Scholastic (SCHL) 10-K2022 FY Annual report

 

Scholastic Corporation (the “Corporation” and together with its subsidiaries, “Scholastic” or the “Company”) is the world’s largest publisher and distributor of children’s books, a leading provider of print and digital instructional materials for grades pre-kindergarten ("pre-K") to grade 12 and a producer of educational and entertaining children’s media. The Company creates quality books and ebooks, print and technology-based learning materials and programs, classroom magazines and other products that, in combination, offer schools, as well as parents and children, customized and comprehensive solutions to support children’s learning and reading both at school and at home. Since its founding in 1920, Scholastic has emphasized quality products and a dedication to reading, learning and literacy. The Company is the leading operator of school-based book club and book fair proprietary channels. It distributes its products and services through these channels, as well as directly to schools and libraries, through retail stores and through the internet. The Company’s website, scholastic.com, is a leading site for teachers, classrooms and parents and an award-winning destination for children. Scholastic has operations in the United States and throughout the world including Canada, the United Kingdom, Australia, New Zealand, Asia and through its export business, sells products in approximately 165 international locations.

 

 

 

The following table sets forth revenues by reportable segment for the three fiscal years ended May 31: 

 

Additional financial information relating to the Company’s reportable segments is included in Note 3, "Segment Information", of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data,” which is included herein.

 

(57.6% of fiscal 2022 revenues)

 

The Company is the world’s largest publisher and distributor of children’s books and is the leading operator of school-based book clubs and school-based book fairs in the United States. The Company is also a leading publisher of children’s print books, ebooks and audiobooks distributed through the trade channel. Scholastic offers a broad range of children’s books through its school and trade channels, many of which have received awards for excellence in children’s literature, including the Caldecott and Newbery Medals.

The Company obtains titles for sale through its distribution channels from three principal sources. The first source for titles is the Company’s publication of books created under exclusive agreements with authors, illustrators, book packagers or other media companies. Scholastic generally controls the exclusive rights to sell these titles through all channels of distribution in the United States and, to a lesser extent, internationally. Scholastic’s second source of titles is through obtaining licenses to publish books exclusively in specified channels of distribution, including reprints of

books originally published by other publishers for which the Company acquires rights to sell in the school market. The third source of titles is the Company’s purchase of finished books from other publishers. 

Scholastic founded its first school-based book club in 1948. The Company's school-based book clubs consist of reading clubs for pre-K through grade 8. In addition to its regular reading club offerings, the Company creates special theme-based and seasonal offers targeted to different grade levels during the year.

The Company distributes promotional materials containing order forms to classrooms in the vast majority of the pre-K to grade 8 schools in the United States. Classroom teachers who wish to participate in a school-based book club provide the promotional materials to their students, who may choose from curated selections at substantial reductions from list prices. Approximately 46% of kindergarten ("K") to grade 5 elementary school teachers in the United States who received promotional materials in fiscal 2022 participated in the Company’s school-based book clubs. In fiscal 2022, approximately 97% of total book club revenues were placed via the internet through the Company’s online ordering platform, which allows parents, as well as teachers, to order online, with approximately 57% of such revenues being placed by parents via the Company's online ordering platform. Alternatively, the teacher may manually aggregate the students’ orders and forward them to the Company. Products are typically shipped to the classroom for distribution to the students. Teachers who participate in book clubs receive bonus points and other promotional incentives, which may be redeemed from the Company for additional books and other resource materials and items for their classrooms or the school.

 

The Company entered the school-based book fairs channel in 1981 under the name Scholastic Book Fairs. The Company is the leading distributor of school-based book fairs in the United States serving schools in all 50 states. Book fairs provide children access to hundreds of popular, quality books and educational materials, increase student reading and help book fair organizers raise funds for the purchase of school library and classroom books, supplies and equipment. Book fairs have traditionally been weeklong events where children and families peruse and purchase their favorite books together. The Company typically delivers book fairs product from its warehouses to schools principally by a fleet of Company-owned and leased vehicles. Sales and customer service representatives, working from the Company’s regional offices, distribution facilities and national distribution facility in Missouri, along with local area field representatives, provide support to book fair organizers. Physical book fairs are conducted by school personnel, volunteers and parent-teacher organizations, from which the schools may receive either books, supplies and equipment or a portion of the proceeds from every book fair.

 

 

Also included in the Company's trade organization are Weston Woods Studios, Inc. ("Weston Woods") and Scholastic Audio, as well as Scholastic Entertainment Inc. ("SEI"). Weston Woods creates audiovisual adaptations of classic children's picture books distributed through the school and retail markets. Scholastic Audio provides audiobook productions of popular children's titles. SEI is responsible for exploiting the Company's film and television assets,

which include a large television programming library based on the Company's properties, and for developing new programming.

(24.0% of fiscal 2022 revenues)

 

(18.4% of fiscal 2022 revenues)

 

Scholastic has operations in Major Markets, which include Canada, the United Kingdom, Ireland, Australia, and New Zealand, as well as in India, Singapore and other parts of Asia including Malaysia, Thailand, the Philippines, Indonesia, Hong Kong, Taiwan, Korea and Japan. The Company has branches in the United Arab Emirates and Colombia, a business in China that supports English language learning and also sells products in approximately 130 international locations through its export business. The Company’s international operations have original trade and educational publishing programs; distribute children’s books, digital educational resources and other materials through school-based book clubs, school-based book fairs and trade channels; and produce and distribute magazines and on-line subscription services. Many of the Company’s international operations also have their own export and foreign rights licensing programs and are book publishing licensees for major media properties. Original books published by many of these operations have received awards for excellence in children’s literature. In Asia, the Company also operates a franchise program for tutorial centers that provide English language training to students, primarily in China.

Scholastic Canada, founded in 1957, is a leading publisher and distributor of English and French language children’s books in Canada. Scholastic Canada is the largest operator of school-based marketing channels in Canada and is one of the leading suppliers of original or licensed children’s books to the Canadian trade market. Since 1965, Scholastic Canada has also produced quality Canadian-authored books and educational materials, including an early reading program sold to schools for grades K to 6.

 

Scholastic UK, founded in 1964, is the largest operator of school-based marketing channels in the United Kingdom and is a publisher and one of the leading suppliers of original or licensed children’s books to the United Kingdom trade market. Scholastic UK also publishes supplemental educational materials, including professional books for teachers.

Scholastic Australia, founded in 1968, is the largest operator of school-based marketing channels in Australia, reaching approximately 90% of the country’s primary schools. Scholastic Australia also publishes quality children’s books supplying the Australian trade market. In addition, Scholastic Australia holds an equity method investment in a publisher and distributor of children's books.

Scholastic New Zealand, founded in 1962, is the largest children’s book publisher and the leading book distributor to schools in New Zealand. Through its school-based book clubs and book fairs channels, Scholastic New Zealand reaches approximately 90% of the country’s primary schools. In addition, Scholastic New Zealand publishes quality children’s books supplying the New Zealand trade market. 

The Company’s Asian operations consist of initiatives for educational publishing programs based out of Singapore. In addition, the Company operates school-based marketing channels throughout Asia; publishes original titles in English and Hindi languages in India, including specialized curriculum books for local schools; conducts reading improvement programs inside local schools in the Philippines; and operates a franchise program for English language tutorial centers in China in cooperation with local partners, which were temporarily closed to limit the spread of the coronavirus.

In fiscal 2022, the Company committed to a plan to exit its direct sales business in Asia, which has traditionally sold English language and early childhood learning materials through a network of independent sales representatives in India, Indonesia, Malaysia, the Philippines, and Thailand and engaged in direct sales business activities, both in shopping malls and door-to-door.

The Company licenses the rights to select Scholastic titles in 65 languages to other publishing companies around the world. The Company’s export business sells educational materials, digital educational resources and children’s books to schools, libraries, bookstores and other book distributors in approximately 130 international locations that are not otherwise directly serviced by Scholastic subsidiaries. The Company also partners with governments and non-governmental agencies to create and distribute books to public schools in developing countries.

The Company’s books, magazines and other materials are manufactured by the Company with the assistance of third parties under contracts entered into through arms-length negotiations and competitive bidding. As appropriate, the Company enters into multi-year agreements that guarantee specified volumes in exchange for favorable pricing terms. Paper is purchased directly from paper mills and other third-party sources.

 

In the United States, the Company mainly processes and fulfills orders for school-based book clubs, trade, reference and non-fiction products, educational products and export orders from its primary warehouse and distribution facility in Jefferson City, Missouri. In connection with its trade business, the Company may fulfill product orders directly from printers to customers. Magazine orders are processed at the Jefferson City facility and the magazines are shipped directly from printers. School-based book fairs are fulfilled through a network of warehouses across the country, as well as from the Company's Jefferson City warehouse and distribution facility. The Company’s international school-based book clubs, school-based book fairs, trade and educational operations use distribution systems similar to those employed in the United States.

 

Access to intellectual property or content (“Content”) for the Company’s product offerings is critical to the success of the Company’s operations. The Company incurs significant costs for the acquisition and development of Content for its product offerings. These costs are often deferred and recognized as the Company generates revenues derived from the benefits of these costs. These costs include the following:

 

release dates of published titles. The Company generally experiences a loss from operations in the first and third quarters of each fiscal year.

The markets for children’s books, educational products and entertainment materials are highly competitive. Competition is based on the quality and range of materials made available, price, promotion and customer service, as well as the nature of the distribution channels. Competitors include numerous other book, ebook, textbook, library, reference material and supplementary publishers, distributors and other resellers (including over the internet) of children’s books and other educational materials, national publishers of classroom and professional magazines with substantial circulation, and distributors of products and services on the internet. In the United States, competitors include regional and local school-based book fair operators and other fund raising activities in schools and bookstores, as well as one other competitor operating on a national level. Competition may increase to the extent that other entities enter the market and to the extent that current competitors or new competitors develop and introduce new materials that compete directly with the products distributed by the Company or develop or expand competitive sales channels. The Company believes that its position as both a publisher and distributor are unique to certain of the markets in which it competes, principally in the context of its children’s book business.

 

As an international publisher and distributor of books, Scholastic aggressively utilizes the intellectual property protections of the United States and other countries in order to maintain its exclusive rights to identify and distribute many of its products. Accordingly, SCHOLASTIC is a trademark registered in the United States and in a number of countries where the Company conducts business or otherwise distributes its products. The Corporation’s principal operating subsidiary in the United States, Scholastic Inc., and the Corporation’s international subsidiaries, through Scholastic Inc., have registered and/or have pending applications to register in relevant territories trademarks for important services and programs. All of the Company’s publications, including books and magazines, are subject to copyright protection both in the United States and internationally. The Company also obtains domain name protection for its internet domains. The Company seeks to obtain the broadest possible intellectual property rights for its products, and because inadequate legal and technological protections for intellectual property and proprietary rights could adversely affect operating results, the Company vigorously defends those rights against infringement.

The following individuals have been determined by the Board of Directors to be the executive officers of the Company. Each such individual serves in his or her position with Scholastic until such person’s successor has been elected or appointed and qualified or until such person’s earlier resignation or removal.

 

The Corporation’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports are accessible at the Investor Relations portion of its website (scholastic.com) and are available, without charge, as soon as reasonably practicable after such reports are electronically filed or furnished to the Securities and Exchange Commission (“SEC”). The Company also posts the dates of its upcoming scheduled financial press releases, telephonic investor calls and investor presentations on the “Events and Presentations” portion of its website at least five days prior to the event. The Company’s investor calls are open to the public and remain available through the Company’s website for at least 45 days thereafter.

 

The public may also read and copy materials that the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information, as well as copies of the Company’s filings, from the Office of Investor Education and Advocacy by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site, at www.sec.gov, that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

The Company’s business, in particular the trade publishing and media portions of the business, is highly dependent on maintaining strong relationships with the authors, illustrators and other creative talent who produce the products and services that are sold to its customers. Any overall weakening of these relationships, or the failure to develop successful new relationships, could have an adverse impact on the Company’s business and financial performance.

 

 

 

The Company’s major expense categories include employee compensation, printing, paper and distribution (such as postage, shipping and fuel) costs. Compensation costs are influenced by general economic factors, including those affecting costs of health insurance, postretirement benefits and any trends specific to the employee skill sets that the Company requires. Current shortages for warehouse labor, driver labor and other required skills, as well as labor supply chain issues, such as union strikes, may cause the Company's costs to increase beyond increases currently expected.

 

Paper prices fluctuate based on worldwide demand and supply for paper in general, as well as for the specific types of paper used by the Company. The Company is also subject to inflationary pressures on printing, paper, transportation and labor costs. While the Company has taken steps to manage and budget for certain expected operating cost increases, if there is a significant disruption in the supply of paper or a significant increase in paper costs, or in its shipping or fuel costs, beyond those currently anticipated, which would generally be beyond the control of the Company, or if the Company’s strategies to try to manage these costs, including additional cost savings initiatives, are ineffective, the Company’s results of operations could be adversely affected. In addition, supplier bankruptcy may cause price increases for the Company.

The Company’s employees, notably its senior executives and editorial staff members, have substantial experience in the publishing and education markets. In addition, the Company continues in the process of implementing a strategic information technology transformation process, requiring diverse levels of relevant expertise and experience. If the Company were unable to continue to adequately maintain and develop a workforce of this nature meeting the foregoing needs, including the development of new skills in the context of a rapidly changing business environment created by technology, involving new business processes and increased access to data and data analytics, it could negatively impact the Company’s operations and growth prospects. Additionally, high industry-wide demand for truck drivers may impact the Company's ability to hire and retain adequate staffing levels to deliver book fairs in the number anticipated.

 

The Company outsources business processes to reduce complexity and increase efficiency for activities such as distribution, manufacturing, product development, transactional processing, information technologies and various administrative functions. Increasingly, the Company is engaging third parties to provide SaaS, which can reduce the Company’s internal execution risk, but increases the Company’s dependency upon third parties to execute business critical information technology tasks. If SaaS providers are unable to provide these services or if outsource providers fail to execute their contracted functionality, or if such providers experience a substantial data breach, the Company could experience disruptions to its distribution and other business activities and may incur higher costs.

 

The Company operates in highly competitive markets that are subject to rapid change, including, in particular, changes in customer preferences and changes and advances in relevant technologies. There are substantial uncertainties associated with the Company’s efforts to develop successful trade publishing, educational, and media products and services, including digital products and services, for its customers, as well as to adapt its print and other materials to new digital technologies, including the internet cloud technologies, tablets, mobile and other devices and school-based technologies. The Company makes significant investments in new products and services that may not be profitable, or whose profitability may be significantly lower than the Company anticipates or has experienced historically. In particular, in the context of the Company’s current focus on key digital opportunities, the markets are continuing to develop and the Company may be unsuccessful in establishing itself as a significant factor in any relevant market segment which does develop. Many aspects of markets which could develop for children and schools, such as the nature of the relevant software and devices or hardware, the size of the market, relevant methods of delivery and relevant content, as well as pricing models, are still evolving and will, most likely, be subject to change on a recurring basis until a pattern develops and becomes more defined. In addition, the Company faces market risks associated with systems development and service delivery in its evolving school ordering and ecommerce businesses, as well as in responding to changes in how schools plan to utilize technology for virtual or remote learning and the associated impact on the demand for printed materials in schools.

 

 

The Company’s school-based book fairs and book clubs businesses produce a substantial amount of the Company’s revenues. The Company is subject to the risks that it will not successfully continue to develop and execute new promotional strategies for its school-based book fairs or book clubs in response to future customer trends or technological changes or that it will not otherwise meet market needs in these businesses in a timely or cost-effective fashion. The book clubs business also relies on attracting and retaining new sponsor-teachers to promote and support the distribution of its offerings. If the Company cannot attract new millennial and younger teachers and meet the changing preferences and demands of these teachers, its revenues and cash flows could be negatively impacted.

The Company has differentiated itself from competitors by providing curated offerings in its school-based book clubs and book fairs designed to make reading attractive for children, in furtherance of its mission as a champion of literacy. Competition from mass market and on-line distributors using customer-specific curation tools could reduce this differentiation, posing a risk to the Company's results.

The Company is subject to significant competition, including from other trade and educational publishers and media, entertainment and internet companies, as well as retail and internet distributors, many of which are substantially larger than the Company and have much greater resources. To the extent the Company cannot meet challenges from existing or new competitors and develop new product offerings to meet customer preferences or needs, the Company’s revenues and profitability could be adversely affected.

In its educational publishing business, the Company has invested in a core curriculum literacy program covering grades pre-K through 6 in direct competition with traditional basal textbook publishers to meet the perceived needs of the modern curriculum. There can be no assurance that the Company will be successful in having school districts adopt the new core program in preference to basal textbooks or be successful in state adoptions, nor that basal textbook publishers will not successfully adapt their business models to the development of new forms of core curriculum, which could have an adverse effect on the return on the Company’s investments in this area, as well as on its financial performance and growth prospects. Traditional basal text book publishers generally maintain larger sales forces than the Company, and sell across several academic disciplines, allowing them a larger presence than the Company, which only carries core and supplemental literacy solutions. Additionally, demand for many of the Company’s product offerings, particularly books sold through school channels, is subject to price sensitivity. Failure to maintain a competitive pricing model could reduce revenues and profitability.

The Company’s distribution channels include online retailers and ecommerce sites, digital delivery platforms and expanding social media and other marketing platforms. An increased concentration of retailer power has also resulted in the increased importance of mass merchandisers as well as of publishing best sellers to meet consumer demand. Currently, the Company’s top five trade customers make up approximately 78% of the Company’s U.S. trade business and 16% of the Company’s total revenues. Adverse changes in the mix of the major customers of the trade business, including the type of customer, which may also be engaged in a competitive business, or in their purchasing patterns or financial condition or the nature of their distribution arrangements with the trade business, could negatively affect the profitability of the Company’s trade business and the Company’s financial performance.

 

The Company invests in authors and illustrators for its trade publication business, and has a history of publishing hit titles. The inability to publish best-selling new titles in future years could negatively impact the Company.

In addition, competition among electronic and print book retailers, including the decrease in the number of independent booksellers, could decrease prices for new title releases, as well as the number of outlets for book sales. The growing use of self-publishing technologies by authors also increases competition and could result in the decreased use of traditional publishing services. The effects of any of the foregoing factors could have an adverse impact on the Company's business, financial condition or results of operation.

The businesses of the Company focus on children’s reading, learning and education, and its key relationships are with educators, teachers, parents and children. In particular, the Company believes that, in selecting its products, teachers, educators and parents rely on the Company’s reputation for quality books and educational materials and programs appropriate for children. Negative publicity, either through traditional media or through social media, could tarnish this relationship.

The Company is subject to privacy laws and regulations in the conduct of its business in the United States and in other jurisdictions in which it conducts its international operations, many of which vary significantly, relating to the collection and use of personal information, including the European Union General Data Protection Regulation, which became enforceable on May 25, 2018, and the California Consumer Privacy Act, which became effective in January 2020. In addition, the Company is also subject to the regulatory requirements of the Children’s Online Privacy Protection Act ("COPPA") in the United States relating to access to, and the use of information received from, children in respect to the Company’s on-line offerings. Since the businesses of the Company are primarily centered on children, failures of the Company to comply with the requirements of COPPA and similar laws in particular, as well as failures to comply generally with applicable privacy laws and regulations, as referred to above, could lead to significant reputational damage and other penalties and costs, including loss of future business.

In addition, the decentralized and global nature of the Company’s operations makes it more difficult to communicate and monitor compliance with the Company’s Code of Ethics and other material Company policies and to assure compliance with applicable laws and regulations, some of which have global applicability, such as the Foreign Corrupt Practices Act in the United States and the UK Bribery Act in the United Kingdom. Failures to comply with the Company’s Code of Ethics and violations of such laws or regulations, including through employee misconduct, could result in significant liabilities for the Company, including criminal liability, fines and civil litigation risk, and result in damage to the reputation of the Company.

The Company’s products generally comprise intellectual property delivered through a variety of media. The ability to achieve anticipated results depends in part on the Company’s ability to defend its intellectual property against infringement, as well as the breadth of rights obtained. The Company’s operating results could be adversely affected by inadequate legal and technological protections for its intellectual property and proprietary rights in some jurisdictions, markets and media, as well as by the costs of dealing with claims alleging infringement of the intellectual property rights of others, including claims involving business method patents in the ecommerce and internet areas and the licensing of photographs in the trade and educational publishing areas, and the Company’s revenues could be constrained by limitations on the rights that the Company is able to secure to exploit its intellectual property in different media and distribution channels, as well as geographic limitations on the exploitation of such rights.

The Company has various operating subsidiaries domiciled in foreign countries. In addition, the Company sells products and services to customers located in foreign countries where it does not have operating subsidiaries, and a significant portion of the Company’s revenues are generated from outside of the United States. The Company’s business processes, including distribution, sales, sourcing of content, marketing and advertising, are, accordingly, subject to multiple national, regional and local laws, regulations and policies. The Company could be adversely affected by noncompliance with foreign laws, regulations and policies, including those pertaining to foreign rights and exportation. The Company is also exposed to fluctuations in foreign currency exchange rates and to business disruption caused by political, financial or economic instability or the occurrence of war or natural disasters in foreign countries. In addition, the Company and its foreign operations could be adversely impacted by a downturn in general economic conditions on a more global basis caused by general political instability or unrest or changes in global economic affiliations or conditions, such as inflation. Changes in international trade relations with foreign countries, such as increased tariffs and duties (including those imposed by the United States) could cause the Company's costs to rise, or its overseas revenues to decline.

 

The Company has direct ownership of certain significant real estate assets, in particular the Company’s headquarters location in New York City, its primary distribution center in Jefferson City, Missouri and the new UK facility in Warwickshire. The New York headquarters location serves a dual purpose as it also contains premium retail space that is or will be leased to retail tenants in order to generate rental income and cash flow. Accordingly, the Company is sensitive to various risk factors such as changes to real estate values and property taxes, pricing and demand for high end retail spaces in Soho, New York City, interest rates, cash flow of underlying real estate assets, supply and demand, and the credit worthiness of any retail tenants. There is also no guarantee that investment objectives for the retail component of the Company’s real estate will be achieved.

 

The voting power of the Corporation's capital stock is vested exclusively in the holders of Class A Stock, except for the right of the holders of Common Stock to elect one-fifth of the Board of Directors and except as otherwise provided by law or as may be established in favor of any series of preferred stock that may be issued. The Estate of Richard Robinson, the former Chairman of the Board, President and Chief Executive Officer of the Company, beneficially owns a majority of the outstanding shares of Class A Stock and is able to elect up to four-fifths of the Corporation's Board of Directors and, without the approval of the Corporation's other stockholders, to effect or block other actions or transactions requiring stockholder approval, such as a merger, sale of substantially all assets or similar transaction. Iole Lucchese, Chair of the Board of Directors, Executive Vice President and Chief Strategy Officer of the Company and President of Scholastic Entertainment, Inc., in her capacity as Scholastic special executor of the Estate under Mr. Robinson's will and revocable trust, controls the voting of the Estate's Class A Stock.

The risk factors listed above should not be construed as exhaustive of all possible risks that the Company may face. Additional risks not currently known to the Company or that the Company does not consider to be significant at the present time could also impact the Company's consolidated financial position and results of operations.

 

This Annual Report on Form 10-K contains forward-looking statements relating to future periods. Additional written and oral forward-looking statements may be made by the Company from time to time in SEC filings and otherwise. The Company cautions readers that results or expectations expressed by forward-looking statements, including, without limitation, those relating to the Company’s future business prospects and strategic plans, ecommerce and digital initiatives, new product introductions, strategies, new education standards and policies, goals, revenues, improved efficiencies, general costs, manufacturing costs, medical costs, potential cost savings, merit pay, operating margins, working capital, liquidity, capital needs, the cost and timing of capital projects, interest costs, cash flows and income, are subject to risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to factors including those noted in this Annual Report and other risks and factors identified from time to time in the Company’s filings with the SEC. The Company disclaims any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.

None.

 

 

Various claims and lawsuits arising in the normal course of business are pending against the Company. The Company accrues a liability for such matters when it is probable that a liability has occurred and the amount of such liability can be reasonably estimated.  When only a range can be estimated, the most probable amount in the range is accrued unless no amount within the range is a better estimate than any other amount, in which case the minimum amount in the range is accrued. Legal costs associated with litigation loss contingencies are expensed in the period in which they are incurred. The Company does not expect, in the case of those claims and lawsuits where a loss is considered probable or reasonably possible, after taking into account any amounts currently accrued, that the reasonably possible losses from such claims and lawsuits would have a material adverse effect on the Company’s consolidated financial position or results of operations. See Note 6, "Commitments and Contingencies," of Notes to the Consolidated Financial Statements in Item 8, "Consolidated Financial Statements and Supplementary Data" for further discussion.

Not Applicable.

 

 

 

The following table provides information with respect to repurchases of shares of Common Stock by the Corporation during the three months ended May 31, 2022:

The graph below matches the Corporation’s cumulative 5-year total shareholder return on Common Stock with the cumulative total returns of the NASDAQ Composite index and a customized peer group of three companies that includes Pearson PLC, John Wiley & Sons Inc. and Houghton Mifflin Harcourt, which is no longer a publicly traded company as of April 8, 2022. The graph tracks the performance of a $100 investment in the Corporation’s Common Stock, in the index and in the peer group (with the reinvestment of all dividends) from June 1, 2017 to May 31, 2022.

 

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

 

 

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.”

 

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.

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.

 

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:

 

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.

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.

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 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.

 

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. 

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 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. 

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:

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.

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.

 

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.

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.

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

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.

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.

 

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.

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.

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.

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”):

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.

The Company conducts its business in various foreign countries, and as such, its cash flows and earnings are subject to fluctuations from changes in foreign currency exchange rates. The Company sells products from its domestic operations to its foreign subsidiaries, creating additional currency risk. The Company manages its exposures to this market risk through internally established procedures and, when deemed appropriate, through the use of short-term forward exchange contracts which were not significant as of May 31, 2022. The Company does not enter into derivative transactions or use other financial instruments for trading or speculative purposes.

The Company is subject to the risk that market interest rates and its cost of borrowing will increase and thereby increase the interest charged under its variable-rate debt.

The following table sets forth information about the Company’s debt instruments as of May 31, 2022:

 

All other schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements or the Notes thereto.