Document


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United States
Securities and Exchange Commission
 
Washington, D.C. 20549 
Form 10-K 
Annual Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
 
For the fiscal year ended May 31, 2019   |   Commission File No. 000-19860 
Scholastic Corporation 
(Exact name of Registrant as specified in its charter)
Delaware
13-3385513
(State or other jurisdiction of
(IRS Employer Identification No.)
incorporation or organization)
 
 
 
557 Broadway, New York, New York
10012
(Address of principal executive offices)
(Zip Code)
 

Registrant’s telephone number, including area code: (212) 343-6100
Securities Registered Pursuant to Section 12(b) of the Act: 
Title of Class
Trading Symbol
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value
SCHL
The NASDAQ Stock Market LLC

Securities Registered Pursuant to Section 12(g) of the Act:
NONE 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x  No o
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No x
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit). Yes x  No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
x  Large accelerated filer
o  Accelerated filer
o  Non-accelerated filer
o  Smaller reporting company
o  Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
 
The aggregate market value of the Common Stock, par value $0.01, held by non-affiliates as of November 30, 2018, was approximately $1,368,279,434. As of such date, non-affiliates held no shares of the Class A Stock, $0.01 par value. There is no active market for the Class A Stock.
 
The number of shares outstanding of each class of the Registrant’s voting stock as of June 30, 2019 was as follows: 33,163,721
shares of Common Stock and 1,656,200 shares of Class A Stock.
Documents Incorporated By Reference

Part III incorporates certain information by reference from the Registrant’s definitive proxy statement for the Annual Meeting of Stockholders to be held September 18, 2019.




Table of Contents
 
 
 
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




Part I
Item 1 | Business
 
Overview
 
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 and Asia and, through its export business, sells products in approximately 165 countries around the world.
 
The Company currently employs approximately 6,400 people in the United States and approximately 2,500 people outside the United States.
 
Segments – Continuing Operations
 
The Company categorizes its businesses into three reportable segments: Children’s Book Publishing and Distribution; Education; and International.
 
The following table sets forth revenues by reportable segment for the three fiscal years ended May 31: 
 
 
 
(Amounts in millions)
 
 
2019
 
2018
 
2017
Children’s Book Publishing and Distribution
$
990.3

 
$
970.2

 
$
1,061.2

Education
297.4

 
288.6

 
303.6

International
366.2

 
369.6

 
376.8

Total
$
1,653.9

 
$
1,628.4

 
$
1,741.6

 
Additional financial information relating to the Company’s reportable segments is included in Note 3 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data,” which is included herein.
 
CHILDREN’S BOOK PUBLISHING AND DISTRIBUTION

(59.9% of fiscal 2019 revenues)
 
General

The Company’s Children’s Book Publishing and Distribution segment includes the publication and distribution of children’s books, ebooks, media and interactive products in the United States through its school book clubs and school book fairs channels and through its trade channel.

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

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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. 

School-Based Book Clubs
 
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 mails 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. The teacher aggregates the students’ orders and forwards them to the Company. Approximately 65% of kindergarten ("K") to grade 5 elementary school teachers in the United States who received promotional materials in fiscal 2019 participated in the Company’s school-based book clubs. In fiscal 2019, approximately 96% 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 47% of such revenues being placed by parents via the Company's online ordering platform. Products are shipped to the classroom for distribution to the students. Teachers who participate in the 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.
 
School-Based Book Fairs
 
The Company entered the school-based book fairs channel in 1981 under the name Scholastic Book Fairs. The Company is now 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 are generally weeklong events where children and families peruse and purchase their favorite books together. The Company 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. 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. Approximately 92% of the schools that conducted a book fair in fiscal 2018 hosted a fair in fiscal 2019.
 
Trade
 
Scholastic is a leading publisher of children’s books sold through bookstores, internet retailers and mass merchandisers in the United States. Scholastic’s original publications include Harry Potter™, The Hunger Games, The 39 Clues®, Spirit Animals®, The Magic School Bus®, I Spy™, Captain Underpants®, Dog Man®, Goosebumps® and Clifford The Big Red Dog® and licensed properties such as Star Wars®, Lego®, Pokemon® and Geronimo Stilton®. In addition, the Company’s Klutz® imprint is a publisher and creator of “books plus” products for children, including titles such as Sew Mini Treats, Lego Chain Reactions and Make Your Own Bath Bombs.
 
The Company’s trade organization focuses on publishing, marketing and selling books to bookstores, internet retailers, mass merchandisers, specialty sales outlets and other book retailers, and also supplies books for the Company’s proprietary school channels. The Company maintains a talented and experienced creative staff that constantly seeks to attract, develop and retain the best children’s authors and illustrators. The Company believes that its trade publishing staff, combined with the Company’s reputation and proprietary school distribution channels, provides a significant competitive advantage, evidenced by numerous bestsellers over the past two decades. Bestsellers in the trade division during fiscal 2019 included Dav Pilkey's Dog Man: Lord of the Fleas and Dog Man: Brawl of the Wild, J.K. Rowling's Fantastic Beasts: The Crimes of Grindelwald - The Original Screenplay and The Wonky Donkey.

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

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productions of popular children's titles. SEI is responsible for exploiting the Company's film and television assets, which includes a large television programming library based on the Company's properties.

Scholastic is also a leading publisher of quality children’s reference and non-fiction products sold primarily to schools and libraries in the United States. These products include non-fiction books published in the United States under the imprints Children’s Press® and Franklin Watts®.

EDUCATION

(18.0% of fiscal 2019 revenues)
 
The Education segment includes the publication and distribution to schools and libraries of children’s books, other print and on-line reference, non-fiction and fiction focused products, classroom magazines and classroom materials for core and supplemental literacy instruction, as well as consulting services and related products supporting professional development for teachers and school and district administrators, including professional books, coaching, workshops and seminars which in combination cover grades pre-K to 12 in the United States.

Scholastic Literacy
In the spring of 2019, the Company launched Scholastic Literacy, a comprehensive approach to core literacy for students in pre-K to grade 6 that includes both core and supplemental curriculum materials, in digital and print, teaching guides and professional books, and resources for family and community engagement. The Company’s Scholastic Literacy instructional methodology leads to responsive teaching in three classroom configurations: (1) to students with teacher-led whole class instruction; (2) with children through teacher-facilitated small group differentiated instruction; and (3) by students through independent reading practice and mastery. The Company believes that the Scholastic Literacy core curriculum reading program contains a number of key differentiators, including the highest volume of authentic and culturally-relevant texts in the market and data to inform responsive, personalized instruction for students, that will help position it for initial market penetration in fiscal 2020.
Supplemental
The Company is a leading provider of classroom libraries and paperback collections, including best-selling titles and leveled books for guided reading, to individual teachers and other educators and schools and school district customers. Additionally, the Company provides books and consulting services to community-based organizations and other groups engaged in literacy initiatives through Scholastic Family and Community Engagement (FACE). Scholastic helps schools build classroom collections of high quality, award-winning books for every grade, reading level and multicultural background. Scholastic serves customer needs with customized support for literacy instruction, by providing comprehensive literacy programs which include print and digital content, as well as providing assessment tools. These materials are designed for and generally purchased by teachers, both directly from the Company and through teacher stores and booksellers, including the Company's on-line teacher store (www.scholastic.com/teacherstore), which provides professional books and other educational materials to teachers and other educators.
Scholastic is also the leading publisher of classroom magazines. Teachers in grades pre-K to 12 use the Company’s 30 classroom magazines, including Scholastic News®, Scope®, Storyworks®, Let's Find Out® and Junior Scholastic®, to supplement formal learning programs by bringing subjects of current interest into the classroom, including current events, literature, math, science, social studies and foreign languages. These offerings provide schools with substantial non-fiction material, which is required to meet new higher educational standards. Each magazine has its own website with online digital resources that supplement the print materials. Scholastic’s classroom magazine circulation in the United States in fiscal 2019 was approximately 15 million, with approximately 88% of the circulation in grades pre-K to 6. The majority of magazines purchased are paid for with school or district funds, with parents and teachers paying for the balance. Circulation revenue accounted for substantially all classroom magazine revenue in fiscal 2019. Also included in the segment is the Company's custom publishing business.

INTERNATIONAL

(22.1% of fiscal 2019 revenues)

General
 
The International segment includes the publication and distribution of products and services outside the United States by the Company’s international operations, and its export and foreign rights businesses.
 

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Scholastic has operations in Canada, the United Kingdom, Ireland, Australia, New Zealand, 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, through its export business, sells products in approximately 165 countries. 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 publishes and distributes products under the Grolier name for parents to teach their children at home and engages in direct sales in shopping malls and door to door, as well as operating a franchise program for tutorial centers that provide English language training to students.

Canada
 
Scholastic Canada, founded in 1957, is a leading publisher and distributor of English and French language children’s books. 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.
 
United Kingdom
 
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.

Australia
 
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 holds an equity method investment in a publisher and distributor of children's books.

New Zealand
 
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. 

Asia

The Company’s Asian operations include initiatives for educational publishing programs based out of Singapore, as well as the wholly-owned Grolier direct sales business, which sells English language and early childhood learning materials through a network of independent sales representatives in India, Indonesia, Malaysia, the Philippines, Singapore and Thailand and engages in direct sales in shopping malls and door to door. 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 chain of English language tutorial centers in China in cooperation with local partners.

Foreign Rights and Export
 
The Company licenses the rights to select Scholastic titles in 45 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 150 countries 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.


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PRODUCTION AND DISTRIBUTION
 
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. The Company does not anticipate any difficulty in continuing to satisfy its manufacturing and paper requirements.
 
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 are shipped directly from printers.
 
School-based book fair orders 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.
 
CONTENT ACQUISITION
 
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:
 
Prepublication costs - Prepublication costs are incurred in all of the Company’s reportable segments. Prepublication costs include costs incurred to create and develop the art, prepress, editorial, digital conversion and other content required for the creation of the master copy of a book or other media.

Royalty advances - Royalty advances are incurred in all of the Company’s reportable segments, but are most prevalent in the Children’s Book Publishing and Distribution segment and enable the Company to obtain contractual commitments from authors to produce Content. The Company regularly provides authors with advances against expected future royalty payments, often before the books are written. Upon publication and sale of the books or other media, the authors generally will not receive further royalty payments until the contractual royalties earned from sales of such books or other media exceed such advances. The Company values its position in the market as the largest publisher and distributor of children's books in obtaining Content, and the Company’s experienced editorial staff aggressively acquires Content from both new and established authors.

Acquired intangible assets - The Company may acquire fully or partially developed Content from third parties via acquisitions of entities or the purchase of the rights to Content outright.

SEASONALITY
 
The Company’s Children’s Book Publishing and Distribution school-based book club and book fair channels and most of its Education businesses operate on a school-year basis; therefore, the Company’s business is highly seasonal. As a result, the Company’s revenues in the first and third quarters of the fiscal year generally are lower than its revenues in the other two fiscal quarters. Typically, school-based channels and magazine revenues are minimal in the first quarter of the fiscal year as schools are not in session. Trade sales can vary throughout the year due to varying release dates of published titles. The Company generally experiences a loss from operations in the first and third quarters of each fiscal year.
 

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COMPETITION 

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. The Company has also become subject to increased competition resulting from the entry into the book fairs business of a competitor operating on a national level, which has also initiated a classroom-directed program competitive with the Company’s school-based book clubs business. 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.
 
COPYRIGHT AND TRADEMARKS
 
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.

EXECUTIVE OFFICERS
 
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.
 
Name
Age

Employed by
Registrant Since
Previous Position(s) Held
Richard Robinson
82

1962
Chairman of the Board (since 1982), President (since 1974) and Chief Executive Officer (since 1975).
Kenneth J. Cleary
54

2008
Chief Financial Officer (since 2017), Senior Vice President, Chief Accounting Officer (2014-2017), Vice President, External Reporting and Compliance (2008-2014).
Iole Lucchese
52

1991
Executive Vice President (since 2016), Chief Strategy Officer (since 2014); President, Scholastic Canada (2016);
and Co-President, Scholastic Canada (2003-2015).
Satbir Bedi
55

2012
Executive Vice President and Chief Technology Officer (since 2018), Senior Vice President and Chief Technology Officer (2012-2018).
Judith A. Newman
61

1993
Executive Vice President and President, Scholastic Book Clubs (since 2014), Book Clubs and eCommerce (2011-2014), Book Clubs (2005-2011) and Scholastic At Home (2005-2006); Senior Vice President and President, Book Clubs and Scholastic At Home (2004-2005); and Senior Vice President, Book Clubs (1997-2004).
Alan Boyko
65

1988
President, Scholastic Book Fairs, Inc. (since 2005).
Andrew S. Hedden
78

2008
Executive Vice President, General Counsel and Secretary (since 2008) and member of the Board of Directors (since 1991).
 

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AVAILABLE INFORMATION
 
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.

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Item 1A | Risk Factors
 
Set forth below and elsewhere in this Annual Report on Form 10-K and in other documents that the Corporation files with the SEC are risks that should be considered in evaluating the Corporation’s common stock, as well as risks and uncertainties that could cause the actual future results of the Company to differ from those expressed or implied in the forward-looking statements contained in this Report and in other public statements the Company makes. Additionally, because of the following risks and uncertainties, as well as other variables affecting the Company’s operating results, the Company’s past financial performance should not be considered an indicator of future performance.
 
If we cannot anticipate technology trends and develop new products or adapt to new technologies responding to changing customer preferences, this could adversely affect our revenues or profitability.
 
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 market 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. For example, the Company previously determined to cease its support for its ereading applications offered to consumers through its school and ecommerce channels in favor of concentrating its efforts towards the introduction of a universal cross-platform streaming application, made available initially to the classroom market. There can be no assurance that the Company will be successful in implementing its revised digital strategy, including the continuing development of new applications and digital products for its consumer and school markets, which could adversely affect the Company’s revenues and growth opportunities. Further, there can be no assurance that the Company will ultimately be successful in its broader redirected strategy based on a streaming model directed to the classroom market coupled with its continuing development of a broader streaming model. In addition, the Company faces market risks associated with systems development and service delivery in its evolving school ordering and ecommerce businesses.
 
Our financial results would suffer if we fail to successfully differentiate our offerings and meet market needs in school-based book clubs and book fairs, two of our core businesses.
 
The Company’s school-based book clubs and book fairs 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 clubs or book fairs 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 relies on attracting and retaining new sponsor-teachers to promote its products. 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. Likewise, the inability to meet the preferences or service expectations of individuals and groups within schools who organize and run book fairs could negatively impact the Company's revenues and cash flows.

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. In addition, the Company has become subject to increased competition in its school book fair business as a result of the entry into this business of a competitor operating on a national level, which has also initiated a classroom-directed program competitive with the Company's school-based book clubs business. Failure to effectively meet this increased competition would have an adverse effect on the Company's financial performance and results of operations.
  
 

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If we fail to maintain the continuance of strong relationships with our authors, illustrators and other creative talent, as well as to develop relationships with new creative talent, our business could be adversely affected.
 
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.

Our financial results would suffer if we fail to mitigate the effects of having to institute a sales tax collection program in our school book clubs business as a result of a U.S. Supreme Court ruling reversing prior law and holding that remote sellers, including on-line retailers, can be required to collect state sales tax notwithstanding the absence of a physical presence within the state taxing jurisdiction.

In June 2018, the U.S. Supreme Court reversed its prior case law holding that it was unconstitutional for states to require remote sellers of goods, such as catalog mailers and ecommerce internet sellers, to collect and remit sales tax in respect to sales made to residents of a state, if the remote sellers maintained no physical presence in the state. This holding affected certain of Scholastic's business, primarily its school book clubs business unit, which had not previously collected or remitted sales tax on sales of books through its book clubs in certain states, based on the absence of the requisite presence in the relevant state to enable the state to constitutionally require that it collect or remit such taxes. The result of this decision has been to subject the Company's school book club business to remitting sales tax in additional states where it had not previously remitted such tax on the sales of books through the school book clubs to residents of the state.

As a result of the U.S. Supreme Court ruling, the Company initiated a sales tax collection program with its March 2019 school book clubs offerings which resulted in a significant adverse impact on the revenue of the book clubs business for the fourth quarter of its 2019 fiscal year. The continued effects of the ruling are still unclear and depend on, among other things, the final procedures and regulations the various states institute to implement their tax collection efforts based on the ruling, the extent to which the various states may seek to apply the ruling retroactively to prior time periods and for what periods and, in the case of the Company's school books club business, additional issues relating to the provisions of the applicable law previously in effect in a particular state and its application to the book clubs business model applied to that state. Additional factors will depend on the success of the Company's efforts to significantly increase the number of parents who are taking advantage of the parents on-line ordering system, which provides for the automatic application of sales tax during the ordering process, as well as the ability of the Company to otherwise make successful changes to its sales tax collection program as initially implemented to seek to mitigate its adverse impact. There can be no assurance that the Company will be successful in its efforts to mitigate the adverse impact of the initiation of sales tax collection in its school book clubs business or the time it will take to realize the benefit of any mitigation efforts undertaken, including attracting more parents to its on-line ordering system, changing the nature and pricing structure of its offerings or other adjustments, in which case the revenues and profitability, as well as the growth prospects, of the Company's school book clubs business would continue to be adversely impacted.

If we fail to adapt to new purchasing patterns or trends, our business and financial results could be adversely affected.
 
The Company’s business is affected significantly by changes in customer purchasing patterns or trends in, as well as the underlying strength of, the trade, educational and media markets for children. In particular, the Company’s educational publishing business may be adversely affected by budgetary restraints and other changes in educational funding as a result of new policies which could be implemented at the federal level or otherwise resulting from new legislation or regulatory action at the federal, state or local level and changes in the procurement process, to which the Company may be unable to adapt successfully. In addition, there are many competing demands for educational funds, and there can be no guarantee that the Company will be successful in continuing to obtain sales of its educational programs and materials from any available funding.

The competitive pressures we face in our businesses could adversely affect our financial performance and growth prospects.
 
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 these challenges from

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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.

Changes in the mix of our major customers in our trade distribution channel or in their purchasing patterns may affect the profitability of our trade publishing business and restrict our growth.

The Company’s traditional distribution channels have changed significantly over the last few years to now include, among others, 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 and of publishing best sellers to meet consumer demand. Currently, the Company’s top five trade customers make up approximately 75% of the Company’s trade business and 13% of the Company’s total revenues, with one customer accounting for 29% of the trade business and 5% of 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.

Our reputation is one of our most important assets, and any adverse publicity or adverse events, such as a significant data privacy breach or violation of privacy laws or regulations, could cause significant reputational damage and financial loss.
 
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.

Also, in certain of its businesses the Company holds or has access to personal data, including that of customers. Adverse publicity stemming from a data breach, whether or not valid, could reduce demand for the Company’s products or adversely affect its relationship with teachers or educators, impacting participation in book clubs or book fairs or decisions to purchase educational materials or programs produced by the Company's Education segment. Further, a failure to adequately protect personal data, including that of customers or children, or other data security failure, such as cyber attacks from third parties, could lead to penalties, significant remediation costs and reputational damage, including loss of future business.

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 will become 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.

We maintain an experienced and dedicated employee base that executes the Company’s strategies. Failure to attract, retain and develop this employee base could result in difficulty with executing our strategy.

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The Company’s employees, notably its Chief Executive Officer, senior executives and other editorial staff members, have substantial experience in the publishing and education markets. In addition, the Company is in the process of implementing a strategic information technology transformation process, requiring diverse levels of relevant expertise and experience. Inability 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, could negatively impact the Company’s operations and growth prospects.
 
If we are unsuccessful in implementing our corporate strategy we may not be able to maintain our historical growth.
 
The Company’s future growth depends upon a number of factors, including:
The ability of the Company to successfully implement its strategies for its respective business units in a timely manner
The introduction and acceptance of new products and services, including the success of its digital strategy and its ability to implement and successfully market its new core literacy program, as well as other programs, in its educational publishing business, as well as through the Company's international educational publishing operation in Singapore
The ability to expand in the global markets that it serves
The ability to meet demand for content meeting current standards in the United States
Continuing success in implementing on-going cost containment and reduction programs
The ability to implement cross channel marketing and pricing

Difficulties, delays or failures experienced in connection with any of these factors could materially affect the future growth of the Company.

Failure to meet the objectives of the Company’s “2020 Plan” could adversely affect our future operating results.

The Company is engaged in the implementation of its integrated program to increase profitability - the “2020 Plan." The plan seeks to leverage new technology, process improvements and cross-business opportunities through improved data analytics intended to drive improved profitability over a period of three fiscal years. Failure to execute the programs in one or more of these areas could negatively impact the Company’s financial results.

Failure of one or more of our information technology platforms could affect our ability to execute our operating strategy.

The Company relies on a variety of information technology platforms to execute its operations, including human resources, payroll, finance, order-to-cash, procurement, vendor payment, inventory management, distribution and content management systems and its internal operating systems. Many of these systems are integrated via internally developed interfaces and modifications. Failure of one or more systems could lead to operating inefficiencies or disruptions and a resulting decline in revenue or profitability. As the Company continues the implementation of its new enterprise-wide customer and content management systems and the migration to software as a service ("SaaS") and cloud-based technology solutions, in its initiatives to integrate its separate legacy platforms into a cohesive enterprise-wide system, there can be no assurance that it will be successful in its efforts or that the implementation of the remaining stages of these initiatives in the Company's global operations will not involve disruptions in its systems or processes having a short term adverse impact on its operations and ability to service its customers.
 
Increases in certain operating costs and expenses, which are beyond our control and can significantly affect our profitability, could adversely affect our operating performance.
 
The Company’s major expense categories include employee compensation and 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 may cause the Company's costs to increase.
 
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. While the Company has taken steps to manage certain expected operating cost

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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.

Failure of third party providers to provide contracted outsourcing of business processes and information technology services could cause business interruptions and could increase the costs of these services to the Company.

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, the Company could experience disruptions to its distribution and other business activities and may incur higher costs.

The inability to obtain and publish best-selling new titles could cause our future results to decline in comparison to historical results.
 
The Company invests in authors and illustrators for its Trade publication business, and has a history of publishing hit titles such as Harry Potter. 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 could decrease prices for new title releases, as well as the number of outlets for books 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 loss of or failure to obtain rights to intellectual property material to our businesses would adversely affect our financial results.

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.

Because we procure products and sell our products and services in foreign countries, changes in currency exchange rates, as well as other risks and uncertainties, could adversely affect our operations and financial results.
 
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 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 economic affiliations. For example, the results of the Referendum on the United Kingdom’s (or the UK) Membership in the European Union (EU) (referred to as Brexit), advising for the exit of the United Kingdom from the European Union, could affect our sales in the UK, as the uncertainty caused by the vote and the current uncertain state of negotiations

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between the EU and the UK and the nature of any exit could negatively impact the economies of the UK and other nations. Changes in international trade relations with foreign countries, such as increased tariffs and duties (including those recently imposed by the United States) could cause the Company's costs to rise, or our overseas revenues to decline.

Failure to meet the demands of regulators, and the associated high cost of compliance with regulations, as well as failure to enforce compliance with our Code of Ethics and other policies, could negatively impact us.

The Company operates in multiple countries and is subject to different regulations throughout the world. In the United States, the Company is regulated by the Internal Revenue Service, the Securities and Exchange Commission, the Federal Trade Commission and other regulating bodies. Failure to comply with these regulators, including providing these regulators with accurate financial and statistical information that often is subject to estimates and assumptions, or the high cost of complying with relevant regulations, could negatively impact the Company.

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.

Certain of our activities are subject to weather and natural disaster risks, which could disrupt our operations or otherwise adversely affect our financial performance.
 
The Company conducts certain of its businesses and maintains warehouse and office facilities in locations that are at risk of being negatively affected by severe weather and natural disaster events, such as hurricanes, tornadoes, floods, snowstorms or earthquakes. Notably, much of the Company’s domestic distribution facilities are located in central Missouri. A disruption of these or other facilities could impact the Company’s school-based book clubs, school-based book fairs and education businesses. Additionally, weather and natural disaster disruptions could result in school closures, resulting in reduced demand for the Company’s products in its school channels during the affected periods. Accordingly, the Company could be adversely affected by any future significant weather and natural disaster events.
 
Control of the Company resides in our Chairman of the Board, President and Chief Executive Officer and other members of his family through their ownership of Class A Stock, and the holders of the Common Stock generally have no voting rights with respect to transactions requiring stockholder approval.
 
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. Richard Robinson, the Chairman of the Board, President and Chief Executive Officer, and other members of the Robinson family beneficially own all of the outstanding shares of Class A Stock and are 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.
 
We own certain significant real estate assets which are subject to various risks related to conditions affecting the real estate market.

The Company has direct ownership of certain significant real estate assets, in particular the Company’s headquarters location in New York City and its primary distribution center in Jefferson City, Missouri. 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. The Company has recently completed the renovation of its New York headquarters, which includes making additional space available for retail use. 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.




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Note

The risk factors listed above should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by the Company prior to and including the date hereof.
 
Forward-Looking Statements:
 
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, strategic 2020 Plan and other plans, ecommerce and digital initiatives, new product introductions, strategies, new education standards, 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.


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Item 1B | Unresolved Staff Comments
 
None.
 
Item 2 | Properties
The Company maintains its principal offices in the metropolitan New York area, where it owns or leases approximately 0.5 million square feet of space. The Company acquired its headquarters space (including land, building, fixtures and related personal property and leases) at 555 Broadway, New York in February 2014 and, as a result, the Company now owns the entirety of its principal headquarters space located at 557 Broadway in New York City. In fiscal 2019, the Company completed the renovation of its headquarters space to create a more modern and efficient office in addition to new premium retail space.
The Company also owns or leases approximately 1.5 million square feet of office and warehouse space for its primary warehouse and distribution facility located in the Jefferson City, Missouri area. In addition, the Company owns or leases approximately 2.8 million square feet of office and warehouse space across approximately 60 facilities in the United States, principally for Scholastic book fairs. The Company owns or leases approximately 1.4 million square feet of office and warehouse space in approximately 130 facilities in Canada, the United Kingdom, Australia, New Zealand, Asia and elsewhere around the world for its international businesses.
The Company considers its properties adequate for its current needs. With respect to the Company’s leased properties, no difficulties are anticipated in negotiating renewals as leases expire or in finding other satisfactory space, if current premises become unavailable. For further information concerning the Company’s obligations under its leases, see Notes 1 and 5 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data.”
 
Item 3 | Legal Proceedings
 
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 5, "Commitments and Contingencies," of Notes to the Consolidated Financial Statements in Item 8, "Consolidated Financial Statements and Supplementary Data" for further discussion.


Item 4 | Mine Safety Disclosures
 
Not Applicable.


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Part II

Item 5 | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information: Scholastic Corporation’s Common Stock, par value $0.01 per share (the "Common Stock"), is traded on the NASDAQ Global Select Market (the "NASDAQ") under the symbol SCHL. Scholastic Corporation’s Class A Stock, par value $0.01 per share (the “Class A Stock”), is convertible, at any time, into Common Stock on a share-for-share basis. There is no public trading market for the Class A Stock.
 
Holders: The number of holders of Class A Stock and Common Stock as of July 23, 2019 were 3 and approximately 9,800, respectively.
 
Dividends: On a quarterly basis, the Board of Directors considers the payment of cash dividends based upon its review of Company earnings, cash position and other relevant factors. On July 24, 2019, the Board of Directors declared a regular cash dividend of $0.15 per Class A and Common share in respect of the first quarter of fiscal 2020. The dividend is payable on September 16, 2019 to shareholders of record on August 30, 2019. All dividends have been in compliance with the Company’s debt covenants.
 
Share purchases: During fiscal 2019, the Company repurchased 216,612 Common shares on the open market at an average price paid per share of $39.42 for a total cost of approximately $8.5 million, pursuant to a share buy-back program authorized by the Board of Directors. During fiscal 2018, pursuant to the same share buy-back program, the Company repurchased 722,796 Common shares on the open market at an average price paid per share of $37.66 for a total cost of approximately $27.2 million.

The following table provides information with respect to repurchases of shares of Common Stock by the Corporation during the three months ended May 31, 2019:
Period
 
Total number of
shares purchased
 
Average
price paid
per share
 
Total number of shares purchased as part of publicly
announced plans or programs
 
Maximum number of shares (or approximate dollar value in millions) that may yet be purchased under the plans or programs (i)
March 1, 2019 through March 31, 2019
 
64,769

 
$
39.50

 
64,769

 
$
56.8

April 1, 2019 through April 30, 2019
 
58,168

 
$
39.94

 
58,168

 
$
54.6

May 1, 2019 through May 31, 2019
 
42,848

 
$
39.69

 
42,848

 
$
52.9

Total
 
165,785

 

 
165,785

 
$
52.9


(i) Total represents the amount remaining under the Board authorization for Common share repurchases on July 22, 2015 and the current $50.0 million Board authorization for Common share repurchases announced on March 21, 2018, which is available for further repurchases, from time to time as conditions allow, on the open market or through negotiated private transactions.


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Stock Price Performance Graph
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. 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, 2014 to May 31, 2019.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Scholastic Corporation, the NASDAQ Composite Index
and a Peer Group
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*$100 invested on 5/31/14 in stock or index, including reinvestment of dividends

 
Fiscal year ending May 31,
 
2014
2015
2016
2017
2018
2019
Scholastic Corporation
$
100.00

$
141.83

$
126.45

$
139.69

$
150.03

$
111.94

NASDAQ Composite Index
100.00

119.50

116.63

146.10

175.41

175.67

Peer Group
100.00

113.01

79.41

65.99

86.56

69.13

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

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Item 6 | Selected Financial Data
(Amounts in millions, except per share data)
For fiscal years ended May 31,
 
 
2019
 
2018
 
2017
 
2016
 
2015
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Revenues
$
1,653.9

 
$
1,628.4

 
$
1,741.6

 
$
1,672.8

 
$
1,635.8

Cost of goods sold (1)
779.9

 
744.6

 
814.5

 
762.3

 
758.5

Selling, general and administrative expenses(2)
781.4

 
765.7

 
777.5

 
773.6

 
765.6

Depreciation and amortization
56.1

 
41.4

 
38.7

 
38.9

 
47.9

Severance (3)
10.6

 
9.9

 
14.9

 
11.9

 
9.6

Asset impairments (4)
0.9

 
11.2

 
6.8

 
14.4

 
15.8

Operating income
25.0

 
55.6

 
89.2

 
71.7

 
38.4

Interest (income) expense, net
(3.4
)
 
(1.1
)
 
1.0

 
1.1

 
3.5

Other components of net periodic benefit (cost) (5)
(1.4
)
 
(58.2
)
 
(0.3
)
 
(4.1
)
 
(5.5
)
Gain (loss) on investments and other (6)
(1.0
)
 
0.0

 

 
2.2

 
0.5

Earnings (loss) from continuing operations before income taxes
26.0


(1.5
)

87.9


68.7


29.9

Provision (benefit) for income taxes (7)
10.4

 
3.5

 
35.4

 
24.7

 
14.4

Earnings (loss) from continuing operations
15.6

 
(5.0
)
 
52.5

 
44.0

 
15.5

Earnings (loss) from discontinued operations, net of tax

 

 
(0.2
)
 
(3.5
)
 
279.1

Net income (loss)
$
15.6

 
$
(5.0
)
 
$
52.3

 
$
40.5

 
$
294.6

Less: Net income (loss) attributable to noncontrolling interest
0.0

 

 

 

 

Net income (loss) attributable to Scholastic Corporation
$
15.6

 
$
(5.0
)
 
$
52.3

 
$
40.5

 
$
294.6

Share Information:
 

 
 

 
 

 
 

 
 

Basic:
 

 
 

 
 

 
 

 
 

Earnings (loss) from continuing operations
$
0.44

 
$
(0.14
)
 
$
1.51

 
$
1.29

 
$
0.47

Earnings (loss) from discontinued operations
$

 
$

 
$
(0.00
)
 
$
(0.11
)
 
$
8.53

Net Income (loss)
$
0.44

 
$
(0.14
)
 
$
1.51

 
$
1.18

 
$
9.00

Diluted:
 
 
 

 
 

 
 

 
 
Earnings (loss) from continuing operations
$
0.43

 
$
(0.14
)
 
$
1.48

 
$
1.26

 
$
0.46

Earnings (loss) from discontinued operations
$

 
$

 
$
(0.01
)
 
$
(0.10
)
 
$
8.34

Net Income (loss)
$
0.43

 
$
(0.14
)
 
$
1.47

 
$
1.16

 
$
8.80

Weighted average shares outstanding - basic
35.2

 
35.0

 
34.7

 
34.1

 
32.7

Weighted average shares outstanding - diluted
35.8

 
35.0

 
35.4

 
34.9

 
33.4

Dividends declared per common share
$
0.60

 
$
0.60

 
$
0.60

 
$
0.60

 
$
0.60

Balance Sheet Data:
 

 
 

 
 

 
 

 
 

Working Capital
$
419.1

 
$
512.5

 
$
583.4

 
$
571.8

 
$
562.4

Cash and cash equivalents
334.1

 
391.9

 
444.1

 
399.7

 
506.8

Total assets
1,878.5

 
1,825.4

 
1,760.4

 
1,713.1

 
1,822.3

Long-term debt (excluding capital leases)

 

 

 

 

Total debt
7.3

 
7.9

 
6.2

 
6.3

 
6.0

Long-term capital lease obligations
8.4

 
6.2

 
6.5

 
7.5

 
0.4

Total capital lease obligations
10.1

 
7.4

 
7.6

 
8.6

 
0.7

Total stockholders’ equity
1,272.8

 
1,320.8

 
1,307.9

 
1,257.6

 
1,204.9


(1) In fiscal 2018, the Company recognized pretax costs related to branch warehouse consolidation in Canada of $0.1. In 2017, the Company recognized pretax exit costs related to its software distribution business in Australia of $0.5. In fiscal 2015, the Company recognized a pretax charge of $1.5 related to a warehouse optimization project in Canada and a $0.4 pretax charge related to unabsorbed burden associated with the former educational technology and services business.

(2) In fiscal 2019, the Company recognized pretax charges related to a settlement of a legacy sales tax assessment of $8.1, and pretax costs associated with branch consolidation charges of $0.5. In fiscal 2018, the Company recognized pretax share-based compensation charges of $0.7 due to the accelerated vesting of certain awards. In fiscal 2016, the Company recognized a pretax charge of $1.5 related to a branch consolidation project in the Company's book fairs operations. In fiscal 2015, the Company recognized a pretax charge of $15.4 related to unabsorbed burden associated with the former educational technology and services business and a $0.4 pretax charge related to the relocation of the Company's Klutz® division.

(3) In fiscal 2019, the Company recognized pretax severance expense of $6.5 primarily related to cost reduction and restructuring programs. In fiscal 2018, the Company recognized pretax severance expense of $7.4 primarily related to cost reduction and restructuring programs. In fiscal 2017, the Company recognized pretax severance expense of $12.9 as part of cost reduction programs. In fiscal 2016, the Company recognized pretax severance expense of $9.5 as part of cost reduction and restructuring programs. In fiscal 2015, the Company recognized pretax severance expense of $8.9.

(4) In fiscal 2019, the Company recognized a pretax impairment charge of $0.9 related to legacy building improvements. In fiscal 2018, the Company recognized a pretax impairment charge of $11.0 related to legacy building improvements and a pretax impairment charge of $0.2 related to book fairs trucks. In fiscal 2017, the Company recognized a pretax impairment charge related to certain website development assets of $5.7 and certain legacy prepublication assets of $1.1. In fiscal 2016, the Company recognized a pretax impairment charge of $7.5 related to legacy building improvements in connection with the Company's headquarters renovation and a pretax charge of $6.9 for certain legacy prepublication assets. In fiscal 2015, the Company recognized a pretax impairment charge of $8.3 in connection with the restructuring of the Company's media and entertainment businesses, a $4.6 pretax impairment charge related to the discontinuation of certain outdated technology platforms and a $2.9 pretax impairment charge associated with the closure of the retail store located at the Company headquarters in New York City.


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(5) In fiscal 2018, the Company recognized a pretax charge related to the final settlement of the Company's domestic defined benefit pension plan of $57.3. In fiscal 2015, the Company recognized a pretax pension settlement charge of $4.3.

(6) In fiscal 2019, the Company recognized a pretax charge of $1.0 related to the recognition of foreign currency translation adjustment previously recorded within accumulated other comprehensive income (loss) as a result of the acquisition of Make Believe Ideas Limited.
In fiscal 2016, the Company recognized a pretax gain of $2.2 on the sale of a China-based cost method investment. In fiscal 2015, the Company recognized a pretax gain of $0.6 on the sale of a UK-based cost method investment.

(7) In fiscal 2019, the Company recognized a benefit for income taxes in respect to one-time pretax charges of $4.2 and income tax provision of $4.7 primarily related to the Company's state deferred tax balances. In fiscal 2018, the Company recognized a benefit for income taxes on certain pretax charges of $26.5, partly offset by $5.7 of income tax provision related to the remeasurement of the Company's U.S. deferred tax balance in connection with the passage of the Tax Cuts and Jobs Act of 2017. In fiscal 2017, the Company recognized a benefit for income taxes on certain pretax charges of $7.8. In fiscal 2016, the Company recognized a benefit for income taxes on certain pretax charges of $10.3. In fiscal 2015, the Company recognized a benefit for income taxes on certain pretax charges of $18.3.


Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
General
 
The Company categorizes its businesses into three reportable segments: Children’s Book Publishing and Distribution; Education; and International.

The following discussion and analysis of the Company’s financial position and results of operations should be read in conjunction with the Company’s Consolidated Financial Statements and the related Notes included in Item 8, “Consolidated Financial Statements and Supplementary Data.”
 
Overview and Outlook
 
Revenues in fiscal 2019 were $1.65 billion, an increase of 1.6% from $1.63 billion in fiscal 2018, on strong trade publishing in both domestic and international markets, which more than offset declines in book club sales, which were adversely impacted by new sales tax collection practices, and a decline in book fairs revenues, where the adoption of a new accounting standard required the recognition of revenue related to certain incentive programs to be deferred until the redemption or expiration of those incentives. In Education, higher revenues were driven by sales of instruction products and programs, including Guided Reading, Leveled Bookroom and LitCamp, a reading program for summer school. International revenues declined $3.4 million due to a $15.4 million unfavorable impact of foreign exchange which was partially offset by higher trade publishing revenues in all of the major markets and in Asia coupled with higher education sales in the UK, Australia and Asia. Earnings from continuing operations per diluted share was $0.43 for the fiscal year ended May 31, 2019, compared to loss from continuing operations per diluted share of $0.14 in the prior fiscal year.

In fiscal 2019, Children's Book Publishing and Distribution revenue increased $20.1 million driven by a 20% increase in consolidated trade channel sales, including higher media and entertainment revenues from the Company's evergreen programming library of children's shows, partially offset by lower sales in the school-based distribution channels. Top selling titles in the trade channel included Dav Pilkey's Dog Man: Lord of the Fleas and Dog Man: Brawl of the Wild, new Harry Potter publishing including Fantastic Beasts: The Crimes of Grindelwald and The Wonky Donkey. Within the school-based channels, the book clubs channel experienced lower sales and higher expenses associated with the sales tax collection program initiated as a result of the Supreme Court's Wayfair decision on sales tax collection, including re-engineering the book clubs offers, in print and online. The book fairs channel experienced higher expenses associated with increased promotions and incentive spending to attract and retain book fairs in response to increased competition.

In fiscal 2020, the Company expects increases in revenue driven by new trade publishing as the Company continues to grow its important franchises including Hunger Games, Dog Man, Captain Underpants, Wings of Fire and I Survived along with an increased focus on licensing and brand merchandising. The trade channel sales will also be favorably impacted by the recent acquisition of Make Believe Ideas, a UK-based publisher of creative books for young children. The school-based channels are expecting lower revenues as book club customers are transitioned to on-line ordering platforms and the Company seeks to simplify the book fair experience for organizers and volunteers. The Company also expects growth in Education with its comprehensive approach to K-6 literacy instruction in select states and open territory reading adoptions, in addition to core and supplemental curriculum materials in digital and print. The Company continues to expect cost pressures due to paper mills and print vendor consolidation and rising costs related to tariffs, labor, fuel and postage. To address these cost pressures, the Company is implementing initiatives as part of the multi-year Scholastic 2020 plan to drive savings, implement selective pricing initiatives and sustainable operational efficiencies within the supply chain. The Company expects higher levels of depreciation and amortization from the full-year impact of the capital investments made in assets placed in service in fiscal 2019.

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Critical Accounting Policies and Estimates
 
General:
 
The Company’s discussion and analysis of its financial condition and results of operations is based upon its Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements involves the use of estimates and assumptions by management, which affects the amounts reported in the Consolidated Financial Statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, future expectations and various other assumptions believed to be reasonable under the circumstances, all of which are necessary in order to form a basis for determining the carrying values of assets and liabilities. Actual results may differ from those estimates and assumptions. On an on-going basis, the Company evaluates the adequacy of its reserves and the estimates used in calculations, including, but not limited to: collectability of accounts receivable; variable consideration related to anticipated returns; allocation of transaction price to contractual performance obligations; amortization periods; stock-based compensation expense; pension and other postretirement obligations; tax rates; recoverability of inventories; deferred income taxes and tax reserves; the timing and amount of future income taxes and related deductions; fixed assets; prepublication costs; royalty advance reserves; customer reward programs; and the impairment assessment of goodwill and other intangibles. For a complete description of the Company’s significant accounting policies, see Note 1 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’s revenue recognition policies for its principal businesses are as follows:
 
School-Based Book Clubs – Revenue from school-based book clubs is recognized upon shipment of the products.
 
School-Based Book Fairs – 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 fair 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.

Trade – Revenue from the sale of children’s books for distribution in the retail channel is primarily recognized when performance obligations are satisfied and control is transferred to the customer, or when the product is on sale and available to the public. For newly published titles, the Company, on occasion, contractually agrees with its customers when the publication may be first offered for sale to the public, or an agreed upon “Strict Laydown Date." For such titles, the control of the product is not deemed to be transferred to the customer until such time that the publication can contractually be sold to the public, and the Company defers revenue on sales of such titles until such time as the customer is permitted to sell the product to the public. Revenue for ebooks, which is generally the net amount received from the retailer, is recognized upon electronic delivery to the customer by the retailer. The sale of trade product includes a right of return.
 
Education – Revenue from the sale of educational materials is recognized upon shipment of the products, or upon acceptance of product by the customer, depending on individual contractual terms. Revenues from professional development services are recognized when the services have been provided to the customer.
 
Film Production and Licensing – Revenue from the sale of film rights, principally for the home video and domestic and foreign television markets, is recognized when the film has been delivered and is available for showing or

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exploitation. Licensing revenue is recognized in accordance with royalty agreements at the time the licensed materials are available to the licensee and collections are reasonably assured.
 
Magazines – Revenue is deferred and recognized ratably over the subscription period, as the magazines are delivered.
 
Magazine Advertising – Revenue is recognized when the magazine is for sale and available to the subscribers.
 
Scholastic In-School Marketing – Revenue is recognized when the Company has satisfied its obligations under the program and the customer has acknowledged acceptance of the product or service. Certain revenues may be deferred pending future deliverables.
 
The Company has elected to present sales and other related taxes on a net basis, excluded from revenues, and as such, these are included within Other accrued expenses until remitted to taxing authorities.

Accounts receivable:
 
Accounts receivable are recognized net of allowances for doubtful accounts. In the normal course of business, the Company extends credit to customers that satisfy predefined credit criteria. The Company is required to estimate the collectability of its receivables. Reserves for estimated bad debts are established at the time of sale and are based on an evaluation of accounts receivable aging and, where applicable, specific reserves on a customer-by-customer basis, creditworthiness of the Company’s customers and prior collection experience to estimate the ultimate collectability of these receivables. At the time the Company determines that a receivable balance, or any portion thereof, is deemed to be permanently uncollectible, the balance is then written off. A one percentage point change in the estimated bad debt reserve rates, which are applied to the accounts receivable aging, would have resulted in an increase or decrease in operating income for the year ended May 31, 2019 of approximately $2.3 million.
 
Estimated returns:

For sales that include a right of return, the Company will estimate the transaction price and record revenues as variable consideration based on the amounts the Company expects to ultimately be entitled. In order to determine estimated returns, the Company utilizes historical return rates, sales patterns, types of products and expectations and recognizes a corresponding reduction to Revenues and Cost of goods sold. Management also considers patterns of sales and returns in the months preceding the fiscal year, as well as actual returns received subsequent to the fiscal year, available customer and market specific data and other return rate information that management believes is relevant. In addition, a refund liability is recorded within Other accrued expenses for the consideration to which the Company believes it will not ultimately be entitled and a return asset is recorded within Prepaid expenses and other current assets for the expected inventory to be returned. Actual returns could differ from the Company's estimate. A one percentage point change in the estimated reserve for returns rate would have resulted in an increase or decrease in operating income for the year ended May 31, 2019 of approximately $1.8 million.

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 historical usage rates by channel and the sales patterns of its products, and specifically identified obsolete inventory. 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, 2019 of approximately $3.7 million.
 
Royalty advances:
 
Royalty advances are initially capitalized and subsequently expensed as related revenues are earned or when the Company determines future recovery through earndowns is not probable. The Company has a long history of providing authors with royalty advances, and it tracks each advance earned with respect to the sale of the related publication. Historically, the longer the unearned portion of the advance remains outstanding, the less likely it is that the Company will recover the advance through the sale of the publication, as the related royalties earned are applied first against the remaining unearned portion of the advance. The Company applies this historical experience to its existing outstanding royalty advances to estimate the likelihood of recovery. Additionally, the Company’s editorial staff regularly reviews its portfolio of royalty advances to determine if individual royalty advances are not recoverable through earndowns for discrete reasons, such as the death of an author prior to completion of a title or titles, a

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Company decision to not publish a title, poor market demand or other relevant factors that could impact recoverability.
 
Goodwill and intangible assets:
 
Goodwill and other intangible assets with indefinite lives are not amortized and are reviewed for impairment annually or more frequently if impairment indicators arise.
 
With regard to goodwill, 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 two-step goodwill impairment test. 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. 
 
With regard to other intangibles with indefinite lives, the Company first performs a qualitative assessment to determine whether it is more likely than not that the fair value of the identified asset is less than its carrying value. If it is more likely than not that the fair value of the asset is less than its carrying amount, the Company performs a quantitative test. The estimated fair value is determined utilizing the expected present value of the projected future cash flows of the asset.
 
Intangible assets with definite lives consist principally of tradenames, customer lists, intellectual property and other agreements and are amortized over their expected useful lives. Customer lists are amortized on a straight-line basis over five to ten years, while other agreements are amortized on a straight-line basis over their useful life. Intellectual property assets are amortized over their remaining useful lives, which is approximately five years.

Employee Benefit Plan Obligations:
 
The rate assumptions discussed below impact the Company’s calculations of its UK pension and U.S. postretirement obligations. The rates applied by the Company are based on the UK pension plan asset portfolio's past average rates of return, discount rates and actuarial information. Any change in market performance, interest rate performance, assumed health care cost trend rate and compensation rates could result in significant changes in the Company’s UK pension plan and U.S. postretirement obligations. The U.S. Pension Plan was terminated in fiscal 2018.

Pension obligations
    
UK Pension Plan
The Company’s UK Pension Plan calculations are based on three primary actuarial assumptions: the discount rate, the long-term expected rate of return on plan assets and the anticipated rate of compensation increases. The discount rate is used in the measurement of the projected, accumulated and vested benefit obligations and interest cost component of net periodic pension costs. The long-term expected return on plan assets is used to calculate the expected earnings from the investment or reinvestment of plan assets. The anticipated rate of compensation increases is used to estimate the increase in compensation for participants of the plan from their current age to their assumed retirement age. The estimated compensation amounts are used to determine the benefit obligations and the service cost component of net periodic pension costs. A one percentage point change in the discount rate

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would have resulted in an increase or decrease in operating income for the year ended May 31, 2019 of approximately $0.5 million and approximately $0.6 million, respectively.

U.S. Pension Plan
The Company's U.S. Pension Plan was terminated in fiscal 2018. There are no actuarial assumptions reflected in any U.S. Pension Plan estimates and there is no ongoing net periodic benefit cost.
 
Other Postretirement benefits

The Company provides postretirement benefits, consisting of healthcare and life insurance benefits, to eligible retired United States-based employees. The postretirement medical plan benefits are funded on a pay-as-you-go basis, with the employee paying a portion of the premium and the Company paying the remainder. The existing benefit obligation is based on the discount rate and the assumed health care cost trend rate. The discount rate is used in the measurement of the projected and accumulated benefit obligations and the interest cost component of net periodic postretirement benefit cost. The assumed health care cost trend rate is used in the measurement of the long-term expected increase in medical claims.

A one percentage point change in the discount rate would have resulted in an increase or decrease in operating income for the year ended May 31, 2019 of approximately $0.1 million and approximately $0.4 million, respectively. A one percentage point change in the health care cost trend rate would have resulted in an increase or decrease in operating income for the year ended May 31, 2019 of approximately $0.1 million and an increase or decrease in the postretirement benefit obligation as of May 31, 2019 of approximately $2.1 million and approximately $1.9 million, respectively.

Equity Awards:

Stock-based compensation – The Company measures the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The Company recognizes the cost, based on the award’s fair value at the date of grant, on a straight-line basis over an award’s requisite service period, which is generally the vesting period, except for the grants to retirement-eligible employees. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The determination of the assumptions used in the Black-Scholes model requires management to make significant judgments and estimates. The use of different assumptions and estimates in the option-pricing model could have a material impact on the estimated fair value of option grants and the related expense. The risk-free interest rate is based on a U.S. Treasury rate in effect on the date of grant with a term equal to the expected life. The expected term is determined based on historical employee exercise and post-vesting termination behavior. The expected dividend yield is based on actual dividends paid or to be paid by the Company. The volatility is estimated based on historical volatility corresponding to the expected life. The fair value of restricted stock units are assumed to be the per share market price of the Company's stock as of the date of grant.

Taxes:

Income Taxes – The Company uses the asset and liability method of accounting for income taxes. Under this method, for purposes of determining taxable income, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of such assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to be realized.
 
The Company believes that its taxable earnings, during the periods when the temporary differences giving rise to deferred tax assets become deductible or when tax benefit carryforwards may be utilized, should be sufficient to realize the related future income tax benefits. For those jurisdictions where the expiration date of the tax benefit carryforwards or the projected taxable earnings indicate that realization is not likely, the Company establishes a valuation allowance.
 
In assessing the need for a valuation allowance, the Company estimates future taxable earnings, with consideration for the feasibility of on-going tax planning strategies and the realizability of tax benefit carryforwards, to determine which deferred tax assets are more likely than not to be realized in the future. Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates and future taxable earnings. In the event that actual results differ from these estimates in future periods, the Company may need to adjust the valuation allowance. 


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The Company accounts for uncertain tax positions using a two-step method. Recognition occurs when an entity concludes that a tax position, based solely on technical merits, is more likely than not to be sustained upon examination. If a tax position is more likely than not to be sustained upon examination, the amount recognized is the largest amount of benefit, determined on a cumulative probability basis, which is more likely than not to be realized upon settlement. The Company assesses all income tax positions and adjusts its reserves against these positions periodically based upon these criteria. The Company also assesses potential penalties and interest associated with these tax positions, and includes these amounts as a component of income tax expense.

The Company assesses foreign investment levels periodically to determine if all or a portion of the Company’s investments in foreign subsidiaries are indefinitely invested. Any required adjustment to the income tax provision would be reflected in the period that the Company changes this assessment.

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act. The Act imposes a new minimum tax on global intangible low-taxed income ("GILTI") earned by foreign subsidiaries. The Financial Accounting Standards Board ("FASB") Staff Q&A, Topic 740 No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity may make an accounting policy election to either recognize deferred taxes for temporary differences expected to be reserved as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. The Company elects to recognize the tax on GILTI as a period expense in the period the tax is incurred.

Non-income Taxes The Company is subject to tax examinations for sales-based taxes. A number of these examinations are ongoing and, in certain cases, have resulted in assessments from taxing authorities. Where a sales tax liability with respect to a jurisdiction is probable and can be reliably estimated, the Company has made accruals for these matters and these amounts are included in the Consolidated Statements of Operations in Selling, general and administrative expenses. Future developments relating to the foregoing could result in adjustments being made to these accruals.





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Results of Operations
 
(Amounts in millions, except per share data)
For fiscal years ended May 31,
 
2019
2018
2017
 
 
$
Accounting Adoption (1)
Adjusted 2019 (2)
% (3)
 
$
 
% (3)
 
$
 
% (3)
Revenues:
 
 

 
 
 
 
 
 
 

 
 

 
 

 
 

Children’s Book Publishing and Distribution
 
$
990.3

 
$
12.3

 
$
1,002.6

60.2

 
$
970.2

 
59.6

 
$
1,061.2

 
61.0

Education
 
297.4

 

 
297.4

17.8

 
288.6

 
17.7

 
303.6

 
17.4

International
 
366.2

 
0.5

 
366.7

22.0

 
369.6

 
22.7

 
376.8

 
21.6

Total revenues
 
1,653.9

 
12.8

 
1,666.7

100.0

 
1,628.4

 
100.0

 
1,741.6

 
100.0

Cost of goods sold (4)
 
779.9

 
4.0

 
783.9

47.0

 
744.6

 
45.7

 
814.5

 
46.8

Selling, general and administrative expenses(5)
 
781.4

 
1.1

 
782.5

46.9

 
765.7

 
47.0

 
777.5

 
44.6

Depreciation and amortization
 
56.1

 

 
56.1

3.4

 
41.4

 
2.6

 
38.7

 
2.2

Severance (6)
 
10.6

 

 
10.6

0.6

 
9.9

 
0.6

 
14.9

 
0.9

Asset impairments (7)
 
0.9

 

 
0.9

0.1

 
11.2

 
0.7

 
6.8

 
0.4

Operating income
 
25.0

 
7.7

 
32.7

2.0

 
55.6

 
3.4

 
89.2

 
5.1

Interest income
 
5.6

 

 
5.6

0.3

 
3.1

 
0.2

 
1.4

 
0.1

Interest expense
 
(2.2
)
 

 
(2.2
)
(0.1
)
 
(2.0
)
 
(0.1
)
 
(2.4
)
 
(0.2
)
Other components of net periodic benefit (cost) (8)
 
(1.4
)
 

 
(1.4
)
(0.1
)
 
(58.2
)
 
(3.6
)
 
(0.3
)
 
(0.0
)
Gain (loss) on investments and other (9)
 
(1.0
)
 

 
(1.0
)
(0.1
)
 
0.0

 
0.0

 

 

Earnings (loss) from continuing operations before income taxes
 
26.0

 
7.7

 
33.7

2.0

 
(1.5
)
 
(0.1
)
 
87.9

 
5.0

Provision (benefit) for income taxes (10)
 
10.4

 
2.1

 
12.5

0.7

 
3.5

 
0.2

 
35.4

 
2.0

Earnings (loss) from continuing operations
 
15.6

 
5.6

 
21.2

1.3

 
(5.0
)
 
(0.3
)
 
52.5

 
3.0

Earnings (loss) from discontinued operations, net of tax
 

 

 


 

 

 
(0.2
)
 
(0.0
)
Net income (loss)
 
$
15.6

 
5.6

 
21.2

1.3

 
$
(5.0
)
 
(0.3
)
 
$
52.3

 
3.0

Less: Net income (loss) attributable to noncontrolling interest
 
0.0

 

 
0.0


 

 

 

 

Net income (loss) attributable to Scholastic Corporation
 
15.6

 
5.6

 
21.2

1.3

 
(5.0
)
 
(0.3
)
 
52.3

 
3.0

Earnings (loss) per share:
 


 
 
 
 
 
 


 
 

 
 

 
 

Basic:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) from continuing operations
 
$
0.44

 
0.16

 
0.60



 
$
(0.14
)
 
 

 
$
1.51

 
 

Earnings (loss) from discontinued operations
 
$

 

 



 
$

 
 

 
$
(0.00
)
 
 

Net Income (loss)
 
$
0.44

 
0.16

 
0.60

 
 
$
(0.14
)
 
 
 
$
1.51

 
 
Diluted:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) from continuing operations
 
$
0.43

 
0.16

 
0.59



 
$
(0.14
)
 
 

 
$
1.48

 
 

Earnings (loss) from discontinued operations
 
$

 

 



 

 
 

 
$
(0.01
)
 
 

Net Income (loss)
 
$
0.43

 
0.16

 
0.59

 
 
(0.14
)
 
 
 
$
1.47

 
 

(1) In the first quarter of fiscal 2019, the Company adopted Topic 606, the application of which resulted in the deferral of revenue for incentive credits earned from the holding of school book fairs until such credits are redeemed. In addition, Topic 606 eliminated the deferral of certain advertising costs primarily impacting the magazine business.

(2) Under the modified retrospective method of adoption for Topic 606, prior period amounts are not restated to reflect the adoption of the new accounting standard. Therefore, the Company has included an Adjusted 2019 column to exclude the impact of Topic 606 and provide a comparable period-over-period variance.

(3) Represents percentage of total revenues.

(4) In fiscal 2018, the Company recognized pretax costs associated with the consolidation of a Canadian book fair warehouse of $0.1. In fiscal 2017, the Company recognized pretax exit costs related to its software distribution business in Australia of $0.5.

(5) In fiscal 2019, the Company recognized pretax charges related to the settlement of a legacy sales tax assessment of $8.1, and pretax costs associated with the Canadian book fairs branch consolidation of $0.5. In fiscal 2018, the Company recognized pretax share-based compensation charges of $0.7 due to the accelerated vesting of certain awards.


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(6) In fiscal 2019, the Company recognized pretax severance expense of $6.5 related to cost reduction and restructuring programs. In fiscal 2018, the Company recognized pretax severance expense of $7.4 primarily related to cost reduction and restructuring programs. In fiscal 2017, the Company recognized pretax severance expense of $12.9 as part of cost reduction programs.

(7) In fiscal 2019, the Company recognized pretax impairment charges of $0.9 related to legacy building improvements. In fiscal 2018, the Company recognized pretax impairment charges of $11.0 related to legacy building improvements and a pretax impairment charge of $0.2 related to book fairs trucks. In fiscal 2017, the Company recognized pretax impairment charges related to certain website development assets of $5.7 and certain legacy prepublication assets of $1.1.

(8) In fiscal 2018, the Company recognized pretax charges related to the settlement of the Company's domestic defined benefit pension plan of $57.3.

(9) In fiscal 2019, the Company recognized a pretax charge of $1.0 related to the recognition of foreign currency translation adjustment previously recorded within accumulated other comprehensive income (loss) as a result of the acquisition of Make Believe Ideas Limited.

(10) In fiscal 2019, the Company recognized a benefit for income taxes in respect to one-time pretax charges of $4.2 and income tax provision of $4.7 primarily related to the Company's state deferred tax balances. In fiscal 2018, the Company recognized a benefit for income taxes on certain pretax charges of $26.5, partly offset by $5.7 of income tax provision related to the remeasurement of the Company's U.S. deferred tax balance in connection with the passage of the Tax Cuts and Jobs Act of 2017. In fiscal 2017, the Company recognized a benefit for income taxes on certain pretax charges of $7.8.

Results of Operations – Consolidated

Fiscal 2019 compared to fiscal 2018

Adjusted Revenues from operations for the fiscal year ended May 31, 2019 increased by $38.3 million, or 2.4%, to $1,666.7 million, compared to $1,628.4 million in the prior fiscal year. The increase in revenues was primarily due to higher Children’s Book Publishing and Distribution segment revenues of $32.4 million, and higher sales in the Education segment of $8.8 million, partially offset by lower International revenue of $2.9 million. Within the Children’s Book Publishing and Distribution segment, revenues from the trade channel increased $46.0 million primarily due to the success of Dav Pilkey's Dog Man: Lord of the Fleas and Dog Man: Brawl of the Wild, J.K. Rowling's Fantastic Beasts: The Crimes of Grindelwald - The Original Screenplay, The Wonky Donkey and various backlist series. This was partially offset by lower revenues in the book club channel of $11.9 million, primarily driven by the Company's implementation of a new sales tax collection program in response to the Supreme Court's Wayfair decision earlier in the fiscal year which had an unfavorable impact on the number of events and revenue per event. Book fairs channel revenues decreased $1.7 million, primarily driven by lower fair count as a result of a more competitive marketplace. The Education segment revenues increased $8.8 million, due to higher sales of instructional products, including Scholastic Edge, Guided Reading, Level Bookroom and LitCamp as well as supplemental print products and dealer trade sales within the Company's teaching resources business. Local currency revenues in the International segment increased $12.5 million, primarily driven by higher trade sales in Australia, the UK, Canada and Asia. The increase in International revenues was offset by unfavorable foreign currency exchange of $15.4 million, driven by the strengthening of the U.S. dollar.

Components of Cost of goods sold for fiscal years 2019, 2018, and 2017 are as follows:
 
($ amounts in millions)
 
 
Adjusted 2019 (1)
% of revenue
2018
% of revenue
2017
% of revenue
Product, service and production costs
$
432.0

25.9
%
$
409.1

25.1
%
$
432.6

24.8
%
Royalty costs
118.7

7.1

103.6

6.4

146.4

8.4

Prepublication and production amortization
25.6

1.5

21.9

1.3

23.5

1.3

Postage, freight, shipping, fulfillment and all other costs
207.6

12.5

210.0

12.9

212.0

12.3

Total cost of goods sold
$
783.9

47.0
%
$
744.6

45.7
%
$
814.5

46.8
%

(1) Under the modified retrospective method of adoption for Topic 606, prior period amounts are not restated to reflect the new accounting treatment. Therefore, the adjusted 2019 amounts are used to exclude the impact of Topic 606 and provide a comparable period-over-period variance. For fiscal 2019, the Topic 606 impact to cost of goods sold was a reduction of $4.0 million within the Product, service and production cost category above.
 
Adjusted Cost of goods sold as a percentage of revenue for the fiscal year ended May 31, 2019 was 47.0%, compared to 45.7% in the prior fiscal year. The increase in adjusted Cost of goods sold as a percentage of revenue was primarily due to higher royalty costs in the trade channel, as certain bestselling book series command higher royalty rates,

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higher paper and printing costs. The increase was also impacted by higher product costs as a result of higher customer incentive costs in the book fairs channel.

Adjusted Selling, general and administrative expenses for the fiscal year ended May 31, 2019 were $782.5 million, compared to $765.7 million in the prior fiscal year. The increase was primarily related to higher employee-related expenses, particularly salaries and benefits which were partially offset by lower incentive and equity compensation. In addition, higher costs were incurred in the book club channel in connection with the initiation of the state sales tax collection program and differentiated on-line and paper-based offers in response to the Supreme Court's Wayfair decision. The Wayfair decision also drove higher sales tax expense in the book club channel. Also impacting sales tax expense was a charge of $8.1 million related to the settlement of an outstanding sales tax assessment from prior fiscal years by the State of Wisconsin.

Depreciation and amortization expenses for the fiscal year ended May 31, 2019 were $56.1 million, compared to $41.4 million in the prior fiscal year. The increase was primarily attributable to capitalized strategic technology investments and assets related to the redesign and upgrade of the Company's headquarters in New York City which were placed into service in fiscal 2019 and 2018.

Severance expense for the fiscal year ended May 31, 2019 was $10.6 million, compared to $9.9 million in the prior fiscal year, which included charges of $6.5 million and $7.4 million in fiscal 2019 and fiscal 2018, respectively, related to cost reduction and restructuring programs

Asset impairments for the fiscal year ended May 31, 2019 were $0.9 million, compared to $11.2 million in the prior fiscal year. In fiscal 2019 and fiscal 2018, the Company recognized impairment charges of $0.9 million and $11.0 million, respectively, on the abandonment of legacy building improvements in connection with the Company's renovation of its headquarters location in New York City. In fiscal 2018 the Company also recognized an impairment charge of $0.2 million related to book fair trucks.

For the fiscal year ended May 31, 2019, Net interest income was $3.4 million, compared to Net interest income of $1.1 million in the prior fiscal year. The increase in interest income was primarily driven by higher interest rates applied to the Company's cash and cash equivalents balances, while interest expense remained relatively flat due to the absence of long-term debt.

For the fiscal year ended May 31, 2018, the Company recognized final settlement charges of $57.3 million in Other components of net periodic benefit (cost), related to the settlement of the U.S Pension Plan and the related purchase of insurance company group annuity contracts. The U.S. Pension Plan's asset balance was sufficient to fund the purchase of these insurance contracts as well as to meet any remaining benefit obligations and plan-related operating expenses, with no additional cost to the Company as the plan sponsor. There were no such charges incurred in fiscal 2019.
The Company’s adjusted effective tax rate for the fiscal year ended May 31, 2019 was 37.1%, compared to 233.3% in the prior fiscal year. The current fiscal year effective tax rate was impacted by a reduction in the federal statutory rate under the Tax Cuts and Jobs Act, as the new rate was applicable to the entire current fiscal year period. The prior fiscal year effective tax rate was impacted by an increase in income tax provision related to the remeasurement of the Company's U.S. deferred tax balance in connection with the passage of the Tax Cuts and Jobs Act, resulting in an additional tax provision of $5.7 million.
 
Adjusted Net income for fiscal 2019 increased by $26.2 million to $21.2 million, compared to a Net loss of $5.0 million in fiscal 2018. The adjusted basic and diluted earnings per share of Class A Stock and Common Stock were $0.60 and $0.59, respectively, in fiscal 2019, compared to basic and diluted loss per share of Class A Stock and Common Stock of $0.14 and $0.14, respectively, in fiscal 2018.

Adjusted Net income attributable to noncontrolling interest for fiscal 2019 was less than $0.1 million. There was no Net income or loss attributable to noncontrolling interest in the prior fiscal year.

Fiscal 2018 compared to fiscal 2017

Continuing Operations

Revenues from continuing operations for the fiscal year ended May 31, 2018 decreased by $113.2 million, or 6.5%, to $1,628.4 million, compared to $1,741.6 million in the prior fiscal year. The decrease in revenue was primarily due to lower sales of Harry Potter publishing, frontlist and backlist, compared to the prior fiscal year, which included the

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release of Harry Potter and the Cursed Child, Parts One and Two, as well as the screen play Fantastic Beasts and Where to Find Them. Within the Children’s Book Publishing and Distribution segment, revenues from the trade channel decreased $84.7 million primarily due to lower Harry Potter-related sales and lower revenues in the book club channel of $11.5 million, which were partially offset by higher revenues in the book fairs channel of $5.2 million, primarily driven by higher revenue per fair. The Education segment revenues decreased $15.0 million, due in part to a shift in customer buying patterns for leveled book room and guided reading products. Local currency revenues in the International segment decreased $19.5 million, primarily driven by lower Harry Potter-related sales in Canada and certain export markets and lower sales in the Asia direct sales channel, partially offset by higher trade channel sales of other core titles in Canada, the UK, Australia and Asia. The decrease in international revenues was partially offset by favorable foreign currency exchange of $12.3 million, driven by the weakening of the U.S. dollar.

Cost of goods sold as a percentage of revenue for the fiscal year ended May 31, 2018 was 45.7%, compared to 46.8% in the prior fiscal year. The decrease in Cost of goods sold as a percentage of revenue was primarily due to the lower royalty costs associated with the decrease in sales of Harry Potter-related titles and favorable product mix in the book fair channel, partially offset by the unfavorable impact lower revenues had on fixed costs and a favorable inventory adjustment in the book club channel that yielded lower costs in the prior fiscal year.

Selling, general and administrative expenses for the fiscal year ended May 31, 2018 were $765.7 million, compared to $777.5 million in the prior fiscal year. The decrease was primarily related to lower employee-related expenses due in part to favorable medical claims experience and lower incentive compensation, as well as a decrease in costs in the book club channel as a result of lower marketing expenses. This was partially offset by increased salaries and related costs for the expansion of the sales and marketing organizations supporting curriculum publishing in the Education segment.

Depreciation and amortization expenses for the fiscal year ended May 31, 2018 were $41.4 million, compared to $38.7 million in the prior fiscal year. The increase was primarily attributable to capitalized strategic technology investments and assets related to the redesign and upgrade of the Company's headquarters in New York City which were placed into service during fiscal 2018.

Severance expense of $9.9 million in fiscal 2018 included charges of $7.4 million primarily related to cost reduction and restructuring programs. Severance expense of $14.9 million in fiscal 2017 included $12.9 million related to cost reduction and restructuring programs.

Asset impairments for the fiscal year ended May 31, 2018 were $11.2 million, compared to $6.8 million in the prior fiscal year. In fiscal 2018, the Company recognized impairment charges of $11.0 million on the abandonment of legacy building improvements in connection with the Company's renovation of its headquarters location in New York City and an impairment charge of $0.2 million related to book fair trucks. In fiscal 2017, the Company recognized impairment charges related to certain website development assets of $5.7 million and certain legacy prepublication assets of $1.1 million.

For the fiscal year ended May 31, 2018, net interest income was $1.1 million, compared to net interest expense of $1.0 million in the prior fiscal year. The increase in interest income was primarily driven by higher interest rates associated with the Company's cash and cash equivalents balances, while interest expense remained relatively flat due to the absence of long-term debt.

For the fiscal year ended May 31, 2018, the Company recognized final settlement charges of $57.3 million in Other components of net periodic benefit (cost), related to the settlement of the U.S Pension Plan and the related purchase of insurance company group annuity contracts. The U.S. Pension Plan's asset balance was sufficient to fund the purchase of these insurance contracts as well as to meet any remaining benefit obligations and plan-related operating expenses, with no additional cost to the Company as the plan sponsor.
The Company’s effective tax rate for the fiscal year ended May 31, 2018 was 233.3%, compared to 40.3% in the prior fiscal year. The change in the effective tax rate was primarily driven by an increase in income tax provision related to the remeasurement of the Company's U.S. deferred tax balance in connection with the passage of the Tax Cuts and Jobs Act, resulting in a tax provision expense of $5.7 million.
 
Net loss for fiscal 2018 was $5.0 million compared to Net income of $52.3 million in fiscal 2017. The basic and diluted loss per share of Class A Stock and Common Stock were $0.14 and $0.14, respectively, in fiscal 2018, compared to basic and diluted earnings per share of Class A Stock and Common Stock of $1.51 and $1.47, respectively, in fiscal 2017.


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Results of Operations – Segments
 
CHILDREN’S BOOK PUBLISHING AND DISTRIBUTION 
($ amounts in millions)
 
 
 
 
 
 

 
 

2019 compared to 2018

2018 compared to 2017
 
2019
Accounting Adoption (1)
Adjusted 2019 (2)
2018

2017

$ change

% change

$ change

% change
Revenues
$
990.3
 
$
12.3

 
$
1,002.6

$
970.2
 

$
1,061.2
 

$
32.4


3.3
 %

$
(91.0
)
 
(8.6
)%
Cost of goods sold
443.4
 
3.9

 
447.3

412.1
 

466.5
 

35.2


8.5


(54.4
)
 
(11.7
)
Other operating expenses (3)
464.0
 

 
464.0

452.1
 

451.2
 

11.9


2.6


0.9

 
0.2

Asset impairments
 

 

0.2
 

 

(0.2
)

(100.0
)

0.2

 
100.0

Operating income (loss)
$
82.9
 
$
8.4

 
$
91.3

$
105.8
 

$
143.5
 

$
(14.5
)

(13.7
)%

$
(37.7
)
 
(26.3
)%
Operating margin
 
8.4
%
 
 
9.1
%

10.9
%

 
13.5
%

 


 


 


 


(1) In the first quarter of fiscal 2019, the Company adopted Topic 606, the application of which resulted in the deferral of revenue for incentive credits earned from the holding of school book fairs until such credits are redeemed.

(2) Under the modified retrospective method of adoption for Topic 606, prior period amounts are not restated to reflect the new accounting treatment. Therefore, the Company has included an Adjusted 2019 column to exclude the impact of Topic 606 and provide a comparable period-over-period variance.
 
(3) Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization.
 
Fiscal 2019 compared to fiscal 2018

Adjusted revenues for the fiscal year ended May 31, 2019 increased by $32.4 million to $1,002.6 million, compared to $970.2 million in the prior fiscal year. Trade channel revenues increased $46.0 million, primarily driven by the success of Dav Pilkey's Dog Man: Lord of the Fleas and Dog Man: Brawl of the Wild, as well as J.K. Rowling's Fantastic Beasts: The Crimes of Grindelwald - The Original Screenplay, Harry Potter: The Illustrated Collection, The Wonky Donkey, Wings of Fire: The Hive Queen, Wings of Fire: The Lost Continent and Alan Gratz's Refugee, as well as higher sales of backlist series such as Dog Man, Harry Potter and The Babysitters Club® graphic novels. Book club channel revenues decreased $11.9 million primarily driven by the Company's implementation of a new sales tax collection program, including differentiated on-line and paper-based offers, in response to the Supreme Court's Wayfair decision earlier in the fiscal year, which had an unfavorable impact on the number of events and revenue per event. Book fairs channel revenues decreased $1.7 million primarily driven by lower fair count as a result of a more competitive marketplace, partially offset by higher revenue per fair.

Adjusted cost of goods sold for the fiscal year ended May 31, 2019 was $447.3 million, or 44.6% of revenues, compared to $412.1 million, or 42.5% of revenues, in the prior fiscal year. The increase in cost of goods sold as a percentage of revenue was primarily driven by higher royalty costs in all channels, as certain bestselling book series command higher royalty rates, as well as higher paper and printing costs, and increased product costs associated with promotions in the book fair channel. This decrease was partially offset by the favorable impact higher revenues had on fixed costs in the trade channel.

Other operating expenses were $464.0 million for the fiscal year ended May 31, 2019, compared to $452.1 million in the prior fiscal year. In the book club channel, higher costs were primarily driven by the Company's response to the Supreme Court's Wayfair decision which resulted in the implementation of a new sales tax collection program, including differentiated on-line and paper-based offers, increased state registration requirements and higher sales tax expense in fiscal 2019, partially offset by lower marketing expenses. Increased costs in the book fairs channel was primarily driven by an increase in employee-related expenses related to rising labor costs and increased spending associated with initiatives to attract and retain fairs in a more competitive market place, as well as higher depreciation expense as a result of the introduction of new point-of-sale devices. In the the trade channel, increased costs were impacted by higher employee-related expenses.

Adjusted segment operating income for the fiscal year ended May 31, 2019 was $91.3 million, compared to $105.8 million in the prior fiscal year. The decrease in operating income was primarily driven by the higher operating costs due to the Company's response to the Supreme Court's Wayfair decision related to sales tax, higher employee-related

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expenses and increased depreciation expenses associated with the new point-of-sale devices, partially offset by increased trade channel revenues.

Fiscal 2018 compared to fiscal 2017

Revenues for the fiscal year ended May 31, 2018 decreased by $91.0 million to $970.2 million, compared to $1,061.2 million in the prior fiscal year. Trade channel revenues decreased $84.7 million, primarily due to the prior fiscal year's success of new Harry Potter-related publishing, particularly Harry Potter and the Cursed Child, Parts One and Two, partially offset by the strong performance of other titles from the Company's core publishing list, including titles from Dav Pilkey's Dog Man and Captain Underpants series, the Wings of Fire series, and The Baby-Sitters Club® Graphix series, as well as higher sales of the Company's Klutz activity books such as Lego® Chain Reactions and Lego® Make Your Own Movie. Book club channel revenues decreased $11.5 million primarily due to lower revenue per sponsor. Book fairs channel revenues increased $5.2 million in fiscal 2018 resulting from higher revenue per fair of approximately 2%.

Cost of goods sold for the fiscal year ended May 31, 2018 was $412.1 million, or 42.5% of revenues, compared to $466.5 million, or 44.0% of revenues, in the prior fiscal year. The decrease in cost of goods sold as a percentage of revenue was primarily driven by lower royalty costs in the trade channel, mainly associated with lower sales of Harry Potter-related titles, and favorable product mix in the book fairs channel. This was partially offset by a favorable inventory adjustment in the book clubs channel that yielded lower costs in fiscal 2017.

Other operating expenses were $452.1 million for the fiscal year ended May 31, 2018, compared to $451.2 million in the prior fiscal year. The increase was primarily related to costs associated with the rollout of new point-of-sale devices in the book fair channel, partially offset by lower costs in the book club channel as a result of lower marketing expenses, enabled by technology improvements and improved efficiencies in customer service and fulfillment.

Asset impairments of $0.2 million for the fiscal year ended May 31, 2018 related to the impairment of trucks in the book fairs channel.

Segment operating income for the fiscal year ended May 31, 2018 was $105.8 million, compared to $143.5 million in the prior fiscal year. The decrease in operating income was primarily driven by the lower Harry Potter-related sales in the trade channel.

EDUCATION
($ amounts in millions)
 
 
 
 
 
 
 
 
 
2019 compared to 2018
 
2018 compared to 2017
 
2019
Accounting Adoption (1)
Adjusted 2019 (2)
 
2018
 
2017
 
$ change
 
% change
 
$ change
 
% change
Revenues
$
297.4
 
$

 
$
297.4

 
$
288.6
 
 
$
303.6
 
 
$
8.8

 
3.0
 %
 
$
(15.0
)
 
(4.9
)%
Cost of goods sold
100.6
 

 
100.6

 
93.7
 
 
98.8
 
 
6.9

 
7.4

 
(5.1
)
 
(5.2
)
Other operating expenses (3)
166.2
 
1.1

 
167.3

 
161.0
 
 
153.4
 
 
6.3

 
3.9

 
7.6

 
5.0

Asset impairments
 

 

 
 
 
1.1
 
 

 
N/A
 
(1.1
)
 
(100.0
)
Operating income (loss)
$
30.6
 
$
(1.1
)
 
$
29.5

 
$
33.9
 
 
$
50.3
 
 
$
(4.4
)
 
(13.0
)%
 
$
(16.4
)
 
(32.6
)%
Operating margin
 
10.3
%
 
 
9.9
%
 
 
11.7
%
 
 
16.6
%
 
 

 
 

 
 

 
 

 
(1) In the first quarter of fiscal 2019, the Company adopted Topic 606, the application of which resulted in the changes in the timing of expense recognition for direct response advertising costs. For the fiscal year ended May 31, 2019, all direct response advertising costs were expensed as incurred.

(2) Under the modified retrospective method of adoption for Topic 606, prior period amounts are not restated to reflect the new accounting treatment. Therefore, the Company has included an Adjusted 2019 column to exclude the impact of Topic 606 and provide a comparable period-over-period variance.

(3) Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization.


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Fiscal 2019 compared to fiscal 2018
 
Revenues for the fiscal year ended May 31, 2019 increased by $8.8 million to $297.4 million, compared to $288.6 million in the prior fiscal year, due to higher sales of instructional products, including Scholastic Edge, Guided Reading, Level Bookroom and LitCamp, as well as supplemental print products and dealer trade sales within the Company's teaching resources business. Revenues also increased by $1.5 million due to higher revenues from custom publishing programs when compared to the prior fiscal year.

Cost of goods sold for the fiscal year ended May 31, 2019 was $100.6 million, or 33.8% of revenue, compared to $93.7 million, or 32.5% of revenue, in the prior fiscal year. Cost of goods sold as a percentage of revenue increased primarily due to an increase in amortization of prepublication costs related to newly released programs and to unfavorable product mix.

Adjusted other operating expenses were $167.3 million for the fiscal year ended May 31, 2019, compared to $161.0 million in the prior fiscal year. The increase was mainly attributable to higher employee-related and promotional expenses associated with the launch of Scholastic Literacy, the Company's new core curriculum literacy program, and other new digital education products along with the related expansion of the sales and marketing organizations.

Adjusted segment operating income for the fiscal year ended May 31, 2019 was $29.5 million, compared to $33.9 million in the prior fiscal year. The decrease in adjusted operating income was primarily driven by higher costs associated with the launch of Scholastic Literacy, the Company's new core curriculum literacy program and higher amortization of new digital subscription products now in the market. This segment will continue to experience higher amortization costs as it fully rolls out new products in fiscal 2020.
Fiscal 2018 compared to fiscal 2017

Revenues for the fiscal year ended May 31, 2018 decreased by $15.0 million to $288.6 million, compared to $303.6 million in the prior fiscal year, primarily driven by $6.4 million in lower sales due in part to a shift in customer buying patterns for leveled book room and guided reading products, partially offset by higher revenues from professional learning offerings as well as revenues from the Company's new strategic support program for struggling readers, Scholastic EDGE™. Revenues also decreased by $0.5 million due to fewer custom publishing programs when compared to the prior fiscal year. This was partially offset by $0.6 million in higher revenues related to classroom magazines. The fiscal 2018 increase in classroom magazines was partially offset by the lower election material sales due to the fiscal 2017 U.S. presidential election.

Cost of goods sold for the fiscal year ended May 31, 2018 was $93.7 million, or 32.5% of revenue, compared to $98.8 million, or 32.5% of revenue, in the prior fiscal year. Cost of goods sold as percentage of revenue remained consistent due to favorable product mix driven by teaching resources and digital products as well as fewer customer publishing programs. This was partially offset by the unfavorable impact lower revenues had on fixed costs.

Other operating expenses were $161.0 million for the fiscal year ended May 31, 2018, compared to $153.4 million in the prior fiscal year. The increase was mainly attributable to higher employee-related expenses for the expansion of the sales and marketing organizations supporting curriculum publishing. Costs associated with the expanded sales and marketing organizations impact operating expenses on an on-going basis.

In fiscal 2017, the Company recognized a pretax impairment charge related to certain legacy prepublication assets of $1.1 million.
Segment operating income for the fiscal year ended May 31, 2018 was $33.9 million, compared to $50.3 million in the prior fiscal year. The decrease in operating income was primarily driven by the decline in revenues and higher employee-related expenses.

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INTERNATIONAL
($ amounts in millions)
 
 
 
 
 
 
 
 
 
2019 compared to 2018
 
2018 compared to 2017
 
2019
Accounting Adoption (1)
Adjusted 2019 (2)
 
2018
 
2017
 
$ change
 
% change
 
$ change
 
% change
Revenues
$
366.2
 
$
0.5

 
$
366.7

 
$
369.6
 
 
$
376.8
 
 
$
(2.9
)
 
(0.8
)%
 
$
(7.2
)
 
(1.9
)%
Cost of goods sold
190.8
 
0.1

 
190.9

 
186.0
 
 
197.2
 
 
4.9

 
2.6

 
(11.2
)
 
(5.7
)
Other operating expenses (3)
161.6
 

 
161.6

 
165.9
 
 
159.9
 
 
(4.3
)
 
(2.6
)
 
6.0

 
3.8

Operating income (loss)
$
13.8
 
$
0.4

 
$
14.2

 
$
17.7
 
 
$
19.7
 
 
$
(3.5
)
 
(19.8
)%
 
$
(2.0
)
 
(10.2
)%
Operating margin
 
3.8
%
 
 
3.9
%
 
 
4.8
%
 
 
5.2
%
 
 

 
 

 
 

 
 

 
(1) In the first quarter of fiscal 2019, the Company adopted Topic 606, the application of which resulted in the deferral of revenue for incentive credits earned from the holding of school book fairs until such credits are redeemed.

(2) Under the modified retrospective method of adoption for Topic 606, prior period amounts are not restated to reflect the new accounting treatment. Therefore, the Company has included an Adjusted 2019 column to exclude the impact of Topic 606 and provide a comparable period-over-period variance.

(3) Other operating expenses include selling, general and administrative expenses, bad debt expenses, severance and depreciation and amortization.
 
Fiscal 2019 compared to fiscal 2018

Adjusted revenues for the fiscal year ended May 31, 2019 decreased by $2.9 million to $366.7 million compared to $369.6 million in the prior fiscal year. Total local currency revenues across the Company's foreign operations increased $12.5 million when compared to the prior fiscal year which were more than offset by an adverse foreign exchange impact of $15.4 million due to the strengthening of the U.S. dollar. Local currency revenues improved due to increased trade channel revenues in all major markets and across Asia along with higher revenues from education products in the UK, Australia and Asia. This increase was partially offset by decreases in revenue in the Canada, Australia and Asia book club channels and lower revenues in the Australia book fair channel. The strength in the overall trade channel was the result of the continued success of series such as Dav Pilkey's Dog Man, the Captain Underpants series and Lego, as well as certain backlist titles such as The Wonky Donkey.

Adjusted cost of goods sold for the fiscal year ended May 31, 2019 was $190.9 million, or 52.1% of revenues, compared to $186.0 million, or 50.3% of revenues, in the prior fiscal year. The higher cost of goods sold as a percentage of revenue was driven by an increase in royalty costs as a result of increased trade channel revenue, as certain bestselling book series command higher royalty rates and increased fulfillment costs across the major markets.

Other operating expenses were $161.6 million for the fiscal year ended May 31, 2019, compared to $165.9 million in the prior fiscal year. In local currencies, Other operating expenses decreased by $1.1 million. Severance expense for the fiscal year ended May 31, 2019 was $1.3 million, compared to $0.9 million in the prior fiscal year. Other operating expenses were also impacted by favorable foreign currency exchange of $5.4 million due to the strengthening of the U.S. Dollar.

Adjusted segment operating income for the fiscal year ended May 31, 2019 was $14.2 million, compared to $17.7 million in the prior fiscal year. Total local currency operating income across the Company's foreign operations decreased $2.4 million, driven by higher fulfillment and royalty costs along with increased employee-related expenses, partially offset by increased trade channel revenues compared to the prior year.

Fiscal 2018 compared to fiscal 2017

Revenues for the fiscal year ended May 31, 2018 decreased by $7.2 million to $369.6 million, compared to $376.8 million in the prior fiscal year. Total local currency revenues across the Company's foreign operations decreased $19.5 million when compared to the prior fiscal year. Local currency revenues from the Company's Asia operations coupled with the revenues of the export and foreign rights channels decreased $9.5 million, primarily due to the success of Harry Potter publishing in certain export channels in the prior fiscal year and lower local currency revenues in the Asia direct sales channel, partially offset by higher local currency revenues in core publishing in the Asia trade channel. Local currency revenues from Canada decreased $8.2 million, primarily due to the success of new Harry Potter publishing in the prior fiscal year, partially offset by higher local currency revenues from other titles in the core

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publishing list driven by Dav Pilkey's Dog Man series and higher local currency revenues from the book fair channel on higher revenue per fair. Local currency revenues from Australia and New Zealand decreased $3.8 million, primarily due to lower software distribution revenues of $4.2 million as the Company exited this low margin business in Australia in the prior fiscal year, partially offset by continued demand for local titles within the Australia trade channel and the strong performance from the Australia and New Zealand book club channels. Local UK currency revenues increased $2.0 million, primarily due to an increase in trade channel sales from its core publishing list, including The Ugly Five by Julia Donaldson and Axel Scheffler and new titles in the Liz Pinchon's Tom Gates series, coupled with higher local currency revenues from the acquisition of a UK-based book distribution business in the third quarter of fiscal 2018. Total revenues for the segment were also impacted by favorable foreign currency exchange of $12.3 million in fiscal 2018 due to the weakening of the U.S. dollar.

Cost of goods sold for the fiscal year ended May 31, 2018 was $186.0 million, or 50.3% of sales, compared to $197.2 million, or 52.3% of sales, in the prior fiscal year. The lower cost of goods sold as a percentage of revenue was driven by a decrease in royalty costs associated with lower sales of Harry Potter related titles and Australia's prior fiscal year exit of the low margin technology distribution business, net of exit costs of $0.5 million, partially offset by $0.1 million of costs associated with the consolidation of a Canadian book fair warehouse in fiscal 2018.

Other operating expenses were $165.9 million for the fiscal year ended May 31, 2018, compared to $159.9 million in the prior fiscal year. In local currencies, Other operating expenses decreased by $0.3 million. Severance expense for the fiscal year ended May 31, 2018 was $0.9 million, of which $0.7 million related to cost reduction efforts associated with the consolidation of a Canadian book fair warehouse, compared to $1.2 million in the prior fiscal year, of which $0.9 million related cost saving initiatives. Other operating expenses were also impacted by unfavorable foreign currency exchange of $6.3 million due to the weakening of the U.S. Dollar.

Segment operating income for the fiscal year ended May 31, 2018 was $17.7 million, compared to $19.7 million in the prior fiscal year. Total local currency operating income across the Company's foreign operations decreased $1.4 million, primarily driven by lower sales of Harry Potter related titles when compared with the prior year's success of Harry Potter publishing.

Overhead

Fiscal 2019 compared to fiscal 2018
 
Corporate overhead expense for fiscal 2019 increased by $0.5 million to $102.3 million, compared to $101.8 million in the prior fiscal year. This increase was the result of higher depreciation of $11.5 million due to building improvements and technology assets placed into service in fiscal 2019 and additional sales tax expense of $8.1 million as a result of the settlement of a legacy sales tax assessment with the State of Wisconsin. This increase was partially offset by lower impairment charges of $10.1 million and lower employee related expenses including severance and stock-based compensation of $2.1 million. In fiscal 2019, severance related expenses of $5.5 million were recognized primarily related to cost reduction and restructuring programs, compared to $6.7 million in the prior fiscal year period.

Fiscal 2018 compared to fiscal 2017

Corporate overhead expense for fiscal 2018 decreased by $22.5 million to $101.8 million, compared to $124.3 million in the prior fiscal year. The decrease was primarily related to lower employee-related expenses due in part to favorable medical claims experience and lower incentive compensation, as well as lower severance expense of $4.7 million and a decrease in unallocated costs associated with strategic technology initiatives. Severance related expenses decreased to $9.0 million, compared to $13.7 million in the prior fiscal year period. In fiscal 2018, severance related expenses of $6.7 million were recognized primarily related to cost reduction and restructuring programs. In fiscal 2017, severance related expenses included $12.0 million in cost reduction programs. The decrease in overhead expenses was partially offset by higher asset impairments of $5.3 million due to the fiscal 2018 impairment charge of $11.0 million related to legacy building improvements compared to the fiscal 2017 impairment charges related to certain website development assets of $5.7 million. A majority of the capital improvements to the Company's headquarters location in New York City were completed in fiscal 2018.







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Liquidity and Capital Resources

Fiscal 2019 compared to fiscal 2018
 
Cash provided by operating activities was $116.4 million for the fiscal year ended May 31, 2019, compared to cash provided by operating activities of $141.5 million for the prior fiscal year, representing a decrease in cash provided by operating activities of $25.1 million. This was primarily driven by higher inventory purchases which in part were due to the Company utilizing working capital to optimize procurement opportunities related to certain capacity constraints and longer lead times with strategic printers and suppliers. The decrease was also impacted by higher royalty payments, partially offset by an increase in customer remittances related to the increase in revenues.

Cash used in investing activities was $147.3 million for the fiscal year ended May 31, 2019, compared to cash used in investing activities of $162.0 million for the prior fiscal year, representing a decrease in cash used in investing activities of $14.7 million. The decrease in cash used was primarily driven by $26.5 million in lower capital spending on the Company's headquarters building modernization project as it has now been completed, partially offset by increased prepublication spending in fiscal 2019 of $2.0 million for new print and digital core instruction products within the Education segment. In addition, cash used in investing activities increased as a result of higher acquisition-related payments in fiscal 2019 of $14.1 million from the acquisition of the majority interest in Make Believe Ideas and an equity investment in a U.S.-based production company. Although the capital improvements to the Company's headquarters location in New York City are completed, capital improvements will continue in fiscal 2020 to complete the remaining work related to preparing the newly created retail space for tenancy, including the restoration of the Mercer Street facade and development of Mercer Street facing high-end retail store fronts. The Company will also continue to incur capital spending, at reduced levels from prior fiscal periods, related to strategic technology initiatives in future fiscal periods as part of the Scholastic 2020 plan. The Company has sufficient liquidity to fund these ongoing initiatives.

Cash used in financing activities was $25.7 million for the fiscal year ended May 31, 2019, compared to cash used in financing activities of $32.0 million for the prior fiscal year, representing a decrease in cash used in financing activities of $6.3 million. The Company repurchased $18.8 million less common stock in the current fiscal year which was partially offset by lower proceeds pursuant to employee stock plans of $9.8 million and lower short-term credit facility net borrowings of $4.2 million.

Fiscal 2018 compared to fiscal 2017

Cash provided by operating activities was $141.5 million for the fiscal year ended May 31, 2018, compared to cash provided by operating activities of $141.4 million for the prior fiscal year. The lower revenues in fiscal 2018 resulted in a reduction of cash generated from earnings, which was partially offset by lower royalty payments, as a result of lower revenues primarily attributable to the decreased sales of Harry Potter-related titles, lower tax payments driven by the lower income and the timing of vendor payments.

Cash used in investing activities was $162.0 million for the fiscal year ended May 31, 2018, compared to cash used in investing activities of $92.8 million for the prior fiscal year, representing an increase in cash used in investing activities of $69.2 million. The increase in cash used was primarily driven by $55.8 million in higher capital spending related to the investment plan to create premium retail space and modernize the Company's headquarters office space and increased spending for strategic technology initiatives. In addition, the Company had higher prepublication and production capital spending of $9.2 million, primarily related to additional product publishing in the Education segment, and the absence of cash released from escrow in connection with the sale of the educational technology and services business in the prior fiscal year. The higher use of cash for investing was partially offset by lower acquisition related payments in fiscal 2019 of $5.7 million.

Cash used in financing activities was $32.0 million for the fiscal year ended May 31, 2018, compared to cash used in financing activities of $4.1 million for the prior fiscal year, representing an increase in cash used in financing activities of $27.9 million. The Company repurchased $20.4 million more common stock and received lower proceeds pursuant to employee stock plans of $9.6 million, partially offset by higher short-term credit facility net borrowings of $3.1 million.

Cash Position


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The Company’s cash and cash equivalents totaled $334.1 million at May 31, 2019 and $391.9 million at May 31, 2018. Cash and cash equivalents held by the Company’s U.S. operations totaled $308.7 million at May 31, 2019 and $371.1 million at May 31, 2018.

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.
 
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 the fiscal year ended May 31, 2019, the Company purchased approximately $8.5 million of its Common shares on the open market, compared to approximately $27.3 million of share purchases in the prior fiscal year.
 
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, dividends, currently authorized Common share repurchases, debt service, planned capital expenditures and other investments. As of May 31, 2019, the Company’s primary sources of liquidity consisted of cash and cash equivalents of $334.1 million, cash from operations, and funding available under the Loan Agreement totaling approximately $375.0 million. The Company may at any time, but in any event not more than once in any calendar year, request that the aggregate availability of credit under the Revolving Loan be increased by an amount of $10.0 million or an integral multiple of $10.0 million (but not to exceed $150.0 million). Additionally, the Company has short-term credit facilities of $49.5 million, less current borrowings of $7.3 million and commitments of $4.9 million, resulting in $37.3 million of current availability at May 31, 2019. Accordingly, the Company believes these sources of liquidity are sufficient to finance its ongoing operating needs, as well as its financing and investing activities, and the Company does not expect to incur significant domestic borrowings to meet operating needs in fiscal 2020.

The following table summarizes, as of May 31, 2019, the Company’s contractual cash obligations by future period (see Notes 4, 5 and 13 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data”):

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$ 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
$
49.2

 
$
3.1

 
$
1.4

 
$

 
$
53.7

Royalty advances
6.7

 
4.7

 
0.2

 

 
11.6

Lines of credit and short-term debt
7.3

 

 

 

 
7.3

Capital leases (1)
2.0

 
3.9

 
3.3

 
2.1

 
11.3

Pension and postretirement plans (2)
2.9

 
5.6

 
6.3

 
18.7

 
33.5

Operating leases
27.8

 
40.0

 
19.4

 
11.7

 
98.9

Total
$
95.9

 
$
57.3

 
$
30.6

 
$
32.5

 
$
216.3

 

(1) Includes principal and interest.
(2) Excludes expected Medicare Part D subsidy receipts.

Financing
 
Loan Agreement

The Company is party to the Loan Agreement and certain credit lines with various banks. There were no outstanding borrowings under the Loan Agreement as of May 31, 2019. For a more complete description of the Loan Agreement, as well as the Company's other debt obligations, reference is made to Note 4 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 9 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data