Scholastic Corporation — FY2022 Form 10-K
Reporting period: Fiscal year ended May 31, 2022 (not calendar 2021 Q4). Scholastic publishes and distributes children’s books, educational materials and media through its Children’s Book Publishing and Distribution, Education Solutions and International segments.
Financial performance
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $1,642.9 million | $1,300.3 million |
| Operating income (loss) | $97.4 million | $(22.7) million |
| Operating margin | 5.9% | (1.7)% |
| Net income (loss) | $81.0 million | $(10.9) million |
| Basic / diluted EPS | $2.33 / $2.27 | $(0.32) / $(0.32) |
| Cash from operating activities | $226.0 million | $71.0 million |
| Cash and equivalents at year-end | $316.6 million | $366.5 million |
| Total debt at year-end | $6.5 million | $190.2 million |
Revenue rose 26.3%. Cost of goods sold was 46.6% of revenue versus 48.4%, implying gross margins of 53.4% and 51.6%, respectively. Net margin was approximately 4.9%, versus a loss margin of approximately 0.8% in FY2021.
- Children’s Book Publishing and Distribution: Revenue increased 40.2% to $946.5 million; operating income was $115.3 million versus $8.9 million. U.S. book-fair revenue increased $265.4 million as in-person events resumed; fairs reached 72% of pre-pandemic count, with revenue per fair up 26%. Book-club revenue fell $19.0 million amid system and labor-related shipping delays.
- Education Solutions: Revenue increased 26.0% to $393.6 million; operating income rose to $81.8 million from $57.7 million. Demand benefited from literacy, early-childhood, culturally responsive and summer-reading products, government-funded programs, and Florida’s New Worlds Reading Initiative.
- International: Revenue decreased 3.3% to $302.8 million and operating income fell to $3.3 million from $21.2 million. Pandemic disruptions weighed on Asia and Australia/New Zealand; Canada and the UK improved.
Operating cash flow increased by $155.0 million, primarily reflecting higher customer collections and tax refunds, partly offset by higher inventory purchases and operating costs. Investing activities used $43.2 million; financing activities used $229.2 million, including $175.0 million of U.S. credit-agreement repayments, $33.4 million of share repurchases and dividend payments. Current assets were $996.0 million and current liabilities were $619.7 million.
Changes, unusual items and capital allocation
- Profitability recovered sharply from FY2021, when pandemic-related school disruption contributed to a loss. Book fairs’ higher sales per event improved fulfillment economics; lower prior-year excess inventory reserves also benefited FY2022 cost of goods sold.
- Inflation increased printing, paper, transportation and labor costs. Management expected higher cost of goods sold as a percentage of revenue in FY2023 as more recently purchased inventory flowed through.
- FY2022 included a $15.1 million loss on assets held for sale related to the planned exit from Asia direct sales, partly offset by $9.7 million of asset-sale gains and $6.6 million of insurance recoveries related to a prior-year intellectual-property settlement. The Asia write-down reduced basic and diluted EPS by $0.33 and $0.32, respectively.
- The effective tax rate was a 9.7% provision; the IRS examination of tax years 2015–2020 led to releases of uncertain tax reserves. The company repurchased 870,258 shares for approximately $33.4 million. After year-end, the board raised the quarterly dividend 33% to $0.20 per share.
- The company had no borrowings under its $300 million revolving U.S. credit facility at May 31, 2022, which matures October 2026; it reported compliance with covenants. It also reported $27.1 million of availability under short-term credit facilities. The business is seasonal and typically uses cash in June–October.
Outlook, risks and contingencies
For FY2023, management expected book-fair count to recover to 85% of pre-pandemic levels, with strong revenue per fair; continued trade-channel growth; and sustained education demand supported by funding programs. It expected modest Education Solutions operating-income growth, modest International profit improvement, and to finalize the Asia direct-sales exit. Planned investment in cross-selling, data-driven selling and digital transformation, along with inflation and higher salary costs, was expected to pressure costs and operating income. These are management expectations, not guarantees.
Key risks include renewed school closures or pandemic disruption; inflation and supply, labor, shipping and fuel constraints; competition and changing print/digital purchasing patterns; dependence on successful titles and creative talent; educational budgets, procurement and content-policy changes; customer concentration in U.S. trade distribution; cybersecurity, privacy and technology-system execution; foreign exchange and geopolitical risks; and estimation uncertainty in returns, inventory, royalty advances and book-fair incentive-credit revenue allocation. The filing identifies the allocation of book-fair contract consideration between product and incentive credits as a critical audit matter. Ordinary-course legal claims were not expected to have a material adverse effect; sales-tax examinations remain ongoing. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Track the recovery in in-person book fairs, revenue per fair and book-club fulfillment after FY2022 system and labor problems.
- Assess whether inflation, inventory costs and wage pressures reduce margins as newer-cost inventory is sold.
- Verify execution, proceeds and remaining liabilities from the planned Asia direct-sales exit and sale.
- Monitor Education Solutions growth and the duration of government-funded programs, including the New Worlds Reading Initiative.
- Review book-fair incentive-credit revenue estimates, return and inventory reserves, and cash conversion given the seasonal working-capital cycle.
- Consider governance and voting concentration: the Estate of former CEO Richard Robinson held a majority of Class A shares, whose holders control most director elections and other stockholder votes.