Scholastic
Annual Report 2013

Plain-text annual report

2012/2013 AnnuAl Repo Rt THE READING BILL OF RIGHTS Today we live in a world full of digital information. Yet reading has never been more important, for we know that for young people the ability to read is the door opener to the 21st century: to hold a job, to understand their world, and to know themselves. That is why we are asking you to join our Global Literacy Call to Action: We call this campaign: “Read Every Day. Lead a Better Life.” We are asking parents, teachers, school and business leaders, and the general public to support their children’s right to read for a better life in the digital world of the 21st century. Here is what we believe about reading in the second decade of the 21st century. We call this The Reading Bill of Rights: WE BELIEVE that literacy – the ability to read, write and understand – is the birthright of every child in the world as well as the pathway to succeed in school and to realize a complete life. Young people need to read nonfiction for information to understand their world, and literature for imagination to understand themselves. WE BELIEVE that the massive amounts of digital information and images now transmitted daily make it even more important for a young person to know how to analyze, interpret and understand information, to separate fact from opinion, and to have deep respect for logical thinking. WE BELIEVE that literature and drama, whether on printed pages, screens, on stage or film, help young people experience the great stories of emotion and action, leading to a deeper understanding of what it means to be truly human. Without this literacy heritage, life lacks meaning, coherence and soul. WE BELIEVE every child has a right to a “textual lineage” – a reading and writing autobiography which shows that who you are is in part developed through the stories and information you’ve experienced. This textual lineage will enable all young people to have a reading and writing identity which helps them understand who they are and how they can make their lives better. In short, “You Are What You Read.” WE BELIEVE every child should have access to books, magazines, newspapers, computers, e-readers, and text on phones. Whatever way you read, you will need to figure out what the facts are or what the story tells you. No matter how and where you get access to ideas, you will need the skills of reading to understand yourself and your world. WE BELIEVE that reading widely and reading fluently will give children the reading stamina to deal with more challenging texts they will meet in college, at work and in everyday life. Every child needs literacy confidence – the ability to read, write and speak about what they know, what they feel, and who they are. This will come from Reading Every Day. As you read more you will find it easier to read and to learn. WE BELIEVE that every child has the right to a great teacher who will help them learn to read and love to read. Children need teachers who provide intentional, focused instruction to give young people the skills to read and interpret information or understand great stories they will encounter throughout life. WE BELIEVE that in the 21st century, “literacy care,” including the right to read, is as essential to the developing child as the right to health care. The ability to read is necessary not only to succeed but to survive—for without the ability to understand information, young people cannot compete economically and may therefore be consigned to a life without purpose. . d e v r e s e r s t h g i r l l A . n o s l e N r i d a K y b t r a l i a n g i r O . c n I l c i t s a o h c S y b 3 1 0 2 © & M T 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 1 Fellow Shareholders: In fiscal 2013, Scholastic reached the high end of our revised guidance despite a challenging prior year comparison due to the extraordinary sales of The Hunger Games trilogy in fiscal 2012. Even though the series remained on The New York Timesbestseller list, sales declined significantly from prior year, resulting in an overall decline in company revenue and profits. At the same time, our education segments showed strength in the second half of the fiscal year driven by strong sales of customized print and technology-based programs and professional development for schools implementing the new, more rigorous Common Core State Standards. A few highlights from fiscal 2013: • We launched Storia®, our award-winning children’s ereading app, and earned enthusiastic praise from teachers, who embraced the app for classroom use, while parents also bought ebooks through Storia for their children’s home reading. • We kicked off the largest-ever launch of new Educational Technology product in the history of the Company and we expect to see wide acceptance for these five new programs for grades K-12 throughout next year and beyond. • We have been responding to RFPs for various school districts with customized packages designed to help teachers implement the Common Core State Standards, and districts are highly receptive to Scholastic’s solutions. • Finally, we continue to grow the global market for children’s reading. In fiscal 2013, Scholastic UK was named Children’s Publisher of the Year; Scholastic India grew more than 20% for the third year in a row; and we continue to bring the benefits of reading to more kids in more places – this year, for example, delivering 3.5 million books in My Afghan Library, published by Scholastic in cooperation with the U.S. Department of State, to 43 locations throughout Afghanistan. This is a time of great change in both the book business and in education, and Scholastic is well-positioned to capitalize on the opportunities these changes present. We know that our significant role in the reading and learning lives of children both at school and at home continues to be more important than ever. With the Common Core State Standards moving into classrooms in the coming school year, we expect to drive revenue and profit growth by delivering books to families that help link children’s independent reading to Common Core, and to boost our education revenues by providing teachers and administrators with customized curriculum packages and professional development solutions to support their needs as they implement the new standards. In the education segments, in addition to our ability to customize solutions to meet districts’ specific needs with our extensive list of print and digital programs, we expect to see increased revenue and growth from the launch of five new education technology programs all built for the Common Core. These include: • MATH 180™, a revolutionary math intervention program for students in grades 6 and up; • iRead™, a digital foundational reading program for grades K-2; • SYSTEM 44® Next Generation, a fully upgraded version of our reading intervention program for students who need instruction in phonics before they are ready for READ 180; • READ 180® for iPad, which we believe is the most comprehensive education program offered to date on iPad; and • Common Core Code X™, a middle school English Language Arts program chosen as an approved curriculum by New York City Department of Education, which is selling briskly to other school districts looking for the more complex texts required by the Common Core State Standards. 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 2 We are already seeing that many school districts, which have embraced READ 180for more than a decade, are highly receptive to our innovative new programs. The new products, along with our library of children’s ebooks available on Storia for use in school and at home, our print and digital classroom magazines, our fiction and non-fiction classroom books programs, and our teaching resources and professional development programs, comprise a comprehensive solution which helps all students prepare for college and career. Increasingly, schools are asking us to work with them to provide customized programs linked to the goals of the school system, which will package a range of content and services to train teachers, provide relevant books and digital materials, carry out assessment and ensure effective implementation so that districts can help teachers and students reach the higher levels of performance required by the Common Core State Standards. This makes us an integral part of the school’s basic operations in teaching and learning. Common Core and the changing landscape in the book market are also creating significant opportunities in our children’s book businesses. According to a recent industry research report, Scholastic Book Fairs and Book Clubs are increasingly important for families as a trusted source of recommendations for age-appropriate, quality books. These channels are helping teachers, schools and families find books that help students link their independent reading to the new standards, which require children to read more and at a higher level. To maximize our opportunities in the children’s book market, Book Clubs are now organized with a specific club for each grade level, enabling our club offerings to be fully aligned to Common Core. In addition, we are aligning our Book Club and Book Fairs sales and marketing to promote greater use of both our services and create more touchpoints with our customers. We believe these strategies, combined with our ability to provide a strong offering of favorite children’s ebooks for use in school and at home through Storia, will continue to make our trusted channels the go-to source for parents and teachers for the best children’s books at the best prices. With continued growth in our International division, we will be introducing several products this year, including in India and Pakistan where we are launching Prime, a new mathematics program based on the best math education practices of top performing nations. We will also be launching a new global Scholastic Reading Inventory and a suite of assessment products through the new Scholastic Learning Zone platform, designed to deliver our digital product to an international audience. Whether we reach young people in school, at home, online, or on mobile devices, through print and digital books and materials, through our industry-leading educational technology programs and services, or our proprietary children’s ebook platform, Storia, we are confident that Scholastic will remain the brand that teachers and schools rely on, parents trust and children love for many years to come. As schools implement the Common Core State Standards and parents seek to support their children’s reading at home to meet the new standards, Scholastic will continue to be their trusted partner. Thank you for your ongoing support of our Company. Richard Robinson Chairman, President and Chief Executive Officer July 30, 2013 01_73994_Scholastic_AR 7/31/13 11:41 AM Page FC1 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, 2013 | Commission File No. 000-19860 Scholastic Corporation (Exact name of Registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 557 Broadway, New York, New York (Address of principal executive offices) 13-3385513 (IRS Employer Identification No.) 10012 (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 Common Stock, $0.01 par value Name of Each Exchange on Which Registered 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 (cid:1) No □ 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 □ No (cid:1) 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 (cid:1) No □ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, 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 and post such files). Yes (cid:1) No □ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. □ Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): (cid:1) Large accelerated filer □ Accelerated filer □ Non-accelerated filer □ Smaller reporting company Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes □ No (cid:1) The aggregate market value of the Common Stock, par value $0.01, held by non-affiliates as of November 30, 2012, was approximately $740,510,478. 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 28, 2013 was as follows: 30,116,979 shares of Common Stock and 1,656,200 shares of Class A Stock. Part III incorporates certain information by reference from the Registrant’s definitive proxy statement for the Annual Meeting of Stockholders to be held September 18, 2013. Documents Incorporated By Reference 01_73994_Scholastic_AR 7/31/13 11:41 AM Page FC2 [This Page Intentionally Left Blank] 01_73994_Scholastic_AR 7/31/13 11:41 AM Page IFC1 Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. Item 10. Item 11. Item 12. Item 13. Item 14. Item 15. Table of Contents Part I PAGE Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 Part II Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . .37 Consolidated Financial Statements and Supplementary Data . . . . . . . . . . . . .38 Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39 Consolidated Statements of Comprehensive Income (Loss) . . . . . . . . . . . . . . .40 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . .47 Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . .80 Supplementary Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .82 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .83 Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .83 Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .83 Part III Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . .84 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .84 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .84 Certain Relationships and Related Transactions, and Director Independence . .84 Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .84 Part IV Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89 Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89 Schedule II: Valuation and Qualifying Accounts and Reserves . . . . . . . . . . .S-2 01_73994_Scholastic_AR 7/31/13 11:41 AM Page IFC2 [This Page Intentionally Left Blank] 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 1 Part I Item 1 | Business Overview decision-maker assesses operating performance and allocates resources. Scholastic Corporation (the “Corporation” and together The following table sets forth revenues by operating with its subsidiaries, “Scholastic” or the “Company”) is segment for the three fiscal years ended May 31: a global children’s publishing, education and media company. Since its founding in 1920, Scholastic has emphasized quality products and a dedication to reading and learning. The Company is the world’s largest publisher and distributor of children’s books and a leading provider of educational technology products and related services and children’s media. Scholastic creates quality books and ebooks, print and technology-based learning materials and programs, (Amounts in millions) 2013 2012 2011 Children’s Book Publishing and Distribution $846.9 $1,111.3 Educational Technology and Services 227.7 254.7 Classroom and Supplemental Materials Publishing Media, Licensing and Advertising International Total 218.0 58.7 441.1 208.2 75.3 489.6 $1,792.4 $2,139.1 $1,877.6 $922.0 230.8 197.2 82.7 444.9 magazines, multi-media and other products that help Additional financial information relating to the children learn both at school and at home. The Company’s operating segments is included in Note 4 of Company is a leading operator of school-based book Notes to Consolidated Financial Statements in Item 8, clubs and book fairs in the United States. It distributes “Consolidated Financial Statements and its products and services through these proprietary Supplementary Data,” which is included herein. 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, Canada, the United Kingdom, Australia, New Zealand, Ireland, India, China, Singapore and other parts of Asia, and, through its export business, sells products in approximately 140 countries. C H I L D R E N ’ S B O O K P U B L I S H I N G A N D D I S T R I B U T I O N (47.2% of fiscal 2013 revenues) General The Company’s Children’s Book Publishing and Distributionsegment includes the publication and distribution of children’s books in the United States through school-based book clubs, book fairs, ecommerce and the trade channel. The Company currently employs approximately 7,500 people in the United States and approximately 2,100 people outside the United States. Operating Segments – Continuing Operations The Company is the world’s largest publisher and distributor of children’s books and is a 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 and ebooks The Company categorizes its businesses into five distributed through the trade channel. Scholastic reportable segments: Children’s Book Publishing and offers a broad range of children’s books, many of Distribution; Educational Technology and Services; which have received awards for excellence in children’s Classroom and Supplemental Materials Publishing; literature, including the Caldecott and Newbery Media, Licensing and Advertising(which collectively Medals. The Company also markets books to teachers, represent the Company’s domestic operations); and parents and children through Storia®, an interactive International.This classification reflects the nature of and educational ereading app and ebookstore, products, services and distribution consistent with the launched during fiscal 2012 through the book club method by which the Company’s chief operating and book fair channels. Storia gives access to a 1 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 2 growing selection of ebooks for kids and also allows reductions from list prices. The teacher aggregates the teachers and parents to track the reader’s progress students’ orders and forwards them to the Company. through each book, while making reading easier with The Company estimates that approximately 62% of all the Storia dictionary, which defines and pronounces elementary school teachers in the United States who any word the reader highlights. Selected titles offered received promotional materials in fiscal 2013 through the ebookstore include enriched ebooks, participated in the Company’s school-based book clubs. which also provide word games, story interactions and In fiscal 2013, approximately 90% of total book club animation. 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 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 Honeybee®, serving toddlers to age 4; Firefly®, serving pre-kindergarten (“pre-K”) and kindergarten (“K”) students; SeeSaw®, serving students grades K to 1; Lucky®, serving students grades 2 to 3; Arrow®, serving students grades 4 to 6; TAB®, serving students grades 7 and up; and Club LeoTM, which provides Spanish language offers to students in pre-K to grade 6. In addition to its regular offers, the Company creates special theme-based and seasonal offers targeted to different grade levels during the year. The Company mails promotional materials containing order forms to teachers in the vast majority of the pre-K to grade 8 schools in the United States. Teachers who wish to participate in a school-based book club distribute the promotional materials to their students, who may choose from selections at substantial orders were placed via the internet through COOL (Clubs Ordering On-Line), a new version of the Company’s online ordering platform originally rolled out to all customers in the fall of 2010, which allows parents, as well as teachers, to order online, with improved ecommerce functionality. The orders are shipped to the classroom for distribution to the students. Sponsors who participate in the book clubs receive bonus points and other promotional incentives, which may be redeemed from the Company for additional books and other resource materials and items for their classrooms or the school. School-Based Book Fairs The Company began offering school-based book fairs in 1981 under the name Scholastic Book Fairs. Today, the Company is the leading distributor of school-based book fairs in the United States with operations in all 50 states. Book fairs give children access to hundreds of popular, quality books and educational materials, increase student reading and help book fair organizers raise funds for the purchase of school library and classroom books, supplies and equipment. Book fairs are generally weeklong events where children and families peruse and purchase their favorite books together. The Company delivers its book fairs from its warehouses to schools principally by a fleet of Company-owned vehicles. Sales and customer service representatives, working from the Company’s regional offices, distribution facilities, and national distribution facility in Missouri, along with local area field representatives, provide support to book fair organizers. Book fairs are conducted by school personnel, volunteers and parent-teacher organizations, from which the schools may receive either books, supplies and equipment or a portion of the proceeds from every book fair they host. The Company is currently focused on increasing the 2 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 3 number of second and third fairs conducted by its E D U C A T I O N A L T E C H N O L O G Y A N D S E R V I C E S school customers during the school year and increasing attendance at each book fair event. Approximately 90% of the schools that conducted a Scholastic Book Fair in fiscal 2012 hosted a fair in fiscal 2013. Trade (12.7% of fiscal 2013 revenues) General Scholastic Education, which encompasses the Company’s core curriculum publishing operations, develops and distributes technology-based instructional materials directly to schools in the Scholastic is a leading publisher of children’s books United States, primarily purchased through school sold through bookstores, internet retailers and mass and district budgets, often with the help of federal and merchandisers in the United States. The Company state funding, as well as local funding. These maintains approximately 6,100 titles for trade operations include reading and math improvement distribution. Scholastic’s original publications include programs and other educational technology products, Harry Potter®, The Hunger Games, The 39 Clues®, The as well as consulting and professional development Magic School Bus®, I SpyTM, Captain Underpants®, services. Goosebumps® and Clifford The Big Red Dog®, and licensed properties such as Star Wars®, Lego® and Geronimo Stilton®. In addition, the Company’s Klutz® imprint is a publisher and creator of “books plus” products for children, including titles such as Clay Scholastic Education’s efforts are focused on partnering with school districts to raise student achievement by providing solutions that combine technology, content and services in the areas of Charms, Star Wars Thumb Doodlesand Beaded Bands. reading and math. Significant technology-based The Company’s trade organization focuses on reading improvement programs that Scholastic offers include: READ 180®, a reading intervention program publishing, marketing and selling print and ebook for students in grades 4 to 12 reading at least two properties to bookstores, internet retailers, mass years below grade level, READ 180® Next Generation, merchandisers, specialty sales outlets and other book a substantially revised version of the original product; retailers, and also supplies the Company’s proprietary System 44®, a foundational reading intervention school channels. The Company maintains a talented program for students in grades 4 to 12 who have not and experienced creative staff that constantly seeks to yet mastered the 44 sounds and 26 letters of the attract, develop and retain the best children’s authors English language; and Scholastic Reading Inventory, and illustrators. The Company believes that its trade which is a research-based, computer-adaptive publishing staff, combined with the Company’s reputation and distribution channels, provides a significant competitive advantage, evidenced by numerous bestsellers over the past decade. Print assessment for grades K to 12 that allows educators to assess a student’s reading comprehension. Other major programs include FASTT Math®, a technology- based program to improve math fact fluency developed bestsellers in the Trade division during fiscal 2013 with the creator of READ 180, and Do The Math®, a included the Hunger Gamestrilogy by Suzanne Collins, which was also an ebook bestseller, The 39 Clues® series and the Harry Potterseries, as well as mathematics intervention program created by Marilyn Burns, a nationally known math educator and the founder of Math Solutions. The segment has made other titles, such as Dramaby Raina Telgemeier, The significant investments in new Educational Raven Boysby Maggie Stiefvater, and Captain Underpants and the Revolting Revenge of the Radioactive Robo-Boxersby Dav Pilkey. Technology products which it plans to launch in fiscal 2014, including System 44® Next Generation, MATH 180TM, iReadTM, Common Core Code XTM and Read 180 for iPad®. These new products will assist educators as they implement the Common Core State Standards and incorporate more technology and mobile solutions in 3 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 4 the classroom. The Company considers its educational the United States. The Company’s products also technology products and related services to be a include non-fiction books published in the United growth driver and continues to focus on investment in States under the imprints Children’s Press® and its technology and services businesses. Franklin Watts®. C L A S S R O O M A N D S U P P L E M E N T A L M A T E R I A L S P U B L I S H I N G (12.2% of fiscal 2013 revenues) General Classroom and Supplemental Materials Publishing includes the publication and distribution to schools and libraries of children’s books, classroom magazines, supplemental classroom materials, custom curriculum and teaching guides and print and on-line reference and non-fiction products for grades pre-K to 12 in the United States. Scholastic Classroom and Community Group The Company is the leading provider of classroom libraries and paperback collections, including classroom books and guided reading products, to schools and school districts for classroom libraries and other uses, as well as to literacy organizations. Scholastic helps schools compile classroom collections of high quality, award-winning books for every grade level, reading level and multicultural background, Scholastic is a leading publisher of classroom magazines. Teachers in grades pre-K to 12 use the Company’s 30 classroom magazines, including Scholastic News®, Junior Scholastic® and Weekly Reader®, to supplement formal learning programs by bringing subjects of current interest into the classroom, including literature, math, science, current events, social studies and foreign languages. Each magazine has its own website with online digital resources that supplement the print materials. Scholastic’s classroom magazine circulation in the United States in fiscal 2013 was approximately 11.2 million, with approximately 70% of the circulation in grades pre-K to six. 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 of the classroom magazine revenues in fiscal 2013. M E D I A , L I C E N S I N G A N D A D V E R T I S I N G (3.3% of fiscal 2013 revenues) including the Phyllis C. Hunterand the Leveled Math General Readersseries. In 2013, partially in response to Common Core State Standards, this business began developing customized curriculum products and related teaching guides for classroom customers. The teaching resources business publishes and sells The Company’s Media, Licensing and Advertising segment includes the production and/or distribution of digital media, consumer promotions and merchandising and advertising revenue, including sponsorship programs. professional books and supplemental materials Production and Distribution designed for and generally purchased by teachers, Through Scholastic Media, the Company creates and both directly from the Company and through teacher produces programming and digital content for all stores and booksellers, including the Company’s on- platforms, including television, DVDs, audio, movies, line Teacher store, which provides professional books interactive games, apps (applications) and websites. and other educational materials to schools and Scholastic Media builds consumer awareness and teachers. value for the Company’s franchises by creating family- Scholastic Library Publishing and Classroom Magazines Scholastic is a leading publisher of quality children’s reference and non-fiction products and subscriptions to databases sold primarily to schools and libraries in focused media that form the foundation for the Company’s global branding campaigns. The media group generates revenue by exploiting these assets throughout the Scholastic distribution channels, globally across multiple media platforms and by developing and executing cross platform brand- 4 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 5 marketing campaigns that support the Company’s key organizations, government agencies, associations and franchises. Scholastic Media consists of Scholastic some corporations to develop literacy, education and Entertainment Inc. (SEI), Scholastic Audio, Soup2Nuts pro-social campaigns which are aligned to the Inc. (S2N), Weston Woods Studios, Inc. and Scholastic Company’s corporate mission of supporting children’s Interactive L.L.C. reading and learning in classrooms and at home, as well as the Company’s consumer magazines business. SEI has built a television library consisting of over 500 half-hour productions, including: Clifford The Big Red I N T E R N A T I O N A L Dog®, Clifford’s Puppy DaysTM, WordGirl®, Maya & (24.6% of fiscal 2013 revenues) MiguelTM, The Magic School Bus®, Turbo Dogs, I Spy, Goosebumps®, Animorphs®, Dear America®, Horrible General Histories®, Sammy’s StoryshopTM, Stellaluna, The Very Hungry Caterpillarand The Baby-sitters Club®. These series have been sold in the United States and throughout the world and have garnered over 130 major awards including Emmys, Peabodys and an Academy award. S2N, an award-winning animation and audio production studio, has produced television programming, including the animated series Time Warp Trioand O’Grady, and, with SEI, has produced 104 half-hour episodes of the Emmy award-winning animated series Word Girl. Weston Woods Studios, Inc. creates audiovisual adaptations of classic children’s picture books, such as Where the Wild Things Are, Chrysanthemumand Make Way for Ducklings,which were initially produced for the school and library market and are now distributed through the retail market. Scholastic audio produces young adult and children’s audio recordings for the school, library and retail markets. The Internationalsegment 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 Canada, the United Kingdom, Australia, New Zealand, Ireland, India, China, Singapore and other parts of Asia. Scholastic’s operations in Canada, the United Kingdom and Australia generally mirror its United States business model. The Company’s international operations have original trade and educational publishing programs; distribute children’s books, software and other materials through school-based book clubs, school- based book fairs and trade channels; produce and distribute magazines; and offer on-line 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 most of these operations have received awards for excellence in Scholastic Interactive creates original and licensed children’s literature. In Asia, the Company also consumer software, including handheld and console publishes and distributes reference products and products and mobile apps, for grades pre-K to 8. Its provides services under the Grolier name, and it also products are distributed through the Company’s operates tutorial centers that provide English school-based book clubs and book fairs, as well as to language training to students. the library/teacher market and the retail market. The Company’s titles for Leapster and LeapPad include the series I Spy, Brain Play®, Clifford®, Goosebumps®, The Magic School Bus®, The 39 Clues® series, Scholastic Animal Genius® and Math Missions®. Other Canada Scholastic Canada, founded in 1957, is a leading publisher and distributor of English and French language children’s books. Scholastic Canada also is the largest school-based book club and school-based book fair operator in Canada and is one of the leading Also included in this segment is Scholastic National suppliers of original or licensed children’s books to the Partnerships, which partners with non-profit Canadian trade market. Since 1965, Scholastic Canada 5 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 6 has also produced quality Canadian-authored books operates a chain of English language tutorial centers and educational materials, including an early reading in China in cooperation with local partners. program sold to schools for grades K to 6. Foreign Rights and Export United Kingdom The Company licenses the rights to selected Scholastic Scholastic UK, founded in 1964, is the largest school- titles in over 45 languages to other publishing based book club and school-based book fair operator companies around the world. The Company’s export and a leading children’s publisher in the United business sells educational materials, software and Kingdom. Scholastic UK also publishes supplemental children’s books to schools, libraries, bookstores and educational materials, including professional books for other book distributors in approximately 140 teachers, and is one of the leading suppliers of original countries that are not otherwise directly serviced by or licensed children’s books to the United Kingdom Scholastic subsidiaries. The Company partners with trade market. Australia Scholastic Australia, founded in 1968, is the largest governments and non-governmental agencies to create and distribute books to public schools in developing countries. school-based book club and book fair operation in Discontinued Operations Australia, reaching approximately 90% of the The Company closed or sold several operations during country’s primary schools. Scholastic Australia also fiscal 2009, 2010, 2012 and 2013. During the first publishes quality children’s books supplying the quarter of fiscal 2012, the Company ceased operations Australian trade market. in its direct-to-home catalog business specializing in 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, 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 programs based out of Singapore, as well as the wholly-owned Grolier direct sales business, which sells English language reference materials and early childhood learning materials through a network of independent sales representatives in India, Indonesia, Malaysia, the Philippines, Singapore and Thailand. In addition, the Company operates school- based book clubs and book fairs 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 toys. In the fourth quarter of fiscal 2013, the Company sold a facility that was previously classified as held for sale. Also in the fourth quarter of fiscal 2013, the Company discontinued a computer club business, which was included in the Children’s Book Publishing and Distributionsegment, and discontinued a subscription-based business which was previously reported in the Media, Licensing and Advertising segment. All of these businesses are classified as discontinued operations in the Company’s financial statements. P R O D U C T I O N A N D D I S T R I B U T I O N The Company’s books, magazines, software and interactive products and other materials are manufactured by the Company with the assistance of third parties under contracts entered into through arms-length negotiations or competitive bidding. As appropriate, the Company enters into multi-year agreements that guarantee specified volume 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. 6 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 7 In the United States, the Company mainly processes • Royalty advances. Royalty advances are and fulfills orders for school-based book clubs, trade, incurred in all of the Company’s reportable curriculum publishing, reference and non-fiction segments, but are most prevalent in the products and export orders from its primary Children’s Book Publishing and Distribution warehouse and distribution facility in Jefferson City, segment and enable the Company to obtain Missouri. Magazine orders are processed at the contractual commitments from authors to Jefferson City facility and are shipped directly from produce Content. The Company regularly printers. Orders for ebooks are fulfilled through a provides authors with advances against expected third party. In connection with its trade business, the Company sometimes will ship product directly from printers to customers. School-based book fair orders are fulfilled through a network of warehouses across the country. The Company’s international school-based book clubs, school-based book fair, trade and educational operations use distribution systems similar to those employed in the U.S. C O N T E N T A C Q U I S I T I O N Access to intellectual property or content (“Content”) for the Company’s product offerings is critical to the success of the Company’s operations. The Company incurs significant costs for the acquisition and development of Content for its product offerings. These costs are often deferred and recognized as the Company generates revenues derived from the benefits of these costs. These costs include the following: • Prepublication costs. Prepublication costs are incurred in all of the Company’s reportable segments. Prepublication costs include costs incurred to create and develop the art, prepress, editorial, digital conversion and other content required for the creation of the master copy of a book or other media. While prepublication costs in the Children’s Book Publishing and Distributionsegment are relatively modest amounts for each individual title, there are a large number of separate titles published annually. Prepublication costs in the Educational Technology and Servicessegment are often in excess of $1 million for an individual program, as the development of Content for complex intervention and educational programs requires significant resources and investment. 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 new and established authors. • Production costs. Production costs are incurred in the Media, Licensing and Advertising segment. Production costs include the costs to create films, television programming, home videos and other entertainment Content. These costs include the costs of talent, artists, production crews and editors, as well as other costs incurred in connection with the production of this Content. Advertising and promotional costs are not included in production costs. S E A S O N A L I T Y The Company’s school-based book clubs, school-based book fairs and most of its magazines 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 book club and book fair revenues are greatest in the second and fourth quarters of the fiscal year, while revenues from the sale of instructional materials and educational technology products and services are highest in the first and fourth quarters. The Company generally experiences a loss from operations in the first and third quarters of each fiscal year. Trade sales can vary 7 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 8 throughout the year due to varying release dates of various areas related to education. Competition may published titles. C O M P E T I T I O N The markets for children’s books and entertainment materials and educational technology products and other educational 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 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. other book, ebook, textbook, library, reference material C O P Y R I G H T A N D T R A D E M A R K S and supplementary text publishers, distributors and As an international publisher and distributor of books, other resellers (including over the internet) of software and other media products, Scholastic children’s books and other educational materials, aggressively utilizes the intellectual property national publishers of classroom and professional protections of the United States and other countries in magazines with substantial circulation, numerous order to maintain its exclusive rights to identify and producers of television and film programming (many distribute many of its products. Accordingly, of which are substantially larger than the Company), SCHOLASTIC is a trademark registered in the United television and cable networks, publishers of computer States and in a number of countries where the software and interactive products, and distributors of Company conducts business. The Corporation’s products and services on the internet. In the United principal operating subsidiary in the United States, States, competitors also include regional and local Scholastic Inc., and the Corporation’s international school-based book fair operators, other fundraising subsidiaries have registered and/or have pending activities in schools, and bookstores. In its educational applications to register in relevant territories technology business, additional competitive factors trademarks for important services and programs. All include the demonstrated effectiveness of the products of the Company’s publications, including books, being offered, as well as available funding sources to magazines and software and interactive products, are school districts, and, although the Company believes subject to copyright protection both in the United no other organization or company offers as States and internationally. The Company also obtains comprehensive an offering as its suite of reading and domain name protection for its internet domains. The math intervention products and services, the Company Company seeks to obtain the broadest possible faces competition from textbook publishers, intellectual property rights for its products, and distributors of other technology-based programs because inadequate legal and technological protections addressing the subject areas of the Company’s for intellectual property and proprietary rights could offerings, such as reading, phonics and mathematics, adversely affect operating results, the Company and, with respect to its consulting services, not-for- vigorously defends those rights against infringement. profit organizations providing consulting covering 8 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 9 Executive Officers The following individuals have been determined by the Board of Directors to be the executive officers of the Company. Each such individual serves in his or her position with Scholastic until such person’s successor has been elected or appointed and qualified or until such person’s earlier resignation or removal. Name Richard Robinson Age 76 Employed by Registrant Since 1962 Position(s) for Past Five Years Chairman of the Board (since 1982), President (since 1974) and Chief Executive Officer (since 1975). Maureen O’Connell 51 2007 Executive Vice President, Chief Administrative Officer and Chief Financial Officer (since 2007). Margery W. Mayer 61 1990 Judith A. Newman 55 1993 Andrew S. Hedden 72 2008 Executive Vice President (since 1990), President, Scholastic Education (since 2002) and Executive Vice President, Learning Ventures (1998-2002). Executive Vice President and President, Book Clubs and eCommerce (since 2011), Book Clubs (since 2005) and Scholastic At Home (2005-2006); Senior Vice President and President, Book Clubs and Scholastic At Home (2004-2005); and Senior Vice President, Book Clubs (1997-2004). Member of the Board of Directors (since 1991) and Executive Vice President, General Counsel and Secretary (since 2008); prior to joining the Company, partner at the law firm of Baker & McKenzie LLP (2005-2008) and the law firm of Coudert Brothers LLP (1975-2005). Alan Boyko 59 1988 President, Scholastic Book Fairs, Inc. (since 2005). 9 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 10 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. Item 1A | Risk Factors Set forth below and elsewhere in this Annual Report on Form 10-K and in other documents that the Corporation files with the SEC are risks that should be considered in evaluating the Corporation’s common stock, as well as risks and uncertainties that could cause the actual future results of the Company to differ from those expressed or implied in the forward- looking statements contained in this Report and in other public statements the Company makes. Additionally, because of the following risks and uncertainties, as well as other variables affecting the Company’s operating results, the Company’s past financial performance should not be considered an indicator of future performance. If we cannot anticipate 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 educational, trade publishing, entertainment and software and interactive products and services for its customers, as well as to adapt its print and other materials to new digital technologies, including the internet, ebook reader devices, tablets 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 has experienced historically. In particular, in the context of the Company’s current focus on key digital opportunities, including ebooks for children, the market is developing and the Company may be unsuccessful in establishing itself as a significant factor in any market which does develop. Many aspects of an ebook market which could develop for children, such as the nature of the relevant software and hardware, the size of the market, relevant methods of delivery, including affordable devices, and relevant content, as well as pricing models, are developing and will, most likely, be subject to change on a recurrent basis until a pattern develops and the potential market for children becomes more defined. There can be no assurance that the Company will be successful in implementing its ebook strategy, including the continuing development of its Storia ereading app and ebookstore for children, which could adversely affect the Company’s revenues and growth opportunities. The Company has relied on outside providers to assist in the development of ebook reader technologies. The failure of these providers to continue to deliver services to the Company as expected would have a negative effect on the Company’s endeavors in these new markets. In addition, the Company faces technological risks associated with software product 10 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 11 development and service delivery in its educational particular, the Company’s educational technology and technology and ecommerce businesses, as well as its services and educational publishing businesses may be internal business support systems, which could involve adversely affected by budgetary restraints and other service failures, delays or internal system failures that changes in state educational funding as a result of result in damages, lost business or failures to be able to new legislation or regulatory actions, both at the fully exploit business opportunities. federal and state level, as well as changes in the Our financial results would suffer if we fail to successfully meet market needs in school-based book clubs and book fairs, two of our core businesses. 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 The Company’s school-based book clubs and book fairs otherwise be successful in continuing to obtain sales of are core businesses, which produce a substantial part its products from any available funding. of the Company’s revenues. The Company is subject to the risk that it will not successfully develop and execute new promotional strategies for its school-based book clubs or book fairs in response to future customer trends, including any trends relating to a demand for ebooks on the part of customers, or technological changes or that it will not otherwise meet market needs in these businesses in a timely or cost-effective fashion and successfully maintain teacher or school sponsorship and ordering levels, which would have an adverse effect on the Company’s financial results. If we fail to maintain the continuance of strong relationships with our authors, illustrators and other creative talent, as well as to develop relationships with new creative talent, our business could be adversely affected. The Company’s business, in particular the trade publishing and media portions of the business, is highly dependent on maintaining strong relationships with the authors, illustrators and other creative talent who produce the products and services that are sold to its customers. Any overall weakening of these relationships, or the failure to develop successful new relationships, could have an adverse impact on the Company’s business and financial performance. If we fail to adapt to new purchasing patterns or requirements, our business and financial results could be adversely affected. 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 educational and trade 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, including in the educational publishing business, and develop new product offerings to meet customer preferences or needs, the Company’s revenues and profitability could be adversely affected. The reputation of the Company is one of its most important assets, and any adverse publicity or adverse events, such as a significant data privacy breach, could cause significant reputational damage and financial loss. The businesses of the Company focus on 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 educational products appropriate for children. Also, in certain of its businesses the Company holds significant volumes of personal data, including that of customers, and, in its educational technology business, students. Adverse The Company’s business is affected significantly by publicity, whether or not valid, could reduce demand changes in customer purchasing patterns or trends in, for the Company’s products or adversely affect its as well as the underlying strength of, the educational, relationship with teachers or educators, impacting trade, entertainment and software markets. In participation in book clubs or book fairs or decisions to 11 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 12 purchase educational technology or other products or significant increase in such costs, or in its shipping or services of the Company’s educational technology fuel costs, beyond those currently anticipated, which business. Further, a failure to adequately protect would generally be beyond the control of the Company, personal data, including that of customers or students, or if the Company’s strategies to try to manage these or other data security failure could lead to penalties, costs, including additional cost savings initiatives, are significant remediation costs and reputational ineffective, the Company’s results of operations could damage, including loss of future business. be adversely affected. If we are unsuccessful in implementing our corporate strategy we may not be able to maintain our historical growth. The Company’s future growth depends upon a number of factors, including the ability of the Company to successfully implement its strategies for the respective business units in a timely manner, the introduction and acceptance of new products and services, including the success of its digital strategy and its The inability to obtain and publish best-selling new titles such as Harry Potter and the Hunger Games trilogy could cause our future results to decline in comparison to historical results. The Company invests in authors and illustrators for its Trade publication business, and has a history of publishing hit titles such as Harry Potter and the Hunger Games trilogy. The inability to publish best- selling new titles in future years could negatively ability to implement new product introductions in its impact the Company. educational technology business, its ability to expand in the global markets that it serves, its ability to meet demand for content meeting Common Core State The loss of or failure to obtain rights to intellectual property material to our businesses would adversely affect our financial results. standards and its continuing success in implementing The Company’s products generally comprise on-going cost containment and reduction programs. intellectual property delivered through a variety of Difficulties, delays or failures experienced in media. The ability to achieve anticipated results connection with any of these factors could materially depends in part on the Company’s ability to defend its affect the future growth of the Company. intellectual property against infringement, as well as 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 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 The Company’s major expense categories include jurisdictions, markets and media, as well as by the employee compensation and printing, paper and costs of dealing with claims alleging infringement distribution (such as postage, shipping and fuel) costs. involving business method patents in the ecommerce The Company offers its employees competitive salaries and internet area, and the Company’s revenues could and benefit packages in order to attract and retain the be constrained by limitations on the rights that the quality of employees required to grow and expand its Company is able to secure to exploit its intellectual businesses. Compensation costs are influenced by property in different media and distribution channels. general economic factors, including those affecting costs of health insurance, post-retirement benefits and any trends specific to the employee skill sets that the Company requires. 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. If there is a significant disruption in the supply of paper or a Because we 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 12 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 13 operating subsidiaries, and a significant portion of the approval, such as a merger, sale of substantially all Company’s revenues are generated from outside of the assets or similar transaction. 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 laws, regulations and policies, as well as by Note The risk factors listed above should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by the Company prior to and including the date hereof. fluctuations in currency exchange rates and by political, Forward-Looking Statements: financial or economic instability in foreign countries. This Annual Report on Form 10-K contains forward- Certain of our activities are subject to weather risks, which could disrupt our operations or otherwise adversely affect our financial performance. looking statements. 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 The Company conducts certain of its businesses and or expectations expressed by forward-looking maintains warehouse and office facilities in locations statements, including, without limitation, those that are at risk of being negatively affected by severe relating to the Company’s future business prospects, weather events, such as hurricanes, tornados, floods plans, ecommerce and digital initiatives, new product or snowstorms. This could impact the Company’s introductions, strategies, Common Core State school-based book clubs, school-based book fairs and Standards, goals, revenues, improved efficiencies, education businesses, in particular as a result of general costs, manufacturing costs, medical costs, school closures caused by such events. Accordingly, merit pay, operating margins, working capital, the Company could be adversely affected by any future liquidity, capital needs, interest costs, cash flows and significant weather event. 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, 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 except for the right of the holders of Common Stock to otherwise. 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 Item 1B | Unresolved Staff Comments issued. Richard Robinson, the Chairman of the Board, None 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 Item 2 | Properties elect up to four-fifths of the Corporation’s Board of The Company maintains its principal offices in the Directors and, without the approval of the metropolitan New York area, where it owns or leases Corporation’s other stockholders, to effect or block approximately 0.6 million square feet of space. The other actions or transactions requiring stockholder Company also owns or leases approximately 1.5 million square feet of office and warehouse space for 13 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 14 its primary warehouse and distribution facility located the Company’s consolidated financial position or in the Jefferson City, Missouri area. In addition, the results of operations. Company owns or leases approximately 2.9 million square feet of office and warehouse space in over 70 facilities in the United States, principally for Scholastic Item 4 | Mine Safety Disclosures book fairs. Not Applicable. Additionally, the Company owns or leases approximately 1.5 million square feet of office and warehouse space in over 100 facilities in Canada, the United Kingdom, Australia, New Zealand, Asia and elsewhere around the world for its international businesses. The Company considers its properties adequate for its current needs. With respect to the Company’s leased properties, no difficulties are anticipated in negotiating renewals as leases expire or in finding other satisfactory space, if current premises become unavailable. For further information concerning the Company’s obligations under its leases, see Notes 1 and 6 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 these 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 14 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 15 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, is traded on the NASDAQ Global Select Market 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. Set forth below are the quarterly high and low closing sales prices for the Common Stock as reported by NASDAQ for the periods indicated: First Quarter Second Quarter Third Quarter Fourth Quarter 2013 For fiscal years ended May 31, 2012 High $31.99 34.55 31.56 32.09 Low $26.04 25.03 27.81 25.62 High $30.20 30.00 32.00 40.18 Low $23.32 24.20 24.76 26.80 Holders: The number of holders of Class A Stock and Common Stock as of July 24, 2013 were 3 and approximately 10,000, respectively. Dividends: During the first and second quarters of fiscal 2012, the Company paid a regular quarterly dividend in the amount of $0.10 per Class A and Common share, which dividend was increased to $0.125 per Class A and Common share for the third and fourth quarters of fiscal 2012. Accordingly, the total dividend paid for fiscal 2012 was $0.45 per share. During fiscal 2013, the Company paid a regular quarterly dividend in the amount of $0.125 per Class A and Common share, amounting to a total dividend paid in fiscal 2013 of $0.50 per share. On July 17, 2013, the Board of Directors declared a cash dividend of $0.125 per Class A and Common share in respect of the first quarter of fiscal 2014. This dividend is payable on September 16, 2013 to shareholders of record on August 30, 2013. All dividends have been in compliance with the Company’s debt covenants. Share purchases: During fiscal 2013, the Company repurchased 432,330 Common shares on the open market at an average price paid per share of $27.34, for a total of approximately $11.8 million, pursuant to a share buy-back program authorized by the Board of Directors. During fiscal 2012, the Company repurchased 475,672 Common shares on the open market at an average price paid per share of $27.48, for a total cost of approximately $13.1 million, pursuant to a share buy-back program authorized by the Board of Directors. The following table provides information with respect to purchases of shares of Common Stock by the Corporation during the quarter ended May 31, 2013: Period Total number of shares purchased Average price paid per share Total number of shares purchased as part of publicly announced plans or programs Approximate dollar value (in millions) that may yet be purchased under the plans or programs March 1, 2013 through March 31, 2013 April 1, 2013 through April 30, 2013 May 1, 2013 through May 31, 2013 Total 61,251 168,447 — 229,698 $26.24 $26.05 $ — $26.10 61,251 168,447 — 229,698 $24.0 $19.6 $19.6 $19.6 As of May 31, 2013, approximately $19.6 million remained available for future purchases of Common shares under the current repurchase authorization of the Board of Directors. 15 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 16 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 two companies that includes Pearson PLC and John Wiley & Sons Inc. In the prior year, the customized peer group also included The McGraw-Hill Companies, which is no longer included in such peer group due to the reorganization of the McGraw-Hill Companies and subsequent sale of its education and educational publishing businesses in March 2013, resulting in such businesses no longer being part of a publicly traded company. The McGraw-Hill Companies had been included in the peer group primarily on the basis of its education and educational publishing businesses. The graph tracks the performance of a $100 investment in the Corporation’s Common Stock, in the peer group and in the index (with the reinvestment of all dividends) from June 1, 2008 to May 31, 2013. Comparison of 5 Year Cumulative Total Return* Among Scholastic Corporation, The NASDAQ Composite Index and a Peer Group n s u n s u n s u n s u n s u $180 $160 $140 $120 $100 s n u $80 $60 $40 $20 $0 5/08 5/09 5/10 5/11 5/12 5/13 u Scholastic Corporation s NASDAQ Composite Index n Peer Group *$100 invested on 5/31/08 in stock or index, including reinvestment of dividends. Fiscal year ending May 31. Scholastic Corporation NASDAQ Composite Index Peer Group 2008 $ 100.00 100.00 100.00 2009 $ 62.74 70.34 80.88 2010 $ 84.64 89.47 107.36 2011 $ 89.32 112.39 151.22 Fiscal year ended May 31, 2013 2012 $ 102.41 $ 89.76 118.20 112.08 154.35 145.17 The stock price performance included in this graph is not necessarily indicative of future stock price performance. 16 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 17 Item 6 | Selected Financial Data Statement of Operations Data: Total revenues Cost of goods sold (exclusive of depreciation and amortization) Selling, general and administrative expenses (exclusive of depreciation and amortization)(1) Depreciation and amortization(2) Severance(3) Loss on leases and asset impairments(4) Operating income Other income (expense) Interest expense, net Loss on investments(5) Earnings (loss) from continuing operations Earnings (loss) from discontinued operations, net of tax Net income (loss) Share Information: Earnings (loss) from continuing operations: Basic Diluted Earnings (loss) from discontinued operations: Basic Diluted Net income (loss): Basic Diluted (Amounts in millions, except per share data) 2013 2012 2011 For fiscal years ended May 31, 2009 2010 $ 1,792.4 $ 2,139.1 $ 1,877.6 $ 1,882.0 $ 1,812.8 829.6 815.0 66.5 13.4 0.0 67.9 0.0 14.5 — 35.8 (4.7) 31.1 1.12 1.10 (0.15) (0.15) 0.97 0.95 31.8 32.4 0.50 $ $ $ $ $ $ $ 984.6 878.5 68.8 14.9 7.0 185.3 (0.1) 15.5 — 108.1 (5.7) 102.4 3.45 3.39 (0.18) (0.18) 3.27 3.21 31.2 31.7 0.45 $ $ $ $ $ $ $ 869.0 834.7 60.1 6.7 3.4 103.7 (0.4) 15.6 (3.6) 45.3 (5.9) 39.4 1.36 1.34 (0.18) (0.18) 1.18 1.16 33.1 33.6 0.35 $ $ $ $ $ $ $ 843.1 798.7 59.5 9.2 40.1 131.4 0.9 16.2 (1.5) 60.5 (4.4) 56.1 1.66 1.64 (0.12) (0.12) 1.54 1.52 36.5 36.8 0.30 $ $ $ $ $ $ $ 859.5 778.1 61.2 26.5 26.3 61.2 0.7 23.0 (13.5) 7.3 (21.6) (14.3) $ $ $ $ 0.20 0.20 (0.58) (0.58) $ (0.38) $ (0.38) 37.2 37.4 0.30 $ Weighted average shares outstanding – basic Weighted average shares outstanding – diluted Dividends declared per common share Balance Sheet Data: Working Capital Cash and cash equivalents Total assets Long-term debt (excluding capital leases) Total debt Long-term capital lease obligations Total capital lease obligations Total stockholders’ equity (1) $ 404.9 $ 299.5 143.6 87.4 1,608.8 1,441.0 250.0 — 303.7 2.0 54.5 57.5 57.9 57.7 785.0 864.4 In fiscal 2013, the Company recorded a pretax charge of $4.0 related to asset impairments. In fiscal 2012, the Company recorded a pretax charge of $1.3 for an impairment of a U.S.- based equity method investment. In fiscal 2011, the Company recorded a pretax charge of $3.0 associated with restructuring in the UK. In fiscal 2010, the Company recorded a pretax charge of $4.7 associated with restructuring in the UK. In fiscal 2009, the Company recorded a pretax charge of $1.4 related to asset impairments. $ 335.4 105.3 1,487.0 159.9 203.4 55.0 55.5 740.0 $ 493.6 244.1 1,600.4 202.5 252.8 55.0 55.9 830.4 $ 427.5 194.9 1,670.3 152.8 159.3 56.4 57.4 830.3 (2) (3) (4) In fiscal 2012, the Company recorded a pretax charge of $4.9 for the impairment of intangible assets relating to certain publishing properties. In fiscal 2013, the Company recorded pretax severance expense of $9.6 as part of a cost savings initiative. In fiscal 2012, the Company recorded pretax severance expense of $9.3 for a voluntary retirement program. In fiscal 2009, the Company recorded pretax expense of $18.1 for employee-related expense related to the Company’s voluntary retirement program and a workforce reduction program. In fiscal 2012, the Company recorded a pretax impairment loss of $6.2 related to certain subleases in lower Manhattan. In fiscal 2011, the Company recorded a pretax impairment charge of $3.4 related to assets in the library publishing and classroom magazines business. In fiscal 2010, the Company recorded a pretax asset impairment charge of $36.3 attributable to intangible assets and prepublication costs associated with the library business and a pretax charge of $3.8 associated with a customer list. In fiscal 2009, the Company recorded a pretax goodwill impairment charge of $17.0 attributable to the Company’s UK operations. (5) In fiscal 2011, the Company recorded a pretax loss of $3.6 related to a UK-based cost method investment. In fiscal 2010, the Company recorded a pretax loss of $1.5 related to a U.S.-based cost method investment. In fiscal 2009, the Company recorded a pretax loss on investments of $13.5 related to investments in the UK. 17 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 18 Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations General The Company’s significant role in the reading and learning lives of children, both at school and at home, continues to be a core strength of the Company. The Company expects growth in fiscal 2014 to be driven by The Company categorizes its businesses into five further opportunities to deliver books to families that reportable segments: Children’s Book Publishing and help link children’s independent reading to Common Distribution; Educational Technology and Services; Core State Standards, and to provide teachers and Classroom and Supplemental Materials Publishing; administrators with customized curriculum packages Media, Licensing and Advertising(which collectively and professional development solutions that now cover represent the Company’s domestic operations); and grades pre-K to 12. Key to this growth is the International. This classification reflects the nature of introduction of five major new education technology products, services and distribution consistent with the products including System 44® Next Generation, method by which the Company’s chief operating MATH 180TM, iReadTM, Common Core Code XTM and decision-maker assesses operating performance and Read 180for iPad®, coupled with strong and growing allocates resources. 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 In fiscal 2013, revenue was $1,792.4 million, compared to $2,139.1 million a year ago, largely driven by lower U.S. and international sales of The Hunger Games trilogy, partially offset by stronger sales from the Company’s education businesses in the second half of the year. For the fiscal year, earnings per diluted share from continuing operations were $1.10 versus $3.39 in fiscal 2012. The Company is operating at a time of significant change in the book business and in education and is well-positioned to capitalize on the opportunities presented by evolving needs in the classroom and buying behavior in children’s books. With fewer retail outlets for children’s books, parents are increasingly relying on the Company’s book fair and book clubs channels to find age-appropriate, quality books. Additionally, educators are looking to the Company for custom print and digital curriculum packages and for technology-based programs, particularly for tablets, that support instructional needs as they implement the more rigorous Common Core State Standards. demand for the Company’s customized solutions packages provided through the Classroom and Supplemental Materials Publishingsegment. These packages, tailored for the K-8 English Language Arts block, include Guided Reading, Traits Writing, Classroom Magazines and other product and professional development offerings to meet the specific needs of school districts. In the children’s book businesses, the Company is aligning resources to serve customers in a unified way and introducing grade-specific marketing in the school book clubs. Children’s book revenue is expected to decrease slightly compared to fiscal 2013 due to anticipated lower year over year sales of The Hunger Games trilogy, expected to be partially offset by increased revenue per fair in school book fairs and new titles released through the trade channel. Book club revenue is expected to be flat. As planned, fiscal 2014 investments in Storia, the Company’s ereading platform and delivery system, will decrease. Platform development for Storia is substantially complete and future investments will focus on content delivery and enhancements, including features designed to make the application more useful in the classroom. The Company plans to continue to implement programs to enhance operating efficiency and to align its cost base with its revenue growth expectations. 18 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 19 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, School-Based Book Fairs – Revenues associated with school-based book fairs are related to sales of product. Book fairs are typically run by schools and/or parent teacher organizations over a five business-day period. The amount of revenue recognized for each fair represents the net amount of cash collected at the fair. Revenue is fully recognized at the completion of the fair. At the end of reporting periods, the Company defers estimated revenue for those fairs that have not been completed as of the period end, based on the number of fair days occurring after period end on a straight-line calculation of the full fair’s estimated revenue. current business factors, future expectations and Trade – Revenue from the sale of children’s books for various other assumptions believed to be reasonable distribution in the retail channel is recognized when under the circumstances, all of which are necessary in risks and benefits transfer to the customer, or when order to form a basis for determining the carrying the product is on sale and available to the public. For values of assets and liabilities. Actual results may differ newly published titles, the Company, on occasion, from those estimates and assumptions. On an on-going contractually agrees with its customers when the basis, the Company evaluates the adequacy of its reserves and the estimates used in calculations, publication may be first offered for sale to the public, or an agreed upon “Strict Laydown Date.” For such including, but not limited to: collectability of accounts titles, the risks and benefits of the publication are not receivable; sales returns; amortization periods; stock- deemed to be transferred to the customer until such based compensation expense; pension and other post- time that the publication can contractually be sold to retirement obligations; tax rates; recoverability of the public, and the Company defers revenue on sales of inventories, deferred income taxes and tax reserves, such titles until such time as the customer is permitted fixed assets, prepublication costs, royalty advances and to sell the product to the public. Revenue for ebooks, customer reward programs; and the fair value of goodwill and other intangibles. For a complete which is the net amount received from the retailer, is generally recognized upon electronic delivery to the description of the Company’s significant accounting customer by the retailer. policies, see Note 1 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data,” of this Report. 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. For ebooks, revenue is recognized upon electronic delivery to the customer. A reserve for estimated returns is established at the time of sale and recorded as a reduction to revenue. Actual returns are charged to the reserve as received. The calculation of the reserve for estimated returns is based on historical return rates, sales patterns, type of product and expectations. Actual returns could differ from the Company’s estimate. In order to develop the estimate of returns that will be received subsequent to May 31, 2013, management considers patterns of sales and returns in the months preceding May 31, 2013, as well as actual returns received subsequent to year end, available sell-through information and other return rate information that management believes is relevant. A one percentage point change in the estimated 19 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 20 reserve for returns rate would have resulted in an Magazines – Revenue is deferred and recognized increase or decrease in operating income for the year ratably over the subscription period, as the magazines ended May 31, 2013 of approximately $0.7 million. A are delivered. reserve for estimated bad debts is established based on the aggregate aging of accounts receivable and specific reserves on a customer-by-customer basis, where applicable. Magazine Advertising – Revenue is recognized when the magazine is for sale and available to the subscribers. Educational Technology and Services – For shipments to schools, revenue is recognized when risks and benefits transfer to the customer. Shipments to depositories are on consignment and revenue is recognized based on actual shipments from the Scholastic In-School Marketing – Revenue is recognized when the Company has satisfied its obligations under the program and the customer has acknowledged acceptance of the product or service. Certain revenues may be deferred pending future depositories to the schools. For certain software-based deliverables. products, the Company offers new customers installation, maintenance and training with these products and, in such cases, revenue is deferred and recognized as services are delivered or over the life of the contract. Revenues from contracts with multiple deliverables are recognized as each deliverable is earned, based on the relative selling price of each deliverable, provided the deliverable has value to customers on a standalone basis, the customer has full use of the deliverable and there is no further obligation from the Company. If there is a right of return, revenue is recognized if delivery of the undelivered items or services is probable and substantially in control of the Company. Classroom and Supplemental Materials Publishing – Revenue from the sale of classroom and supplemental materials is recognized upon shipment of the products. 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 recorded in accordance with royalty agreements at the time the licensed materials are available to the licensee and collections are reasonably assured. Accounts receivable: Accounts receivable are recorded net of allowances for doubtful accounts and reserves for returns. In the normal course of business, the Company extends credit to customers that satisfy predefined credit criteria. Reserves for returns are based on historical return rates, sales patterns and an assessment of product on hand with the customer when estimable. Allowances for doubtful accounts are established through the evaluation of accounts receivable aging, prior collection experience and creditworthiness of the Company’s customers 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, 2013 of approximately $2.6 million. Inventories: Inventories, consisting principally of books, are stated at the lower of cost, using the first-in, first-out method, or market. The Company records a reserve for excess and obsolete inventory based upon a calculation using the historical usage rates and sales patterns of its products, and specifically identified obsolete inventory. The impact of a one percentage point change in the obsolescence reserve rate would have 20 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 21 resulted in an increase or decrease in operating comparisons to similar companies. The Company income for the year ended May 31, 2013 of reviews its definition of reporting units annually or approximately $3.6 million. more frequently if conditions indicate that the 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: 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 identified twelve separate reporting units for goodwill impairment testing purposes. 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 Goodwill and other intangible assets with indefinite possible that changes in assumptions and the lives are not amortized and are reviewed for impairment annually or more frequently if impairment indicators arise. performance of certain reporting units could lead to impairments in future periods, which may be material. The reporting unit associated with the Company’s book With regard to goodwill, the Company compares the clubs operations was the only reporting unit valued estimated fair value of its identified reporting units to using a quantitative analysis as of May 31, 2013, as the carrying value of the net assets. The Company first changes in market conditions and declining revenues performs a qualitative assessment to determine in the period were indicative of a potential for goodwill whether it is more likely than not that the fair value of impairment. The fair value of the unit declined from its identified reporting units are less than their the prior year from $65.0 million to $59.5 million, but carrying values. If it is more likely than not that the remained higher than the carrying value of $48.8 fair value of a reporting unit is less than its carrying million. This reporting unit has $13.4 million of amount the Company performs the two-step test. For associated goodwill. The Company used forecasted cash each of the reporting units, the estimated fair value is flows, and to a lesser extent, observable revenue determined utilizing the expected present value of the multiples for comparable companies, consistent with projected future cash flows of the units, in addition to determining its fair value. A discount rate of 15% and a 21 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 22 perpetual growth rate of 3% were employed for the Other noncurrent liabilities: discounted cash flow analysis and revenue multiples All of the rate assumptions discussed below impact used were between 0.4 times historical revenues and the Company’s calculations of its pension and post- 0.5 times future revenues. The value of the reporting retirement obligations. The rates applied by the unit is largely dependent on the success of the Storia Company are based on the portfolios’ past average ereading app which was launched in fiscal 2012. rates of return, discount rates and actuarial Should Storia not achieve its projected revenue, and the information. Any change in market performance, Company is unable to adjust its strategy to effectively interest rate performance, assumed health care costs compensate, there is a potential for an impairment of trend rate or compensation rates could result in goodwill in this reporting unit in future periods. significant changes in the Company’s pension and With regard to other intangibles with indefinite lives, post-retirement obligations. the Company determines the fair value by asset, which Pension obligations – The Company’s pension is then compared to its carrying value. The Company calculations are based on three primary actuarial first performs a qualitative assessment to determine assumptions: the discount rate, the long-term expected whether it is more likely than not that the fair value of rate of return on plan assets and the anticipated rate its identified reporting unit is less than its carrying of compensation increases. The discount rate is used in value. If it is more likely than not that the fair value of the measurement of the projected, accumulated and a reporting unit is less than its carrying amount the vested benefit obligations and interest cost components Company performs a quantitative test. The estimated of net periodic pension costs. The long-term expected fair value is determined utilizing the expected present return on plan assets is used to calculate the expected value of the projected future cash flows of the asset. earnings from the investment or reinvestment of plan Intangible assets with definite lives consist principally of customer lists, covenants not to compete, and certain other intellectual property assets and are amortized over their expected useful lives. Customer lists are amortized on a straight-line basis over a five- year period, while covenants not to compete are amortized on a straight-line basis over their contractual term. Other intellectual property assets are amortized over their remaining useful lives, which range from five to twenty years. Unredeemed Incentive Credits: The Company employs incentive programs to assets. The anticipated rate of compensation increase is used to estimate the increase in compensation for participants of the plan from their current age to their assumed retirement age. The estimated compensation amounts are used to determine the benefit obligations and the service cost. 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, 2013 of approximately $1.0 million and $0.8 million, respectively. A one percentage point change in the expected long-term return on plan assets would have resulted in an increase or decrease in operating income for the year ended May 31, 2013 of encourage sponsor participation in its book clubs and approximately $1.4 million. Pension benefits in the book fairs. These programs allow the sponsors to accumulate credits which can then be redeemed for Company products or other items offered by the Company. The Company recognizes a liability at the cash balance plan for employees located in the United States are based on formulas in which the employees’ balances are credited monthly with interest based on the average rate for one-year United States Treasury estimated cost of providing these credits at the time of Bills plus 1%. Contribution credits are based on the recognition of revenue for the underlying purchases of Company product that resulted in the employees’ years of service and compensation levels during their employment periods for the periods prior granting of the credits. As the credits are redeemed, to June 1, 2009. such liability is reduced. 22 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 23 Other post-retirement benefits – The Company Treasury rate in effect on the date of grant with a term provides post-retirement benefits, consisting of equal to the expected life. The expected term is healthcare and life insurance benefits, to eligible determined based on historical employee exercise and retired United States-based employees. The post- post-vesting termination behavior. The expected retirement medical plan benefits are funded on a pay- dividend yield is based on actual dividends paid or to as-you-go basis, with the employee paying a portion of be paid by the Company. The volatility is estimated the premium and the Company paying the remainder based on historical volatility corresponding to the of the medical cost. The existing benefit obligation is expected life. 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 service and interest cost components of net periodic post-retirement benefit cost. 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, 2013 of approximately $0.6 million. 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 health care cost trend rate would have resulted in an increase or decrease in operating income for the year ended May 31, 2013 of approximately $0.2 million and $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 the post-retirement benefit obligation as of May 31, 2013 of approximately $4.0 million and $3.4 million, respectively. 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 on a straight-line basis over an award’s requisite service period, which is generally the vesting period, based on the award’s fair value at the date of grant. 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. Income Taxes – The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to enter into the determination of taxable income. 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 recognizes a liability for uncertain tax positions that the Company has taken or expects to file in an income tax return. An uncertain tax position is recognized only if it is “more likely than not” that the 23 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 24 position is sustainable based on its technical merit. A recognized tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority having full knowledge of all relevant information. 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. If foreign investments are not expected to be indefinitely invested, the Company provides for income taxes on the portion that is not indefinitely invested. 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 liability associated with these examinations and assessments is probable and can be reliably estimated, the Company has made accruals for these matters which are reflected in the Company’s Consolidated Financial Statements. Future developments relating to the foregoing could result in adjustments being made to these accruals. 24 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 25 Results of Operations 2013 $ Revenues: Children’s Book Publishing and Distribution $ 846.9 Educational Technology and Services 227.7 Classroom and Supplemental Materials Publishing Media, Licensing and Advertising International 218.0 58.7 441.1 (Amounts in millions, except per share data) 2012 For fiscal years ended May 31, 2011 %(1) 47.2 12.7 12.2 3.3 24.6 $ $1,111.3 254.7 208.2 75.3 489.6 %(1) 52.0 11.9 9.7 3.5 22.9 $ $ 922.0 230.8 197.2 82.7 444.9 %(1) 49.1 12.3 10.5 4.4 23.7 Total revenues 1,792.4 100.0 2,139.1 100.0 1,877.6 100.0 Cost of goods sold (exclusive of depreciation and amortization) 829.6 46.3 984.6 46.0 869.0 Selling, general and administrative expenses (exclusive of depreciation and amortization)(2) Depreciation and amortization(3) Severance(4) Loss on leases and asset impairments(5) Operating income Other income (expense) Interest income Interest expense Loss on investments(6) Earnings (loss) from continuing operations before income taxes Earnings (loss) from continuing operations Earnings (loss) from discontinued operations, net of tax Net income (loss) Earnings (loss) per share: Basic: 815.0 66.5 13.4 0.0 67.9 0.0 1.2 (15.7) — 53.4 35.8 (4.7) $ 31.1 Earnings (loss) from continuing operations $ 1.12 Earnings (loss) from discontinued operations Net income (loss) Diluted: $ (0.15) $ 0.97 Earnings (loss) from continuing operations $ 1.10 Earnings (loss) from discontinued operations Net income (loss) (1) Represents percentage of total revenues. $ (0.15) $ 0.95 45.5 3.7 0.7 0.0 3.8 0.0 0.1 (0.9) — 3.0 2.0 (0.3) 1.7 878.5 68.8 14.9 7.0 185.3 (0.1) 1.0 (16.5) — 169.7 108.1 (5.7) $ 102.4 $ 3.45 $ (0.18) $ 3.27 $ 3.39 $ (0.18) $ 3.21 41.1 3.2 0.7 0.3 8.7 0.0 0.1 (0.8) — 8.0 5.1 (0.3) 4.8 834.7 60.1 6.7 3.4 103.7 (0.4) 1.5 (17.1) (3.6) 84.1 45.3 (5.9) $ 39.4 $ 1.36 $ (0.18) $ 1.18 $ 1.34 $ (0.18) $ 1.16 46.3 44.5 3.2 0.4 0.2 5.5 0.0 0.1 (0.9) (0.2) 4.5 2.4 (0.3) 2.1 (2) (3) (4) (5) In fiscal 2013, the Company recorded a pretax charge of $4.0 related to asset impairments. In fiscal 2012, the Company recorded a pretax charge of $1.3 for an impairment of a U.S.-based equity investment. In fiscal 2011, the Company recorded a pretax charge of $3.0 associated with restructuring in the UK. In fiscal 2012, the Company recorded a pretax charge of $4.9 for the impairment of intangible assets relating to certain publishing properties. In fiscal 2013, the Company recorded pretax severance expense of $9.6 as part of a cost savings initiative. In fiscal 2012, the Company recorded pretax severance expense of $9.3 for a voluntary retirement program. In fiscal 2012, the Company recorded a pretax impairment loss of $6.2 related to certain subleases in lower Manhattan. In fiscal 2011, the Company recorded a pretax impairment charge of $3.4 related to assets in the library publishing and classroom magazines business. (6) In fiscal 2011, the Company recorded a pretax loss of $3.6 related to a UK-based cost-method investment. 25 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 26 Results of Operations – Consolidated Cost of goods sold (exclusive of depreciation and Revenues for fiscal 2013 decreased by $346.7 million, or 16.2%, to $1,792.4 million, compared to $2,139.1 million in fiscal 2012 due to lower revenues in the Children’s Book Publishing and Distributionsegment, the Educational Technology and Servicessegment, the Internationalsegment and the Media, Licensing and Advertisingsegment of $264.4 million, $27.0 million, $48.5 million and $16.6 million, respectively, while revenues increased $9.8 million in the Classroom and Supplemental Materials Publishingsegment. amortization) as a percentage of revenue for fiscal 2012 remained relatively consistent at 46.0%, compared to 46.3% in fiscal 2011. The increase in fiscal 2012 of $115.6 million to $984.6 million, compared to $869.0 million in fiscal 2011, was primarily related to the increase in revenues. In addition, in response to changing trends in the children’s book market the Company changed its estimate for inventory obsolescence and recorded an increase in the reserve of $17.9 million. Product, service and production costs as well as royalty costs Revenues for fiscal 2012 increased by $261.5 million increased in fiscal 2012, primarily related to the to $2,139.1 million, compared to $1,877.6 million in higher revenues discussed above. Included in product, fiscal 2011. This increase was primarily related to service and production costs is the $17.9 million of increased revenues in the Children’s Book Publishing additional inventory obsolescence costs, as referenced and Distributionsegment of $189.3 million, driven by above. Prepublication and production amortization for higher sales in the Company’s trade and school book fiscal 2012 increased by $4.5 million, primarily related fairs businesses; higher revenues in the International to an impairment recorded by the Company for one of segment of $44.7 million; higher revenues in the its production properties. Postage, freight, shipping, Educational Technology and Servicessegment of fulfillment and all other costs increased slightly from $23.9 million relating to higher sales of educational fiscal 2011 to fiscal 2012; however, these costs technology products and related services; and higher decreased as a percentage of revenue by 1.4%, from revenues in the Classroom and Supplemental Materials 12.4% in fiscal 2011 to 11.0% in fiscal 2012. Publishingsegment of $11.0 million. The increase was partially offset by lower revenues in the Media, Licensing and Advertisingsegment of $7.4 million. Cost of goods sold (exclusive of depreciation and amortization) as a percentage of revenue for fiscal 2013 remained relatively consistent at 46.3%, compared to 46.0% in the prior fiscal year. While cost of goods sold as a percentage of revenue remained consistent for the total Company, the Children’s Book Publishing and Distributionsegment experienced higher relative costs for free books and related fulfillment costs in the book clubs distribution channel and lower volumes in the Trade business, but these Components of Cost of goods sold (exclusive of depreciation and amortization) for fiscal years 2013, 2012 and 2011 are as follows: ($ amounts in millions) 2013 2012 2011 $ 456.0 $ 536.2 $ 492.1 90.7 51.7 157.4 56.1 93.3 51.6 Product, service and production costs Royalty costs Prepublication and production amortization Postage, freight, shipping, fulfillment and all other costs 231.2 234.9 232.0 Total cost of goods sold (exclusive of depreciation and amortization) $ 829.6 $ 984.6 $ 869.0 were largely offset by improvements in the book fairs Selling, general and administrative expenses business. In educational segments, higher service (exclusive of depreciation and amortization) in fiscal revenues in the Educational Technology and Services 2013 decreased by $63.5 million to $815.0 million, segment, which carry a higher relative cost, were compared to $878.5 million in the prior fiscal year. offset by improved margins in the Classroom and The decrease was driven by lower sales tax accrual in Supplemental Materials Publishingsegment due to two jurisdictions in the Children’s Book Publishing increased circulation of classroom magazines. and Distributionsegment resulting from sales tax assessments of $19.7 million recorded in fiscal 2012, 26 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 27 and the absence of employee bonuses and lower stock The Company’s provision for income taxes with respect compensation expense in fiscal 2013. to continuing operations resulted in an effective tax Selling, general and administrative expenses for fiscal 2012 increased $43.8 million to $878.5 million, compared to $834.7 million in fiscal 2011. The increase was driven by higher employee-related costs associated with higher revenues and increased sales tax expenses, which included accruals of $19.7 million based on sales tax assessments in two jurisdictions, as rate of 33.0%, 36.3% and 46.1% for fiscal 2013, 2012 and 2011, respectively. The decrease in the effective tax rate for fiscal 2013 and 2012 was primarily due to the reversal of valuation allowances based on higher profitability in the UK and uncertain tax positions. These valuation allowances were established in fiscal 2011 and prior years. well as higher continued digital initiative spending. Earnings from continuing operations for fiscal 2013 Severance expense of $13.4 million in fiscal 2013 includes $9.6 million related to cost reduction initiatives as the Company continues to focus on efficiency initiatives. Severance expense was $14.9 million in fiscal 2012, compared to $6.7 million in fiscal 2011, related to the Company’s cost reduction programs, which included $9.3 million recorded in fiscal 2012 relating to a voluntary retirement program. During fiscal 2012, the Company entered into sublease arrangements for certain leased properties in Manhattan. The fair value of the net rents to be received was less than the Company’s lease commitments for these properties over the remaining term of the leases. Accordingly, the Company recognized a loss on these subleases of $6.2 million. The Company has substantially exited these leases as of May 31, 2013. In fiscal 2011, the Company determined the carrying value of its Scholastic Library Publishing and Classroom Magazines business within the Classroom and Supplemental Materials Publishing segment exceeded the fair value of this reporting unit and recorded an impairment charge of $3.4 million. For fiscal 2013, net interest expense decreased to $14.5 million, compared to $15.5 million in fiscal 2012, reflecting lower interest rates and borrowings. Net interest expense for fiscal 2012 was relatively flat to the fiscal 2011 net interest expense of $15.6 million. In fiscal 2011, the Company recognized a $3.6 million loss on a UK-based cost method investment. decreased by $72.3 million to $35.8 million, compared to $108.1 million in fiscal 2012. Earnings from continuing operations increased by $62.8 million to $108.1 million in fiscal 2012, compared to $45.3 million in fiscal 2011. The basic and diluted earnings from continuing operations per share of Class A Stock and Common Stock were $1.12 and $1.10, respectively, in fiscal 2013, $3.45 and $3.39, respectively, in fiscal 2012 and $1.36 and $1.34, respectively, in fiscal 2011. Loss from discontinued operations, net of tax, for fiscal 2013 was $4.7 million, compared to $5.7 million for fiscal 2012. The loss in the current fiscal year was principally comprised of closure costs and asset impairments totaling $4.0 million. The loss in fiscal 2012 includes an impairment of the Company’s Maumelle facility of $2.2 million, which was sold in fiscal 2013, and operational losses from the Company’s discontinued Back to Basics business of $2.1 million. In addition, in fiscal 2012 the Company recognized a liability for the present value of future lease payments due on multiple leases in a discontinued UK business as the Company believes there is no opportunity for subleasing. The resulting net income for fiscal 2013 was $31.1 million, or $0.97 and $0.95 per basic and diluted share, respectively, compared to net income of $102.4 million, or $3.27 and $3.21 per basic and diluted share, respectively, in fiscal 2012. Net income in fiscal 2011 was $39.4 million, or $1.18 and $1.16 per basic and diluted share, respectively. 27 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 28 Results of Operations – Segments C H I L D R E N ’ S B O O K P U B L I S H I N G A N D D I S T R I B U T I O N 2013 compared to 2012 2012 compared to 2011 ($ amounts in millions) 2012 2011 $ change % change $ change % change $1,111.3 $922.0 $(264.4) –23.8% $189.3 Revenues Cost of goods sold (exclusive of depreciation and amortization) Other operating expenses* Depreciation and amortization 2013 $846.9 359.4 446.5 16.5 Operating income (loss) Operating margin $ 24.5 $ 152.2 2.9% 13.7% 466.7 471.8 20.6 396.0 433.1 15.6 $ 77.3 8.4% (107.3) (25.3) (4.1) $(127.7) –23.0% –5.4% –19.9% –83.9% 70.7 38.7 5.0 $ 74.9 20.5% 17.9% 8.9% 32.1% 96.9% * Other operating expenses include selling, general and administrative expenses, bad debt expenses and asset impairments where applicable. Revenues for fiscal 2013 decreased by $264.4 million 42.4% of revenues, compared to $466.7 million, or to $846.9 million, compared to $1,111.3 million in 42.0% of revenues, in fiscal 2012. The absolute fiscal 2012. Lower net revenues in the Company’s decrease in cost of goods sold of $107.3 million is due trade channel of $213.0 million reflected decreased predominantly to the lower level of Hunger Games sales of the Hunger Games trilogy compared to the sales in fiscal 2013. Cost of goods sold as a percentage trilogy’s strong results in fiscal 2012. Revenues from of revenue remained flat for this segment, with higher the Company’s book clubs channel declined $57.5 relative costs for free books and related fulfillment million, related to lower revenue per event and costs of $3.2 million in the book clubs distribution decreased sponsorship. These decreases were partially channel and lower volumes in the trade channel being offset by an increase in the Company’s book fair offset by improved margins primarily from the book channel of $6.1 million over the prior fiscal year fairs channel, as well as book clubs, driven by lower driven by modest increases in the number of fairs and inventory obsolescence in fiscal 2013. revenue per fair. Cost of goods sold (exclusive of depreciation and Revenues for fiscal 2012 increased by $189.3 million amortization) for fiscal 2011 was $396.0 million, or to $1,111.3 million, compared to $922.0 million in 43.0% of revenues. The absolute increase in cost of fiscal 2011. Revenues from the Company’s trade goods sold of $70.7 million from fiscal 2011 to fiscal distribution channel increased by $206.3 million from 2012 is due to the increased level of Hunger Games fiscal 2012 to fiscal 2011, driven by increased sales, in sales and higher inventory obsolescence due to a both print and ebook formats, of the Hunger Games change in estimated obsolescence. Cost of goods sold trilogy, as well as other titles. Revenues from school as a percentage of revenue remained relatively flat for book fairs increased by $17.7 million in fiscal 2012 this segment as increased inventory obsolescence in from fiscal 2011, related to both an increase in revenue fiscal 2012 was offset by higher volume related per fair and an increase in the number of fairs held. margins in the trade channel. Additionally, warehouse sales in fiscal 2012 increased as compared to fiscal 2011. Revenues from school book clubs in fiscal 2012 decreased by $34.7 million compared to fiscal 2011. During fiscal 2012, the number of book club sponsors declined modestly from fiscal 2011. Other operating expenses decreased by $25.3 million to $446.5 million in fiscal 2013, compared to $471.8 million in fiscal 2012. The decrease is primarily related to the prior fiscal year’s additional sales tax expense of $19.7 million relating to sales tax assessments in two jurisdictions in the Company’s book clubs channel, as Cost of goods sold (exclusive of depreciation and well as the higher prior year employee-related expenses amortization) for fiscal 2013 was $359.4 million, or for incentive compensation, favorability in collections 28 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 29 in the Company’s trade channel customer accounts in was lower compared to the prior year due to Hunger the current fiscal year, and higher amortization Games related revenues, but remained strong from expense in the prior fiscal year for impairment of titles such as The 39 Clues® series and the Harry certain publishing and trademark rights of $4.9 Potter series, as well as other titles, such as Dramaby million. These decreases were partially offset by higher Raina Telgemeier, The Raven Boys by Maggie promotional expense of $5.7 million in the book clubs Stiefvater, and Captain Underpants and the Revolting channel in the current fiscal year. Revenge of the Radioactive Robo-Boxersby Dav Pilkey. Other operating expenses increased by $38.7 million to $471.8 million in fiscal 2012, compared to $433.1 million in fiscal 2011. Higher sales tax expense, driven by the $19.7 million attributable to two jurisdictions, The Company is actively reducing promotional costs in book clubs channels by more precisely targeting its marketing resources. This segment continues to invest in its Storia ereading and ebook initiatives. higher employee-related expenses for incentive Segment operating income in fiscal 2012 increased by compensation and higher digital spending was $74.9 million to $152.2 million, compared to $77.3 partially offset by decreased promotional expense of million in fiscal 2011, driven primarily by the higher $18.5 million in the book clubs channel in fiscal 2012 revenues in the Company’s trade and school book fair compared to fiscal 2011. channels, as well as by decreased promotional Segment operating income for fiscal 2013 decreased by $127.7 million to $24.5 million, compared to $152.2 million in the prior fiscal year. The prior fiscal year benefited from the success of the Hunger Games trilogy, while fiscal 2013 experienced strong results from the book fairs channel, offset by lower revenues and higher promotional expenses in the book clubs channel. Operating income from trade channel sales E D U C A T I O N A L T E C H N O L O G Y A N D S E R V I C E S expenses in the Company’s school book clubs channel. These were partially offset by increased sales tax expense and increased expenses related to the Company’s continued investment in its digital initiatives, as well as higher employee incentive costs associated with higher revenue, increases in reserves for obsolete inventory and the partial impairment of one of the Company’s publishing properties. Revenues Cost of goods sold (exclusive of depreciation and amortization) Other operating expenses* Depreciation and amortization Operating income (loss) Operating margin 2013 $227.7 88.7 108.3 1.2 $ 29.5 13.0% 2012 $254.7 90.5 113.7 1.3 $ 49.2 19.3% 2013 compared to 2012 2012 compared to 2011 2011 $ change % change $ change % change ($ amounts in millions) $230.8 $(27.0) –10.6% $23.9 80.4 111.1 1.3 $ 38.0 16.5% (1.8) (5.4) (0.1) $(19.7) –2.0% –4.7% –7.7% –40.0% 10.1 2.6 — $11.2 10.4% 12.6% 2.3% 0.0% 29.5% * Other operating expenses include selling, general and administrative expenses, bad debt expenses and asset impairments where applicable. Revenues for the fiscal year ended May 31, 2013 decreased by $27.0 million, or 10.6%, to $227.7 million, compared to $254.7 million in the prior fiscal year, primarily related to decreased sales of curriculum educational technology products of $32.9 million, due to lower spending by school districts, as well as a significant sale of adoption product in Texas in the prior fiscal year. In addition, the prior fiscal year benefited from higher revenues related to the launch of READ 180® Next Generation. The decrease was partially offset by higher revenues of $7.8 million for products and services provided by the Math Solutions business and by the consulting business associated with training for the Common Core State Standards, as the Company meets the increased demand for such services. 29 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 30 In fiscal 2012, segment revenues increased by $23.9 million to $254.7 million, compared to $230.8 million in fiscal 2011, driven by higher sales of educational technology products and related services, including Read 180 Next Generationproducts and services, which was launched late in fiscal 2011. Cost of goods sold (exclusive of depreciation and amortization) decreased to $88.7 million, or 39.0% of revenues, in fiscal 2013, compared to $90.5 million, or 35.5% of revenues, for fiscal 2012. The increase in Cost of goods sold as a percentage of revenue was primarily due to a shift in revenues from higher margin product sales to lower margin service revenues. The Company’s service revenues as a percentage of total Educational Technology and Services revenue was 37.8% for fiscal 2013, compared to 31.4% for fiscal 2012. Fiscal 2013 includes accelerated prepublication costs of $2.0 million, while fiscal 2012 includes accelerated amortization of $0.8 million. Cost of goods sold (exclusive of depreciation and amortization) increased $10.1 million to $90.5 million in fiscal 2012, compared to $80.4 million in fiscal 2011. Cost of goods sold as a percentage of sales of 34.8% in fiscal 2011 remained relatively consistent in 2012, as the Company’s cost structure did not vary. Other operating expenses for fiscal 2013 decreased by $5.4 million to $108.3 million, compared to $113.7 million in the prior fiscal year. The decrease was partially related to lower commission expense of $2.4 million, resulting from the lower revenue, as well as higher incentive compensation costs in the prior fiscal year period. Other operating expenses for fiscal 2012 increased by $2.6 million to $113.7 million, compared to $111.1 million in fiscal 2011. The modest increase was related to incentive compensation costs. Segment operating income for fiscal 2013 decreased by $19.7 million, or 40.0%, to $29.5 million, compared to $49.2 million in the prior fiscal year period. This segment benefited in the prior year from the launch of READ 180Next Generation, and did not have similar product launches in fiscal 2013. The segment has made significant investments and plans new product launches in fiscal 2014, including System 44® Next Generation, MATH 180TM, iReadTM, Common Core Code XTM and Read 180for iPad®. These new products assist educators in the implementation of Common Core State Standards and in incorporating more technology and mobile solutions in the classroom. In fiscal 2012, segment operating income increased by $11.2 million to $49.2 million, compared to $38.0 million in the prior fiscal year, related to the higher revenues, partially offset by increased employee-related expenses and incentive compensation in the segment. C L A S S R O O M A N D S U P P L E M E N T A L M A T E R I A L S P U B L I S H I N G Revenues Cost of goods sold (exclusive of depreciation and amortization) Other operating expenses* Depreciation and amortization Operating income (loss) Operating margin 2013 $218.0 83.9 103.1 1.4 $ 29.6 13.6% 2012 $208.2 86.2 102.7 1.0 $ 18.3 8.8% 2013 compared to 2012 2012 compared to 2011 2011 $ change % change $ change % change ($ amounts in millions) $197.2 79.8 102.5 1.3 $ 13.6 6.9% $ 9.8 (2.3) 0.4 0.4 $11.3 4.7% $11.0 5.6% –2.7% 0.4% 40.0% 61.7% 6.4 0.2 (0.3) $ 4.7 8.0% 0.2% –23.1% 34.6% * Other operating expenses include selling, general and administrative expenses, bad debt expenses and asset impairments where applicable. 30 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 31 Revenues for fiscal 2013 increased by $9.8 million, or Cost of goods sold (exclusive of depreciation and 4.7%, to $218.0 million, compared to $208.2 million in amortization) as a percentage of revenue remained the prior fiscal year. This increase was due to higher consistent at approximately 41% in fiscal 2012 from revenues from sales of classroom magazines of $16.8 fiscal 2011. million. Circulation improved in the classroom magazines business, as the Company experienced increased demand for non-fiction content to meet the requirements of the Common Core State Standards, as well as strong interest for digital magazine content. Partially offsetting this increase were decreased sales of classroom libraries. In fiscal 2012, segment revenues increased by $11.0 million to $208.2 million, compared to $197.2 million in fiscal 2011, driven by higher revenues in the Company’s classroom magazines business related to the Company’s acquisition of Weekly Reader,which was fully integrated for fiscal year 2013, and improvements in all other segment channels. Other operating expenses for fiscal 2013 were relatively consistent at $103.1 million, compared to $102.7 million in fiscal 2012 and $102.5 million in fiscal 2011. Fiscal 2011 incurred an impairment charge of $3.4 million and experienced lower employee-related expenses than the two most recent fiscal years. Segment operating income for fiscal 2013 improved significantly to $29.6 million, compared to $18.3 million in fiscal 2012. The above noted growth in the classroom magazines business led the improvement. The Company views this segment as a strategic component of both its digital initiatives and meeting Common Core State Standards. In the current year, the Cost of goods sold (exclusive of depreciation and Company began providing customized classroom amortization) for the fiscal year ended May 31, 2013 curriculum and teaching guides, broadening the was $83.9 million, or 38.5% of revenue, compared to offering to classrooms. $86.2 million, or 41.4% of revenue, in fiscal 2012. The absolute decrease in Cost of goods sold was the result of lower sales volume of classroom libraries. The improvement as a percentage of sales is the result of higher circulation in the classroom magazines business, as much of the content cost in this business is fixed and does not vary with increased circulation. M E D I A , L I C E N S I N G A N D A D V E R T I S I N G In fiscal 2012, segment operating income increased by $4.7 million to $18.3 million, compared to $13.6 million in the prior fiscal year, related to the higher revenues in the Company’s library publishing business, as well as an impairment charge of $3.4 million in fiscal 2011. Revenues Cost of goods sold (exclusive of depreciation and amortization) Other operating expenses* Depreciation and amortization Operating income (loss) Operating margin 2013 $58.7 22.0 31.5 0.5 $ 4.7 8.0% 2012 $75.3 40.6 39.1 0.5 $(4.9) –6.5% 2011 $82.7 35.9 42.6 0.7 $ 3.5 4.2% 2013 compared to 2012 2012 compared to 2011 $ change % change $ change % change ($ amounts in millions) $(16.6) (18.6) (7.6) — $ 9.6 –22.0% –45.8% –19.4% 0.0% ** $(7.4) 4.7 (3.5) (0.2) $(8.4) –8.9% 13.1% –8.2% –28.6% ** * Other operating expenses include selling, general and administrative expenses, bad debt expenses and asset impairments where applicable. ** Not meaningful Revenues for fiscal 2013 decreased by $16.6 million to $58.7 million, compared to $75.3 million in the prior fiscal year. This decrease was primarily related to the absence of $9.9 million of revenues from sales of console games, as the Company has reduced its focus on interactive products. Lower production revenues of $6.1 million, principally 31 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 32 of Word Girl®, and lower advertising and consumer Other operating expenses for fiscal 2013 decreased by magazine revenues of $1.3 million also contributed to $7.6 million to $31.5 million, compared to $39.1 the decline. Partially offsetting these declines were million in the prior fiscal year period. The decrease is increased sales of audio books of $2.0 million. related to settlement income received of $1.3 million, In fiscal 2012, segment revenues declined by $7.4 million to $75.3 million, compared to $82.7 million in fiscal 2011, driven by anticipated lower revenues in as well as lower promotional, employee and other operating expenses in the Company’s consumer magazine business and Scholastic Entertainment, Inc. the Company’s custom publishing and magazine Segment operating income for fiscal 2013 was $4.7 advertising businesses of $10.5 million, partially offset million, compared to a loss of $4.9 million in the prior by increased revenues in the Company’s interactive fiscal year. The absence of the above noted accelerated business of $4.9 million. amortization in the production business, the success of Cost of goods sold (exclusive of depreciation and amortization) was $22.0 million, or 37.5% of revenue, for fiscal 2013, compared to $40.6 million, or 53.9% of revenue, for the prior fiscal year. The improvement as a percentage of revenue was driven by the reduced focus on low-margin console game sales. Contributing the audio books business and the return of the consumer magazines business to a profitable position were responsible for the improvements in fiscal 2013. The Company continues to decrease its reliance on low- margin console products and is focusing its efforts on repurposing content for digital platforms. to the improvement was the prior year acceleration of In fiscal 2012, the segment had an operating loss of amortization on certain owned properties. Cost of $4.9 million, compared to operating income of $3.5 goods sold was $35.9 million in fiscal 2011, or 43.4% million in fiscal 2011, yielding a reduction in of revenue. The increase from fiscal 2011 to fiscal profitability of $8.4 million, primarily related to the 2012 is attributable to the accelerated amortization for lower revenues, as well as accelerated amortization of certain owned properties of $4.0 million in fiscal 2012. one of the Company’s production properties. I N T E R N A T I O N A L Revenues Cost of goods sold (exclusive of depreciation and amortization) Other operating expenses* Depreciation and amortization Operating income (loss) Operating margin 2013 $441.1 213.6 182.4 5.3 $ 39.8 9.0% 2012 $489.6 242.5 183.1 6.4 $ 57.6 11.8% 2013 compared to 2012 2012 compared to 2011 2011 $ change % change $ change % change ($ amounts in millions) $444.9 $(48.5) –9.9% $44.7 221.5 179.5 5.6 $ 38.3 8.6% (28.9) (0.7) (1.1) $(17.8) –11.9% –0.4% –17.2% –30.9% 21.0 3.6 0.8 $19.3 10.0% 9.5% 2.0% 14.3% 50.4% * Other operating expenses include selling, general and administrative expenses, bad debt expenses and asset impairments where applicable. Revenues for fiscal 2013 decreased by $48.5 million to $441.1 million, compared to $489.6 million in the prior fiscal year. This decrease was primarily related to lower revenues in Canada of $27.4 million, primarily in the trade and book clubs channels, as well as lower revenues in Australia of $13.4 million, primarily in the new media and trade businesses. In both cases, the lower revenues in the trade channel resulted from lower sales of the Hunger Games trilogy, as well as the negative impact of foreign currency exchange rates of $3.9 million, all of which were partially offset by higher revenues in the Company’s export business of $2.0 million and increases in the Company’s businesses in Asia of $2.8 million, where the Company is focused on educational products. 32 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 33 In fiscal 2012, segment revenues increased by $44.7 prior year. Fiscal 2011 unallocated overhead was $67.0 million to $489.6 million, compared to $444.9 million million. The increase from fiscal 2011 to fiscal 2012 in fiscal 2011. The increase was primarily related to was due to higher employee-related compensation increased revenues in the Company’s UK, Canada and expenses and the impairment loss related to certain Australia operations, which benefitted from sales of subleases in lower Manhattan. the Hunger Gamestrilogy and other trade titles, as well as a favorable impact of foreign currency exchange rates, principally in Australia, of $9.2 million. Cost of goods sold (exclusive of depreciation and amortization) decreased to $213.6 million in fiscal 2013 from $242.5 million in fiscal 2012, but remained relatively consistent at 48.4% as a percentage of revenue, compared to 49.5% of revenue in fiscal 2012. Cost of goods sold in fiscal 2011 equaled 49.8% of revenue, higher than fiscal 2012 due to improved costs in the Company’s UK operations in fiscal 2012. Other operating expenses decreased slightly to $182.4 million in fiscal 2013 from $183.1 million in fiscal 2012. Other operating expenses for fiscal 2012 increased by $3.6 million, from $179.5 million in fiscal 2011. Segment operating income for fiscal 2013 decreased by $17.8 million to $39.8 million, compared to $57.6 million in the prior fiscal year period. The decrease is primarily due to unfavorable results in the Company’s Australia and Canada operations of $5.4 million and $5.6 million, respectively, and a $1.1 million decrease in its operating income in Asia. Lower results in Asia reflect the Company’s continuing investment in English language educational businesses, which it views as a future growth driver. Liquidity and Capital Resources The Company’s cash and cash equivalents totaled $87.4 million at May 31, 2013, $194.9 million at May 31, 2012 and $105.3 million at May 31, 2011. Fiscal 2013 compared to fiscal 2012 Cash provided by operating activities was $189.1 million for fiscal 2013, compared to $260.2 million for fiscal 2012, representing a decrease in cash provided by operating activities of $71.1 million. The key driver of the decrease was the lower operating profitability of $71.3 million, driven by the prior year’s strong Hunger Games sales. Working capital balances shifted, but the net impact from changes in the total working capital was modest, as collections of receivables in fiscal 2013 were offset by royalty payments and higher payments of employee bonuses of $31.4 million in fiscal 2013 related to fiscal 2012 performance. Cash used in investing activities was $124.0 million for fiscal 2013, compared to $121.3 million in the prior fiscal year. The Company has continued to invest in its ongoing digital and information technology initiatives and upgraded its fleet of vehicles in the book fairs business as well as invested in product development in the Educational Technology and Servicessegment. In fiscal 2013, the Company sold a vacant facility in Maumelle, Arkansas, receiving $5.0 million in cash, while in the prior year the Company made strategic acquisitions totaling $9.5 million in cash Segment operating income in fiscal 2012 increased by expenditures. $19.3 million to $57.6 million, compared to $38.3 million in fiscal 2011, driven primarily by the higher revenues discussed above. Overhead Cash used in financing activities was $172.7 million for fiscal 2013, compared to $47.4 million for the prior fiscal year. In fiscal 2013, the Company’s 5% Notes due April 2013 matured and were fully repaid for $153.0 Corporate overhead for fiscal 2013 decreased by $26.9 million. In fiscal 2012, the Company paid $50.2 million to $60.2 million, compared to $87.1 million in million in scheduled payments on the 5% Notes. the prior fiscal year. The decrease was primarily related to lower employee-related expenses and incentive compensation in fiscal 2013 compared to the Dividend payouts increased by $2.7 million, as the Company implemented a higher per share dividend 33 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 34 rate. Contributing to the higher use of cash were lower during June, July and August, have generally peaked net borrowings under lines of credit of $12.9 million in September or October, and have been at their lowest and a decrease in proceeds pursuant to stock-based point in May. compensation plans of $8.5 million in fiscal 2013 compared to the prior fiscal year. Fiscal 2012 compared to fiscal 2011 Cash provided by operating activities was $260.2 million for fiscal 2012, an increase of $31.8 million, compared to $228.4 million for fiscal 2011. This increase was primarily driven by the increase in net income from continuing operations, adding back the effect of non-cash charges of $61.2 million. The earnings, and related operating cash flows, were The Company’s operating philosophy is to use cash provided from operating activities to create value by paying down debt, reinvesting in existing businesses and, from time to time, making acquisitions that will complement its portfolio of businesses, as well as engaging in shareholder enhancement initiatives, such as share repurchases or dividend declarations. The Company believes that funds generated by its operations and funds available under its current credit facilities will be sufficient to finance its short-and long- driven by sales of the Hunger Games and READ 180. term capital requirements. Most of the receivables from the Hunger Games sales were realized in fiscal 2012, while related royalty The Company has maintained, and expects to maintain payments were made in fiscal 2013. Cash used in investing activities for fiscal 2012 decreased by $19.8 million to $121.3 million, compared to cash used in investing activities of $141.1 million for fiscal 2011. This decrease was primarily due to the $24.3 million purchase, in fiscal 2011, of the land on which the Company’s corporate headquarters are located. Cash used in financing activities in fiscal 2012 decreased by $183.1 million to $47.4 million, compared to cash used in financing activities in fiscal 2011 of $230.5 million. The change was primarily due to the completion of a large share repurchase pursuant to a modified Dutch auction tender offer in fiscal 2011. In addition, the Company had higher proceeds related to stock-based compensation plans, as well as lower debt pay downs, in fiscal 2012. Due to the seasonal nature of its business as discussed under “Seasonality” above, the Company usually experiences negative cash flows in the June through October time period. As a result of the Company’s business cycle, borrowings have historically increased for the foreseeable future, sufficient liquidity to fund ongoing operations, including pension contributions, dividends, currently authorized common share repurchases, debt service, planned capital expenditures and other investments. As of May 31, 2013, the Company’s primary sources of liquidity consisted of cash and cash equivalents of $87.4 million, cash from operations and funding available under the Revolving Loan (as described under “Financing” below) totaling $425.0 million. The Company may at any time, but in any event not more than once in any calendar year, request that the aggregate availability of credit under the Revolving Loan be increased by an amount of $10.0 million or an integral multiple of $10.0 million (but not to exceed $150.0 million). Accordingly, the Company believes these sources of liquidity are sufficient to finance its ongoing operating needs, as well as its financing and investing activities. Effective December 5, 2012, as discussed below under the caption “Financing”, the Company amended its existing revolving credit facility, which was scheduled to mature on June 1, 2014, to extend the maturity date to December 5, 2017. 34 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 35 The following table summarizes, as of May 31, 2013, the Company’s contractual cash obligations by future period (see Notes 5, 6 and 12 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data”): Contractual Obligations Minimum print quantities Royalty advances Lines of credit and short-term debt Capital leases(1) Pension and post-retirement plans(2) Operating leases Total 1 Year or Less $ 58.8 10.7 2.0 5.4 22.0 34.6 $133.5 (1) Includes principal and interest. (2) Excludes expected Medicare Part D subsidy receipts. Financing Loan Agreement On June 1, 2007, Scholastic Corporation and Scholastic Inc. (each, a “Borrower” and together, the “Borrowers”) entered into a $525.0 million credit facility with certain banks (the “Loan Agreement”), consisting of a $325.0 million revolving credit component (the “Revolving Loan”) and a $200.0 million amortizing term loan component (the “Term Loan”). The Loan Agreement was amended on August 16, 2010, on October 25, 2011, and most recently on December 5, 2012. The amendment on December 5, 2012 served to, among other things, (i) increase the Revolving Loan from $325.0 million to $425.0 million (with the continued ability to increase the aggregate Revolving Loan commitments of the lenders by up to an additional $150.0 million), (ii) extend the maturity of the $425.0 million Revolving Loan to December 5, 2017 from June 1, 2014, (iii) amend a covenant in the Loan Agreement to permit certain sales, transfers and dispositions of assets by either Borrower or any subsidiary to any other Borrower or subsidiary and (iv) amend a covenant in the Loan Agreement to permit transactions between or among the Company and its wholly-owned subsidiaries not involving any other affiliates. Additionally, this amendment added certain lenders to the Loan Agreement and other lenders exited the Loan Agreement with no further obligation. Payments Due By Period Years 4-5 Years 2-3 $ 107.2 4.8 — 10.3 28.9 54.8 $206.0 $ 97.5 1.6 — 12.0 27.3 33.3 $171.7 After Year 5 $ 100.7 — — 179.1 64.3 41.8 $385.9 ($ amounts in millions) Total $ 364.2 17.1 2.0 206.8 142.5 164.5 $897.1 The Revolving Loan allows the Company to borrow, repay or prepay and reborrow at any time prior to the maturity date, and the proceeds may be used for general corporate purposes, including financing for acquisitions and share repurchases. On April 15, 2013, the Company drew on the Revolving Loan to fully repay the 5% Notes due April 2013. Interest on the Revolving Loan is due and payable in arrears on the last day of the interest period (defined as the period commencing on the date of the advance and ending on the last day of the period selected by the Borrower at the time each advance is made). The interest pricing under the Revolving Loan is dependent upon the Borrower’s election of a rate that is either: • A Base Rate equal to the higher of (i) the prime rate, (ii) the prevailing Federal Funds rate plus 0.500% or (iii) the Eurodollar Rate for a one month interest period plus 1% plus, in each case, an applicable spread ranging from 0.18% to 0.60%, as determined by the Company’s prevailing consolidated debt to total capital ratio. – or – • A Eurodollar Rate equal to the London interbank offered rate (LIBOR) plus an applicable spread ranging from 1.18% to 1.60%, as determined by the Company’s prevailing consolidated debt to total capital ratio. 35 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 36 As of May 31, 2013, the indicated spread on Base Rate borrowings equivalent to $6.5 million at May 31, 2012 Advances was 0.18% and the indicated spread on at a weighted average interest rate of 5.3%. Eurodollar Rate Advances was 1.18%, both based on the Company’s prevailing consolidated debt to total capital ratio. The Loan Agreement also provides for the payment of a facility fee ranging from 0.20% to 0.40% per annum based upon the Company’s prevailing consolidated debt to total capital ratio. At May 31, 2013, the facility fee rate was 0.20%. There were no outstanding borrowings under the Revolving Loan as of May 31, 2013 and May 31, 2012. As of May 31, 2013, standby letters of credit outstanding under the Loan Agreement totaled $1.4 million. The Loan Agreement contains certain covenants, including interest coverage and leverage ratio tests and certain limitations on the amount of dividends and other distributions, and at May 31, 2013, the Company was in compliance with these covenants. Lines of Credit The Company has unsecured money market bid rate credit lines, with available borrowings of $14.8 million. There were no outstanding borrowings under these credit lines at May 31, 2013 and May 31, 2012. All loans made under these credit lines are at the sole discretion of the lender and at an interest rate and term agreed to at the time each loan is made, but not to exceed 365 days. These credit lines may be renewed, if requested by the Company, at the sole option of the lender. As of May 31, 2013, the Company also had various local currency credit lines, with maximum available borrowings in amounts equivalent to $27.0 million, 5% Notes due 2013 In April 2003, Scholastic Corporation issued $175.0 million of 5% Notes due April 2013 (the “5% Notes”). The 5% Notes were senior unsecured obligations that matured on April 15, 2013. Interest on the 5% Notes was payable semi-annually on April 15 and October 15 of each year through maturity. As discussed above, the Company amended its existing revolving credit facility, which was scheduled to mature on June 1, 2014, to extend the maturity date of the Revolving Loan to December 5, 2017. On April 15, 2013, the Company drew on the Revolving Loan to satisfy its obligations to fully repay the 5% Notes. As of May 31, 2013, the Company had fully paid down the Revolving Loan. At May 31, 2013 and May 31, 2012, the Company had open standby letters of credit totaling $6.6 million issued under certain credit lines, including the $1.4 million under the Loan Agreement discussed above. These letters of credit are scheduled to expire within one year; however, the Company expects that substantially all of these letters of credit will be renewed, at similar terms, prior to expiration. The Company’s total debt obligations were $2.0 million at May 31, 2013 and $159.3 million at May 31, 2012. For a more complete description of the Company’s debt obligations, see Note 5 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data.” underwritten by banks primarily in the United States, Acquisitions Canada and the United Kingdom. These credit lines In the ordinary course of business, the Company are typically available for overdraft borrowings or explores domestic and international expansion loans up to 364 days and may be renewed, if requested opportunities, including potential niche and strategic by the Company, at the sole option of the lender. There acquisitions. As part of this process, the Company were borrowings outstanding under these facilities engages with interested parties in discussions equivalent to $2.0 million at May 31, 2013 at a concerning possible transactions. On January 3, 2012, weighted average interest rate of 9.0%, compared to the Company acquired Learners Publishing, a Singapore-based publisher of supplemental learning 36 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 37 materials for English-Language Learners. The subject to fluctuations from changes in foreign Company has integrated this business into its currency exchange rates. The Company sells product Internationalsegment. On February 8, 2012, the from its domestic operations to its foreign subsidiaries, Company acquired the business and certain assets of creating additional currency risk. The Company Weekly Reader, a publisher of weekly educational manages its exposures to this market risk through classroom magazines designed for children in grades internally established procedures and, when deemed pre-K – 12. The Company has fully integrated this appropriate, through the use of short-term forward business in its Classroom and Supplemental Materials exchange contracts, which were not significant as of Publishingsegment (see Note 2 of Notes to May 31, 2013. The Company does not enter into Consolidated Financial Statements in Item 8, derivative transactions or use other financial “Consolidated Financial Statements and instruments for trading or speculative purposes. Supplementary Data”). The Company will continue to evaluate such expansion opportunities and prospects. Item 7A | Quantitative and Qualitative Disclosures about Market Risk The Company conducts its business in various foreign countries, and as such, its cash flows and earnings are Additional information relating to the Company’s outstanding financial instruments is included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The following table sets forth information about the Company’s debt instruments as of May 31, 2013 (see Note 5 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data”): Debt Obligations Lines of credit and short-term debt Average interest rate Fiscal Year Maturity 2014 2015 2016 2017 Thereafter Total Fair Value 2013 ($ amounts in millions) $2.0 9.0% $ — — $ — — $ — — $ — — $2.0 $2.0 37 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 38 Item 8 | Consolidated Financial Statements and Supplementary Data Consolidated Statements of Operations for the years ended May 31, 2013, 2012 and 2011 Consolidated Statements of Comprehensive Income (Loss) for the years ended May 31, 2013, 2012 and 2011 Consolidated Balance Sheets at May 31, 2013 and 2012 Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (Loss) for the years ended May 31, 2013, 2012 and 2011 Consolidated Statements of Cash Flows for the years ended May 31, 2013, 2012 and 2011 Notes to Consolidated Financial Statements Reports of Independent Registered Public Accounting Firm Supplementary Financial Information - Summary of Quarterly Results of Operations The following consolidated financial statement schedule for the years ended May 31, 2013, 2012 and 2011 is filed with this annual report on Form 10-K: Schedule II — Valuation and Qualifying Accounts and Reserves Page(s) 39 40 41 43 45 47 80 82 S-2 All other schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements or the Notes thereto. 38 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 39 Consolidated Statements of Operations Revenues Operating costs and expenses: (Amounts in millions, except per share data) For fiscal years ended May 31, 2013 $ 1,792.4 2012 $ 2,139.1 2011 $ 1,877.6 Cost of goods sold (exclusive of depreciation and amortization) Selling, general and administrative expenses Depreciation and amortization Severance Loss on leases and asset impairments 829.6 815.0 66.5 13.4 0.0 984.6 878.5 68.8 14.9 7.0 869.0 834.7 60.1 6.7 3.4 Total operating costs and expenses 1,724.5 1,953.8 1,773.9 Operating income Other income (expense) Interest income Interest expense Loss on investments Earnings (loss) from continuing operations before income taxes Provision for income taxes Earnings (loss) from continuing operations Earnings (loss) from discontinued operations, net of tax 67.9 0.0 1.2 (15.7) — 53.4 17.6 35.8 (4.7) 185.3 (0.1) 1.0 (16.5) — 169.7 61.6 108.1 (5.7) 103.7 (0.4) 1.5 (17.1) (3.6) 84.1 38.8 45.3 (5.9) Net income (loss) $ 31.1 $ 102.4 $ 39.4 Basic and diluted earnings (loss) per share of Class A and Common Stock Basic: Earnings (loss) from continuing operations Earnings (loss) from discontinued operations Net income (loss) Diluted: Earnings (loss) from continuing operations Earnings (loss) from discontinued operations Net income (loss) Dividends declared per common share See accompanying notes $ 1.12 $ (0.15) $ 0.97 $ $ $ $ 1.10 (0.15) 0.95 0.50 $ $ $ $ $ $ $ 3.45 (0.18) 3.27 3.39 (0.18) 3.21 0.45 $ 1.36 (0.18) $ 1.18 $ $ $ $ $ 1.34 (0.18) 1.16 0.35 39 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 40 Consolidated Statements of Comprehensive Income (Loss) Net income (loss) Other comprehensive income (loss), net: Foreign currency translation adjustments Pension and post-retirement adjustments: Amortization of prior service credit Amortization of unrecognized gains and losses included in net periodic cost Total other comprehensive income (loss) Comprehensive income (loss) See accompanying notes (Amounts in millions, except per share data) For fiscal years ended May 31, 2012 $102.4 (8.2) (0.6) (11.5) $ (20.3) $ 82.1 2011 $ 39.4 25.2 (0.7) 7.0 $ 31.5 $ 70.9 2013 $ 31.1 (2.6) (0.4) 11.8 $ 8.8 $ 39.9 40 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 41 Consolidated Balance Sheets ASSETS Current Assets: Cash and cash equivalents Accounts receivable (less allowance for doubtful accounts of $19.3 at May 31, 2013 and $25.9 at May 31, 2012) Inventories Deferred income taxes Prepaid expenses and other current assets Current assets of discontinued operations Total current assets Property, Plant and Equipment Land Buildings Capitalized software Furniture, fixtures and equipment Leasehold improvements Less accumulated depreciation and amortization Net property, plant and equipment Other Assets and Deferred Charges: Prepublication costs Royalty advances (less allowance for reserves of $81.5 at May 31, 2013 and $77.8 at May 31, 2012) Production costs Goodwill Other intangibles Noncurrent deferred income taxes Other assets and deferred charges Total other assets and deferred charges Total assets See accompanying notes (Amounts in millions, except share data) Balances at May 31, 2013 2012 $ 87.4 $ 194.9 214.9 278.1 79.2 61.2 0.4 721.2 37.3 100.7 239.9 241.4 172.4 791.7 (480.1) 311.6 147.3 37.0 1.7 157.9 14.6 14.9 34.8 313.9 295.3 71.4 46.8 7.7 930.0 37.2 101.3 217.9 243.8 183.4 783.6 (456.4) 327.2 125.7 34.8 1.6 157.7 16.7 42.3 34.3 408.2 $ 1,441.0 413.1 $ 1,670.3 41 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 42 LIABILITIES AND STOCKHOLDERS’ EQUITY 2013 2012 (Amounts in millions, except share data) Balances at May 31, Current Liabilities: Lines of credit and current portion of long-term debt Capital lease obligations Accounts payable Accrued royalties Deferred revenue Other accrued expenses Current liabilities of discontinued operations Total current liabilities Noncurrent Liabilities: Long-term debt Capital lease obligations Other noncurrent liabilities Total noncurrent liabilities Commitments and Contingencies: Stockholders’ Equity: Preferred Stock, $1.00 par value Authorized - 2,000,000; Issued - None Class A Stock, $.01 par value Authorized - 4,000,000; Issued and Outstanding - 1,656,200 shares Common Stock, $.01 par value Authorized - 70,000,000; Issued - 42,911,624 shares; Outstanding - 30,105,479 shares (42,911,624 shares issued and 29,795,911 shares outstanding at May 31, 2012) Additional paid-in capital Accumulated other comprehensive income (loss) Retained earnings Treasury stock at cost Total stockholders’ equity Total liabilities and stockholders’ equity See accompanying notes $ 2.0 0.2 156.2 34.4 48.1 179.5 1.3 421.7 $ 6.5 1.0 119.6 92.7 47.1 233.5 2.1 502.5 — 57.5 97.4 154.9 — — 0.0 0.4 582.9 (65.4) 738.9 (392.4) 864.4 152.8 56.4 128.3 337.5 — — 0.0 0.4 583.0 (74.2) 723.9 (402.8) 830.3 $ 1,441.0 $ 1,670.3 42 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 43 Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income (Loss) (Amounts in millions, except share data) Class A Stock Common Stock Shares Amount Shares Amount Balance at May 31, 2010 Net Income (loss) Foreign currency translation adjustment Pension and postretirement adjustments (net of tax of $4.0) Stock-based compensation Proceeds from issuance of common stock pursuant to stock-based compensation plans Purchases of treasury stock at cost Treasury stock issued pursuant to stock purchase plans Dividends Balance at May 31, 2011 Net Income (loss) Foreign currency translation adjustment Pension and postretirement adjustments (net of tax of $(6.5)) Stock-based compensation Proceeds from issuance of common stock pursuant to stock-based compensation plans Purchases of treasury stock at cost Treasury stock issued pursuant to stock purchase plans Dividends 1,656,200 — — — — — — — — 1,656,200 — — — — — — — — Balance at May 31, 2012 Net Income (loss) Foreign currency translation adjustment Pension and postretirement adjustments (net of tax of $8.4) Stock-based compensation Proceeds from issuance of common stock pursuant to 1,656,200 — — — — stock-based compensation plans Purchases of treasury stock at cost Treasury stock issued pursuant to stock purchase plans Dividends — — — — $0.0 — — — — — — — — $0.0 — — — — — — — — $0.0 — — — — — — — — 34,598,258 — — $0.4 — — — — 104,100 (5,588,125) 202,458 — 29,316,691 — — — — 724,613 (475,672) 230,279 — 29,795,911 — — — — 507,197 (432,330) 234,701 — — — — — — — $0.4 — — — — — — — — $0.4 — — — — — — — — Additional Paid-in Capital $569.2 — — — 13.7 2.9 — (9.2) — $576.6 — — — 12.2 22.4 — (28.2) — $583.0 — — — 7.3 14.7 — (22.1) — Balance at May 31, 2013 See accompanying notes 1,656,200 $0.0 30,105,479 $0.4 $582.9 $(65.4) $(392.4) $864.4 43 Accumulated Other Comprehensive Income (Loss) Treasury Stock At Cost $(261.6) Total Stockholders’ Equity $830.4 $(85.4) — 25.2 6.3 — — — — — — — — — — — — — — — $(53.9) — (8.2) (12.1) $(74.2) — (2.6) 11.4 Retained Earnings $607.8 39.4 — — — — — — — — — — — — — — — — — — (11.4) $635.8 102.4 (14.3) $723.9 31.1 (16.1) $738.9 (166.9) 9.6 — $(418.9) — — — — — — — — — — — — — — — — (13.1) 29.2 (11.8) 22.2 — 39.4 25.2 6.3 13.7 2.9 (166.9) 0.4 (11.4) $740.0 102.4 (8.2) (12.1) 12.2 22.4 (13.1) 1.0 (14.3) 31.1 (2.6) 11.4 7.3 14.7 (11.8) 0.1 (16.1) $(402.8) $830.3 Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income (Loss) (Amounts in millions, except share data) Class A Stock Common Stock Shares Amount Shares Amount 1,656,200 $0.0 34,598,258 $0.4 Additional Paid-in Capital $569.2 1,656,200 $0.0 29,316,691 $0.4 $576.6 Balance at May 31, 2010 Net Income (loss) Foreign currency translation adjustment Pension and postretirement adjustments (net of tax of $4.0) Stock-based compensation Proceeds from issuance of common stock pursuant to stock-based compensation plans Purchases of treasury stock at cost Treasury stock issued pursuant to stock purchase plans Dividends Balance at May 31, 2011 Net Income (loss) Foreign currency translation adjustment Pension and postretirement adjustments (net of tax of $(6.5)) Stock-based compensation Proceeds from issuance of common stock pursuant to stock-based compensation plans Purchases of treasury stock at cost Treasury stock issued pursuant to stock purchase plans Dividends Balance at May 31, 2012 Net Income (loss) Foreign currency translation adjustment Pension and postretirement adjustments (net of tax of $8.4) Stock-based compensation Proceeds from issuance of common stock pursuant to stock-based compensation plans Purchases of treasury stock at cost Treasury stock issued pursuant to stock purchase plans Dividends Balance at May 31, 2013 See accompanying notes — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 104,100 (5,588,125) 202,458 — — — — — — — — — — — — — — 724,613 (475,672) 230,279 507,197 (432,330) 234,701 — — — — — — — — — — — — — — — — — — — — — — — — — — — — 13.7 2.9 — (9.2) — — — — 12.2 22.4 — (28.2) — — — — 7.3 14.7 — (22.1) — 1,656,200 $0.0 29,795,911 $0.4 $583.0 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 44 Accumulated Other Comprehensive Income (Loss) $(85.4) — 25.2 6.3 — — — — — $(53.9) — (8.2) (12.1) — — — — — $(74.2) — (2.6) 11.4 — — — — — Retained Earnings $607.8 39.4 — — — — — — (11.4) $635.8 102.4 — — — — — — (14.3) $723.9 31.1 — — — — — — (16.1) Treasury Stock At Cost $(261.6) — — — — — (166.9) 9.6 — $(418.9) — — — — — (13.1) 29.2 — $(402.8) — — — — — (11.8) 22.2 — Total Stockholders’ Equity $830.4 39.4 25.2 6.3 13.7 2.9 (166.9) 0.4 (11.4) $740.0 102.4 (8.2) (12.1) 12.2 22.4 (13.1) 1.0 (14.3) $830.3 31.1 (2.6) 11.4 7.3 14.7 (11.8) 0.1 (16.1) 1,656,200 $0.0 30,105,479 $0.4 $582.9 $(65.4) $738.9 $(392.4) $864.4 44 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 45 Consolidated Statements of Cash Flows Cash flows – operating activities: Net income (loss) Earnings (loss) from discontinued operations, net of tax Earnings (loss) from continuing operations Adjustments to reconcile earnings (loss) from continuing operations to net cash provided by (used in) operating activities of continuing operations: 2013 2012 2011 (Amounts in millions) Years ended May 31, $ 31.1 (4.7) 35.8 $ 102.4 (5.7) 108.1 $ 39.4 (5.9) 45.3 Provision for losses on accounts receivable Provision for losses on inventory Provision for losses on royalty advances Loss on subleases Amortization of prepublication and production costs Depreciation and amortization Deferred income taxes Stock-based compensation Non cash net gain on equity investments Non cash write off related to asset impairment Unrealized loss on investments Changes in assets and liabilities, net of amounts acquired: Accounts receivable Inventories Prepaid expenses and other current assets Deferred promotion costs Royalty advances Accounts payable Other accrued expenses Accrued royalties Deferred revenue Pension and post-retirement liabilities Other noncurrent liabilities Other, net Total adjustments Net cash provided by (used in) operating activities of continuing operations Net cash provided by (used in) operating activities of discontinued operations Net cash provided by (used in) operating activities Cash flows – investing activities: Prepublication and production expenditures Additions to property, plant and equipment Acquisition related payments Land acquisition Other Net cash provided by (used in) investing activities of continuing operations Net cash provided by (used in) investing activities of discontinued operations Net cash provided by (used in) investing activities See accompanying notes 6.8 27.2 4.7 — 48.9 68.6 19.6 6.3 (2.3) 7.2 — 94.4 (9.9) (14.2) 0.3 (7.0) 35.6 (53.4) (58.5) 1.1 (16.0) (3.6) 0.4 156.2 192.0 (2.9) 189.1 (73.8) (54.6) (0.3) — 0.8 (127.9) 3.9 (124.0) 12.3 48.1 6.5 6.2 55.1 68.8 (37.5) 12.2 (1.3) 0.8 — (108.7) (40.4) 10.1 — (6.2) (0.3) 64.7 58.2 (1.7) (7.0) 5.9 7.8 153.6 261.7 (1.5) 260.2 (58.8) (53.7) (9.5) — 0.8 (121.2) (0.1) (121.3) 13.6 27.3 4.5 — 51.1 60.1 (2.8) 13.7 (1.7) 3.4 3.6 (12.6) (9.8) 0.6 0.1 (1.2) 19.1 15.9 (8.3) 8.7 (11.3) 5.6 7.1 186.7 232.0 (3.6) 228.4 (57.9) (50.0) (10.1) (24.3) 1.2 (141.1) — (141.1) 45 01_73994_Scholastic_AR 7/31/13 11:41 AM Page 46 Consolidated Statements of Cash Flows Cash flows – financing activities: Borrowings under credit agreement and revolving loan Repayment of credit agreement and revolving loan Repayment of term loan Repayment of 5.00% notes Borrowings under lines of credit Repayments under lines of credit Repayment of capital lease obligations Reacquisition of common stock Proceeds pursuant to stock-based compensation plans Payment of dividends Other Net cash provided by (used in) financing activities Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental Information: Income taxes payments (refunds), net Interest paid See accompanying notes 2013 2012 2011 (Amounts in millions) Years ended May 31, $ 153.0 (153.0) — (153.0) 23.2 (27.5) (1.0) (11.8) 13.9 (15.9) (0.6) (172.7) 0.1 (107.5) 194.9 $ 87.4 $ 30.0 15.1 $ 28.8 (28.8) (50.2) — 89.2 (80.6) (0.7) (13.1) 22.4 (13.2) (1.2) (47.4) (1.9) 89.6 105.3 $ 194.9 $ 61.0 15.3 $ 70.0 (70.0) (42.8) — 118.6 (128.2) (2.0) (166.9) 2.9 (10.8) (1.3) (230.5) 4.4 (138.8) 244.1 $ 105.3 $ 31.5 15.4 46 02_73994_Scholastic_AR 7/31/13 11:44 AM Page 47 Notes to Consolidated Financial Statements (Amounts in millions, except share and per Discontinued Operations share data) 1. DESCRIPTION OF THE BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of the business Scholastic Corporation (the “Corporation” and together with its subsidiaries, “Scholastic” or the “Company”) is a global children’s publishing, education and media company. Since its founding in 1920, Scholastic has emphasized quality products and a dedication to reading and learning. The Company is the world’s largest publisher and distributor of children’s books. It The Company closed or sold several operations during fiscal 2009, 2010, 2012 and 2013. During the first quarter of fiscal 2012, the Company ceased operations in its direct-to-home catalog business specializing in toys. In the fourth quarter of fiscal 2013, the Company sold a facility that was previously classified as held for sale. In the fourth quarter of fiscal 2013, the Company also discontinued a computer club business which was previously included in the Children’s Book Publishing and Distributionsegment and a subscription-based business which was previously reported in the Media, Licensing and Advertisingsegment. All of these businesses are classified as discontinued operations in the Company’s financial statements for all periods is also a leading developer of educational technology products and ebooks for children. Scholastic also presented. creates quality educational and entertainment Use of estimates materials and products for use in school and at home, The Company’s Consolidated Financial Statements including magazines, ebooks, children’s reference and have been prepared in accordance with accounting non-fiction materials, teacher materials, television principles generally accepted in the United States. The programming and film. The Company is the leading preparation of these financial statements involves the operator of school-based book clubs and book fairs in use of estimates and assumptions by management, the United States. It distributes its products and which affects the amounts reported in the services through these proprietary channels, as well as Consolidated Financial Statements and accompanying directly to schools and libraries, through retail stores notes. The Company bases its estimates on historical and through the internet. The Company’s website, experience, current business factors, and various other scholastic.com, is a leading site for teachers, assumptions believed to be reasonable under the classrooms and parents and an award-winning circumstances, all of which are necessary in order to destination for children. In addition to its operations form a basis for determining the carrying values of in the United States, Scholastic has operations in assets and liabilities. Actual results may differ from Canada, the United Kingdom, Australia, New Zealand, those estimates and assumptions. Ireland, India, China, Singapore and other parts of Asia, and, through its export business, sells products in approximately 140 countries. Basis of presentation Principles of consolidation The Consolidated Financial Statements include the accounts of the Corporation and all wholly-owned and majority-owned subsidiaries. All significant intercompany transactions are eliminated in consolidation. The Company’s significant estimates include those developed for: • Accounts receivable, returns and allowances • Pension and post-retirement obligations • Uncertain tax positions • Inventory reserves • Gross profits for book fair operations during interim periods • Sales taxes 47 02_73994_Scholastic_AR 7/31/13 11:44 AM Page 48 • Royalty advance reserves A reserve for estimated returns is established at the • Customer reward programs • Impairment testing for goodwill, intangibles and other long-lived assets Summary of Significant Accounting Policies Revenue recognition The Company’s revenue recognition policies for its principal businesses are as follows: School-Based Book Clubs – Revenue from school- based book clubs is recognized upon shipment of the products. For ebooks, revenue is recognized upon electronic delivery to the customer. time of sale and recorded as a reduction to revenue. Actual returns are charged to the reserve as received. The calculation of the reserve for estimated returns is based on historical return rates, sales patterns, type of product and expectations. Actual returns could differ from the Company’s estimate. A reserve for estimated bad debts is established at the time of sale and is based on the aging of accounts receivable and specific reserves on a customer-by-customer basis, where applicable. Educational Technology and Services – For shipments to schools, revenue is recognized when risks and benefits transfer to the customer. Shipments to depositories are on consignment and revenue is School-Based Book Fairs – Revenues associated with recognized based on actual shipments from the school-based book fairs are related to sales of product. depositories to the schools. For certain software-based Book fairs are typically run by schools and/or parent products, the Company offers new customers teacher organizations over a five business-day period. installation, maintenance and training with these The amount of revenue recognized for each fair products and, in such cases, revenue is deferred and represents the net amount of cash collected at the fair. recognized as services are delivered or over the life of Revenue is fully recognized at the completion of the the contract. Revenues from contracts with multiple fair. At the end of reporting periods, the Company deliverables are recognized as each deliverable is defers estimated revenue for those fairs that have not earned, based on the relative selling price of each been completed as of the period end based on the deliverable, provided the deliverable has value to number of fair days occurring after period end on a customers on a standalone basis, the customer has full straight-line calculation of the full fair’s revenue. use of the deliverable and there is no further obligation Trade – Revenue from the sale of children’s books for distribution in the retail channel is primarily recognized when risks and benefits transfer to the customer, or when the product is on sale and available from the Company. If there is a right of return, revenue is recognized if delivery of the undelivered items or services is probable and substantially in control of the Company. to the public. For newly published titles, the Company, Classroom and Supplemental Materials on occasion, contractually agrees with its customers Publishing – Revenue from the sale of classroom and when the publication may be first offered for sale to supplemental materials is recognized upon shipment the public, or an agreed upon “Strict Laydown Date.” of the products. For such titles, the risks and benefits of the publication are 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 the net amount received from the retailer, is recognized upon electronic delivery to the customer by the retailer. 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 recorded in accordance with royalty agreements at the time the licensed materials are available to the licensee and collections are reasonably assured. 48 02_73994_Scholastic_AR 7/31/13 11:44 AM Page 49 Magazines – Revenue is deferred and recognized Inventories ratably over the subscription period, as the magazines Inventories, consisting principally of books, are stated are delivered. Magazine Advertising – Revenue is recognized when the magazine is for sale and available to the subscribers. Scholastic In-School Marketing – Revenue is recognized when the Company has satisfied its obligations under the program and the customer has acknowledged acceptance of the product or service. Certain revenues may be deferred pending future deliverables. Cash equivalents Cash equivalents consist of short-term investments with original maturities of three months or less. The Consolidated Balance Sheets include restricted cash of $1.0 at May 31, 2013 and at May 31, 2012, which is reported in “Other current assets.” Accounts receivable at the lower of cost, using the first-in, first-out method, or market. The Company records a reserve for excess and obsolete inventory based upon a calculation using the historical usage rates, sales patterns of its products and specifically identified obsolete inventory. In fiscal 2012, in response to changing trends in the children’s book market, the Company changed its estimate for inventory obsolescence and recorded an increase in the reserve of $17.9. Property, plant and equipment Property, plant and equipment are stated at cost. Depreciation and amortization are recorded on a straight-line basis, over the estimated useful lives of the assets. Buildings have an estimated useful life, for purposes of depreciation, of forty years. Capitalized software, net of accumulated amortization, was $50.7 and $57.2 at May 31, 2013 and 2012, respectively. Capitalized software is depreciated over a period of three to seven years. Amortization expense for Accounts receivable are recorded net of allowances for capitalized software was $31.2, $27.6 and $25.8 for the doubtful accounts and reserves for returns. In the fiscal years ended May 31, 2013, 2012 and 2011, normal course of business, the Company extends respectively. Furniture, fixtures and equipment are credit to customers that satisfy predefined credit depreciated over periods not exceeding ten years. criteria. The Company is required to estimate the Leasehold improvements are amortized over the life of collectability of its receivables. Reserves for returns are the lease or the life of the assets, whichever is shorter. based on historical return rates and sales patterns. The The Company evaluates the depreciation periods of Company’s return reserve balance was greater than property, plant and equipment to determine whether typical as of May 31, 2012 due to increased trade sales events or circumstances indicate that the asset’s in the second half of fiscal 2012. In order to develop carrying value is not recoverable or warrant revised the estimate of returns that will be received estimates of useful lives. The Company recorded an subsequent to fiscal year end, management considers impairment of $4.0 in fiscal 2013 for certain assets. patterns of sales and returns in the months preceding the fiscal year end, as well as actual returns received Leases subsequent to year end, available sell-through information and other return rate information that management believes is relevant. Allowances for doubtful accounts are established through the evaluation of accounts receivable aging 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 uncollectable, the balance is then written off. Lease agreements are evaluated to determine whether they are capital or operating leases. When substantially all of the risks and benefits of property ownership have been transferred to the Company, as determined by the test criteria in the current authoritative guidance, the lease is recognized as a capital lease. Capital leases are capitalized at the lower of the net present value of the total amount of rent payable under the leasing agreement (excluding finance 49 02_73994_Scholastic_AR 7/31/13 11:44 AM Page 50 charges) or the fair market value of the leased asset. editorial staff regularly reviews its portfolio of royalty Capital lease assets are depreciated on a straight-line advances to determine if individual royalty advances basis, over a period consistent with the Company’s are not recoverable through earndowns for discrete normal depreciation policy for tangible fixed assets, reasons, such as the death of an author prior to but not exceeding the lease term. Interest charges are completion of a title or titles, a Company decision to expensed over the period of the lease in relation to the not publish a title, poor market demand or other carrying value of the capital lease obligation. relevant factors that could impact recoverability. Rent expense for operating leases, which may include Goodwill and intangible assets free rent or fixed escalation amounts in addition to minimum lease payments, is recognized on a straight- line basis over the duration of each lease term. Goodwill and other intangible assets with indefinite lives are not amortized and are reviewed for impairment annually or more frequently if Sublease income is recognized on a straight-line basis impairment indicators arise. over the duration of each lease term. To the extent expected sublease income is less than expected rental payments the Company recognizes a current loss on the difference between the fair values of the sublease and the rental payments. Prepublication costs With regard to goodwill, the Company compares the estimated fair value of its identified reporting units to the carrying value of the net assets. The Company first performs a qualitative assessment to determine whether it is more likely than not that the fair value of its identified reporting unit is less than its carrying The Company capitalizes the art, prepress, editorial, value. If it is more likely than not that the fair value of digital conversion and enhancements and other costs a reporting unit is less than its carrying amount the incurred in the creation of the master copy of a book Company performs the two-step test. For each of the or other media (the “prepublication costs”). reporting units, the estimated fair value is determined Prepublication costs are amortized on a straight-line utilizing the expected present value of the projected basis over a three-to-seven-year period based on future cash flows of the units, in addition to expected future revenues. The Company regularly comparisons to similar companies. The Company reviews the recoverability of the capitalized costs based reviews its definition of reporting units annually or on expected future revenues. more frequently if conditions indicate that the 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. The royalties earned are applied first against the remaining unearned portion of the advance. Historically, the longer the unearned portion of the advance remains outstanding, the less likely it is that the Company will recover the advance through the sale of the publication. The Company applies this historical experience to its existing outstanding royalty advances to estimate the likelihood of recoveries through earndowns. Additionally, the Company’s reporting units may change. The Company evaluates its operating segments to determine if there are components one level below the operating segment. 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 50 02_73994_Scholastic_AR 7/31/13 11:44 AM Page 51 characteristics are deemed to be individual reporting projected taxable earnings indicates that realization is units for goodwill impairment testing purposes. The not likely, the Company establishes a valuation Company has identified twelve separate reporting allowance. units for goodwill impairment testing purposes. In assessing the need for a valuation allowance, the With regard to other intangibles with indefinite lives, Company estimates future taxable earnings, with the Company determines the fair value by asset, which consideration for the feasibility of on-going tax is then compared to its carrying value. The Company planning strategies and the realizability of tax benefit first performs a qualitative assessment to determine carryforwards, to determine which deferred tax assets whether it is more likely than not that the fair value of are more likely than not to be realized in the future. its identified reporting unit is less than its carrying Valuation allowances related to deferred tax assets can value. If it is more likely than not that the fair value of be impacted by changes to tax laws, changes to a reporting unit is less than its carrying amount the statutory tax rates and future taxable earnings. In the Company performs a quantitative test. The estimated event that actual results differ from these estimates in fair value is determined utilizing the expected present future periods, the Company may need to adjust the value of the projected future cash flows of the asset, valuation allowance. market comparables for similar businesses and other relevant information. The Company accounts for uncertain tax positions using a two-step method. Recognition occurs when an Intangible assets with definite lives consist principally entity concludes that a tax position, based solely on of customer lists, covenants not to compete, and technical merits, is more likely than not to be certain other intellectual property assets and are sustained upon examination. If a tax position is more amortized over their expected useful lives. Customer likely than not to be sustained upon examination, the lists are amortized on a straight-line basis over a five- amount recognized is the largest amount of benefit, year period, while covenants not to compete are determined on a cumulative probability basis, which is amortized on a straight-line basis over their more likely than not to be realized upon settlement. contractual term. Other intellectual property assets are The Company assesses all income tax positions and amortized over their remaining useful lives which adjusts its reserves against these positions periodically range from five to twenty years. based upon these criteria. The Company also assesses Income taxes The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and the tax basis of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to enter into the determination of taxable income. 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 potential penalties and interest associated with these tax positions, and includes these amounts as a component of income tax expense. In calculating the provision for income taxes on an interim basis, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances known. The Company’s effective tax rate is based on expected income and statutory tax rates and permanent differences between financial statement and tax return income applicable to the Company in the various jurisdictions in which the Company operates. 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. If foreign investments are not 51 02_73994_Scholastic_AR 7/31/13 11:44 AM Page 52 expected to be indefinitely invested, the Company Pension obligations – Scholastic Corporation and provides for income taxes on the portion that is not certain of its subsidiaries have defined benefit pension indefinitely invested. 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 in respect to a jurisdiction is probable and can be reliably estimated, the Company has made accruals for these matters which are reflected in the Company’s Consolidated Financial Statements. These amounts are included in the Consolidated Financial Statements in Selling, general and administrative expenses. Future developments relating to the foregoing could result in adjustments being made to these accruals. In fiscal 2012, the Company recorded accruals of $19.7 based on assessments related to sales tax audits in two jurisdictions. Unredeemed incentive credits The Company employs incentive programs to encourage sponsor participation in its book clubs and book fairs. These programs allow the sponsors to accumulate credits which can then be redeemed for Company products or other items offered by the Company. The Company recognizes a liability for the estimated costs of providing these credits at the time of the recognition of revenue for the underlying purchases of Company product that resulted in the granting of the credits. As the credits are redeemed, such liability is reduced. Other noncurrent liabilities All of the rate assumptions discussed below impact the Company’s calculations of its pension and post- retirement obligations. The rates applied by the Company are based on the portfolios’ past average rates of return, discount rates and actuarial information. Any change in market performance, interest rate performance, assumed health care costs trend rate or compensation rates could result in significant changes in the Company’s pension and post-retirement obligations. plans covering the majority of their employees who meet certain eligibility requirements. The Company’s pension plans and other post-retirement benefits are accounted for using actuarial valuations. The Company’s pension 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 the interest cost component of net periodic pension costs. The long-term expected return on plan assets is used to calculate the expected earnings from the investment or reinvestment of plan assets. The anticipated rate of compensation increase is used to estimate the increase in compensation for participants of the plan from their current age to their assumed retirement age. The estimated compensation amounts are used to determine the benefit obligations and the service cost. Pension benefits in the cash balance plan for employees located in the United States are based on formulas in which the employees’ balances are credited monthly with interest based on the average rate for one- year United States Treasury Bills plus 1%. Contribution credits are based on employees’ years of service and compensation levels during their employment periods, for the periods prior to June 1, 2009. Other post-retirement benefits – The Company provides post-retirement benefits, consisting of healthcare and life insurance benefits, to eligible retired United States-based employees. The post- retirement medical plan benefits are funded on a pay- as-you-go basis, with the Company paying a portion of the premium and the employee paying the remainder. The Company calculates the existing benefit obligation, 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 post-retirement benefit cost. The assumed health care cost trend rate is used in the measurement of the long-term expected increase in medical claims. 52 02_73994_Scholastic_AR 7/31/13 11:44 AM Page 53 Foreign currency translation values; and the anticipated costs involved in the selling The Company’s non-United States dollar-denominated process. The Company recognizes operations as assets and liabilities are translated into United States discontinued when the operations have either ceased dollars at prevailing rates at the balance sheet date and or are probable to be disposed of in a sale transaction the revenues, costs and expenses are translated at the in the near term, the operations and cash flows of all weighted average rates prevailing during each discontinued operations have been eliminated, or will reporting period. Net gains or losses resulting from be eliminated, upon consummation of the expected sale the translation of the foreign financial statements and transaction, and the Company will not have any the effect of exchange rate changes on long-term significant continuing involvement in the intercompany balances are accumulated and charged discontinued operations subsequent to the expected directly to the foreign currency translation adjustment sale transaction. component of stockholders’ equity until such time as the operations are substantially liquidated or sold. The Company assesses foreign investment levels periodically to determine if all or a portion of the Company’s investments in foreign subsidiaries are indefinitely invested. Stock-based compensation The Company recognizes the cost of services received in exchange for any stock-based awards. The Company recognizes the cost on a straight-line basis over an award’s requisite service period, which is generally the vesting period, based on the award’s fair value at the Shipping and handling costs date of grant. Amounts billed to customers for shipping and handling are classified as revenue. Costs incurred in shipping and handling are recognized in Cost of goods sold. Advertising costs The fair values of stock options granted by the Company are estimated at the date of grant using the Black-Scholes option-pricing model. The Company’s determination of the fair value of stock-based payment awards using this option-pricing model is affected by The Company incurs costs for both direct-response and the price of the Common Stock as well as by non-direct-response advertising. The Company assumptions regarding highly complex and subjective capitalizes direct-response advertising costs for variables, including, but not limited to, the expected expenditures, primarily in its Classroom Magazines price volatility of the Common Stock over the terms of division. The asset is amortized on a cost-pool-by-cost- the awards, the risk-free interest rate, and actual and pool basis over the period during which the future projected employee stock option exercise behaviors. benefits are expected to be received. Included in Estimates of fair value are not intended to predict Prepaid expenses and other current assets on the actual future events or the value that may ultimately balance sheet is $4.5 and $4.8 of capitalized be realized by those who receive these awards. advertising costs as of May 31, 2013 and 2012, respectively. The Company expenses non-direct- response advertising costs as incurred. Discontinued operations Long-lived assets classified within discontinued operations are recognized at the estimated fair value less cost to sell those long-lived assets for assets held for sale. The calculation of estimated fair value less cost to sell includes significant estimates and assumptions, including, but not limited to: operating projections; excess working capital levels; real estate Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates, in order to derive the Company’s best estimate of awards ultimately expected to vest. In determining the estimated forfeiture rates for stock-based awards, the Company periodically conducts an assessment of the actual number of equity awards that have been forfeited previously. When estimating expected forfeitures, the Company considers factors such as the type of award, the employee class and historical 53 02_73994_Scholastic_AR 7/31/13 11:44 AM Page 54 experience. The estimate of stock-based awards that In July 2012, the FASB issued an update to the will ultimately be forfeited requires significant authoritative guidance related to the impairment judgment and, to the extent that actual results or testing of indefinite-lived intangible assets. Similar to updated estimates differ from current estimates, such the guidance for goodwill impairment testing, amounts will be recorded as a cumulative adjustment companies will have the option to first perform a in the period such estimates are revised. qualitative assessment to determine whether it is more The table set forth below provides the estimated fair value of options granted during fiscal years 2013, 2012 and 2011 and the significant weighted average assumptions used in determining the fair value for options granted by the Company under the Black- Scholes option pricing model. The average expected life represents an estimate of the period of time stock options are expected to remain outstanding based on the historical exercise behavior of the option grantees. The risk-free interest rate was based on the U.S. Treasury yield curve corresponding to the expected life in effect at the time of the grant. The volatility was estimated based on historical volatility corresponding to the expected life. likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying value. The guidance provides companies with a revised list of examples of events and circumstances to consider, in their totality, to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount. If a company concludes that this is the case, the company is required to perform the quantitative impairment test by comparing the fair value with the carrying value. Otherwise, a company can skip the quantitative test. Companies are not required to perform the qualitative assessment and are permitted to skip the qualitative assessment for any indefinite-lived asset in any period and proceed directly to the quantitative impairment test. The Estimated fair value of stock options granted Assumptions: 2013 2012 2011 company may resume performing the qualitative assessment in any subsequent period. The $9.77 $9.30 $8.15 amendments are effective for annual and interim Expected dividend yield Expected stock price volatility Risk-free interest rate 1.6% 37.5% 0.9% 1.4% 36.7% 1.6% Expected life of options 6 years 7 years 1.3% 37.3% 2.0% 6 years New Accounting Pronouncements impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company adopted this guidance in the fourth quarter of fiscal 2013. 2. ACQUISITIONS In February 2013, the Financial Accounting Standards On January 3, 2012, the Company acquired Learners Board (the “FASB”) issued an update to the Publishing, a Singapore-based publisher of authoritative guidance related to the reporting of supplemental learning materials for English- amounts reclassified out of accumulated other Language Learners, for $3.0, net of cash acquired. As comprehensive income. This new requirement about a result of this transaction, the Company recorded presenting information about amounts reclassified out $1.5 of goodwill. The results of operations of this of accumulated other comprehensive income and their business subsequent to the acquisition date are corresponding effect on net income will present, in one included in the Internationalsegment. place, information about significant amounts reclassified and, in some cases, cross-references to related footnote disclosures. The disclosure amendments in this update are effective prospectively for reporting periods beginning after December 15, 2012 and early adoption is permitted. The Company adopted this guidance in the fourth quarter of fiscal 2013. On February 8, 2012, the Company acquired the business and certain assets of Weekly Reader, a publisher of weekly educational classroom magazines designed for children in grades pre-K – 12, for $2.0 in cash and $4.8 in assumed liabilities, which were fulfilled by the Company as of May 31, 2012. The Company utilized internally-developed discounted cash 54 02_73994_Scholastic_AR 7/31/13 11:44 AM Page 55 flow forecasts and market comparisons of royalty The following table summarizes the operating results rates to determine the fair value of the assets acquired of the discontinued operations for the fiscal years and the amount to be allocated to goodwill. As a result, ended May 31: the Company recognized $1.4 of goodwill and $5.4 of intangible assets. The results of operations of this business subsequent to the acquisition date are Revenues Gain (loss) on sale included in the Classroom and Supplemental Materials Earnings (loss) before income taxes Publishingsegment, and certain assets will benefit the Children’s Book Publishing and Distributionsegment. 3. DISCONTINUED OPERATIONS The Company continuously evaluates its portfolio of businesses for both impairment and economic viability. The Company monitors the expected cash proceeds to be realized from the disposition of discontinued operations’ assets, and adjusts asset values accordingly. 2013 $ 6.2 (1.1) (7.2) 2.5 2012 $ 9.8 — (7.2) 1.5 2011 $ 28.5 0.3 (7.6) 1.7 Income tax benefit (provision) Earnings (loss) from discontinued operations, net of tax $ (4.7) $ (5.7) $ (5.9) The following table sets forth the assets and liabilities of the discontinued operations included in the Consolidated Balance Sheets of the Company as of May 31: Accounts receivable, net Other assets 2013 $ 0.0 0.4 $ 0.4 1.3 2012 $ 0.2 7.5 $ 7.7 2.1 In the first quarter of fiscal 2012, the Company ceased operations in its direct-to-home catalog business Current assets of discontinued operations Accrued expenses and other current liabilities specializing in toys. This business was a separate Current liabilities of discontinued operations $ 1.3 $ 2.1 reporting unit included in the Media, Licensing and Advertisingsegment. The prior fiscal year loss before income taxes includes lease costs associated with a vacant facility which formerly served the Company’s direct-to-home toy catalog business. In the fourth quarter of fiscal 2012, the Company reviewed the estimate of the fair value less cost to sell of its Maumelle facility and recognized an additional charge of $2.2. The Company used market value estimates of the property and an estimate of the anticipated costs to sell the asset. The Company subsequently sold the Maumelle facility during the fourth quarter of fiscal 2013 for approximately $5.0, recognizing a loss on the sale in the amount of $1.1. In the fourth quarter of fiscal 2013, the Company discontinued a computer club business which was included in the Children’s Book Publishing and Distributionsegment. In addition, the Company discontinued a subscription-based business which was previously reported in the Media, Licensing and Advertisingsegment. All of these businesses are classified as discontinued operations in the Company’s Consolidated Financial Statements. 55 02_73994_Scholastic_AR 7/31/13 11:44 AM Page 56 4. SEGMENT INFORMATION The Company categorizes its businesses into five reportable segments: Children’s Book Publishing and Distribution; Educational Technology and Services; Classroom and Supplemental Materials Publishing; Media, Licensing and Advertising;and International. This classification reflects the nature of products and services consistent with the method by which the Company’s chief operating decision-maker assesses operating performance and allocates resources. • Children’s Book Publishing and Distribution operates as an integrated business which includes the publication and distribution of children’s books, media and interactive products in the United States through school-based book clubs and book fairs and the trade channel. This segment is comprised of three operating segments. • Educational Technology and Services includes the production and distribution to schools of curriculum- based learning technology and materials for grades pre-kindergarten to 12 in the United States, together with related implementation and assessment services and school consulting services. This segment is comprised of one operating segment. • Classroom and Supplemental Materials Publishing includes the publication and distribution to schools and libraries of children’s books, classroom magazines, supplemental classroom materials and print and on-line reference and non-fiction products for grades pre-kindergarten to 12 in the United States. This segment is comprised of two operating segments. • Media, Licensing and Advertising includes the production and/or distribution of digital media, consumer promotions and merchandising and advertising revenue, including sponsorship programs. This segment is comprised of two operating segments. • International 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. This segment is comprised of three operating segments. 56 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 57 The following table sets forth information for the Company’s segments for the three fiscal years ended May 31: Children’s Classroom & Book Educational Supplemental Materials Total Publishing(1)(2) Advertising(1) Overhead(1)(3) Domestic Publishing & Technology Distribution(1) & Services(1) Media, Licensing & 2013 Revenues Bad debts Depreciation and amortization(5) Amortization(6) Loss on leases and asset Impairments Segment operating income (loss) Segment assets at May 31, 2013 Goodwill at May 31, 2013 Expenditures for long-lived assets $ 846.9 1.8 16.5 15.0 — 24.5 407.5 54.3 52.3 165.3 including royalty advances Long-lived assets at May 31, 2013 2012 Revenues Bad debts Depreciation and amortization(5) Amortization(6) Loss on leases and asset Impairments Segment operating income (loss) Segment assets at May 31, 2012 Goodwill at May 31, 2012 Expenditures for long-lived assets including royalty advances Long-lived assets at May 31, 2012 2011 Revenues Bad debts Depreciation and amortization(5) Amortization(6) Loss on leases and asset Impairments Segment operating income (loss) Segment assets at May 31, 2011 Goodwill at May 31, 2011 Expenditures for long-lived assets $1,111.3 6.4 20.6 12.5 0.5 152.2 543.5 54.3 44.4 167.5 $ 922.0 8.7 15.6 12.6 — 77.3 427.1 54.3 including royalty advances Long-lived assets at May 31, 2011 40.4 175.9 $227.7 1.1 1.2 21.5 — 29.5 170.8 22.7 40.3 116.5 $254.7 0.7 1.3 20.9 — 49.2 168.5 22.7 26.2 101.1 $230.8 0.7 1.3 22.8 — 38.0 161.1 21.8 35.7 97.6 $218.0 1.4 1.4 8.0 — 29.6 168.6 65.4 10.9 91.4 $208.2 1.9 1.0 6.7 — 18.3 163.6 65.4 17.9 90.3 $197.2 1.2 1.3 5.0 3.4 13.6 150.8 64.0 9.1 80.2 $58.7 0.1 0.5 2.5 — 4.7 26.9 5.4 3.7 12.0 $75.3 0.1 0.5 12.3 — (4.9) 38.1 5.4 6.3 11.6 $82.7 0.2 0.7 8.0 — 3.5 44.9 5.4 9.4 20.1 $ — — 41.6 — — (60.2) 402.1 — 33.3 236.5 $ — — 39.0 — 6.2 (87.1) 438.6 — 37.9 246.7 $ — — 35.6 — — (67.0) 405.1 — 56.3 249.0 $1,351.3 4.4 61.2 47.0 — 28.1 1,175.9 147.8 140.5 621.7 $1,649.5 9.1 62.4 52.4 6.7 127.7 1,352.3 147.8 132.7 617.2 $1,432.7 10.8 54.5 48.4 3.4 65.4 1,189.0 145.5 150.9 622.8 International(1)(4) Total $441.1 2.4 5.3 1.9 — 39.8 264.7 10.1 $1,792.4 6.8 66.5 48.9 — 67.9 1,440.6 157.9 13.4 68.0 153.9 689.7 $489.6 3.2 6.4 2.7 0.3 57.6 310.3 9.9 $2,139.1 12.3 68.8 55.1 7.0 185.3 1,662.6 157.7 13.2 67.1 145.9 684.3 $444.9 2.8 5.6 2.7 — 38.3 287.5 8.7 $1,877.6 13.6 60.1 51.1 3.4 103.7 1,476.5 154.2 11.8 71.2 162.7 694.0 (1) As discussed in Note 3, “Discontinued Operations,” the Company closed or sold several operations during the first quarter of fiscal 2012 and the fourth quarter of fiscal 2013. All of these businesses are classified as discontinued operations in the Company’s financial statements and, as such, are not reflected in this table. (2) Includes assets and results of operations acquired in a business acquisition as of February 8, 2012. (3) Overhead includes all domestic corporate amounts not allocated to segments, including expenses and costs related to the management of corporate assets. Unallocated assets are principally comprised of deferred income taxes and property, plant and equipment related to the Company’s headquarters in the metropolitan New York area, its fulfillment and distribution facilities located in Missouri and its facility located in Connecticut. Overhead also includes amounts previously allocated to the Media, Licensing and Advertising segment for the Company’s direct-to-home toy catalog business that was discontinued in the first quarter of fiscal 2012. Overhead also includes amounts previously allocated to the Children’s Book Publishing and Distribution segment for the computer club business that was discontinued in the fourth quarter of fiscal 2013. (4) (5) (6) Includes assets and results of operations acquired in a business acquisition as of January 3, 2012. Includes depreciation of property, plant and equipment and amortization of intangible assets. Includes amortization of prepublication and production costs. 57 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 58 5. DEBT The following table summarizes debt as of May 31: Lines of Credit (weighted average interest rates of 9.0% and 5.3%, respectively) Loan Agreement: Revolving Loan Term Loan 5% Notes due 2013, net of discount Total debt Less lines of credit and current portion of long-term debt Total long-term debt Carrying Value Fair Value Carrying Value Fair Value 2013 2012 $ 2.0 $ 2.0 $ 6.5 $ 6.5 — — — $ 2.0 (2.0) $ — — — — $ 2.0 (2.0) $ — — — 152.8 — — 155.4 $ 159.3 $ 161.9 (6.5) $ 152.8 (6.5) $ 155.4 The short-term debt’s carrying value approximates its fair value. The fair values of the Notes were estimated based on market quotes, where available, or dealer quotes. 58 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 59 The following table sets forth the maturities of the carrying values of the Company’s debt obligations as of May 31, 2013 for the fiscal years ending May 31: Interest on the Revolving Loan is due and payable in arrears on the last day of the interest period (defined as the period commencing on the date of the advance 2014 2015 2016 2017 2018 Thereafter Total debt $ 2.0 and ending on the last day of the period selected by the — — — — — $ 2.0 Borrower at the time each advance is made). The interest pricing under the Revolving Loan is dependent upon the Borrower’s election of a rate that is either: Loan Agreement On June 1, 2007, Scholastic Corporation and Scholastic Inc. (each, a “Borrower” and together, the “Borrowers”) entered into a $525.0 credit facility with certain banks (the “Loan Agreement”), consisting of a $325.0 revolving credit component (the “Revolving Loan”) and a $200.0 amortizing term loan component • A Base Rate equal to the higher of (i) the prime rate, (ii) the prevailing Federal Funds rate plus 0.500% or (iii) the Eurodollar Rate for a one month interest period plus 1% plus, in each case, an applicable spread ranging from 0.18% to 0.60%, as determined by the Company’s prevailing consolidated debt to total capital ratio. (the “Term Loan”). The Loan Agreement was amended – or – on August 16, 2010, on October 25, 2011, and most recently on December 5, 2012. The amendment on December 5, 2012 served to, among other things, (i) increase the Revolving Loan from $325.0 to $425.0 (with the continued ability to increase the aggregate Revolving Loan commitments of the lenders by up to an additional $150.0), (ii) extend the maturity of the $425.0 Revolving Loan to December 5, 2017 from June 1, 2014, (iii) amend a covenant in the Loan Agreement to permit certain sales, transfers and dispositions of assets by either Borrower or any subsidiary to any other Borrower or subsidiary and • A Eurodollar Rate equal to the London interbank offered rate (LIBOR) plus an applicable spread ranging from 1.18% to 1.60%, as determined by the Company’s prevailing consolidated debt to total capital ratio. As of May 31, 2013, the indicated spread on Base Rate Advances was 0.18% and the indicated spread on Eurodollar Rate Advances was 1.18%, both based on the Company’s prevailing consolidated debt to total capital ratio. (iv) amend a covenant in the Loan Agreement to permit The Loan Agreement also provides for the payment of transactions between or among the Company and its a facility fee ranging from 0.20% to 0.40% per annum wholly-owned subsidiaries not involving any other based upon the Company’s prevailing consolidated debt affiliates. Additionally, this amendment added certain to total capital ratio. At May 31, 2013, the facility fee lenders to the Loan Agreement and other lenders exited rate was 0.20%. the Loan Agreement with no further obligation. The Revolving Loan allows the Company to borrow, Revolving Loan as of May 31, 2012 and May 31, 2013. There were no outstanding borrowings under the repay or prepay and reborrow at any time prior to the maturity date, and the proceeds may be used for general corporate purposes, including financing for acquisitions and share repurchases. On April 15, 2013, the Company drew on this Revolving Loan to fully repay the 5% Notes due April 2013. As of May 31, 2013, the Company had fully paid down the Revolving Loan. At May 31, 2013, the Company had open standby letters of credit totaling $6.6 issued under certain credit lines, including $1.4 under the Loan agreement discussed above. These letters of credit are scheduled to expire within one year; however, the Company expects that substantially all of these letters of credit will be renewed, at similar terms, prior to expiration. 59 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 60 The Loan Agreement contains certain covenants, April 2013. As of May 31, 2013, the Company had including interest coverage and leverage ratio tests fully paid down the Revolving Loan. and certain limitations on the amount of dividends and other distributions, and at May 31, 2013, the Company was in compliance with these covenants. Lines of Credit As of May 31, 2013, the Company’s domestic credit lines available under unsecured money market bid rate credit lines totaled $14.8. There were no outstanding borrowings under these credit lines at May 31, 2013 and 2012. All loans made under these credit lines are at the sole discretion of the lender and at an interest rate and term agreed to at the time each loan is made, but not to exceed 365 days. These credit lines may be renewed, if requested by the Company, at the option of the lender. 6. COMMITMENTS AND CONTINGENCIES Lease obligations The Company leases warehouse space, office space and equipment under various capital and operating leases over periods ranging from one to forty years. Certain of these leases provide for scheduled rent increases based on price-level factors. The Company generally does not enter into leases that call for contingent rent. In most cases, the Company expects that, in the normal course of business, leases will be renewed or replaced. Net rent expense relating to the Company’s non-cancelable operating leases for the three fiscal years ended May 31, 2013, 2012 and 2011 was $32.9, As of May 31, 2013, the Company had various local $38.9 and $47.2, respectively. currency credit lines, with maximum available borrowings in amounts equivalent to $27.0, underwritten by banks primarily in the United States, Canada and the United Kingdom. These credit lines are typically available for overdraft borrowings or loans up to 364 days and may be renewed, if requested by the Company, at the sole option of the lender. There were borrowings outstanding under these facilities equivalent to $2.0 at May 31, 2013 at a weighted average interest rate of 9.0%, compared to borrowings outstanding equivalent to $6.5 at May 31, 2012 at a weighted average interest rate of 5.3%. 5% Notes due 2013 In April 2003, Scholastic Corporation issued $175.0 of 5% Notes (the “5% Notes”). The 5% Notes were senior unsecured obligations that matured on April 15, 2013. Interest on the 5% Notes was payable semi-annually on April 15 and October 15 of each year through maturity. As discussed above, the Company amended its existing revolving credit facility, which was scheduled to mature on June 1, 2014, to extend the maturity date of the Revolving Loan to December 5, 2017. On April 15, 2013, the Company drew on the Revolving Loan to satisfy its obligations to fully repay the 5% Notes due Amortization of assets under capital leases covering land, buildings and equipment was $1.1, $1.1 and $1.2 for the fiscal years ended May 31, 2013, 2012 and 2011, respectively, and is included in Depreciation and amortization expense. The most significant of the Company’s capital leases is for the New York office where the Company’s headquarters are located. This capital lease has an imputed interest rate of 7.9% and the term ends July 2039. The following table sets forth the composition of capital leases reflected as Property, plant and equipment in the Consolidated Balance Sheets at May 31: Land Buildings Equipment Accumulated amortization Total 2013 $ — 39.0 1.0 40.0 (13.4) 2012 $ 3.5 39.0 1.0 43.5 (12.3) $ 26.6 $ 31.2 The following table sets forth the aggregate minimum future annual rental commitments at May 31, 2013 under all non-cancelable leases for the fiscal years ending May 31: 60 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 61 Operating Leases $ 34.6 Capital Leases $ 5.4 2014 2015 2016 2017 2018 Thereafter Total minimum lease payments Less minimum sublease income to be received Minimum lease payments, net of sublease income 30.2 24.6 18.8 14.5 41.8 $164.5 $ 13.9 $150.6 Less amount representing interest Present value of net minimum capital lease payments Less current maturities of capital lease obligations Long-term capital lease obligations Other Commitments The following table sets forth the aggregate minimum future contractual commitments at May 31, 2013 relating to royalty advances and minimum print quantities for the fiscal years ending May 31: Royalty Advances $ 10.7 Minimum Print Quantities $ 58.8 2014 2015 2016 2017 2018 Thereafter 3.2 1.6 0.7 0.9 — 5.2 5.1 5.9 6.1 179.1 $ 206.8 $ 65.0 $ 141.8 149.1 57.7 0.2 $ 57.5 59.6 47.6 48.4 49.1 100.7 $364.2 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 various claims and lawsuits arising in the normal course of business where a loss is considered probable or reasonably possible, that the reasonably possible losses from such claims and lawsuits (either individually or in the aggregate) would have a material adverse effect on the Company’s consolidated financial position or results of operations. Grolier Limited is an indirect subsidiary of Scholastic Corporation, located in the United Kingdom, which ceased operations in fiscal 2008 and the operations of which are included in discontinued operations. The Company is currently in the process of settling a Grolier Limited pension plan in effect at the time it ceased operations and is evaluating the potential pension liabilities under the plan relating to the status of the plan as a defined contribution or a defined benefit plan in the context of the conversion of the plan from a defined benefit to a defined contribution plan in 1986. Based on the information currently available to it, the Company does not expect to incur any additional material liability in resolving this issue and settling the plan. 7. INVESTMENTS Total commitments $17.1 The Company had open standby letters of credit of section of the Company’s Consolidated Balance Sheets $6.6 issued under certain credit lines as of May 31, were investments of $19.6 and $20.6 at May 31, 2013 2013 and 2012, respectively. These letters of credit are and May 31, 2012, respectively. Included in the Other assets and deferred charges scheduled to expire within one year; however, the Company expects that substantially all of these letters of credit will be renewed, at similar terms, prior to expiration. Contingencies The Company owns a 15.0% non-controlling interest in a book distribution business located in the UK, which is accounted for as a cost-basis investment. The carrying value of these assets was $5.0 as of May 31, 2013. Various claims and lawsuits arising in the normal course of business are pending against the Company. The Company’s 26.2% non-controlling interest in a The Company accrues a liability for such matters children’s book publishing business located in the UK when it is probable that a liability has occurred and the is accounted for using the equity method of amount of such liability can be reasonably estimated. accounting. The net value of this investment at When only a range can be estimated, the most probable May 31, 2013 was $14.6. The Company received $0.8 amount in the range is accrued unless no amount of dividends in fiscal 2013 from this investment. within the range is a better estimate than any other 61 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 62 Income from equity investments totaled $2.3 for the Publishingsegment, and certain assets will benefit the year ended May 31, 2013, $2.6 for the year ended Children’s Book Publishing and Distributionsegment. May 31, 2012 and $1.8 for the year ended May 31, 2011. On January 3, 2012, the Company acquired Learners Publishing, a Singapore-based publisher of The following table summarizes the Company’s supplemental learning materials for English- investments as of May 31: Language Learners, for $3.0, net of cash acquired. The 2013 2012 Company utilized Level 3 fair value measurement Cost method investments: UK-based Total cost method investments Equity method investments: UK-based Total equity method investments Total $ $ 5.0 5.0 $ 14.6 $ 14.6 $ 19.6 $ $ 5.2 5.2 $ 15.4 $ 15.4 $ 20.6 8. GOODWILL AND OTHER INTANGIBLES Goodwill is reviewed for impairment annually or more frequently if impairment indicators arise. inputs, using its own assumptions, including internally-developed discounted cash flow forecasts, to determine the fair value of the assets acquired and the amount of goodwill to be allocated to the Learners Publishing business. As a result of this transaction, the Company recorded $1.5 of goodwill. The results of operations of this business subsequent to the acquisition date are included in the International segment. The Company assesses goodwill annually or more frequently if impairment indicators are such that the The following table summarizes the activity in goodwill is more likely than not impaired. The Goodwill for the fiscal years ended May 31: Company continues to monitor impairment indicators Gross beginning balance Accumulated impairment Beginning balance Additions due to acquisition Impairment charge Foreign currency translation Other Gross ending balance Accumulated impairment Ending balance 2013 $ 178.5 (20.8) 157.7 — — 0.0 0.2 178.7 (20.8) 2012 $ 175.0 (20.8) 154.2 2.7 — 0.0 0.8 178.5 (20.8) in light of reduced earnings, changes in market conditions, near and long-term demand for the Company’s products and other relevant factors. Goodwill of $64.0 is attributed to a reporting unit (Classroom and Community Group) within the Classroom and Supplemental Materials Publishing segment. During the third quarter of fiscal 2013, the Company determined that this reporting unit had impairment indicators. The Company performed an $157.9 $157.7 interim impairment review of this reporting unit and On February 8, 2012, the Company acquired the business and certain assets of Weekly Reader, a publisher of weekly educational classroom magazines designed for children in grades pre-K – 12, for $2.0 in cash and $4.8 in assumed liabilities, which were fulfilled by the Company as of May 31, 2012. The Company utilized internally-developed discounted cash flow forecasts and market comparisons of royalty rates to determine the fair value of the assets acquired and the amount to be allocated to goodwill. As a result, the Company recognized $1.4 of goodwill and $5.4 of intangible assets. The results of operations of this business subsequent to the acquisition date are included in the Classroom and Supplemental Materials determined that the fair value exceeds the carrying value by greater than 20% as of January 31, 2013. The Company employed Level 3 valuation measures, including expected discounted cash flow analysis and market comparisons. Internal cash flow forecasts and other assumptions were developed consistent with the highest and best use of the reporting unit. A discount rate of 16% was employed for the discounted cash flow analysis and a factor of 4.5 times EBITDA was used to compare to similar public companies. The discount rate and EBITDA multiples utilized reflect risks specific to the reporting unit, including forecast risk and product diversity risk. Using a discount rate of 18% combined with a multiple of 3.8 times EBITDA 62 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 63 would not result in an impairment based upon the In fiscal 2012, due to declining revenues associated valuation methodology employed. A qualitative review with certain publishing and trademark rights in the was performed as of May 31, 2013 and no impairment Children’s Book Publishing and Distributionsegment, was noted. The reporting unit associated with the Company’s book clubs operations was the only reporting unit valued using a quantitative analysis as of May 31, 2013, as changes in market conditions and declining revenues in the period were indicative of a potential for goodwill impairment. The fair value of the unit declined from the prior year from $65.0 to $59.5, but remained higher than the carrying value of $48.8. This reporting unit has $13.4 of associated goodwill. The Company used forecasted cash flows, and to a lesser extent, observable revenue multiples for the Company determined that the intangible assets associated with these rights were not fully recoverable and recognized an impairment in amortization expense of $4.9 based upon the difference between the carrying value and the fair value of this asset and reduced the expected useful life of the asset. The Company employed Level 3 fair value measurement techniques to determine the fair value of these assets as of May 31, 2012, including the relief from royalty method. Amortization expense for Other intangibles totaled $2.5, $6.5 and $1.4 for the fiscal years ended May 31, 2013, 2012 and 2011, respectively. comparable companies, consistent with determining The following table reflects the estimated amortization its fair value. A discount rate of 15% and a perpetual expense for intangibles for the next five fiscal years growth rate of 3% were employed for the discounted ending May 31: 2014 2015 2016 2017 2018 $ 2.4 2.3 2.2 2.2 0.5 Intangible assets with definite lives consist principally of customer lists, covenants not to compete and trademarks. Intangible assets with definite lives are amortized over their estimated useful lives. The weighted-average remaining useful lives of all amortizable intangible assets is 9 years. 9. TAXES The components of earnings from continuing operations before income taxes for the fiscal years ended May 31 are: United States Non-United States Total 2013 $ 34.6 18.8 2012 $ 145.4 24.3 2011 $ 77.0 7.1 $ 53.4 $169.7 $ 84.1 cash flow analysis and revenue multiples used were between 0.4 times historical revenues and 0.5 times future revenues. The value of the reporting unit is largely dependent on the success of the Storia ereading app which was launched in fiscal 2012. Should Storia not achieve its projected revenue, and the Company is unable to adjust its strategy to effectively compensate, there is a potential for an impairment of goodwill in this reporting unit in future periods. The following table summarizes Other intangibles as of May 31: 2013 $ 4.3 2012 $ 0.7 Beginning balance – Customer lists Additions due to acquisition Amortization expense Foreign currency translation Customer lists, net of accumulated amortization of $2.3 and $1.3, respectively Beginning balance – Other intangibles Additions due to acquisition Impairment charge Amortization expense Other 0.1 (1.0) 0.0 $ 3.4 $ 10.4 0.2 — (1.5) 0.1 Other intangibles, net of accumulated amortization of $12.0 and $10.5, respectively $ 9.2 Total other intangibles subject to amortization $12.6 Trademarks and other $ 2.0 Total other intangibles not subject to amortization $ 2.0 Total other intangibles $14.6 3.8 (0.2) 0.0 $ 4.3 $ 17.3 — (5.4) (1.4) (0.1) $ 10.4 $14.7 $ 2.0 $ 2.0 $16.7 63 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 64 The provision for income taxes from continuing unrecognized deferred tax liability related to those operations for the fiscal years ended May 31 consists investments in these non-U.S. subsidiaries is not of the following components: practicable. The Company assesses foreign investment 2013 2012 2011 levels periodically to determine if all or a portion of the Company’s investments in foreign subsidiaries are indefinitely invested. Deferred Taxes The significant components for deferred income taxes for the fiscal years ended May 31, including deferred income taxes related to discontinued operations, are as follows: Federal Current Deferred State and local Current Deferred International Current Deferred Total Current Deferred $ 4.5 2.4 $ 6.9 $ 0.5 2.2 $ 2.7 $ 7.8 0.2 $ 8.0 $ 12.8 4.8 $ 17.6 $ 49.1 (8.2) $ 40.9 $ 12.0 (0.7) $ 11.3 $ 12.8 (3.4) $ 9.4 $ 73.9 (12.3) $ 61.6 $ 10.2 9.1 $ 19.3 $ 3.8 2.2 $ 6.0 $ 12.5 1.0 $ 13.5 $ 26.5 12.3 $ 38.8 Deferred tax assets Tax uniform capitalization Inventory reserves Allowance for doubtful accounts Other reserves Post-retirement, post-employment and pension obligations Tax carryforwards Lease accounting Other – net Valuation allowance Total deferred tax assets Deferred tax liabilities Prepaid expenses 2013 2012 $ 25.8 $ 16.8 29.2 5.4 26.3 12.6 47.8 11.7 32.7 29.8 7.8 41.2 23.1 40.3 10.1 34.2 191.5 (31.9) 203.3 (34.4) $ 159.6 $ 168.9 (0.5) (65.0) (0.6) (54.6) $ (65.5) $ 94.1 $ (55.2) $ 113.7 Effective Tax Rate Reconciliation A reconciliation of the significant differences between the effective income tax rate and the federal statutory Gross deferred tax assets rate on earnings from continuing operations before income taxes for the fiscal years ended May 31 is as 2013 2012 2011 Depreciation and amortization 35.0% 35.0% 35.0% Total deferred tax liability Total net deferred tax assets net of federal income tax benefit 3.3% 4.3% 5.2% follows: Computed federal statutory provision State income tax provision, Difference in effective tax rates on earnings of foreign subsidiaries Charitable contributions Tax credits Valuation allowances Other – net Effective tax rates 0.3% -4.4% -0.4% 2.4% -3.2% 0.2% -0.7% -0.1% -1.4% -1.0% -0.8% -1.5% -0.2% 5.9% 2.5% Total net deferred tax assets of $94.1 at May 31, 2013 and $113.7 at May 31, 2012 include $79.2 and $71.4, respectively, in current assets. Total noncurrent deferred tax assets of $14.9 and $42.3 are reflected in noncurrent assets at May 31, 2013 and 2012, 33.0% 36.3% 46.1% respectively. Total provision for income taxes $ 17.6 $ 61.6 $ 38.8 Unremitted Earnings For the year ended May 31, 2013, the valuation allowance decreased by $2.5 and for the year ended At May 31, 2013, the Company had not provided U.S. May 31, 2012, the valuation allowance decreased by income taxes on accumulated but undistributed $2.4. The valuation allowance is based on the earnings of its non-U.S. subsidiaries of approximately Company’s assessment that it is more likely than not $78.6, as substantially all of these undistributed that certain deferred tax assets will not be realized in earnings are expected to be permanently reinvested. the foreseeable future. The valuation allowance at However, if any portion were to be distributed, the May 31, 2013 primarily relates to foreign operating related U.S. tax liability may be reduced by foreign loss carryforwards of $116.3, principally in the UK, income taxes paid on those earnings. Determining the which do not expire. 64 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 65 The benefits of uncertain tax positions are recorded in Gross unrecognized benefits at May 31, 2012 the financial statements only after determining a more likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from taxing Decreases related to prior year tax positions Increase related to prior year tax positions Increases related to current year tax positions Settlements during the period authorities. These uncertain tax positions are included Lapse of statute of limitation in long-term income taxes payable, reduced by the Gross unrecognized benefits at May 31, 2013 $ 38.7 (7.2) 3.5 1.0 (0.5) — $ 35.5 associated federal deduction for state taxes and non- U.S. tax credits, and may also include other long-term tax liabilities that are not uncertain but have not yet been paid. The interest and penalties related to these uncertain tax positions are recorded as part of the Company’s income tax expense and part of the income tax liability on the Company’s Consolidated Balance Sheets. Unrecognized tax benefits for the Company decreased by $3.2 and increased by $7.9 for the years ended May 31, 2013 and 2012, respectively. Although the timing of the resolution and/or closure on audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next twelve months. The total amount of unrecognized tax benefits at However, given the number of years remaining subject May 31, 2013, 2012 and 2011 were $35.5, excluding to examination and the number of matters being $6.5 accrued for interest and penalties, $38.7, examined, the Company is unable to estimate the full excluding $7.1 accrued for interest and penalties, and range of possible adjustments to the balance of gross $30.8, excluding $5.9 for accrued interest and unrecognized tax benefits. penalties, respectively. Of the total amount of unrecognized tax benefits at May 31, 2013, 2012 and 2011, $21.8, $18.1 and $19.2, respectively, would impact the Company’s effective tax rate. The Company, including subsidiaries, files income tax returns in the U.S., various states and various foreign jurisdictions. The Company is routinely audited by various tax authorities. At May 31, 2013, the Company During the years presented, the Company recognized is currently under audit by the Internal Revenue interest and penalties related to unrecognized tax Service for its fiscal years ended May 31, 2007, 2008 benefits with the provision for taxes on the and 2009. The Company is currently under audit by consolidated financial statements. The Company New York State for its fiscal years ended May 31, recognized a benefit of $0.5, and expense of $2.4 and 2006, 2007 and 2008 and New York City for its fiscal $1.0, for the years ended May 31, 2013, 2012 and years ended May 31, 2005, 2006 and 2007. If any of 2011, respectively. A reconciliation of the unrecognized tax benefits for the fiscal years ended May 31 is as follows: Gross unrecognized benefits at May 31, 2010 $ 30.6 Decreases related to prior year tax positions Increase related to prior year tax positions Increases related to current year tax positions Settlements during the period Lapse of statute of limitation (2.9) 2.5 2.8 (2.2) — Gross unrecognized benefits at May 31, 2011 $ 30.8 Decreases related to prior year tax positions Increase related to prior year tax positions Increases related to current year tax positions Settlements during the period Lapse of statute of limitation (0.8) 9.5 1.7 (2.4) (0.1) these tax examinations are concluded within the next twelve months, the Company will make any necessary adjustments to its unrecognized tax benefits. 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 in respect to a jurisdiction is probable and can be reliably estimable, for a particular jurisdiction, the Company has made accruals for these matters which are reflected in the Company’s Consolidated Financial Statements. In the third quarter of fiscal 2012, the Company recorded accruals of $19.7 based on the current status of sales tax assessments in two jurisdictions. These amounts are included in the 65 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 66 Consolidated Financial Statements in Selling, general with regard to the Common Stock: the Scholastic and administrative expenses. During the fiscal year Corporation 1995 Stock Option Plan (the “1995 Plan”), 2013, the Company made payments of $15.3 for these under which no further awards can be made; the prior assessments. Future developments relating to Scholastic Corporation 2001 Stock Incentive Plan (the the foregoing could result in adjustments being made “2001 Plan”), under which no further awards can be to these accruals. 10. CAPITAL STOCK AND STOCK- BASED AWARDS made; and the Scholastic Corporation 2011 Stock Incentive Plan (the “2011 Plan”). The 2011 Plan was adopted in July 2011 and provides for the issuance of incentive stock options; options that are not so Class A Stock and Common Stock qualified, called non-qualified stock options; restricted Capital stock consisted of the following as of May 31, stock; and other stock-based awards. 2013: Class A Stock Common Stock Preferred Stock Authorized Reserved for Issuance Outstanding 4,000,000 1,499,000 1,656,200 70,000,000 8,052,806 30,105,479 2,000,000 — — The Company’s stock-based compensation vests over periods not exceeding four years. Provisions in the Company’s stock-based compensation plans allow for the acceleration of vesting for certain retirement- eligible employees, as well as in certain other events. The only voting rights vested in the holders of Stock Options – At May 31, 2013, non-qualified stock Common Stock, except as required by law, are the options to purchase 174,500 shares, 1,646,897 shares election of such number of directors as shall equal at and 581,376 shares of Common Stock were least one-fifth of the members of the Board. The Class outstanding under the 1995 Plan, the 2001 Plan and A Stockholders are entitled to elect all other directors the 2011 Plan, respectively. During fiscal 2013, 45,907 and to vote on all other matters. The Class A options were granted under the 2011 Plan at a Stockholders and the holders of Common Stock are weighted average exercise price of $31.96. entitled to one vote per share on matters on which they are entitled to vote. The Class A Stockholders have the right, at their option, to convert shares of Class A Stock into shares of Common Stock on a share-for- share basis. With the exception of voting rights and conversion rights, and as to any rights of holders of Preferred Stock if issued, the Class A Stock and the Common Stock are equal in rank and are entitled to dividends and distributions, when and if declared by the Board. Preferred Stock At May 31, 2013, 1,253,908 shares of Common Stock were available for additional awards under the 2011 Plan. The Company also maintains the 1997 Outside Directors’ Stock Option Plan (the “1997 Directors’ Plan”), a stockholder-approved stock option plan for outside directors under which no further awards may be made. The 1997 Directors’ Plan, as amended, provided for the automatic grant to each non-employee director on the date of each annual stockholders’ The Preferred Stock may be issued in one or more meeting of non-qualified stock options to purchase series, with the rights of each series, including voting 6,000 shares of Common Stock. At May 31, 2013, rights, to be determined by the Board before each options to purchase 132,000 shares of Common Stock issuance. To date, no shares of Preferred Stock have were outstanding under the 1997 Directors’ Plan. been issued. Stock-based awards In September 2007, the Corporation adopted the Scholastic Corporation 2007 Outside Directors’ Stock At May 31, 2013, the Company maintained three Incentive Plan (the “2007 Directors Plan”). From stockholder-approved stock-based compensation plans September 2007 through September 2011, the 2007 66 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 67 Directors Plan provided for the automatic grant to outstanding under the Class A Plan, and no shares of each non-employee director, on the date of each annual Class A Stock remained available for additional awards meeting of stockholders, of non-qualified stock options under the Class A Plan. Generally, options granted under the various plans may not be exercised for a minimum of one year after the date of grant and expire approximately ten years after the date of grant. The intrinsic value of these stock options is deductible by the Company for tax purposes upon exercise. The Company amortizes the fair value of stock options as stock-based compensation expense over the requisite service period on a straight- line basis, or sooner if the employee effectively vests upon termination of employment under certain circumstances. The following table sets forth the intrinsic value of stock options exercised, pretax stock-based compensation cost and related tax benefits for the Class A Stock and Common Stock plans for the fiscal years ended May 31: Total intrinsic value of stock options exercised Stock-based compensation cost (pretax) Tax benefits related to stock-based compensation cost fair value per option 2013 2012 2011 $ 2.3 $ 6.3 $ 0.8 $9.77 $ 5.0 $12.2 $ 1.8 $9.30 $ 0.4 $13.7 $ 1.8 $8.15 As of May 31, 2013, the total pretax compensation cost not yet recognized by the Company with regard to outstanding unvested stock options was $1.7. The weighted average period over which this compensation cost is expected to be recognized is 2.2 years. to purchase 3,000 shares of Common Stock at a purchase price per share equal to the fair market value of a share of Common Stock on the date of grant and 1,200 restricted stock units. In July 2012, the Board approved an amended and restated 2007 Outside Directors Plan (the “Amended 2007 Directors Plan”). The Amended 2007 Directors Plan provides for the automatic grant to each non-employee director, on the date of each annual meeting of stockholders, of stock options and restricted stock units with a value equal to a fixed dollar amount. Such dollar amount, as well as the split of such amount between stock options and restricted stock units, will be determined annually by the Board (or committee designated by the Board) in advance of the grant date. The value of the stock option portion of the annual grant is determined based on the Black-Scholes option pricing method, with the exercise price being the fair market value of the Common Stock on the grant date, and the value of the restricted stock unit portion is the fair market value of the Common Stock on the grant date. In September 2012, stock options and restricted stock units with a value of $70,000 for each non-employee director, with the form of restricted stock units, were approved, and an aggregate of 40,707 options at an exercise price of $33.39 per share and 7,542 restricted stock units were granted to the non-employee directors under the 2007 Directors Plan. As of May 31, 2013, 151,707 options were outstanding under the 2007 Directors Plan and 285,551 shares of Common Stock remained available for additional awards under the 2007 Directors Plan. The Scholastic Corporation 2004 Class A Stock Incentive Plan (the “Class A Plan”) provided for the grant to Richard Robinson, the Chief Executive Officer of the Corporation as of the effective date of the Class A Plan, of options to purchase Class A Stock (the “Class A Options”). As of May 31, 2013, there were 1,499,000 Class A Options granted to Mr. Robinson 67 40% of such value in the form of options and 60% in Weighted average grant date 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 68 The following table sets forth the stock option activity for the Class A Stock and Common Stock plans for the fiscal year ended May 31, 2013: Outstanding at May 31, 2012 Granted Exercised Expired Cancellations and forfeitures Outstanding at May 31, 2013 Exercisable at May 31, 2013 Weighted Average Exercise Price $29.69 $31.96 $27.29 $35.89 $32.72 $29.49 $30.25 Options 4,948,075 86,614 (475,432) (348,840) (24,937) 4,185,480 3,370,439 Average Remaining Contractual Term (in years) Aggregate Intrinsic Value 4.8 4.0 $9.7 $6.5 Restricted Stock Units – In addition to stock options, Management Stock Purchase Plan – The Company the Company has issued restricted stock units to maintains a Management Stock Purchase Plan certain officers and key executives under the 2011 (“MSPP”), which allows certain members of senior Plan (“Stock Units”). The Stock Units automatically management to defer up to 100% of their annual cash convert to shares of Common Stock on a one-for-one bonus payments in the form of Restricted Stock Units basis as the award vests, which is typically over a four- (“RSUs”) which are purchased by the employee at a year period beginning thirteen months from the grant 25% discount from the lowest closing price of the date and thereafter annually on the anniversary of the Common Stock on NASDAQ on any day during the grant date. There were 242,433 shares of Common fiscal quarter in which such bonuses are payable. The Stock issued upon vesting of Stock Units during fiscal RSUs are converted into shares of Common Stock on a 2013. The Company measures the value of Stock Units one-for-one basis at the end of the applicable deferral at fair value based on the number of Stock Units period. The Company measures the value of RSUs granted and the price of the underlying Common based on the number of RSUs granted and the price of Stock on the grant date. The Company amortizes the the underlying Common Stock on the grant date, fair value of outstanding Stock Units as stock-based giving effect to the 25% discount. The Company compensation expense over the requisite service period amortizes this discount as stock-based compensation on a straight-line basis, or sooner if the employee expense over the vesting term on a straight-line basis, effectively vests upon termination of employment or sooner if the employee effectively vests upon under certain circumstances. termination of employment under certain The following table sets forth the RSU activity for the circumstances. fiscal years ended May 31: The following table sets forth the MSPP RSU activity RSUs granted Weighted average grant date price per unit 2013 125,584 2012 205,620 2011 141,600 $ 23.05 $ 27.92 $ 25.03 for the fiscal years ended May 31: MSPP RSUs allocated Purchase price per unit 2013 87,317 $ 19.73 2012 22,486 $ 17.78 As of May 31, 2013, the total pretax compensation cost not yet recognized by the Company with regard to unvested Stock Units was $3.2. The weighted average period over which this compensation cost is expected to be recognized is 2.4 years. At May 31, 2013, there were 451,922 shares of Common Stock remaining authorized for issuance under the MSPP. 68 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 69 As of May 31, 2013, the total pretax compensation cost 11. TREASURY STOCK not yet recognized by the Company with regard to unvested RSUs under the MSPP was $0.3. The weighted average period over which this compensation cost is expected to be recognized is 2.0 years. The following table sets forth Stock Unit and RSU activity for the year ended May 31, 2013: Stock Units/ RSUs 710,895 125,584 (242,433) (34,643) 559,403 Weighted Average grant date fair value $22.81 $23.05 $26.53 $26.85 $29.98 Nonvested as of May 31, 2012 Granted Vested Forfeited Nonvested as of May 31, 2013 The total fair value of shares vested during the fiscal years ended May 31, 2013, 2012 and 2011 was $6.4, $6.0 and $4.1, respectively. Employee Stock Purchase Plan The Company maintains an Employee Stock Purchase Plan (the “ESPP”), which is offered to eligible United States employees. The ESPP permits participating employees to purchase Common Stock, with after-tax payroll deductions, on a quarterly basis at a 15% discount from the closing price of the Common Stock on NASDAQ. In fiscal 2012, the ESPP was amended to provide that the purchase of Common Stock occurs on the last business day of the calendar quarter. The Company recognizes the discount on the Common Stock issued under the ESPP as stock-based compensation expense in the quarter in which the employees participated in the plan. The following table sets forth the ESPP share activity for the fiscal years ended May 31: Shares issued Weighted average purchase price per share 2013 68,228 $ 24.78 2012 54,967 $ 23.45 The Company has authorizations from the Board of Directors to repurchase Common Stock, from time to time as conditions allow, on the open market or through negotiated private transactions, as summarized in the table below: Authorization December 2007 May 2008 November 2008 February 2009 December 2009 September 2010 Subtotal Amount $ 20.0 20.0 10.0 5.0 20.0 44.0(a) $ 119.0 Less repurchases made from December 2007 through May 2013 (99.4) Remaining Board authorization at May 31, 2013 $ 19.6 (a) Represents the remainder of a $200.0 authorization after giving effect to the purchase of 5,199,699 shares at $30.00 per share pursuant to a large share repurchase in the form of a modified Dutch auction tender offer that was completed by the Company on November 3, 2010 for a total cost of $156.0, excluding related fees and expenses. During the twelve months ended May 31, 2013, the Company repurchased approximately 0.4 million shares on the open market for approximately $11.8 at an average cost of $27.34 per share. The Company’s repurchase program may be suspended at any time without prior notice. 12. EMPLOYEE BENEFIT PLANS Pension Plans The Company has a cash balance retirement plan (the “Pension Plan”), which covers the majority of United States employees who meet certain eligibility requirements. The Company funds all of the contributions for the Pension Plan. Benefits generally are based on the Company’s contributions and interest credits allocated to participants’ accounts based on years of benefit service and annual pensionable earnings. The Pension Plan is a defined benefit plan. It is the Company’s policy to fund the minimum amount required by the Employee Retirement Income Security Act of 1974, as amended. Effective June 1, 2009, no At May 31, 2013, there were 219,745 shares of further benefits will accrue to employees under the Common Stock remaining authorized for issuance Pension Plan. under the ESPP. Scholastic Ltd., an indirect subsidiary of Scholastic Corporation located in the United Kingdom, has a 69 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 70 defined benefit pension plan (the “UK Pension Plan”) Benefits, effectively excluding a large percentage of that covers its employees who meet various eligibility employees from the plan. requirements. Benefits are based on years of service and on a percentage of compensation near retirement. The UK Pension Plan is funded by contributions from Scholastic Ltd. and its employees. The Medicare Prescription Drug, Improvement and Modernization Act (the “Medicare Act”) introduced a prescription drug benefit under Medicare (“Medicare Part D”) as well as a Federal subsidy of 28% to The Company’s pension plans have a measurement sponsors of retiree health care benefit plans providing date of May 31. Post-Retirement Benefits The Company provides post-retirement benefits to eligible retired United States-based employees (the “Post-Retirement Benefits”) consisting of certain healthcare and life insurance benefits. Employees may become eligible for these benefits after completing certain minimum age and service requirements. At May 31, 2013, the unrecognized prior service credit remaining was $0.5. Effective June 1, 2009, the Company modified the terms of the Post-Retirement a benefit that is at least actuarially equivalent to Medicare Part D. The Company has determined that the Post-Retirement Benefits provided to the retiree population are in aggregate the actuarial equivalent of the benefits under Medicare Part D. As a result, in fiscal 2013, 2012 and 2011, the Company recognized a cumulative reduction of its accumulated post- retirement benefit obligation of $3.1, $2.9 and $3.0, respectively, due to the Federal subsidy under the Medicare Act. 70 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 71 The following table sets forth the weighted average actuarial assumptions utilized to determine the benefit obligations for the Pension Plan and the UK Pension Plan (collectively the “Pension Plans”), including the Post- Retirement Benefits, at May 31: Pension Plans 2012 2013 2011 Post-Retirement Benefits 2012 2011 2013 Weighted average assumptions used to determine benefit obligations: Discount rate Rate of compensation increase Weighted average assumptions used to determine net periodic benefit cost: Discount rate Expected long-term return on plan assets Rate of compensation increase 4.0% 4.4% 4.0% 7.3% 3.3% 4.0% 3.3% 5.1% 7.7% 4.3% 5.1% 4.3% 5.4% 7.5% 4.3% 3.9% — 3.9% — — 3.9% — 5.0% — — 5.0% — 5.4% — — To develop the expected long-term rate of return on assets assumption for the Pension Plans, the Company considers historical returns and future expectations. Considering this information and the potential for lower future returns due to a generally lower interest rate environment, the Company selected an assumed weighted average long-term rate of return of 7.3%. The following table sets forth the change in benefit obligation for the Pension Plans and Post-Retirement Benefits at May 31: Change in benefit obligation: Benefit obligation at beginning of year Service cost Interest cost Plan participants’ contributions Actuarial losses (gains) Foreign currency translation Benefits paid, including expenses Pension Plans 2013 2012 $ 182.2 — 6.9 — 7.4 (0.8) (10.1) $ 173.9 — 8.4 — 11.1 (1.9) (9.3) Benefit obligation at end of year $ 185.6 $ 182.2 Post-Retirement Benefits 2013 2012 $ 39.6 0.0 1.4 0.4 (2.8) — (2.4) $ 36.2 $ 38.3 0.0 1.7 0.4 1.7 — (2.5) $ 39.6 71 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 72 The following table sets forth the change in plan assets for the Pension Plans and Post-Retirement Benefits at May 31: Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Benefits paid, including expenses Plan participants’ contributions Foreign currency translation Pension Plans 2013 2012 $ 145.8 29.9 8.8 (10.1) — (0.6) $ 146.7 (0.2) 9.9 (9.3) — (1.3) Fair value of plan assets at end of year $ 173.8 $ 145.8 Post-Retirement Benefits 2013 2012 $ — — 2.0 (2.4) 0.4 — $ — $ — — 2.2 (2.6) 0.4 — $ — The following table sets forth the net underfunded status of the Pension Plans and Post-Retirement Benefits and the related amounts recognized on the Company’s Consolidated Balance Sheets at May 31: Current liabilities Non-current liabilities Net underfunded balance Pension Plans 2013 $ — 11.8 $ 11.8 2012 $ — 36.4 $ 36.4 Post-Retirement Benefits 2013 2012 $ 2.7 33.5 $ 36.2 $ 3.4 36.2 $ 39.6 The following amounts were recognized in Accumulated other comprehensive loss for the Pension Plans and Post- Retirement Benefits in the Company’s Consolidated Balance Sheets at May 31: 2013 Post- Retirement Benefits (13.4) 0.5 $ Pension Plans (62.1) — $ $ Total (75.5) 0.5 Pension Plans (76.4) — $ 2012 Post- Retirement Benefits (19.2) 0.8 $ $ Total (95.6) 0.8 $ (62.1) $ (12.9) $ (75.0) $ (76.4) $ (18.4) $ (94.8) Net actuarial gain (loss) Net prior service credit Net amount recognized in Accumulated other comprehensive income (loss) The estimated net loss for the Pension Plans that will be amortized from Accumulated other comprehensive loss into net periodic benefit cost over the Company’s fiscal year ending May 31, 2014 is $1.8. The estimated net loss and prior service credit for the Post-Retirement Benefits that will be amortized from Accumulated other comprehensive loss into net periodic benefit cost over the fiscal year ending May 31, 2014 are $2.5 and $0.2, respectively. Income tax expense of $8.4 and income tax benefit of $6.5 were recognized in Accumulated other comprehensive loss at May 31, 2013 and 2012, respectively. 72 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 73 The following table sets forth information with respect to the Pension Plans with accumulated benefit obligations in excess of plan assets for the fiscal years ended May 31: Projected benefit obligations Accumulated benefit obligations Fair value of plan assets 2013 $ 185.6 184.6 173.8 2012 $ 182.2 181.1 145.8 The following table sets forth the net periodic (benefit) cost for the Pension Plans and Post-Retirement Benefits for the fiscal years ended May 31: Pension Plans 2012 2011 2013 Post-Retirement Benefits 2011 2012 2013 Components of net periodic (benefit) cost: Service cost Interest cost Expected return on assets Net amortization and deferrals Settlement Recognized net actuarial loss $ — 6.9 (10.5) — — 2.2 $ — 8.4 (10.8) — — 1.4 $ 0.3 8.9 (9.4) — 4.2 1.8 Net periodic (benefit) cost $ (1.4) $ (1.0) $ 5.8 $ 0.0 1.4 — (0.4) — 3.0 $ 4.0 $ 0.0 1.7 — (0.6) — 3.8 $ 4.9 $ — 1.9 — (0.7) — 2.6 $ 3.8 Plan Assets The Company’s investment policy with regard to the assets in the Pension Plans is to actively manage, within acceptable risk parameters, certain asset classes where the potential exists to outperform the broader market. The following table sets forth the total weighted average asset allocations for the Pension Plans by asset category at May 31: Equity securities Debt securities Real estate Other 2013 2012 69.5% 24.0% 1.0% 5.5% 63.5% 26.5% 1.0% 9.0% 100.0% 100.0% The following table sets forth the targeted weighted average asset allocations for the Pension Plans included in the Company’s investment policy: Equity Debt and cash equivalents Real estate and other US Pension Plan 70% 30% 0% 100% UK Pension Plan 40% 30% 30% 100% 73 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 74 The fair values of the Company’s Pension Plans’ assets are measured using Level 1, Level 2 and Level 3 fair value measurements. The fair values of the Level 1 Pension Plans’ assets are determined based on quoted market prices in active markets for identical assets. The fair values of the Level 2 and Level 3 Pension Plans’ assets are based on the net asset values of the funds, which are based on quoted market prices of the underlying investments. For a more complete description of fair value measurements see Note 18, “Fair Value Measurements.” The following table sets forth the measurement of the Company’s Pension Plans’ assets at fair value by asset category at the respective dates: Cash and cash equivalents Equity securities: U.S.(1) International(2) Fixed Income(3) Annuities Real estate(4) Total Cash and cash equivalents Equity securities: U.S.(1) International(2) Fixed Income(3) Annuities Real estate(4) Assets at Fair Value as of May 31, 2013 Level 1 Level 2 Level 3 $ 3.5 $ — $ — Total $ 3.5 94.0 16.3 34.4 — — — 10.4 7.4 — 1.7 — — — 6.1 — 94.0 26.7 41.8 6.1 1.7 $ 148.2 $ 19.5 $ 6.1 $ 173.8 Assets at Fair Value as of May 31, 2012 Level 1 Level 2 Level 3 $ 7.4 $ — $ — Total $ 7.4 73.0 11.2 32.2 — — — 8.3 6.4 — 1.5 — — — 5.8 — 73.0 19.5 38.6 5.8 1.5 $ 145.8 Total (1) Funds which invest in a diversified portfolio of publicly traded U.S. common stocks of large-cap, medium-cap and small-cap companies. There are no restrictions on these $ 123.8 $ 16.2 $ 5.8 investments. (2) Funds which invest in a diversified portfolio of publicly traded common stock of non-U.S. companies, primarily in Europe and Asia. There are no restrictions on these investments. (3) Funds which invest in a diversified portfolio of publicly traded government bonds, corporate bonds and mortgage-backed securities. There are no restrictions on these investments. (4) Represents assets of a non-U.S. entity plan invested in a fund whose underlying investments are comprised of properties. The fund has publicly available quoted market prices and there are no restrictions on these investments. 74 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 75 The Company has purchased annuities to service fixed Assumed health care cost trend rates at May 31: payments to certain retired plan participants in the UK. These annuities are purchased from investment Health care cost trend rate assumed grade counterparties. These annuities are not traded for the next fiscal year on open markets, and are therefore valued based upon the actuarial determined valuation, and related assumptions, of the underlying projected benefit Rate to which the cost trend is assumed to decline (the ultimate trend rate) Year that the rate reaches the ultimate trend rate 2013 2012 7.5% 5.0% 2021 7.5% 5.0% 2020 obligation, a Level 3 valuation technique. The fair Assumed health care cost trend rates could have a value of these assets was $6.1 and $5.8 at May 31, significant effect on the amounts reported for the post- 2013 and May 31, 2012, respectively. The following retirement health care plan. A one percentage point table summarizes the changes in fair value of these change in assumed health care cost trend rates would Level 3 assets for the fiscal years ended May 31, 2013 have the following effects: and 2012: Balance at May 31, 2011 Actual Return on Plan Assets: Relating to assets still held at May 31, 2012 Relating to assets sold during the year Purchases, sales and settlements, net Transfers in and/or out of Level 3 Foreign currency translation Balance at May 31, 2012 Actual Return on Plan Assets: Relating to assets still held at May 31, 2013 Relating to assets sold during the year Purchases, sales and settlements, net Transfers in and/or out of Level 3 Foreign currency translation Balance at May 31, 2013 Contributions $ 5.7 0.7 — (0.3) — (0.3) $ 5.8 0.7 — (0.3) — (0.1) $ 6.1 Total service and interest cost - 1% increase Total service and interest cost - 1% decrease Post-retirement benefit obligation - 1% increase Post-retirement benefit obligation - 1% decrease 2013 $ 0.2 2012 $ 0.2 (0.1) 4.0 (3.4) (0.2) 4.3 (3.7) Defined contribution plans The Company also provides defined contribution plans for certain eligible employees. In the United States, the Company sponsors a 401(k) retirement plan and has contributed $8.0, $7.4 and $6.9 for fiscal 2013, 2012 and 2011, respectively. 13. ACCRUED SEVERANCE The table below provides information regarding Accrued severance, which is included in “Other accrued expenses” on the Company’s Consolidated In fiscal 2014, the Company expects to contribute $8.3 Balance Sheets. to the Pension Plans. Estimated future benefit payments The following table sets forth the expected future benefit payments under the Pension Plans and the Post-Retirement Benefits by fiscal year: Beginning balance Accruals Payments Ending balance 2013 2012 $ 2.7 13.4 (12.8) $ 3.3 $ 1.9 14.9 (14.1) $ 2.7 Post-Retirement Pension Benefits $ 19.1 Benefit Payments $ 2.9 Medicare Subsidy Receipts $ 0.3 11.5 11.6 10.9 10.7 51.1 2.9 2.9 2.9 2.8 13.2 0.3 0.3 0.3 0.3 1.6 2014 2015 2016 2017 2018 2019-2023 The Company implemented cost saving initiatives in fiscal year 2013, recognizing expense of $9.6. The Company implemented certain cost reduction initiatives in fiscal 2012, and incurred severance expense of $9.3 related to these initiatives. 75 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 76 14. EARNINGS (LOSS) PER SHARE The following table summarizes the reconciliation of the numerators and denominators for the Basic and Diluted earnings (loss) per share computation for the fiscal years ended May 31: Earnings (loss) from continuing operations attributable to Class A and Common Shares Earnings (loss) from discontinued operations attributable to Class A and Common Shares, net of tax Net income (loss) attributable to Class A and Common Shares Weighted average Shares of Class A Stock and Common Stock outstanding for basic earnings (loss) per share (in millions) Dilutive effect of Class A Stock and Common Stock potentially issuable pursuant to stock-based compensation plans (in millions) Adjusted weighted average Shares of Class A Stock and Common Stock outstanding for diluted earnings (loss) per share (in millions) Earnings (loss) per share of Class A Stock and Common Stock: Basic earnings (loss) per share: Earnings (loss) from continuing operations Earnings (loss) from discontinued operations, net of tax Net income (loss) Diluted earnings (loss) per share: Earnings (loss) from continuing operations Earnings (loss) from discontinued operations, net of tax Net income (loss) 2013 2012 2011 $ 35.7 $ 107.6 $ 45.0 (4.7) 31.0 31.8 0.6 32.4 $ 1.12 $ (0.15) $ 0.97 $ 1.10 $ (0.15) $ 0.95 (5.7) 101.9 31.2 0.5 31.7 $ 3.45 $ (0.18) $ 3.27 $ 3.39 $ (0.18) $ 3.21 (5.9) 39.1 33.1 0.5 33.6 $ 1.36 $ (0.18) $ 1.18 $ 1.34 $ (0.18) $ 1.16 Earnings from continuing operations exclude earnings of $0.1, $0.5 and $0.3 for the years ended May 31, 2013, 2012 and 2011, respectively, for earnings attributable to participating restricted stock units. In a period in which the Company reports a discontinued operation, Earnings (loss) from continuing operations is used as the “control number” in determining whether potentially dilutive common shares are dilutive or anti-dilutive. A portion of the Company’s restricted stock units granted to employees participates in earnings through cumulative non-forfeitable dividends payable to the employees upon vesting of the restricted stock units. Accordingly, the Company measures earnings per share based upon the two-class method. Equity awards that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive totaled: 2,083,054 at May 31, 2013; 3,962,650 at May 31, 2012; and 4,341,331 at May 31, 2011. Options outstanding pursuant to compensation plans were 4.2 million and 4.9 million as of May 31, 2013 and 2012, respectively. As of May 31, 2013, $19.6 remains available for future purchases of common shares under the current repurchase authorization of the Board of Directors. See Note 11, “Treasury Stock,” for a more complete description of the Company’s share buy-back program. 76 2013 $ 45.8 22.0 29.3 38.2 5.5 8.7 30.0 $ 179.5 2012 $ 145.0 127.3 55.1 0.7 2012 $ 48.1 57.3 42.8 36.1 10.2 8.4 30.6 $ 233.5 2011 $ 151.9 125.1 51.1 (1.3) 2013 $ 146.4 149.0 48.9 (0.5) 54.8 61.1 44.9 2013 2012 $ 9.5 2013 $ (13.5) (51.9) $ (65.4) $ 9.2 2012 $ (10.9) (63.3) $ (74.2) 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 77 15. OTHER ACCRUED EXPENSES Other accrued expenses consist of the following at May 31: Accrued payroll, payroll taxes and benefits Accrued bonus and commissions Accrued other taxes Accrued advertising and promotions Accrued income taxes Accrued insurance Other accrued expenses Total accrued expenses 16. OTHER FINANCIAL DATA Other financial data consisted of the following for the fiscal years ended May 31: Advertising expense Prepublication and production costs Amortization of prepublication and production costs Foreign currency transaction gain (loss) Purchases related to contractual commitments for minimum print quantities during fiscal years Unredeemed credits issued in conjunction with the Company’s school-based book club and book fair operations (included in other accrued expenses) Components of Accumulated other comprehensive income (loss): Foreign Currency Translation Pension Obligations (net of tax of $23.1 and $31.5) Accumulated other comprehensive income (loss) 77 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 78 17. DERIVATIVES AND HEDGING • Level 3 Unobservable inputs in which there is little The Company enters into foreign currency derivative contracts to economically hedge the exposure to foreign currency fluctuations associated with the forecasted purchase of inventory and the foreign exchange risk associated with certain receivables denominated in foreign currencies. These derivative contracts are economic hedges and are not designated as cash flow hedges. The Company marks-to-market these instruments and records the changes in the fair value of these items in current earnings, and it recognizes the unrealized gain or loss in other current assets or liabilities. Unrealized gains of $0.5 were recognized at May 31, 2013 and at May 31, 2012, respectively. or no market data available, which are significant to the fair value measurement and require the Company to develop its own assumptions. The Company’s financial assets and liabilities measured at fair value consisted of cash and cash equivalents, debt and foreign currency forward contracts. Cash and cash equivalents are comprised of bank deposits and short-term investments, such as money market funds, the fair value of which is based on quoted market prices, a Level 1 fair value measure. The Company employs Level 2 fair value measurements for the disclosure of the fair value of its 5% Notes and its various lines of credit. For a more complete description of fair value measurements 18. FAIR VALUE MEASUREMENTS employed, see Note 5, “Debt.” The fair values of foreign The Company determines the appropriate level in the currency forward contracts, used by the Company to fair value hierarchy for each fair value measurement manage the impact of foreign exchange rate changes of assets and liabilities carried at fair value on a to the financial statements, are based on quotations recurring basis in the Company’s financial statements. from financial institutions, a Level 2 fair value The fair value hierarchy prioritizes the inputs, which measure. refer to assumptions that market participants would use in pricing an asset or liability, based upon the highest and best use, into three levels as follows: Non-financial assets and liabilities for which the Company employs fair value measures on a non- recurring basis include: • Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date. • Long-lived assets • Investments • Level 2 Observable inputs other than unadjusted quoted prices in active markets for identical assets • Assets acquired in a business combination or liabilities such as • Goodwill and indefinite-lived intangible assets • Quoted prices for similar assets or liabilities • Long-lived assets held for sale in active markets • Quoted prices for identical or similar assets or Company in the fair value measurement of these assets Level 2 and Level 3 inputs are employed by the liabilities in inactive markets • Inputs other than quoted prices that are observable for the asset or liability • Inputs that are derived principally from or corroborated by observable market data by correlation or other means and liabilities. The following tables present non- financial assets that were measured and recorded at fair value on a non-recurring basis and the total impairment losses and additions recognized on those assets: 78 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 79 Other Intangible assets Property, plant and equipment, net Prepublication assets Net carrying value as of May 31, 2013 $ 0.3 — — Goodwill Other intangible assets impairment Other intangibles Production assets Prepublication assets Investments Net carrying value as of May 31, 2012 $ 2.7 4.9 5.4 0.6 — — Goodwill impairment Goodwill Other Intangible assets Property, plant and equipment, net Prepublication assets Investments Net carrying value as of May 31, 2011 $ — 1.0 5.6 — — 5.7 19. SUBSEQUENT EVENTS Fair value measured and recorded using Level 1 $ — — — Level 2 $ — — — Level 3 $ 0.3 — — Fair value measured and recorded using Level 1 $ — — — — — — Level 2 $ — — — — — — Level 3 $ 2.7 4.9 5.4 0.6 — — Fair value measured and recorded using Level 1 $ — — — — — — Level 2 $ — — — — — — Level 3 $ — 1.0 5.6 — — 5.7 Impairment losses for fiscal year ended May 31, 2013 $ — 5.2 2.0 Impairment losses for fiscal year ended May 31, 2012 $ — 6.8 — 4.0 0.8 1.3 Impairment losses for fiscal year ended May 31, 2011 $ 3.4 — — 1.4 2.7 3.6 Additions due to acquisitions $ 0.3 — — Additions due to acquisitions $ 2.7 — 5.4 — — — Additions due to acquisitions $ — 1.0 5.6 — — — On July 17, 2013, the Board of Directors declared a regular cash dividend of $0.125 per Class A and Common share in respect of the first quarter of fiscal 2014. The dividend is payable on September 16, 2013 to shareholders of record on August 30, 2013. 79 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 80 Report of Independent Registered Public Accounting Firm THE BOARD OF DIRECTORS AND STOCKHOLDERS OF SCHOLASTIC CORPORATION We have audited the accompanying consolidated balance sheets of Scholastic Corporation as of May 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity and cash flows for each of the three years in the period ended May 31, 2013. Our audits also included the financial statement schedule included in the Index at Item 15(a). These financial statements and the schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Scholastic Corporation at May 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended May 31, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Scholastic Corporation’s internal control over financial reporting as of May 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated July 29, 2013 expressed an unqualified opinion thereon. New York, New York July 29, 2013 80 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 81 Report of Independent Registered Public Accounting Firm THE BOARD OF DIRECTORS AND STOCKHOLDERS OF SCHOLASTIC CORPORATION We have audited Scholastic Corporation’s internal control over financial reporting as of May 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Scholastic Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Scholastic Corporation maintained, in all material respects, effective internal control over financial reporting as of May 31, 2013, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Scholastic Corporation as of May 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity and cash flows for each of the three years in the period ended May 31, 2013, and our report dated July 29, 2013 expressed an unqualified opinion thereon. New York, New York July 29, 2013 81 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 82 Supplementary Financial Information Summary of Quarterly Results of Operations (Unaudited, amounts in millions except per share data) Fiscal Year Ended May 31, Third Quarter Fourth Quarter $378.6 190.0 (19.9) (0.2) (20.1) (0.62) (0.01) (0.63) (0.62) (0.01) (0.63) $463.9 218.2 (10.3) 0.0 (10.3) (0.33) (0.00) (0.33) (0.33) (0.00) (0.33) $506.9 226.8 24.8 (3.3) 21.5 $1,792.4 829.6 35.8 (4.7) 31.1 0.78 (0.11) 0.67 0.76 (0.10) 0.66 1.12 (0.15) 0.97 1.10 (0.15) 0.95 $676.6 322.6 60.3 (3.3) 57.0 $2,139.1 984.6 108.1 (5.7) 102.4 1.91 (0.11) 1.80 1.86 (0.10) 1.76 3.45 (0.18) 3.27 3.39 (0.18) 3.21 First Quarter Second Quarter 2013 Revenues Cost of Goods Sold Earnings (loss) from continuing operations Earnings (loss) from discontinued operations, net of tax Net income (loss) Earnings (loss) per share of Class A and Common Stock: $293.4 150.8 (31.7) (0.4) (32.1) Basic: Earnings (loss) from continuing operations Earnings (loss) from discontinued operations, net of tax Net income (loss) Diluted: Earnings (loss) from continuing operations Earnings (loss) from discontinued operations, net of tax Net income (loss) (1.01) (0.01) (1.02) (1.01) (0.01) (1.02) 2012 Revenues Cost of Goods Sold Earnings (loss) from continuing operations Earnings (loss) from discontinued operations, net of tax Net income (loss) Earnings (loss) per share of Class A and Common Stock: $317.8 160.3 (25.0) (2.1) (27.1) Basic: Earnings (loss) from continuing operations Earnings (loss) from discontinued operations, net of tax Net income (loss) Diluted: Earnings (loss) from continuing operations Earnings (loss) from discontinued operations, net of tax Net income (loss) (0.80) (0.07) (0.87) (0.80) (0.07) (0.87) $613.5 262.0 62.6 (0.8) 61.8 1.95 (0.02) 1.93 1.91 (0.02) 1.89 $680.8 283.5 83.1 (0.3) 82.8 2.65 (0.01) 2.64 2.61 (0.01) 2.60 82 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 83 Item 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A | Controls and Procedures Evaluation of Disclosure Controls and Procedures The Chief Executive Officer and Chief Financial Officer of the Corporation, after conducting an evaluation, together with other members of the Company’s management, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures as of May 31, 2013, have concluded that the Corporation’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Corporation in its reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and accumulated and communicated to members of the Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Management’s Report on Internal Control over Financial Reporting The management of the Corporation is responsible for establishing and maintaining adequate internal control over financial reporting for the Corporation. A corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Company’s management (with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer), after conducting an evaluation of the effectiveness of the Corporation’s internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992), concluded that the Corporation’s internal control over financial reporting was effective as of May 31, 2013. Ernst & Young LLP, an independent registered public accounting firm, has issued an attestation report on the Corporation’s internal control over financial reporting as of May 31, 2013, which is included herein. There was no change in the Corporation’s internal control over financial reporting that occurred during the quarter ended May 31, 2013 that materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting. Item 9B | Other Information None. 83 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 84 Part III Item 10 | Directors, Executive Officers and Corporate Governance Information required by this item is incorporated herein by reference from the Corporation’s definitive proxy statement for the Annual Meeting of Stockholders to be held September 18, 2013 to be filed with the SEC pursuant to Regulation 14A under the Exchange Act. Certain information regarding the Corporation’s Executive Officers is set forth in Part I - Item 1 - Business. Item 11 | Executive Compensation Incorporated herein by reference from the Corporation’s definitive proxy statement for the Annual Meeting of Stockholders to be held September 18, 2013 to be filed pursuant to Regulation 14A under the Exchange Act. Item 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Incorporated herein by reference from the Corporation’s definitive proxy statement for the Annual Meeting of Stockholders to be held September 18, 2013 to be filed pursuant to Regulation 14A under the Exchange Act. Item 13 | Certain Relationships and Related Transactions, and Director Independence Incorporated herein by reference from the Corporation’s definitive proxy statement for the Annual Meeting of Stockholders to be held September 18, 2013 to be filed pursuant to Regulation 14A under the Exchange Act. Item 14 | Principal Accounting Fees and Services Incorporated herein by reference from the Corporation’s definitive proxy statement for the Annual Meeting of Stockholders to be held September 18, 2013 to be filed pursuant to Regulation 14A under the Exchange Act. 84 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 85 Part IV Item 15 | Exhibits, Financial Statement Schedules (a)(1) Financial Statements: The following Consolidated Financial Statements are included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data”: Consolidated Statements of Operations for the years ended May 31, 2013, 2012 and 2011 Consolidated Statements of Comprehensive Income (Loss) for the years ended May 31, 2013, 2012 and 2011 Consolidated Balance Sheets at May 31, 2013 and 2012 Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (Loss) for the years ended May 31, 2013, 2012 and 2011 Consolidated Statements of Cash Flows for the years ended May 31, 2013, 2012 and 2011 Notes to Consolidated Financial Statements (a)(2) Supplementary Financial Information - Summary of Quarterly Results of Operations Financial Statement Schedule: and (c) The following consolidated financial statement schedule is included with this report: Schedule II- Valuation and Qualifying Accounts and Reserves. All other schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements or the Notes thereto. (a)(3) and (b) Exhibits: 3.1 Amended and Restated Certificate of Incorporation of the Corporation, as amended to date (incorporated by reference to the Corporation’s Quarterly Report on Form 10-Q as filed with the SEC on October 5, 2006, SEC File No. 000-19860) (the “August 31, 2006 10-Q”). 3.2 Bylaws of the Corporation, amended and restated as of December 12, 2007 (incorporated by reference to the Corporation’s Current Report on Form 8-K as filed with the SEC on December 14, 2007, SEC File No. 000-19860). 4.1 Credit Agreement, dated as of June 1, 2007, among the Corporation and Scholastic Inc., as borrowers, the Initial Lenders named therein, JP Morgan Chase Bank, N.A., as administrative agent, J.P. Morgan Securities Inc. and Bank of America Securities LLC., as joint lead arrangers and joint bookrunners, Bank of America, N. A. and Wachovia Bank, N. A., as syndication agents, and SunTrust Bank and The Royal Bank of Scotland, plc, as Documentation Agents (incorporated by reference to the Corporation’s Annual Report on Form 10-K as filed with the SEC on July 30, 2007, SEC File No. 000-19860) (the “2007 10-K”). 85 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 86 4.2 Amendment No. 1, dated as of August 16, 2010, to the Credit Agreement, dated as of June 1, 2007 (incorporated by reference to the Corporation’s Quarterly Report on Form 10-Q as filed with the SEC on October 1, 2010, SEC file No. 000-19860) (the “August 30, 2010 10-Q”). 4.3 Amendment No. 2, dated as of October 25, 2011, to the Credit Agreement, dated as of June 1, 2007 (incorporated by reference to the Corporation’s Quarterly Report on Form 10-Q as filed with the SEC on December 22, 2011, SEC file No. 000-19860) (the “November 30, 2011 10-Q”). 4.4 Amendment No. 3, dated as of December 5, 2012, to the Credit Agreement, dated as of June 1, 2007 (incorporated by reference to the Corporation’s Quarterly Report on Form 10-Q as filed with the SEC on March 29, 2013, SEC File No. 000-19860) ( the “February 28, 2013 10-Q”). 10.1** Scholastic Corporation 1995 Stock Option Plan, effective as of September 21, 1995 (incorporated by reference to the Corporation’s Registration Statement on Form S-8 (Registration No. 33-98186), as filed with the SEC on October 16, 1995, SEC File No. 000-19860), together with Amendment No. 1, effective September 16, 1998 (incorporated by reference to the Corporation’s Quarterly Report on Form 10-Q as filed with the SEC on October 15, 1998, SEC File No. 000-19860), Amendment No. 2, effective as of July 18, 2001 (incorporated by reference to the Corporation’s Annual Report on Form 10-K as filed with the SEC on August 24, 2001, SEC File No. 000-19860), Amendment No. 3, effective as of May 25, 2006 (incorporated by reference to the Corporation’s Annual Report on Form 10-K as filed with the SEC on August 9, 2006, SEC File No. 000-19860, (the “2006 10-K”), Amendment No. 4, dated as of March 21, 2007 (incorporated by reference to the Corporation’s Quarterly Report on Form 10-Q as filed with the SEC on March 30, 2007, SEC File No. 000-19860) (the “February 28, 2007 10-Q”) and Amendment No. 5, dated as of May 20, 2008 (incorporated by reference to the Corporation’s Annual Report on Form 10-K as filed with the SEC on July 30, 2008, SEC file No. 000-19860). 10.2** Scholastic Corporation Management Stock Purchase Plan, amended and restated effective as of September 23, 2008 (incorporated by reference to the Corporation’s Annual Report on Form 10-K as filed with the SEC on July 30, 2009, SEC File No. 000-19860) (the “2009 10-K”), together with Amendment No. 1 to the Scholastic Corporation Management Stock Purchase Plan, effective as of September 21, 2011 (incorporated by reference to Appendix B to the Corporation’s definitive Proxy Statement as filed with the SEC on August 9, 2011, SEC File No. 000-19860). 10.3** Scholastic Corporation 1997 Outside Directors’ Stock Option Plan, amended and restated as of May 25, 1999 (incorporated by reference to the Corporation’s Annual Report on Form 10-K as filed with the SEC on August 23, 1999, SEC File No. 000-19860) (the “1999 10-K”), together with Amendment No. 1, dated September 20, 2001 (incorporated by reference to the Corporation’s Quarterly Report on Form 10-Q as filed with the SEC on January 14, 2002, SEC File No. 000-19860), Amendment No. 2, effective as of September 23, 2003 (incorporated by reference to Appendix B to the Corporation’s definitive Proxy Statement as filed with the SEC on August 19, 2003, SEC File No. 000-19860), and Amendment No. 3, effective as of May 25, 2006 (incorporated by reference to the 2006 10-K) and Amendment No. 4, effective as of May 21, 2013, filed herewith. 10.4** Scholastic Corporation Director’s Deferred Compensation Plan, amended and restated effective as of September 23, 2008 (incorporated by reference to the 2009 10-K). 86 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 87 10.5** Scholastic Corporation 2007 Outside Directors Stock Incentive Plan (the “2007 Directors’ Plan”) effective as of September 23, 2008 (incorporated by reference to the 2009 10-K) and the Amended and Restated Scholastic Corporation 2007 Outside Directors Stock Incentive Plan (incorporated by reference to the Corporation’s Quarterly Report on Form 10-Q as filed with the SEC on January 2, 2013, SEC File No. 000-19860) (“the November 30, 2012 10-Q”), and Amendment No. 4, effective as of May 21, 2013, filed herewith. 10.6** Form of Stock Option Agreement under the 2007 Directors’ Plan (incorporated by reference to the Corporation’s Quarterly Report on Form 10-Q as filed with the SEC on January 9, 2008, SEC File No. 000-19860) (the “November 30, 2007 10-Q”) and the Form of Stock Option Agreement under the 2007 Directors’ Plan, effective as of September 19, 2012 (incorporated by reference to the November 30, 2012 10-Q). 10.7** Form of Restricted Stock Unit Agreement under the 2007 Directors’ Plan effective as of September 23, 2008 (incorporated by reference to the 2009 10-K) and the Form of Restricted Stock Unit Agreement, effective as of September 19, 2012 (incorporated by reference to the November 30, 2012 10-Q). 10.8** Scholastic Corporation Executive Performance Incentive Plan, effective as of May 21, 2008 (incorporated by reference to Appendix B to the Corporation’s definitive Proxy Statement as filed with the SEC on August 15, 2008, SEC File No. 000-19860). 10.9** Scholastic Corporation 2001 Stock Incentive Plan, amended and restated as of July 21, 2009 (the “2001 Plan”) (incorporated by reference to the Corporation’s Quarterly Report on Form 10-Q as filed with the SEC on October 10, 2009, SEC File No. 000-19860) (the “August 31, 2009 10-Q”), and Amendment No. 1 to the Amended and Restated Scholastic Corporation 2001 Stock Incentive Plan, filed herewith. 10.10** Form of Stock Unit Agreement under the 2001 Plan (incorporated by reference to the August 31, 2009 10-Q). 10.11** Amended and Restated Guidelines for Stock Units granted under the 2001 Plan, amended and restated as of July 21, 2009 (incorporated by reference to the August 31, 2009 10-Q). 10.12** Form of Non-Qualified Stock Option Agreement under the 2001 Plan (incorporated by reference to the August 31, 2009 10-Q). 10.13** Scholastic Corporation 2004 Class A Stock Incentive Plan (the “Class A Plan”) (incorporated by reference to Appendix A to the Corporation’s definitive Proxy Statement as filed with the SEC on August 2, 2004, SEC File No. 000-19860), Amendment No. 1, effective as of May 25, 2006 (incorporated by reference to the 2006 10-K), Amendment No. 2, dated July 18, 2006 (incorporated by reference to Appendix C to the Corporation’s definitive Proxy Statement as filed with the SEC on August 1, 2006, SEC File No. 000-19860), and Amendment No. 3, dated as of March 20, 2007 (incorporated by reference to the February 28, 2007 10-Q). 10.14** Form of Class A Option Agreement under the Class A Plan (incorporated by reference to the Corporation’s Annual Report on Form 10-K as filed with the SEC on August 8, 2005, SEC File No. 000-19860). 10.15** Scholastic Corporation 2011 Stock Incentive Plan (incorporated by reference to the November 30, 2011 10-Q) and Amendment No. 1 to the Scholastic Corporation 2011 Stock Incentive Plan, filed herewith. 87 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 88 10.17** Form of Restricted Stock Unit Agreement under the Scholastic Corporation 2011 Stock Incentive Plan (incorporated by reference to the November 30, 2011 10-Q). 10.18** Form of Stock Option Agreement under the Scholastic Corporation 2011 Stock Incentive Plan (incorporated by reference to the November 30, 2011 10-Q). 10.19 Amended and Restated Lease, effective as of August 1, 1999, between ISE 555 Broadway, LLC, and Scholastic Inc., tenant, for the building known as 555 Broadway, NY, NY (incorporated by reference to the 1999 10-K). 10.20 Amended and Restated Sublease, effective as of October 9, 1996, between Kalodop Corp. and Scholastic Inc., as subtenant, for the premises known as 557 Broadway, NY, NY (incorporated reference to the 1999 10-K). 21 23 Subsidiaries of the Corporation, as of July 16, 2013. Consent of Ernst & Young LLP. 31.1 Certification of the Chief Executive Officer of the Corporation filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer of the Corporation filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certifications of the Chief Executive Officer and the Chief Financial Officer of the Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS XBRL Instance Document *** 101.SCH XBRL Taxonomy Extension Schema Document *** 101.CAL XBRL Taxonomy Extension Calculation Document *** 101.DEF XBRL Taxonomy Extension Definitions Document *** 101.LAB XBRL Taxonomy Extension Labels Document *** 101.PRE XBRL Taxonomy Extension Presentation Document *** * Such long-term debt does not individually amount to more than 10% of the total assets of the Corporation and its subsidiaries on a consolidated basis. Accordingly, pursuant to Item 601(b)(4)(iii) of Regulation S-K, such instrument is not filed herewith. The Corporation hereby agrees to furnish a copy of any such instrument to the SEC upon request. ** The referenced exhibit is a management contract or compensation plan or arrangement described in Item 601(b) (10) (iii) of Regulation S-K. *** In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Annual Report on Form 10-K shall be deemed to be “furnished” and not “filed.” 88 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 89 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: July 29, 2013 Power of Attorney SCHOLASTIC CORPORATION By: /s/ Richard Robinson _____________________________________ Richard Robinson, Chairman of the Board, President and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard Robinson his or her true and lawful attorney-in-fact and agent, with power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in- fact and agent full power and authority to do and perform each and every act and thing necessary and requisite to be done, as fully and to all the intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title /s/ Richard Robinson _________________________ Richard Robinson Chairman of the Board, President and Chief Executive Officer and Director (principal executive officer) /s/ Maureen O’Connell _________________________ Maureen O’Connell Executive Vice President, Chief Administrative Officer and Chief Financial Officer (principal financial officer) /s/ Robert M. Gibney _________________________ Robert M. Gibney Senior Vice President, Chief Accounting Officer (principal accounting officer) /s/ James W. Barge _________________________ James W. Barge /s/ Marianne Caponnetto _________________________ Marianne Caponnetto /s/ John L. Davies _________________________ John L. Davies /s/ Andrew S. Hedden _________________________ Andrew S. Hedden Director Director Director Director 89 Date July 29, 2013 July 29, 2013 July 29, 2013 July 29, 2013 July 29, 2013 July 29, 2013 July 29, 2013 02_73994_Scholastic_AR 7/31/13 11:45 AM Page 90 Signature /s/ Mae C. Jemison _________________________ Mae C. Jemison /s/ Peter M. Mayer _________________________ Peter M. Mayer /s/ John G. McDonald _________________________ John G. McDonald /s/ Augustus K. Oliver _________________________ Augustus K. Oliver /s/ Richard M. Spaulding _________________________ Richard M. Spaulding /s/ Margaret A. Williams _________________________ Margaret A. Williams Title Director Director Director Director Director Director Date July 29, 2013 July 29, 2013 July 29, 2013 July 29, 2013 July 29, 2013 July 29, 2013 90 02_73994_Scholastic_AR 7/31/13 11:45 AM Page S-1 Scholastic Corporation Financial Statement Schedule ANNUAL REPORT ON FORM 10-K YEAR ENDED MAY 31, 2013 ITEM 15(c) S-1 02_73994_Scholastic_AR 7/31/13 11:45 AM Page S-2 Schedule II Valuation and Qualifying Accounts and Reserves Balance at Beginning of Year Expensed Write-Offs and Other Balance at End of Year (Amounts in millions) Years ended May 31, $ 25.9 57.5 90.8 77.8 $ 22.3 33.0 82.2 71.8 $ 18.5 30.9 78.1 68.9 $ 6.8 50.2 27.2 4.7 $ 12.3 81.8 48.1 6.5 $ 13.6 69.6 27.3 4.5 $ 13.4 81.3(1) 27.7 1.0 $ 8.7 57.3(1) 39.5 0.5 $ 9.8 67.5(1) 23.2 1.6 $ 19.3 26.4 90.3 81.5 $ 25.9 57.5 90.8 77.8 $ 22.3 33.0 82.2 71.8 2013 Allowance for doubtful accounts Reserve for returns Reserves for obsolescence Reserve for royalty advances 2012 Allowance for doubtful accounts Reserve for returns Reserves for obsolescence Reserve for royalty advances 2011 Allowance for doubtful accounts Reserve for returns Reserves for obsolescence Reserve for royalty advances (1) Represents actual returns charged to the reserve S-2 02_73994_Scholastic_AR 7/31/13 11:45 AM Page S-3 [This Page Intentionally Left Blank] 02_73994_Scholastic_AR 7/31/13 11:45 AM Page S-4 Offices and Corporate Information U.S. Offices Scholastic Corporation Accounting Services and Information Systems Center 100 Plaza Drive, 4th floor Secaucus, NJ 07094 201-633-2400 National Service Organization; Scholastic Book Clubs, Inc. 2931 East McCarty Street Jefferson City, MO 65101 573-636-5271 International Offices Malaysia Grolier (Malaysia) SDN. BHD. 60 3 2688 1688 New Zealand Scholastic New Zealand Ltd. 64 9 274 8112 Philippines Grolier International, Inc. 63 2 944 7323 Puerto Rico Scholastic 787 724 2590 China Scholastic Education Information Consulting Co., Ltd. 86 2164264555 Stockholder Information Media Relations and Inquiries The news media and others seeking information about the Company should contact: Scholastic Corporation Media Relations 212-343-4563 news@scholastic.com Stock Listing Scholastic Corporation common stock is traded on The NASDAQ Stock Market under the symbol SCHL. Stock Transfer Agent, Registrar, and Dividend Disbursement Agent Computershare 1-877-272-1580 1-201-680-6578 (International) TDD hearing impaired telephone numbers: 1-800-231-5469 1-201-680-6610 (International) www.bnymellon.com/shareowner/ equityaccess Scholastic Book Fairs, Inc. 1080 Greenwood Boulevard Lake Mary, FL 32746 407-829-7300 Customer Service 1-800-SCHOLASTIC (1-800-724-6527) www.scholastic.com/custsupport Singapore Grolier International, Inc. 65 6922 9555 Scholastic Education International (Singapore) Private Limited 65 6922 9589 Taiwan Grolier International, Inc. 886 2 2719 2188 Thailand Grolier International, Inc. 66 2 233 9450 United Kingdom and Ireland Scholastic Ltd. 44 207 756 7756 Scholastic Ireland Ltd. 353 1830 6798 Registered stockholders who need to change their address or transfer shares should send instructions to: By Mail: Computershare P.O. Box 358015 Pittsburgh, PA 15252-8015 By Overnight Delivery: Computershare 480 Washington Boulevard Jersey City, NJ 07310-1900 Independent Accountants Ernst & Young LLP 5 Times Square New York, NY 10036-6530 General Counsel Baker & McKenzie LLP 452 Fifth Avenue New York, NY 10018 Scholastic Corporation, Scholastic Inc., Corporate and Editorial Offices 557 Broadway New York, NY 10012 212-343-6100 www.scholastic.com Scholastic Library Publishing, Inc. 90 Sherman Turnpike Danbury, CT 06816 203-797-3500 Australia Scholastic Australia Pty. Ltd. 61 2 4328 3555 Canada Scholastic Canada Ltd. 905 887 7323 Hong Kong Scholastic Hong Kong Ltd. 852 2722 6161 India Scholastic India Private Ltd. 91 124 484 2800 Grolier International Private Limited 91 11 4611 8118 Indonesia Grolier International, Inc. 62 21 392 3042 2013 Annual Stockholders’ Meeting 2013 Annual Meeting of Stockholders will be held at 9:00 a.m. on Wednesday, September 18, 2013, at Scholastic’s Corporate Headquarters, 557 Broadway, New York, NY 10012. Investor Relations and Information Copies of Scholastic Corporation’s report on Form 10-K as filed with the Securities and Exchange Commission as well as other financial reports and news from Scholastic may be read and downloaded at investor.scholastic.com. If you do not have access to the Internet, you may request free printed material upon written request to the Company. Stockholders and analysts seeking information about the Company should contact: Scholastic Corporation Investor Relations 212-343-6741 investor_relations@scholastic.com The Company announces the dates/times of all upcoming earnings releases and teleconferences in advance. These calls are open to the public and are also available as a simultaneous webcast via the Company’s website. DIRECTORS AND OFFICERS Directors of the Corporation Richard Robinson (E) Chairman of the Board, President and Chief Executive Officer, Scholastic Corporation Andrew S. Hedden (R) Executive Vice President, General Counsel and Secretary, Scholastic Corporation John G. McDonald (H, R) The Stanford Investors Professor, Graduate School of Business, Stanford University James W. Barge (A, N) Independent Financial Consultant Mae C. Jemison (N, P, R) President and Founder, The Jemison Group, Inc. Augustus K. Oliver (A, E, P) Managing Member, Oliver Press Partners, LLC Marianne Caponnetto (H, P) President and Founder, MCW Group, Inc. John L. Davies (A, H) Private Investor Peter M. Mayer (E, H, P) President, The Overlook Press/ Peter Mayer Publishers, Inc. Richard M. Spaulding (E, N, P, R) Former Executive Vice President, Scholastic Corporation Margaret A. Williams (P) Partner, Griffin Williams LLC A: Audit Committee E: Executive Committee H: Human Resources and Compensation Committee N: Nominating and Governance Committee P: Strategic Planning Committee R: Retirement Plan Committee Corporate Executive Officers Richard Robinson Chairman of the Board, President and Chief Executive Officer Andrew S. Hedden Executive Vice President, General Counsel and Secretary Judith A. Newman Executive Vice President and President, Book Clubs and E-Commerce Maureen O’Connell Executive Vice President, Chief Administrative Officer and Chief Financial Officer Margery W. Mayer Executive Vice President and President, Scholastic Education Alan Boyko President, Scholastic Book Fairs, Inc. 557 Broadway, New York, NY 10012 212-343-6100 www.scholastic.com . d e v r e s e r s t h g i r l l A . n o s l e N r i d a K y b t r a l i a n g i r O . c n I l c i t s a o h c S y b 3 1 0 2 © & M T 557 Broadway, New York, NY 10012 212-343-6100 www.scholastic.com 

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