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
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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
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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
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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.
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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.
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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
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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.
Note
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.
Forward-Looking Statements:
This Annual Report on Form 10-K contains forward-looking statements relating to future periods. Additional written and oral forward-looking statements may be made by the Company from time to time in SEC filings and otherwise. The Company cautions readers that results or expectations expressed by forward-looking statements, including, without limitation, those relating to the Company’s future business prospects 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,
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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
None.
Item 2 | Properties
As of May 31, 2021, the Company operated the following facilities:
Location Purpose Owned Square Footage Leased Square Footage
U.S. Various Locations Book Fairs warehouses — 2,099,000
Lake Mary, FL Book Fairs office space 74,000 —
(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.”
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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
Not Applicable.
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Part II
Item 5 | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information: Scholastic Corporation’s Common Stock, par value $0.01 per share (the "Common Stock"), is traded on the NASDAQ Global Select Market (the "NASDAQ") under the symbol SCHL. Scholastic Corporation’s Class A Stock, par value $0.01 per share (the “Class A Stock”), is convertible, at any time, into Common Stock on a share-for-share basis. There is no public trading market for the Class A Stock.
Holders: The number of holders of Class A Stock and Common Stock as of July 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.
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Stock Price Performance Graph
The graph below matches the Corporation’s cumulative 5-year total shareholder return on Common Stock with the cumulative total returns of the NASDAQ Composite index and a customized peer group of three companies that includes Pearson PLC, John Wiley & Sons Inc. and Houghton Mifflin Harcourt. The graph tracks the performance of a $100 investment in the Corporation’s Common Stock, in the index and in the peer group (with the reinvestment of all dividends) from June 1, 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,
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.
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Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The Company categorizes its businesses into three reportable segments: Children’s Book Publishing and Distribution; Education; and International.
The following discussion and analysis of the Company’s financial position and results of operations should be read in conjunction with the Company’s Consolidated Financial Statements and the related Notes included in Item 8, “Consolidated Financial Statements and Supplementary Data.”
Overview and Outlook
Overview
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.
Outlook
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.
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Critical Accounting Policies and Estimates
General:
The Company’s discussion and analysis of its financial condition and results of operations is based upon its Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements involves the use of estimates and assumptions by management, which affects the amounts reported in the Consolidated Financial Statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, future expectations and various other assumptions believed to be reasonable under the circumstances, all of which are necessary in order to form a basis for determining the carrying values of assets and liabilities. Actual results may differ from those estimates and assumptions. On an on-going basis, the Company evaluates the adequacy of its reserves and the estimates used in calculations, including, but not limited to: collectability of accounts receivable; variable consideration related to anticipated returns; allocation of transaction price to contractual performance obligations; amortization periods; stock-based compensation expense; pension and other postretirement obligations; tax rates; recoverability of inventories; deferred income taxes and tax reserves; the timing and amount of future income taxes and related deductions; 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:
Revenue Recognition:
The Company’s revenue recognition policies for its principal businesses are as follows:
School-Based Book Clubs – Revenue from school-based book clubs is recognized upon shipment of the products.
School-Based Book Fairs – Revenues associated with school-based book fairs relate to the sale of children's books and other products to book fair sponsors. In addition, the Company employs an incentive program to encourage the sponsorship of book fairs and increase the number of fairs held each school year. The Company identifies two potential performance obligations within its school-based book fair contracts, which include the fulfillment of book fairs product and the fulfillment of product upon the redemption of incentive program credits by customers. The Company allocates the transaction price to each performance obligation and recognizes revenue at a point in time. The Company utilizes certain estimates based on historical experience, redemption patterns and future expectations related to the participation in the incentive program to determine the relative fair value of each performance obligation when allocating the transaction price. Changes in these estimates could impact the timing of the recognition of revenue. Revenue allocated to the book 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
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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:
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.
Estimated returns:
For sales that include a right of return, the Company will estimate the transaction price and record revenues as variable consideration based on the amounts the Company expects to ultimately be entitled. In order to determine estimated returns, the Company utilizes historical return rates, sales patterns, types of products and expectations and recognizes a corresponding reduction to Revenues and Cost of goods sold. Management also considers patterns of sales and returns in the months preceding the fiscal year, as well as actual returns received subsequent to the fiscal year, available customer and market specific data and other return rate information that management believes is relevant. In addition, a refund liability is recorded within Other accrued expenses for the consideration to which the Company believes it will not ultimately be entitled and a return asset is recorded within Prepaid expenses and other current assets for the expected inventory to be returned. Actual returns could differ from the Company's estimate. A one percentage point change in the estimated reserve for returns rate would have resulted in an increase or decrease in operating income for the year ended May 31, 2021 of approximately $3.1 million.
Inventories:
Inventories, consisting principally of books, are stated at the lower of cost, using the first-in, first-out method, or net realizable value. The Company records a reserve for excess and obsolete inventory based upon a calculation using the 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.
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Long-lived assets:
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:
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.
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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.
Pension 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.
Equity Awards:
Stock-based compensation – The Company measures the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The Company recognizes the cost, based on the award’s fair value at the date of grant, on a straight-line basis over an award’s requisite service period, which is generally the vesting period, except for the grants to retirement-eligible employees. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The determination of the assumptions used in the Black-Scholes model requires management to make significant judgments and estimates. The use of different assumptions and estimates in the option-pricing model could have a material impact on the estimated fair value of option grants and the related expense. The risk-free interest rate is based on a U.S. Treasury rate in effect on the date of grant with a term equal to the expected life. The expected term is determined based on historical employee exercise and post-vesting termination behavior. The expected dividend yield is based on actual dividends paid or to be paid by the Company. The volatility is estimated based on historical volatility corresponding to the expected life. The fair value of restricted stock units are assumed to be the per share market price of the Company's stock as of the date of grant.
Taxes:
Income Taxes – The Company uses the asset and liability method of accounting for income taxes. Under this method, for purposes of determining taxable income, deferred tax assets and liabilities are determined based on
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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.
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Results of Operations
(Amounts in millions, except per share data)For fiscal years ended May 31,
$ % (1) $ % (1)
Revenues:
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) (7.3) (0.6) (46.0) (3.1)
Less: Net income (loss) attributable to noncontrolling interest 0.1 0.0 0.1 0.0
Earnings (loss) per share:
Basic:
Net income (loss) attributable to Scholastic Corporation $ (0.32) $ (1.27)
Diluted:
Net income (loss) attributable to Scholastic Corporation $ (0.32) $ (1.27)
(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.
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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 segmentrevenues 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)
Prepublication and production amortization 26.6 2.1 27.4 1.8
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
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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
Asset impairments and write downs 2.6 — 2.6 NM
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-
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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 $23.6 million in the prior fiscal year. The decrease was primarily driven by the significant decline in book fairs channel revenues and related restructuring activities within the book fairs operations which resulted in asset impairment charges and branch consolidation costs. This decrease was partially offset by increased sales in the trade channel and increased profitability in the book clubs channel due to lower kit costs, as well as a reduction in employee-related costs, primarily in the school-based channels, attributable to the cost-saving programs implemented by the Company.
EDUCATION
($ amounts in millions) 2021 compared to 2020
* 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
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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 $30.7 million improvement was primarily driven by revenue increases in a number of the segment's business lines, including Grab and Go and summer reading packs, instructional programs, literacy partnerships, digital product subscriptions, and teaching resources products, coupled with cost-saving measures taken to mitigate the impact of COVID-19.
INTERNATIONAL
($ amounts in millions) 2021 compared to 2020
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.
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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.
Overhead
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
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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.
Cash Position
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.
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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
Lines of credit and short-term debt 182.9 — — — 182.9
Long-term debt — 7.3 — — 7.3
(1) Includes principal and interest.
(2) Excludes expected Medicare Part D subsidy receipts.
Financing
Loan Agreements
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.”
Acquisitions
In the ordinary course of business, the Company explores domestic and international expansion opportunities, including potential niche and strategic acquisitions. As part of this process, the Company engages with interested parties in discussions concerning possible transactions. The Company will continue to evaluate such expansion opportunities and prospects. See Note 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.
Additional information relating to the Company’s outstanding financial instruments is included in Note 5 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data,” which is included herein.
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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
Average interest rate 2.6 % — — — — —
Long-term debt $ — $ 7.3 $ — $ — $ — $ — $ 7.3 $ 7.3
Average interest rate — 1.9 % — — — —
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Item 8 | Consolidated Financial Statements and Supplementary Data
Page
Notes to Consolidated Financial Statements 42
Reports of Independent Registered Public Accounting Firm 79
Schedule II — Valuation and Qualifying Accounts and Reserves S-1
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.
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Consolidated Statements of Operations
(Amounts in millions, except per share data)For fiscal years ended May 31,
Operating costs and expenses
Selling, general and administrative expenses 584.9 722.5 792.0
Asset impairments and write downs 11.1 40.6 0.9
Interest expense (6.2) (3.0) (2.2)
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
Less: Net income (loss) attributable to noncontrolling interest 0.1 0.1 0.0
Basic and diluted earnings (loss) per share of Class A and Common Stock
Basic:
Diluted:
Dividends declared per share of Class A and Common Stock $ 0.60 $ 0.60 $ 0.60
See accompanying notes
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Consolidated Statements of Comprehensive Income (Loss)
(Amounts in millions)For fiscal years ended May 31,
Other comprehensive income (loss), net:
Foreign currency translation adjustments 19.9 (2.9) (5.2)
Pension and postretirement adjustments net of tax 3.7 4.3 1.2
Total other comprehensive income (loss) $ 23.6 $ 1.4 $ (4.0)
Less: Net income (loss) attributable to noncontrolling interest 0.1 0.1 0.0
See accompanying notes
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Consolidated Balance Sheets
(Amounts in millions)Balances at May 31,
Current Assets:
Cash and cash equivalents $ 366.5 $ 393.8
Income tax receivable 88.8 90.0
Prepaid expenses and other current assets 47.2 41.1
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
Noncurrent deferred income taxes 25.4 18.6
Other assets and deferred charges 83.3 72.1
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Lines of credit and current portion of long-term debt $ 182.9 $ 7.9
Accrued income taxes 3.0 1.4
Operating lease liabilities 25.0 22.8
Noncurrent Liabilities:
Operating lease liabilities 67.4 75.7
Other noncurrent liabilities 55.8 65.2
Commitments and Contingencies: — —
Stockholders’ Equity:
Accumulated other comprehensive income (loss) (34.7) (58.3)
Total stockholders' equity of Scholastic Corporation 1,180.8 1,179.2
Noncontrolling interest 1.5 1.4
Total liabilities and stockholders’ equity $ 2,008.3 $ 2,033.6
See accompanying notes
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Consolidated Statement of Changes in Stockholders’ Equity
(Amounts in millions)
Shares Amount Shares Amount
Net Income (loss) — — — — — — 15.6 — 15.6 — 15.6
Adoption of ASC606 (net of tax of $16.0) — — — — — — (47.0) — (47.0) — (47.0)
Foreign currency translation adjustment — — — — — (5.2) — — (5.2) — (5.2)
Stock-based compensation — — — — 8.3 — — — 8.3 — 8.3
Purchases of treasury stock at cost — — (0.2) — — — — (8.5) (8.5) — (8.5)
Dividends — — — — — — (21.2) — (21.2) — (21.2)
Fair value of noncontrolling interest in Make Believe Ideas Limited — 1.3 1.3
Net Income (loss) — — — — — — (43.8) — (43.8) 0.1 (43.7)
Foreign currency translation adjustment — — — — — (2.9) — (2.9) — (2.9)
Stock-based compensation — — — — 3.8 — — — 3.8 — 3.8
Proceeds pursuant to stock-based compensation plans — — — — 0.7 — — — 0.7 — 0.7
Purchases of treasury stock at cost — — (1.0) — — — — (35.5) (35.5) — (35.5)
Dividends — — — — — — (20.8) — (20.8) — (20.8)
Net Income (loss) — — — — — — (11.0) — (11.0) 0.1 (10.9)
Foreign currency translation adjustment — — — — — 19.9 — 19.9 — 19.9
Stock-based compensation — — — — 6.6 — — — 6.6 — 6.6
Proceeds pursuant to stock-based compensation plans — — — — 0.4 — — — 0.4 — 0.4
Dividends — — — — — — (20.6) — (20.6) — (20.6)
See accompanying notes
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Consolidated Statements of Cash Flows
(Amounts in millions)Years ended May 31,
Cash flows - operating activities:
Provision for losses on accounts receivable 5.2 15.6 7.0
Provision for losses on inventory 36.6 34.3 20.8
Provision for losses on royalty advances 5.4 8.1 6.8
Amortization of prepublication costs 25.4 26.2 22.4
Amortization of pension and postretirement plans 0.0 0.8 0.7
Deferred income taxes (8.0) 17.9 3.3
Stock-based compensation 6.6 3.8 8.3
Income from equity investments (7.4) (3.2) (5.9)
Non cash write off related to asset impairments and write downs 11.1 40.6 0.9
(Gain) loss on sale of assets and other (10.4) — 1.0
Changes in assets and liabilities, net of amounts acquired:
Income tax receivable 1.4 (79.8) 7.4
Prepaid expenses and other current assets (3.5) 0.9 8.1
Royalty advances (8.5) (2.6) (9.8)
Accrued income taxes 1.3 0.1 (0.9)
Accrued royalties 6.2 (3.8) 7.9
Net cash provided by (used in) operating activities 71.0 2.1 116.4
Cash flows - investing activities:
Prepublication expenditures (20.7) (28.5) (38.1)
Additions to property, plant and equipment (47.2) (62.7) (95.0)
Proceeds from sale of assets 17.4 — —
Land acquisition — (3.3) —
Other investment and acquisition-related payments — (1.2) (14.2)
Net cash provided by (used in) investing activities (50.5) (95.7) (147.3)
See accompanying notes
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Consolidated Statements of Cash Flows
(Amounts in millions)Years ended May 31,
Cash flows - financing activities:
Repayment of capital lease obligations (2.3) (2.0) (1.6)
Reacquisition of common stock — (35.5) (8.5)
Proceeds pursuant to stock-based compensation plans 0.4 0.7 6.0
Net cash provided by (used in) financing activities (52.3) 154.1 (25.7)
Effect of exchange rate changes on cash and cash equivalents 4.5 (0.8) (1.2)
Net increase (decrease) in cash and cash equivalents (27.3) 59.7 (57.8)
Cash and cash equivalents at beginning of period 393.8 334.1 391.9
Cash and cash equivalents at end of period $ 366.5 $ 393.8 $ 334.1
Supplemental Information:
Income tax payments (refunds) $ 1.3 $ 7.2 $ 2.5
See accompanying notes
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Notes to Consolidated Financial Statements
(Amounts in millions, except share and per share data)
1. DESCRIPTION OF THE BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the 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.
Basis of presentation
Principles of consolidation
The Consolidated Financial Statements include the accounts of the Corporation and all wholly-owned and majority-owned subsidiaries. All significant intercompany transactions are eliminated in consolidation. Certain reclassifications have been made to conform to the current year presentation.
Noncontrolling Interest
The Company owns a 95.0% majority ownership interest in Make Believe Ideas Limited ("MBI"), a UK-based children's book publishing company. The founder and chief executive officer of MBI retains a 5.0% noncontrolling ownership interest in MBI. The Company fully consolidated MBI as of the acquisition date, and the 5.0% noncontrolling interest is classified within stockholder's equity.
Use of estimates
The Company’s Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). 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 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:
•Accounts receivable allowance for credit losses
•Pension and postretirement benefit plans
•Uncertain tax positions
•The timing and amount of future income taxes and related deductions
•Inventory reserves
•Cost of goods sold from book fair operations during interim periods based on estimated gross profit rates
•Sales tax contingencies
•Royalty advance reserves and royalty expense accruals
•Impairment testing for goodwill, intangibles and other long-lived assets and investments
•Assets and liabilities acquired in business combinations
•Variable consideration related to anticipated returns
•Allocation of transaction price to contractual performance obligations
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Summary of Significant Accounting Policies
Revenue recognition
The Company’s revenue recognition policies for its principal businesses are as follows:
School-Based Book Clubs– Revenue from school-based book clubs is recognized upon shipment of the products.
School-Based Book Fairs – Revenues associated with school-based book fairs relate to the sale of children's books and other products to book fair sponsors. In addition, the Company employs an incentive program to encourage the sponsorship of book fairs and increase the number of fairs held each school year. The Company identifies two potential performance obligations within its school-based book fair contracts, which include the fulfillment of book fairs product and the fulfillment of product upon the redemption of incentive program credits by customers. The Company allocates the transaction price to each performance obligation and recognizes revenue at a point in time. The Company utilizes certain estimates based on historical experience, redemption patterns and future expectations related to the participation in the incentive program to determine the relative fair value of each performance obligation when allocating the transaction price. Changes in these estimates could impact the timing of the recognition of revenue. Revenue allocated to the book 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 as the customer is permitted to sell the product to the public. Revenue for ebooks, which is generally the net amount received from the retailer, is recognized upon electronic delivery to the customer by the retailer. The sale of trade product 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 and export channels 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.
Cash equivalents
Cash equivalents consist of short-term investments with original maturities of three months or less.
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Accounts receivable
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. Accounts receivable allowance for credit losses was $21.4 and $19.9 as of May 31, 2021 and 2020, respectively.
Estimated returns
For sales that include a right of return, the Company will estimate the transaction price and record revenues as variable consideration based on the amounts the Company expects to ultimately be entitled. In order to determine estimated returns, the Company utilizes historical return rates, sales patterns, types of products and expectations and recognizes a corresponding reduction to Revenues and Cost of goods sold. Management also considers patterns of sales and returns in the months preceding the fiscal year, as well as actual returns received subsequent to the fiscal year, available customer and market specific data and other return rate information that management believes is relevant. In addition, a refund liability is recorded within Other accrued expenses for the consideration to which the Company believes it will not ultimately be entitled and a return asset is recorded within Prepaid expenses and other current assets for the expected inventory to be returned. Actual returns could differ from the Company's estimate.
Inventories
Inventories, consisting principally of books, are stated at the lower of cost, using the first-in, first-out method, or net realizable value. The Company records a reserve for excess and obsolete inventory based upon a calculation using the 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.
Property, plant and equipment
Property, plant and equipment are stated at cost. Depreciation and amortization are recognized on a straight-line basis over the estimated useful lives of the assets. Buildings have an estimated useful life, for purposes of depreciation, of forty years. Building improvements are depreciated over the life of the improvement which typically does not exceed twenty-five years. Capitalized software, net of accumulated amortization, was $59.4 and $52.3 at May 31, 2021 and 2020, respectively. Capitalized software is amortized over a period of three to seven years. Amortization expense for capitalized software was $27.6, $27.3 and $25.3 for the fiscal years ended May 31, 2021, 2020 and 2019, respectively. Furniture, fixtures and equipment are depreciated over periods not exceeding ten years. Leasehold improvements are amortized over the life of the lease or the life of the assets, whichever is shorter. The Company evaluates the depreciation periods of property, plant and equipment to determine whether events or circumstances indicate that the asset’s carrying value is not recoverable or warrant revised estimates of useful lives.
Cloud Computing Arrangements
The Company incurs costs to implement cloud computing arrangements that are hosted by a third party vendor. Implementation costs incurred during the application development stage are capitalized and amortized over the term of the hosting arrangement on a straight-line basis. The Company capitalized $4.6 and $11.9 of costs incurred in fiscal 2021 and 2020, respectively, to implement cloud computing arrangements, primarily related to digital and consumer data platforms. These amounts are included within Other assets and deferred charges on the Company's Consolidated Balance Sheets. Amortization expense totaled $0.7 and $0.0 for the fiscal years ended May 31, 2021 and 2020, respectively, which is included in Selling, general and administrative expenses within the Company's Consolidated Statements of Operations.
Leases
The Company's lease arrangements primarily relate to corporate offices and warehouse facilities, and to a lesser
extent, certain equipment and other assets. The Company's leases generally have initial terms ranging from 3 to 10 years and certain leases include renewal or early-termination options, rent escalation clauses, and/or lease incentives. Lease renewal rent payment terms generally reflect adjustments for market rates prevailing at the time of renewal. The Company's leases require fixed minimum rent payments and also often require the payment of certain other costs that do not relate specifically to its right to use an underlying leased asset, but are associated with the asset, such as real
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estate taxes, insurance, common area maintenance fees and/or certain other costs (referred to collectively herein as "non-lease components"), which may be fixed or variable in amount depending on the terms of the respective lease agreement. The Company's leases do not contain significant residual value guarantees or restrictive covenants.
The Company determines whether an arrangement contains a lease at the inception of the arrangement. If a lease is determined to exist, the term of such lease is assessed based on the date on which the underlying asset is made available for the Company's use by the lessor. The Company's assessment of the lease term reflects the non-cancelable term of the lease, inclusive of any rent-free periods and/or periods covered by early-termination options which the Company is reasonably certain of not exercising, as well as periods covered by renewal options which the Company is reasonably certain of exercising. The Company also determines lease classification as either operating or finance at lease commencement, which governs the pattern of expense recognition and the presentation reflected in the Consolidated Statements of Operations over the lease term.
For leases with a term exceeding 12 months, a lease liability is recorded on the Company's Consolidated Balance Sheet at lease commencement reflecting the present value of its fixed minimum payment obligations over the lease term. A corresponding right-of-use ("ROU") asset equal to the initial lease liability is also recorded, adjusted for any prepaid rent and/or initial direct costs incurred in connection with execution of the lease and reduced by any lease incentives received. The Company includes fixed payment obligations related to non-lease components in the measurement of ROU assets and lease liabilities, as it elects to account for lease and non-lease components together as a single lease component. ROU assets associated with finance leases are presented separate from ROU assets associated with operating leases and are included within Property, plant and equipment, net on the Company's Consolidated Balance Sheet. For purposes of measuring the present value of its fixed payment obligations for a given lease, the Company uses its incremental borrowing rate, determined based on information available at lease commencement, as rates implicit in its leasing arrangements are typically not readily determinable. The Company's incremental borrowing rate reflects the rate it would pay to borrow on a secured basis, and incorporates the term and economic environment of the associated lease.
For operating leases, fixed lease payments are recognized as lease expense on a straight-line basis over the lease term. For finance leases, the initial ROU asset is depreciated on a straight-line basis over the lease term, along with recognition of interest expense associated with accretion of the lease liability, which is ultimately reduced by the related fixed payments. For leases with a term of 12 months or less, any fixed lease payments are recognized on a straight-line basis over the lease term, and are not recognized on the Company's Consolidated Balance Sheet. Variable lease costs for both operating and finance leases, if any, are recognized as incurred.
Sublease rental income is recognized on a straight-line basis over the duration of each lease term. To the extent expected sublease income is less than expected rental payments, the Company recognizes a loss on the difference between the present value of the minimum lease payments under each lease. Lease payments received are presented as a reduction to rent expense in Selling, general and administrative expenses.
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. Prepublication costs are amortized on a straight-line basis over a two-to-five-year period based on expected future revenues. The Company regularly reviews the recoverability of these capitalized costs based on expected future cash flows.
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.
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. The royalties earned are applied first against the remaining unearned portion of the advance. 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. The Company applies this historical experience to its existing
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outstanding royalty advances to estimate the likelihood of recoveries through earndowns. 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. The reserve for royalty advances was $115.5 and $109.5 as of May 31, 2021 and 2020, respectively.
Goodwill and intangible assets
Goodwill and other intangible assets with indefinite lives are not amortized and are reviewed for impairment annually as of May 31 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.
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 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 contractual term. Intellectual property assets are amortized over their remaining useful lives, which is approximately five years.
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 the financial reporting and the 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 indicates that realization is not likely, the Company establishes a valuation allowance.
In assessing the need for a valuation allowance, the Company estimates future taxable earnings, with consideration for the feasibility of on-going tax planning strategies and the realizability of tax benefit carryforwards, to determine which deferred tax assets are more likely than not to be realized in the future. Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates and future taxable earnings. In the event that actual results differ from these estimates in future periods, the Company may need to adjust the valuation allowance.
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The Company accounts for uncertain tax positions using a two-step method. Recognition occurs when an entity concludes that a tax position, based solely on technical merits, is more likely than not to be sustained upon examination. If a tax position is more likely than not to be sustained upon examination, the amount recognized is the largest amount of benefit, determined on a cumulative probability basis, which is more likely than not to be realized upon settlement. The Company assesses all income tax positions and adjusts its reserves against these positions periodically based upon these criteria. The Company also assesses potential penalties and interest associated with these tax positions, and includes these amounts as a component of income tax expense.
The Company assesses foreign investment levels periodically to determine if all or a portion of the Company’s investments in foreign subsidiaries are indefinitely invested. Any required adjustment to the income tax provision would be reflected in the period that the Company changes this assessment. 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 which are reflected in the Company’s Consolidated Financial Statements. These amounts are included in the Consolidated Financial Statements in Selling, general and administrative expenses. Future developments relating to the foregoing could result in adjustments being made to these accruals.
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.
Pension obligations – Scholastic Corporation's UK subsidiary has a defined benefit pension plan covering the majority of its employees who meet certain eligibility requirements. The Company’s pension plan and other postretirement benefits are accounted for using actuarial valuations.
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.
Other postretirement benefits – The Company provides postretirement benefits, consisting of healthcare and life insurance benefits, to eligible retired United State-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.
Foreign currency translation
The Company’s non-United States dollar-denominated assets and liabilities are translated into United States dollars at prevailing rates at the balance sheet date and the revenues, costs and expenses are translated at the weighted average rates prevailing during each reporting period. Net gains or losses resulting from the translation of the foreign financial statements and the effect of exchange rate changes on long-term intercompany balances are accumulated and charged directly to the foreign currency translation adjustment component of stockholders’ equity until such time as the operations are substantially liquidated or sold. 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.
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Shipping and handling costs
Amounts billed to customers for shipping and handling are classified as revenue. Costs incurred in shipping and handling are recognized in Cost of goods sold.
Advertising costs
Advertising costs are expensed by the Company as incurred. Total advertising expense was $60.1, $85.2 and $106.8 for the twelve months ended May 31, 2021, 2020 and 2019, respectively.
Stock-based compensation
The Company recognizes the cost of services received in exchange for any stock-based awards. The Company recognizes the cost 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, based on the award’s fair value at the date of grant.
The fair values of stock options granted by the Company are estimated at the date of grant using the Black-Scholes option-pricing model. The Company’s determination of the fair value of stock-based payment awards using this option-pricing model is affected by the price of the Common Stock as well as by assumptions regarding highly complex and subjective variables, including, but not limited to, the expected price volatility of the Common Stock over the terms of the awards, the risk-free interest rate, and actual and projected employee stock option exercise behaviors. Estimates of fair value are not intended to predict actual future events or the value that may ultimately be realized by those who receive these awards.
Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates, in order to derive the Company’s best estimate of awards ultimately expected to vest. In determining the estimated forfeiture rates for stock-based awards, the Company annually conducts an assessment of the actual number of equity awards that have been forfeited previously. When estimating expected forfeitures, the Company considers factors such as the type of award, the employee class and historical experience. The estimate of stock-based awards that will ultimately be forfeited requires significant judgment and, to the extent that actual results or updated estimates differ from current estimates, such amounts will be recognized as a cumulative adjustment in the period such estimates are revised.
The table set forth below provides the estimated fair value of options granted by the Company during fiscal years 2021, 2020 and 2019 and the significant weighted average assumptions used in determining such fair value under the Black-Scholes option-pricing model. The average expected life represents an estimate of the period of time stock options are expected to remain outstanding based on the historical exercise behavior of the option grantees. The risk-free interest rate was based on the U.S. Treasury yield curve corresponding to the expected life in effect at the time of the grant. The volatility was estimated based on historical volatility corresponding to the expected life.
Estimated fair value of stock options granted $ 3.80 $ 6.99 $ 11.97
Assumptions:
Expected dividend yield 2.9 % 1.9 % 1.4 %
Expected stock price volatility 30.2 % 27.4 % 28.4 %
Risk-free interest rate 0.2 % 1.3 % 3.0 %
Average expected life of options 4 years 5 years 6 years
New Accounting Pronouncements
Current Fiscal Year Adoptions:
ASU No. 2016-13
In June 2016, the FASB issued ASU No. 2016-13, "Measurement of Credit Losses on Financial Instruments" (ASU 2016-13). ASU 2016-13, which was further updated and clarified by the FASB through the issuance of additional related ASUs, amends the guidance surrounding measurement and recognition of credit losses on financial assets measured at amortized cost, including trade receivables and debt securities, by requiring recognition of an allowance for credit losses expected to be incurred over an asset's lifetime based on relevant information about past events, current conditions, and supportable forecasts impacting its ultimate collectability. This "expected loss" model may result in earlier recognition of credit losses than the current "as incurred" model, under which losses were recognized only upon an occurrence of an event that gave rise to the incurrence of a probable loss. The Company adopted ASU
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2016-13 as of the beginning of the first quarter of fiscal 2021 which did not have a material impact on the Company’s Consolidated Financial Statements. Refer to Note 2, Revenues, for further discussion of the Company's accounting policy and disclosures related to the allowance for credit losses.
ASU No. 2017-04
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which removes step two from the goodwill impairment test (comparison of implied fair value of goodwill with the carrying amount of that goodwill for a reporting unit). Instead, an entity will measure its goodwill impairment by the amount the carrying value exceeds the fair value of a reporting unit. The Company adopted ASU 2017-04 as of the beginning of the first quarter of fiscal 2021 which resulted in no impact to the Company's Consolidated Financial Statements.
Regulation S-X Acquired and Disposed Businesses Disclosure Amendments
In January 2021, the SEC adopted final rules that amend registrants requirements to provide information about acquired and disposed businesses. The SEC amended the investment and income tests in Rule 1-02(w) of Regulation S-X that are used to determine whether a registrant needs to file audited financial statements. The new investment test considers the registrant’s market capitalization, and the new income test adds consideration of the revenue of the registrant and the acquired business. The Company early adopted the guidance to use the revenue component in determining the significance of its equity investment which resulted in no impact to the Company's Consolidated Financial Statements.
Regulation S-K Amendments
In November 2020, the SEC adopted final amendments to improve the readability of Regulation S-K required disclosure documents to modernize the description of business, legal proceedings and risk factor disclosures. The final rule issued by the SEC amends the risk factor disclosure to report "material" risk factors organized under relevant headings, to add a principle-based human capital disclosure as well as updates to simplify the description of business and legal proceedings disclosures. The Company adopted certain provisions within the amendments to the Form 10-K for the year ended May 31, 2021, as reflected in Item 1. Business, Item 1A. Risk Factors, and elsewhere in this report.
In February 2021, the SEC adopted final amendments to modernize and enhance the Regulation S-K required Management's Discussions and Analysis disclosure including eliminating duplicative information for the benefit of investors. The final rule issued by the SEC eliminates the requirement in Item 301 to present selected financial data for each of its last five years and simplifies certain sections of the Management's Discussions and Analysis disclosure that do not have an impact on the Company's results in fiscal 2021. The Company has adopted certain provisions within the amendments to Regulation S-K that eliminate Item 301.
Forthcoming Adoption:
ASU No. 2019-12