Scholastic Corporation — FY2023 Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2023. The filing is an annual report, not a standalone 2022 Q4 filing; it also presents unaudited fourth-quarter results. Scholastic publishes and distributes children’s books and educational materials through three segments: Children’s Book Publishing and Distribution, Education Solutions, and International.
Financial performance
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Revenue | $1,704.0 million | $1,642.9 million | +3.7% |
| Operating income | $106.3 million | $97.4 million | +$8.9 million |
| Operating margin | 6.2% | 5.9% | +0.3 percentage points |
| Net income | $86.5 million | $81.0 million | +$5.5 million |
| Net income attributable to Scholastic | $86.3 million | $80.9 million | |
| Basic / diluted EPS | $2.56 / $2.49 | $2.33 / $2.27 | |
| Cash from operating activities | $148.9 million | $226.0 million | Down $77.1 million |
| Cash and cash equivalents at year-end | $224.5 million | $316.6 million | Down $92.1 million |
Gross margin was approximately 53.8%, up from 53.4%, as cost of goods sold declined to 46.2% of revenue from 46.6%. Selling, general and administrative expenses increased to $756.6 million from $722.8 million. The effective tax rate rose to 23.0% from 9.7%; the prior year benefited from the release of uncertain tax positions after settlement of the IRS examination.
Segment results were mixed. Children’s Book Publishing and Distribution revenue rose 9.7% to $1,038.0 million, with operating income of $143.4 million versus $115.3 million. Education Solutions revenue declined 1.8% to $386.6 million and operating income fell to $58.4 million from $81.8 million. International revenue decreased 7.7% to $279.4 million and the segment recorded a $3.6 million operating loss, compared with $3.3 million of income.
For the fourth quarter, revenue was $528.3 million versus $514.4 million in Q4 FY2022; net income was $75.8 million versus $52.1 million. Diluted EPS was $2.26 versus $1.46.
Liquidity, debt and capital allocation
Operating cash flow fell mainly because inventory purchases were approximately $110 million higher; the Company increased purchases earlier in the year to mitigate supply-chain lead times. Inventory was $334.5 million at year-end, up from $281.4 million. Investing activities used $99.6 million, including $62.0 million of property and equipment additions, $26.9 million of prepublication spending and $10.7 million of acquisition-related payments. Financing activities used $139.5 million, including share repurchases and dividends.
Total debt was $6.0 million, all current borrowings under international credit facilities; there were no borrowings under the $300 million U.S. revolving credit agreement. The filing reports $299.6 million of availability under that agreement and $25.1 million of availability under short-term facilities. The Company said available cash, operating cash flow and credit facilities were sufficient for anticipated needs and that it expected to maintain sufficient liquidity. Contractual obligations include $112.3 million of operating lease payments and $41.3 million of royalty advances.
FY2023 share repurchases totaled $135.1 million, and dividends declared were $0.80 per share for the year. After year-end, the Board authorized an additional $100 million for repurchases, bringing the reported current authorization to $119.2 million after subsequent purchases. A quarterly dividend of $0.20 per share was declared for FY2024 Q1.
Changes, outlook and notable items
- Book fairs revenue increased $123.4 million, supported by a 15% increase in fair count, higher revenue per fair and greater incentive-credit redemptions. Fair count was approximately 85% of pre-pandemic levels.
- Trade revenue declined $23.3 million amid weakness in retail book markets. Book clubs revenue fell $8.6 million, reflecting lower sponsor participation and fewer events.
- Effective June 1, 2023, Scholastic combined U.S. book fairs and book clubs into a school reading events business. Management expects operational synergies and a coordinated sales approach.
- Management expects fair count to reach approximately 90% of pre-pandemic levels, with modest growth in revenue per fair. It anticipates continued investment in digital and print literacy solutions and expects state-sponsored programs to support Education Solutions in the second half of FY2024. The Company also expects continued recovery in International markets and investment in manufacturing and distribution efficiencies. No consolidated numerical revenue or earnings guidance is provided in the supplied filing text.
- Management expects severance costs in FY2024 related to restructuring in Canada and integration of the U.S. book businesses. Depreciation and amortization expense is expected to increase as capital spending continues.
- Unusual items included $5.0 million of insurance recoveries related to prior-period photo litigation settlements and a $1.8 million benefit from a favorable settlement of legacy sales-tax matters. FY2022 included a $15.1 million loss on assets held for sale related to the exit from direct sales in Asia, partly offset by $9.7 million of gains on facility sales.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The audit identified book-fair revenue allocation to incentive-credit obligations as a critical audit matter because estimates of credit issuance and redemption affect revenue timing.
Risks and contingencies
Key risks include weak retail demand; changes in school purchasing, funding, curriculum or content policies; inflation and volatility in paper, printing, labor, postage, freight and fuel costs; foreign-exchange movements; and reliance on authors, hit titles, major trade customers and school-based channels. The filing also highlights cyber and privacy risks involving children’s data, technology-system implementation and third-party service providers, competition in digital learning, and potential disruption from severe weather, school closures or labor disputes. The Company warned that book-fair growth, inventory requirements and execution of the newly integrated reading-events business could affect results.
Various claims and lawsuits are pending in the ordinary course of business. Management does not expect reasonably possible losses, after amounts accrued, to materially adversely affect consolidated financial position or results. The Estate of former Chairman Richard Robinson controls a majority of Class A shares, which carry most voting power; common shareholders generally have limited voting rights.
Most important facts for investors to verify
- Whether book-fair participation and revenue per fair continue to improve toward management’s approximately 90%-of-pre-pandemic fair-count expectation, and whether integration delivers efficiencies.
- Whether Education Solutions recovers through state-sponsored programs and new literacy products, including Ready4Reading, while managing lower demand for certain established programs.
- Whether inventory levels and working-capital demands normalize and operating cash flow improves after the FY2023 decline.
- How retail-market softness, input-cost inflation, freight disruption and currency movements affect segment margins, particularly International and trade publishing.
- Whether earnings and liquidity support continued dividends and the expanded share-repurchase authorization; review the effects of repurchases on cash balances and share count.
- Monitor execution of digital and enterprise technology initiatives, key revenue-estimation assumptions for book-fair incentive credits, and the governance implications of Class A voting control.