SCHOLASTIC CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) The increase was partially offset by lower employee-related costs and technology-related spending in an effort to mitigate the impact on operating income of lower sales volumes due to COVID-19, as well as the absence of a $1.5 million settlement, without admission of liability, for an alleged patent infringement that occurred in the prior year fiscal quarter. Seasonality The Company’s Children’s Book Publishing and Distribution school-based book club and book fair channels and most of its Education businesses operate on a school-year basis; therefore, the Company’s business is highly seasonal. As a result, the Company’s revenues in the first and third quarters of the fiscal year generally are lower than its revenues in the other two fiscal quarters. Typically, school-based channels and magazine revenues are minimal in the first quarter of the fiscal year as schools are not in session. Trade sales can vary throughout the year due to varying release dates of published titles. While the Company generally experiences a loss from operations in the first and third quarters of each fiscal year, the second quarter of fiscal 2021, ending November 30, 2020, which is traditionally an income quarter, is expected to be negatively impacted by the COVID-19 pandemic. Presently, there are many uncertainties concerning the timing of, and any patterns which may emerge from, school re-openings for the new school year, and the nature and continuing magnitude of the negative impact of COVID-19 into and beyond the second quarter of fiscal 2021 will depend on the actual timing and emerging patterns of such re-openings throughout the United States. Liquidity and Capital Resources Cash used by operating activities was $26.0 million for the three months ended August 31, 2020, compared to cash used by operating activities of $97.6 million for the prior fiscal year quarter, representing a decrease in cash used by operating activities of $71.6 million. While there were lower revenues in the quarter ended August 31, 2020, the cost-saving measures taken by the Company resulted in a decrease in cash used compared to the prior fiscal year quarter. The Company modified inventory procurement and other activities, which usually ramp up in advance of the back-to-school selling season, to adapt to the anticipated impact of the COVID-related delays in school re-openings. In addition, there was an overall reduction in general spending as part of the cost-saving programs, such as lower payroll spending due to employee furlough programs, lower spending on non-essential projects, and limitations on expenditures related to travel, events, and conferences. The Company intends to continue to limit spending in view of the economic uncertainty brought on by the global pandemic. Cash used in investing activities was $8.9 million for the three months ended August 31, 2020, compared to cash used in investing activities of $24.3 million in the prior fiscal year quarter, representing a decrease in cash used in investing activities of $15.4 million. The decrease in cash used was primarily driven by the net proceeds from the sale of the Danbury facility of $12.3 million and the absence of the UK land acquisition of $3.3 million which occurred in the prior fiscal year quarter. The Company intends to continue to limit investment spending in view of the economic uncertainty brought on by the global pandemic. Cash used in financing activities was $5.3 million for the three months ended August 31, 2020, compared to cash used in financing activities of $12.3 million for the prior fiscal year quarter, representing a decrease in cash used in financing activities of $7.0 million. The decrease in cash used is primarily related to the suspension of the Company's share buy back program pursuant to which $12.6 million of common stock was reacquired in the prior fiscal year quarter. This was partially offset by lower short-term credit facility net borrowings of $7.8 million. Cash Position The Company’s cash and cash equivalents totaled $355.5 million at August 31, 2020, $393.8 million at May 31, 2020 and $199.4 million at August 31, 2019. Cash and cash equivalents held by the Company’s U.S. operations totaled $323.7 million at August 31, 2020, $364.2 million at May 31, 2020 and $177.5 million at August 31, 2019. 27 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) Due to the seasonal nature of its business as discussed under “Seasonality” above, the Company usually experiences negative cash flows in the June through October time period. As a result of the Company’s business cycle, borrowings have historically increased during June, July and August, have generally peaked in September or October, and have been at their lowest point in May. The Company expects lower cash receipts from its school channel businesses in the second quarter of fiscal 2021 as a result of the effects of COVID-19 on school re-openings, resulting in lower book fairs and book clubs revenues. As a precautionary measure in the context of the COVID-19 pandemic, the Company accessed its $375.0 million committed bank credit facility in the fourth quarter of fiscal 2020 by taking a U.S. dollar LIBOR-based advance for $200.0 million, although there continues to be no immediate working capital requirement. The Company’s operating philosophy is to use cash provided by operating activities to create value by paying down debt, reinvesting in existing businesses and, from time to time, making acquisitions that will complement its portfolio of businesses or acquiring other strategic assets, as well as engaging in shareholder enhancement initiatives, such as share repurchases or dividend declarations. The Company’s open-market buy-back program continues to be suspended in the face of COVID-19 uncertainties. The Company has maintained, and expects to maintain for the foreseeable future, sufficient liquidity to fund ongoing operations, including working capital requirements, pension contributions, postretirement benefits, debt service, planned capital expenditures and other investments, as well as dividends and share repurchases as appropriate in the context of COVID-19 considerations. As of August 31, 2020, the Company’s primary sources of liquidity consisted of cash and cash equivalents of $355.5 million, cash from operations and the Company's loan agreements in the US and the UK totaling $386.4 million, less borrowings of $211.4 million and commitments of $0.4 million, resulting in $174.6 million of availability. 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 US Loan Agreement be increased by an amount of $10.0 million or an integral multiple of $10.0 million (but not to exceed $150.0 million). Additionally, the Company has short-term credit facilities of $55.2 million, less current borrowings of $8.5 million and commitments of $3.9 million, resulting in $42.8 million of current availability at August 31, 2020. Accordingly, the Company believes these sources of liquidity are sufficient to finance its currently anticipated ongoing operating needs, as well as its financing and investing activities, taking COVID-19 into consideration. Financing The Company is party to the US and UK Loan Agreements and certain credit lines with various banks as described in Note 4 of Notes to Condensed Consolidated Financial Statements - unaudited in Item 1, “Financial Statements." The Company had $200.0 million in outstanding borrowings under the US Loan Agreement as of August 31, 2020. On September 23, 2019, Scholastic Limited UK entered into a term loan agreement to borrow £2.0 million to fund a land purchase in connection with the construction of the new UK facility. The loan has a maturity date of July 31, 2021. As of August 31, 2020, the Company had $2.7 million outstanding on the loan. On January 24, 2020, Scholastic Limited UK entered into a term loan facility with a borrowing limit of £6.6 million to fund the construction of the new UK facility. The loan has a maturity date of July 31, 2021. As of August 31, 2020, the Company had $8.7 million outstanding on the loan. New Accounting Pronouncements Reference is made to Note 1 of Notes to Financial Statements - unaudited in Item 1, “Financial Statements,” for information concerning recent accounting pronouncements since the filing of the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2020. 28 SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) Forward Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements. Additional written and oral forward-looking statements may be made by the Company from time to time in Securities and Exchange Commission ("SEC") filings and otherwise. The Company cautions readers that results or expectations expressed by forward-looking statements, including, without limitation, those relating to the Company’s future business prospects and strategic plans, ecommerce and digital initiatives, new product introductions, strategies, new education standards, goals, revenues, improved efficiencies, general costs, manufacturing costs, medical costs, potential cost savings, merit pay, operating margins, working capital, liquidity, capital needs, the cost and timing of capital projects, interest costs, cash flows and income, are subject to risks and uncertainties, including, in particular, how the foregoing may be affected by developments in the context of the current COVID-19 pandemic and measures or responses of governmental authorities, business suppliers or customers, which may have an impact on the Company's operations and could cause actual results to differ materially from those indicated in the forward-looking statements, due to factors including those noted in the Annual Report and this Quarterly Report and other risks and factors identified from time to time in the Company’s filings with the SEC. The Company disclaims any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise. 29 SCHOLASTIC CORPORATION