sold in fiscal 2026. Operating income also benefited from the absence of asset impairment charges that were recognized in the prior fiscal year.
Overhead
Fiscal 2026 compared to fiscal 2025
Unallocated overhead expense for the fiscal year ended May 31, 2026 increased by $5.8 million to $113.9 million, compared to $108.1 million in the prior fiscal year. The increase was primarily attributable to the $7.2 million impact of
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sale and leaseback transactions completed during the third quarter of fiscal 2026, which resulted in lower rental income and higher rent expense, partially offset by lower depreciation expense. In addition, the Company incurred $7.9 million of higher severance expense related to cost-savings initiatives, which was partially offset by lower employee-related costs resulting from reorganization efforts implemented in prior periods. The Company expects rental expense to increase in fiscal 2027 compared to fiscal 2026, primarily due to the recognition of a full year of expense associated with the Company's leased headquarters facility.
Liquidity and Capital Resources
Fiscal 2026 compared to fiscal 2025
Cash provided by operating activities was $50.9 million for the fiscal year ended May 31, 2026, compared to cash provided by operating activities of $124.2 million for the prior fiscal year, representing a decrease in cash provided by operating activities of $73.3 million. The decrease was primarily driven by higher net tax payments of $41.4 million, largely attributable to the gain recognized on the sale-leaseback transactions, as well as an additional contribution to the U.K. Pension Plan and higher severance and postage payments. In addition, the Company generated lower rental income from leasable space within its New York headquarters building, which was sold during fiscal 2026. These cash outflows were partially offset by lower royalty advance payments.
Cash provided by investing activities was $405.8 million for the fiscal year ended May 31, 2026, compared to cash used in investing activities of $252.9 million for the prior fiscal year, representing an increase in cash provided by investing activities of $658.7 million. This increase was primarily driven by $452.4 million of pre-tax net proceeds from sale and leaseback transactions related to the Company's New York City headquarters and Jefferson City, Missouri primary distribution center, as well as $19.4 million of net proceeds from the sale of the Company's 26.2% equity interest in a U.K.-based children’s book publishing business. The increase was also attributable to the absence of the $176.2 million cash outflow incurred in the prior fiscal year in connection with the acquisition of 9 Story, as well as lower capital and prepublication expenditures of $10.4 million.
Cash used in financing activities was $446.0 million for the fiscal year ended May 31, 2026, compared to cash provided by financing activities of $137.3 million for the prior fiscal year, representing an increase in cash used by financing activities of $583.3 million. This change was primarily attributable to net repayments of $175.0 million under the U.S. Credit Agreement during fiscal 2026, compared to net borrowings of $250.0 million in the prior fiscal year to fund the acquisition of 9 Story. In addition, the Company repurchased $265.9 million of common stock, compared to $70.0 million in the prior fiscal year, and made higher net repayments of film obligations of $17.3 million. These uses of cash were partially offset by $17.4 million of higher proceeds from stock option exercises.
Cash Position
The Company’s cash and cash equivalents totaled $134.9 million at May 31, 2026 and $124.0 million at May 31, 2025. Cash and cash equivalents held by the Company’s U.S. operations totaled $66.6 million at May 31, 2026 and $48.7 million at May 31, 2025.
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 2026, the Company repurchased $150.6 million of its common stock through open-market transactions and $113.4 million through a modified Dutch tender offer, in each case excluding taxes and fees. See Note 16, "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 share repurchase program, $183.0 million remained available for future purchases of Common Stock as of May 31, 2026.
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, 2026, the Company’s primary sources of liquidity consisted of cash and cash equivalents of $134.9 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 U.S. Credit Agreement has a borrowing limit of $400 million and a maturity date of November 26, 2029. See Note 6, "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, 2026, the Company's U.S. Credit Agreement, less
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borrowings of $75.0 million and commitments of $0.4 million, had $324.6 million of availability. Additionally, the Company has short-term credit facilities of $36.1 million, less current borrowings of $5.5 million and commitments of $5.0 million, resulting in $25.6 million of current availability under these facilities at May 31, 2026. 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, 2026, the Company’s contractual cash obligations by future period (see Notes 6, 7, 11 and 17 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data”):
| $ amounts in millions | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Payments Due By Period | ||||||||||||||||||
| Contractual Obligations | 1 Year or Less | Years 2-3 | Years 4-5 | After Year 5 | Total | |||||||||||||
| Minimum print quantities | $ | 0.4 | $ | 1.0 | $ | 0.3 | $ | — | $ | 1.7 | ||||||||
| Royalty advances | 20.1 | 12.2 | 3.7 | 1.6 | 37.6 | |||||||||||||
| Lines of credit and short-term debt | 5.5 | — | — | — | 5.5 | |||||||||||||
| Long-term debt | — | — | 75.0 | — | 75.0 | |||||||||||||
| Film related obligations (1) | 2.6 | 14.4 | 0.1 | — | 17.1 | |||||||||||||
| Finance leases (2) | 3.9 | 5.9 | 4.6 | 2.8 | 17.2 | |||||||||||||
| Operating leases | 49.4 | 90.0 | 72.4 | 335.5 | 547.3 | |||||||||||||
| Pension and postretirement plans | 2.4 | 4.8 | 4.7 | 11.6 | 23.5 | |||||||||||||
| Total | $ | 84.3 | $ | 128.3 | $ | 160.8 | $ | 351.5 | $ | 724.9 |
(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.
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 6, "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 12, "Acquisitions," of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data.”