Securities and Exchange Commission
Washington, D.C. 20549
Annual Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
|For the fiscal year ended||May 31, 2021||Commission File No.||000-19860|
(Exact name of Registrant as specified in its charter)
|(State or other jurisdiction of incorporation or organization)||(IRS Employer Identification No.)|
|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:
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý 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 ý
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 ý 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 ý No o
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.
|Large accelerated filer||☐||Accelerated filer||☐||Non-accelerated filer ||☐||Smaller reporting company||☐||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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ý
The aggregate market value of the Common Stock, par value $0.01, held by non-affiliates as of November 30, 2020, was approximately $692,546,687. 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, 2021 was as follows:
|Title of each class|| ||Number of shares outstanding as of June 30, 2021|
|Common Stock, $0.01 par value|| ||32,718,240|
|Class A Stock, $0.01 par value|| ||1,656,200|
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 22, 2021.
Item 1 | Business
Scholastic Corporation (the “Corporation” and together with its subsidiaries, “Scholastic” or the “Company”) is the world’s largest publisher and distributor of children’s books, a leading provider of print and digital instructional materials for grades pre-kindergarten ("pre-K") to grade 12 and a producer of educational and entertaining children’s media. The Company creates quality books and ebooks, print and technology-based learning materials and programs, classroom magazines and other products that, in combination, offer schools, as well as parents and children, customized and comprehensive solutions to support children’s learning and reading both at school and at home. Since its founding in 1920, Scholastic has emphasized quality products and a dedication to reading, learning and literacy. The Company is the leading operator of school-based book club and book fair proprietary channels. It distributes its products and services through these channels, as well as directly to schools and libraries, through retail stores and through the internet. The Company’s website, scholastic.com, is a leading site for teachers, classrooms and parents and an award-winning destination for children. Scholastic has operations in the United States and throughout the world including Canada, the United Kingdom, Australia, New Zealand, Asia and through its export business, sells products in approximately 165 international locations.
The 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)|
|Children’s Book Publishing and Distribution||$||664.7 ||$||875.4 ||$||990.3 |
|Education||312.3 ||287.3 ||297.4 |
|International||323.3 ||324.4 ||366.2 |
|Total||$||1,300.3 ||$||1,487.1 ||$||1,653.9 |
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.
In connection with the following description of the Company's reportable segments, reference is also made to Item 1A, Risk Factors, for additional information concerning the impact of the COVID-19 pandemic on such reportable segments.
CHILDREN’S BOOK PUBLISHING AND DISTRIBUTION
(51.1% of fiscal 2021 revenues)
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 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 distributes promotional materials containing order forms to classrooms in the vast majority of the pre-K to grade 8 schools in the United States. Classroom teachers who wish to participate in a school-based book club provide the promotional materials to their students, who may choose from curated selections at substantial reductions from list prices. The teacher aggregates the students’ orders and forwards them to the Company. Approximately 58% of kindergarten ("K") to grade 5 elementary school teachers in the United States who received promotional materials in fiscal 2021 participated in the Company’s school-based book clubs. In fiscal 2021, 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 56% of such revenues being placed by parents via the Company's online ordering platform. Products are typically shipped to the classroom for distribution to the students, however during the COVID-19 pandemic, the Company provided shipping directly to parents' and teachers' homes due to school closures. Teachers who participate in book clubs receive bonus points and other promotional incentives, which may be redeemed from the Company for additional books and other resource materials and items for their classrooms or the school.
School-Based Book Fairs
The Company entered the school-based book fairs channel in 1981 under the name Scholastic Book Fairs. The Company is the leading distributor of school-based book fairs in the United States serving schools in all 50 states. Book fairs provide children access to hundreds of popular, quality books and educational materials, increase student reading and help book fair organizers raise funds for the purchase of school library and classroom books, supplies and equipment. Book fairs have traditionally been weeklong events where children and families peruse and purchase their favorite books together. The Company typically delivers book fairs product from its warehouses to schools principally by a fleet of Company-owned and leased vehicles. However, as a result of COVID-19 school closings and the cancellation of physical book fairs held at schools, the Company offered virtual book fairs and ship-to-home options as an alternative temporary method for delivering fair products. Sales and customer service representatives, working from the Company’s regional offices, distribution facilities and national distribution facility in Missouri, along with local area field representatives, provide support to book fair organizers. Physical book fairs are conducted by school personnel, volunteers and parent-teacher organizations, from which the schools may receive either books, supplies and equipment or a portion of the proceeds from every book fair.
Scholastic is a leading publisher of children’s books sold through bookstores, on-line retailers and mass merchandisers primarily in the United States. Scholastic’s original publications include Harry Potter™, The Hunger Games®, The Bad Guys™, The Baby-Sitters Club® graphic novels, The Magic School Bus®, Captain Underpants®, Dog Man®, Wings of Fire™, Cat Kid Comic Club™, Goosebumps® and Clifford The Big Red Dog®, and licensed properties such as Peppa Pig® and Pokemon®. In addition, Klutz® and Make Believe Ideas™ publish and create “books plus” and novelty products for children, including titles such as Make Your Own Pet Adoption Truck, Mini Bake Shop, LEGO® Gear Bots and titles in the Never Touch series.
The Company’s trade organization focuses on publishing, marketing and selling books to bookstores, on-line 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 2021 included Dav Pilkey's Dog Man series and Cat Kid Comic Club, The Ickabog®, All Because You Matter, Harry Potter series, including Harry Potter and the Sorcerer’s Stone: MinaLima Edition, The Ballad
of Songbirds and Snakes (A Hunger Games Novel), Wings of Fire, Book 14: The Dangerous Gift and The Baby-Sitters Club graphic novels, including Logan Likes Mary Anne! and Claudia and the New Girl.
Also included in the Company's trade organization are Weston Woods Studios, Inc. ("Weston Woods") and Scholastic Audio, as well as Scholastic Entertainment Inc. ("SEI"). Weston Woods creates audiovisual adaptations of classic children's picture books distributed through the school and retail markets. Scholastic Audio provides audiobook productions of popular children's titles. SEI is responsible for exploiting the Company's film and television assets, which include a large television programming library based on the Company's properties, and for developing new programming.
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®.
(24.0% of fiscal 2021 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. In response to COVID-19 school closings, the Company has introduced alternative distribution methods including "take home packs" that are provided to schools and school districts, allowing families access to educational materials when arriving at local facilities to access meals as part of the National School Lunch Program and, in certain circumstances, were mailed to individual residences. In addition, the Company offers a "learning at home" service providing free learning activities and resources to students and their families.
In the spring of 2019, the Company launched Scholastic Literacy, a comprehensive approach to core literacy for students in kindergarten to grade 6 that includes curriculum materials in both digital and print. Scholastic Literacy's 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, which will help it continue to gain traction in the market.
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 to community-based organizations and other groups engaged in literacy initiatives through Scholastic Family and Community Engagement (FACE). Professional consulting services are also provided to support academic leadership with training on a multitude of topics, ranging from product implementation to engaging with families and communities. 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 to support instruction based teaching and learning, and are generally purchased by district and school leadership, 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 33 classroom magazines, including Scholastic News®, Scholastic 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, as well as providing access to the magazine in a digital format. A "digital only" subscription to the magazine is also offered, in which digital
delivery is expected to be increasingly important due to COVID-19 uncertainties. Scholastic’s classroom magazine circulation in the United States in fiscal 2021 was approximately 12.4 million, with approximately 80% 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. Also included in the segment is the Company's custom publishing business, which was phased out, or in some cases, assigned to other business units for particular clients.
(24.9% of fiscal 2021 revenues)
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.
Scholastic has operations in Major Markets, which include Canada, the United Kingdom, Ireland, Australia, and New Zealand, as well as in India, Singapore and other parts of Asia including Malaysia, Thailand, the Philippines, Indonesia, Hong Kong, Taiwan, Korea and Japan. The Company has branches in the United Arab Emirates and Colombia, a business in China that supports English language learning and, sells products in approximately 130 international locations through its export business. The Company’s international operations have original trade and educational publishing programs; distribute children’s books, digital educational resources and other materials through school-based book clubs, school-based book fairs and trade channels; and produce and distribute magazines and on-line subscription services. Many of the Company’s international operations also have their own export and foreign rights licensing programs and are book publishing licensees for major media properties. Original books published by many of these operations have received awards for excellence in children’s literature. In Asia, the Company also publishes and distributes products under the Grolier name for parents to provide English language learning for 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 primarily in China.
Scholastic Canada, founded in 1957, is a leading publisher and distributor of English and French language children’s books in Canada. Scholastic Canada is the largest operator of school-based marketing channels in Canada and is one of the leading suppliers of original or licensed children’s books to the Canadian trade market. Since 1965, Scholastic Canada has also produced quality Canadian-authored books and educational materials, including an early reading program sold to schools for grades K to 6. In response to the COVID-19 school closures, the Canadian school-based businesses identified alternative methods to deliver products to students, which included shipping products directly to parents' homes.
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. The UK school-based business has responded to the COVID-19 pandemic by implementing increased digital marketing and delivering products directly to parents' homes for the book clubs channel.
Scholastic Australia, founded in 1968, is the largest operator of school-based marketing channels in Australia, reaching approximately 90% of the country’s primary schools. Scholastic Australia also publishes quality children’s books supplying the Australian trade market. In addition, Scholastic Australia holds an equity method investment in a publisher and distributor of children's books.
Scholastic New Zealand, founded in 1962, is the largest children’s book publisher and the leading book distributor to schools in New Zealand. Through its school-based book clubs and book fairs channels, Scholastic New Zealand reaches approximately 90% of the country’s primary schools. In addition, Scholastic New Zealand publishes quality children’s books supplying the New Zealand trade market.
The Company’s Asian operations include initiatives for educational publishing programs based out of Singapore, as well as the wholly-owned Grolier direct sales business, which has traditionally sold English language and early childhood learning materials through a network of independent sales representatives in India, Indonesia, Malaysia, the Philippines, and Thailand and engages in direct sales in shopping malls and door to door, business activities which were disrupted by the COVID-19 pandemic in an effort to curtail the spread of the virus. In addition, the Company operates school-based marketing channels throughout Asia; publishes original titles in English and Hindi languages in India, including specialized curriculum books for local schools; conducts reading improvement programs inside local schools in the Philippines; and operates a franchise program for English language tutorial centers in China in cooperation with local partners, which have been temporarily closed to limit the spread of the coronavirus.
Foreign Rights and Export
The Company licenses the rights to select Scholastic titles in 65 languages to other publishing companies around the world. The Company’s export business sells educational materials, digital educational resources and children’s books to schools, libraries, bookstores and other book distributors in approximately 130 international locations that are not otherwise directly serviced by Scholastic subsidiaries. The Company also partners with governments and non-governmental agencies to create and distribute books to public schools in developing countries.
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.
In the United States, the Company mainly processes and fulfills orders for school-based book clubs, trade, reference and non-fiction products, educational products and export orders from its primary warehouse and distribution facility in Jefferson City, Missouri. In connection with its trade business, the Company may fulfill product orders directly from printers to customers. Magazine orders are processed at the Jefferson City facility and the magazines are shipped directly from printers. School-based book fairs are fulfilled through a network of warehouses across the country, as well as from the Company's Jefferson City warehouse and distribution facility. In fiscal 2021, the Company committed to permanently close 13 of the 54 U.S. book fairs warehouses as part of a branch consolidation project. 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.
The Company continues to monitor the impact of COVID-19 on manufacturing and paper requirements as well as fulfillment needs. See Item 1A, Risk Factors, for further discussion on potential risks associated with the COVID-19 pandemic.
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 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.
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. The COVID-19 pandemic significantly impacted the Company during fiscal 2021 and there remain many uncertainties concerning the timing of and any patterns which may emerge with respect to school instruction, whether in-school, remote or hybrid for the new school year, and the nature and continuing magnitude of the negative impact of COVID-19 into and beyond the first quarter of fiscal 2022. Reference is also made to Item 1A, Risk Factors, for further discussion on potential risks associated with the COVID-19 pandemic.
The markets for children’s books, educational products and entertainment materials are highly competitive. Competition is based on the quality and range of materials made available, price, promotion and customer service, as well as the nature of the distribution channels. Competitors include numerous other book, ebook, textbook, library, reference material and supplementary publishers, distributors and other resellers (including over the internet) of children’s books and other educational materials, national publishers of classroom and professional magazines with substantial circulation, and distributors of products and services on the internet. In the United States, competitors include regional and local school-based book fair operators and other fund raising activities in schools and bookstores, as well as one other competitor operating on a national level. Competition may increase to the extent that other entities enter the market and to the extent that current competitors or new competitors develop and introduce new materials that compete directly with the products distributed by the Company or develop or expand competitive sales channels. The Company believes that its position as both a publisher and distributor are unique to certain of the markets in which it competes, principally in the context of its children’s book business.
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.
As of May 31, 2021, we had approximately 6,800 employees, of which 4,700 were located in the United States and 2,100 outside the United States. Globally, approximately 72% of our employees are employed on a full-time basis, 9% part-time, and 19% seasonal. The seasonal employees are largely associated with the school-based businesses which are dependent on the fall and spring seasons when schools are in session.
The Human Resources and Compensation Committee (“HRCC") provides oversight on human capital matters. The HRCC is responsible for evaluating executive compensation, senior management selection, retention and succession planning and human resources strategies in respect to general employee benefit programs (including retirement plan programs) and talent management.
Diversity, Equity, Inclusion and Belonging
We are committed to diverse representation, in the books we publish and those we distribute through our book fairs and book clubs, the articles we feature in our classroom magazines and the instructional tools we provide to educators. We offer books featuring a diverse representation of ethnicities and cultures, LGBTQIA+ protagonists, individuals with physical, mental, and emotional exceptionalities, other historically underrepresented groups, and increasing diversity of contributors.
We have recently formed the Diversity, Equity, Inclusion and Belonging Task Force to advance our goals in three priority focus areas: People and Culture which will focus on creating an inclusive workplace culture, enabling ongoing internal education, and increasing overall staff diversity; Publishing and Education which will focus on promoting equity, social justice, representation and civic understanding in the classroom and in the world; and Procurement and Purchasing which will continue to expand supplier diversity, focused on sourcing from minority-owned businesses.
We will continue to build on Scholastic’s credo and our commitment to the individual worth of each and every child, regardless of race, sexual orientation, gender identity and expression, economic, political, attitudinal, neurodiversity, religious or demographic background and to inspire everyone who works at the Company with contemporary employee policies and programs dedicated to creating a safe, inclusive environment in which every employee can be heard and feel respected.
Compensation and Benefits
We are committed to helping our employees and their families lead healthy productive lives. Our benefits packages and wellness programs help our employees succeed at work and at home. We offer comprehensive compensation and benefits packages designed to attract, retain and recognize our employees. We are committed to achieving pay equity and aligning rewards to performance. Our benefits program provides an array of flexible plans to meet the needs of eligible employees, which includes, among other things, medical, dental and vision plans, health management and incentive programs, flexible spending arrangements, life and disability insurance, retirement plans, work/life balance programs and an employee discount program including discounts on Scholastic products and an Employee Stock Purchase Plan (“ESPP”). The ESPP provides eligible employees the opportunity to purchase Scholastic common stock at a discount. We also provide eligible employees paid time off, in addition to volunteer hours to enable involvement in community action.
Learning and Development
Successful execution of our strategy is dependent on attracting, retaining and developing employees and members of our management team. Our learning and development program enhances current and future organizational effectiveness by identifying skill gaps and assessing needs that can be supported by providing high quality educational and developmental programs that are strategic, measurable, effective, and serve to increase employees’ skills, knowledge, and effectiveness. In addition to annual trainings on key topics including compliance, ethics and integrity and information security, employees have access to the Scholastic Learning Center, a learning portal that includes self-paced online courses, books, and videos, as well as virtual and live instructor-led opportunities. Full and part-time employees also participate in an annual performance review process.
Health and Safety
The safety and well-being of our employees, customers, and community is a top priority. We have a safety program in place that focuses on policies and training programs to prevent injuries and incidents in the distribution centers. In response to the COVID-19 pandemic, we have implemented additional safety measures in all our offices and facilities including work from home flexibility for non-site specific roles, enhanced cleaning protocols, and health monitoring and temperature screening of employees, in addition to offering onsite vaccine distribution at certain facilities or paid time allowances for employees to receive the vaccine from clinics and emotional support resources for employees impacted by COVID-19. We have also worked with outside safety experts to implement additional stringent protocols in delivering safe book fairs to schools, including training for our drivers and team members and a safety toolkit for all in-school fairs. We have committed resources regularly to review these policies and monitor compliance, while staying current with any new CDC recommendations.
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.
|Previous Position(s) Held as of July 23, 2021|
|Kenneth J. Cleary||56||2008||Chief Financial Officer (since 2017); Senior Vice President, Chief Accounting Officer (2014-2017); Vice President, External Reporting and Compliance (2008-2014). |
|Andrew S. Hedden||80||2008||Executive Vice President, General Counsel and Secretary (since 2008).|
|Iole Lucchese||54||1991||Executive Vice President (since 2016), Chief Strategy Officer (since 2014), President, Scholastic Entertainment (since 2018), President, Scholastic Canada (2016) and Chair of the Board of Directors (2021). |
|Sasha Quinton||43||2020||Executive Vice President and President, Scholastic Book Fairs (2020); Vice President & GMM, Bookstore, Barnes and Noble, Inc. (2019); Senior Vice President, Marketing and Procurement, ReaderLink Distribution Services (2017-2019); Vice President, Marketing and Procurement, ReaderLink Distribution Services (2014-2017).|
|Rosamund M. Else-Mitchell||51||2021|
President, Education Solutions (2021), Houghton Mifflin Harcourt - Chief Learning Officer & General Manager (2017 -2019), Executive Vice President, Professional Services (2015-2019).
Richard Robinson, Chairman of the Board, President and Chief Executive Officer, unexpectedly passed away on June 5, 2021 after overseeing Scholastic’s long-term strategy and vision for close to 50 years. On July 19, 2021, Peter Warwick, who has served on the Company’s Board since 2014, was named the Company’s new President and Chief Executive Officer effective August 1, 2021.
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.
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, particularly in the context of the current COVID-19 pandemic.
Risks Related to the COVID-19 Pandemic
Our business, results of operations and financial condition may continue to be adversely affected by the COVID-19 pandemic and other infectious diseases.
The COVID-19 pandemic and actions taken, or which may be taken in the future, based on the future course of the pandemic, by governments, businesses and individuals to limit the spread of the virus may continue to have an adverse effect on the Company’s results of operations and financial condition. The following are ways that the virus and steps taken to curtail it have impacted or may in the future impact the Company’s businesses and operations:
Books Fairs / Book Clubs: A major part of the Company’s business depends upon access to and activities at schools in the United States and other markets. While it is anticipated that schools will be open for in-person learning for the 2021/2022 school year, if schools are closed again or if in-person group activities in schools are prohibited or limited at those schools that remain open, the book fairs and book clubs businesses may continue to be adversely affected. This may also have a continuing effect on the Company’s current business models for book fairs and book clubs, requiring the Company to adapt its models or develop alternative models to respond to in-school and remote learning patterns which may emerge, whether temporarily or permanently, with the new school year, and there can be no assurance that the Company will be successful in meeting this challenge, which would have an adverse effect on the previous levels of revenue and operating results the Company has been able to achieve through these school channels prior to the pandemic.
Education: Similarly, school closings or other measures designed to prevent the spread of the virus in schools that remain open may adversely impact the Company’s Education segment, particularly if school administrators and other personnel who order educational products decide, in order to limit the spread of the virus or to limit spending, to curtail purchases of the Company’s curated collections of physical books which are meant to be shared by students in classrooms or print copies of classroom magazines which are used in the classrooms. In addition, the Company was affected by school administrators and other personnel who order educational products not being present in the schools and in a position to order products as a large percentage of schools were operating in a remote or hybrid mode. While this may be expected to be resolved through new school administrative practices, and the Company believes it has a strong suite of both physical and digital products and programs to meet current educational learning needs, whether in the classroom or through remote learning, the Company’s Education business may be adversely affected by changing patterns in the nature of the products and programs being ordered by schools, whether print or digital. In addition, this business may also be adversely affected by schools diverting funds from educational materials to safety measures in response to COVID-19.
Trade Publishing: To the extent that malls and other brick and mortar outlets, including independent bookstores, close again or are subject to limits on customers, the Company’s trade sales business may also be adversely affected by lower foot traffic at these establishments, although this impact may continue to be mitigated by widespread access to online ordering platforms. The Trade business may also be affected to the extent independent bookstores which have been closed due to governmental actions taken to curtail the spread of the virus find themselves financially unable to reopen, as conditions permit, resulting in a further decline in the number of independent bookstores.
International: The Company’s International segment is also subject to the same continuing risks from steps taken to limit the spread of the virus, which had resulted in the temporary closing of the Company’s franchised English language learning centers in China, and continues to cause disruption in the Company’s direct sales business in other parts of Southeast Asia, as well as adversely affecting the Company’s book fairs and book clubs businesses in certain of its Major Markets, particularly Canada and the UK.
Facility Closures; Business Suppliers: In addition to the impact on the Company’s ability to market and sell its products, measures taken by governmental authorities and private actors to limit the spread of the virus may interfere with the ability of employees, suppliers, and other business providers to carry out their assigned tasks or supply materials at
ordinary levels of performance relative to the conduct of the Company’s business, which may make it necessary for the Company to limit certain of its business operations. Many of the Company’s employees in the United States and around the globe are working remotely, as multiple business locations, including the Company’s headquarters office in New York City, were temporarily closed. Although the Company’s digital platforms and business systems have successfully allowed a large part of the work force to continue to work remotely, there can be no assurance that continued closures of (or limited attendance at) the Company’s facilities will not have an adverse impact on the Company’s results of operations or financial condition. While the Company’s headquarters and certain other facilities are expected to reopen through a multi-phased approach, the Company expects that, at least during the course of the pandemic, a significant shift will continue in the number of employees continuing to work remotely, which may ultimately result in a continuing change in working patterns to which the Company will need to adapt.
Business Operations: Business closures, curtailed business activities and exceptional demand for shipping and delivery to homes of parents rather than to schools may in the future result in delays in customers receiving products that they purchase from the Company and also may result in higher costs to the Company, each of which may have an adverse impact on the Company’s results of operations and financial condition.
Finally, the COVID-19 pandemic is having a significant adverse impact on employment and general economic conditions in the United States and elsewhere, resulting in lower consumer spending for non-essentials and lower tax revenues, which may lead to strained school district budgets and procurement of new materials and programs, whether in digital, or, in particular, print form. As a result, lower consumer spending in general and pressures on school budgets in the United States and elsewhere may have a continuing adverse impact on the Company’s results of operations and financial condition.
The Company cannot predict how long the COVID-19 pandemic may continue to impact its businesses or the magnitude of the adverse consequences of the virus on the Company’s business, results of operations or financial condition, but it anticipates that such effects may be material, especially if, during any phases of the pandemic, schools remain closed or are closed again after being reopened, or the patterns of the physical presence of children in schools are materially altered, and the Company is unsuccessful in adapting its relevant business models to such changed conditions. Concerns remain that the Company's Major Markets and other global markets could see a resurgence of COVID-19 cases triggering additional shutdowns including school closures, for example, due to the emergence of COVID-19 variants for which existing vaccines are not effective.
Risks Related to Our Business and Operations
If we fail to maintain 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.
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, which could be significantly influenced by constraints caused by the COVID-19 pandemic, or by 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.
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. In addition, the COVID-19 pandemic has resulted in third party mail and delivery services to be at capacity. The increased demand to receive products directly at the home, versus at a retail store, could drive an increase in the Company's shipping costs.
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 increases, if there is a significant disruption in the supply of paper or a significant increase in paper costs, or in its shipping or fuel costs, beyond those currently anticipated, which would generally be beyond the control of the Company, or if the Company’s strategies to try to manage these costs, including additional cost savings initiatives, are ineffective, the Company’s results of operations could be adversely affected. In addition, supplier bankruptcy may cause price increases for the Company.
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.
The Company’s employees, notably its 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. If the Company were unable to continue to adequately maintain and develop a workforce of this nature meeting the foregoing needs, including the development of new skills in the context of a rapidly changing business environment created by technology, involving new business processes and increased access to data and data analytics, it could negatively impact the Company’s operations and growth prospects. Additionally, high industry-wide demand on truck drivers may impact the Company's ability to hire and retain adequate staffing levels to deliver book fairs.
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 in response to the COVID-19 pandemic in a timely and flexible manner. Examples include:
◦strategies for its respective business units to adapt to changes in the school market related to virtual or remote learning
◦strategies in implementing on-going cost containment and reduction programs
•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
•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 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, or if such providers experience a substantial data breach, the Company could experience disruptions to its distribution and other business activities and may incur higher costs.
Risks Related to Competition
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. In addition, the Company faces market risks associated with systems development and service delivery in its evolving school ordering and ecommerce businesses as well as responding to changes in how schools plan to utilize technology for virtual or remote learning as a result of the COVID-19 pandemic, and the associated impact on the demand for printed materials in schools.
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. For example, the COVID-19 pandemic has resulted in school closures around the globe and created the need for virtual learning. The book clubs business relies on attracting and retaining new sponsor-teachers to promote its products. With teachers not being physically present in a classroom or at a school, their ability to encourage book club participation could be significantly impacted. If the Company cannot attract new millennial and younger teachers and meet the changing preferences and demands of these teachers, its revenues and cash flows could be negatively impacted. The book fairs business relies on large in-person gatherings at a school. If these kinds of in-person gatherings continue to be prohibited or discouraged in schools and the Company cannot develop feasible alternatives to such in-person book fairs that meet the preferences or service expectations of individuals and groups within schools who organize and run book fairs in this new environment, the Company's revenues and cash flows could be negatively impacted.
The Company has differentiated itself from competitors by providing curated offerings in its school-based book clubs and book fairs designed to make reading attractive for children, in furtherance of its mission as a champion of literacy. The Company also has the ability to accumulate book club orders on-line as well as run "virtual" book fairs. Competition from mass market and on-line distributors using customer-specific curation tools could reduce this differentiation, posing a risk to the Company's results.
The 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 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 distribution channels include online retailers and ecommerce sites, digital delivery platforms and expanding social media and other marketing platforms. An increased concentration of retailer power has also resulted in the increased importance of mass merchandisers and of publishing best sellers to meet consumer demand. Currently, the Company’s top five trade customers make up approximately 81% of the Company’s U.S. trade business and 21% of the Company’s total revenues, with one customer accounting for 36% of the U.S. trade business and 12% 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.
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. The inability to publish best-selling new titles in future years could negatively impact the Company.
In addition, competition among electronic and print book retailers, including the decrease in the number of independent booksellers, could decrease prices for new title releases, as well as the number of outlets for 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.
Risks Related to Information Technology and Systems
Privacy breaches and other cyber security risks related to our business could negatively affect our reputation, credibility and business.
In certain of its businesses the Company holds or has access to personal data, including that of customers or received from schools. 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.
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.
Risks Related to Laws and Regulations
Our reputation is one of our most important assets, and any adverse publicity or adverse events, such as a 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.
The Company is subject to privacy laws and regulations in the conduct of its business in the United States and in other jurisdictions in which it conducts its international operations, many of which vary significantly, relating to the collection and use of personal information, including the European Union General Data Protection Regulation, which became enforceable on May 25, 2018, and the California Consumer Privacy Act, which became effective in January 2020. In addition, the Company is also subject to the regulatory requirements of the Children’s Online Privacy Protection Act ("COPPA") in the United States relating to access to, and the use of information received from, children in respect to the Company’s on-line offerings. Since the businesses of the Company are primarily centered on children, failures of the Company to comply with the requirements of COPPA and similar laws in particular, as well as failures to comply generally with applicable privacy laws and regulations, as referred to above, could lead to significant reputational damage and other penalties and costs, including loss of future business.
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.
Risks Related to Our Intellectual Property
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.
Risks Related to External Factors
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. 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. In addition, supply chain disruptions in Asia related to COVID-19 could cause increased costs for 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, trade 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.
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. The COVID-19 pandemic could adversely impact the demand for and value of real estate holdings in New York City, including both office space and retail space.
Risks Related to Stock Ownership
Control of the Company resides in the Estate of our former Chairman of the Board, President and Chief Executive Officer through its 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. The Estate of Richard Robinson, the former Chairman of the Board, President and Chief Executive Officer beneficially owns a majority of the outstanding shares of Class A Stock and is able to elect up to four-fifths of the Corporation's Board of Directors and, without the approval of the Corporation's other stockholders, to effect or block other actions or transactions requiring stockholder approval, such as a merger, sale of substantially all assets or similar transaction. Due to the unexpected passing of Mr. Robinson on June 5, 2021, the Class A Stock he formerly owned is held in his Estate. lole Lucchese, Chair of the Board of Directors, Executive Vice President and Chief Strategy Officer of the Company and President of Scholastic Entertainment, Inc., in her capacity as Scholastic special executor of the Estate under Mr. Robinson's will and revocable trust, controls the voting of the Estate's Class A Stock.
The risk factors listed above should not be construed as exhaustive of all possible risks that the Company may face. Additional risks not currently known to the Company or that the Company does not consider to be significant at the present time could impact the Company's consolidated financial position and results of operations.
This Annual Report on Form 10-K contains forward-looking statements relating to future periods. Additional written and oral forward-looking statements may be made by the Company from time to time in SEC filings and otherwise. The Company cautions readers that results or expectations expressed by forward-looking statements, including, without limitation, those relating to the Company’s future business prospects and strategic plans, ecommerce and digital initiatives, new product introductions, strategies, new education standards, 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.
Item 1B | Unresolved Staff Comments
Item 2 | Properties
As of May 31, 2021, the Company operated the following facilities:
|Location||Purpose||Owned Square Footage||Leased Square Footage|
Metropolitan NY Area
|355,000 ||19,000 |
|U.S. Various Locations||Book Fairs warehouses||— ||2,099,000 |
Lake Mary, FL
|Book Fairs office space||74,000 ||— |
|Jefferson City, MO Area||Primary warehouse and distribution facility||1,459,000 ||47,000 |
|Warehouse and office space||230,000 ||946,000 |
(1) Consists of approximately 70 facilities in Canada, the United Kingdom, Australia, New Zealand, Asia.
The Company owns the entirety of its principal headquarters including land, building, fixtures and related personal property located at 557 Broadway in New York City. The Company holds certain space within its New York headquarters to be leased to retail tenants and some of this space is currently vacant. During fiscal 2021, the Company committed to a plan to cease use of certain leased office space in New York City and consolidated the offices into the company-owned New York headquarters building.
In fiscal 2021, the Company committed to permanently close 13 of the 54 U.S. book fairs warehouses as part of a branch consolidation project. As of May 31, 2021, the Company operated 41 book fairs warehouse facilities in the United States.
During the third quarter of fiscal 2021, the Company committed to a plan to sell the office building and related land located in Lake Mary, FL and relocate to a leased office space as part of the initiative to reduce future operating costs. During the third quarter of fiscal 2020, the Company committed to a plan to sell the UK distribution center located in Witney and consolidate the operations into a newly constructed facility. These facilities are classified as held for sale as of May 31, 2021.
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 9 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 6, "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
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 12, 2021 were 3 and approximately 11,100, 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 21, 2021, the Board of Directors, having considered such factors, including the current impact of COVID-19 on the Company's financial position, determined to continue its current dividend practice at the present time and declared a regular cash dividend of $0.15 per Class A and Common share in respect of the first quarter of fiscal 2022. The dividend is payable on September 15, 2021 to shareholders of record on August 31, 2021. All dividends have been in compliance with the Company’s debt covenants.
Share purchases: There were no repurchases of the Company's Common Stock during fiscal 2021. The Company’s share buy-back program is temporarily suspended at this time due to COVID-19 uncertainties. As of May 31, 2021, approximately $67.3 million remains available for future purchases of Common shares, which represents the amount remaining under the Board authorization for Common share repurchases on March 21, 2018 and the current $50.0 Board authorization for Common share repurchases announced on March 18, 2020, which is available for further repurchases, from time to time as conditions allow, on the open market or through negotiated private transactions, subject to temporary limitations under the amended credit agreement as defined in Note 5, "Debt" of Notes to the Consolidated Financial Statements in Item 8, "Consolidated Financial Statements and Supplementary Data" for further discussion.
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, 2016 to May 31, 2021.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Scholastic Corporation, the NASDAQ Composite Index
and a Peer Group
*$100 invested on 5/31/16 in stock or index, including reinvestment of dividends
| ||Fiscal year ending May 31,|
|Scholastic Corporation||$||100.00 ||$||110.48 ||$||118.65 ||$||88.53 ||$||80.07 ||$||94.05 |
|NASDAQ Composite Index||100.00 ||125.27 ||150.41 ||150.63 ||191.79 ||277.86 |
|Peer Group||100.00 ||83.10 ||109.06 ||95.57 ||56.37 ||133.48 |
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
Item 6 | Selected Financial Data
Item 6 of this report is no longer required as the Company has adopted certain provisions within the amendments to Regulation S-K that eliminate Item 301.
Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 2021 were $1.30 billion, a decrease of 12.6% from $1.49 billion in fiscal 2020, reflecting lower sales in the Company's Children's Book Publishing and Distribution segment of $210.7 million, primarily driven by a decline in book fair channel revenues as schools were not hosting fairs on-site due to COVID-19, partially offset by an increase in trade channel revenues as a result of strong demand for core frontlist titles and backlist titles from best-selling series. In the Education segment, revenues increased by $25.0 million on higher sales in several business lines, particularly Grab and Go and summer reading packs, instructional programs, and literacy partnerships as well as in the segment’s teaching resources and digital subscription product categories. The decrease in local currency revenues in the International segment of $18.0 million was primarily due to lower book fairs channel revenues in Canada and the UK, coupled with a decrease in direct-to-home sales in Asia, and were largely offset by a favorable impact of foreign exchange of $16.9 million. Loss per diluted share was $0.32 for the fiscal year ended May 31, 2021, compared to $1.27 in the prior fiscal year.
Operating loss in fiscal 2021 was $22.7 million compared to $88.5 million in the prior fiscal year, representing an improvement of $65.8 million. The improvement year-over-year was directly attributable to the cost-saving initiatives implemented by the Company during fiscal 2021, which helped to mitigate the adverse impacts of the COVID-19 pandemic on the Company’s end markets and supply chain, coupled with the absence of the $40.0 million write down of inventory that occurred in fiscal 2020. The cost savings were partially offset by a mediation-assisted settlement of $20.0 million regarding certain licenses and trademarks related to intellectual property used in formerly owned products, exclusive of potential insurance recoveries. In addition, the Company recognized asset impairments of $11.1 million in fiscal 2021 related to the Company's plan to cease use of its leased office space in New York City and consolidate into the company-owned New York headquarters building and permanently close 13 of its 54 U.S. book fairs warehouses as part of a branch consolidation project. The Company also incurred higher severance costs of $10.0 million associated with an effort to align the Company's workforce size with COVID-impacted business volumes.
Fiscal 2021 results were significantly impacted by the pandemic as a large percentage of schools were operating in a remote or hybrid mode as a result of COVID-19 concerns and restrictions. However, the Company showed improved results in revenue and operating income during the fourth quarter of fiscal 2021, even as educators around the globe struggled with transitioning their students safely back to the classroom. While executing on the cost-saving program, the Company continued to make investments related to its key growth initiatives with a focus on book fairs recovery, new education solutions, including digital products and early childhood programs, increasing parent access to the Company’s eCommerce platforms, English language learning in Asia, the acquisition and development of content for its trade and media operations, as well as continued technology investments to improve systems and processes, all of which are the foundation of the Company's growth strategy in fiscal 2022 and beyond.
While uncertainty still remains with respect to COVID-19, the Company is beginning to see strengthening underlying trends across all businesses and school and trade markets, as students around the globe return to the classroom, educators look to dependable and effective ways for accelerating student achievement, and stores welcome shoppers without restrictions. The Company believes it is well-positioned to continue the growth patterns seen in the fourth quarter of fiscal 2021 as markets recover, especially for the book fairs businesses in the U.S., Canada and the U.K., and expects stronger operating leverage and resulting cash flow given the successful reduction in labor and other operating costs from pre-pandemic levels. Additionally, the Company continues to identify further opportunities for incremental cost savings through process improvements and automation, consolidating functions, and increased utilization of the Company’s international shared services resources.
Critical Accounting Policies and Estimates
The Company’s discussion and analysis of its financial condition and results of operations is based upon its Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements involves the use of estimates and assumptions by management, which affects the amounts reported in the Consolidated Financial Statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, future expectations and various other assumptions believed to be reasonable under the circumstances, all of which are necessary in order to form a basis for determining the carrying values of assets and liabilities. Actual results may differ from those estimates and assumptions. On an on-going basis, the Company evaluates the adequacy of its reserves and the estimates used in calculations, including, but not limited to: collectability of accounts receivable; variable consideration related to anticipated returns; allocation of transaction price to contractual performance obligations; amortization periods; stock-based compensation expense; pension and other postretirement obligations; tax rates; recoverability of inventories; deferred income taxes and tax reserves; the timing and amount of future income taxes and related deductions; recoverability of prepublication costs; royalty advance reserves; customer reward programs; and the impairment assessment of long-lived assets, goodwill and other intangibles. For a complete description of the Company’s significant accounting policies, see Note 1 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data.” The following policies and account descriptions include all those identified by the Company as critical to its business operations and the understanding of its results of operations:
The Company’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 fairs product is recognized at the point at which product is delivered to the customer and control is transferred. The revenue allocated to the incentive program credits is recognized upon redemption of incentive credits and the transfer of control of the redeemed product. Incentive credits are generally redeemed within 12 months of issuance. Payment for school-based book fairs product is due at the completion of a customer's fair. Revenues associated with virtual fairs are recognized upon shipment of the products and related incentive program credits are expensed upon issuance.
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 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 generally 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. Revenue from digital products is deferred and recognized ratably over the subscription period. Revenue from professional development services is recognized when the services have been provided to the customer. Revenue from contracts with multiple
deliverables are recognized as each performance obligation is satisfied in which the transaction price is allocated on a relative standalone selling price basis.
Film Production and Licensing – Revenue from the sale of film rights, principally for the home video, streaming and domestic and foreign television markets, is deferred during production and recognized when the film or episodes have been delivered and are available for showing or 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.
Direct Sales and Export – Revenue from the direct sales channel is recognized upon acceptance of the physical product by the customer.
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 are recognized net of an allowance for credit losses. In the normal course of business, the Company extends credit to customers that satisfy predefined credit criteria. The Company recognizes an allowance for credit losses on trade receivables that are expected to be incurred over the lifetime of the receivable. Reserves for estimated credit losses are established at the time of sale and are based on relevant information about past events, current conditions, and supportable forecasts impacting its ultimate collectability, including specific reserves on a customer-by-customer basis, creditworthiness of the Company’s customers and prior collection experience. 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, 2021 of approximately $2.2 million and approximately $2.8 million, respectively.
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, 2021 of approximately $3.1 million.
Inventories, consisting principally of books, are stated at the lower of cost, using the first-in, first-out method, or net realizable value. The Company records a reserve for excess and obsolete inventory based upon a calculation using the expected future sales of existing inventory driven by estimates around forecasted purchases, inventory consumption costs, and the sell-through rate of current fiscal year purchases. In accordance with the Company's inventory retention policy, expected future sales of existing inventory are compared against historical usage by channel for reasonableness and any specifically identified excess or obsolete inventory, due to an anticipated lack of demand, will also be reserved. The impact of a one percentage point change in the obsolescence reserve rate would have resulted in an increase or decrease in operating income for the year ended May 31, 2021 of approximately $3.6 million.
Long-lived assets, including operating lease right-of-use assets, property, plant, and equipment, prepublication costs and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. For the purposes of impairment testing, long-lived assets are grouped at the lowest level of identifiable cash flows. If impairment indicators are present, the Company performs a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the asset to its carrying amount. If it is determined that a long-lived asset is not recoverable, an impairment loss is recognized based on the excess of the carrying amount over the fair value of the asset. The fair values determined by the Company require significant judgment and include certain assumptions regarding future sales and expenses, discount rates and real estate market conditions.
Royalty advances are initially capitalized and subsequently expensed as related revenues are earned or when the Company determines future recovery through earndowns is not probable. The Company has a long history of providing authors with royalty advances, and it tracks each advance earned with respect to the sale of the related publication. Historically, the longer the unearned portion of the advance remains outstanding, the less likely it is that the Company will recover the advance through the sale of the publication, as the related royalties earned are applied first against the remaining unearned portion of the advance. The Company applies this historical experience to its existing outstanding royalty advances to estimate the likelihood of recovery. Additionally, the Company’s editorial staff regularly reviews its portfolio of royalty advances to determine if individual royalty advances are not recoverable through earndowns for discrete reasons, such as the death of an author prior to completion of a title or titles, a Company decision to not publish a title, poor market demand or other relevant factors that could impact recoverability.
Goodwill 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 quantitative goodwill impairment test. The Company measures goodwill impairment by the amount the carrying value exceeds the fair value of a reporting unit. For each of the reporting units, the estimated fair value is determined utilizing the expected present value of the projected future cash flows of the reporting unit, in addition to comparisons to similar companies. The Company reviews its definition of reporting units annually or more frequently if conditions indicate that the reporting units may change. The Company evaluates its operating segments to determine if there are components one level below the operating segment level. A component is present if discrete financial information is available and segment management regularly reviews the operating results of the business. If an operating segment only contains a single component, that component is determined to be a reporting unit for goodwill impairment testing purposes. If an operating segment contains multiple components, the Company evaluates the economic characteristics of these components. Any components within an operating segment that share similar economic characteristics are aggregated and deemed to be a reporting unit for goodwill impairment testing purposes. Components within the same operating segment that do not share similar economic characteristics are deemed to be individual reporting units for goodwill impairment testing purposes.
The Company has seven reporting units with goodwill subject to impairment testing. The determination of the fair value of the Company’s reporting units involves a number of assumptions, including the estimates of future cash flows, discount rates and market-based multiples, among others, each of which is subject to change. Accordingly, it is possible that changes in assumptions and the performance of certain reporting units could lead to impairments in future periods, which may be material.
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 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 increase 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. 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, 2021 of approximately $0.3 million and approximately $0.8 million, respectively. A one percentage point change in the expected long-term return on plan assets would have resulted in an increase or decrease in operating income for the year ended May 31, 2021 of approximately $0.4 million.
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, 2021 of approximately $0.1 million.
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.
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.
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. The Company elects to recognize the tax on Global Intangible Low-Taxed Income (GILTI) earned by foreign subsidiaries 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.
Results of Operations
|(Amounts in millions, except per share data)|
For fiscal years ended May 31,
|Revenues:|| || || || |
Children’s Book Publishing and Distribution
|$||664.7 ||51.1 ||$||875.4 ||58.9 |
|312.3 ||24.0 ||287.3 ||19.3 |
|323.3 ||24.9 ||324.4 ||21.8 |
|Total revenues||1,300.3 ||100.0 ||1,487.1 ||100.0 |
Cost of goods sold
|666.5 ||51.3 ||751.0 ||50.5 |
Selling, general and administrative expenses (2)
|584.9 ||45.0 ||722.5 ||48.7 |
Depreciation and amortization
|60.5 ||4.6 ||61.5 ||4.1 |
Asset impairments and write downs (3)
|11.1 ||0.8 ||40.6 ||2.7 |
|Operating income (loss)||(22.7)||(1.7)||(88.5)||(6.0)|
|Interest income||0.4 ||0.0 ||3.1 ||0.2 |
|Other components of net periodic benefit (cost)||(0.1)||(0.0)||(1.3)||(0.0)|
Gain (loss) on sale of assets and other (4)
|10.4 ||0.8 ||— ||— |
|Earnings (loss) before income taxes||(18.2)||(1.4)||(89.7)||(6.0)|
Provision (benefit) for income taxes (5)
|Net income (loss)||$||(10.9)||(0.8)||$||(43.7)||(2.9)|
|Less: Net income (loss) attributable to noncontrolling interest||0.1 ||0.0 ||0.1 ||0.0 |
|Net income (loss) attributable to Scholastic Corporation ||$||(11.0)||(0.8)||$||(43.8)||(2.9)|
|Earnings (loss) per share:|| |
Net income (loss) attributable to Scholastic Corporation
Net income (loss) attributable to Scholastic Corporation
(1) Represents percentage of total revenues.
(2) In fiscal 2021, the Company recognized a pretax mediation-assisted settlement of $20.0 regarding certain licenses and trademarks related to intellectual property used in formerly owned products and pretax branch consolidation and other business rationalization costs of $7.5. In fiscal 2021 and 2020, the Company recognized pretax severance expense of $23.1 and $13.1, respectively, related to cost reduction and restructuring programs. In fiscal 2020, the Company recognized a pretax charge of $1.0 related to a settlement of an intellectual property producing agreement and a pretax settlement expense of $1.5 related to an alleged patent infringement claim.
(3) In fiscal 2021, the Company recognized a pretax impairment charge of $8.5 related to its plan to cease use of certain leased office space in New York City and consolidate into its company-owned New York headquarters building and a pretax impairment charge of $2.6 related to its plan to permanently close 13 of its 54 book fair warehouses in the U.S. as part of a branch consolidation project. In fiscal 2020, the Company recognized a pretax impairment charge of $40.0 related to the write down of inventory from lower anticipated requirements in the Company's club and fair channels and a pretax impairment charge of $0.6 related to an outdated technology platform in Canada.
(4) In fiscal 2021, the Company recognized a pretax gain of $3.8 on the sale of its UK distribution center located in Southam and a pretax gain of $6.6 on the sale of its Danbury facility.
(5) In fiscal 2021 and 2020, the Company recognized a benefit for income taxes in respect to one-time pretax charges of $15.5 and $15.3, respectively.
Results of Operations – Consolidated
The section below is a discussion of the Company's fiscal year 2021 results compared to fiscal year 2020. A detailed discussion of the Company's fiscal year 2019 results and year-over-year comparisons between fiscal years 2020 and 2019 that are not included in this Form 10-K can be found in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the year ended May 31, 2020, filed with the Company's Form 10-K dated July 24, 2020.
Revenues from operations for the fiscal year ended May 31, 2021 decreased by $186.8 million, or 12.6%, to $1,300.3 million, compared to $1,487.1 million in the prior fiscal year. The decrease in revenues was due to lower Children’s Book Publishing and Distribution segment revenues of $210.7 million and lower International segment revenues of $1.1 million, partially offset by increased revenues in the Education segment of $25.0 million. Within the Children’s Book Publishing and Distribution segment, book fairs channel revenues decreased $219.5 million due to significantly lower in-person fair count as schools were not hosting fairs on-site due to COVID-19, coupled with lower book clubs channel revenues of $11.7 million due, in part, to decreased sponsorship as schools were operating in a remote or hybrid mode due to COVID-19. Lower revenues were partially offset by increased revenues from the trade channel of $20.5 million, driven by the release of a number of best-selling frontlist titles combined with higher backlist sales from best-selling series. Within the Education segment, increased revenues were driven by higher sales in several business lines, particularly Grab and Go and summer reading packs, instructional programs, and literacy partnerships, as well as in the segment’s teaching resources and digital subscription product categories. Local currency revenues in the International segment decreased $18.0 million, primarily driven by lower book fairs channel revenues in Canada and the UK for a combined $26.1 million decrease and lower direct-to-home sales in Asia, partially offset by increased revenues in the trade channel across all international markets. The International segment revenues were also impacted by favorable foreign currency exchange of $16.9 million.
Components of Cost of goods sold for fiscal years 2021 and 2020 are as follows:
| ||($ amounts in millions)|
| ||2021||% of revenue||2020||% of revenue|
|Product, service and production costs||$||352.7 ||27.1 ||%||$||411.3 ||27.7 ||%|
|Royalty costs||121.7 ||9.4 ||119.2 ||8.0 |
|Prepublication and production amortization||26.6 ||2.1 ||27.4 ||1.8 |
|Postage, freight, shipping, fulfillment and all other costs||165.5 ||12.7 ||193.1 ||13.0 |
|Total cost of goods sold||$||666.5 ||51.3 ||%||$||751.0 ||50.5 ||%|
Cost of goods sold as a percentage of revenue for the fiscal year ended May 31, 2021 was 51.3%, compared to 50.5% in the prior fiscal year. The increase in Cost of goods sold as a percentage of revenue was primarily driven by the sales decline in the book fairs channel, which traditionally has a higher mix of non-royalty bearing titles, coupled with higher trade sales, which typically have a higher royalty rate. In addition, the Company recognized higher inventory reserves in the book fairs channel due to the COVID-19 related sales decline, offset by lower inventory reserves in the book clubs and trade channels as a result of improved inventory management.
Selling, general and administrative expenses for the fiscal year ended May 31, 2021 were $584.9 million, compared to $722.5 million in the prior fiscal year. The $137.6 million decrease was driven by the Company's COVID-related cost-saving program, which included temporary employee furlough and reduced work week programs, the majority of which were discontinued at the end of the first quarter of fiscal 2021, a more permanent restructuring initiative resulting in lower employee-related expenses, improvements in operating and financial processes, and other efforts to lower the Company's overall cost base. The Company also benefited from the participation in government subsidy programs resulting in subsidies of $11.2 million internationally and $8.6 million domestically. A substantial portion of the cost-saving program, excluding the employee furlough, reduced work week and government subsidy programs, is expected to bring permanent improvements to the Company's cost structure. The cost savings were partially offset by a mediation-assisted settlement of $20.0 million regarding certain licenses and trademarks related to intellectual property used in formerly owned products, exclusive of potential insurance recoveries, as well as higher severance expense, which increased to $23.5 million for the fiscal year ended May 31, 2021 from $17.2 million in the prior year period. Severance expense included a charge related to cost reduction and restructuring programs of $23.1 million in fiscal 2021 compared to $13.1 million in fiscal 2020. In addition, in fiscal 2021, the Company recognized restructuring
charges in the Philippines to scale back a non-profitable channel related the direct sales business of $4.2 million and branch consolidation costs of $3.3 million.
Depreciation and amortization expenses for the fiscal year ended May 31, 2021 were $60.5 million, which were relatively consistent to $61.5 million in the prior fiscal year. There were no significant changes to the assets in service in fiscal 2021.
Asset impairments and write downs for the fiscal year ended May 31, 2021 were $11.1 million, compared to $40.6 million in the prior fiscal year. In fiscal 2021, the Company committed to a plan to cease use of its leased office space in New York City and consolidate into the company-owned New York headquarters and permanently close 13 of its 54 U.S. book fairs warehouses as part of a branch consolidation project. As a result, the Company recorded an impairment of the right-of-use assets associated with operating leases in the amount of $9.6 million and an impairment of $1.5 million of other long-lived assets, primarily leasehold improvements. The Company will continue to identify opportunities to consolidate distribution networks within the book fairs business. In fiscal 2020, changes were made to the Company's North American purchasing protocols, product offerings and inventory retention policies reducing the anticipated inventory requirements in the Company's school channels. As a result, the Company recorded a write down of inventory of $37.6 million and author advances and prepublication costs, related to the inventory, of $1.6 million and $0.8 million, respectively. In addition, in fiscal 2020, the Company recognized an impairment charge of $0.6 million related to an outdated technology platform in Canada.
Interest income for the fiscal year ended May 31, 2021 was $0.4 million, compared to $3.1 million in the prior fiscal year. The decrease was primarily due to lower U.S. interest rates on short-term investment balances. Interest expense for the fiscal year ended May 31, 2021 was $6.2 million, compared to $3.0 million in the prior fiscal year. The increase was primarily due to interest expense on increased debt borrowings.
Gain (loss) on sale of assets and other for the fiscal year ended May 31, 2021 was $10.4 million. The Company sold the company-owned facility located in Danbury, Connecticut and the UK distribution center located in Southam, recognizing a gain on sale of $6.6 million and $3.8 million, respectively.
The Company’s effective tax rate for the fiscal year ended May 31, 2021 was 40.1%, compared to 51.3% in the prior fiscal year. The lower benefit for income taxes when compared to the prior fiscal year was primarily driven by the rate differential on the prior fiscal year federal net operating loss carrybacks that did not repeat in the current fiscal year.
Net loss for fiscal 2021 was $10.9 million compared to $43.7 million in fiscal 2020, an improvement of $32.8 million. The basic and diluted loss per share of Class A Stock and Common Stock was $0.32 in fiscal 2021, compared to $1.27 in fiscal 2020.
Net income attributable to noncontrolling interest for fiscal 2021 and fiscal 2020 was $0.1 million.
Results of Operations – Segments
CHILDREN’S BOOK PUBLISHING AND DISTRIBUTION
|($ amounts in millions)||2021 compared to 2020|
| ||2021||2020||$ change||% change|
|Revenues||$||664.7 ||$||875.4 ||$||(210.7)||(24.1)||%|
|Cost of goods sold ||344.0 ||430.9 ||(86.9)||(20.2)|
|Other operating expenses *||304.4 ||420.9 ||(116.5)||(27.7)|
|Asset impairments and write downs||2.6 ||— ||2.6 ||NM|
|Operating income (loss)||$||13.7 ||$||23.6 ||$||(9.9)||(41.9)||%|
|Operating margin|| ||2.1 ||%||2.7 ||%|| || |
* Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization.
NM Not meaningful
Fiscal 2021 compared to fiscal 2020
Revenues for the fiscal year ended May 31, 2021 decreased by $210.7 million to $664.7 million, compared to $875.4 million in the prior fiscal year. The decrease in segment revenues is primarily driven by lower book fairs channel revenues of $219.5 million due to the significantly lower in-person fair count as schools were not able to host fairs on-
site due to COVID-19. Book clubs channel revenues decreased $11.7 million due to COVID-impacted delays in school reopenings coupled with a strategic reduction in certain offers and SKUs to enhance profitability. These revenue declines were partially offset by increased trade channel revenues of $20.5 million, driven by sales of current fiscal year releases including Dog Man: Grime and Punishment, Dog Man: Mothering Heights, The Ickabog®, Cat Kid Comic Club, The Baby-Sitters Club Graphic Novel #8: Logan Likes Mary Anne!, The Baby-Sitters Club Graphic Novel #9: Claudia and the New Girl, Harry Potter and the Sorcerer’s Stone: MinaLima Edition, and Wings of Fire, Book 14: The Dangerous Gift, increased backlist sales from best-selling series including Harry Potter®, Dog Man®, Hunger Games®, Captain Underpants®, The Bad GuysTM, Five Nights at Freddy's, Wings of Fire and The Baby-Sitters Club® GraphixTM, as well as increased sales of workbooks within the Scholastic Early Learners and BOB Books® lines and higher audio book sales. While there were strong sales of The Ballad of Songbirds and Snakes (A Hunger Games Novel) in fiscal 2021, the prior fiscal year results benefited from higher sales of this title as the release occurred during the fourth quarter of fiscal 2020.
Cost of goods sold for the fiscal year ended May 31, 2021 was $344.0 million, or 51.8% of revenues, compared to $430.9 million, or 49.2% of revenues, in the prior fiscal year. The increase in cost of goods sold as a percentage of revenue was primarily driven by the sales decline in the book fairs channel which traditionally has a higher mix of non-royalty bearing titles, coupled with higher trade sales, which typically have a higher royalty rate. In addition, postage, freight and shipping costs as a percentage of revenues increased in the school-based channels due to higher volumes of direct ship-to-home and the payment of holiday surcharges as a result of industry-wide capacity constraints. The Company also recognized higher inventory reserves in the book fairs channel due to the COVID-19 related sales decline, offset by lower inventory reserves in the book clubs and trade channels as a result of improved inventory management.
Other operating expenses were $304.4 million for the fiscal year ended May 31, 2021, compared to $420.9 million in the prior fiscal year. The $116.5 million decrease was attributable to the cost-saving program, which included employee furlough and reduced work week programs in the first fiscal quarter as well as restructuring initiatives, resulting in a reduction in employee-related costs across all channels, a COVID-related governmental employee retention credit, lower book clubs kit costs and savings from the temporary closure of certain book fair distribution facilities. The decrease was partially offset by branch consolidation costs of $2.8 million within the book fairs channel.
Asset impairments were $2.6 million for the fiscal year ended May 31, 2021. The Company committed to a plan to permanently close 13 of its 54 book fairs warehouses in the U.S. as part of the branch consolidation project, resulting in the recognition of an impairment expense of $2.6 million, primarily related to the right-of-use assets associated with these warehouse operating leases. The Company intends to continue to identify opportunities to consolidate distribution networks within the book fairs business.
Segment operating income for the fiscal year ended May 31, 2021 was $13.7 million, compared to $23.6 million in the prior fiscal year. The decrease was primarily driven by the significant decline in book fairs channel revenues and related restructuring activities within the book fairs operations which resulted in asset impairment charges and branch consolidation costs. This decrease was partially offset by increased sales in the trade channel and increased profitability in the book clubs channel due to lower kit costs, as well as a reduction in employee-related costs, primarily in the school-based channels, attributable to the cost-saving programs implemented by the Company.
|($ amounts in millions)||2021 compared to 2020 |
| ||2021||2020||$ change||% change|
|Revenues||$||312.3 ||$||287.3 ||$||25.0||8.7 ||%|
|Cost of goods sold ||108.4 ||100.7 ||7.7||7.6 |
|Other operating expenses *||143.3 ||156.7 ||(13.4)||(8.6)|
|Operating income (loss)||$||60.6 ||$||29.9 ||$||30.7||102.7 ||%|
|Operating margin||19.4 ||%||10.4 ||%|| || |
* Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization.
Fiscal 2021 compared to fiscal 2020
Revenues for the fiscal year ended May 31, 2021 increased by $25.0 million to $312.3 million, compared to $287.3 million in the prior fiscal year. The Company is winding down the custom publishing magazine business, which resulted in a decrease of $10.0 million in revenues compared to the prior fiscal year period. Excluding custom
publishing business revenues, segment revenues increased $35.0 million driven by higher sales of the Company's Grab and Go and summer reading packs to school districts and community-based organizations, as well as higher sales of summer instructional programs, as educators attempted to keep students engaged during the summer after remote and hybrid learning imposed by the COVID-19 pandemic. The Company anticipates federal stimulus funds to be utilized by schools during the 2021/2022 school year to help students accelerate their learning post-pandemic. Digital revenues increased $4.7 million in fiscal 2021 due to higher sales of digital subscription products, including Scholastic Literacy Pro® and BookFlix®, coupled with a large school district sale of Scholastic Literacy Pro and Scholastic F.I.R.S.T.® digital programs for independent reading and foundational reading skills. In addition, the Company's teaching resources business revenues increased $10.0 million from sales of jumbo workbooks and early readers, as parents turned to these resources to supplement remote and hybrid learning resulting from COVID-19. This increase was partially offset by lower sales of the Company's classroom magazines and traditional classroom book collections as many school districts remained closed for in-person learning.
Cost of goods sold for the fiscal year ended May 31, 2021 was $108.4 million, or 34.7% of revenue, compared to $100.7 million, or 35.1% of revenue, in the prior fiscal year. In fiscal 2021, favorable product mix from higher digital sales and sales of take-home reading packs, as well as lower employee costs associated with professional services revenue as services were delivered virtually rather than in person, were offset by higher inventory reserves as a result of a shortened selling season due to COVID-19.
Other operating expenses were $143.3 million for the fiscal year ended May 31, 2021, compared to $156.7 million in the prior fiscal year. The $13.4 million decrease was primarily related to a decrease in employee-related costs as a result of cost-saving measures implemented to mitigate the impact of COVID-19.
Segment operating income for the fiscal year ended May 31, 2021 was $60.6 million, compared to $29.9 million in the prior fiscal year. The $30.7 million improvement was primarily driven by revenue increases in a number of the segment's business lines, including Grab and Go and summer reading packs, instructional programs, literacy partnerships, digital product subscriptions, and teaching resources products, coupled with cost-saving measures taken to mitigate the impact of COVID-19.
|($ amounts in millions)||2021 compared to 2020|
| ||2021||2020||$ change||% change|
|Revenues||$||323.3 ||$||324.4 ||$||(1.1)||(0.3)||%|
|Cost of goods sold ||173.2 ||177.3 ||(4.1)||(2.3)|
|Other operating expenses *||126.1 ||153.0 ||(26.9)||(17.6)|
|Asset impairments and write downs||— ||0.6 ||(0.6)||NM|
|Operating income (loss)||$||24.0 ||$||(6.5)||$||30.5||NM|
|Operating margin||7.4 ||%||— ||%|
* Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization.
NM Not meaningful
Fiscal 2021 compared to fiscal 2020
Revenues for the fiscal year ended May 31, 2021 decreased by $1.1 million to $323.3 million compared to $324.4 million in the prior fiscal year, including a favorable foreign exchange impact of $16.9 million. Total local currency revenues across the Company's foreign operations decreased $18.0 million when compared to the prior fiscal year. In Canada, local currency revenues decreased $11.9 million primarily driven by lower school-based channel sales as a result of COVID-19 restrictions, partially offset by increased sales of best-selling trade titles. In the UK, local currency revenues decreased $8.4 million primarily due to lower volumes in the book fairs channel due to COVID-related school closures, partially offset by increased book clubs sales from parent-to-home orders, as well as increased sales of trade titles. In Asia, local currency revenues decreased $5.4 million primarily related to lower revenues from the direct sales channel and lower school-based channel revenues, primarily due to the adverse impact of COVID-19, partially offset by increased sales in the trade channel. In Australia and New Zealand, local currency revenues increased $5.5 million, primarily on higher revenue from the trade and book clubs channels, partially offset by lower volumes in the book fairs channel in Australia. In addition, revenues from foreign rights increased $3.4 million while the export channel revenues decreased $1.2 million as compared to the prior fiscal year.
Cost of goods sold for the fiscal year ended May 31, 2021 was $173.2 million, or 53.6% of revenues, compared to $177.3 million, or 54.7% of revenues. The decrease in cost of goods sold as a percentage of revenues was due to lower fulfillment costs in the book fairs channel due to revenue declines, partially offset by higher royalty costs due to a sales shift to trade titles with higher royalty rates.
Other operating expenses were $126.1 million for the fiscal year ended May 31, 2021, compared to $153.0 million in the prior fiscal year. In local currencies, Other operating expenses decreased by $33.2 million primarily driven by lower employee-related expenses as a result of the cost-saving programs implemented by the Company and COVID-related governmental subsidy programs in Australia, New Zealand, Canada, and the UK which resulted in subsidies of $11.2 million in fiscal 2021. In addition, the Company recognized higher income from equity investments in fiscal 2021 compared to the prior year. The decrease in operating expenses was partially offset by restructuring charges in the Philippines to scale back a non-profitable channel related the direct sales business of $4.2 million in fiscal 2021 and higher one-time severance expense which increased by $1.5 million to $2.6 million compared to $1.1 million in the prior fiscal year. Other operating expenses were also impacted by favorable foreign currency exchange of $6.3 million.
There were no asset impairments during the fiscal year ended May 31, 2021. Asset impairments were $0.6 million in fiscal 2020 due to an impairment charge related to an outdated technology platform in Canada.
Segment operating income for the fiscal year ended May 31, 2021 was $24.0 million, compared to operating loss of $6.5 million in the prior fiscal year. Total local currency operating results across the Company's foreign operations improved $30.1 million, primarily driven by COVID-related governmental employee retention programs and lower employee-related costs as a result of cost-saving measures, in addition to increased trade channel revenues and higher equity investment income, partially offset by lower revenues in the book fairs and direct sales channels as well as increased severance expense and business rationalization costs.
Fiscal 2021 compared to fiscal 2020
Unallocated overhead expense for fiscal 2021 decreased by $14.5 million to $121.0 million, compared to $135.5 million in the prior fiscal year. A substantial portion of the decrease is related to charges in the prior fiscal year period that did not reoccur in the current fiscal year period including the $40.0 million write down of inventory, a $1.5 million settlement charge related to an alleged patent infringement and a $1.0 million settlement arising from an intellectual property producing agreement. Also contributing to the decrease in costs were lower employee-related costs resulting from lower headcount from restructuring activities and a COVID-related governmental employee retention credit, and an overall reduction in spending including medical, outside services and consultants, travel, and supplies. This decrease was partially offset by one-time charges in the current fiscal year including a mediation-assisted settlement of $20.0 million regarding certain licenses and trademarks related to intellectual property used in formerly owned products, exclusive of potential insurance recoveries, an $8.5 million asset impairment related to the leased office space in New York City in connection with the consolidation into the company-owned New York headquarters and higher severance expense related to the cost-saving programs, which increased by $8.5 million to $20.5 million, compared to $12.0 million in the prior fiscal year.
Liquidity and Capital Resources
Fiscal 2021 compared to fiscal 2020
Cash provided by operating activities was $71.0 million for the fiscal year ended May 31, 2021, compared to cash provided by operating activities of $2.1 million for the prior fiscal year, representing an increase in cash provided by operating activities of $68.9 million. Despite lower revenues in fiscal 2021, the Company’s cost-savings initiatives continued to drive an overall reduction in spending including employee-related costs, medical, outside services and consultants, travel, and supplies, as well as lower income tax payments in the U.S. The Company intends to continue to limit certain spending in view of the economic uncertainty brought on by the global pandemic, however, savings related to certain employee-related costs are not expected to continue into fiscal 2022.
Cash used in investing activities was $50.5 million for the fiscal year ended May 31, 2021, compared to cash used in investing activities of $95.7 million for the prior fiscal year, representing a decrease in cash used in investing activities of $45.2 million. The decrease in cash used was primarily driven by the net proceeds from the sale of the Danbury facility and the Southam distribution center of $12.3 million and $5.1 million, respectively. The Company also had lower capital expenditures of $15.5 million as it continued to make strategic investments in key growth areas of the
business and technology, both internal and customer-facing, to allow it to operate with greater efficiency, and lower prepublication spending of $7.8 million. Additionally, in the prior year, the Company acquired land in the UK as part of a warehouse consolidation project and made other acquisition-related payments, both of which did not reoccur in the current fiscal year.
Cash used by financing activities was $52.3 million for the fiscal year ended May 31, 2021, compared to cash provided in financing activities of $154.1 million for the prior fiscal year. The decrease in cash provided by financing activities of $206.4 million was primarily driven by the $200.0 million borrowing under the U.S. loan agreement in the fourth quarter of fiscal 2020, with no additional borrowings made in fiscal 2021. The decrease was also attributable to a repayment of borrowings under the U.S. loan agreement of $25.0 million and lower short-term credit facility net borrowings of $12.4 million in fiscal 2021. This decrease was partially offset by the temporary suspension of the Company's share buy back program pursuant to which $35.5 million of common stock was reacquired in the prior fiscal year.
The Company’s cash and cash equivalents totaled $366.5 million at May 31, 2021 and $393.8 million at May 31, 2020. Cash and cash equivalents held by the Company’s U.S. operations totaled $318.0 million at May 31, 2021 and $364.2 million at May 31, 2020.
Due to the seasonal nature of its business as discussed under “Seasonality” above, the Company usually experiences negative cash flows in the June through October time period. As a result of the Company’s business cycle, borrowings have historically increased during June, July and August, have generally peaked in September or October, and have been at their lowest point in May. As a precautionary measure in the context of the COVID-19 pandemic, the Company accessed its committed bank credit facility in the fourth quarter of fiscal 2020 by taking a U.S. dollar LIBOR-based advance for $200.0 million, although there continues to be no immediate working capital requirement. During the second quarter of fiscal 2021, the Company paid down $25.0 million of the borrowing, resulting in $175.0 million outstanding as of May 31, 2021, which is classified as current effective as of the third quarter of fiscal 2021. On December 16, 2020, the U.S. loan agreement was amended, which, among other things, included adjustments to certain covenant thresholds and reduced the borrowing limit from $375.0 million to $250.0 million. See Note 5, "Debt" of Notes to the Consolidated Financial Statements in Item 8, "Consolidated Financial Statements and Supplementary Data" for more information concerning the amended U.S. loan agreement. The Company intends to extend the current Loan Agreement, or enter into a new long-term bank credit facility, prior to its expiration on January 5, 2022.
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, 2021, there were no share repurchases as the Company's open-market buy-back program was, and continues to be, temporarily suspended in the face of COVID-19 uncertainties. Approximately $35.5 million of shares were repurchased 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, debt service, planned capital expenditures and other investments, as well as dividends and share repurchases as appropriate in the context of COVID-19 considerations. As of May 31, 2021, the Company’s primary sources of liquidity consisted of cash and cash equivalents of $366.5 million, cash from operations, and the Company's loan agreements in the U.S. and the UK. As indicated above, the U.S. loan agreement was amended on December 16, 2020, which reduced the borrowing limit from $375.0 million to $250.0 million, of which a maximum of $225.0 is available until the Company satisfies its pre-amendment financial covenants and the minimum liquidity covenant that has been added by the Amendment. The Company's amended U.S. loan agreement and its loan agreements in the UK total $237.1 million, less borrowings of $182.3 million and commitments of $0.4 million, resulting in $54.4 million of availability. Additionally, the Company has short-term credit facilities of $38.6 million, less current borrowings of $7.9 million and commitments of $3.9 million, resulting in $26.8 million of current availability at May 31, 2021. Accordingly, the Company believes these sources of liquidity are sufficient to finance its currently anticipated ongoing operating needs, as well as its financing and investing activities.
The following table summarizes, as of May 31, 2021, the Company’s contractual cash obligations by future period (see Notes 5, 6, 9 and 15 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data”):
| || || || ||$ amounts in millions|
| ||Payments Due By Period|
|Contractual Obligations||1 Year or Less||Years 2-3||Years 4-5||After Year 5||Total|
|Minimum print quantities||$||1.3 ||$||1.3 ||$||— ||$||— ||$||2.6 |
|Royalty advances||32.6 ||8.9 ||0.6 ||0.1 ||42.2 |
|Lines of credit and short-term debt||182.9 ||— ||— ||— ||182.9 |
|Long-term debt ||— ||7.3 ||— ||— ||7.3 |
Capital leases (1)
|2.6 ||4.9 ||2.7 ||2.1 ||12.3 |
|Operating leases||28.7 ||39.1 ||15.2 ||24.5 ||107.5 |
Pension and postretirement plans (2)
|2.6 ||4.9 ||5.5 ||12.7 ||25.7 |
|Total||$||250.7 ||$||66.4 ||$||24.0 ||$||39.4 ||$||380.5 |
(1) Includes principal and interest.
(2) Excludes expected Medicare Part D subsidy receipts.
The Company is party to two loan agreements, as well as certain credit lines with various banks. For a more complete description of the loan agreements, as well as the Company's other debt obligations, reference is made to Note 5 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data.”
In the ordinary course of business, the Company explores domestic and international expansion opportunities, including potential niche and strategic acquisitions. As part of this process, the Company engages with interested parties in discussions concerning possible transactions. The Company will continue to evaluate such expansion opportunities and prospects. See Note 11 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data.”
Item 7A | Quantitative and Qualitative Disclosures about Market Risk
The Company conducts its business in various foreign countries, and as such, its cash flows and earnings are subject to fluctuations from changes in foreign currency exchange rates. The Company sells products from its domestic operations to its foreign subsidiaries, creating additional currency risk. The Company manages its exposures to this market risk through internally established procedures and, when deemed appropriate, through the use of short-term forward exchange contracts which were not significant as of May 31, 2021. The Company does not enter into derivative transactions or use other financial instruments for trading or speculative purposes.
The Company is subject to the risk that market interest rates and its cost of borrowing will increase and thereby increase the interest charged under its variable-rate debt.
The following table sets forth information about the Company’s debt instruments as of May 31, 2021:
| || || || || || ||$ amounts in millions|
| ||Fiscal Year Maturity|| ||Fair Value|
|Debt Obligations|| || || || || || || |
|Lines of credit and current portion of long-term debt||$||182.9 ||$||— ||$||— ||$||— ||$||— ||$||— ||$||182.9 ||$||182.9 |
|Average interest rate||2.6 ||%||— ||— ||— ||— ||— |
|Long-term debt||$||— ||$||7.3 ||$||— ||$||— ||$||— ||$||— ||$||7.3 ||$||7.3 |
|Average interest rate||— ||1.9 ||%||— ||— ||— ||— |
Item 8 | Consolidated Financial Statements and Supplementary Data
| || ||Page|
| || || |
| || || |
| || || |
| || || |
| || || |
| || || |
| || || |
| || || |
| || || |
|The following consolidated financial statement schedule for the years ended May 31, 2021, 2020 and 2019 is filed with this annual report on Form 10-K:|| || |
| || || |
All other schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements or the Notes thereto.
Consolidated Statements of Operations
| ||(Amounts in millions, except per share data)|
For fiscal years ended May 31,
|Revenues||$||1,300.3 ||$||1,487.1 ||$||1,653.9 |
|Operating costs and expenses|| || || |
|Cost of goods sold||666.5 ||751.0 ||779.9 |
Selling, general and administrative expenses
|584.9 ||722.5 ||792.0 |
Depreciation and amortization
|60.5 ||61.5 ||56.1 |
|Asset impairments and write downs||11.1 ||40.6 ||0.9 |
|Total operating costs and expenses||1,323.0 ||1,575.6 ||1,628.9 |
|Operating income (loss)||(22.7)||(88.5)||25.0 |
|Interest income||0.4 ||3.1 ||5.6 |
|Other components of net periodic benefit (cost) ||(0.1)||(1.3)||(1.4)|
|Gain (loss) on sale of assets and other ||10.4 ||— ||(1.0)|
|Earnings (loss) before income taxes||(18.2)||(89.7)||26.0 |
|Provision (benefit) for income taxes||(7.3)||(46.0)||10.4 |
|Net income (loss)||$||(10.9)||$||(43.7)||$||15.6 |
|Less: Net income (loss) attributable to noncontrolling interest||0.1 ||0.1 ||0.0 |
|Net income (loss) attributable to Scholastic Corporation ||$||(11.0)||$||(43.8)||$||15.6 |
|Basic and diluted earnings (loss) per share of Class A and Common Stock|| || |
Net Income (loss) attributable to Scholastic Corporation
Net Income (loss) attributable to Scholastic Corporation
|Dividends declared per share of Class A and Common Stock||$||0.60 ||$||0.60 ||$||0.60 |
See accompanying notes
Consolidated Statements of Comprehensive Income (Loss)
| ||(Amounts in millions)|
For fiscal years ended May 31,
|Net income (loss)||$||(10.9)||$||(43.7)||$||15.6 |
|Other comprehensive income (loss), net:|| || || |
Foreign currency translation adjustments
| Pension and postretirement adjustments net of tax||3.7 ||4.3 ||1.2 |
|Total other comprehensive income (loss)||$||23.6 ||$||1.4 ||$||(4.0)|
|Comprehensive income (loss)||12.7 ||(42.3)||11.6 |
|Less: Net income (loss) attributable to noncontrolling interest||0.1 ||0.1 ||0.0 |
|Comprehensive income (loss) attributable to Scholastic Corporation ||$||12.6 ||$||(42.4)||$||11.6 |
See accompanying notes
Consolidated Balance Sheets
|(Amounts in millions)|
Balances at May 31,
|Current Assets:|| || |
Cash and cash equivalents
|$||366.5 ||$||393.8 |
Accounts receivable, net
|256.1 ||239.8 |
|269.7 ||270.6 |
Income tax receivable
|88.8 ||90.0 |
Prepaid expenses and other current assets
|47.2 ||41.1 |
|Total current assets||1,028.3 ||1,035.3 |
|Noncurrent Assets:|| || |
Property, plant and equipment, net
|556.9 ||576.9 |
Prepublication costs, net
|65.7 ||70.6 |
Operating lease right-of-use assets, net
|78.6 ||95.3 |
Royalty advances, net
|43.8 ||39.9 |
|126.3 ||124.9 |
Noncurrent deferred income taxes
|25.4 ||18.6 |
Other assets and deferred charges
|83.3 ||72.1 |
|Total noncurrent assets||980.0 ||998.3 |
|Total assets||$||2,008.3 ||$||2,033.6 |
|LIABILITIES AND STOCKHOLDERS’ EQUITY|
Lines of credit and current portion of long-term debt
|$||182.9 ||$||7.9 |
|138.0 ||153.6 |
|45.5 ||37.8 |
|99.1 ||116.5 |
Other accrued expenses
|202.0 ||161.5 |
Accrued income taxes
|3.0 ||1.4 |
Operating lease liabilities
|25.0 ||22.8 |
|Total current liabilities||695.5 ||501.5 |
|Noncurrent Liabilities:|| || |
|7.3 ||210.6 |
Operating lease liabilities