Scholastic Corporation
10-K on 07/27/2020   Download
SEC Document
SEC Filing
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United States
Securities and Exchange Commission
 
Washington, D.C. 20549 
Form 10-K 
Annual Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
 
For the fiscal year ended
May 31, 2020
 
Commission File No.
000-19860
Scholastic Corporation 
(Exact name of Registrant as specified in its charter)
Delaware
 
13-3385513
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
557 Broadway
 
 
New York,
New York
 
10012
(Address of principal executive offices)
 
(Zip Code)
 

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

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

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

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No ý
 
The aggregate market value of the Common Stock, par value $0.01, held by non-affiliates as of November 30, 2019, was approximately $1,092,596,663, based upon the closing price of the Common Stock on November 29, 2019, of $37.13. As of such date, non-affiliates held no shares of the Class A Stock, $0.01 par value. There is no active market for the Class A Stock.
 





The number of shares outstanding of each class of the Registrant’s voting stock as of June 30, 2020 was as follows:
Title of each class
 
Number of shares outstanding as of June 30, 2020
Common Stock, $0.01 par value
 
32,530,986
Class A Stock, $.01 par value
 
1,656,200

Documents Incorporated By Reference

Part III incorporates certain information by reference from the Registrant’s definitive proxy statement for the Annual Meeting of Stockholders to be held September 23, 2020.




Table of Contents
 
 
 
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




Part I
Item 1 | Business
 
Overview
 
Scholastic Corporation (the “Corporation” and together with its subsidiaries, “Scholastic” or the “Company”) is the
world’s largest publisher and distributor of children’s books, a leading provider of print and digital instructional materials for grades pre-kindergarten ("pre-K") to grade 12 and a producer of educational and entertaining children’s media. The Company creates quality books and ebooks, print and technology-based learning materials and programs, classroom magazines and other products that, in combination, offer schools, as well as parents and children, customized and comprehensive solutions to support children’s learning and reading both at school and at home. Since its founding in 1920, Scholastic has emphasized quality products and a dedication to reading, learning and literacy. The Company is the leading operator of school-based book club and book fair proprietary channels. It distributes its products and services through these channels, as well as directly to schools and libraries, through retail stores and through the internet. The Company’s website, scholastic.com, is a leading site for teachers, classrooms and parents and an award-winning destination for children. Scholastic has operations in the United States and throughout the world including Canada, the United Kingdom, Australia, New Zealand and Asia and, through its export business, sells products in approximately 165 countries around the world.
 
The Company currently employs approximately 6,000 people in the United States and approximately 2,300 people outside the United States.
 
Segments – Continuing Operations
 
The Company categorizes its businesses into three reportable segments: Children’s Book Publishing and Distribution; Education; and International.
 
The following table sets forth revenues by reportable segment for the three fiscal years ended May 31: 
(Amounts in millions)
 
 
2020
 
2019
 
2018
Children’s Book Publishing and Distribution
$
875.4

 
$
990.3

 
$
970.2

Education
 
287.3

 
 
297.4

 
 
288.6

International
 
324.4

 
 
366.2

 
 
369.6

Total
$
1,487.1

 
$
1,653.9

 
$
1,628.4

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

In connection with the following description of the Company's reportable segments, reference is also made to Item 1A, Risk Factors, for additional information concerning the impact of the COVID-19 pandemic on such reportable segments.
 
CHILDREN’S BOOK PUBLISHING AND DISTRIBUTION

(58.9% of fiscal 2020 revenues)
 
General

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

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

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

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

The Company distributes promotional materials containing order forms to classrooms in the vast majority of the pre-K to grade 8 schools in the United States. Classroom teachers who wish to participate in a school-based book club provide the promotional materials to their students, who may choose from curated selections at substantial reductions from list prices. The teacher aggregates the students’ orders and forwards them to the Company. Approximately 61% of kindergarten ("K") to grade 5 elementary school teachers in the United States who received promotional materials in fiscal 2020 participated in the Company’s school-based book clubs. In fiscal 2020, approximately 96% of total book club revenues were placed via the internet through the Company’s online ordering platform, which allows parents, as well as teachers, to order online, with approximately 48% of such revenues being placed by parents via the Company's online ordering platform. Products are typically shipped to the classroom for distribution to the students, however during the COVID-19 pandemic, the Company provided shipping directly to teachers' homes due to school closures. Teachers who participate in book clubs receive bonus points and other promotional incentives, which may be redeemed from the Company for additional books and other resource materials and items for their classrooms or the school.
 
School-Based Book Fairs
 
The Company entered the school-based book fairs channel in 1981 under the name Scholastic Book Fairs. The Company is the leading distributor of school-based book fairs in the United States serving schools in all 50 states. Book fairs provide children access to hundreds of popular, quality books and educational materials, increase student reading and help book fair organizers raise funds for the purchase of school library and classroom books, supplies and equipment. Book fairs have traditionally been weeklong events where children and families peruse and purchase their favorite books together. The Company typically delivers book fairs product from its warehouses to schools principally by a fleet of Company-owned and leased vehicles. However, as a result of COVID-19 school closings and the cancellation of physical book fairs held at schools, the Company is in the process of developing alternative methods for delivering fair products. Sales and customer service representatives, working from the Company’s regional offices, distribution facilities and national distribution facility in Missouri, along with local area field representatives, provide support to book fair organizers. Physical book fairs are conducted by school personnel, volunteers and parent-teacher organizations, from which the schools may receive either books, supplies and equipment or a portion of the proceeds from every book fair. In a typical year, prior to COVID-19, approximately 92% of the schools that conducted a book fair hosted a fair in the following year.
 
Trade
 
Scholastic is a leading publisher of children’s books sold through bookstores, on-line retailers and mass merchandisers primarily in the United States. Scholastic’s original publications include Harry Potter™, The Hunger Games®, The Bad Guys™, The Baby-Sitters Club® graphic novels, The Magic School Bus®, I Spy™, Captain Underpants®, Dog Man®, Wings of Fire™, Goosebumps® and Clifford The Big Red Dog®, and licensed properties such as Peppa Pig®, Five Nights at Freddy’s®, Pokemon® and Geronimo Stilton®. In addition, Klutz® and Make Believe Ideas™ publish and create “books plus” and novelty products for children, including titles such as Mini Grocery Store, Rocks, Gems & Geodes Maker Lab,
LEGO® Chain Reactions, Hope the Rainbow Fairy, and the titles related to the Never Touch series.
 
The Company’s trade organization focuses on publishing, marketing and selling books to bookstores, on-line retailers, mass merchandisers, specialty sales outlets and other book retailers, and also supplies books for the Company’s proprietary school channels. The Company maintains a talented and experienced creative staff that constantly seeks to attract, develop and retain the best children’s authors and illustrators. The Company believes that its trade

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publishing staff, combined with the Company’s reputation and proprietary school distribution channels, provides a significant competitive advantage, evidenced by numerous bestsellers over the past two decades. Bestsellers in the trade division during fiscal 2020 included Dav Pilkey's Dog Man series, Harry Potter and the Goblet of Fire: The Illustrated Edition, Raina Telgemeir’s Guts, the Wings of Fire series, the Hunger Games series, including the newest book, The Ballad of Songbirds and Snakes, by Suzanne Collins, and The Wonky Donkey and The Dinky Donkey titles.

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

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

(19.3% of fiscal 2020 revenues)
 
The Education segment includes the publication and distribution to schools and libraries of children’s books, other print and on-line reference, non-fiction and fiction focused products, classroom magazines and classroom materials for core and supplemental literacy instruction, as well as consulting services and related products supporting professional development for teachers and school and district administrators, including professional books, coaching, workshops and seminars which in combination cover grades pre-K to 12 in the United States. In response to COVID-19 school closings, the Company has introduced alternative temporary distribution methods including "take home packs" that are provided to schools and school districts, allowing families access to educational materials when arriving at local facilities to access meals as part of the National School Lunch Program and, in certain circumstances, were mailed to individual residences. In addition, the Company offered a "learning at home" service providing free learning activities and resources to students and their families, which has been turned into a paid subscription service as of July 1, 2020.

Scholastic Literacy
In the spring of 2019, the Company launched Scholastic Literacy, a comprehensive approach to core literacy for students in kindergarten to grade 6 that includes curriculum materials in both digital and print. Scholastic Literacy's instructional methodology leads to responsive teaching in three classroom configurations: (1) to students with teacher-led whole class instruction; (2) with children through teacher-facilitated small group differentiated instruction; and (3) by students through independent reading practice and mastery. The Company believes that the Scholastic Literacy core curriculum reading program contains a number of key differentiators, including the highest volume of authentic and culturally-relevant texts in the market and data to inform responsive, personalized instruction for students, that helped position this product for initial market penetration in fiscal 2020.
Supplemental
The Company is a leading provider of classroom libraries and paperback collections, including best-selling titles and leveled books for guided reading, to individual teachers and other educators and schools and school district customers. Additionally, the Company provides books to community-based organizations and other groups engaged in literacy initiatives through Scholastic Family and Community Engagement (FACE). Professional consulting services are also provided to support academic leadership with training on a multitude of topics, ranging from product implementation to engaging with families and communities. Scholastic helps schools build classroom collections of high quality, award-winning books for every grade, reading level and multicultural background. Scholastic serves customer needs with customized support for literacy instruction, by providing comprehensive literacy programs which include print and digital content, as well as providing assessment tools. These materials are designed to support instruction based teaching and learning, and are generally purchased by district and school leadership, both directly from the Company and through teacher stores and booksellers, including the Company's on-line teacher store (www.scholastic.com/teacherstore), which provides professional books and other educational materials to teachers and other educators.
Scholastic is also the leading publisher of classroom magazines. Teachers in grades pre-K to 12 use the Company’s 30 classroom magazines, including Scholastic News®, Scope®, Storyworks®, Let's Find Out® and Junior Scholastic®, to supplement formal learning programs by bringing subjects of current interest into the classroom, including current events, literature, math, science, social studies and foreign languages. These offerings provide schools with substantial

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non-fiction material, which is required to meet new higher educational standards. Each magazine has its own website with online digital resources that supplement the print materials, as well as providing access to the magazine in a digital format. A "digital only" subscription to the magazine is also being offered in response to COVID-19. Digital delivery is expected to be increasingly important due to COVID-19 uncertainties. Scholastic’s classroom magazine circulation in the United States in fiscal 2020 was approximately 14.4 million, with approximately 80% of the circulation in grades pre-K to 6. The majority of magazines purchased are paid for with school or district funds, with parents and teachers paying for the balance. Circulation revenue accounted for substantially all classroom magazine revenue in fiscal 2020. Also included in the segment is the Company's custom publishing business, which is being phased out, or in some cases, assigned to other business units for particular clients.
INTERNATIONAL

(21.8% of fiscal 2020 revenues)

General
 
The International segment includes the publication and distribution of products and services outside the United States by the Company’s international operations, and its export and foreign rights businesses.
 
Scholastic has operations in the Major Markets, which include Canada, the United Kingdom, Ireland, Australia, and New Zealand, as well as India, Singapore and other parts of Asia including Malaysia, Thailand, the Philippines, Indonesia, Hong Kong, Taiwan, Korea and Japan. The Company has branches in the United Arab Emirates and Colombia, a business in China that supports English language learning and, through its export business, sells products in approximately 165 countries. The Company’s international operations have original trade and educational publishing programs; distribute children’s books, digital educational resources and other materials through school-based book clubs, school-based book fairs and trade channels; and produce and distribute magazines and on-line subscription services. Many of the Company’s international operations also have their own export and foreign rights licensing programs and are book publishing licensees for major media properties. Original books published by many of these operations have received awards for excellence in children’s literature. In Asia, the Company also publishes and distributes products under the Grolier name for parents to provide English language learning for their children at home and engages in direct sales in shopping malls and door to door, as well as operating a franchise program for tutorial centers that provide English language training to students primarily in China.

Canada
 
Scholastic Canada, founded in 1957, is a leading publisher and distributor of English and French language children’s books in Canada. Scholastic Canada is the largest operator of school-based marketing channels in Canada and is one of the leading suppliers of original or licensed children’s books to the Canadian trade market. Since 1965, Scholastic Canada has also produced quality Canadian-authored books and educational materials, including an early reading program sold to schools for grades K to 6. In response to the COVID-19 school closures, the Canadian school-based businesses identified alternative methods to deliver products to students, which included shipping products directly to parents' homes.
 
United Kingdom
 
Scholastic UK, founded in 1964, is the largest operator of school-based marketing channels in the United Kingdom and is a publisher and one of the leading suppliers of original or licensed children’s books to the United Kingdom trade market. Scholastic UK also publishes supplemental educational materials, including professional books for teachers. The UK school-based business has responded to the COVID-19 pandemic by implementing increased digital marketing while operating a safe warehouse that has enabled deliveries directly to parents' homes for the book clubs channel.

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


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

Asia

The Company’s Asian operations include initiatives for educational publishing programs based out of Singapore, as well as the wholly-owned Grolier direct sales business, which has traditionally sold English language and early childhood learning materials through a network of independent sales representatives in India, Indonesia, Malaysia, the Philippines, and Thailand and engages in direct sales in shopping malls and door to door, business activities which were disrupted by the COVID-19 pandemic in an effort to curtail the spread of the virus. In addition, the Company operates school-based marketing channels throughout Asia; publishes original titles in English and Hindi languages in India, including specialized curriculum books for local schools; conducts reading improvement programs inside local schools in the Philippines; and operates a franchise program for English language tutorial centers in China in cooperation with local partners, which have been temporarily closed to limit the spread of the coronavirus.

Foreign Rights and Export
 
The Company licenses the rights to select Scholastic titles in 65 languages to other publishing companies around the world. The Company’s export business sells educational materials, digital educational resources and children’s books to schools, libraries, bookstores and other book distributors in approximately 150 countries that are not otherwise directly serviced by Scholastic subsidiaries. The Company also partners with governments and non-governmental agencies to create and distribute books to public schools in developing countries.

PRODUCTION AND DISTRIBUTION
 
The Company’s books, magazines and other materials are manufactured by the Company with the assistance of third parties under contracts entered into through arms-length negotiations and competitive bidding. As appropriate, the Company enters into multi-year agreements that guarantee specified volumes in exchange for favorable pricing terms. Paper is purchased directly from paper mills and other third-party sources. The Company does not anticipate any difficulty in continuing to satisfy its manufacturing and paper requirements. See also Item 1A, Risk Factors, for further discussion on potential risks associated with the COVID-19 pandemic.
 
In the United States, the Company mainly processes and fulfills orders for school-based book clubs, trade, reference and non-fiction products, educational products and export orders from its primary warehouse and distribution facility in Jefferson City, Missouri. In connection with its trade business, the Company may fulfill product orders directly from printers to customers. Magazine orders are processed at the Jefferson City facility and the magazines are shipped directly from printers.
 
School-based book fairs are fulfilled through a network of warehouses across the country, a significant number of which were closed in the fourth quarter of fiscal 2020 due to the absence of physical book fairs, as well as from the Company's Jefferson City warehouse and distribution facility. The Company’s international school-based book clubs, school-based book fairs, trade and educational operations use distribution systems similar to those employed in the United States.

The Company does not anticipate fulfillment issues, however see Item 1A, Risk Factors, for further discussion on potential risks associated with the COVID-19 pandemic.
 
CONTENT ACQUISITION
 
Access to intellectual property or content (“Content”) for the Company’s product offerings is critical to the success of the Company’s operations. The Company incurs significant costs for the acquisition and development of Content for its product offerings. These costs are often deferred and recognized as the Company generates revenues derived from the benefits of these costs. These costs include the following:
 
Prepublication costs - Prepublication costs are incurred in all of the Company’s reportable segments. Prepublication costs include costs incurred to create and develop the art, prepress,

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editorial, digital conversion and other content required for the creation of the master copy of a book or other media.

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

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

SEASONALITY
 
The Company’s Children’s Book Publishing and Distribution school-based book club and book fair channels and most of its Education businesses operate on a school-year basis; therefore, the Company’s business is highly seasonal. As a result, the Company’s revenues in the first and third quarters of the fiscal year generally are lower than its revenues in the other two fiscal quarters. Typically, school-based channels and magazine revenues are minimal in the first quarter of the fiscal year as schools are not in session. Trade sales can vary throughout the year due to varying release dates of published titles. The Company generally experiences a loss from operations in the first and third quarters of each fiscal year. The COVID-19 pandemic began to significantly impact the Company in the fourth fiscal quarter and is expected to continue to negatively impact the Company at least through the first quarter of fiscal 2021, ending August 31, 2020, which is traditionally a loss quarter. Presently, there are many uncertainties concerning the timing of, and any patterns which may emerge from, school reopenings for the new school year, and the nature and continuing magnitude of the negative impact of COVID-19 into and beyond the second quarter of fiscal 2021 will depend on the actual timing and emerging patterns of such reopenings throughout the United States. Reference is also made to Item 1A, Risk Factors, for further discussion on potential risks associated with the COVID-19 pandemic.


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COMPETITION 

The markets for children’s books, educational products and entertainment materials are highly competitive. Competition is based on the quality and range of materials made available, price, promotion and customer service, as well as the nature of the distribution channels. Competitors include numerous other book, ebook, textbook, library, reference material and supplementary publishers, distributors and other resellers (including over the internet) of children’s books and other educational materials, national publishers of classroom and professional magazines with substantial circulation, and distributors of products and services on the internet. In the United States, competitors include regional and local school-based book fair operators and other fund raising activities in schools and bookstores, as well as one other competitor operating on a national level. Competition may increase to the extent that other entities enter the market and to the extent that current competitors or new competitors develop and introduce new materials that compete directly with the products distributed by the Company or develop or expand competitive sales channels. The Company believes that its position as both a publisher and distributor are unique to certain of the markets in which it competes, principally in the context of its children’s book business.
 
COPYRIGHT AND TRADEMARKS
 
As an international publisher and distributor of books, Scholastic aggressively utilizes the intellectual property protections of the United States and other countries in order to maintain its exclusive rights to identify and distribute many of its products. Accordingly, SCHOLASTIC is a trademark registered in the United States and in a number of countries where the Company conducts business or otherwise distributes its products. The Corporation’s principal operating subsidiary in the United States, Scholastic Inc., and the Corporation’s international subsidiaries, through Scholastic Inc., have registered and/or have pending applications to register in relevant territories trademarks for important services and programs. All of the Company’s publications, including books and magazines, are subject to copyright protection both in the United States and internationally. The Company also obtains domain name protection for its internet domains. The Company seeks to obtain the broadest possible intellectual property rights for its products, and because inadequate legal and technological protections for intellectual property and proprietary rights could adversely affect operating results, the Company vigorously defends those rights against infringement.

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

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Name
Age
Employed by
Registrant Since
Previous Position(s) Held
Richard Robinson
83
1962
Chairman of the Board (since 1982), President (since 1974) and Chief Executive Officer (since 1975).
Kenneth J. Cleary
55
2008
Chief Financial Officer (since 2017); Senior Vice President, Chief Accounting Officer (2014-2017); Vice President, External Reporting and Compliance (2008-2014).
Iole Lucchese
53
1991
Executive Vice President (since 2016), Chief Strategy Officer (since 2014), President, Scholastic Entertainment (since 2018),
President, Scholastic Canada (2016).
Satbir Bedi
56
2012
Executive Vice President and Chief Technology Officer (since 2018); Senior Vice President and Chief Technology Officer (2012-2018).
Judith A. Newman
62
1993
Executive Vice President and President, Scholastic Book Clubs (since 2014), Book Clubs and eCommerce (2011-2014), Book Clubs (2005-2011); Senior Vice President and President, Book Clubs and Scholastic At Home (2004-2005); Senior Vice President, Book Clubs (1997-2004).
Sasha Quinton
42
2020
Executive Vice President and President, Scholastic Book Fairs (2020); Vice President & GMM, Bookstore, Barnes and Noble, Inc. (2019); Senior Vice President, Marketing and Procurement, ReaderLink Distribution Services (2017-2019); Vice President, Marketing and Procurement, ReaderLink Distribution Services (2014-2017).


Andrew S. Hedden
79
2008
Executive Vice President, General Counsel and Secretary (since 2008) and member of the Board of Directors (since 1991).

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AVAILABLE INFORMATION
 
The Corporation’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports are accessible at the Investor Relations portion of its website (scholastic.com) and are available, without charge, as soon as reasonably practicable after such reports are electronically filed or furnished to the Securities and Exchange Commission (“SEC”). The Company also posts the dates of its upcoming scheduled financial press releases, telephonic investor calls and investor presentations on the “Events and Presentations” portion of its website at least five days prior to the event. The Company’s investor calls are open to the public and remain available through the Company’s website for at least 45 days thereafter.
 
The public may also read and copy materials that the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information, as well as copies of the Company’s filings, from the Office of Investor Education and Advocacy by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site, at www.sec.gov, that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

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Item 1A | Risk Factors
 
Set forth below and elsewhere in this Annual Report on Form 10-K and in other documents that the Corporation files with the SEC are risks that should be considered in evaluating the Corporation’s common stock, as well as risks and uncertainties that could cause the actual future results of the Company to differ from those expressed or implied in the forward-looking statements contained in this Report and in other public statements the Company makes. Additionally, because of the following risks and uncertainties, as well as other variables affecting the Company’s operating results, the Company’s past financial performance should not be considered an indicator of future performance, particularly in the context of the current 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 following any easing of current restrictions 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. If schools continue to be closed or if in-person group activities in schools are prohibited or limited at those schools that remain open, the book fair 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 current 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.

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, during the current phase of the response to COVID-19, with the majority of schools completely closed, the Company has been affected by school administrators and other personnel who order educational products not being present in the schools and in a position to order products. 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, remain closed or subject to limits on customers, the Company’s trade sales business may also be adversely affected by lower foot traffic at these establishments, although this impact may continue to be mitigated by widespread access to online ordering platforms. The Trade business may also be affected to the extent independent bookstores which have been closed due to governmental actions taken to curtail the spread of the virus find themselves financially unable to reopen, as conditions permit, resulting in a further decline in the number of independent bookstores.

International: The Company’s International segment is also subject to the same continuing risks from steps taken to limit the spread of the virus, which had resulted in the temporary closing of the Company’s franchised English language learning centers in China, and continues to cause disruption in the Company’s direct sales business in other parts of Southeast Asia, as well as adversely affecting the Company’s book fairs and book clubs businesses in certain of its Major Markets, particularly Canada and the UK.

Facility Closures; Business Suppliers: In addition to the impact on the Company’s ability to market and sell its products, measures taken by governmental authorities and private actors to limit the spread of the virus may interfere with the ability of employees, suppliers, and other business providers to carry out their assigned tasks or supply materials at ordinary levels of performance relative to the conduct of the Company’s business, which may make it necessary for the Company to limit certain of its business operations. Many of the Company’s employees in the United States and

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around the globe are working remotely, as multiple business locations, including the Company’s headquarters office in New York City, remain 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.

If we cannot anticipate technology trends and develop new products or adapt to new technologies responding to changing customer preferences, this could adversely affect our revenues or profitability.
 
The Company operates in highly competitive markets that are subject to rapid change, including, in particular, changes in customer preferences and changes and advances in relevant technologies. There are substantial uncertainties associated with the Company’s efforts to develop successful trade publishing, educational, and media products and services, including digital products and services, for its customers, as well as to adapt its print and other materials to new digital technologies, including the internet cloud technologies, tablets, mobile and other devices and school-based technologies. The Company makes significant investments in new products and services that may not be profitable, or whose profitability may be significantly lower than the Company anticipates or has experienced historically. In particular, in the context of the Company’s current focus on key digital opportunities, the markets are continuing to develop and the Company may be unsuccessful in establishing itself as a significant factor in any market which does develop. Many aspects of markets which could develop for children and schools, such as the nature of the relevant software and devices or hardware, the size of the market, relevant methods of delivery and relevant content, as well as pricing models, are still evolving and will, most likely, be subject to change on a recurring basis until a pattern develops and becomes more defined. In addition, the Company faces market risks associated with systems development and service delivery in its evolving school ordering and ecommerce businesses as well as responding to changes in how schools plan to utilize technology for virtual or remote learning as a result of the COVID-19 pandemic, and the associated impact on the demand for printed materials in schools.
 
Our financial results would suffer if we fail to successfully differentiate our offerings and meet market needs in school-based book clubs and book fairs, two of our core businesses.
 
The Company’s school-based book clubs and book fairs businesses produce a substantial amount of the Company’s revenues. The Company is subject to the risks that it will not successfully continue to develop and execute new promotional strategies for its school-based book clubs or book fairs in response to future customer trends or technological changes or that it will not otherwise meet market needs in these businesses in a timely or cost-effective fashion. For example, the COVID-19 pandemic has resulted in school closures around the globe and created the need for virtual learning. The book clubs business relies on attracting and retaining new sponsor-teachers to promote its products. With teachers not being physically present in a classroom or at a school, their ability to encourage book club participation could be significantly impacted. If the Company cannot attract new millennial and younger teachers and meet the changing preferences and demands of these teachers, its revenues and cash flows could be negatively impacted. The book fairs business relies on large in-person gatherings at a school. If these kinds of in-person

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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.
 
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.

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

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

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

The Company’s distribution channels include online retailers and ecommerce sites, digital delivery platforms and expanding social media and other marketing platforms. An increased concentration of retailer power has also resulted in the increased importance of mass merchandisers and of publishing best sellers to meet consumer demand. Currently, the Company’s top five trade customers make up approximately 81% of the Company’s trade business and

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17% of the Company’s total revenues, with one customer accounting for 36% of the trade business and 8% of total revenues. Adverse changes in the mix of the major customers of the trade business, including the type of customer, which may also be engaged in a competitive business, or in their purchasing patterns or financial condition or the nature of their distribution arrangements with the trade business, could negatively affect the profitability of the Company’s trade business and the Company’s financial performance.

Our reputation is one of our most important assets, and any adverse publicity or adverse events, such as a significant data privacy breach or violation of privacy laws or regulations, could cause significant reputational damage and financial loss.
 
The businesses of the Company focus on children’s reading, learning and education, and its key relationships are with educators, teachers, parents and children. In particular, the Company believes that, in selecting its products, teachers, educators and parents rely on the Company’s reputation for quality books and educational materials and programs appropriate for children. Negative publicity, either through traditional media or through social media, could tarnish this relationship.

Also, in certain of its businesses the Company holds or has access to personal data, including that of customers 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.

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.

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 Chief Executive Officer, senior executives and other editorial staff members, have substantial experience in the publishing and education markets. In addition, the Company is in the process of implementing a strategic information technology transformation process, requiring diverse levels of relevant expertise and experience. 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.
 
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

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

The Company relies on a variety of information technology platforms to execute its operations, including human resources, payroll, finance, order-to-cash, procurement, vendor payment, inventory management, distribution and content management systems and its internal operating systems. Many of these systems are integrated via internally developed interfaces and modifications. Failure of one or more systems could lead to operating inefficiencies or disruptions and a resulting decline in revenue or profitability. As the Company continues the implementation of its new enterprise-wide customer and content management systems and the migration to software as a service ("SaaS") and cloud-based technology solutions, in its initiatives to integrate its separate legacy platforms into a cohesive enterprise-wide system, there can be no assurance that it will be successful in its efforts or that the implementation of the remaining stages of these initiatives in the Company's global operations will not involve disruptions in its systems or processes having a short term adverse impact on its operations and ability to service its customers.
 
Increases in certain operating costs and expenses, which are beyond our control and can significantly affect our profitability, could adversely affect our operating performance.
 
The Company’s major expense categories include employee compensation and printing, paper and distribution (such as postage, shipping and fuel) costs. Compensation costs are influenced by general economic factors, including those affecting costs of health insurance, postretirement benefits and any trends specific to the employee skill sets that the Company requires. Current shortages for warehouse labor, driver labor and other required skills may cause the Company's costs to increase. 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.

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

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

The inability to obtain and publish best-selling new titles could cause our future results to decline in comparison to historical results.
 
The Company invests in authors and illustrators for its Trade publication business, and has a history of publishing hit titles. 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

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decreased use of traditional publishing services. The effects of any of the foregoing factors could have an adverse impact on the Company's business, financial condition or results of operation.

The loss of or failure to obtain rights to intellectual property material to our businesses would adversely affect our financial results.

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

Because we procure products and sell our products and services in foreign countries, changes in currency exchange rates, as well as other risks and uncertainties, could adversely affect our operations and financial results.
 
The Company has various operating subsidiaries domiciled in foreign countries. In addition, the Company sells products and services to customers located in foreign countries where it does not have operating subsidiaries, and a significant portion of the Company’s revenues are generated from outside of the United States. The Company’s business processes, including distribution, sales, sourcing of content, marketing and advertising, are, accordingly, subject to multiple national, regional and local laws, regulations and policies. The Company could be adversely affected by noncompliance with foreign laws, regulations and policies, including those pertaining to foreign rights and exportation. The Company is also exposed to fluctuations in foreign currency exchange rates and to business disruption caused by political, financial or economic instability or the occurrence of natural disasters in foreign countries. In addition, the Company and its foreign operations could be adversely impacted by a downturn in general economic conditions on a more global basis caused by general political instability or unrest or changes in economic affiliations. For example, the United Kingdom’s exit from the European Union, could affect the Company's sales in the UK, as the current uncertain state of negotiations between the EU and the UK regarding the terms of the exit could negatively impact the economies of the UK and other nations. Changes in international trade relations with foreign countries, such as increased tariffs and duties (including those recently imposed by the United States) could cause the Company's costs to rise, or our overseas revenues to decline. In addition, supply chain disruptions in Asia related to COVID-19 could cause increased costs for the Company.

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

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

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

Certain of our activities are subject to weather and natural disaster risks, which could disrupt our operations or otherwise adversely affect our financial performance.
 
The Company conducts certain of its businesses and maintains warehouse and office facilities in locations that are at risk of being negatively affected by severe weather and natural disaster events, such as hurricanes, tornadoes, floods, snowstorms or earthquakes. Notably, much of the Company’s domestic distribution facilities are located in central

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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.
 
Control of the Company resides in our Chairman of the Board, President and Chief Executive Officer and other members of his family through their ownership of Class A Stock, and the holders of the Common Stock generally have no voting rights with respect to transactions requiring stockholder approval.
 
The voting power of the Corporation’s capital stock is vested exclusively in the holders of Class A Stock, except for the right of the holders of Common Stock to elect one-fifth of the Board of Directors and except as otherwise provided by law or as may be established in favor of any series of preferred stock that may be issued. Richard Robinson, the Chairman of the Board, President and Chief Executive Officer, and other members of the Robinson family beneficially own all of the outstanding shares of Class A Stock and are able to elect up to four-fifths of the Corporation’s Board of Directors and, without the approval of the Corporation’s other stockholders, to effect or block other actions or transactions requiring stockholder approval, such as a merger, sale of substantially all assets or similar transaction.
 
We own certain significant real estate assets which are subject to various risks related to conditions affecting the real estate market.

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

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, are subject to risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to factors including those noted in this Annual Report and other risks and factors identified from time to time in the Company’s filings with the SEC. The Company disclaims any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.


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Item 1B | Unresolved Staff Comments
 
None.
 
Item 2 | Properties
The Company maintains its principal offices in the metropolitan New York area, where it owns or leases approximately 0.4 million square feet of space. 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.
The Company also owns or leases approximately 1.5 million square feet of office and warehouse space for its primary warehouse and distribution facility located in the Jefferson City, Missouri area. In addition, the Company owns or leases approximately 3.0 million square feet of office and warehouse space across approximately 60 facilities in the United States, principally for Scholastic book fairs. The Company owns or leases approximately 1.4 million square feet of office and warehouse space in approximately 130 facilities in Canada, the United Kingdom, Australia, New Zealand, Asia and elsewhere around the world for its international businesses.

The Company committed to a plan to sell the company-owned facility located in Danbury, Connecticut and relocate the warehousing and distribution operations conducted at the Danbury facility to a leased warehouse in Allentown, Pennsylvania. This facility was subsequently sold on June 5, 2020. The Company also committed to a plan to sell two UK distribution centers and consolidate the operations into a new facility currently under construction. The Company expects the sale of these facilities to be completed within one year.
The Company considers its properties adequate for its current needs. With respect to the Company’s leased properties, no difficulties are anticipated in negotiating renewals as leases expire or in finding other satisfactory space, if current premises become unavailable. For further information concerning the Company’s obligations under its leases, see Notes 1 and 9 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data.”
 
Item 3 | Legal Proceedings
 
Various claims and lawsuits arising in the normal course of business are pending against the Company. The Company accrues a liability for such matters when it is probable that a liability has occurred and the amount of such liability can be reasonably estimated.  When only a range can be estimated, the most probable amount in the range is accrued unless no amount within the range is a better estimate than any other amount, in which case the minimum amount in the range is accrued. Legal costs associated with litigation loss contingencies are expensed in the period in which they are incurred. The Company does not expect, in the case of those claims and lawsuits where a loss is considered probable or reasonably possible, after taking into account any amounts currently accrued, that the reasonably possible losses from such claims and lawsuits would have a material adverse effect on the Company’s consolidated financial position or results of operations. See Note 6, "Commitments and Contingencies," of Notes to the Consolidated Financial Statements in Item 8, "Consolidated Financial Statements and Supplementary Data" for further discussion.

Item 4 | Mine Safety Disclosures
 
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 16, 2020 were 3 and approximately 9,400, 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 22, 2020, 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 2021. The dividend is payable on September 15, 2020 to shareholders of record on August 31, 2020. All dividends have been in compliance with the Company’s debt covenants.
 
Share purchases: During fiscal 2020, the Company repurchased 1,036,658 Common shares on the open market at an average price paid per share of $34.23 for a total cost of approximately $35.5 million, pursuant to a share buy-back program authorized by the Board of Directors. During fiscal 2019, pursuant to the same share buy-back program, the Company repurchased 216,612 Common shares on the open market at an average price paid per share of $39.42 for a total cost of approximately $8.5 million.

The following table provides information with respect to repurchases of shares of Common Stock by the Corporation during the three months ended May 31, 2020:
Period
 
Total number of
shares purchased
 
 
Average
price paid
per share
 
Total number of shares purchased as part of publicly
announced plans or programs
 
Maximum number of shares (or approximate dollar value in millions) that may yet be purchased under the plans or programs (i)
March 1, 2020 through March 31, 2020
 
93,248

 
$
30.16

 
93,248

 
$
67.3

April 1, 2020 through April 30, 2020
 

 
 

 

 
 
67.3

May 1, 2020 through May 31, 2020
 

 
 

 

 
 
67.3

Total
 
93,248

 
 

 
93,248

 
$
67.3


(i) Total represents the amount remaining under the Board authorization for Common share repurchases on March 21, 2018 and the current $50.0 million 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.



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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, 2015 to May 31, 2020.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Scholastic Corporation, the NASDAQ Composite Index
and a Peer Group
chart-8c68701ffc3f55cab3f.jpg
*$100 invested on 5/31/15 in stock or index, including reinvestment of dividends

 
Fiscal year ending May 31,
 
2015
2016
2017
2018
2019
2020
Scholastic Corporation
$
100.00

$
89.15

$
98.49

$
105.78

$
78.93

$
71.39

NASDAQ Composite Index
100.00

97.59

122.26

146.79

147.00

187.18

Peer Group
100.00

70.27

58.40

76.63

67.16

41.14

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

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Item 6 | Selected Financial Data
 
(Amounts in millions, except per share data)
For fiscal years ended May 31,
 
 
2020
 
2019
 
2018
 
2017
 
2016
Statement of Operations Data:
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
1,487.1

 
$
1,653.9

 
$
1,628.4

 
$
1,741.6

 
$
1,672.8

Cost of goods sold (1)
 
751.0

 
 
779.9

 
 
744.6

 
 
814.5

 
 
762.3

Selling, general and administrative expenses(2)
 
705.3

 
 
781.4

 
 
765.7

 
 
777.5

 
 
773.6

Depreciation and amortization
 
61.5

 
 
56.1

 
 
41.4

 
 
38.7

 
 
38.9

Severance (3)
 
17.2

 
 
10.6

 
 
9.9

 
 
14.9

 
 
11.9

Asset impairments and write downs (4)
 
40.6

 
 
0.9

 
 
11.2

 
 
6.8

 
 
14.4

Operating income (loss)
 
(88.5
)
 
 
25.0

 
 
55.6

 
 
89.2

 
 
71.7

Interest (income) expense, net
 
(0.1
)
 
 
(3.4
)
 
 
(1.1
)
 
 
1.0

 
 
1.1

Other components of net periodic benefit (cost) (5)
 
(1.3
)
 
 
(1.4
)
 
 
(58.2
)
 
 
(0.3
)
 
 
(4.1
)
Gain (loss) on investments and other (6)
 

 
 
(1.0
)
 
 
0.0

 
 

 
 
2.2

Earnings (loss) from continuing operations before income taxes
 
(89.7
)
 

26.0

 

(1.5
)
 

87.9

 

68.7

Provision (benefit) for income taxes (7)
 
(46.0
)
 
 
10.4

 
 
3.5

 
 
35.4

 
 
24.7

Earnings (loss) from continuing operations
 
(43.7
)
 
 
15.6

 
 
(5.0
)
 
 
52.5

 
 
44.0

Earnings (loss) from discontinued operations, net of tax
 

 
 

 
 

 
 
(0.2
)
 
 
(3.5
)
Net income (loss)
$
(43.7
)
 
$
15.6

 
$
(5.0
)
 
$
52.3

 
$
40.5

Less: Net income (loss) attributable to noncontrolling interest
 
0.1

 
 
0.0

 
 

 
 

 
 

Net income (loss) attributable to Scholastic Corporation
$
(43.8
)
 
$
15.6

 
$
(5.0
)
 
$
52.3

 
$
40.5

Share Information:
 
 

 
 
 

 
 
 

 
 
 

 
 
 

Basic:
 
 

 
 
 

 
 
 

 
 
 

 
 
 

Earnings (loss) from continuing operations
$
(1.27
)
 
$
0.44

 
$
(0.14
)
 
$
1.51

 
$
1.29

Earnings (loss) from discontinued operations
$

 
$

 
$

 
$
(0.00
)
 
$
(0.11
)
Net Income (loss) attributable to Scholastic Corporation
$
(1.27
)
 
$
0.44

 
$
(0.14
)
 
$
1.51

 
$
1.18

Diluted:
 
 
 
 
 

 
 
 

 
 
 

 
 
 
Earnings (loss) from continuing operations
$
(1.27
)
 
$
0.43

 
$
(0.14
)
 
$
1.48

 
$
1.26

Earnings (loss) from discontinued operations
$

 
$

 
$

 
$
(0.01
)
 
$
(0.10
)
Net Income (loss) attributable to Scholastic Corporation
$
(1.27
)
 
$
0.43

 
$
(0.14
)
 
$
1.47

 
$
1.16

Weighted average shares outstanding - basic
 
34.6

 
 
35.2

 
 
35.0

 
 
34.7

 
 
34.1

Weighted average shares outstanding - diluted
 
34.6

 
 
35.8

 
 
35.0

 
 
35.4

 
 
34.9

Dividends declared per common share
$
0.60

 
$
0.60

 
$
0.60

 
$
0.60

 
$
0.60

Balance Sheet Data:
 
 

 
 
 

 
 
 

 
 
 

 
 
 

Working Capital
$
533.8

 
$
419.1

 
$
512.5

 
$
583.4

 
$
571.8

Cash and cash equivalents
 
393.8

 
 
334.1

 
 
391.9

 
 
444.1

 
 
399.7

Total assets
 
2,033.6

 
 
1,878.5

 
 
1,825.4

 
 
1,760.4

 
 
1,713.1

Long-term debt (excluding capital leases)
 
210.6

 
 

 
 

 
 

 
 

Total debt
 
218.5

 
 
7.3

 
 
7.9

 
 
6.2

 
 
6.3

Long-term capital lease obligations
 
9.5

 
 
8.4

 
 
6.2

 
 
6.5

 
 
7.5

Total capital lease obligations
 
11.6

 
 
10.1

 
 
7.4

 
 
7.6

 
 
8.6

Total stockholders’ equity
$
1,180.6

 
$
1,272.8

 
$
1,320.8

 
$
1,307.9

 
$
1,257.6


(1) In fiscal 2018, the Company recognized pretax costs related to branch warehouse consolidation in Canada of $0.1. In 2017, the Company recognized pretax exit costs related to its software distribution business in Australia of $0.5.

(2) 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. In fiscal 2019, the Company recognized pretax charges related to a settlement of a legacy sales tax assessment of $8.1 and pretax costs associated with branch consolidation charges of $0.5. In fiscal 2018, the Company recognized pretax share-based compensation charges of $0.7 due to the accelerated vesting of certain awards. In fiscal 2016, the Company recognized a pretax charge of $1.5 related to a branch consolidation project in the Company's book fairs operations.

(3) In fiscal years 2020, 2019, 2018, 2017 and 2016, the Company recognized pretax severance expense primarily related to cost reduction and restructuring programs of $13.1, $6.5, $7.4, $12.9 and $9.5, respectively.

(4) 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 school channels and a pretax impairment charge of $0.6 related to an outdated technology platform in Canada. In fiscal 2019, the Company recognized a pretax impairment charge of $0.9 related to legacy building improvements. In fiscal 2018, the Company recognized a pretax impairment charge of $11.0 related to legacy building improvements and a pretax impairment charge of $0.2 related to book fairs trucks. In fiscal 2017, the Company recognized a pretax impairment charge related to certain website development assets of $5.7 and certain legacy prepublication assets of $1.1. In fiscal 2016, the Company recognized a pretax impairment charge of $7.5 related to legacy building improvements in connection with the Company's headquarters renovation and a pretax charge of $6.9 for certain legacy prepublication assets.


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20



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

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

(7) In fiscal 2020, the Company recognized a benefit for income taxes in respect to one-time pretax charges of $15.3. In fiscal 2019, the Company recognized a benefit for income taxes in respect to one-time pretax charges of $4.2 and income tax provision of $4.7 primarily related to the Company's state deferred tax balances. In fiscal 2018, the Company recognized a benefit for income taxes on certain pretax charges of $26.5, partly offset by $5.7 of income tax provision related to the remeasurement of the Company's U.S. deferred tax balance in connection with the passage of the Tax Cuts and Jobs Act of 2017. In fiscal 2017, the Company recognized a benefit for income taxes on certain pretax charges of $7.8. In fiscal 2016, the Company recognized a benefit for income taxes on certain pretax charges of $10.3.


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 2020 were $1.49 billion, a decrease of 10.1% from $1.65 billion in fiscal 2019, reflecting lower sales in the Company's Children's Book Publishing and Distribution segment of $114.9 million, decreased revenues in the Education segment of $10.1 million, and lower local currency revenues in the International segment of $33.9 million, coupled with an unfavorable impact of foreign exchange of $7.9 million. Loss per diluted share was $1.27 for the fiscal year ended May 31, 2020, compared to Earnings per diluted share of $0.43 in the prior fiscal year.

The COVID-19 pandemic had a significant adverse impact on the results of operations and cash flows in fiscal 2020. Global school closings during the fourth fiscal quarter adversely impacted the Company’s school-based channels as well as the education business as school administrators, teachers and specialists were working remotely during this period. In the Children's Book Publishing and Distribution segment, the book fairs channel was particularly impacted as school closings led to the cancellation of virtually all of the book fairs in the fourth quarter. In the book club channel, school closings led to a significant decrease in the participation by teacher sponsors in scheduled book clubs offerings. In the Education segment, the last quarter of the fiscal year is normally a significant quarter as school administrators and other educational personnel, prior to breaking for the summer, receive product in preparation for the following academic school year. These orders were significantly impacted by the absence from the schools of such administrators and other educational personnel resulting from school closings. The International segment school-based channels were also significantly impacted by the COVID-19 mandated school closings as well as the temporary closing of English language learning centers in China and the disruption in the direct sales business in Asia resulting from measures imposed to curtail the spread of COVID-19. Partially offsetting the declines, the Company's trade channel, in both domestic and international markets, ended the fiscal year with higher sales driven by frontlist titles including The Ballad of Songbirds and Snakes, the fourth title in The Hunger Games series by Suzanne Collins. When compared to the prior fiscal year, domestic trade channel sales increased $56.5 million even as industry-wide bookstore sales declined as a result of brick-and-mortar store closures in the fourth quarter.

Operating loss in fiscal 2020 was $88.5 million compared to Operating income in the prior fiscal year of $25.0 million, an increase in Operating loss of $113.5 million. The increase in the Operating loss was directly attributable to the pandemic-related drop in sales, as well as other, mostly non-cash, consequences of the COVID-19 economic slowdown, including higher inventory obsolescence reserves, customer bad debt, return reserves, unearned author advances and vacation accruals. In addition, the Company had a non-cash inventory write-down of $40.0 million in the third fiscal quarter as a result of a change in procurement and retention practices, and experienced higher one-time severance of $6.6 million in fiscal 2020 when compared to the prior fiscal year in connection with both its on-going restructuring projects, as well as staffing decisions made to mitigate the pandemic's impact on the Company’s profitability. This was partially offset by cost-saving initiatives, including the closing of distribution centers in highly impacted regions, scaling the operations to meet near-term business needs, reductions to labor-related costs and inventory purchases, and suspension of the stock buy-back program.

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Outlook
There is still significant uncertainty surrounding COVID-19’s near-term and long-term effects on schools and retailers at this time. Measures are still being taken to curtail the spread of the virus, including mandated school closings, resulting in uncertain timing and manner of subsequent school openings, as well as remaining capacity restrictions on “non-essential” businesses which continue to impact most brick-and-mortar booksellers. The Company is planning for a slower than normal start to the 2020-21 school year, with expectations for most schools to be open, but with a variety of in-person, distance learning and hybrid options. As schools re-open, the Company expects demand for children’s books delivered through book clubs and book fairs to schools and direct-to-home. The Company also expects demand for digital education programs, including classroom magazines, as schools look for digital learning tools to bridge the gap between home and school. The trade channel is expected to benefit from new titles such as Dog Man: Grime and Punishment, Cat Kid Comic Club™, a new series by Dav Pilkey, and The Ickabog® by J.K. Rowling, as well as new titles from other best-selling authors including Tui T. Sutherland, Alan Gratz, Kelly Yang and Varian Johnson. Given the uncertainties around the duration and magnitude of the current COVID-19 economic slowdown, as well as the pattern of school openings, the Company has implemented cost savings initiatives, including labor-related reductions, as well as process improvements to provide the Company with increased flexibility to achieve higher operating leverage and adjust its cost structure to align with changes in volume.

Critical Accounting Policies and Estimates
 
General:
 
The Company’s discussion and analysis of its financial condition and results of operations is based upon its Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements involves the use of estimates and assumptions by management, which affects the amounts reported in the Consolidated Financial Statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, future expectations and various other assumptions believed to be reasonable under the circumstances, all of which are necessary in order to form a basis for determining the carrying values of assets and liabilities. Actual results may differ from those estimates and assumptions. On an on-going basis, the Company evaluates the adequacy of its reserves and the estimates used in calculations, including, but not limited to: collectability of accounts receivable; variable consideration related to anticipated returns; allocation of transaction price to contractual performance obligations; amortization periods; stock-based compensation expense; pension and other postretirement obligations; tax rates; recoverability of inventories; deferred income taxes and tax reserves; the timing and amount of future income taxes and related deductions; fixed assets; prepublication costs; royalty advance reserves; customer reward programs; and the impairment assessment of goodwill and other intangibles. For a complete description of the Company’s significant accounting policies, see Note 1 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data.” The following policies and account descriptions include all those identified by the Company as critical to its business operations and the understanding of its results of operations:
 
Revenue Recognition:
 
The Company’s revenue recognition policies for its principal businesses are as follows:
 
School-Based Book Clubs – Revenue from school-based book clubs is recognized upon shipment of the products.
 
School-Based Book Fairs – Revenues associated with school-based book fairs relate to the sale of children's books and other products to book fair sponsors. In addition, the Company employs an incentive program to encourage the sponsorship of book fairs and increase the number of fairs held each school year. The Company identifies two potential performance obligations within its school-based book fair contracts, which include the fulfillment of book fairs product and the fulfillment of product upon the redemption of incentive program credits by customers. The Company allocates the transaction price to each performance obligation and recognizes revenue at a point in time. The Company utilizes certain estimates based on historical experience, redemption patterns and future expectations related to the participation in the incentive program to determine the relative fair value of each performance obligation when allocating the transaction price. Changes in these estimates could impact the timing of the recognition of revenue. Revenue allocated to the book 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.

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22




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.
 
Film Production and Licensing – Revenue from the sale of film rights, principally for the home video and domestic and foreign television markets, is recognized when the film has been delivered and is available for showing or exploitation. Licensing revenue is recognized in accordance with royalty agreements at the time the licensed materials are available to the licensee and collections are reasonably assured.
 
Magazines – Revenue is deferred and recognized ratably over the subscription period, as the magazines are delivered.
 
Magazine Custom Publishing – Revenue is recognized when the Company has satisfied its obligations under the program and the customer has acknowledged acceptance of the product or service. Certain revenues may be deferred pending future deliverables.

Direct Sales – 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 allowances for doubtful accounts. In the normal course of business, the Company extends credit to customers that satisfy predefined credit criteria. The Company is required to estimate the collectability of its receivables. Reserves for estimated bad debts are established at the time of sale and are based on an evaluation of accounts receivable aging and, where applicable, specific reserves on a customer-by-customer basis, creditworthiness of the Company’s customers and prior collection experience to estimate the ultimate collectability of these receivables. At the time the Company determines that a receivable balance, or any portion thereof, is deemed to be permanently uncollectible, the balance is then written off. A one percentage point change in the estimated bad debt reserve rates, which are applied to the accounts receivable aging, would have resulted in an increase or decrease in operating income for the year ended May 31, 2020 of approximately $2.5 million.
 
Estimated returns:

For sales that include a right of return, the Company will estimate the transaction price and record revenues as variable consideration based on the amounts the Company expects to ultimately be entitled. In order to determine estimated returns, the Company utilizes historical return rates, sales patterns, types of products and expectations and recognizes a corresponding reduction to Revenues and Cost of goods sold. Management also considers patterns of sales and returns in the months preceding the fiscal year, as well as actual returns received subsequent to the fiscal year, available customer and market specific data and other return rate information that management believes is relevant. In addition, a refund liability is recorded within Other accrued expenses for the consideration to which the Company believes it will not ultimately be entitled and a return asset is recorded within Prepaid expenses and other current assets for the expected inventory to be returned. Actual returns could differ from the Company's estimate. A one percentage point change in the estimated reserve for returns rate would have resulted in an increase or decrease in operating income for the year ended May 31, 2020 of approximately $2.4 million.


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23



Inventories:
 
Inventories, consisting principally of books, are stated at the lower of cost, using the first-in, first-out method, or net realizable value. The Company records a reserve for excess and obsolete inventory based upon a calculation using the historical usage by channel, expected future sales of existing inventory and specifically identified obsolete inventory. The impact of a one percentage point change in the obsolescence reserve rate would have resulted in an increase or decrease in operating income for the year ended May 31, 2020 of approximately $3.7 million.
 
Royalty advances:
 
Royalty advances are initially capitalized and subsequently expensed as related revenues are earned or when the Company determines future recovery through earndowns is not probable. The Company has a long history of providing authors with royalty advances, and it tracks each advance earned with respect to the sale of the related publication. Historically, the longer the unearned portion of the advance remains outstanding, the less likely it is that the Company will recover the advance through the sale of the publication, as the related royalties earned are applied first against the remaining unearned portion of the advance. The Company applies this historical experience to its existing outstanding royalty advances to estimate the likelihood of recovery. Additionally, the Company’s editorial staff regularly reviews its portfolio of royalty advances to determine if individual royalty advances are not recoverable through earndowns for discrete reasons, such as the death of an author prior to completion of a title or titles, a Company decision to not publish a title, poor market demand or other relevant factors that could impact recoverability.
 
Goodwill and intangible assets:
 
Goodwill and other intangible assets with indefinite lives are not amortized and are reviewed for impairment annually or more frequently if impairment indicators arise.
 
With regard to goodwill, the Company compares the estimated fair values of its identified reporting units to the carrying values of their net assets. The Company first performs a qualitative assessment to determine whether it is more likely than not that the fair values of its identified reporting units are less than their carrying values. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company performs the two-step goodwill impairment test. For each of the reporting units, the estimated fair value is determined utilizing the expected present value of the projected future cash flows of the reporting unit, in addition to comparisons to similar companies. The Company reviews its definition of reporting units annually or more frequently if conditions indicate that the reporting units may change. The Company evaluates its operating segments to determine if there are components one level below the operating segment level. A component is present if discrete financial information is available and segment management regularly reviews the operating results of the business. If an operating segment only contains a single component, that component is determined to be a reporting unit for goodwill impairment testing purposes. If an operating segment contains multiple components, the Company evaluates the economic characteristics of these components. Any components within an operating segment that share similar economic characteristics are aggregated and deemed to be a reporting unit for goodwill impairment testing purposes.
Components within the same operating segment that do not share similar economic characteristics are deemed to be individual reporting units for goodwill impairment testing purposes. 

The Company has seven reporting units with goodwill subject to impairment testing. The determination of the fair value of the Company’s reporting units involves a number of assumptions, including the estimates of future cash flows, discount rates and market-based multiples, among others, each of which is subject to change. Accordingly, it is possible that changes in assumptions and the performance of certain reporting units could lead to impairments in future periods, which may be material. 
 
With regard to other intangibles with indefinite lives, the Company first performs a qualitative assessment to determine whether it is more likely than not that the fair value of the identified asset is less than its carrying value. If it is more likely than not that the fair value of the asset is less than its carrying amount, the Company performs a quantitative test. The estimated fair value is determined utilizing the expected present value of the projected future cash flows of the asset.
 
Intangible assets with definite lives consist principally of tradenames, customer lists, intellectual property and other agreements and are amortized over their expected useful lives. Customer lists are amortized on a straight-line basis over five to ten years, while other agreements are amortized on a straight-line basis over their useful life. Intellectual property assets are amortized over their remaining useful lives, which is approximately five years.

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24




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 increases is used to estimate the increase in compensation for participants of the plan from their current age to their assumed retirement age. The estimated compensation amounts are used to determine the benefit obligations. 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, 2020 of approximately $0.7 million and approximately $0.6 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, 2020 of approximately $0.3 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, 2020 of approximately $0.1 million and less than $0.1 million, respectively. A one percentage point change in the health care cost trend rate would have resulted in an increase or decrease in operating income for the year ended May 31, 2020 of approximately $0.1 million and an increase or decrease in the postretirement benefit obligation as of May 31, 2020 of approximately $1.9 million and approximately $1.7 million, respectively.

Equity Awards:

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

Taxes:

Income Taxes – The Company uses the asset and liability method of accounting for income taxes. Under this method, for purposes of determining taxable income, deferred tax assets and liabilities are determined based on

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25



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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26



Results of Operations
         
 
(Amounts in millions, except per share data)
For fiscal years ended May 31,
 
 
2020
 
2019
 
$
 
% (1)
 
$
 
% (1)
Revenues:
 
 

 
 

 
 
 

 
 

Children’s Book Publishing and Distribution
$
875.4

 
58.9

 
$
990.3

 
59.9

Education
 
287.3

 
19.3

 
 
297.4

 
18.0

International
 
324.4

 
21.8

 
 
366.2

 
22.1

Total revenues
 
1,487.1

 
100.0

 
 
1,653.9

 
100.0

Cost of goods sold
 
751.0

 
50.5

 
 
779.9

 
47.2

Selling, general and administrative expenses (2)
 
705.3

 
47.5

 
 
781.4

 
47.2

Depreciation and amortization
 
61.5

 
4.1

 
 
56.1

 
3.4

Severance (3)
 
17.2

 
1.2

 
 
10.6

 
0.6

Asset impairments and write downs (4)
 
40.6

 
2.7

 
 
0.9

 
0.1

Operating income (loss)
 
(88.5
)
 
(6.0
)
 
 
25.0

 
1.5

Interest income
 
3.1

 
0.2

 
 
5.6

 
0.3

Interest expense
 
(3.0
)
 
(0.2
)
 
 
(2.2
)
 
(0.1
)
Other components of net periodic benefit (cost)
 
(1.3
)
 
(0.0
)
 
 
(1.4
)
 
(0.1
)
Gain (loss) on investments and other (5)
 

 

 
 
(1.0
)
 
(0.0
)
Earnings (loss) before income taxes
 
(89.7
)
 
(6.0
)
 
 
26.0

 
1.6

Provision (benefit) for income taxes (6)
 
(46.0
)
 
(3.1
)
 
 
10.4

 
0.7

Net income (loss)
$
(43.7
)
 
(2.9
)
 
$
15.6

 
0.9

Less: Net income (loss) attributable to noncontrolling interest
 
0.1

 
0.0

 
 
0.0

 
0.0

Net income (loss) attributable to Scholastic Corporation
$
(43.8
)
 
(2.9
)
 
$
15.6

 
0.9

Earnings (loss) per share:
 


 
 

 
 


 
 
Basic:
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to Scholastic Corporation
$
(1.27
)
 
 
 
$
0.44

 
 
Diluted:
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to Scholastic Corporation
$
(1.27
)
 


 
$
0.43

 
 

(1) Represents percentage of total revenues.

(2) 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. In fiscal 2019, the Company recognized pretax charges related to the settlement of a legacy sales tax assessment of $8.1, and pretax costs associated with the Canadian book fairs branch consolidation of $0.5.

(3) In fiscal 2020 and 2019, the Company recognized pretax severance expense of $13.1 and $6.5, respectively, primarily related to cost reduction and restructuring programs.

(4) 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. In fiscal 2019, the Company recognized pretax impairment charges of $0.9 related to legacy building improvements.

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

(6) In fiscal 2020, the Company recognized a benefit for income taxes in respect to one-time pretax charges of $15.3. In fiscal 2019, the Company recognized a benefit for income taxes in respect to one-time pretax charges of $4.2 and income tax provision of $4.7 primarily related to the Company's state deferred tax balances.




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27



Results of Operations – Consolidated

The Securities and Exchange Commission (SEC or Commission) adopted a final rule that modernizes and simplifies certain disclosure requirements in Regulation S-K. Accordingly, the section below is a discussion of the Company's fiscal year 2020 results compared to fiscal year 2019. A detailed discussion of the Company's fiscal year 2018 results and year-over-year comparisons between fiscal years 2019 and 2018 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, 2019, filed with the Company's Form 10-K dated July 29, 2019.

The impact of the COVID-19 pandemic is referenced throughout this section. Refer to "Overview and Outlook" for a discussion of this impact on the Company's operations.

Revenues from operations for the fiscal year ended May 31, 2020 decreased by $166.8 million, or 10.1%, to $1,487.1 million, compared to $1,653.9 million in the prior fiscal year. The decrease in revenues was primarily due to lower Children’s Book Publishing and Distribution segment revenues of $114.9 million, lower sales in the Education segment of $10.1 million, and lower International revenue of $41.8 million. Within the Children’s Book Publishing and Distribution segment, revenues from the school-based channels were adversely impacted by COVID-19 mandated school closures, resulting in lower book fairs channel revenues of $115.8 million and lower book clubs channel revenues of $55.6 million. Lower revenues were partially offset by increased revenues from the trade channel of $56.5 million primarily due to increased sales of frontlist titles led by the May 2020 release of The Ballad of Songbirds and Snakes, the fourth title in The Hunger Games series by Suzanne Collins. The trade channel revenues were also impacted by the completion of the acquisition of a majority interest in MBI and its full consolidation in the financial statements in the current fiscal year. The Education segment revenues decreased $10.1 million, primarily due to lower sales of instructional products, including Scholastic Edge, Guided Reading, Level Bookroom and LitCamp, as a result of the COVID-19 pandemic. Local currency revenues in the International segment decreased $33.9 million, primarily driven by lower sales in Canada, the UK, and Asia due to COVID-19 mandated school closures. The decrease in International revenues was also impacted by unfavorable foreign currency exchange of $7.9 million, driven by the strengthening of the U.S. dollar.

Components of Cost of goods sold for fiscal years 2020 and 2019 are as follows:
 
($ amounts in millions)
 
 
2020
% of revenue
 
2019
% of revenue
Product, service and production costs
$
411.3

27.7
%
 
$
428.0

25.9
%
Royalty costs
 
119.2

8.0

 
 
118.7

7.2

Prepublication and production amortization
 
27.4

1.8

 
 
25.6

1.5

Postage, freight, shipping, fulfillment and all other costs
 
193.1

13.0

 
 
207.6

12.6

Total cost of goods sold
$
751.0

50.5
%
 
$
779.9

47.2
%

Cost of goods sold as a percentage of revenue for the fiscal year ended May 31, 2020 was 50.5%, compared to 47.2% in the prior fiscal year. The increase in Cost of goods sold as a percentage of revenue was primarily driven by higher inventory obsolescence reserves in the book clubs and book fairs channels due to excess inventory from lower fourth fiscal quarter sales due to COVID-19. The increase was also impacted by the completion of the acquisition of the majority interest in MBI and its full consolidation in the financial statements in the current fiscal year. MBI manufacturing costs associated with specialty products resulted in a higher percentage of Cost of goods sold. The Company also recognized higher tariff costs in the current fiscal year.

Selling, general and administrative expenses for the fiscal year ended May 31, 2020 were $705.3 million, compared to $781.4 million in the prior fiscal year. The decrease was primarily related to cost saving initiatives to offset the lower revenues driven by COVID-19, including reductions in employee-related expenses throughout the Company, reduced marketing expenses in the book clubs and education channels, and reductions to operating expenses in the book fairs channel such as the closing of distribution centers in highly impacted regions. The decrease in expense was also impacted by the absence of a prior period pretax charge related to a legacy sales tax assessment. The decreases in expenses were partially offset by increased bad debt and lower equity method investment income due to the consolidation of MBI.

Depreciation and amortization expenses for the fiscal year ended May 31, 2020 were $61.5 million, compared to $56.1 million in the prior fiscal year. The increase was primarily attributable to upgraded point-of-sale machines placed in

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28



service in the book fairs channel in the current fiscal year and assets placed in service for capitalized strategic technology investments during fiscal 2020.

Severance expense for the fiscal year ended May 31, 2020 was $17.2 million, compared to $10.6 million in the prior fiscal year, which included charges of $13.1 million and $6.5 million in fiscal 2020 and fiscal 2019, respectively, related to cost reduction and restructuring programs.

Asset impairments and write downs for the fiscal year ended May 31, 2020 were $40.6 million, compared to $0.9 million in the prior fiscal year. In the third     quarter of fiscal 2020, the Company recognized a write down of $40.0 million related to changes that were made to the Company's North American purchasing protocols, product offerings and inventory retention policies, which reduced the anticipated inventory requirements in the Company's school channels. The changes resulted in lower inventory requirements, more efficient asset utilization, lower inventory obsolescence expense and reduced warehouse labor and storage costs expected in future periods. As a result of the foregoing, the Company recorded a write down of inventory of $37.6 million. Capitalized prepublication and author advances costs, related to the inventory, of $0.8 million and $1.6 million, respectively, were written down as well. The Company also recognized an impairment charge of $0.6 million related to an outdated technology platform in Canada. In fiscal 2019, the Company recognized impairment charges of $0.9 million on the abandonment of legacy building improvements in connection with the Company's renovation of its headquarters location in New York City.

For the fiscal year ended May 31, 2020, the net amount of Interest income and Interest expense was $0.1 million, compared to the net amount of Interest income and Interest expense of $3.4 million in the prior fiscal year. The decrease was primarily due to interest expense on long-term debt borrowings in fiscal 2020, lower U.S. interest rates and lower short-term investment balances driven, in part, by higher common stock repurchases.

The Company’s effective tax rate for the fiscal year ended May 31, 2020 was 51.3%, compared to 40.0% in the prior fiscal year. The higher benefit for income taxes when compared to the previous fiscal year was primarily driven by net operating losses generated in the U.S. which are expected to be carried back to previous periods.
 
Net loss for fiscal 2020 increased by $59.3 million to $43.7 million compared to Net income of $15.6 million in fiscal 2019. The basic and diluted loss per share of Class A Stock and Common Stock were $1.27 and $1.27, respectively, in fiscal 2020, compared to basic and diluted earnings per share of Class A Stock and Common Stock of $0.44 and $0.43, respectively, in fiscal 2019.

Net income attributable to noncontrolling interest for fiscal 2020 was $0.1 million. The Net income attributable to noncontrolling interest for fiscal 2019 was less than $0.1 million.

Results of Operations – Segments
 
CHILDREN’S BOOK PUBLISHING AND DISTRIBUTION 
($ amounts in millions)
2020 compared to 2019
 
 
2020
 
2019
 
$ change

% change
Revenues
$
875.4

 
$
990.3

 
$
(114.9
)

(11.6
)%
Cost of goods sold
 
430.9

 
 
443.4

 
 
(12.5
)

(2.8
)
Other operating expenses *
 
420.9

 
 
464.0

 
 
(43.1
)

(9.3
)