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, 2017 | Commission File No. 000-19860 | | | | | | | | | | | | | | |
| For the fiscal year ended | May 31, 2023 | | Commission File No. | 000-19860 |
Scholastic Corporation
(Exact name of Registrant as specified in its charter)
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| Delaware | | 13-3385513 |
| (State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification No.) |
incorporation or organization)557 Broadway | | |
| New York, | New York | | 10012 |
557 Broadway, New York, New York | 10012 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (212) 343-6100
Securities Registered Pursuant to Section 12(b) of the Act:
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Title of classClass | Trading Symbol | Name of Each Exchange on Which Registered |
| Common Stock, $0.01 par value | SCHL | The NASDAQ Stock Market LLC |
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes xý No o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No xý
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 xý No o
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)submit). Yes xý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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xý
| Large accelerated filer | o☐
| Accelerated filer | o☐
| Non-accelerated filer (Do not check if a smaller reporting company)
| o☐
| Smaller reporting company | o☐
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. o
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Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o☐ No xý
The aggregate market value of the Common Stock, par value $0.01, held by non-affiliates as of November 30, 2016,2022, was approximately $1,312,526,586.$1,175,620,524. As of such date, non-affiliates held no shares of the Class A Stock, $0.01 par value. There is no active market for the Class A Stock.
The number of shares outstanding of each class of the Registrant’s voting stock as of June 30, 20172023 was as follows: 33,460,158 shares of Common Stock and 1,656,200 shares of Class A Stock.
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| Title of each class | | Number of shares outstanding as of June 30, 2023 |
| Common Stock, $0.01 par value | | 29,953,334 |
| Class A Stock, $0.01 par value | | 1,656,200 |
Documents Incorporated By Reference
Part III incorporates certain information by reference from the Registrant’s definitive proxy statement for the Annual Meeting of Stockholders to be held September 20, 2017.2023.
Part I
Item 1 | Business
Overview
Scholastic Corporation (the “Corporation” and together with its subsidiaries, “Scholastic” or the “Company”) is the world’s largest publisher and distributor of children’s books, a leading provider of print and digital instructional materials for grades pre-kindergarten ("pre-K") to grade 12 and a producer of educational and entertaining children’s media. The Company creates quality books and ebooks, print and technology-based learning materials
and programs, classroom magazines and other products that, in combination, offer schools, as well as parents and children, customized and comprehensive solutions to support children’s learning and reading both at school and at home. Since its founding in 1920, Scholastic has emphasized quality products and a dedication to reading, learning and learning.literacy. The Company is the leading operator of school-based book clubsclub and book fairs in the United States.fair proprietary channels. It distributes its products and services through these proprietary channels, as well as directly to schools and libraries, through retail stores and through the internet. The Company’s website, scholastic.com, is a leading site for teachers, classrooms and parents and an award-winning destination for children. Scholastic has operations in the United States and throughout the world including Canada, the United Kingdom, Australia, New Zealand and other parts of Asia and, through its export business, sells products in approximately 145 countries.
The Company currently employs approximately 6,500 people in the United States and approximately 2,500 people outside the United States.120 international locations.
Segments – Continuing Operations
The Company categorizes its businesses into three reportable segments: Children’s Book Publishing and Distribution; Education Solutions; and International.
The following table sets forth revenues by reportable segment for the three fiscal years ended May 31:
| | | | | | (Amounts in millions) | | |
| (Amounts in millions) | | (Amounts in millions) |
| | 2017 | | 2016 | | 2015 | | 2023 | | 2022 | | 2021 |
| Children’s Book Publishing and Distribution | $ | 1,052.1 |
| | $ | 1,000.9 |
| | $ | 957.8 |
| Children’s Book Publishing and Distribution | $ | 1,038.0 | | | $ | 946.5 | | | $ | 675.0 | |
| Education | 312.7 |
| | 299.7 |
| | 276.8 |
| |
| Education Solutions | | Education Solutions | | 386.6 | | | 393.6 | | | 312.3 | |
| International | 376.8 |
| | 372.2 |
| | 401.2 |
| International | | 279.4 | | | 302.8 | | | 313.0 | |
| Total | $ | 1,741.6 |
| | $ | 1,672.8 |
| | $ | 1,635.8 |
| Total | $ | 1,704.0 | | | $ | 1,642.9 | | | $ | 1,300.3 | |
Additional financial information relating to the Company’s reportable segments is included in Note 3, "Segment Information", of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data,” which is included herein.
CHILDREN’S BOOK PUBLISHING AND DISTRIBUTION
(60.4%60.9% of fiscal 20172023 revenues)
General
The Company’s Children’s Book Publishing and Distribution segment includes the publication and distribution of children’s books, ebooks, media and interactive products in the United States through its school book clubs and school book fairs channels and through the trade channel.
The Company is the world’s largest publisher and distributor of children’s books and is the leading operator of school-based book clubs and school-based book fairs in the United States. The Company is also a leading publisher of children’s print books, ebooks and audiobooks distributed through the trade channel. Scholastic offers a broad range of children’s books through its school and trade channels, many of which have received awards for excellence in children’s literature, including the Caldecott and Newbery Medals.
The Company obtains titles for sale through its distribution channels from three principal sources. The first source for titles is the Company’s publication of books created under exclusive agreements with authors, illustrators, book packagers or other media companies. Scholastic generally controls the exclusive rights to sell and distribute these titles through all
channels of distribution in the United States and, to a lesser extent, internationally. Scholastic’s second source of titles is through obtaining licenses to publishsell books exclusively in specified channels of distribution, including reprints of books
originally published by other publishers for which the Company acquires rights to sell in the school market. The third source of titles is the Company’s purchase of finished books from other publishers.
School-Based Book Clubs
Scholastic founded its first school-based book club in 1948. The Company's school-based book clubs consist of reading clubs for pre-K through grade 8. In addition to its regular reading club offerings, the Company creates special theme-based and seasonal offers targeted to different grade levels during the year.
The Company mailsdistributes promotional materials containing order forms to classrooms in the vast majority of the pre-K to grade 8 schools in the United States. Classroom teachers who wish to participate in a school-based book club provide the promotional materials to their students, who may choose from curated selections at substantial reductions from list prices. The teacher aggregates the students’ orders and forwards them to the Company. Approximately 64%37% of kindergarten ("K") to grade 5 elementary school teachers in the United States who received promotional materials in fiscal 20172023 participated in the Company’s school-based book clubs. In fiscal 2017,2023, approximately 96%97% of total book club revenues were placed via the internet through the Company’s online ordering platform, which allows parents, as well as teachers, to order online.online, with approximately 57% of such revenues being placed by parents via the Company's online ordering platform. Alternatively, the teacher may manually aggregate the students’ orders and forward them to the Company. Products are typically shipped to the classroom for distribution to the students. Teachers 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 offeringentered the school-based book fairs channel in 1981 under the name Scholastic Book Fairs. The Company is the leading distributor of school-based book fairs in the United States serving schools in all 50 states. Book fairs giveprovide 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 generallyhave traditionally been weeklong events where children and families peruse and purchase their favorite books together. The Company typically delivers its book fairs product from its warehouses to schools principally by a fleet of Company-owned and leased vehicles. Sales and customer service representatives, working from the Company’s regional offices, and distribution facilities and national distribution facility in Missouri, along with local area field representatives, provide support to book fair organizers. BookPhysical 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. Thefair.
Effective June 1, 2023, the Company is currently focused on maximizing participation at itshas combined the school-based book fairs through increasing attendance at eachand book fair event. Approximately 91% ofclubs businesses into the schools that conducted a Scholastic Book Fair in fiscal 2016 hosted a fair in fiscal 2017.newly formed reading events business.
Trade
Scholastic is a leading publisher of children’s books sold through bookstores, interneton-line retailers and mass merchandisers primarily in the United States. Scholastic’s original publications include Harry Potter™Potter®, The Hunger Games®, The 39 Clues®Bad Guys™, Spirit AnimalsThe Baby-Sitters Club®, The Magic School Bus®, I Spy™, Captain Underpants®, Dog Man®, Wings of Fire™, Cat Kid Comic Club®, I Survived, Goosebumps® and Clifford The Big Red Dog®, and licensed properties such as Star WarsPeppa Pig®, Lego®, Pokemon®and Geronimo StiltonPokemon®. In addition, the Company’s Klutz® imprint is a publisher and creator ofMake Believe Ideas™ publish and create “books plus” and novelty products for children, including Klutz titles such as Ink and Paint Manga, Mini Clay World Puppy Treat Truck, and LEGO® Race Cars andtitles in the Never Touch series from Make Clay Charms, Sew Mini Treats, Make Your Own Mini Erasers, and Lego Chain Reactions.Believe Ideas.
The Company’s trade organization focuses on publishing, marketing and selling books to bookstores, interneton-line retailers, mass merchandisers, specialty sales outlets and other book retailers, and also supplies books for the Company’s proprietary school channels. The Company maintains a talented and experienced creative staff that constantly seeks to attract, develop and retain the best children’s authors and illustrators. The Company believes that its trade publishing staff, combined with the Company’s reputation and proprietary school distribution channels, provides a significant competitive advantage, evidenced by numerous bestsellers over the past two decades. BestsellersTop selling new release titles in the trade division during fiscal 20172023 included Dog Man #11: Twenty Thousand Fleas Under the Sea, Cat Kid Comic Club: Collaborations,Harry Potter and the Cursed Child, Parts One and Two,the original screenplayOrder of theFantastic Beasts and Where to Find Them™film, Ghosts, Dogmanand Dogman Unleashed, Five Nights at Freddy's: Phoenix: The Silver Eyes, and the Pokemon: Deluxe Essential Handbook,as well as multiple series, including Harry Potter, Captain Underpants,Illustrated Edition, Wings of Fire Graphix #6: Moon Rising, The Baby-Sitters Club® Graphix, Graphic Novel #13: Mary Anne's Bad Luck Mystery and Star Wars: Jedi Academy.Nick and Charlie: A HeartstopperTM Novella.
Also included in the Company's trade organization are Weston Woods Studios, Inc. ("Weston Woods") and Scholastic Audio, as well as Scholastic Entertainment Inc. ("SEI"). Weston Woods creates audiovisual adaptations of classic children’schildren's picture books distributed through the school and retail markets. Scholastic Audio provides audiobook
productions of popular children's titles. SEI is responsible for exploiting the Company's film and television assets, which include a large television programming library based on the Company's properties.properties, and for developing new programming. During fiscal 2023, the Company produced the animated series "Eva the Owlet,"® based on the Owl DiariesTM books, which was released on AppleTV+® in March 2023.
EDUCATION SOLUTIONS
(18.0%22.7% of fiscal 20172023 revenues)
The Education Solutions segment includes the publication and distribution to schools and libraries of children’s books, other print and on-line reference, non-fiction and fiction focused products, classroom magazines and classroom materials for core and supplemental literacy instruction, as well as consulting services and related products supporting professional development for teachers and school and district administrators, including professional books, coaching, workshops and seminars which in combination cover grades pre-K to 12 in the United States.
Classroom Libraries and Collections
The Company is a leading provider of classroom libraries and paperback collections, including best-selling titles, and leveled books for guided reading, to individual teachers and other educators and schools and school district customers. Additionally, the Company provides books and consulting services to community-based organizations and other groups engaged in literacy initiatives through Scholastic Family and Community Engagement (FACE). Scholastic helps schools build classroom and library collections ofwith high quality, award-winning books for every grade, reading level and multicultural background, including it's Leveled Bookroomthe Company’s Rising Voices Library® offering, which meets the increasing demand for culturally responsive content and instruction. In addition, the Phyllis C. Hunter classroom library series. Company provides books to students for summer reading through its Grab and Go reading packs.
Instructional Products and Programs
Scholastic serves customer needs with customized support for literacy instruction, by providing comprehensive core and supplemental literacy and reading programs which include print and digital content as well as providing assessment tools. The Company publishes and sells professional books authored by notable experts in education, such as Disrupting Thinking by Kylene Beers and Bob Probst, and supplemental materials like Next Step Forward in Guided Reading, authored by Jan Richardson. These materials are designed forto support instruction-based teaching and learning, and are generally purchased by teachers,district and school leadership, both directly from the Company and through teacher stores and booksellers,booksellers. The Company’s offerings include comprehensive reading programs such as Scholastic Bookroom and Guided Reading, early childhood programs such as PreK On My WayTM and comprehensive literacy programs such as Scholastic LiteracyTM. In addition, the Company offers summer learning products to provide students with increased access to books and learning opportunities over the summer. During fiscal 2023, the Company acquired Learning Ovations, Inc., a U.S.-based education technology business and developer of a literacy assessment and instructional system, and integrated the acquired technology into its new K-3 phonic program, Ready4ReadingTM, which was launched in June 2023.
Teaching Resources and Professional Learning
The Company provides a variety of resources to teachers and school leadership including lesson planning, reading management, classroom management, classroom organization, and other instructional resources. These products are available on the Company's on-line teacher store (www.scholastic.com/teacherstore), which provides professional books and other educational materials to teachers and other educators. Professional consulting services are also provided to support academic leadership with training on a multitude of topics, ranging from product implementation to engaging with families and communities.
Literacy Initiatives
The Company provides books to community-based organizations and other groups engaged in literacy initiatives through Scholastic Family and Community Engagement (FACE)TM. The Company also partners with mission-driven organizations to support literacy by increasing children's access to books through the Scholastic Literacy Partners program.
Scholastic Magazines+TM
Scholastic is the leading publisher of classroom magazines.magazines, Scholastic Magazines+TM. Teachers in grades pre-K to 12 use the Company’s 3033 classroom magazines, including Scholastic News®, Scholastic Scope®,Storyworks®,Let's Find Out® and Junior Scholastic®,to supplement formal learning programs by bringing subjects of current interest into the classroom, including current events, literature, math, science, social studies and foreign languages. These offerings provide schools with substantial non-fiction material, which is required to meet new higher educational standards. Each magazine has its own website with online digital resources that supplement the print materials. materials, as well as providing access to the magazine in a digital format. A "digital only" subscription to the magazine is also offered.
Scholastic’s classroom magazine circulation in the United States in fiscal 20172023 was approximately 15.513.3 million, with approximately 77%80% of the circulation in grades pre-K to 6. The majority of magazines purchased are paid for with school or district funds, with parents and teachers paying for the balance. Circulation revenue accounted for substantially all classroom magazine revenue in fiscal 2017.
Scholastic is also a leading publisher of quality children’s reference and non-fiction products and subscriptions to databases sold primarily to schools and libraries in the United States. These products include non-fiction books published in the United States under the imprints Children’s Press® and Franklin Watts®. Also included in the segment is the Company's consumer magazine business, including Teacher magazine.
Sponsored Programs
The productsCompany works with state partners to provide books to eligible students, generally those reading below grade level, at no cost to the student. The books are purchased with state funds and services described above are offered by Scholastictypically shipped directly to educators in pre-K to 12 schools as a comprehensive program for student achievement and literacy development. These solutions encompass core literacy curriculum publishing, including the Company’s guided reading programs, print programs involving customized classroom and library book collections, related supplemental materials made available through the Company’s classroom magazines, including additional non-fiction material available to students through the digital components accompanying the print classroom magazines, and the Company’s custom curriculum and teaching guides and other professional development materials and services to aid teachers in the implementation of the Company’s comprehensive solutions.students’ homes.
INTERNATIONAL
(21.6%16.4% of fiscal 20172023 revenues)
General
The International segment includes the publication and distribution of products and services outside the United States by the Company’s international operations, and its export and foreign rights businesses.
Scholastic has operations in Major Markets, which include Canada, the United Kingdom, Ireland, Australia, and New Zealand, as well as in India, China, Singapore and other parts of Asia including Malaysia, Thailand, the Philippines, Indonesia, Hong Kong, Taiwan, Korea and Japan. The Company has branches in the United Arab Emirates and Colombia, a business in China that supports English language learning and through its export business,also sells products in approximately 145 countries.120 international locations through its export business. The Company’s international operations have original trade and educational publishing programs; distribute children’s books, digital educational resources and other materials through school-based book clubs, school-based book fairs and trade channels; and produce and distribute magazines;magazines and offer on-line subscription services. Many of the Company’s international operations also have their own export and foreign rights licensing programs and are book publishing licensees for major media properties. Original books published by many of these operations have received awards for excellence in children’s literature. In Asia, the Company also publishes and distributes products under the Grolier nameoperates a franchise program for parents to teach their children at home and engages in direct sales in shopping malls and door to door, as well as operating tutorial centers that provide English language training to students.students, primarily in China.
Canada
Scholastic Canada, founded in 1957, is a leading publisher and distributor of English and French language children’s books.books in Canada. Scholastic Canada is the largest operator of school-based book club and school-based book fair operatormarketing channels in Canada and is one of the leading suppliers of original or licensed children’s books to the Canadian trade market. Since 1965, Scholastic Canada has also produced quality Canadian-authored books and educational materials, including an early reading program sold to schools for grades K to 6.
United Kingdom
Scholastic UK, founded in 1964, is the largest operator of school-based book club and book fair operatormarketing channels in the United Kingdom and is a publisher and one of the leading suppliers of original or licensed children’s books to the United Kingdom trade market. Scholastic UK also publishes supplemental educational materials, including professional books for teachers. Scholastic also holds equity method investments in two publishers, one of which is also a distributor, in the United Kingdom.
Australia
Scholastic Australia, founded in 1968, is the largest operator of school-based book club and book fair operatormarketing channels in Australia, reaching approximately 90% of the country’s primary schools. Scholastic Australia also publishes quality children’s books supplying the Australian trade market. In addition, Scholastic Australia holds an equity method investment in a publisher and distributor of children's books.
New Zealand
Scholastic New Zealand, founded in 1962, is the largest children’s book publisher and the leading book distributor to schools in New Zealand. Through its school-based book clubs and book fairs channels, Scholastic New Zealand reaches approximately 90% of the country’s primary schools. In addition, Scholastic New Zealand publishes quality children’s books supplying the New Zealand trade market.
Asia
The Company’s Asian operations includeconsist of initiatives for educational publishing programs based out of Singapore, as well as the wholly-owned Grolier direct sales business, which sells English language and early childhood learning materials through a network of independent sales representatives in India, Indonesia, Malaysia, the Philippines, Singapore and Thailand and engages in direct sales in shopping malls and door to door.Singapore. In addition, the Company operates school-based book clubs and book fairsmarketing channels throughout Asia; publishes original titles in English and Hindi languages in India, including specialized curriculum books for local schools; conducts reading improvement programs inside local schools in the Philippines; and operates a chain offranchise program for English language tutorial centers in China in cooperation with local partners.partners, certain of which were temporarily closed during fiscal 2023 to limit the spread of the coronavirus. All tutorial centers were open as of May 31, 2023.
Foreign Rights and Export
The Company licenses the rights to selectedselect Scholastic titles in 4765 languages to other publishing companies around the world. The Company’s export business sells educational materials, digital educational resources and children’s books to schools, libraries, bookstores and other book distributors in approximately 145 countries120 international locations that are not otherwise directly serviced by Scholastic subsidiaries. The Company also partners with governments and non-governmental agencies to create and distribute books to public schools in developing countries.
Discontinued Operations
During the twelve month period ended May 31, 2017, the Company did not dispose of any components of the business that would meet the criteria for discontinued operations reporting.
During the fourth quarter of fiscal 2015, the Company sold its educational technology and services business (formerly the Company's Educational Technology and Services segment) to Houghton Mifflin Harcourt. The transaction was completed on May 29, 2015. The educational technology and services business was engaged, among other things, in the development and sale of reading and math improvement programs, as well as providing consulting and professional development services, principally to schools in the United States. The sale included the equity in two former subsidiaries, International Center for Leadership in Education and Tom Snyder Productions, as well as rights to sell all of the products of the educational technology and services business internationally.
Additionally, during fiscal 2015, the Company completed a restructuring of the Media, Licensing and Advertising segment and discontinued its Soup2Nuts animation and audio production studio operations, Scholastic Interactive, which designed software, apps and games for pre-K to grade 8, and the print edition of Parent and Child, a periodic consumer magazine.
PRODUCTION AND DISTRIBUTION
The Company’s books, magazines and other materials are manufactured by the Company with the assistance of third parties under contracts entered into through arms-length negotiations orand competitive bidding. As appropriate, the Company enters into multi-year agreements that guarantee specified volumevolumes 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.
In the United States, the Company mainly processes and fulfills orders for school-based book clubs, trade, reference and non-fiction products, educational products and export orders from its primary warehouse and distribution facility in Jefferson City, Missouri. In connection with its trade business, the Company sometimes will shipmay fulfill product orders directly from printers to customers. Magazine orders are processed at the Jefferson City facility and the magazines are shipped directly from printers.
School-based book fair ordersfairs are fulfilled through a network of warehouses across the country, as well as from the Company's Jefferson City warehouse and distribution facility. The Company’s international school-based book clubs, school-based book fairs, trade and educational operations use distribution systems similar to those employed in the United States.
CONTENT ACQUISITION
Access to intellectual property or content (“Content”) for the Company’s product offerings is critical to the success of the Company’s operations. The Company incurs significant costs for the acquisition and development of Content for its product offerings. These costs are often deferred and recognized as the Company generates revenues derived from the benefits of these costs. These costs include the following:
•Prepublication costs.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.
•Royalty advances.advances - Royalty advances are incurred in all of the Company’s reportable segments, but are most prevalent in the Children’s Book Publishing and Distribution segment and enable the Company to obtain contractual commitments from authors to produce Content. The Company regularly provides authors with advances against expected future royalty payments, often before the books are written. Upon publication and sale of the books or other media, the authors generally will not receive further royalty payments until the contractual royalties earned from sales of such books or other media exceed such advances. The Company values its position in the market as the largest publisher and distributor of children's books in obtaining Content, and the Company’s experienced editorial staff aggressively acquires Content from both new and established authors.
•Acquired intangible assets.assets - The Company may acquire fully or partially developed Content from third parties via acquisitions of entities or outrightthe purchase of the rights to Content.
Content outright.
SEASONALITY
The Company’s Children’s Book Publishing and Distribution school-based book fairclub and book clubfair channels and most of its Education Solutions 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. Education channel revenues are generally higher in the fourth quarter. Trade sales can vary throughthroughout the year due to varying release dates of published titles. The Company generally experiences a loss from operations in the first and third quarters of each fiscal year.
COMPETITION
The markets for children’s books, educational products and entertainment materials are highly competitive. Competition is based on the quality and range of materials made available, price, promotion and customer service, as well as the nature of the distribution channels. Competitors include numerous other book, ebook, textbook, library, reference material and supplementaryeducational publishers, including of core and supplemental educational materials in both print and digital formats, distributors and other resellers (including over the internet) of children’s books and other educational materials, national publishers of classroom and professional magazines with substantial circulation, and distributors of products and services on the internet. In the United States, competitors also include regional and local school-based book fair operators and other fundraisingfund raising activities in schools and bookstores.bookstores, as well as one other competitor operating on a national level. Competition may increase to the extent that other entities enter the market and to the extent that current competitors or new competitors develop and introduce new materials that compete directly with the products distributed by the Company or develop or expand competitive sales channels. The Company believes that its position as both a publisher and distributor are unique to certain of the markets in which it competes, principally in the context of its children’s book business.
COPYRIGHT AND TRADEMARKS
As an international publisher and distributor of books, Scholastic aggressively utilizes the intellectual property protections of the United States and other countries in order to maintain its exclusive rights to identify and distribute many of its products. Accordingly, SCHOLASTIC is a trademark registered in the United States and in a number of countries where the Company conducts business or otherwise distributes its products. The Corporation’s principal operating subsidiary in the United States, Scholastic Inc., and the Corporation’s international subsidiaries, through Scholastic Inc., have registered and/or have pending applications to register in relevant territories trademarks for important services and programs. All of the Company’s publications, including books and magazines, are subject to copyright protection both in the United States and internationally. The Company also obtains domain name protection for its internet domains. The Company seeks to obtain the broadest possible intellectual property rights for its products, and because inadequate legal and technological protections for intellectual property and proprietary rights could adversely affect operating results, the Company vigorously defends those rights against infringement.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG)
Environmental Responsibility
Paper consumption is a significant environmental concern for the Company and although the Company creates engaging digital content, educators and parents agree that physical books are the best way to engage and teach young children how to read and become avid readers into adulthood. The Company maintains a procurement policy that extends purchasing preference to products and suppliers that are aligned with the Company's environmental goals such as sustainable forestry practices, efficient use of resources, including the use of recycled paper and materials, clean manufacturing practices, economic viability and credible reporting and verification. The Company strives for all paper manufactured for Scholastic product to be free of unacceptable sources of fiber as described by the Forest Stewardship Council (FSC) controlled wood standard. The Company has a preference for FSC-certified paper and continues to maintain a minimum goal of 60% of paper purchases for publications to be FSC-certified.
Social Responsibility
Promoting literacy has been at the core of Scholastic's mission since the founding of the Company over 100 years ago. The Company's business is focused around providing engaging educational content to help improve childhood literacy. In the United States, during fiscal 2023, the Company distributed over 500 million books and educational materials and, through the book fairs channel, schools earned over $210 million in proceeds in cash and incentive program credits primarily used for books, supplies and other classroom-related materials. The Company also
worked with more than 85 partners to sponsor over 700 books fairs in high-need schools, ensuring that each child that participated in these fairs left with a book at no cost.
Executive Officers
In addition to its core business, the Company supports the following initiatives and programs:
•The Scholastic Possible Fund, established by the Company to provide donations of quality books to children in underserved communities and in communities recovering from crises or natural disasters with the goal of improving global literacy, donating approximately 5 million books and over $500,000 in cash to partners such as Save the Children, National Book Foundation, Toys for Tots, Share the Magic Foundation, Hindi's Libraries and Barbershop Books in fiscal 2023.
•providing teachers with a free platform, ClassroomsCount™, to raise funds for books and reading materials for their classrooms.
•serving as the presenting sponsor of the Scholastic Art & Writing Awards, the largest creative scholarship program in the country, providing direct scholarships to approximately 100 students in fiscal 2023.
Governance
Scholastic selects board members with diverse and relevant backgrounds to provide the right expertise and oversight to management. The Human Resources and Compensation Committee of the Board of Directors (“HRCC") provides oversight on human capital matters. The HRCC is responsible for evaluating executive compensation, senior management selection, retention and succession planning and human resources strategies in respect to general employee benefit programs (including retirement plan programs) as well as talent management. For detailed background information on senior management and the Board of Directors visit the Company's "About Us" section of the Scholastic home page https://www.scholastic.com/home or use the following link https://www.scholastic.com/aboutscholastic/senior-management/.
Human Capital
As of May 31, 2023, the Company had approximately 6,760 employees, of which 5,100 were located in the United States and 1,660 outside the United States. Globally, approximately 74% of its employees are employed on a full-time basis, 18% part-time, and 8% seasonal. The seasonal employees are largely associated with the school-based businesses which are dependent on the fall and spring seasons when schools are in session.
The table below represents the approximate number of employees by business channel and function.
| | | | | | | | | | | | | | |
| Full-time | Part-time | Seasonal | Total |
Central Functions1 | 720 | 10 | — | 730 |
| Primary U.S. Warehouse | 1,050 | 150 | 60 | 1,260 |
| Book Fairs Warehouses | 740 | 700 | 250 | 1,690 |
| Book Fairs | 440 | 20 | 50 | 510 |
| Book Clubs | 60 | — | — | 60 |
| Trade | 220 | 10 | — | 230 |
| Education Solutions | 530 | 90 | — | 620 |
| International | 950 | 100 | 20 | 1,070 |
| International Warehouses | 270 | 130 | 190 | 590 |
| Total | 4,980 | 1,210 | 570 | 6,760 |
1 Includes functions such as finance, accounting, executive, information technology, human resources, legal, and inventory demand planning. |
Diversity, Equity, Inclusion and Belonging
The Company is committed to diverse representation in the books, authors and illustrators that it publishes in its trade and education groups. The Company offers age-appropriate books and content featuring storylines and characters that positively represent a wide range of cultures, ethnicities and race, sexual orientation and gender identity, individuals with physical, mental, and emotional exceptionalities, other historically underrepresented groups, and portrayals of varying family structures. The Company applies this same commitment to its selection process for book fairs and books clubs when reviewing content from partner publishers.
In fiscal 2021, the Diversity, Equity, Inclusion and Belonging Task Force was created to advance the Company's goals in three priority focus areas: People and Culture focusing on creating an inclusive workplace culture, enabling ongoing internal education, and increasing overall staff diversity; Publishing and Education focusing on promoting equity, social justice, representation and civic understanding in the classroom and in the world; and Procurement and Purchasing with a focus on expanding supplier diversity and sourcing from minority-owned businesses.
The Company will continue to build on its credo and commitment to the individual worth of each and every child, regardless of race, sexual orientation, gender identity and expression, economic, political, attitudinal, neurodiverse, religious or demographic background and to inspire everyone who works at the Company with contemporary employee policies and programs dedicated to creating a safe, inclusive environment where every employee can be heard and feel respected.
Compensation and Benefits
The Company is committed to helping its employees and their families lead healthy productive lives. The Company's benefits packages and wellness programs help its employees succeed at work and at home. The Company offers comprehensive compensation and benefits packages designed to attract, retain and recognize its employees and is committed to achieving pay equity and aligning rewards to performance. The Company's benefits program provides an array of flexible plans to meet the needs of eligible employees, which includes, among other things, medical, dental and vision plans, health management and incentive programs, flexible spending arrangements, life and disability insurance, retirement plans, work/life balance programs, 401k contribution matching, an employee discount program including discounts on Scholastic products and an Employee Stock Purchase Plan (“ESPP”). The ESPP provides eligible employees the opportunity to purchase Scholastic common stock at a discount. The Company also provides eligible employees paid time off, in addition to volunteer hours to enable involvement in community affairs.
Learning and Development
Successful execution of the Company's strategy is dependent on attracting, retaining and developing employees and members of its management teams. The Company's learning and development program enhances current and future organizational effectiveness by identifying skill gaps and assessing needs that can be supported by providing high quality educational and developmental programs that are strategic, measurable, effective, and serve to increase employees’ skills, knowledge, and effectiveness. In addition to annual trainings on key topics including compliance, ethics and integrity and information security, employees have access to the Scholastic Learning Center, a learning portal that includes self-paced online courses, books, and videos, as well as virtual and live instructor-led opportunities.
Health and Safety
The safety and well-being of the Company's employees, customers, and community is a top priority. The Company has a safety program in place that focuses on policies and training programs to prevent injuries and incidents in the distribution centers. In response to the COVID-19 pandemic, the Company has implemented continuing additional safety measures in all its offices and facilities, including work from home flexibility for non-site specific roles, enhanced cleaning protocols, and health monitoring and temperature screening of employees as necessary.
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 | Age | Employed by
Registrant Since | Previous Position(s) Held as of July 21, 2023 |
| Peter Warwick | 71 | 2021 | President and Chief Executive Officer (since 2021); Board of Directors Member (since 2014); Chief People Officer of Thomson Reuters (2012 - 2018). |
| Kenneth J. Cleary | 58 | 2008 | Chief Financial Officer (since 2017); Senior Vice President, Chief Accounting Officer (2014-2017); Vice President, External Reporting and Compliance (2008-2014). |
| Andrew S. Hedden | 82 | 2008 | Executive Vice President, General Counsel and Secretary (since 2008). |
| Iole Lucchese | 56 | 1991 | Chair of the Board of Directors (since 2021); Executive Vice President (since 2016); Chief Strategy Officer (since 2014); President, Scholastic Entertainment (since 2018); President, Scholastic Canada (2016). |
| Sasha Quinton | 45 | 2020 | Executive Vice President and President, School Reading Events (since 2023), Executive Vice President and President, Scholastic Book Fairs (2020-2023); Vice President & GMM, Bookstore, Barnes and Noble, Inc. (2019); Senior Vice President, Marketing and Procurement, ReaderLink Distribution Services (2017-2019); Vice President, Marketing and Procurement, ReaderLink Distribution Services (2014-2017). |
| Rosamund M. Else-Mitchell | 53 | 2021 | President, Education Solutions (since 2021); Houghton Mifflin Harcourt - Chief Learning Officer & General Manager (2017 -2019), Executive Vice President, Professional Services (2015-2019). |
|
| | | | |
| Name | Age |
| Employed by Registrant Since | Previous Position(s) Held |
| Richard Robinson | 80 |
| 1962 | Chairman of the Board (since 1982), President (since 1974) and Chief Executive Officer (since 1975). |
| Maureen O’Connell | 55 |
| 2007 | Executive Vice President, Chief Administrative Officer and Chief Financial Officer (since 2007). |
| Iole Lucchese | 50 |
| 1991 | Executive Vice President (since 2016), Chief Strategy Officer (since 2014); President, Scholastic Canada (2015-2016); and Co-President, Scholastic Canada (2003-2015). |
| Judith A. Newman | 59 |
| 1993 | Executive Vice President and President, Book Clubs (since 2014), Book Clubs and eCommerce (2011-2014), Book Clubs (2005-2011) 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). |
| Alan Boyko | 63 |
| 1988 | President, Scholastic Book Fairs, Inc. (since 2005). |
| Andrew S. Hedden | 76 |
| 2008 | Executive Vice President, General Counsel and Secretary (since 2008) and member of the Board of Directors (since 1991). |
Available InformationAVAILABLE 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 affectingwhich may affect the Company’s operating results in the conduct of its business, the Company’s past financial performance should not be considered an indicator of future performance. It is further noted that the Company’s operating results for the fiscal year ended May 31, 2021, and to a lesser extent the fiscal years ended May 31, 2022 and 2023, also reflect the direct effects of the COVID-19 pandemic on the businesses of the Company during those fiscal years.
Risks Related to Our Business and Operations
If we fail to maintain strong relationships with our authors, illustrators and other creative talent, as well as to develop relationships with new creative talent, our business could be adversely affected.
The Company’s business, in particular the trade publishing and media portions of the business, is highly dependent on maintaining strong relationships with the authors, illustrators and other creative talent who produce the products and services that are sold to its customers. Any overall weakening of these relationships, or the failure to develop successful new relationships, could have an adverse impact on the Company’s business and financial performance.
If we fail to adapt to new purchasing patterns or trends, our business and financial results could be adversely affected.
The Company’s business is affected significantly by changes in customer purchasing patterns or trends in, as well as the underlying strength of, the trade, educational and media markets for children. In particular, the Company’s educational publishing business may be adversely affected by budgetary restraints and other changes in educational funding as a result of new policies which could be implemented at the federal level or otherwise resulting from new legislation or regulatory action at the federal, state or local level, or by changes in the procurement process, to which the Company may be unable to adapt successfully. In addition, there are many competing demands for educational funds, and there can be no guarantee that the Company will be successful in continuing to obtain sales of its educational programs and materials from any available funding. Further, changes in educational practices affecting structure or content of educational materials or requiring adaption to new learning approaches, particularly in grades pre-K through 6, as well as those which may arise from new legislation or policies at the state or local level directed at content or teaching practices and materials, to which the Company is unable to successfully adapt could result in a loss of business adversely affecting the Company's business and financial performance. In addition, in a highly politicized environment, the content of some of the product being sold by the Company could become controversial, negatively impacting sales made to schools, through partnerships with government agencies or through sponsorships and funding programs. Within the children's book publishing business, the Company's financial performance could be adversely affected by the adaptability of its U.S. book clubs channel. The Company has taken a new holistic approach to serving its customers as part of the newly formed school reading events division and the Company's ability to execute on new customer-centric strategies and operational improvements may not align with customer purchasing behaviors which could negatively impact operating results.
Increases in certain operating costs and expenses, which are beyond our control and can significantly affect our profitability, could adversely affect our operating performance.
The Company’s major expense categories include employee compensation, printing, paper and distribution (such as postage, shipping and fuel) costs. Compensation costs are influenced by general economic factors, including those affecting costs of health insurance, postretirement benefits and any trends specific to the employee skill sets that the Company requires. Current shortages for warehouse labor, driver labor and other required skills, as well as labor supply chain issues, such as the impact of union strikes, may cause the Company's costs to increase beyond increases normally expected.
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. The Company is also subject to inflationary pressures on printing, paper, transportation and labor costs. While the Company has taken steps to manage and budget for certain expected operating cost increases, if there is a significant disruption in the supply of paper or a significant increase in paper costs, or in its shipping or fuel costs, beyond those currently anticipated, which would generally be beyond the control of the Company, or if the Company’s strategies to try to manage these costs, including additional cost savings initiatives, are ineffective, the Company’s results of operations could be adversely affected. In addition, supplier bankruptcy may cause price increases for the Company.
We maintain an experienced and dedicated employee base that executes the Company’s strategies. Failure to attract, retain and develop this employee base could result in difficulty with executing our strategy.
The Company’s employees, notably its senior executives and editorial staff members, have substantial experience in the publishing and education markets. In addition, the Company continues in the process of implementing a strategic information technology transformation process, requiring diverse levels of relevant expertise and experience. If the Company were unable to continue to adequately maintain and develop a workforce of this nature meeting the foregoing needs, including the development of new skills in the context of a rapidly changing business environment created by technology, involving new business processes and increased access to data and data analytics, it could negatively impact the Company’s operations and growth prospects. Additionally, high industry-wide demand for truck drivers may impact the Company's ability to hire and retain adequate staffing levels to deliver book fairs in the number anticipated.
Failure of third party providers to provide contracted outsourcing of business processes and information technology services could cause business interruptions and could increase the costs of these services to the Company.
The Company outsources business processes to reduce complexity and increase efficiency for activities such as distribution, manufacturing, product development, transactional processing, information technologies and various administrative functions. Increasingly, the Company is engaging third parties to provide SaaS, which can reduce the Company’s internal execution risk, but increases the Company’s dependency upon third parties to execute business critical information technology tasks. If SaaS providers are unable to provide these services or outsource providers fail to execute their contracted functionality, or if such providers experience a substantial data breach, the Company could experience damage to its reputation and disruptions to its distribution and other business activities and may incur higher costs.
Risks Related to Competition
If we cannot anticipate technology trends and develop new products or adapt to new technologies responding to changing customer preferences, this could adversely affect our revenues or profitability.
The Company operates in highly competitive markets that are subject to rapid change, including, in particular, changes in customer preferences and changes and advances in relevant technologies. There are substantial uncertainties associated with the Company’s efforts to develop successful trade publishing, educational, and media products and services, including digital products and services, for its customers, as well as to adapt its print and other materials to new digital technologies, includingsuch as the internet cloud technologies, ebook readers, tablets, mobile and other devices and school-based technologies.technologies and uncertainties involving the use of artificial intelligence in connection with the foregoing. The Company makes significant investments in new products and services that may not be profitable, or whose profitability may be significantly lower than the Company anticipates or has experienced historically. In particular, in the context of the Company’s current focus on key digital opportunities, including ebooks for children and schools, the markets are continuing to develop and the Company may be unsuccessful in establishing itself as a significant factor in any relevant market segment which does develop. Many aspects of an ebook marketmarkets which could develop for children and schools, such as the nature of the relevant software and devices or hardware, the size of the market, relevant methods of delivery and relevant content, as well as pricing models, are still evolving and will, most likely, be subject to change on a recurrentrecurring basis until a pattern develops and becomes more defined. There can be no assurance thatThis could specifically impact the Company will be successful in implementing its ebook strategy, including the continuingCompany's ability to execute on a digital and print literacy solution, which requires a multi-year investment, through internal development, of its ereading applications for consumer and classroom markets, which could adversely affect the Company’s revenues and growth opportunities. In this connection, the Company previously determined to cease its support for its ereading applications offered to consumers through its school and ecommerce channels in favor of concentrating its efforts towards the introduction of a universal cross-platform streaming application, to be made available initially to the classroom market. There can be no assurance that the Company will ultimately be successful in its redirected strategy of introducing a streaming model directed to the classroom market third party providers and/or the subsequent development of a broader streaming model.acquisitions. In addition, the Company faces market risks associated with systems development and service delivery in its evolving school ordering and ecommerce businesses.businesses, as well as in responding to changes in how schools plan to utilize technology for virtual or remote learning and the potential impact on the demand for printed materials in schools.
Our financial results would suffer if we fail to successfully differentiate our offerings and meet market needs in school-based book clubsfairs and book fairs,clubs, two of our core businesses.
The Company’s school-based book clubsfairs and book fairs are coreclubs businesses, which have now been combined to form the Company's reading events business, produce a substantial partamount of the Company’s revenues. The Company is subject to the risks that it will not successfully continue to develop and execute new promotional strategies for itsthe school-based book fairs and book clubs or book fairscomponents of the reading events business 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 businessesthis newly combined business in a timely or cost-effective fashionfashion. The book clubs component also relies on attracting and successfully engage a newerretaining new sponsor-
teachers to promote and support the distribution of its offerings. If the Company cannot attract new millennial teacher population in order to increase current teacher sponsorship in its book club business, as well as maintain school sponsorship atand younger teachers and meet the planned level in its book fair businesschanging preferences and ordering levels in eachdemands of these businesses, which would have an adverse effect on the Company’s financial results. teachers, its revenues and cash flows could be negatively impacted.
The Company differentiateshas differentiated itself from competitors by providing curated offerings in its school-basedboth of the book clubs and book fairs components of the reading events business designed to make reading attractive for children, in furtherance of its mission as a champion of literacy. Competition from mass market and on-line distributors using customer-specific curation tools could reduce this differentiation, posing a risk to the Company's results.
If we fail to maintain 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.
We own certain significant real estate assets which are subject to various risks related to conditions affecting the real estate market.
The Company has direct ownership of certain significant real estate assets, in particular, the Company’s headquarters location in New York City and its primary distribution center in Jefferson City, Missouri. The New York headquarters location serves a dual purpose as it also contains premium retail space that is, from time to time, leased to retail tenants in order to generate rental income and cash flow, and the Company is currently engaged in a renovation of its New York headquarters which will include making additional space available for retail use. Accordingly, the Company is sensitive to various risk factors such as changes to real estate values and property taxes, pricing and demand for high end retail spaces in Soho, New York City, interest rates, cash flow of underlying real estate assets, supply and demand, and the credit worthiness of any retail tenants. There is also no guarantee that investment objectives for the retail component of the Company’s real estate will be achieved.
If we fail to adapt to new purchasing patterns or trends, our business and financial results could be adversely affected.
The Company’s business is affected significantly by changes in customer purchasing patterns or trends in, as well as the underlying strength of, the trade, educational and media markets for children. In particular, the Company’s educational publishing business may be adversely affected by budgetary restraints and other changes in educational funding as a result of new policies which could result from the recent change in administration and changes in the Department of Education at the federal level or otherwise resulting from new legislation or regulatory action, whether at the federal, state or local level, as well as changes in the procurement process, to which the Company may be unable to adapt successfully. In addition, there are many competing demands for educational funds, and there can be no guarantee that the Company will otherwise be successful in continuing to obtain sales of its educational materials and programs from any available funding.
The competitive pressures we face in our businesses could adversely affect our financial performance and growth prospects.
The Company is subject to significant competition, including from other trade and educational publishers and media, entertainment and internet companies, as well as retail and internet distributors, many of which are substantially larger than the Company and have much greater resources. To the extent the Company cannot meet these challenges from existing or new competitors 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.
In its educational publishing business, the Company invests in various literacy program solutions, including both digital and print products, covering grades pre-K through 6 which can be in direct competition with traditional basal textbook offerings, as well as new digital instruction offerings with associated assessment tools, to meet the perceived needs of the modern curriculum. There can be no assurance that the Company will be successful in having school districts adopt the Company's new literacy program solutions in preference to basal textbooks or new digital instruction products offered by others or be successful in state adoptions, nor, in the case of basal textbook publishers, that such publishers will not successfully adapt their business models to the development of new forms of core curriculum, which could have an adverse effect on the return on the Company’s investments in this area, as well as on its financial performance and growth prospects. Traditional basal textbook publishers also generally maintain larger sales forces than the Company, and sell across several academic disciplines, allowing them a larger presence than the Company. Additionally, demand for many of the Company’s product offerings, particularly books sold through school channels, is subject to price sensitivity. Failure to maintain a competitive pricing model could reduce revenues and profitability.
Changes in the mix of our major customers in our trade distribution channel or in their purchasing patterns may affect the profitability of our trade publishing business.
The Company’s distribution channels include online retailers and ecommerce sites, digital delivery platforms and expanding social media and other marketing platforms. An increased concentration of retailer power has also resulted in the increased importance of mass merchandisers as well as of publishing best sellers to meet consumer demand. Currently, the Company’s top five trade customers make up approximately 77% of the Company’s U.S. trade business and 14% of the Company’s total revenues. Adverse changes in the mix of the major customers of the trade business, including the type of customer, which may also be engaged in a competitive business, or in their purchasing patterns or financial condition or the nature of their distribution arrangements with the trade business including any requirements related to ESG with which the Company must comply, more specifically those related to environmental sustainability, could negatively affect the profitability of the Company’s trade business and the Company’s financial performance.
The inability to obtain and publish best-selling new titles could cause our future results to decline in comparison to historical results.
The Company invests in authors and illustrators for its trade publication business, and has a history of publishing hit titles. The inability to publish best-selling new titles in future years could negatively impact the Company.
In addition, competition among electronic and print book retailers, including the decrease in the number of independent booksellers, could decrease prices for new title releases, as well as the number of outlets for book sales. The growing use of self-publishing technologies by authors also increases competition and could result in the decreased use of traditional publishing services. The effects of any of the foregoing factors could have an adverse impact on the Company's business, financial condition or results of operation.
Risks Related to Information Technology and Systems
Privacy breaches and other cyber security risks related to our business could negatively affect our reputation, credibility and business.
In certain of its businesses the Company holds or has access to personal data, including that of customers or received from schools. Adverse publicity stemming from a data breach, whether or not valid, could reduce demand for the Company’s products or adversely affect its relationship with teachers or educators, impacting participation in the book fairs or book clubs components of the Company's reading events business or decisions to purchase educational materials or programs produced by the Company's Education Solutions segment. Further, a failure to adequately protect personal data, including that of customers or children, or other data security failure, such as cyber-attacks from third parties, could lead to penalties, significant remediation costs and reputational damage, including loss of future business.
Failure of one or more of our information technology platforms could affect our ability to execute our operating strategy.
The Company relies on a variety of information technology platforms to execute its operations, including human resources, payroll, finance, order-to-cash, procurement, vendor payment, inventory management, distribution and content management systems as well as its internal operating systems. Many of these systems are integrated via internally developed interfaces and modifications. Failure of one or more systems could lead to operating inefficiencies or disruptions and a resulting decline in revenue or profitability. As the Company continues the implementation of its new enterprise-wide customer and content management systems and the migration to software as a service ("SaaS") and cloud-based technology solutions, in its initiatives to integrate its separate legacy platforms into a cohesive enterprise-wide system, there can be no assurance that it will be successful in its efforts or that the implementation of the remaining stages of these initiatives in the Company's global operations will not involve disruptions in its systems or processes having a short term adverse impact on its operations and ability to service its customers.
Risks Related to Laws and Regulations
Our reputation is one of our most important assets, and any adverse publicity or adverse events, such as a significant data privacy breach or violation of privacy laws or regulations, could cause significant reputational damage and financial loss.
The businesses of the Company focus on children’s reading, learning and education, and its key relationships are with educators, teachers, parents and children. In particular, the Company believes that, in selecting its products, teachers, educators and parents rely on the Company’s reputation for quality books and educational materials and programs appropriate for children. Negative publicity, either through traditional media or through social media, could tarnish this relationship.
Also, in certain of its businesses the Company holds or has access to personal data, including that of customers. Adverse publicity stemming from a data breach, whether or not valid, could reduce demand for the Company’s products or adversely affect its relationship with teachers or educators, impacting participation in book clubs or book fairs or decisions to purchase educational materials or programs produced by the Company's Education segment. Further, a failure to adequately protect personal data, including that of customers or children, or other data security failure, such as cyber attacks from third parties, could lead to penalties, significant remediation costs and reputational damage, including loss of future business.
The Company is subject to privacy laws and regulations in the conduct of its business in the United States and in other jurisdictions in which it conducts its international operations, many of which vary significantly, relating to the collection and use of personal information, obtained from customers of,including the European Union General Data Protection Regulation, which became enforceable on May 25, 2018, and participantsthe California Consumer Privacy Act, which became effective in the Company’s on-line offerings.January 2020. In addition, the Company is also subject to the regulatory requirements of the Children’s Online Privacy Protection Act ("COPPA") in
the United States relating to access to, and the use of information received from, children in respect to the Company’s on-line offerings. Since the businesses of the Company are primarily centered on children, failures of the Company to comply with the requirements of COPPA and similar laws in particular, as well as failures to comply generally with applicable privacy laws and regulations, as referred to above, could lead to significant reputational damage and other penalties and costs, including loss of future business.
We maintain an experienced and dedicated employee base that executes the Company’s strategies. Failure to attract, retainmeet the demands of regulators, and develop this employee basethe associated high cost of compliance with regulations, as well as failure to enforce compliance with our Code of Ethics and other policies, could result in difficulty with executing our strategy.negatively impact us.
The Company’s employees, notably its Chief Executive Officer, senior executivesCompany operates in multiple countries and is subject to different regulations throughout the world. In the United States, the Company is regulated by the Internal Revenue Service, the Securities and Exchange Commission, the Federal Trade Commission and other editorial staff members, have substantial experienceregulating bodies. Failure to comply with these regulators, including providing these regulators with accurate financial and statistical information that often is subject to estimates and assumptions, or the high cost of complying with relevant regulations, including a significant increase in new regulations resulting from changes in the publishing and education markets. Inability to adequately maintain a workforce of this natureregulatory environment, could negatively impact the Company’s operations.Company. The Company is also subject to the risk that it is unable to comply with the unstandardized, rapidly-changing environmental requirements imposed internationally by local governments, including those related to measuring and reporting on the impact its business
has on the environment, which could negatively impact the Company's ability to conduct business in implementing our corporate strategy we maythe related country if not be able to maintain our historical growth.met.
The Company’s future growth depends upon a number of factors, includingIn addition, the abilitydecentralized and global nature of the Company’s operations makes it more difficult to communicate and monitor compliance with the Company’s Code of Ethics and other material Company policies and to successfully implement its strategies for its respective business units in a timely manner,assure compliance with applicable laws and regulations, some of which have global applicability, such as the introduction and acceptance of new products and services, including the success of its digital strategy and its ability to implement and successfully market new programs in its educational publishing business, as well as through the Company's developing educational publishing operation in Singapore, its ability to expand in the global markets that it serves, its ability to meet demand for content meeting current standardsForeign Corrupt Practices Act in the United States and its continuing successthe UK Bribery Act in implementing on-going cost containmentthe United Kingdom. Failures to comply with the Company’s Code of Ethics and reduction programs. Difficulties, delaysviolations of such laws or failures experiencedregulations, including through employee misconduct, could result in connection with any of these factors could materially affectsignificant liabilities for the future growthCompany, including criminal liability, fines and civil litigation risk, and result in damage to the reputation of the Company.
Failure of one or more of our information technology platforms could affect our abilityRisks Related to execute our operating strategy.Our Intellectual Property
The Company relies on a variety of information technology platforms to execute its operations, including human resources, payroll, finance, order-to-cash, procurement, vendor payment, inventory management, distribution and content management systems and its internal operating systems. Many of these systems are integrated via internally developed interfaces and modifications. Failure of one or more systems could lead to operating inefficiencies or disruptions and a resulting decline in revenue or profitability. As the Company continues to implement its new enterprise-wide customer and content management systems and the migration to software as a service ("SaaS") and cloud-based technology solutions, in its initiatives to integrate its separate legacy platforms into a cohesive enterprise-wide system, there can be no assurance that it will be successful in its efforts or that the staged implementation of these initiatives in the Company's global operations will not involve disruptions in its systems or processes having a short term adverse impact on its operations and ability to service its customers.
Increases in certain operating costs and expenses, which are beyond our control and can significantly affect our profitability, could adversely affect our operating performance.
The Company’s major expense categories include employee compensation and printing, paper and distribution (such as postage, shipping and fuel) costs. Compensation costs are influenced by general economic factors, including those affecting costs of health insurance, 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 significant increase in paper costs, or in its shipping or fuel costs, beyond those currently anticipated, which would generally be beyond the control of the Company, or if the Company’s strategies to try to manage these costs, including additional cost savings initiatives, are ineffective, the Company’s results of operations could be adversely affected.
Failure of third party providers to provide contracted outsourcing of business processes and information technology services could cause business interruptions and could increase the costs of these services to the Company.
The Company outsources business processes to reduce complexity and increase efficiency for activities such as distribution, manufacturing, product development, transactional processing, information technologies and various administrative functions. Increasingly, the Company is engaging third parties to provide SaaS, which can reduce the
Company’s internal execution risk, but increases the Company’s dependency upon third parties to execute business critical information technology tasks. If SaaS providers are unable to provide these services, or if outsource providers fail to execute their contracted functionality, the Company could experience disruptions to its distribution and other business activities and may incur higher costs.
The inability to obtain and publish best-selling new titles such as Harry Potter 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. The inability to publish best-selling new titles in future years could negatively impact the Company.
The loss of or failure to obtain rights to intellectual property material to our businesses would adversely affect our financial results.
The Company’s products generally comprise intellectual property delivered through a variety of media. The ability to achieve anticipated results depends in part on the Company’s ability to defend its intellectual property against infringement, as well as the breadth of rights obtained. The Company’s operating results could be adversely affected by inadequate legal and technological protections for its intellectual property and proprietary rights in some jurisdictions, markets and media, as well as by the costs of dealing with claims alleging infringement of the intellectual property rights of others, including claims involving business method patents in the ecommerce and internet area,areas and the licensing of photographs in the trade and educational publishing areas, and the Company’s revenues could be constrained by limitations on the rights that the Company is able to secure to exploit its intellectual property in different media and distribution channels, as well as geographic limitations on the exploitation of such rights.
Risks Related to External Factors
Because we procure products and sell our products and services in foreign countries, changes in currency exchange rates, as well as other risks and uncertainties, could adversely affect our operations and financial results.
The Company has various operating subsidiaries domiciled in foreign countries. In addition, the Company sells products and services to customers located in foreign countries where it does not have operating subsidiaries, and a significant portion of the Company’s revenues are generated from outside of the United States. The Company’s business processes, including distribution, sales, sourcing of content, marketing and advertising, are, accordingly, subject to multiple national, regional and local laws, regulations and policies. The Company could be adversely affected by noncompliance with foreign laws, regulations and policies, including those pertaining to foreign rights and exportation. The Company is also exposed to fluctuations in foreign currency exchange rates and to business disruption caused by political, financial or economic instability or the occurrence of war or natural disasters in foreign countries. In addition, the Company and its foreign operations could be adversely impacted by a downturn in general economic conditions on a more global basis caused by general political instability or unrest or changes in global economic affiliations. For example, the results of the Referendum onaffiliations or conditions, such as inflation. Changes in international trade relations with foreign countries, such as increased tariffs and duties (including those imposed by the United Kingdom’s (orStates) could cause the UK) Membership in the European Union (EU) (referredCompany's costs to as Brexit), advising for the exit of the United Kingdom from the European Union, could affect our sales in the UK, as the uncertainty caused by the vote and the uncertain future course of negotiations between the EU and the UK could negatively impact the economies of the UK and other nations.rise, or its overseas revenues to decline.
Failure to meet the demands of regulators, and the associated high cost of compliance with regulations, as well as failure to enforce compliance with our Code of Ethics and other policies, could negatively impact us.
The Company operates in multiple countries and is subject to different regulations throughout the world. In the United States, the Company is regulated by the Internal Revenue Service, the Securities and Exchange Commission, the Federal Trade Commission and other regulating bodies. Failure to comply with these regulators, including providing these regulators with accurate financial and statistical information that often is subject to estimates and assumptions, or the high cost of complying with relevant regulations, could negatively impact the Company.
In addition, the decentralized and global nature of the Company’s operations makes it more difficult to communicate and monitor compliance with the Company’s Code of Ethics and other material Company policies and to assure compliance with applicable laws and regulations, some of which have global applicability, such as the Foreign Corrupt Practices Act in the United States and the UK Bribery Act in the United Kingdom. Failures to comply with the Company’s Code of Ethics and violations of such laws or regulations, including through employee misconduct, could result in significant liabilities for the Company, including criminal liability, fines and civil litigation risk, and result in damage to the reputation of the Company.
Certain of our activities are subject to weather and natural disaster risks as well as other events outside our control, which could disrupt our operations or otherwise adversely affect our financial performance.
The Company conducts certain of its businesses and maintains warehouse and office facilities in locations that are at risk of being negatively affected by severe weather and natural disaster events, including those caused by climate change, such as hurricanes, tornadoes, floods, snowstorms, heat waves or snowstorms.earthquakes. Notably, much of the Company’s domestic distribution facilities are located in central Missouri. A disruption of these or other facilities could impact the Company’s school-based book clubs, school-based book fairsreading events business, as well as its trade and education businesses. Additionally, disruptions due to weather, disruptionsnatural disaster, epidemic and pandemic could result in school closures, resulting in reduced demand for the Company’s products in its school channels during the affected periods. Further, the Company may not be able to achieve its book fair count goals and may be materially impacted if widespread pandemic-related closures occur this coming school year. Increases in school security associated with high profile school shootings and other tragic incidents could impact the accessibility to schools for the school book fairs component of the Company's reading events business.
We own certain significant real estate assets which are subject to various risks related to conditions affecting the real estate market.
The Company has direct ownership of certain significant real estate assets, in particular the Company’s headquarters location in New York City, its primary distribution center in Jefferson City, Missouri and the UK facility in Warwickshire. The New York headquarters location serves a dual purpose as it also contains premium retail space that is or will be leased to retail tenants in order to generate rental income and cash flow. Accordingly, the Company couldis sensitive to various risk factors such as changes to real estate values and property taxes, pricing and demand for high end retail spaces in Soho, New York City, interest rates, cash flow of underlying real estate assets, supply and demand, and the credit worthiness of any retail tenants. There is also no guarantee that investment objectives for the retail component of the Company’s real estate will be adversely affected by any future significant weather event.achieved.
Risks Related to Stock Ownership
Control of the Company resides in the Estate of our former Chairman of the Board, President and Chief Executive Officer and other members of his family through theirThe Estate's 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’sCorporation's capital stock is vested exclusively in the holders of Class A Stock, except for the right of the holders of Common Stock to elect one-fifth of the Board of Directors and except as otherwise provided by law or as may be established in favor of any series of preferred stock that may be issued. The Estate of Richard Robinson, the former Chairman of the Board, President and Chief Executive Officer and other members of the Robinson familyCompany, beneficially own allowns a majority of the outstanding shares of Class A Stock and areis able to elect up to four-fifths of the Corporation’sCorporation's Board of Directors and, without the approval of the Corporation’sCorporation's other stockholders, to effect or block other actions or transactions requiring stockholder approval, such as a merger, sale of substantially all assets or similar transaction. Iole Lucchese, Chair of the Board of Directors, Executive Vice President and Chief Strategy Officer of the Company and President of Scholastic Entertainment, Inc., in her capacity as Scholastic special executor of the Estate under Mr. Robinson's will and revocable trust, controls the voting of the Estate's Class A Stock.
Note
The risk factors listed above should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made byall possible risks that the Company priormay face. Additional risks not currently known to the Company or that the Company does not consider to be significant at the present time could also impact the Company's consolidated financial position and including the date hereof.results of operations.
Forward-Looking Statements:
This Annual Report on Form 10-K contains forward-looking statements.statements relating to future periods. Additional written and oral forward-looking statements may be made by the Company from time to time in SEC filings and otherwise. The Company cautions readers that results or expectations expressed by forward-looking statements, including, without limitation, those relating to the Company’s future business prospects and strategic plans, ecommerce and digital initiatives, new product introductions, strategies, new education standards and policies, goals, revenues, improved efficiencies, general costs, manufacturing costs, medical costs, potential cost savings, merit pay, operating margins, working capital, liquidity, capital needs, the cost and timing of capital projects, interest costs, cash flows and income, are subject to risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to factors including those noted in this Annual Report and other risks and factors identified from time to time in the Company’s filings with the SEC. The Company disclaims any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.
Item 1B | Unresolved Staff Comments
None.
Item 2 | Properties
The Company maintains its principal offices in the metropolitan New York area, where it owns or leases approximately 0.6 million square feetAs of space. On February 28, 2014,May 31, 2023, the Company acquired its headquarters space (including land, building, fixtures and related personal property and leases) at 555 Broadway, New York, NY from its landlord under a purchase and sale agreement. As a resultoperated the following facilities: | | | | | | | | | | | |
| Location | Primary Purpose | Owned Square Footage | Leased Square Footage |
| Metropolitan NY Area | Principal offices | 355,000 | | 19,000 | |
U.S. Various Locations (1) | Book Fairs warehouses | — | | 2,265,000 | |
| Jefferson City, MO Area | Primary warehouse and distribution facility | 1,459,000 | | 30,000 | |
International (2) | Warehouse and office space | 236,000 | | 975,000 | |
(1)Consists of such purchase, the Company now owns the entiretyapproximately 44 book fairs warehouses.
(2)Consists of its principal headquarters space located at 557 and 555 Broadway in New York City, and the Company has commenced the renovation of this headquarters space to create new premium retail space and a more modern and efficient office plan.The Company also owns or leases approximately 1.5 million square feet of office and warehouse space for its primary warehouse and distribution facility located in the Jefferson City, Missouri area. In addition, the Company owns or leases approximately 2.8 million square feet of office and warehouse space in approximately 60 facilities in the United States, principally for Scholastic book fairs. The Company owns or leases approximately 1.4 million square feet of office and warehouse space in approximately 130 facilities in Canada, the United Kingdom, Australia, New Zealand Asia and elsewhere aroundAsia.
In regards to the world forJefferson City, MO facility located at 6336 Algoa Road, the Company owns the warehouse, including office space, and related land of approximately 86 acres, in addition to two smaller warehouses in the vicinity, including office space, and the related land of approximately 76 acres. In regards to the Company's headquarters in Soho, New York City, the Company owns the land and buildings located at 555/557 Broadway with entrances facing Broadway and Mercer Street. There is leasable space within the Company's headquarters which is detailed in the table below.
| | | | | | | | |
| Floor | Primary Use | Square Footage |
| 1 | Available for lease (1) | 23,600 | |
| 2 | Available for lease (2) | 36,100 | |
| 3 | Occupied by Scholastic; available for lease | 37,800 | |
| 4 | Occupied by Scholastic; available for lease | 37,100 | |
5 to 12 (3) | Occupied by Scholastic | 220,400 | |
(1) The first floor is comprised of three rentable spaces with square footage of approximately 13,400, 7,500 and 2,700. Rentable space of approximately 20,900 sq ft was leased to tenants as of May 31, 2023 and the remaining space was leased subsequent to May, 31, 2023. |
(2) Approximately 3,000 sq ft is leased to a tenant as of May 31, 2023. |
(3) Includes the first floor lobby and sub-floors consisting of an auditorium, wellness and fitness center, mail room, storage, etc. |
During fiscal 2023, the Company incurred capital expenditures of $1.8 million directly related to its international businesses.headquarters location, which represents approximately 3% of total capital expenditures. During fiscal 2023, the Company recognized rental income of $7.1 million. The lease terms with the Company's tenants typically range from 10 to 15 years and, with respect to the 23,900 square footage leased as of May 31, 2023, the Company expects annualized straight-line rental income to total approximately $9.8 million.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 NotesNote 1, "Description of the Business, Basis of Presentation and 5Summary of Significant Accounting Policies," and Note 9, "Leases," of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data.”
Item 3 | Legal Proceedings
Various claims and lawsuits arising in the normal course of business are pending against the Company. The Company accrues a liability for such matters when it is probable that a liability has occurred and the amount of such liability can be reasonably estimated. When only a range can be estimated, the most probable amount in the range is accrued unless no amount within the range is a better estimate than any other amount, in which case the minimum amount in the range is accrued. Legal costs associated with litigation loss contingencies are expensed in the period in which they are incurred. The Company does not expect, in the case of those claims and lawsuits where a loss is considered probable or reasonably possible, after taking into account any amounts currently accrued, that the reasonably possible losses from such claims and lawsuits would have a material adverse effect on the Company’s consolidated financial position or results of operations. See Note 6, "Commitments and Contingencies," of Notes to the Consolidated Financial Statements in Item 8, "Consolidated Financial Statements and Supplementary Data" for further discussion.
Item 4 | Mine Safety Disclosures
Not Applicable.
Part II
Item 5 | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information:Information: Scholastic Corporation’s Common Stock, par value $0.01 per share (the "Common Stock"), is traded on the NASDAQ Global Select Market (the "NASDAQ") under the symbol SCHL. Scholastic Corporation’s Class A Stock, par value $0.01 per share (the “Class A Stock”), is convertible, at any time, into Common Stock on a share-for-share basis. There is no public trading market for the Class A Stock. Set forth below are the quarterly high and low sales prices for the Common Stock as reported by NASDAQ for the periods indicated:
|
| | | | | | | | | | | | | | | |
| | For fiscal years ended May 31, |
| | 2017 | | 2016 |
| | High | | Low | | High | | Low |
| First Quarter | $ | 42.22 |
| | $ | 37.44 |
| | $ | 46.28 |
| | $ | 40.01 |
|
| Second Quarter | 46.51 |
| | 35.20 |
| | 44.24 |
| | 37.58 |
|
| Third Quarter | 49.38 |
| | 42.89 |
| | 43.74 |
| | 30.34 |
|
| Fourth Quarter | 46.57 |
| | 41.04 |
| | 39.45 |
| | 34.51 |
|
Holders: The number of holders of Class A Stock and Common Stock as of July 10, 201712, 2023 were 3 and approximately 10,000,21,200, respectively.
Dividends: During fiscal 2017, On a quarterly basis, the Board of Directors considers the payment of cash dividends based upon its review of Company declared four regular quarterly dividends in the amount of $0.15 per Class Aearnings, cash position and Common share, amounting to total dividends declared during fiscal 2017 of $0.60 per share. During fiscal 2016, the Company declared four regular quarterly dividends in the amount of $0.15 per Class A and Common share, amounting to total dividends declared during fiscal 2016 of $0.60 per share.
other relevant factors. On July 19, 2017,2023, the Board of Directors, declared a regular cash dividend of $0.15$0.20 per Class A and Common share in respect of the first quarter of fiscal 2018. This2024. The dividend is payable on September 15, 20172023 to shareholders of record as of the close of business on August 31, 2017.2023. All dividends have been in compliance with the Company’s debt covenants.
Share purchases:Purchases: During fiscal 2017,2023, the Company repurchased 179,3943,310,489 of its Common shares on the open market at an average price paid per share of $38.80$40.80 for a total cost of approximately $6.9$135.1 million. This included the purchase of 533,793 of its Common shares through a modified Dutch auction tender offer at a price of $40.00 per share for a total cost of $23.3 million, pursuantincluding related fees and expenses. See Note 14, "Treasury Stock," of Notes to a share buy-back program authorized by the Board of Directors.Consolidated Financial Statements in Item 8, "Consolidated Financial Statements and Supplementary Data" for further details regarding this transaction. During fiscal 2016, pursuant to the same share buy-back program,2022, the Company repurchased 413,960870,258 of its Common shares on the open market at an average price paid per share of $34.75$38.39 for a total cost of approximately $14.4$33.4 million. This included a privately negotiated transaction with a related party for 300,000 Common shares at a 4.2% discount to market prices. See Note 21, "Related Party Transactions," of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data” for further details regarding this transaction. In addition, the Company entered into a privately negotiated transaction with a third party for the repurchase of 190,290 Common shares at a 4.0% discount to market prices. As of May 31, 2023, approximately $21.6 million remains available for future purchases of Common shares, which represents the amount remaining under the current $50.0 million Board authorization for Common share repurchases announced on March 22, 2023, which is available for further repurchases, from time to time as conditions allow, on the open market or through negotiated private transactions. Subsequent to May 31, 2023, the Board authorized an increase of $100.0 million for common stock repurchases, resulting in a current Board authorization of $119.2 million, which includes the remaining amount from the previous Board authorization less share repurchases of $2.4 million subsequent to May 31, 2023.
The following table provides information with respect to repurchases of shares of Common Stock by the Corporation during the three months ended May 31, 2017:2023:
|
| | | | | | | | | | | | | | |
| Period | | Total number of
shares purchased | | Average
price paid
per share | | Total number of shares purchased as part of publicly
announced plans or programs | | Maximum number of shares (or approximate dollar value in millions) that may yet be purchased under the plans or programs (i) |
| March 1, 2017 through March 31, 2017 | | — |
| | $ | — |
| | — |
| | $ | 39.5 |
|
| April 1, 2017 through April 30, 2017 | | — |
| | $ | — |
| | — |
| | $ | 39.5 |
|
| May 1, 2017 through May 31, 2017 | | 23,375 |
| | $ | 41.57 |
| | 23,375 |
| | $ | 38.6 |
|
| Total | | 23,375 |
| | $ | 41.57 |
| | 23,375 |
| | $ | 38.6 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Date | | Total number of shares purchased | | Average
price paid
per share | | Total number of shares purchased as part of publicly
announced plans or programs | | Maximum number of shares (or approximate dollar value in millions) that may yet be purchased under the plans or programs (i) |
| March 1, 2023 through March 31, 2023 | | 199,095 | | | 37.65 | | | 199,095 | | | $ | 70.7 | |
| April 1, 2023 through April 30, 2023 | | 636,789 | | | 35.78 | | | 636,789 | | | | 47.9 | |
| May 1, 2023 through May 31, 2023 | | 657,720 | | | 39.93 | | | 657,720 | | | | 21.6 | |
| Total | | 1,493,604 | | | | | 1,493,604 | | | $ | 21.6 | |
(i) RepresentsTotal represents the amount remaining amount under the current $50.0 million Board authorization for Common share repurchases announced on JulyMarch 22, 2015,2023, which is available for further repurchases, from time to time as conditions allow, on the open market or through negotiated private transactions. Subsequent to May 31, 2023, the Board authorized an additional $100.0 million, resulting in a current authorization of $119.2 million, for Common share repurchases, which includes the remaining $21.6 million from the previous Board authorization less share repurchases of $2.4 million subsequent to May 31, 2023.
Stock Price Performance Graph
The graph below matches the Corporation’s cumulative 5-year total shareholder return on Common Stock with the cumulative total returns of the NASDAQ Composite index and a customized peer group of three companies that includes Pearson PLC, John Wiley & Sons Inc. and Houghton Mifflin Harcourt.Stride, Inc. The graph tracks the performance of a $100 investment in the Corporation’s Common Stock, in the index and in the peer group (with the reinvestment of all dividends) from June 1, 20122018 to May 31, 2017.2023. Stride, Inc., an education company with a similar level of revenue to the Corporation, has replaced Houghton Mifflin Harcourt was added toin the peer group on November 14, 2013, which was the first day its sharesthis year as Houghton Mifflin Harcourt ceased being a publicly traded on the NASDAQ stock exchange.company as of April 8, 2022.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Scholastic Corporation, the NASDAQ Composite Index
and a Peer Group
*$100 invested on 5/31/1218 in stock or index, including reinvestment of dividends.dividends
| | | | Fiscal year ending May 31, | | Fiscal year ending May 31, |
| | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 |
| Scholastic Corporation | $ | 100.00 |
| | $ | 114.05 |
| | $ | 122.45 |
| | $ | 173.67 |
| | $ | 154.83 |
| | $ | 171.05 |
| Scholastic Corporation | $ | 100.00 | | $ | 74.61 | | $ | 67.49 | | $ | 79.26 | | $ | 89.81 | | $ | 103.64 | |
| NASDAQ Composite Index | 100.00 |
| | 122.23 |
| | 150.06 |
| | 179.32 |
| | 175.01 |
| | 219.24 |
| NASDAQ Composite Index | 100.00 | | 100.15 | | 127.52 | | 184.74 | | 162.34 | | 173.81 | |
| Peer Group | 100.00 |
| | 106.27 |
| | 122.79 |
| | 138.76 |
| | 97.51 |
| | 81.03 |
| Peer Group | 100.00 | | 92.55 | | 59.03 | | 107.53 | | 96.54 | | 92.69 | |
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
Item 6 | Selected Financial Data[Reserved]
|
| | | | | | | | | | | | | | | | | | | |
(Amounts in millions, except per share data) For fiscal years ended May 31, | |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Statement of Operations Data: | | | | | | | | | |
| Total revenues | $ | 1,741.6 |
| | $ | 1,672.8 |
| | $ | 1,635.8 |
| | $ | 1,561.5 |
| | $ | 1,549.8 |
|
Cost of goods sold (1) | 814.5 |
| | 762.3 |
| | 758.5 |
| | 725.0 |
| | 715.4 |
|
Selling, general and administrative expenses (exclusive of depreciation and amortization) (2) | 777.8 |
| | 777.7 |
| | 771.1 |
| | 727.3 |
| | 734.8 |
|
| Depreciation and amortization | 38.7 |
| | 38.9 |
| | 47.9 |
| | 60.3 |
| | 65.4 |
|
Severance (3) | 14.9 |
| | 11.9 |
| | 9.6 |
| | 10.5 |
| | 13.1 |
|
Asset impairments (4) | 6.8 |
| | 14.4 |
| | 15.8 |
| | 28.0 |
| | — |
|
| Operating income | 88.9 |
| | 67.6 |
| | 32.9 |
| | 10.4 |
| | 21.1 |
|
| Interest expense, net | 1.0 |
| | 1.1 |
| | 3.5 |
| | 6.9 |
| | 14.5 |
|
Gain (loss) on investments and other (5) | — |
| | 2.2 |
| | 0.5 |
| | (5.8 | ) | | 0.0 |
|
| Earnings (loss) from continuing operations before income taxes | 87.9 |
|
| 68.7 |
|
| 29.9 |
|
| (2.3 | ) |
| 6.6 |
|
Provision (benefit) for income taxes (6) | 35.4 |
| | 24.7 |
| | 14.4 |
| | (15.6 | ) | | 1.7 |
|
| Earnings (loss) from continuing operations | 52.5 |
| | 44.0 |
| | 15.5 |
| | 13.3 |
| | 4.9 |
|
| Earnings (loss) from discontinued operations, net of tax | (0.2 | ) | | (3.5 | ) | | 279.1 |
| | 31.1 |
| | 26.2 |
|
| Net income (loss) | 52.3 |
| | 40.5 |
| | 294.6 |
| | 44.4 |
| | 31.1 |
|
| Share Information: | |
| | |
| | |
| | |
| | |
|
| Earnings (loss) from continuing operations: | |
| | |
| | |
| | |
| | |
|
| Basic | $ | 1.51 |
| | $ | 1.29 |
| | $ | 0.47 |
| | $ | 0.42 |
| | $ | 0.15 |
|
| Diluted | $ | 1.48 |
| | $ | 1.26 |
| | $ | 0.46 |
| | $ | 0.41 |
| | $ | 0.15 |
|
| Earnings (loss) from discontinued operations: | | | |
| | |
| | |
| | |
|
| Basic | $ | (0.00 | ) | | $ | (0.11 | ) | | $ | 8.53 |
| | $ | 0.97 |
| | $ | 0.82 |
|
| Diluted | $ | (0.01 | ) | | $ | (0.10 | ) | | $ | 8.34 |
| | $ | 0.95 |
| | $ | 0.80 |
|
| Net income (loss): | |
| | |
| | |
| | |
| | |
|
| Basic | $ | 1.51 |
|
| $ | 1.18 |
|
| $ | 9.00 |
| | $ | 1.39 |
| | $ | 0.97 |
|
| Diluted | $ | 1.47 |
|
| $ | 1.16 |
|
| $ | 8.80 |
| | $ | 1.36 |
| | $ | 0.95 |
|
| Weighted average shares outstanding - basic | 34.7 |
| | 34.1 |
| | 32.7 |
| | 32.0 |
| | 31.8 |
|
| Weighted average shares outstanding - diluted | 35.4 |
| | 34.9 |
| | 33.4 |
| | 32.5 |
| | 32.4 |
|
| Dividends declared per common share | $ | 0.600 |
| | $ | 0.600 |
| | $ | 0.600 |
| | $ | 0.575 |
| | $ | 0.500 |
|
| Balance Sheet Data: | |
| | |
| | |
| | |
| | |
|
| Working Capital | $ | 583.4 |
| | $ | 571.8 |
| | $ | 562.9 |
| | $ | 233.2 |
| | $ | 299.2 |
|
| Cash and cash equivalents | 444.1 |
| | 399.7 |
| | 506.8 |
| | 20.9 |
| | 87.4 |
|
| Total assets | 1,760.4 |
| | 1,713.1 |
| | 1,822.3 |
| | 1,528.5 |
| | 1,441.0 |
|
| Long-term debt (excluding capital leases) | — |
| | — |
| | — |
| | 120.0 |
| | — |
|
| Total debt | 6.2 |
| | 6.3 |
| | 6.0 |
| | 135.8 |
| | 2.0 |
|
| Long-term capital lease obligations | 6.5 |
| | 7.5 |
| | 0.4 |
| | 0.0 |
| | 57.5 |
|
| Total capital lease obligations | 7.6 |
| | 8.6 |
| | 0.7 |
| | 0.0 |
| | 57.7 |
|
| Total stockholders’ equity | 1,307.9 |
| | 1,257.6 |
| | 1,204.9 |
| | 915.4 |
| | 864.4 |
|
| |
(1) | In fiscal 2017, the Company recognized pretax exit costs related to its software distribution business in Australia of $0.5. In fiscal 2015, the Company recognized a pretax charge of $1.5 related to a warehouse optimization project in Canada and a $0.4 pretax charge related to unabsorbed burden associated with the former educational technology and services business. In fiscal 2014, the Company recognized a pretax charge of $2.4 for royalties related to Storia® operating system-specific apps that are no longer supported due to the transition to a Storia streaming model and a $0.3 pretax charge related to unabsorbed burden associated with the former educational technology and services business. In fiscal 2013, the Company recognized a pretax charge for costs related to unabsorbed burden associated with the former educational technology and services business of $0.9.
|
| |
(2) | In fiscal 2016, the Company recognized a pretax charge of $1.5 related to a branch consolidation project in the Company's book fairs operations. In fiscal 2015, the Company recognized a pretax charge of $15.4 related to unabsorbed burden associated with the former educational technology and services business, a pretax pension settlement charge of $4.3, and a $0.4 pretax charge related to the relocation of the Company's Klutz® division. In fiscal 2014, the Company recognized a pretax charge of $15.9 related to unabsorbed burden associated with the former educational technology and services business, a pretax pension settlement charge of $1.7 and a pretax charge of $1.0 related to Storia operating system-specific apps. In fiscal 2013, the Company recognized a pretax charge of $16.5 related to unabsorbed burden associated with the former educational technology and services business and a pretax charge of $4.0 related to asset impairments.
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(3) | In fiscal 2017, the Company recognized pretax severance expense of $12.9 as part of cost reduction programs. In fiscal 2016, the Company recognized pretax severance expense of $9.5 as part of cost reduction and restructuring programs. In fiscal 2015, the Company recognized pretax severance expense of $8.9 as part of cost reduction and restructuring programs. In fiscal 2014, the Company recognized pretax severance expense of $9.9 as part of a cost savings initiative. In fiscal 2013, the Company recognized pretax severance expense of $9.4 as part of a cost savings initiative.
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(4) | In fiscal 2017, the Company recognized a pretax impairment charge related to certain website development assetsof $5.7 and certain legacy prepublication assets of $1.1. In fiscal 2016, the Company recognized a pretax impairment charge of $7.5 related to legacy building improvements in connection with the Company's headquarters renovation and a pretax charge of $6.9 for certain legacy prepublication assets. In fiscal 2015, the Company recognized a pretax impairment charge of $8.3 in connection with the restructuring of the Company's media and entertainment businesses, a $4.6 pretax impairment charge related to the discontinuation of certain outdated technology platforms, and a $2.9 pretax impairment charge associated with the closure of the retail store located at the Company headquarters in New York City. In fiscal 2014, the Company recognized a pretax impairment charge of $14.6 for assets related to Storia operating system-specific apps and a pretax impairment charge of $13.4 related to goodwill associated with the book clubs reporting unit in the Children's Book Publishing and Distribution segment.
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(5) | In fiscal 2016, the Company recognized a pretax gain of $2.2 on the sale of a China-based cost method investment. In fiscal 2015, the Company recognized a pretax gain of $0.6 on the sale of a UK-based cost method investment. In fiscal 2014, the Company recognized a pretax loss of $1.0 and $4.8 related to a U.S.-based equity method investment and a UK-based cost method investment, respectively.
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(6) | In fiscal 2014, the Company recognized previously unrecognized tax positions resulting in a benefit of $13.8, inclusive of interest, as a result of a settlement with the Internal Revenue Service related to the audits for the fiscal years ended May 31, 2007, 2008 and 2009.
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Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The Company categorizes its businesses into three reportable segments: Children’s Book Publishing and Distribution; Education Solutions; and International.
The following discussion and analysis of the Company’s financial position and results of operations should be read in conjunction with the Company’s Consolidated Financial Statements and the related Notes included in Item 8, “Consolidated Financial Statements and Supplementary Data.”
Overview and Outlook
Overview
Revenues from continuing operations in fiscal 2017 were $1.74 billion, an increase of 4.1% from $1.67 billion in fiscal 2016, reflecting higher sales in the Company's Children's Book Publishing and Distribution segment of $51.2 million, increased revenues in the Education segment of $13.0 million, higher local currency revenues in the International segment of $14.1 million, partially offset by the negative impact of foreign exchange of $9.5 million. Earnings from continuing operations per diluted share were $1.48 for the fiscal year ended May 31, 2017,2023 increased by $61.1 million, or 3.7%, to $1,704.0 million, compared to $1.26$1,642.9 million in the prior fiscal year. The Company reported net income per basic and diluted share of Class A and Common Stock of $2.56 and $2.49, respectively, for the fiscal year ended May 31, 2023, compared to $2.33 and $2.27, respectively, in the prior fiscal year.
InThe Children's Book Publishing and Distribution segment revenues increased 29%, outperforming the continued softness in retail, primarily from the book fairs channel due to higher fair count, which approximated 85% of pre-pandemic levels, and improved revenue per fair. The Education Solutions segment experienced an overall reduction in schools' purchasing levels when compared to the prior year when schools were refilling classrooms with in-person learning materials as pandemic restrictions were fully lifted. Although sales were lower in certain instructional products and programs, the Company's diversified portfolio of products met the needs of customers through customized product offers and state sponsored programs. Internationally, local currency revenues increased in the Major Markets as the book fairs channels continued to recover from the pandemic, which offset the lower revenues from the disposition of the direct sales business in Asia.
Operating income in fiscal 2017, operating income grew by $21.32023 was $106.3 million compared to $97.4 million in the prior fiscal year, representing an improvement of $8.9 million, primarily driven by the strong performancebook fairs channel which continues to benefit from top-line growth and operational efficiencies. In addition, the Company realized improved operating margin in Asia attributable to the exit from the direct sales business, which generated losses in the trade channel in the first half of the current fiscal year and the strong finish in the Education segment in the fourth quarter of the current fiscalprior year. The Company continues to seebenefit from the operational efficiencies achieved since the pandemic.
Outlook
The Company previously announced the combination of its book fairs and book clubs channels into an expanding market for core Pre-K to 6integrated school reading programs as a substitute for basal textbooks, andevents business which the Company isexpects will provide multiple opportunities to grow Scholastic's reach, serve its customers better and improve efficiencies within the Children’s Books Publishing and Distribution segment. The Company expects fair count to increase to approximately 90% of pre-pandemic levels with modest growth in a strong positionrevenue per fair. In the Education Solutions segment, the Companyexpects to continue to grow market share with comprehensive literacy curriculum and professional learning services.
In fiscal 2017,invest in addition to the normal maintenance levels of capital expenditures and prepublication expense related to the development of new products and platforms,capabilities to grow its digital and print literacy solutions and expects the Company spent $30.6 million of capital on strategic technology upgrades and initiatives forming part of the previously announced multi-year transformational technology investment program. These technology investments are designedsegment to enable the Company to better utilize data to go to market, simplify and standardize business processes across divisions, and communicate more effectively with
customers. The Company also spent $20.6 million related to the redesign and upgrade of its headquarters buildingbenefit from continued growth in New York City. The investmentstate-sponsored programs in the building is creating a 21st century workplace that integrates seamless and scalable technology to improve capacity and productivity, as well as freeing higher value Broadway-facing retail space on the lower levels.
Looking forward tosecond half of fiscal 2018, the Company has launched Scholastic 2020, a three-year plan to significantly improve operating income as the Company approaches its 100th anniversary in October 2020. This plan will align the Company's investments in transformative technology with its operations and publishing groups in order to reduce costs, simplify business processes and improve the use of data analytics for more efficient marketing and sales. The Scholastic 2020 plan will be based on a concentrated cross company process which will both help manage technology and ensure that the Company works cooperatively on reaching specific goals utilizing the information provided. While2024. Internationally, the Company expects fiscal 2018 to show lower results, particularly afterbenefit from the 2017 breakout performance of the new Harry Potter titles, as well as higher costs in technology, the Company anticipates growth in operating incomecontinued recovery in the following years as a result of the Scholastic 2020 plan to drive process improvements across the Company. The improvements are particularly important for the book clubMajor Markets and book fairs distribution programs as these channels include significant costs of handling, fulfillment, and freight which need to be constantly manged for greater efficiency. As the Company generates better-quality information as a result of the investments in technology, it will realize lower costs in marketing and operations,Asia, as well as the benefits of better digital communications with customers so the Company can continue to provide great products and services to schools and families.
In the Children’s Book Publishing and Distribution segment, the Company expects trade salesreorganization in fiscal 2018 to return to more normal levels after the fiscal 2017 performance of Harry Potter and the Cursed Child, Parts One and Two and the original screenplay by J.K. Rowling of Fantastic Beasts and Where to Find Them. Partially offsetting this decline is the expectation of moderate revenue growth in the Company’s book club and book fairs channels. While the Company expects some increased marketing opportunities in connection with the upcoming 20th anniversary of Harry Potter in the U.S. in calendar year 2018, the Company's fiscal 2018 publishing plan will focus primarily on new books in bestselling series like Dog Man, Wings of Fire and Jedi Academy and licensed publishing against popular media properties like American Girl, Five Nights at Freddy's and Pokemon. The book clubs channel expects to drive growth with new product, pricing and merchandising strategies, including a greater focus on traditionally successful multi-grade club offerings. The book fairs channel expects to improve revenue and profitability by increasing revenue per fair, using more robust business analytics to right-size fair types and target growth opportunities in the higher demographic markets.
In the Education segment, the Company expects to grow revenues in fiscal 2018 by focusing on the opportunity to provide a complete Pre-K to 6 core literacy curriculum to school districts and increase market share for both core and supplemental literacy products, as well as the expansion of the Company's services business focused on product-aligned professional development and family and community engagement. Expected revenue growth in the Education segment is predicated on the Company’s expanded market presence.
In the International segment, revenues in fiscal 2018 are expected to be on par with the past fiscal year, with growth in most countries offset by a return to usual levels in Canada and export in the absence of new Harry Potter-related publishing. In fiscal 2018, the Company will place greater emphasis on growing the international education business in both mature and emerging markets with deeper penetration of key products as the Company looks to build its position as a global partner with schools in support of research-based instructional literacy and mathematics programs.Canada. The Company also expects direct sales in Asia to grow as a result of increased training and support of its large independent sales force.
In fiscal 2018, the Company expects to complete the previously reported termination of its domestic defined benefit pension plan. The final step in this process will involve the distribution of earned benefits to plan participants and the purchase of annuity contracts from a third-party insurance company. The final settlement of these liabilities will trigger the recognition of the accumulated actuarial losses associated with this plan.
In fiscal year 2018, the Company will continueplans to invest in process improvements in its overarching strategic technology innovation program as it looksmanufacturing and distribution functions, which should result in improved efficiencies going forward, and continue to complete the final year of a previously announced plan of investment, as well as the commencement of a new multi-year program seekingutilize positive cash flows to upgrade its Oracle enterprise-wide platforms for financial management, supply chain, transportation and logistics. In addition, the Company will complete all construction work on its headquarters building in fiscal 2018.increase shareholder value.
Critical Accounting Policies and Estimates
General:
The Company’s discussion and analysis of its financial condition and results of operations is based upon its Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements involves the use of estimates and assumptions by management, which affects the amounts reported in the Consolidated Financial Statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, future expectations and various other assumptions believed to be reasonable under the circumstances, all of which are necessary in order to form a basis for determining the carrying values of assets and liabilities. Actual results may differ from those estimates and assumptions. On an on-goingongoing basis, the Company evaluates the adequacy of its reserves and the estimates used in calculations, including, but not limited to: collectability of accounts receivable; salesvariable consideration related to anticipated returns; allocation of transaction price to contractual performance obligations; amortization periods; stock-based compensation expense; pension and other post-retirementpostretirement obligations; tax rates; recoverability of inventories; deferred income taxes and tax reserves; fixed assets;the timing and amount of future income taxes and related deductions; recoverability of prepublication costs; royalty advance reserves; customer reward programs; and the fair valueimpairment assessment of long-lived assets, goodwill and other intangibles. For a complete description of the Company’s significant accounting policies, see Note 1, "Description of Business, Basis of Presentation and Summary of Significant Accounting Policies," of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data,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:recognition:
The Company’s revenue recognition policies for its principal businesses are as follows:
School-Based Book Clubs – Revenue fromCompany has identified the allocation of the transaction price to contractual performance obligations related to revenues within the school-based book clubs is recognized upon shipment of the products.fairs channel, as described below, as a critical accounting estimate.
School-Based Book Fairs – Revenues associated with school-based book fairs arerelate to the sale of children's books and other products to book fair sponsors. In addition, the Company employs an incentive program to encourage the sponsorship of book fairs and increase the number of fairs held each school year. The Company identifies two potential performance obligations within its school-based book fair contracts, which include the fulfillment of book fairs product and the fulfillment of product upon the redemption of incentive program credits by customers. The Company allocates the transaction price to each performance obligation and recognizes revenue at a point in time. The Company utilizes certain estimates based on historical experience, redemption patterns and future expectations related to salesthe participation in the incentive program to determine the relative fair value of product. Bookeach performance obligation when allocating the transaction price. Changes in these estimates could impact the timing of the recognition of revenue. Revenue allocated to the book fairs are typically run by schools and/or parent teacher organizations over a five business-day period. The amount of revenueproduct is recognized for each fair represents the net amount of cash collected at the fair and remittedpoint at which product is delivered to the Company. Revenuecustomer and control is fullytransferred. The revenue allocated to the incentive program credits is recognized upon redemption of incentive credits and the transfer of control of the redeemed product. Incentive credits are generally redeemed within 12 months of issuance. Payment for school-based book fairs product is due at the completion of a customer's fair. Revenues associated with virtual fairs are recognized upon shipment of the fair. At the endproducts and related incentive program credits are expensed upon issuance.
Estimated returns:
For sales that include a right of reporting periods,return, the Company defers estimated revenue for those fairs that have not been completedestimates the transaction price and records revenues as of the period end,variable consideration based on the number of fair days occurring after period end on a straight-line calculation of the full fair’s revenue. The Company also estimates revenues for those fairs which have not reported final fair results.
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 to the public. For newly published titles,amounts the Company on occasion, contractually agrees with its customers when the publication mayexpects to ultimately be first offered for saleentitled. In order to the public, or an agreed upon “Strict Laydown Date.” 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, anddetermine estimated returns, 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 generally is the net amount received from the retailer is recognized upon electronic delivery to the customer by the retailer.
A reserve for estimated returns is established at the time of sale and recognized as a reduction to revenue. Actual returns are charged to the reserve as received. Reserves for returns are based onutilizes historical return rates, sales patterns, typetypes of productproducts and expectations. In orderexpectations and recognizes a corresponding reduction to develop the estimateRevenues and Cost of returns that will be received subsequent to May 31, 2017, managementgoods sold. Management also considers patterns of sales and returns in the months preceding May 31, 2017,the fiscal year, as well as actual returns received subsequent to the fiscal year, end, available customer and market specific data and other return rate information that management believes is relevant. In addition, a refund liability is recorded within Other accrued expenses for the consideration to which the Company believes it will not ultimately be entitled and a return asset is recorded within Prepaid expenses and other current assets for the expected inventory to be returned. Actual returns could differ from the Company’sCompany's estimate. A one percentage point change in the estimated reserve for returns rate would have resulted in an increase or decrease in operating income for the year ended May 31, 20172023 of approximately $1.9 million.$3.0 million and approximately $3.2 million, respectively.
Education – Revenue from the sale of educational materials is recognized upon shipment of the products, or upon acceptance of product by the customer depending on individual customer terms. Revenues from professional development services are recognized when the services have been provided to the customer.
Film Production and Licensing– Revenue from the sale of film rights, principally for the home video and domestic and foreign television markets, is recognized when the film has been delivered and is available for showing or
exploitation. Licensing revenue is recognized in accordance with royalty agreements at the time the licensed materials are available to the licensee and collections are reasonably assured.
Magazines – Revenue is deferred and recognized ratably over the subscription period, as the magazines are delivered.
Magazine 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.
Accounts receivable:
Accounts receivable are recognized 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, type of product and expectations. In order to develop the estimate of returns that will be received subsequent to May 31, 2017, management considers patterns of sales and returns in the months preceding May 31, 2017, as well as actual returns received subsequent to year end, available customer and market specific data and other return rate information that management believes is relevant. Reserves for estimated bad debts are established at the time of sale and are based on an evaluation of accounts receivable aging, and, where applicable, specific reserves on a customer-by-customer basis, creditworthiness of the Company’s customers and prior collection experience to estimate the ultimate collectability of these receivables. At the time the Company determines that a receivable balance, or any portion thereof, is deemed to be permanently uncollectible, the balance is then written off. A one percentage point change in the estimated bad debt reserve rates, which are applied to the accounts receivable aging, would have resulted in an increase or decrease in operating income for the year ended May 31, 2017 of approximately $2.3 million.
Inventories:
Inventories, consisting principally of books, are stated at the lower of cost, using the first-in, first-out method, or market.net realizable value. The Company records a reserve for excess and obsolete inventory based upon a calculation using the expected future sales of existing inventory driven by estimates around forecasted purchases, inventory consumption costs, and the sell-through rate of current fiscal year purchases. In accordance with the Company's inventory retention policy, expected future sales of existing inventory are compared against historical usage rates by channel for reasonableness and the sales patterns of its products, andany specifically identified excess or obsolete inventory.inventory, due to an anticipated lack of demand, will also be reserved. The impact of a one percentage point change in the obsolescence reserve rate would have resulted in an increase or decrease in operating income for the year ended May 31, 20172023 of approximately $3.5$4.2 million.
Royalty advances:
Royalty advances are initially capitalized and subsequently expensed as related revenues are earned or when the Company determines future recovery through earndowns is not probable. The Company has a long history of providing authors with royalty advances, and it tracks each advance earned with respect to the sale of the related publication. Historically, the longer the unearned portion of the advance remains outstanding, the less likely it is that the Company will recover the advance through the sale of the publication, as the related royalties earned are applied first against the remaining unearned portion of the advance. The Company applies this historical experience to its existing outstanding royalty advances to estimate the likelihood of recovery. Additionally, the Company’s editorial staff regularly reviews its portfolio of royalty advances to determine if individual royalty advances are not recoverable through earndowns for discrete reasons, such as the death of an author prior to completion of a title or titles, a Company decision to not publish a title, poor market demand or other relevant factors that could impact recoverability.
Evaluation of Goodwill and intangible assets:impairment:
Goodwill and other intangible assets with indefinite lives areis not amortized and areis reviewed for impairment annually or more frequently if impairment indicators arise.
With regard to goodwill, theThe Company compares the estimated fair values of its identified reporting units to the carrying values of their net assets. The Company first performs a qualitative assessment to determine whether it is more likely than not that the fair values of its identified reporting units are less than their carrying values. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company performs the two-stepquantitative goodwill impairment test. The Company measures goodwill impairment by the amount the carrying value exceeds the fair value of a reporting unit. For each of the reporting units, the estimated fair value is determined utilizing the expected present value of
the projected future cash flows of the reporting unit, in addition to comparisons to similar companies. The Company reviews its definition of reporting units annually or more frequently if conditions indicate that the reporting units may change. The Company evaluates its operating segments to determine if there are components one level below the operating segment level. A component is present if discrete financial information is available and segment management regularly reviews the operating results of the business. If an operating segment only contains a single component, that component is determined to be a reporting unit for goodwill impairment testing purposes. If an operating segment contains multiple components, the Company evaluates the economic characteristics of these components. Any components within an operating segment that share similar economic characteristics are aggregated and deemed to be a reporting unit for goodwill impairment testing purposes. Components within the same operating segment that do not share similar economic characteristics are deemed to be individual reporting units for goodwill impairment testing purposes.
The Company has sevensix reporting units with goodwill subject to impairment testing. The determination of the fair value of the Company’s reporting units involves a number of assumptions, including the estimates of future cash flows, discount rates and market-based multiples, among others, each of which is subject to change. Accordingly, it is possible that changes in assumptions and the performance of certain reporting units could lead to impairments in future periods, which may be material.
With regard to other intangibles with indefinite lives, the Company determines the fair value by asset, which is then compared to its carrying value. The Company first performs a qualitative assessment to determine whether it is more likely than not that the fair value of the identified asset is less than its carrying value. If it is more likely than not that the fair value of the asset is less than its carrying amount, the Company performs a quantitative test. The estimated fair value is determined utilizing the expected present value of the projected future cash flows of the asset.Income taxes:
Intangible assets with definite lives consist principally of customer lists, intellectual property and other agreements and are amortized over their expected useful lives. Customer lists are amortized on a straight-line basis over five to ten years, while other agreements are amortized on a straight-line basis over their contractual term. Intellectual property assets are amortized over their remaining useful lives, which is approximately five years.
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 at the estimated cost 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.
Employee Benefit Plan Obligations:
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, actuarial information and, with regard to the U.S. Pension Plan, assumptions related to the plan's expected termination. Any change in market performance, interest rate performance, assumed health care cost trend rate, compensation rates or, with regard to the U.S. Pension Plan, estimated lump sum payments and expected fair value of annuity contracts could result in significant changes in the Company’s pension and post-retirement obligations.
Pension obligations
UK Pension Plan
The Company’s UK Pension Plan calculations are based on three primary actuarial assumptions: the discount rate, the long-term expected rate of return on plan assets and the anticipated rate of compensation increases. The discount rate is used in the measurement of the projected, accumulated and vested benefit obligations and interest cost component of net periodic pension costs. The long-term expected return on plan assets is used to calculate the expected earnings from the investment or reinvestment of plan assets. The anticipated rate of compensation increase is used to estimate the increase in compensation for participants of the plan from their current age to their assumed retirement age. The estimated compensation amounts are used to determine the benefit obligations and the service cost component of net periodic pension costs.
U.S. Pension Plan
The Company's U.S. Pension Plan calculations are impacted by its expected termination which is considered imminent and likely to occur during fiscal 2018. As such, the Company utilized a discount rate and short-term expected rate of return on plan assets to arrive at an obligation for which additional estimates, related to the anticipated amount of lump sum payments to be distributed in fiscal 2018 and insurance company pricing on the
portion of the obligation not distributed through lump sum payments, were used to calculate the benefit obligation. Pension benefits in the cash balance plan for employees located in the U.S. are based on formulas in which the employees’ balances are credited monthly with interest based on the average rate for one-year U.S. 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.
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, 2017 of approximately $0.1 million. 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, 2017 of approximately $1.5 million.
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 employee paying a portion of the premium and the Company paying the remainder. The existing benefit obligation is based on the discount rate and the assumed health care cost trend rate. The discount rate is used in the measurement of the projected and accumulated benefit obligations and the service and interest cost component 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, 2017 of approximately $0.2 million and $0.7 million, respectively. 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, 2017 of approximately $0.1 million. 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, 2017 of approximately $3.0 million and $2.6 million, respectively.
Equity Awards:
Stock-based compensation – The Company measures the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The Company recognizes the cost on a straight-line basis over an award’s requisite service period, which is generally the vesting period, except for the grants to retirement-eligible employees, based on the award’s fair value at the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The determination of the assumptions used in the Black-Scholes model requires management to make significant judgments and estimates. The use of different assumptions and estimates in the option-pricing model could have a material impact on the estimated fair value of option grants and the related expense. The risk-free interest rate is based on a U.S. Treasury rate in effect on the date of grant with a term equal to the expected life. The expected term is determined based on historical employee exercise and post-vesting termination behavior. The expected dividend yield is based on actual dividends paid or to be paid by the Company. The volatility is estimated based on historical volatility corresponding to the expected life. The fair value of the restricted stock units are assumed to be the per share market price of the Company's stock as of the date of grant.
Taxes:
Income Taxes– The Company uses the asset and liability method of accounting for income taxes. Under this method, for purposes of determining taxable income, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basesbasis of such assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to be realized.
The Company believes that its taxable earnings, during the periods when the temporary differences giving rise to deferred tax assets become deductible or when tax benefit carryforwards may be utilized, should be sufficient to realize the related future income tax benefits. For those jurisdictions where the expiration date of the tax benefit carryforwards or the projected taxable earnings indicate that realization is not likely, the Company establishes a valuation allowance.
In assessing the need for a valuation allowance, the Company estimates future taxable earnings, with consideration for the feasibility of on-goingongoing 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 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 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. Future developments relating to the foregoing could result in adjustments being made to these accruals.
Results of Operations - Consolidated
(Amounts | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Amounts in millions, except per share data)
For fiscal years ended May 31, |
| | 2023 | | 2022 |
| $ | | % (1) | | $ | | % (1) |
| Revenues: | | | | | | | | | |
| Children’s Book Publishing and Distribution | $ | 1,038.0 | | | 60.9 | | | $ | 946.5 | | | 57.6 | |
| Education Solutions | | 386.6 | | | 22.7 | | | | 393.6 | | | 24.0 | |
| International | | 279.4 | | | 16.4 | | | | 302.8 | | | 18.4 | |
| Total revenues | | 1,704.0 | | | 100.0 | | | | 1,642.9 | | | 100.0 | |
| Cost of goods sold | | 786.4 | | | 46.2 | | | | 765.5 | | | 46.6 | |
Selling, general and administrative expenses (2) | | 756.6 | | | 44.4 | | | | 722.8 | | | 44.0 | |
| Depreciation and amortization | | 54.7 | | | 3.2 | | | | 56.8 | | | 3.5 | |
| Asset impairments and write downs | | — | | | — | | | | 0.4 | | | 0.0 | |
| Operating income (loss) | | 106.3 | | | 6.2 | | | | 97.4 | | | 5.9 | |
| | | | | | | | | |
| Interest income | | 7.2 | | | 0.5 | | | | 0.5 | | | 0.1 | |
| Interest expense | | (1.4) | | | (0.1) | | | | (2.9) | | | (0.2) | |
| Other components of net periodic benefit (cost) | | 0.3 | | | 0.0 | | | | 0.1 | | | 0.0 | |
Gain (loss) on assets held for sale (3) | | — | | | — | | | | (15.1) | | | (0.9) | |
Gain (loss) on sale of assets and other (4) | | — | | | — | | | | 9.7 | | | 0.6 | |
| Earnings (loss) before income taxes | | 112.4 | | | 6.6 | | | | 89.7 | | | 5.5 | |
Provision (benefit) for income taxes (5) | | 25.9 | | | 1.5 | | | | 8.7 | | | 0.5 | |
| | | | | | | | | |
| | | | | | | | | |
| Net income (loss) | $ | 86.5 | | | 5.1 | | | $ | 81.0 | | | 4.9 | |
| Less: Net income (loss) attributable to noncontrolling interest | | 0.2 | | | 0.0 | | | | 0.1 | | | 0.0 | |
| Net income (loss) attributable to Scholastic Corporation | $ | 86.3 | | | 5.1 | | | $ | 80.9 | | | 4.9 | |
| | | | | | | | | |
| Basic and diluted earnings (loss) per share of Class A and Common Stock | | | | | | | | | |
| | | | | | | | | |
| Basic | $ | 2.56 | | | | | $ | 2.33 | | | |
| | | | | | | | | |
| Diluted | $ | 2.49 | | | | | $ | 2.27 | | | |
(1) Represents percentage of total revenues.
(2) In fiscal 2022, the Company recognized $6.6 of pretax insurance proceeds related to an intellectual property legal settlement accrued in millions, except per share data)fiscal 2021, pretax severance and related charges of $6.2 and pretax branch consolidation costs of $0.5.
For
(3) In fiscal years ended May 31,2022, the Company recognized pretax loss on assets held for sale related to the Company's plan to exit the direct sales business in Asia of $15.1.
|
| | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | $ | | % (1) | | $ | | % (1) | | $ | | % (1) |
| Revenues: | |
| | |
| | |
| | |
| | |
| | |
|
| Children’s Book Publishing and Distribution | $ | 1,052.1 |
| | 60.4 |
| | $ | 1,000.9 |
| | 59.8 |
| | $ | 957.8 |
| | 58.6 |
|
| Education | 312.7 |
| | 18.0 |
| | 299.7 |
| | 17.9 |
| | 276.8 |
| | 16.9 |
|
| International | 376.8 |
| | 21.6 |
| | 372.2 |
| | 22.3 |
| | 401.2 |
| | 24.5 |
|
| Total revenues | 1,741.6 |
| | 100.0 |
| | 1,672.8 |
| | 100.0 |
| | 1,635.8 |
| | 100.0 |
|
Cost of goods sold (2) | 814.5 |
| | 46.8 |
| | 762.3 |
| | 45.6 |
| | 758.5 |
| | 46.4 |
|
Selling, general and administrative expenses (exclusive of depreciation and amortization) (3) | 777.8 |
| | 44.6 |
| | 777.7 |
| | 46.5 |
| | 771.1 |
| | 47.1 |
|
| Depreciation and amortization | 38.7 |
| | 2.2 |
| | 38.9 |
| | 2.3 |
| | 47.9 |
| | 2.9 |
|
Severance (4) | 14.9 |
| | 0.9 |
| | 11.9 |
| | 0.7 |
| | 9.6 |
| | 0.6 |
|
Asset impairments (5) | 6.8 |
| | 0.4 |
| | 14.4 |
| | 0.9 |
| | 15.8 |
| | 1.0 |
|
| Operating income | 88.9 |
| | 5.1 |
| | 67.6 |
| | 4.0 |
| | 32.9 |
| | 2.0 |
|
| Interest income | 1.4 |
| | 0.1 |
| | 1.1 |
| | 0.1 |
| | 0.3 |
| | 0.0 |
|
| Interest expense | (2.4 | ) | | (0.2 | ) | | (2.2 | ) | | (0.1 | ) | | (3.8 | ) | | (0.2 | ) |
Gain (loss) on investments and other (6) | — |
| | — |
| | 2.2 |
| | 0.1 |
| | 0.5 |
| | 0.0 |
|
| Earnings (loss) from continuing operations before income taxes | 87.9 |
| | 5.0 |
| | 68.7 |
| | 4.1 |
| | 29.9 |
| | 1.8 |
|
| Provision (benefit) for income taxes | 35.4 |
| | 2.0 |
| | 24.7 |
| | 1.5 |
| | 14.4 |
| | 0.9 |
|
| Earnings (loss) from continuing operations | 52.5 |
| | 3.0 |
| | 44.0 |
| | 2.6 |
| | 15.5 |
| | 0.9 |
|
| Earnings (loss) from discontinued operations, net of tax | (0.2 | ) | | (0.0 | ) | | (3.5 | ) | | (0.2 | ) | | 279.1 |
| | 17.1 |
|
| Net income (loss) | $ | 52.3 |
| | 3.0 |
| | $ | 40.5 |
| | 2.4 |
| | $ | 294.6 |
| | 18.0 |
|
| Earnings (loss) per share: |
|
| | |
| |
|
| | |
| | |
| | |
|
| Basic: |
|
| | |
| |
|
| | |
| | |
| | |
|
| Earnings (loss) from continuing operations | $ | 1.51 |
| | |
| | $ | 1.29 |
| | |
| | $ | 0.47 |
| | |
|
| Earnings (loss) from discontinued operations | $ | (0.00 | ) | | |
| | $ | (0.11 | ) | | |
| | $ | 8.53 |
| | |
|
| Net income (loss) | $ | 1.51 |
| | |
| | $ | 1.18 |
| | |
| | $ | 9.00 |
| | |
|
| Diluted: |
|
| | |
| |
|
| | |
| | |
| | |
|
| Earnings (loss) from continuing operations | $ | 1.48 |
| | |
| | $ | 1.26 |
| | |
| | $ | 0.46 |
| | |
|
| Earnings (loss) from discontinued operations | $ | (0.01 | ) | | |
| | $ | (0.10 | ) | | |
| | $ | 8.34 |
| | |
|
| Net income (loss) | $ | 1.47 |
| | |
| | $ | 1.16 |
| | |
| | $ | 8.80 |
| | |
|
(5) In fiscal 2022, the Company recognized a benefit for income taxes in respect to one-time pretax charges of $1.3.
| |
(1) | Represents percentage of total revenues. |
| |
(2) |
In fiscal 2017, the Company recognized pretax exit costs related to its software distribution business in Australia of $0.5. In fiscal 2015, the Company recognized a pretax charge of $1.5 related to a warehouse optimization project in Canada and a $0.4 pretax charge related to unabsorbed burden associated with the former educational technology and services business.
|
| |
(3) | In fiscal 2016, the Company recognized a pretax charge of $1.5 related to a branch consolidation project in the Company's book fairs operations. In fiscal 2015, the Company recognized a pretax charge of $15.4 related to unabsorbed burden associated with the former educational technology and services business, a pretax pension settlement charge of $4.3, and a $0.4 pretax charge related to the relocation of the Company's Klutz® division.
|
| |
(4) | In fiscal 2017, the Company recognized pretax severance expense of $12.9 as part of cost reduction programs. In fiscal 2016, the Company recognized pretax severance expense of $9.5 as part of cost reduction and restructuring programs. In fiscal 2015, the Company recognized pretax severance expense of $8.9 as part of cost reduction and restructuring programs.
|
| |
(5) | In fiscal 2017, the Company recognized pretax impairment charges related to certain website development assets of $5.7 and certain legacy prepublication assets of $1.1. In fiscal 2016, the Company recognized a pretax impairment charge of $7.5 related to legacy building improvements in connection with the Company's headquarters renovation and a pretax charge of $6.9 for certain legacy prepublication assets. In fiscal 2015, the Company recognized a pretax impairment charge of $8.3 in connection with the
|
restructuring of the Company's media and entertainment businesses, a $4.6 pretax impairment charge related to the discontinuation of certain outdated technology platforms, and a $2.9 pretax impairment charge associated with the closure of the retail store located at the Company headquarters in New York City.
| |
(6) | In fiscal 2016, the Company recognized a pretax gain of $2.2 on the sale of a China-based cost method investment. In fiscal 2015, the Company recognized a pretax gain of $0.6 on the sale of a UK-based cost method investment.
|
Results of Operations – Consolidated
Fiscal 2017The section below is a discussion of the Company's fiscal year 2023 results compared to fiscal 2016year 2022. A detailed discussion of the Company's fiscal year 2021 results and year-over-year comparisons between fiscal years 2022 and 2021 that are not included in this Form 10-K can be found in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the year ended May 31, 2022, filed as part of the Company's Form 10-K dated July 22, 2022.
Continuing OperationsFiscal 2023 compared to fiscal 2022
Revenues from continuing operations for the fiscal year ended May 31, 20172023 increased by $68.8$61.1 million, or 4.1%3.7%, to $1,741.6$1,704.0 million, compared to $1,672.8$1,642.9 million in the prior fiscal year. Within the Children’s Book Publishing and Distribution segment revenues increased $91.5 million, partially offset by lower revenues from the tradeEducation Solutions segment and International segment of $7.0 million and $23.4 million, respectively.
Within the Children’s Book Publishing and Distribution segment, revenues in the book fairs channel increased $96.2$123.4 million primarily on higher fair count. Increased redemptions of book fair incentive program credits compared to the prior year and an improvement in revenue per fair also drove higher revenues. Lower book clubs channel revenues of $8.6 million were due to lower sponsor participation and fewer events. To address the continued decline, the Company has combined the U.S.-based book clubs and book fairs businesses into an integrated school reading events business subsequent to year-end. The integration is expected to create synergies in operations and a coordinated go-to-market strategy to result in additional opportunities and improved efficiencies. Trade channel revenues decreased $23.3 million, primarily driven onby the strength of Harry Potter publishing, frontlist and backlist, including Harry Potter and the Cursed Child, Parts One and Two, as wellindustry-wide decline in retail market sales, partially offset by higher media channel revenues as the screen playCompany completed the delivery of episodes associated with the production of the Fantastic Beasts"Eva the Owlet" animated series.
Within the Education Solutions segment, decreased revenues of $7.0 million were driven by an overall reduction in schools' purchasing levels when compared to the prior year when schools were refilling classrooms with in-person learning materials as pandemic restrictions were fully lifted. Demand for certain of the Company's instructional products and Whereprograms, including Scholastic Bookroom, Guided Reading and Scholastic Literacy was lower as customer purchasing shifted to Find Them film released in November 2016.the Company's more customized products and digital and print literacy solutions. This was partially offset by lowerincreased revenues from sponsored programs, which had a full year of shipments in fiscal 2023 compared to a partial year in fiscal 2022. The Company sells to non-school customers through its community and state-sponsored programs and the related sales increased in fiscal 2023.
Revenues in the book club and book fairs channelsInternational segment decreased $23.4 million primarily attributable to unfavorable foreign currency exchange of $33.0$23.0 million and $12.0the disposition of the direct sales business resulting in $15.0 million respectively, primarily driven by fewer book club sponsors and ain lower number of fairs. The Education segmentrevenues. Excluding the foregoing, revenues increased $13.0 million driven by strong fiscal year fourth quarter sales of literacy initiatives, particularly family and community engagement and summer reading programs, as well as higher professional development and services revenue. Local currency revenues in the International segment increased $14.1$14.6 million primarily driven by the strength ofMajor Markets as the new Harry Potter publishing in Canada and certain export markets, as well as sales gains in the trade andbook fairs channels incontinued to recover from the Company's major international markets. The Company's increased international revenues were partialy offset by unfavorable foreign currency exchangepandemic.
Components of $9.5 million, primarily driven by the strengtheningCost of the U.S. dollar against the British pound.goods sold for fiscal years 2023 and 2022 are as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| | ($ amounts in millions) |
| | 2023 | % of revenue | | 2022 | % of revenue |
| Product, service, production costs and inventory reserves | $ | 475.2 | | 27.9 | % | | $ | 448.8 | | 27.3 | % |
| Royalty costs | | 132.8 | | 7.8 | | | | 139.1 | | 8.5 | |
| Prepublication and production amortization | | 26.0 | | 1.5 | | | | 27.4 | | 1.8 | |
| Postage, freight, shipping, fulfillment and all other costs | | 152.4 | | 9.0 | | | | 150.2 | | 9.1 | |
| Total cost of goods sold | $ | 786.4 | | 46.2 | % | | $ | 765.5 | | 46.6 | % |
Cost of goods sold as a percentage of revenue for the fiscal year ended May 31, 20172023 was 46.8%46.2%, compared to 45.6%46.6% in the prior fiscal year. The higher costCost of goods sold benefited from increased sales volume in the U.S. book fairs channel, which also resulted in lower royalty costs as a percentage of revenuerevenue. Traditionally, the book fairs channel has a higher mix of non-royalty bearing titles. This was driven by royalty costs associated with higher sales of Harry Potter titles, partially offset by higher excess and obsolete inventory due to the favorablesoftness in the global retail channels. The Company also incurred higher production costs related to the "Eva the Owlet" animated series in fiscal 2023 and higher print costs, primarily in the U.S. trade channel, as well as an increase in inbound and outbound freight costs in the U.S. and in the Major Markets. As of the end of fiscal 2023, inbound freight costs have returned to pre-pandemic levels, however, there remains uncertainty regarding potential shipping courier union strikes
which could result in increased freight costs for the Company in the near future and impact higher revenues had on fixed costs coupled with favorable product mix and the Company's decisionability to exit the low margin software distribution business in Australia.ship product to customers.
Components of Cost of goods sold for fiscal years 2017, 2016 and 2015 are as follows:
|
| | | | | | | | | | | | | | | |
| | ($ amounts in millions) | |
| | 2017 | % of revenue | 2016 | % of revenue | 2015 | % of revenue |
| Product, service and production costs | $ | 432.6 |
| 24.8 | % | $ | 432.4 |
| 25.8 | % | $ | 429.3 |
| 26.2 | % |
| Royalty costs | 146.4 |
| 8.4 |
| 92.0 |
| 5.5 |
| 84.3 |
| 5.2 |
|
| Prepublication and production amortization | 23.5 |
| 1.3 |
| 27.1 |
| 1.6 |
| 30.0 |
| 1.8 |
|
| Postage, freight, shipping, fulfillment and all other costs | 212.0 |
| 12.3 |
| 210.8 |
| 12.7 |
| 214.9 |
| 13.2 |
|
| Total cost of goods sold | $ | 814.5 |
| 46.8 | % | $ | 762.3 |
| 45.6 | % | $ | 758.5 |
| 46.4 | % |
Selling, general and administrative expenses for the fiscal year ended May 31, 2017 remained relatively flat at $777.82023 were $756.6 million, compared to $777.7$722.8 million in the prior fiscal year. Fiscal 2017 includes higher employee related expensesThe $33.8 million increase was primarily due to the impact of a wage improvement program for employeeshigher spending in the U.S. distribution centers of $9.2 million, higher spending on strategic technology platforms for new enterprise-wide customer and content management systems and the migration to softwarebook fairs channel as a service ("SaaS")result of the increased fair count resulting in higher labor and cloud-based technology solutions combinedother overhead costs, including fuel charges, marketing expenses and bank fees, as well as increased rent for warehouse space. In addition, the Company incurred higher employee-related costs in the Education Solutions segment associated with increased spending on Company websites,strategic initiatives such as the integration efforts related to the Learning Ovations acquisition and the launch of Ready4Reading, as well as additionshigher labor and marketing costs to support the growth in sponsored programs. The increase was also attributable to the prior year receipt of insurance recoveries of $6.6 million related to the intellectual property legal settlement accrued in fiscal 2021. Partially offsetting this increase the Company had lower severance expense from its restructuring programs of $6.2 million, recognized higher COVID-related governmental employee retention credits of $2.1 million received in fiscal 2023, incurred lower costs in Asia as a result of the disposition of the direct sales management team in the Education segment, offset by lower book club channel promotion and catalog costsbusiness of $8.5approximately $12.6 million, and a reductionbenefited from an insurance recovery of $1.5$5.0 million in expenses duefiscal 2023 related to photo litigation settlements and also benefited from a warehouse optimization project in the Company's book fairs operations infavorable settlement of $1.8 million related to legacy sales tax matters. Additionally, bad debt expense was favorable as the prior fiscal year period.was negatively impacted by a discrete systems issue in the book clubs channel which resulted in $6.6 million of higher uncollectible receivable balances. The Company expects to incur severance costs in the first quarter of fiscal 2024 related to restructuring programs in Canada as well as in the U.S. as a result of combining the book clubs and book fairs businesses into an integrated school reading events business.
Depreciation and amortization expenses for the fiscal year ended May 31, 2017 remained relatively flat at $38.72023 were $54.7 million, compared to $38.9$56.8 million in the prior fiscal year. The $2.1 million decrease primarily related to the Company's shift to cloud computing arrangements (e.g. software as a service) which resulted in capitalized software being amortized through Selling, general and administrative expenses rather than Depreciation and amortization. Amortization of capitalized cloud software increased $2.4 million when compared to the prior fiscal 2016 impairment of certain legacy prepublication assets drove lower depreciationyear which offset the decrease in Depreciation and amortization. Management expects Depreciation and amortization expense in fiscal 2017,to increase as the Company's capitalized spending has and was partially offset by higher depreciation expense from certain strategic technology platforms that went live inwill continue to increase into the currentnext fiscal year.
Severance expense of $14.9 million in fiscal 2017 included $12.9 million related to cost reduction programs. Severance expense of $11.9 million in fiscal 2016 included $9.5 million related to cost reduction and restructuring programs.
Asset impairments and write downs for the fiscal year ended May 31, 20172022 were $6.8$0.4 million due to the impairment of right-of-use assets associated with certain operating leases as part of the book fairs warehouse consolidation effort.
Interest income for the fiscal year ended May 31, 2023 was $7.2 million, compared to $14.4$0.5 million in the prior fiscal year. $4.7 million of the increase was driven by overall higher average investment balances as compared to the prior fiscal year, coupled with higher interest rates in fiscal 2023. The Company invests excess cash in short term investments which earn competitive interest rates that change directionally in relation to the Federal Funds rate. In fiscal 2017,addition, the Company recognized pretax impairment charges$2.0 million of interest income related to certain website development assets of $5.7 million and certain legacy prepublication assets of $1.1 million. Intax refunds received during fiscal 2016,2023 that will not repeat in the Company recognized a pretax impairment charge of $7.5 million on the abandonment of legacy building improvements in connection with the Company's renovation of its headquarters location in New York City representing approximately 40% of the total renovation projectnext fiscal year. Interest expense for the entire building. The renovation effort will occur in phases and, as additional floors are renovated over the project's life, additional building improvements will be abandoned. In fiscal 2016, the Company also recognized a pretax impairment charge of $6.9 million for certain legacy prepublication assets.
For the fiscal year ended May 31, 2017, net interest expense remained relatively flat at $1.02023 was $1.4 million, compared to $1.1$2.9 million in the prior fiscal year. The relatively flat netdecrease in interest expense was driven bydue to lower average debt borrowings as compared to the absence of long-term debt and a lack of significant change in short-termprior fiscal year as the outstanding borrowings on available linesthe U.S. credit agreement were paid down during fiscal 2022, resulting in no outstanding borrowings as of credit.the beginning of fiscal 2023.
InGain (loss) on assets held for sale for the fiscal 2016,year ended May 31, 2022 was a loss of $15.1 million related to the Company recognizedCompany's exit of the direct sales business in Asia as it was no longer a pretax gainpart of $2.2 million onthe strategic growth plan for the Company. The exit resulted in the sale of remaining assets, primarily accounts receivable and inventory, and the assets were written down to their recoverable value which equated to the selling price. The loss on assets held for sale included accrued exit costs.
Gain (loss) on sale of assets and other for the fiscal year ended May 31, 2022 was a China-based cost method investment.gain of $9.7 million. In the prior fiscal year, the Company sold its UK distribution facility located in Witney and its facility located in Lake Mary, Florida, resulting in a recognized gain on sale of $3.5 million and $6.2 million, respectively.
The Company’s effective tax rate for the fiscal year ended May 31, 20172023 was 40.3%,a 23.0% tax provision, compared to 36.0%9.7% in the prior fiscal year. The increase in2022 fiscal year tax provision benefited from the release of uncertain tax positions resulting from the effective tax rate was primarily driven by the settlement of a tax position with the IRS inexamination from the prior fiscal period which drove a lower effective rate in fiscal 2016.2015-2020 tax years.
Earnings from continuing operationsNet income for fiscal 2017 increased by $8.5 million to $52.52023 was $86.5 million compared to $44.0$81.0 million in fiscal 2016.2022, an increase of $5.5 million. The basic and diluted earnings from continuing operationsincome per share of Class A Stock and Common Stock were $1.51was $2.56 and $1.48,$2.49, respectively, in fiscal 2017, compared to $1.29 and $1.26, respectively, in fiscal 2016.
Discontinued Operations
Loss from discontinued operations, net of tax, for the fiscal year ended May 31, 2017 was $0.2 million, compared to $3.5 million in the prior fiscal year. The basic and diluted loss from discontinued operations per share of Class A Stock and Common Stock were less than $0.01 and $0.01, per basic and diluted share, respectively, in fiscal 20172023, compared to basic and diluted loss from discontinued operationsincome per share of Class A Stock and Common Stock of $0.11$2.33 and $0.10, respectively, in fiscal 2016. The Company did not discontinue any operations in fiscal 2017.$2.27,
The resulting net income for fiscal 2017 was $52.3 million, or $1.51 and $1.47 per basic and diluted share, respectively, compared to net income of $40.5 million, or $1.18 and $1.16 per basic and diluted share, respectively, in fiscal 2016.
Fiscal 2016 compared to fiscal 2015
Continuing Operations
Revenues from continuing operations for the fiscal year ended May 31, 2016 increased by $37.0 million, or 2.3%, to $1,672.8 million, compared to $1,635.8 million in the prior fiscal year. Within the Children’s Book Publishing and Distribution segment, revenues from trade publishing sales increased $35.5 million driven by strong sales for both frontlist and backlist titles, led by the strong performance of Harry Potter related titles, partially offset by lower year-over-year sales of Minecraft titles. The book fairs channel experienced higher revenues of $23.0 million driven by an increase in revenue per fair coupled with an increase in fair count. The increases within this segment were partially offset by lower media operations revenues of $9.8 million and lower book club channel revenues of $5.6 million due to a lower number of book club events. Education segment revenues for fiscal 2016 increased $22.9 million driven by strong fiscal year fourth quarter sales of classroom books and guided reading programs coupled with increased circulation in classroom magazines, while local currency revenues in the International segment increased $14.2 million, primarily driven by increased sales of local titles within the Australia trade channel. This was more than offset by foreign currency exchange declines of $43.2 million due to the strength of the U.S. dollar against most foreign currencies.
Cost of goods sold as a percentage of revenue for the fiscal year ended May 31, 2016 was 45.6%, compared to 46.4% in the prior fiscal year. The modest decrease in cost of goods sold as a percentage of revenue was driven by lower production costs associated with the Company's media operations and favorable product mix, partially offset by the
strength of the U.S. dollar which impacted the Company's international operations due to purchases of U.S. product in U.S. dollars.
Selling, general and administrative expenses for the fiscal year ended May 31, 2016 increased to $777.7 million, compared to $771.1 million in the prior fiscal year, primarily as a result of higher strategic technology spending on new enterprise-wide customer and content management systems and the migration to SaaS and cloud-based technology solutions. To a lesser extent, the increase was due to higher employee-related expenses of $7.8 million associated with the book fairs channel efforts to increase revenues, higher sales management-related expenses associated with the classroom books and literacy initiatives to increase sales and $1.5 million in expenses related to a branch consolidation project in the Company's book fairs operations, coupled with the effect of a $3.7 million insurance settlement in the prior fiscal year relating to a fire in a warehouse in India. The increases were partially offset by lower international expense attributable to foreign currency translation of $15.3 million, lower unabsorbed overhead burden as costs were being offset by transition service fees under the transition services agreement with the purchaser of the educational technology and services business in fiscal 2016, and lower pension expense of $4.3 million related to a settlement on a portion of the domestic pension plan in the prior fiscal year.
Severance expense of $11.9 million in fiscal 2016 included $9.5 million related to cost reduction and restructuring programs. Severance expense of $9.6 million in fiscal 2015 included $8.9 million related to cost reduction and restructuring programs.
Asset impairments for the fiscal year ended May 31, 2016 were $14.4 million, compared to $15.8 million in the prior fiscal year. In fiscal 2016, the Company recognized a pretax impairment charge of $7.5 million on the abandonment of legacy building improvements in connection with the Company's renovation of its headquarters location in New York City. The project will occur in phases and certain legacy building improvements will be abandoned as additional floors are renovated over the project's life. The Company also recognized a pretax impairment charge of $6.9 million for certain legacy prepublication assets. In fiscal 2015, the Company recognized an impairment charge of $8.3 million in respect to certain goodwill, production and programming assets in connection with the restructuring of the Company's media and entertainment businesses, recognized an impairment charge of $4.6 million for the discontinuation of certain outdated technology platforms and recognized an impairment charge of $2.9 million associated with the closure of its retail store located at the Company headquarters in New York City.
For the fiscal year ended May 31, 2016, net interest expense decreased to $1.1 million, compared to $3.5 million in the prior fiscal year, due to the reduction in borrowings under the Loan Agreement described under "Financing" below.
In fiscal 2016, the Company recognized a pretax gain of $2.2 million on the sale of a China-based cost method investment. In fiscal 2015, the Company recognized a pretax gain of $0.6 million related to a UK-based cost method investment.
The Company’s effective tax rate for the fiscal year ended May 31, 2016 was 36.0%, compared to 48.2% in the prior fiscal year.
Earnings from continuing operations for fiscal 2016 increased by $28.5 million to $44.0 million, compared to $15.5 million in fiscal 2015. The basic and diluted earnings from continuing operations per share of Class A Stock and Common Stock were $1.29 and $1.26, respectively, in fiscal 2016, compared2022. Outstanding shares decreased 7% from 34.2 million to $0.47 and $0.46, respectively,31.7 million as of May 31, 2023 which will benefit earnings per share calculations in fiscal 2015.2024.
Discontinued Operations
Loss from discontinued operations, net of tax, for the fiscal year ended May 31, 2016 was $3.5 million, comparedNet income attributable to earnings from discontinued operations, net of tax, of $279.1 million in the prior fiscal year. The change was driven by the net gain of $275.6 million associated with the sale of the educational technology and services business in the prior fiscal year. The basic and diluted loss from discontinued operations per share of Class A Stock and Common Stock were $0.11 and $0.10, respectively, in fiscal 2016, compared to basic and diluted earnings from discontinued operations per share of Class A Stock and Common Stock of $8.53 and $8.34, respectively, in fiscal 2015.
The resulting net incomenoncontrolling interest for fiscal 20162023 and fiscal 2022 was $40.5$0.2 million or $1.18 and $1.16 per basic and diluted share, respectively, compared to net income of $294.6$0.1 million, or $9.00 and $8.80 per basic and diluted share, respectively, in fiscal 2015.respectively.
Results of Operations – Segments
CHILDREN’S BOOK PUBLISHING AND DISTRIBUTION
| | | ($ amounts in millions) | |
| | |
| | |
| 2017 compared to 2016 |
| 2016 compared to 2015 | ($ amounts in millions) | 2023 compared to 2022 |
| | 2017 |
| 2016 |
| 2015 |
| $ change |
| % change |
| $ change |
| % change | | 2023 | | 2022 | | $ change | | % change |
| Revenues | $ | 1,052.1 | |
| $ | 1,000.9 | |
| $ | 957.8 | |
| $ | 51.2 |
|
| 5.1 | % |
| $ | 43.1 |
| | 4.5 | % | Revenues | $ | 1,038.0 | | | $ | 946.5 | | | $ | 91.5 | | | 9.7 | % |
| Cost of goods sold | 462.1 | |
| 415.9 | |
| 407.1 | |
| 46.2 |
|
| 11.1 |
|
| 8.8 |
| | 2.2 |
| Cost of goods sold | | 481.7 | | | 450.3 | | | 31.4 | | | 7.0 | |
| Other operating expenses * | 446.9 | |
| 464.4 | |
| 445.9 | |
| (17.5 | ) |
| (3.8 | ) |
| 18.5 |
| | 4.1 |
| Other operating expenses * | | 412.9 | | | 380.5 | | | 32.4 | | | 8.5 | |
| Asset impairments | — | |
| — | |
| 10.2 | |
| — |
|
| N/A |
|
| (10.2 | ) | | (100.0 | ) | |
| Asset impairments and write downs | | Asset impairments and write downs | | — | | | 0.4 | | | (0.4) | | | NM |
| Operating income (loss) | $ | 143.1 | |
| $ | 120.6 | |
| $ | 94.6 | |
| $ | 22.5 |
|
| 18.7 | % |
| $ | 26.0 |
| | 27.5 | % | Operating income (loss) | $ | 143.4 | | | $ | 115.3 | | | $ | 28.1 | | | 24.4 | % |
| Operating margin | | 13.6 | % |
|
| 12.0 | % |
| | 9.9 | % |
| |
|
| |
|
| |
|
| |
| Operating margin | | 13.8 | % | | 12.2 | % | | | | |
* Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization.
NM Not meaningful
Fiscal 20172023 compared to fiscal 20162022
Revenues for the fiscal year ended May 31, 20172023 increased by $51.2$91.5 million to $1,052.1$1,038.0 million, compared to $1,000.9$946.5 million in the prior fiscal year. The increase in segment revenues was driven by the book fairs channel with an increase of $123.4 million, or 29%, exceeding pre-pandemic revenues for this channel. The increased revenues were driven by a 15% increase in fair count, coupled with higher revenue per fair and a year-over-year increase in redemptions of book fair incentive program credits. Revenues from the book clubs channel decreased $8.6 million as a result of the multi-year trend of lower sponsor participation and fewer events held in fiscal 2023. To address this continued decline, the Company has combined the U.S.-based book clubs and book fairs businesses into an integrated school reading events business and expects the synergies in operations and a coordinated go-to-market strategy to result in additional opportunities and improved efficiencies. Trade channel revenues increased $96.2decreased $23.3 million primarily due to higherreflecting the industry-wide decline in retail market sales driving overall lower revenues. The prior fiscal year also included the release of J.K. Rowling's The Christmas Pig as well as limited edition foil cover versions of titles in Dav Pilkey's Dog Man series which helped lift overall sales across the series. During fiscal 2023, the trade publishing sales of $94.9 million. The increase in trade publishing revenues was primarily driven onchannel released numerous best-sellers, including Dog Man #11: Twenty Thousand Fleas Under the strength of Harry Potter publishing, frontlist and backlist, including Sea, Cat Kid Comic Club: Collaborations, Harry Potter and the Cursed Child, Parts One and Two, as well as the screen playOrder of the Fantastic Beasts and Where to Find Them film released in November 2016. Continued sales of bestselling series, including Phoenix: The Illustrated Edition,Wings of Fire Graphix #6: Moon Rising, The Baby-Sitters Club® Graphix Graphic Novel #13: Mary Anne's Bad Luck Mystery and Star Wars: Jedi Academy,Nick and Charlie: A Heartstopper Novella. In addition, the successCompany completed the delivery of popular new releases including Dog Man and Dog Man Unleashed by Dav Pilkey, Ghosts by Raina Telgemeier, and Five Nights at Freddy's:episodes associated with the production of the animated series "Eva the Owlet". The Silver Eyes by Scott Cawthorn and Kira Breed-Wrisley, also droveunfavorable economic trends in the higher revenues, which were partially offset by lower year-over-year sales of Minecraft titles. Theretail book clubmarkets could continue to negatively impact the trade channel revenues decreased $33.0 million due to lower teacher sponsor levels, as well as lower revenue per event and per sponsor. The book fairs channel revenues decreased $12.0 million resulting from a 9% reduction in fairs held during the period, reflecting in part the planned strategy to reduce the number of lower margin fairs, partially offset by the higher revenue per fair of approximately 7%.fiscal 2024.
Cost of goods sold for the fiscal year ended May 31, 20172023 was $462.1$481.7 million, or 43.9%46.4% of revenues, compared to $415.9$450.3 million, or 41.6%47.6% of revenues, in the prior fiscal year. The increasedecrease in costCost of goods sold as a percentage of revenuerevenues was primarily driven by increased sales volume in the book fairs channel, which also resulted in lower royalty costs as a percentage of revenue. Traditionally, the book fairs channel has a higher mix of non-royalty bearing titles. The favorability was partially offset by increased product costs in the trade channel mainly associated withdue to higher salesprint and inbound freight costs driven by the continued impact of Harry Potter titles, partiallyinflationary pressures and higher production costs related to the production of the "Eva the Owlet" animated series in the media business. Cost of goods sold benefited from lower excess and obsolete inventory in the book fairs channel in fiscal 2023 as a result of better utilization of aged inventory. This was substantially offset by the favorable impact the higher revenuesexcess and obsolete inventory in the trade channel had on fixed costs, favorable trade channel product mixdue to the softness in the retail market and purchasing efficiencies in the book clubclubs channel that yielded lower product costs.which expects to reduce offerings in fiscal 2024 as part of its integration into the school reading events business. As of the end of fiscal 2023, inbound freight costs have returned to pre-pandemic levels, however, there remains uncertainty regarding potential shipping courier union strikes which could result in increased freight costs for the Company in the near future.
Other operating expenses were $446.9$412.9 million for the fiscal year ended May 31, 2017,2023, compared to $464.4$380.5 million in the prior fiscal year. The decrease$32.4 million increase was primarily due to increased labor and other overhead costs in the book fairs channel, including fuel charges, marketing expenses and bank fees, as a reductionresult of the increased fair count in book club channel promotion
fiscal 2023, as well as increased rent for warehouse space. The higher labor costs were partially offset by a COVID-related governmental employee retention credit of $3.3 million received and catalog costs of $8.5 million, approximately $4.4 millionrecognized in lower depreciationfiscal 2023. In addition, bad debt expense driven bywas favorable as the prior fiscal year impairment of certain legacy prepublication assets andwas negatively impacted by a reduction of $1.5 million in expenses related to a warehouse optimization projectdiscrete systems issue in the Company's book fairs operationsclubs channel which resulted in $6.6 million of higher uncollectible receivable balances.
Asset impairments were $0.4 million for the fiscal year ended May 31, 2022. In the prior fiscal year, period, partially offset by higher promotional spending in the trade channel due to the new Harry Potter titles and the impactCompany recorded an impairment of right-of-use assets associated with certain operating leases as part of the wage improvement program for employees in the U.S. distribution centers.book fairs warehouse consolidation effort.
Segment operating income for the fiscal year ended May 31, 20172023 was $143.1$143.4 million, compared to $120.6$115.3 million in the prior fiscal year. The $28.1 million increase in operating income was primarily driven by the higher sales of Harry Potter titles, partially offset by lower book club and book fair channel revenues and higher cost of goods sold.
Fiscal 2016 compared to fiscal 2015
Revenues for the fiscal year ended May 31, 2016 increased by $43.1 million to $1,000.9 million, compared to $957.8 millioncontinued improvement in the prior fiscal year. Tradebook fairs channel, revenues increased $25.7which resulted in a $123.4 million primarily due to higher trade publishing sales of $35.5 million. The increase in trade publishing revenues was driven by strong sales for both frontlist and backlist titles and the strong performance of Harry Potter, including frontlist titles such as Harry Potter and the Sorcerer's Stone: The Illustrated Edition and the Harry Potter-themed coloring books, as well as an increase in backlist titles, partially offset by lower year-over-year sales of Minecraft titles. Therevenue primarily on higher trade publishing revenues were partially offset by lower sales of $9.8 million in the media operations.fair count. The book fairs channel revenues increased $23.0 million duecontinued to a 3.4%drive an increase in revenue per fair coupled with a 1.0% increase in fair count. The book club channel
revenues decreased $5.6 millionby approximately 5% which benefited operating income due to the fixed distribution costs on a lower numberdelivered fair. In addition, the production and delivery of book club events, causedthe "Eva the Owlet" animated series drove additional profit contribution in part by the relatively late start to the school calendar compared to the prior fiscal year, partially offset2023. Operating income was negatively impacted by a 2.3% increasedecrease in trade channel revenue per event. Sales of Minecraft series handbook titles across all Children's Book Publishingreflecting the industry-wide decline in retail market sales, and Distribution channels totaled $22.2 million for fiscal 2016, compared to $57.1 millioncontinued inflationary pressures driving higher print and inbound freight costs, primarily in the priortrade channel. As of the end of fiscal year.
Cost of goods sold2023, inbound freight costs have returned to pre-pandemic levels, however, there remains uncertainty regarding potential shipping courier union strikes which could result in increased freight costs for the fiscal year ended May 31, 2016 was $415.9 million, or 41.6% of revenues, compared to $407.1 million, or 42.5% of revenues,Company in the prior fiscal year. Cost of goods sold as a percentage of revenue remained relatively flat for this segment, with a modest improvement due to lower production amortization costs.
Other operating expenses were $464.4 million for the fiscal year ended May 31, 2016, compared to $445.9 millionnear future. Lower participation levels in the priorbook clubs channel was also unfavorable to operating income in the current fiscal year. The increase was partially due to higher employee-related expenses of $7.8 million inCompany has combined the U.S.-based book clubs and book fairs channel, primarily associated with continued effortsbusinesses into an integrated school reading events business subsequent to improve sales, and $1.5 millionyear-end. The integration is expected to create synergies in expenses related to a branch consolidation project in the Company's book fairs operations.
Asset impairments were $10.2 million for the fiscal year ended May 31, 2015 as the Company recognized an impairment charge of $8.3 million in respect of certain goodwill, production and programming assets associated with the restructuring of the media and entertainment businessoperations and a $1.9 million impairment charge relatingcoordinated go-to-market strategy to the transition to a new ecommerce software platform for club ordering.result in additional opportunities and improved efficiencies.
Segment operating income for the fiscal year ended May 31, 2016 was $120.6 million, compared to $94.6 million in the prior fiscal year. The increase was driven by higher revenues, primarily from the trade publishing channel and the book fairs channel, relatively flat cost of goods sold as a percentage of revenues and lower impairment charges, partially offset by higher employee-related expenses associated with the efforts to improve book fairs channel sales.
EDUCATION SOLUTIONS
| | | ($ amounts in millions) | | | | | | | 2017 compared to 2016 | | 2016 compared to 2015 | ($ amounts in millions) | 2023 compared to 2022 |
| | 2017 | | 2016 | | 2015 | | $ change | | % change | | $ change | | % change | | 2023 | | 2022 | | $ change | | % change |
| Revenues | $ | 312.7 | | | $ | 299.7 | | | $ | 276.8 | | | $ | 13.0 |
| | 4.3 | % | | $ | 22.9 |
| | 8.3 | % | Revenues | $ | 386.6 | | | $ | 393.6 | | | $ | (7.0) | | (1.8) | % |
| Cost of goods sold | 103.2 | | | 101.5 | | | 96.0 | | | 1.7 |
| | 1.7 |
| | 5.5 |
| | 5.7 |
| Cost of goods sold | | 143.0 | | | 142.4 | | | 0.6 | | 0.4 | |
| Other operating expenses * | 157.7 | | | 148.5 | | | 141.4 | | | 9.2 |
| | 6.2 |
| | 7.1 |
| | 5.0 |
| Other operating expenses * | | 185.2 | | | 169.4 | | | 15.8 | | 9.3 | |
| Asset impairments | 1.1 | | | 6.9 | | | — | | | (5.8 | ) | | (84.1 | ) | | 6.9 |
| | 100.0 |
| |
| | Operating income (loss) | $ | 50.7 | | | $ | 42.8 | | | $ | 39.4 | | | $ | 7.9 |
| | 18.5 | % | | $ | 3.4 |
| | 8.6 | % | Operating income (loss) | $ | 58.4 | | | $ | 81.8 | | | $ | (23.4) | | (28.6) | % |
| Operating margin | | 16.2 | % | | | 14.3 | % | | | 14.2 | % | | |
| | |
| | |
| | |
| Operating margin | | 15.1 | % | | 20.8 | % | | | | |
* Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization.
Fiscal 20172023 compared to fiscal 20162022
Revenues for the fiscal year ended May 31, 2017 increased2023 decreased by $13.0$7.0 million to $312.7$386.6 million, compared to $299.7$393.6 million in the prior fiscal year, primarilyyear. The decrease in segment revenues was largely driven by a $14.8 million increasean overall reduction in revenues from classroom books and literacy initiatives due to strong fiscal year fourth quarter sales of family and community engagement programs, including the summer literacy program LitCamp, and increased demand for customer summer reading programs, higher professional development and services revenue and higher sales of professional books such as The Next Step Forward in Guided Reading and Disruptive Thinking: Why How We Read Matters and the Company's Next Step Guided Reading Assessment product. Classroom magazines revenues increased $3.9 million primarily due to demand for materials for the U.S. presidential election coupled with higher circulation. This was partially offset by $5.7 million in lower revenues primarily resulting from fewer custom publishing programsschools' purchasing levels when compared to the prior year when schools were refilling classrooms with in-person learning materials as pandemic restrictions were being lifted. Demand for certain of the Company's instructional products and programs, including Scholastic Bookroom, Guided Reading and Scholastic Literacy, as well as early childhood programs and summer learning product offerings was lower, due in part to customer purchasing shifting to the Company's more customized products and digital and print literacy solutions. Changes to the methods in which schools approach literacy instruction also contributed to the decline in certain offerings and the Company's new K-3 phonic program, Ready4ReadingTM, is expected to align with the modified instruction methods. The decrease in revenues related to instructional products and programs was also due to the timing of revenues in fiscal 2022, which benefited from shipments, primarily consisting of summer learning products, that shifted from the fourth quarter of fiscal 2021 due to supply chain constraints at that time. During the fourth quarter of fiscal 2022, orders were shipped more timely with fewer sales shifting into the first quarter of fiscal 2023. The segment also had lower sales of Rising Voices Library® products, professional books and teaching resource products. Cultural awareness products like Rising Voices Library continue to be requested by customers and are subject to fluctuations based on large district sales. The Company continues to actively market these products and make additional investments and improvements in accordance with market demand. The overall decrease in segment revenues was partly offset by revenues from sponsored programs, which had a full year of shipments in fiscal 2023 compared to a partial year in fiscal 2022 and the addition of another state program in fiscal 2023. Additionally, the segment benefited from increased revenues from traditional classroom book collections and Grab and Go reading packs as well as products from the Scholastic Family and Community Engagement (FACE)TM initiative, in which a renewed focus helped to increase offerings and expand into new school districts. Revenues from Magazines+ remained relatively consistent with the prior fiscal year and digital subscription revenues modestly increased year over year.
Cost of goods sold for the fiscal year ended May 31, 20172023 was $103.2$143.0 million, or 33.0%37.0% of revenue, compared to $101.5$142.4 million, or 33.9%36.2% of revenue, in the prior fiscal year. The decreaseincrease in costCost of goods sold as a percentage of revenuerevenues was primarily driven by lower prepublication amortization associated with certain digital education products and favorable product mix dueattributable to higher classroom magazineproduct costs, including higher inbound freight costs, in addition to increased postage and outbound freight costs, as the Company continued to be impacted by inflationary pressures. In fiscal 2022, the segment benefited from sales of inventory purchased prior to the cost increases. As of the end of fiscal 2023, inbound freight costs have returned to pre-pandemic levels, however, there remains uncertainty regarding potential shipping courier union strikes which carry higher margins.could result in increased freight costs for the Company in the near future.
Other operating expenses were $157.7$185.2 million for the fiscal year ended May 31, 2017,2023, compared to $148.5$169.4 million in the prior fiscal year. The $15.8 million increase in Other operating expenses was primarily duerelated to additions tohigher spending associated with the sales management team, higher promotional related expenses, the incurrence of higher operating expensesintegration efforts related to the sales of U.S. presidential election year materials in the classroom magazines channelLearning Ovations acquisition which approximated $3 million and the impactlaunch of Ready4Reading as well as the wage improvement program for employees ingrowth within sponsored programs, partially offset by lower bonuses and commissions. In addition, the U.S. distribution centers.
In fiscal 2017, the Company recognized a pretax impairment chargesegment incurred higher marketing costs associated with sponsored programs and continued to incur costs related to certain legacy prepublication assets of $1.1 million. In fiscal 2016,strategic initiatives related to the Company recognized a pretax impairment charge for certain legacy prepublication assets of $6.9 million.Company's digital and print literacy offerings.
Segment operating income for the fiscal year ended May 31, 20172023 was $50.7$58.4 million, compared to $42.8$81.8 million in the prior fiscal year. The increase in operating income$23.4 million decrease was attributable to lower revenues, primarily driven by fewer impairment charges of $5.8 millionfrom instructional products and programs, coupled with the increase in revenues, partially offset by the increase in otherincreased employee-related costs and increased spending associated with growth initiatives.
INTERNATIONAL
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ amounts in millions) | 2023 compared to 2022 |
| | 2023 | | 2022 | | $ change | | % change |
| Revenues | $ | 279.4 | | | $ | 302.8 | | | $ | (23.4) | | (7.7) | % |
| Cost of goods sold | | 169.7 | | | | 169.8 | | | | (0.1) | | (0.1) | |
| Other operating expenses * | | 113.3 | | | | 129.7 | | | | (16.4) | | (12.6) | |
| | | | | | | | | | |
| Operating income (loss) | $ | (3.6) | | | $ | 3.3 | | | $ | (6.9) | | NM |
| Operating margin | | — | % | | | 1.1 | % | | | | | |
* Other operating expenses primarily resulting from the higher employee related expenses.include selling, general and administrative expenses, bad debt expenses and depreciation and amortization.
NM Not meaningfulFiscal 20162023 compared to fiscal 20152022
Revenues for the fiscal year ended May 31, 2016 increased2023 decreased by $22.9$23.4 million to $299.7$279.4 million compared to $276.8$302.8 million in the prior fiscal year. $14.2Local currency revenues in the Company's ongoing foreign operations increased $14.6 million when compared to the prior fiscal year, which excluded $15.0 million in lower revenues from the disposition of the direct sales business and unfavorable foreign exchange impact of $23.0 million. In the Asia channel, excluding the lower revenues from the disposition of the direct sales business, local currency revenues increased $2.1 million primarily attributable to higher revenues in India from the book fairs and trade channels. In Australia and New Zealand, local currency revenues increased $7.3 million, driven by increased sales in the trade and book fairs channels as the prior year was negatively impacted by additional lockdowns imposed by the COVID variant. In the UK, local currency revenues increased $4.5 million largely driven by the continued recovery in the book fairs channel which resulted in a 70% increase in fair count as compared to the prior fiscal year, in addition to increased book clubs channel revenues. This was partially offset by lower education and magazine channel revenues as well as marginally lower revenues in the trade channel due to softness in the retail market which was partially offset by new releases in fiscal 2023 including The Baddies by Julia Donaldson and Dog Man® #11: Twenty Thousand Fleas Under the Sea by Dav Pilkey. In Canada, local currency revenues increased $1.4 million primarily driven by classroom booksthe book fairs channel which continued to recover from the pandemic, resulting in a 37% increase in fair count and literacy initiativeshigher revenue per fair, largely offset by lower trade channel revenues due to strong fiscal year fourth quarteran industry wide decline in the retail market and lower sales of classroom books and guided reading and customized curriculum programs. Classroom magazines revenues increased $5.5 millionin the book clubs channel due to higher circulation and consumer magazines revenues increased $3.2lower sponsor participation. Export sales decreased $0.7 million primarily due to increased digital and custom publishing programs.lower distributor sales.
Cost of goods sold for the fiscal year ended May 31, 20162023 was $101.5$169.7 million, or 33.9%60.7% of revenue,revenues, compared to $96.0$169.8 million, or 34.7%56.1% of revenue, in the prior fiscal year. Cost of goods sold as a percentage of revenue remained relatively flat for this segment, with modest improvement due to the higher margins associated with the Company's classroom magazines.
Other operating expenses increased by $7.1 million for the fiscal year ended May 31, 2016, due to higher sales management-related expenses as part of the Company's continued efforts to increase sales from classroom books and literacy initiatives and higher operating expenses related to the increased circulation of classroom magazines.
Asset impairments were $6.9 million for the fiscal year ended May 31, 2016, due to impairment charges for certain legacy prepublication assets.
Segment operating income for the fiscal year ended May 31, 2016 improved by $3.4 million. The increase was driven by the higher sales from classroom books and literacy initiatives, as well as from classroom magazines, coupled with the relatively flat cost of goods sold as a percentage of revenue, partially offset by higher sales management-related expenses and impairment charges.
INTERNATIONAL
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ amounts in millions) | | | | | | | 2017 compared to 2016 | | 2016 compared to 2015 |
| | 2017 | | 2016 | | 2015 | | $ change | | % change | | $ change | | % change |
| Revenues | $ | 376.8 | | | $ | 372.2 | | | $ | 401.2 | | | $ | 4.6 |
| | 1.2 | % | | $ | (29.0 | ) | | (7.2 | )% |
| Cost of goods sold | 197.2 | | | 194.4 | | | 201.7 | | | 2.8 |
| | 1.4 |
| | (7.3 | ) | | (3.6 | ) |
| Other operating expenses * | 160.9 | | | 166.4 | | | 176.2 | | | (5.5 | ) | | (3.3 | ) | | (9.8 | ) | | (5.6 | ) |
| Asset impairments | — | | | — | | | 2.7 | | | — |
| | N/A |
| | (2.7 | ) | | (100.0 | ) |
| Operating income (loss) | $ | 18.7 | | | $ | 11.4 | | | $ | 20.6 | | | $ | 7.3 |
| | 64.0 | % | | $ | (9.2 | ) | | (44.7 | )% |
| Operating margin | | 5.0 | % | | | 3.1 | % | | | 5.1 | % | | |
| | |
| | |
| | |
|
* Other operating expenses include selling, general and administrative expenses, bad debt expenses, severance and depreciation and amortization.
Fiscal 2017 compared to fiscal 2016
Revenues for the fiscal year ended May 31, 2017 increased by $4.6 million to $376.8 million, compared to $372.2 million in the prior fiscal year. Total local currency revenues, across the Company's foreign operations increased $14.1 million when compared to the prior fiscal year, but were offset by foreign currency exchange declines of $9.5 million, primarily due to the strengthening of the U.S. dollar against the British pound. Local currency revenues from Canada increased $13.5 million, primarily due to the strength of new Harry Potter publishing and, to a lesser extent, improvements in revenues due to the negative impact the labor action in Ontario schools had on the prior fiscal year period sales. Local currency revenues from the Company's Asia operations coupled with the export and foreign rights channels increased $7.0 million, primarily due to certain export sales related to the new Harry Potter publishing, as well as strong performance in the Company's Malaysia operations. Local UK currency revenues increased $2.8 million, primarily due to an increase in revenues driven by licensed product and higher book fairs channel revenues driven by
the prior fiscal year acquisition of a leading book fair provider. Local currency revenues from Australia and New Zealand decreased $9.2 million, primarily due to lower software distribution revenues of $16.0 million as the Company is exiting this low margin business in Australia. This was partially offset by continued demand for local titles within the Australia trade channel and the continued strong performance from the Australia and New Zealand book club channels.
Cost of goods sold for the fiscal year ended May 31, 2017 was $197.2 million, or 52.3% of sales, compared to $194.4 million, or 52.2% of sales, in the prior fiscal year. The relatively flat cost of goods sold as a percentage of revenue was driven by favorable product mix in Australia driven by the exit of the aforementioned low margin software distribution business in Australia net of exit costs of $0.5 million, partially offset by royalty costs associated with the higher sales of Harry Potter titles.
Other operating expenses decreased by $5.5 million when compared to the prior fiscal year. The decrease was primarily driven by $4.9 million in foreign exchange translation, as well as lower operating expenses in Indonesia.
Segment operating income for the fiscal year ended May 31, 2017 was $18.7 million, compared to $11.4 million in the prior fiscal year. Total local currency operating income across the Company's foreign operations increased $6.5 million, primarily driven by the success of the new Harry Potter publishing. Foreign exchange translation was favorable to operating income by $0.8 million.
Fiscal 2016 compared to fiscal 2015
Revenues for the fiscal year ended May 31, 2016 decreased by $29.0 million to $372.2 million, compared to $401.2 million in the prior fiscal year. Total local currency revenues across the Company's foreign operations increased $14.2 million when compared to the prior fiscal year, but were offset by foreign currency exchange declines of $43.2 million as the U.S. dollar strengthened against most foreign currencies. Local currency revenues from Australia and New Zealand increased $10.3 million, primarily on increased sales of local titles within the Australia trade channel. Local currency revenues increased $6.3 million from the Company's Asia operations, primarily led by operations in Malaysia, India, and the Philippines. Local currency revenues from the UK increased $2.8 million, primarily due to an increase in book fairs channel revenues driven by the acquisition of a UK book fairs business, Troubadour, Ltd., partially offset by lower sales within the trade and book club channels. Local currency revenue increases were partially offset by lower revenues in the Company's export and foreign rights channel of $3.1 million, reflecting the negative impact of the strengthened U.S. dollar. Lower local currency revenues in Canada of $2.1 million were due to the effect of the labor action in Ontario schools.
Cost of goods sold for the fiscal year ended May 31, 2016 was $194.4 million, or 52.2% of sales, compared to $201.7 million, or 50.3% of sales, in the prior fiscal year. The increase in costCost of goods sold as a percentage of revenues was primarily driven by continued inflationary pressures in the impact fixedMajor Markets which resulted in an overall increase in product costs had ondue to higher inbound freight costs as well as higher outbound postage and freight costs. Certain foreign operations, primarily Canada, purchase inventory in U.S. dollars and the lower local currency sales in Canada. Additionally,strengthening of the strong U.S. dollar further increased cost
unfavorably impacted Cost of goods sold as a percentage of revenuessold. Fulfillment costs also increased, primarily in Canada, driven by higher labor costs. In addition, higher excess and obsolete inventory in Canada was due to lower inventory utilization in the fact that many of the Company's international operations purchase U.S. product in U.S. dollars. This increasetrade channel, which was partially offset by $1.5 millionlower excess and obsolete inventory in lower costs due toAsia as a warehouse optimization project in Canada that occurred duringresult of the prior fiscal year.exit of the direct sales business.
Other operating expenses decreased by $9.8were $113.3 million when compared to the prior fiscal year. The decrease was primarily driven by $16.3 million in foreign exchange translation, partially offset by a $3.7 million insurance settlement in the prior fiscal year relating to a fire in a warehouse in India and an increase of $1.9 million in bad debt expense due to economic conditions in Malaysia and Thailand. Other operating expenses were also impacted by $0.9 million and $1.5 million of severance expenses for the fiscal years ended May 31, 2016 and 2015, respectively, related to cost saving initiatives.
Segment operating income for the fiscal year ended May 31, 20162023, compared to $129.7 million in the prior fiscal year. In local currencies, Other operating expenses decreased $8.3 million coupled with unfavorable foreign exchange impact of $8.1 million. Approximately $12.6 million of the decrease related to the disposition of the direct sales business in Asia driving lower employee-related expenses, general overhead costs and bad debt expense. In addition, the segment incurred severance expense of $1.2 million related to restructuring programs and UK branch consolidation costs of $0.5 million in the prior fiscal year, both of which did not reoccur in fiscal 2023. Partially offsetting this decrease, Other operating expenses were impacted by higher employee-related expenses due to the increased volume in the book fairs channels and the discontinuation of government subsidies related to COVID-related governmental retention programs in which $1.2 million was $11.4recognized in the prior fiscal year.
Segment operating loss for the fiscal year ended May 31, 2023 was $3.6 million, compared to $20.6operating income of $3.3 million in the prior fiscal year. Operating loss increased $6.9 million, primarily driven by cost pressures in Canada related to the impact of the weakening Canadian dollar on inventory purchases which are primarily denominated in U.S. dollars, higher excess and obsolete inventory due to the softness in the retail market, coupled with higher freight and fulfillment labor costs which, in addition to Canada, also impacted the other Major Markets due to continued inflationary pressures. This was partially offset by improved operating margin in Asia of $4.6 million attributable to the exit from the direct sales business, which generated losses in the prior period. The Company expects to incur severance costs in the first quarter of fiscal 2024 related to restructuring programs in Canada as efforts are being made to utilize efficiencies across North American operations.
Overhead
Fiscal 2023 compared to fiscal 2022
Unallocated overhead expense for the fiscal year ended May 31, 2023 decreased by $11.1 million to $91.9 million, compared to $103.0 million in the prior fiscal year. The decrease was drivenprimarily attributable to $5.0 million of insurance recoveries received and recognized in fiscal 2023 related to photo litigation settlements paid in prior periods and a $1.8 million benefit related to the favorable settlement of certain legacy sales tax matters. In addition, the Company incurred lower unallocated employee-related costs, including lower severance and related charges from the Company's restructuring programs of $5.0 million. This was partially offset by $3.9$6.6 million in foreign exchange translation, higher cost of goods sold due to U.S. sourced product, the presence of a $3.7 million insurance settlementrecoveries received and recognized in the prior fiscal year relating to a fire in a warehouse in India, an increase of $1.9 million in bad debt expense due to economic conditions in Malaysia and Thailand, lower revenues from the Canadian operations and lower gross margin sales in the Australian channels. This was partially offset by $2.7 million in impairment charges of certain outdated technology platforms in the prior fiscal year, $1.5 million in lower costs due to a warehouse optimization project in Canada during the prior fiscal year and $0.6 million in lower severance costs in fiscal 2016.
Overhead
Fiscal 2017 compared to fiscal 2016
Corporate overhead expense for fiscal 2017 increased by $16.4 million to $123.6 million, compared to $107.2 million in the prior fiscal year. The increase was primarily related to higher spending on strategic technology platforms for new enterprise-wide customer and content management systems and the migration to SaaS and cloud-based technology solutions, combined with increased spending on company websites, as well as higher severance expense of $3.4 million related to cost reduction programs and higher facilities-related expenses due to the renovation of the Company's headquarters location in New York City, partially offset by $1.8 million in lower impairment charges. In fiscal 2017, the Company recognized $5.7 million in impairment charges related to certain website development assets compared to $7.5 million in impairment charges in fiscal 2016 related to the abandonment of legacy building improvements in connection with the Company's renovation of its headquarters location in New York City. The Company expects costs associated with its strategic technology initiatives to continue into future fiscal periods, as well as the incurrence of additional impairment charges related to the renovation of the Company's headquarters location in New York City as upcoming phases of the renovation project result in the abandonment of additional legacy building improvements.
Fiscal 2016 compared to fiscal 2015
Corporate overhead for fiscal 2016 decreased by $14.5 million to $107.2 million, compared to $121.7 million in the prior fiscal year. The decrease primarily related to lower unabsorbed overhead burden, as costsintellectual property legal settlement accrued in fiscal 2016 were offset by transition service fees under a transition services agreement with the purchaser of the educational technology and services business, and lower pension expense of $4.3 million related to a settlement on a portion of the domestic pension plan in the prior fiscal year. Cost savings associated with the Company's efforts to offset the unabsorbed overhead burden are reflected in the Company's reportable segments in fiscal 2016 and future fiscal periods. The decrease was partially offset by higher strategic technology spending on the new enterprise-wide customer and content management systems and the migration to SaaS and cloud-based technology solutions and $4.6 million in higher impairment charges associated with a $7.5 million impairment charge related to the abandonment of legacy building improvements in connection with the Company's renovation of its headquarters location in New York City. This compares to a $2.9 million impairment charge in fiscal 2015 associated with the closure of the retail store that was located at the Company headquarters in New York City. Corporate overhead expenses were also impacted by $8.6 million and $7.4 million of severance expenses related to cost saving initiatives for the fiscal years ended May 31, 2016 and 2015, respectively.2021.
Liquidity and Capital Resources
Fiscal 20172023 compared to fiscal 2016
The Company’s cash and cash equivalents totaled $444.1 million at May 31, 2017 and $399.7 million at May 31, 2016. Cash and cash equivalents held by the Company’s U.S. operations totaled $430.5 million at May 31, 2017 and $385.3
million at May 31, 2016.2022
Cash provided by operating activities was $141.4$148.9 million for the fiscal year ended May 31, 2017,2023, compared to cash used inprovided by operating activities of $78.9$226.0 million for the prior fiscal year, representing an increasea decrease in cash provided by operating activities of $220.3$77.1 million. The increasedecrease in cash provided was primarily driven by higher inventory purchases of approximately $110 million. In the first half of the fiscal year, the Company increased purchases by approximately $140 million to mitigate long lead times related to global supply chain challenges. The Company expects to return to historical purchasing patterns as lead times have returned to pre-pandemic levels, however, due to the continued growth of the book fairs business, working capital requirements are expected to remain elevated. The decrease was also attributable to lower net refunds from income taxes of $51.3 million relative to the prior fiscal year, paymentincreased spending on general expenses in the book fairs channel to support the increased fair count and lower cash remittances related to book fairs incentive credits. This was partially offset by higher customer remittances on receivable balances in fiscal 2023 of approximately $186 million in income tax related to the sale of the educational technology and services business, a decrease in cash used in discontinued operations of $10.1 million, and favorable changes in operating assets and liabilities of $28.5 million, primarily driven by a reduction in income tax receivables in fiscal 2017.$62.6 million.
Cash used in investing activities was $92.8$99.6 million for the fiscal year ended May 31, 2017,2023, compared to cash used in investing activities of $39.5$43.2 million for the prior fiscal year, representing an increase in cash used in investing activities of $53.3$56.4 million. The increase in cash used was primarily driven by $30.1 million in higher capital spendingexpenditures of $20.0 million, primarily for new equipment at the Company's Jefferson City, Missouri distribution facility and in the book fairs warehouses to meet expected demand, payments related to the investment plan to create premium retail space and modernize the Company's headquarters office spaceLearning Ovations acquisition of $10.7 million, and increased prepublication spending for strategic technology initiatives. These trends are expected to continueof $9.7 million associated with product development in fiscal 2018.Education Solutions. In addition, $14.7the
prior fiscal year included net proceeds of $10.4 million is attributable to the difference between the amount of the final release of the funds remaining in the escrow established in connection withfrom the sale of the educational technologyU.S. Lake Mary facility and services business and$5.6 million from the amounts releasedsale of the UK distribution facility located in fiscal 2016. The Company also incurred $6.4 million in higher acquisition related payments in the current fiscal year.Witney.
Cash used inby financing activities was $4.1$139.5 million for the fiscal year ended May 31, 2017, compared to cash provided by financing activities of $12.0 million for the prior fiscal year, representing an increase in cash used in financing activities of $16.1 million. The Company experienced lower proceeds pursuant to employee stock plans of $19.9 million and higher short-term credit facility net repayments of $2.7 million, partially offset by a decrease in the Company's repurchase of common stock of $7.5 million.
Fiscal 2016 compared to fiscal 2015
Cash used in operating activities was $78.9 million for the fiscal year ended May 31, 2016, compared to cash provided by operating activities of $166.9 million for the prior fiscal year, representing an increase in cash used in operating activities of $245.8 million. The increase in cash used was primarily due to income tax payments of approximately $186 million in fiscal 2016 resulting from the gain on the sale of the educational technology and services business recognized in fiscal 2015, as well as to discontinued operations which contributed $69.5 million to the increase in cash used driven by the absence of the operating income from the former educational technology and services business which was sold on May 29, 2015.
Cash used in investing activities was $39.5 million for the fiscal year ended May 31, 2016, compared to cash provided by investing activities of $445.3 million for the prior fiscal year, representing an increase in cash used in investing activities of $484.8 million. The increase in cash used was primarily driven by discontinued operations which resulted in an increase in the use of cash of $487.6 million, driven by the cash proceeds of $543.2 million which had been received in the prior fiscal year which comprised sale proceeds of $577.7 million less restricted cash held in escrow of $34.5 million, the $33.9 million in cash used in investing activities associated with the former educational technology and services business before it was sold, the release of $24.6 million in restricted cash from escrow in fiscal 2016 and a working capital adjustment resulting in a $2.9 million final payment to the purchaser in fiscal 2016.
Cash provided by financing activities was $12.0 million for the fiscal year ended May 31, 2016,2023, compared to cash used in financing activities of $124.5$229.2 million for the prior fiscal year. The decrease in cash used in financing activities of $89.7 million was primarily related to repayments of borrowings under the U.S. credit agreement of $175.0 million during the prior fiscal year, representingcoupled with an increase in cash provided by financing activitiesnet proceeds from stock option exercises of $136.5$10.5 million. In fiscal 2016,Partially offsetting this decrease, the Company experienced lower net repayment activity underrepurchased $132.1 million of common stock, compared to repurchases of $33.4 million in the Loan Agreementprior fiscal year, and paid higher dividends of $120.0$4.9 million and higher proceeds pursuant to employee stock plansas part of $19.3 million, and the Company's short-term net borrowings position resulted in an increase in cash provided of $11.5 million. This increase was partially offset by an increase in the Company's repurchase of its Common shares of $10.9 million.
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.shareholder enhancement initiatives. As a result, outstanding shares decreased 7% from 34.2 million to 31.7 million as of May 31, 2023 which will benefit earnings per share calculations in fiscal 2024.
Cash Position
The Company’s cash and cash equivalents totaled $224.5 million at May 31, 2023 and $316.6 million at May 31, 2022. Cash and cash equivalents held by the Company’s business cycle, borrowings have historically increased during June, JulyU.S. operations totaled $174.6 million at May 31, 2023 and August, have generally peaked in September or October, and have been$275.5 million at their lowest point in May.May 31, 2022.
The Company’s operating philosophy is to use cash provided by operating activities to create value by paying down debt, reinvesting in existing businesses and, from time to time, making acquisitions that will complement its portfolio of businesses or acquiring other strategic assets, as well as engaging in shareholder enhancement initiatives, such as share repurchases or dividend declarations. During the fiscal year ended May 31, 2017,2023, the Company purchased approximately $6.9repurchased $135.1 million of its Commoncommon stock, which included shares onrepurchased through a modified Dutch auction tender offer and open-market repurchases. See Note 14, "Treasury Stock," of Notes to the open market comparedConsolidated Financial Statements in Item 8, "Consolidated Financial Statements and Supplementary Data" for further details regarding the modified Dutch auction tender offer. Under the Company's open-market buy-back program, $21.6 million remained available for future purchases of common shares as of May 31, 2023. Subsequent to approximately $14.4May 31, 2023, the Board authorized an increase of $100.0 million for common stock repurchases, resulting in a current Board authorization of $119.2 million, which includes the remaining amount from the previous Board authorization less share purchases in the prior fiscal year.repurchases of $2.4 million subsequent to May 31, 2023.
The Company has maintained, and expects to maintain for the foreseeable future, sufficient liquidity to fund ongoing operations, including working capital requirements, pension contributions, dividends, currently authorized Common share repurchases,postretirement benefits, debt service, planned capital expenditures and other investments.investments, as well as dividends and share repurchases. As of May 31, 2017,2023, the Company’s primary sources of liquidity consisted of cash and cash equivalents of $444.1$224.5 million, cash from operations and funding available under the Loan Agreement totaling approximately $375.0 million.Company's U.S. credit agreement. The Company may at any time, but in any event not more than once in any calendar year, request thatexpects the aggregate availabilityU.S. credit agreement to provide it with an appropriate level of flexibility to strategically manage its business operations. The Company's U.S. credit under the Revolving Loan be increased by an amountagreement, less commitments of $10.0$0.4 million, or an integral multiplehas $299.6 million of $10.0 million (but not to exceed $150.0 million).availability. Additionally, the Company has short-term credit facilities of $48.4$34.5 million, less current borrowings of $6.2$6.0 million and commitments of $4.9$3.4 million, resulting in $37.3$25.1 million of current availability under these facilities at May 31, 2017.2023. 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, and the Company does not expect to incur significant domestic borrowings to meet operating needs in fiscal 2018.activities.
The following table summarizes, as of May 31, 2017,2023, the Company’s contractual cash obligations by future period (see Notes 4, 5, 6, 9 and 1315 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data”):
| | | | | | | | | | $ amounts in millions | | | | | | | | | | $ amounts in millions |
| | Payments Due By Period | | Payments Due By Period |
| Contractual Obligations | 1 Year or Less | | Years 2-3 | | Years 4-5 | | After Year 5 | | Total | Contractual Obligations | 1 Year or Less | | Years 2-3 | | Years 4-5 | | After Year 5 | | Total |
| Minimum print quantities | $ | 45.5 |
| | $ | 93.4 |
| | $ | — |
| | $ | — |
| | $ | 138.9 |
| Minimum print quantities | $ | 0.3 | | | $ | 0.2 | | | $ | — | | | $ | — | | | $ | 0.5 | |
| Royalty advances | 8.4 |
| | 8.2 |
| | 2.7 |
| | 0.1 |
| | 19.4 |
| Royalty advances | | 28.9 | | | 11.9 | | | 0.3 | | | 0.2 | | | 41.3 | |
| Lines of credit and short-term debt | 6.2 |
| | — |
| | — |
| | — |
| | 6.2 |
| Lines of credit and short-term debt | | 6.0 | | | — | | | — | | | — | | | 6.0 | |
Capital leases (1) | 1.4 |
| | 2.5 |
| | 2.1 |
| | 2.5 |
| | 8.5 |
| |
Pension and post-retirement plans (2) | 130.9 |
| | 6.5 |
| | 6.8 |
| | 17.9 |
| | 162.1 |
| |
| Finance leases (1) | | Finance leases (1) | | 2.4 | | | 2.8 | | | 1.9 | | | 0.3 | | | 7.4 | |
| Operating leases | 30.0 |
| | 36.6 |
| | 16.3 |
| | 7.6 |
| | 90.5 |
| Operating leases | | 25.4 | | | 36.4 | | | 25.1 | | | 25.4 | | | 112.3 | |
Pension and postretirement plans (2) | | Pension and postretirement plans (2) | | 2.3 | | | 4.8 | | | 4.5 | | | 10.7 | | | 22.3 | |
| Total | $ | 222.4 |
| | $ | 147.2 |
| | $ | 27.9 |
| | $ | 28.1 |
| | $ | 425.6 |
| Total | $ | 65.3 | | | $ | 56.1 | | | $ | 31.8 | | | $ | 36.6 | | | $ | 189.8 | |
(1) Includes principal and interest.
(2) Includes anticipated amount of U.S. pension plan distributions resulting from the termination of the plan. Excludes expected Medicare
Part D subsidy receipts.
Financing
Loan Agreement
The Company is party to the Loan Agreement andU.S. credit agreement, as well as certain credit lines with various banks as described in Note 4 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data.” There were no outstanding borrowings under the Loan Agreement as of May 31, 2017.banks. For a more complete description of the Loan Agreement,U.S. credit agreement, as well as the Company's other debt obligations, reference is made to Note 45 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data.” The Company had no outstanding borrowings under the U.S. credit agreement as of May 31, 2023. On February 28, 2023, the Company entered into the First and Second Amendments to the U.S. credit agreement which adjusted the credit spread adjustment for SOFR (the secured overnight financing rate as administered by the Federal Reserve Bank of New York) to 0.10% and transitioned the reference rate from LIBOR (the London interbank offered rate) to SOFR. Reference is made to Note 1 and Note 5 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data for further details.
The Company is party to other loan agreements, notes or other documents or instruments which previously referenced USD LIBOR as the benchmark interest rate index used to set the borrowing rate on certain short-term and variable-rate loans or advances. As of May 31, 2023, the Company has effectively replaced USD LIBOR with alternative reference rates in all financial contracts. The Company does not believe that the change in reference rates has or will have any material effect on its ability to access the credit markets under its existing financing agreements, or its ability to modify or amend financial contracts, if required.
Acquisitions
In the ordinary course of business, the Company explores domestic and international expansion opportunities, including potential niche and strategic acquisitions. As part of this process, the Company engages with interested parties in discussions concerning possible transactions. The Company will continue to evaluate such expansion opportunities and prospects. See Note 910, "Acquisitions", of Notes to Consolidated Financial Statements in Item 8, “Consolidated“Consolidated Financial Statements and Supplementary Data.Data.”
Item 7A | Quantitative and Qualitative Disclosures about Market Risk
The Company conducts its business in various foreign countries, and as such, its cash flows and earnings are subject to fluctuations from changes in foreign currency exchange rates. The Company sells products from its domestic operations to its foreign subsidiaries, creating additional currency risk. The Company manages its exposures to this market risk through internally established procedures and, when deemed appropriate, through the use of short-term forward exchange contracts which were not significant as of May 31, 2017.2023. The Company does not enter into derivative transactions or use other financial instruments for trading or speculative purposes.
The Company is subject to the risk that market interest rates and its cost of borrowing will increase and thereby increase the interest charged under its variable-rate debt.
Additional information relating to the Company’s derivative transactions and outstanding financial instruments is included in Note 419, "Derivatives and Hedging," and Note 5, "Debt," respectively, of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data,” which is included herein.
The following table sets forth information about the Company’s debt instruments as of May 31, 2017 (see Note 4 of Notes to Consolidated Financial Statements in Item 8, “Consolidated Financial Statements and Supplementary Data”):2023:
| | | | | | | | | | | | | | | | $ amounts in millions | | | | | | | | | | | | | | $ amounts in millions |
| | | Fiscal Year Maturity | | | | Fair Value | | | Fiscal Year Maturity | | | | Fair Value |
| | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | Thereafter | | Total | | 2017 | | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 | | Thereafter | | Total | | 2023 |
| Debt Obligations | | |
| | |
| | |
| | |
| | | |
| | |
| | |
| Debt Obligations | | | | | | | | | | | | | | |
| Lines of credit and current portion of long-term debt | | $ | 6.2 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| | $ | 6.2 |
| | $ | 6.2 |
| Lines of credit and current portion of long-term debt | | $ | 6.0 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 6.0 | | | $ | 6.0 | |
| Average interest rate | | 4.1 | % | | — |
| | — |
| | — |
| | — |
| — |
| | |
| | |
| Average interest rate | | 4.9 | % | | — | | | — | | | — | | | — | | | — | | |
|
Item 8 | Consolidated Financial Statements and Supplementary Data
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The following consolidated financial statement schedule for the years ended May 31, 2017, 20162023, 2022 and 20152021 is filed with this annual report on Form 10-K: | | |
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All other schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements or the Notes thereto.
Consolidated Statements of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (Amounts in millions, except per share data)
For fiscal years ended May 31, |
| | 2023 | | 2022 | | 2021 |
| Revenues | $ | 1,704.0 | | | $ | 1,642.9 | | | $ | 1,300.3 | |
| Operating costs and expenses | | | | | | | | |
| Cost of goods sold | | 786.4 | | | | 765.5 | | | | 628.7 | |
| Selling, general and administrative expenses | | 756.6 | | | | 722.8 | | | | 622.7 | |
| Depreciation and amortization | | 54.7 | | | | 56.8 | | | | 60.5 | |
| | | | | | | | |
| Asset impairments and write downs | | — | | | | 0.4 | | | | 11.1 | |
| Total operating costs and expenses | | 1,597.7 | | | | 1,545.5 | | | | 1,323.0 | |
| Operating income (loss) | | 106.3 | | | | 97.4 | | | | (22.7) | |
| | | | | | | | |
| Interest income | | 7.2 | | | | 0.5 | | | | 0.4 | |
| Interest expense | | (1.4) | | | | (2.9) | | | | (6.2) | |
| Other components of net periodic benefit (cost) | | 0.3 | | | | 0.1 | | | | (0.1) | |
| Gain (Loss) on assets held for sale | | — | | | | (15.1) | | | | — | |
| Gain (loss) on sale of assets and other | | — | | | | 9.7 | | | | 10.4 | |
| Earnings (loss) before income taxes | | 112.4 | | | | 89.7 | | | | (18.2) | |
| Provision (benefit) for income taxes | | 25.9 | | | | 8.7 | | | | (7.3) | |
| Net income (loss) | $ | 86.5 | | | $ | 81.0 | | | $ | (10.9) | |
| Less: Net income (loss) attributable to noncontrolling interest | | 0.2 | | | | 0.1 | | | | 0.1 | |
| Net income (loss) attributable to Scholastic Corporation | $ | 86.3 | | | $ | 80.9 | | | $ | (11.0) | |
| | | | | | | | |
| Basic and diluted earnings (loss) per share of Class A and Common Stock | | | | | | | | |
| Basic: | | | | | | | | |
| Net Income (loss) attributable to Scholastic Corporation | $ | 2.56 | | | $ | 2.33 | | | $ | (0.32) | |
| Diluted: | | | | | | | | |
| Net Income (loss) attributable to Scholastic Corporation | $ | 2.49 | | | $ | 2.27 | | | $ | (0.32) | |
| Dividends declared per share of Class A and Common Stock | $ | 0.80 | | | $ | 0.60 | | | $ | 0.60 | |
|
| | | | | | | | | | | |
| | (Amounts in millions, except per share data) For fiscal years ended May 31, | |
| | 2017 | | 2016 | | 2015 |
| Revenues | $ | 1,741.6 |
| | $ | 1,672.8 |
| | $ | 1,635.8 |
|
| Operating costs and expenses: | |
| | |
| | |
|
| Cost of goods sold | 814.5 |
| | 762.3 |
| | 758.5 |
|
| Selling, general and administrative expenses | 777.8 |
| | 777.7 |
| | 771.1 |
|
| Depreciation and amortization | 38.7 |
| | 38.9 |
| | 47.9 |
|
| Severance | 14.9 |
| | 11.9 |
| | 9.6 |
|
| Asset impairments | 6.8 |
| | 14.4 |
| | 15.8 |
|
| Total operating costs and expenses | 1,652.7 |
| | 1,605.2 |
| | 1,602.9 |
|
| Operating income | 88.9 |
| | 67.6 |
| | 32.9 |
|
| Interest income | 1.4 |
| | 1.1 |
| | 0.3 |
|
| Interest expense | (2.4 | ) | | (2.2 | ) | | (3.8 | ) |
| Gain (loss) on investments and other | — |
| | 2.2 |
| | 0.5 |
|
| Earnings (loss) from continuing operations before income taxes | 87.9 |
| | 68.7 |
| | 29.9 |
|
| Provision (benefit) for income taxes | 35.4 |
| | 24.7 |
| | 14.4 |
|
| Earnings (loss) from continuing operations | 52.5 |
| | 44.0 |
| | 15.5 |
|
| Earnings (loss) from discontinued operations, net of tax | (0.2 | ) | | (3.5 | ) | | 279.1 |
|
| Net income (loss) | $ | 52.3 |
| | $ | 40.5 |
| | $ | 294.6 |
|
| Basic and diluted earnings (loss) per share of Class A and Common Stock | |
| | |
| | |
|
| Basic: | |
| | |
| | |
|
| Earnings (loss) from continuing operations | $ | 1.51 |
| | $ | 1.29 |
| | $ | 0.47 |
|
| Earnings (loss) from discontinued operations | $ | (0.00 | ) | | $ | (0.11 | ) | | $ | 8.53 |
|
| Net income (loss) | $ | 1.51 |
| | $ | 1.18 |
| | $ | 9.00 |
|
| Diluted: | |
| | |
| | |
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| Earnings (loss) from continuing operations | $ | 1.48 |
| | $ | 1.26 |
| | $ | 0.46 |
|
| Earnings (loss) from discontinued operations | $ | (0.01 | ) | | $ | (0.10 | ) | | $ | 8.34 |
|
| Net income (loss) | $ | 1.47 |
| | $ | 1.16 |
| | $ | 8.80 |
|
| Dividends declared per common share | $ | 0.600 |
| | $ | 0.600 |
| | $ | 0.600 |
|
See accompanying notes
Consolidated Statements of Comprehensive Income (Loss)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (Amounts in millions)
For fiscal years ended May 31, |
| | 2023 | | 2022 | | 2021 |
| Net income (loss) | $ | 86.5 | | | $ | 81.0 | | | $ | (10.9) | |
| Other comprehensive income (loss), net: | | | | | | | | |
| Foreign currency translation adjustments | | (5.4) | | | | (14.5) | | | | 19.9 | |
| Pension and postretirement adjustments, net of tax | | (5.0) | | | | 3.8 | | | | 3.7 | |
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| Total other comprehensive income (loss) | $ | (10.4) | | | $ | (10.7) | | | $ | 23.6 | |
| Comprehensive income (loss) | | 76.1 | | | | 70.3 | | | | 12.7 | |
| Less: Net income (loss) attributable to noncontrolling interest | | 0.2 | | | | 0.1 | | | | 0.1 | |
| Comprehensive income (loss) attributable to Scholastic Corporation | $ | 75.9 | | | $ | 70.2 | | | $ | 12.6 | |
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| | | | | | | | | | | |
| | (Amounts in millions) For fiscal years ended May 31, | |
| | 2017 | | 2016 | | 2015 |
| Net income (loss) | $ | 52.3 |
| | $ | 40.5 |
| | $ | 294.6 |
|
| Other comprehensive income (loss), net: | |
| | |
| | |
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| Foreign currency translation adjustments | (5.3 | ) | | (8.1 | ) | | (15.3 | ) |
| Pension and post-retirement adjustments: | |
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| | |
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| Amortization of prior service credit | — |
| | (0.0 | ) | | (0.2 | ) |
| Net actuarial gain (loss) associated with benefit plans | (2.2 | ) | | (1.6 | ) | | (6.3 | ) |
| Total other comprehensive income (loss) | $ | (7.5 | ) | | $ | (9.7 | ) | | $ | (21.8 | ) |
| Comprehensive income (loss) | $ | 44.8 |
| | $ | 30.8 |
| | $ | 272.8 |
|
See accompanying notes
Consolidated Balance Sheets
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(Amounts in millions) Balances at May 31, | |
| ASSETS | 2017 | | 2016 |
| Current Assets: | |
| | |
|
| Cash and cash equivalents | $ | 444.1 |
| | $ | 399.7 |
|
| Restricted cash held in escrow | — |
| | 9.9 |
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| Accounts receivable, net | 199.2 |
| | 196.3 |
|
| Inventories, net | 282.5 |
| | 271.2 |
|
| Prepaid expenses and other current assets | 44.3 |
| | 72.5 |
|
| Current assets of discontinued operations | 0.4 |
| | 0.5 |
|
| Total current assets | 970.5 |
| | 950.1 |
|
| Noncurrent Assets: | |
| | |
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| Property, plant and equipment, net | 475.3 |
| | 437.6 |
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| Prepublication costs, net | 43.3 |
| | 41.8 |
|
| Royalty advances, net | 41.8 |
| | 44.0 |
|
| Goodwill | 118.9 |
| | 116.2 |
|
| Noncurrent deferred income taxes | 53.7 |
| | 68.5 |
|
| Other assets and deferred charges | 56.9 |
| | 54.9 |
|
| Total noncurrent assets | 789.9 |
| | 763.0 |
|
| Total assets | $ | 1,760.4 |
| | $ | 1,713.1 |
|
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| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current Liabilities: | | | |
| Lines of credit and current portion of long-term debt | $ | 6.2 |
| | $ | 6.3 |
|
| Accounts payable | 141.2 |
| | 138.2 |
|
| Accrued royalties | 34.2 |
| | 31.6 |
|
| Deferred revenue | 24.2 |
| | 23.5 |
|
| Other accrued expenses | 178.0 |
| | 175.9 |
|
| Accrued income taxes | 2.8 |
| | 1.6 |
|
| Current liabilities of discontinued operations | 0.5 |
| | 1.2 |
|
| Total current liabilities | 387.1 |
| | 378.3 |
|
| Noncurrent Liabilities: | |
| | |
|
| Other noncurrent liabilities | 65.4 |
| | 77.2 |
|
| Total noncurrent liabilities | 65.4 |
| | 77.2 |
|
| Commitments and Contingencies: |
|
| |
|
|
| Stockholders’ Equity: | |
| | |
|
| Preferred Stock, $1.00 par value: Authorized, 2.0 shares; Issued and Outstanding, none | — |
| | — |
|
| Class A Stock, $0.01 par value: Authorized, 4.0 shares; Issued and Outstanding, 1.7 shares | 0.0 |
| | 0.0 |
|
| Common Stock, $0.01 par value: Authorized, 70.0 shares; Issued, 42.9 shares; Outstanding, 33.4 and 32.7 shares, respectively | 0.4 |
| | 0.4 |
|
| Additional paid-in capital | 606.8 |
| | 600.7 |
|
| Accumulated other comprehensive income (loss) | (94.2 | ) | | (86.7 | ) |
| Retained earnings | 1,091.2 |
| | 1,059.8 |
|
| Treasury stock at cost | (296.3 | ) | | (316.6 | ) |
| Total stockholders’ equity | 1,307.9 |
| | 1,257.6 |
|
| Total liabilities and stockholders’ equity | $ | 1,760.4 |
| | $ | 1,713.1 |
|
| | | | | | | | | | | | | | | | | |
(Amounts in millions)
Balances at May 31, |
| ASSETS | 2023 | | 2022 |
| Current Assets: | | | | | |
| Cash and cash equivalents | $ | 224.5 | | | $ | 316.6 | |
| | | | | |
| Accounts receivable, net | | 278.0 | | | | 299.4 | |
| Inventories, net | | 334.5 | | | | 281.4 | |
| Income tax receivable | | 8.9 | | | | 26.8 | |
| Prepaid expenses and other current assets | | 47.0 | | | | 68.1 | |
| Assets held for sale | | — | | | | 3.7 | |
| Total current assets | | 892.9 | | | | 996.0 | |
| Noncurrent Assets: | | | | | |
| Property, plant and equipment, net | | 521.4 | | | | 517.0 | |
| Prepublication costs, net | | 56.4 | | | | 55.5 | |
| Operating lease right-of-use assets, net | | 85.7 | | | | 81.9 | |
| Royalty advances, net | | 56.8 | | | | 49.2 | |
| | | | | |
| Goodwill | | 132.7 | | | | 125.3 | |
| | | | | |
| Noncurrent deferred income taxes | | 21.0 | | | | 21.5 | |
| Other assets and deferred charges | | 99.8 | | | | 94.4 | |
| | | | | |
| Total noncurrent assets | | 973.8 | | | | 944.8 | |
| Total assets | $ | 1,866.7 | | | $ | 1,940.8 | |
| | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | |
| Current Liabilities: | | | | | |
| Lines of credit and current portion of long-term debt | $ | 6.0 | | | $ | 6.5 | |
| | | | | |
| Accounts payable | | 170.9 | | | | 162.3 | |
| Accrued royalties | | 52.8 | | | | 61.3 | |
| Deferred revenue | | 169.1 | | | | 172.8 | |
| Other accrued expenses | | 168.9 | | | | 193.3 | |
| Accrued income taxes | | 13.4 | | | | 2.7 | |
| Operating lease liabilities | | 21.2 | | | | 20.8 | |
| | | | | |
| Total current liabilities | | 602.3 | | | | 619.7 | |
| Noncurrent Liabilities: | | | | | |
| Long-term debt | | — | | | | — | |
| Operating lease liabilities | | 73.8 | | | | 69.8 | |
| Other noncurrent liabilities | | 26.1 | | | | 32.9 | |
| Total noncurrent liabilities | | 99.9 | | | | 102.7 | |
| Commitments and Contingencies: | | — | | | | — | |
| Stockholders’ Equity: | | | | | |
| Preferred Stock, $1.00 par value: Authorized, 2.0 shares; Issued and Outstanding, none | $ | — | | | $ | — | |
| Class A Stock, $0.01 par value: Authorized, 4.0 shares; Issued and Outstanding, 1.7 shares | | 0.0 | | | | 0.0 | |
| Common Stock, $0.01 par value: Authorized, 70.0 shares; Issued, 42.9 shares; Outstanding, 30.0 and 32.5 shares, respectively | | 0.4 | | | | 0.4 | |
| Additional paid-in capital | | 632.2 | | | | 627.0 | |
| Accumulated other comprehensive income (loss) | | (55.8) | | | | (45.4) | |
| Retained earnings | | 1,035.6 | | | | 976.5 | |
| Treasury stock at cost: 12.9 shares and 10.4 shares, respectively | | (449.5) | | | | (341.5) | |
| Total stockholders' equity of Scholastic Corporation | | 1,162.9 | | | | 1,217.0 | |
| Noncontrolling interest | | 1.6 | | | | 1.4 | |
| Total stockholders’ equity | | 1,164.5 | | | | 1,218.4 | |
| Total liabilities and stockholders’ equity | $ | 1,866.7 | | | $ | 1,940.8 | |
See accompanying notes
Consolidated Statement of Changes in Stockholders’ Equity |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | (Amounts in millions) | |
| | Class A Stock | Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Treasury Stock At Cost | Total Stockholders' Equity |
| | Shares | | Amount | Shares | | Amount |
| Balance at May 31, 2014 | 1.7 |
| | $ | 0.0 |
| 30.6 |
| | $ | 0.4 |
| | $ | 580.8 |
| | $ | (55.2 | ) | | $ | 765.1 |
| | $ | (375.7 | ) | | $ | 915.4 |
|
| Net Income (loss) | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | 294.6 |
| | — |
| | 294.6 |
|
| Foreign currency translation adjustment | — |
| | — |
| — |
| | — |
| | — |
| | (15.3 | ) | | — |
| | — |
| | (15.3 | ) |
| Pension and post-retirement adjustments (net of tax of $(2.5)) | — |
| | — |
| — |
| | — |
| | — |
| | (6.5 | ) | | — |
| | — |
| | (6.5 | ) |
| Stock-based compensation | — |
| | — |
| — |
| | — |
| | 11.3 |
| | — |
| | — |
| | — |
| | 11.3 |
|
| Proceeds pursuant to stock-based compensation plans | — |
| | — |
| — |
| | — |
| | 28.1 |
| | — |
| | — |
| | — |
| | 28.1 |
|
| Purchases of treasury stock at cost | — |
| | — |
| (0.1 | ) | | — |
| | — |
| | — |
| | — |
| | (3.5 | ) | | (3.5 | ) |
| Treasury stock issued pursuant to equity-based plans | — |
| | — |
| 1.0 |
| | — |
| | (28.7 | ) | | — |
| | — |
| | 29.3 |
| | 0.6 |
|
| Dividends | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | (19.8 | ) | | — |
| | (19.8 | ) |
| Balance at May 31, 2015 | 1.7 |
| | $ | 0.0 |
| 31.5 |
| | $ | 0.4 |
| | $ | 591.5 |
| | $ | (77.0 | ) | | $ | 1,039.9 |
| | $ | (349.9 | ) | | $ | 1,204.9 |
|
| Net Income (loss) | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | 40.5 |
| | — |
| | 40.5 |
|
| Foreign currency translation adjustment | — |
| | — |
| — |
| | — |
| | — |
| | (8.1 | ) | | — |
| | — |
| | (8.1 | ) |
| Pension and post-retirement adjustments (net of tax of $(1.8)) | — |
| | — |
| — |
| | — |
| | — |
| | (1.6 | ) | | — |
| | — |
| | (1.6 | ) |
| Stock-based compensation | — |
| | — |
| — |
| | — |
| | 9.7 |
| | — |
| | — |
| | — |
| | 9.7 |
|
| Proceeds pursuant to stock-based compensation plans | — |
| | — |
| — |
| | — |
| | 47.2 |
| | — |
| | — |
| | — |
| | 47.2 |
|
| Purchases of treasury stock at cost | — |
| | — |
| (0.4 | ) | | — |
| | — |
| | — |
| | — |
| | (14.4 | ) | | (14.4 | ) |
| Treasury stock issued pursuant to equity-based plans | — |
| | — |
| 1.6 |
| | — |
| | (47.7 | ) | | — |
| | — |
| | 47.7 |
| | 0.0 |
|
| Dividends | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | (20.6 | ) | | — |
| | (20.6 | ) |
| Balance at May 31, 2016 | 1.7 |
| | $ | 0.0 |
| 32.7 |
| | $ | 0.4 |
| | $ | 600.7 |
| | $ | (86.7 | ) | | $ | 1,059.8 |
| | $ | (316.6 | ) | | $ | 1,257.6 |
|
| Net Income (loss) | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | 52.3 |
| | — |
| | 52.3 |
|
| Foreign currency translation adjustment | — |
| | — |
| — |
| | — |
| | — |
| | (5.3 | ) | | — |
| | — |
| | (5.3 | ) |
| Pension and post-retirement adjustments (net of tax of $0.4) | — |
| | — |
| — |
| | — |
| | — |
| | (2.2 | ) | | — |
| | — |
| | (2.2 | ) |
| Stock-based compensation | — |
| | — |
| — |
| | — |
| | 10.1 |
| | — |
| | — |
| | — |
| | 10.1 |
|
| Proceeds pursuant to stock-based compensation plans | — |
| | — |
| — |
| | — |
| | 22.5 |
| | — |
| | — |
| | — |
| | 22.5 |
|
| Purchases of treasury stock at cost | — |
| | — |
| (0.2 | ) | | — |
| | — |
| | — |
| | — |
| | (6.9 | ) | | (6.9 | ) |
| Treasury stock issued pursuant to equity-based plans | — |
| | — |
| 0.9 |
| | — |
| | (26.5 | ) | | — |
| | — |
| | 27.2 |
| | 0.7 |
|
| Dividends | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | (20.9 | ) | | — |
| | (20.9 | ) |
| Balance at May 31, 2017 | 1.7 |
| | $ | 0.0 |
| 33.4 |
| | $ | 0.4 |
| | $ | 606.8 |
| | $ | (94.2 | ) | | $ | 1,091.2 |
| | $ | (296.3 | ) | | $ | 1,307.9 |
|
See accompanying notes
Consolidated Statements of Cash Flows |
| | | | | | | | | | | |
| | | | (Amounts in millions) Years ended May 31, | |
| | 2017 | | 2016 | | 2015 |
| Cash flows - operating activities: | |
| | |
| | |
|
| Net income (loss) | $ | 52.3 |
| | $ | 40.5 |
| | $ | 294.6 |
|
| Earnings (loss) from discontinued operations, net of tax | (0.2 | ) | | (3.5 | ) | | 279.1 |
|
| Earnings (loss) from continuing operations | 52.5 |
| | 44.0 |
| | 15.5 |
|
Adjustments to reconcile earnings (loss) from continuing operations to net cash provided by (used in) operating activities of continuing operations: | |
| | |
| | |
|
| Provision for losses on accounts receivable | 11.0 |
| | 12.3 |
| | 10.6 |
|
| Provision for losses on inventory | 16.0 |
| | 12.0 |
| | 21.7 |
|
| Provision for losses on royalty advances | 4.3 |
| | 4.1 |
| | 3.6 |
|
| Amortization of prepublication and production costs | 23.3 |
| | 26.4 |
| | 30.4 |
|
| Depreciation and amortization | 39.1 |
| | 39.3 |
| | 48.3 |
|
| Amortization of pension and post-retirement actuarial gains and losses | 2.1 |
| | 4.4 |
| | 6.9 |
|
| Deferred income taxes | 15.5 |
| | 18.8 |
| | (3.5 | ) |
| Stock-based compensation | 10.1 |
| | 9.7 |
| | 8.8 |
|
| Income from equity investments | (5.3 | ) | | (3.5 | ) | | (2.0 | ) |
| Non cash write off related to asset impairments | 6.8 |
| | 14.4 |
| | 15.8 |
|
| Unrealized (gain) loss on investments | — |
| | (2.2 | ) | | (0.6 | ) |
| Changes in assets and liabilities, net of amounts acquired: | |
| | |
| | |
|
| Accounts receivable | (15.2 | ) | | (18.7 | ) | | 1.6 |
|
| Inventories | (29.4 | ) | | (27.8 | ) | | (33.4 | ) |
| Prepaid expenses and other current assets | 24.9 |
| | (34.4 | ) | | (0.3 | ) |
| Royalty advances | (2.3 | ) | | (9.1 | ) | | (6.2 | ) |
| Accounts payable | (6.0 | ) | | (12.7 | ) | | 12.1 |
|
| Other accrued expenses | 3.1 |
| | 2.8 |
| | 5.3 |
|
| Accrued income taxes | 1.2 |
| | (155.2 | ) | | (24.6 | ) |
| Accrued royalties | 2.9 |
| | 5.2 |
| | (3.1 | ) |
| Deferred revenue | 0.8 |
| | 2.2 |
| | 2.2 |
|
| Pension and post-retirement obligations | (5.3 | ) | | (2.1 | ) | | (2.2 | ) |
| Other noncurrent liabilities | (3.7 | ) | | 0.4 |
| | 2.5 |
|
| Other, net | (4.2 | ) | | 1.7 |
| | (1.1 | ) |
| Total adjustments | 89.7 |
| | (112.0 | ) | | 92.8 |
|
| Net cash provided by (used in) operating activities of continuing operations | 142.2 |
| | (68.0 | ) | | 108.3 |
|
| Net cash provided by (used in) operating activities of discontinued operations | (0.8 | ) | | (10.9 | ) | | 58.6 |
|
| Net cash provided by (used in) operating activities | 141.4 |
| | (78.9 | ) | | 166.9 |
|
| Cash flows - investing activities: | |
| | |
| | |
|
| Prepublication and production expenditures | (26.9 | ) | | (25.2 | ) | | (29.0 | ) |
| Additions to property, plant and equipment | (65.7 | ) | | (35.6 | ) | | (30.3 | ) |
| Proceeds from sale of assets | — |
| | 3.3 |
| | 0.7 |
|
| Loan to investee | — |
| | — |
| | (3.0 | ) |
| Repayment of loan to investee | — |
| | — |
| | 4.8 |
|
| Other investment and acquisition related payments | (10.1 | ) | | (3.7 | ) | | (8.3 | ) |
| Other | — |
| | — |
| | 1.1 |
|
| Net cash provided by (used in) investing activities of continuing operations | (102.7 | ) | | (61.2 | ) | | (64.0 | ) |
| Working capital adjustment/Proceeds from sale of discontinued assets | — |
| | (2.9 | ) | | 577.7 |
|
| Changes in restricted cash held in escrow for discontinued assets | 9.9 |
| | 24.6 |
| | (34.5 | ) |
| Other cash provided by (used in) investing activities of discontinued operations | — |
| | — |
| | (33.9 | ) |
| Net cash provided by (used in) investing activities | (92.8 | ) | | (39.5 | ) | | 445.3 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | (Amounts in millions) |
| Class A Stock | Common Stock | Additional Paid-in Capital | Accumulated
Other Comprehensive
Income (Loss) | Retained
Earnings | Treasury Stock
At Cost | Total
Stockholders'
Equity of Scholastic Corporation | Noncontrolling interest | Total
Stockholders'
Equity |
| | Shares | | Amount | Shares | | Amount |
| Balance at May 31, 2020 | 1.7 | | | $ | 0.0 | | 32.5 | | | $ | 0.4 | | | $ | 622.4 | | | $ | (58.3) | | | $ | 948.0 | | | $ | (333.3) | | | $ | 1,179.2 | | $ | 1.4 | | $ | 1,180.6 | |
| Net Income (loss) | — | | | — | | — | | | — | | | — | | | — | | | (11.0) | | | — | | | (11.0) | | 0.1 | | (10.9) | |
| | | | | | | | | | | | | | | | | | |
| Foreign currency translation adjustment | — | | | — | | — | | | — | | | — | | | 19.9 | | | | | — | | | 19.9 | | — | | 19.9 | |
| Pension and post-retirement adjustments (net of tax of $2.2) | — | | | — | | — | | | — | | | — | | | 3.7 | | | — | | | — | | | 3.7 | | — | | 3.7 | |
| Stock-based compensation | — | | | — | | — | | | — | | | 6.6 | | | — | | | — | | | — | | | 6.6 | | — | | 6.6 | |
| Proceeds from issuance of common stock pursuant to stock-based compensation plans | — | | | — | | — | | | — | | | 0.4 | | | — | | | — | | | — | | | 0.4 | | — | | 0.4 | |
| Purchases of treasury stock at cost | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | — | | — | | — | |
| Treasury stock issued pursuant to stock purchase plans | — | | | — | | 0.2 | | | — | | | (2.9) | | | — | | | — | | | 5.5 | | | 2.6 | | — | | 2.6 | |
| Dividends | — | | | — | | — | | | — | | | — | | | — | | | (20.6) | | | — | | | (20.6) | | — | | (20.6) | |
| | | | | | | | | | | | | | | | | | |
| Balance at May 31, 2021 | 1.7 | | | $ | 0.0 | | 32.7 | | | $ | 0.4 | | | $ | 626.5 | | | $ | (34.7) | | | $ | 916.4 | | | $ | (327.8) | | | $ | 1,180.8 | | $ | 1.5 | | $ | 1,182.3 | |
| Net Income (loss) | — | | | — | | — | | | — | | | — | | | — | | | 80.9 | | | — | | | 80.9 | | 0.1 | | 81.0 | |
| Foreign currency translation adjustment | — | | | — | | — | | | — | | | — | | | (14.5) | | | | | — | | | (14.5) | | — | | (14.5) | |
| Pension and post-retirement adjustments (net of tax of $0.3) | — | | | — | | — | | | — | | | — | | | 3.8 | | | — | | | — | | | 3.8 | | — | | 3.8 | |
| Stock-based compensation | — | | | — | | — | | | — | | | 7.8 | | | — | | | — | | | — | | | 7.8 | | — | | 7.8 | |
| Proceeds pursuant to stock-based compensation plans | — | | | — | | — | | | — | | | 10.4 | | | — | | | — | | | — | | | 10.4 | | — | | 10.4 | |
| Purchases of treasury stock at cost | — | | | — | | (0.9) | | | — | | | — | | | — | | | — | | | (33.4) | | | (33.4) | | — | | (33.4) | |
| Treasury stock issued pursuant to equity-based plans | — | | | — | | 0.7 | | | — | | | (17.7) | | | — | | | — | | | 19.7 | | | 2.0 | | — | | 2.0 | |
| Dividends | — | | | — | | — | | | — | | | — | | | — | | | (20.8) | | | — | | | (20.8) | | — | | (20.8) | |
| Other (noncontrolling interest) | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | — | | (0.2) | | (0.2) | |
| Balance at May 31, 2022 | 1.7 | | | $ | 0.0 | | 32.5 | | | $ | 0.4 | | | $ | 627.0 | | | $ | (45.4) | | | $ | 976.5 | | | $ | (341.5) | | | $ | 1,217.0 | | $ | 1.4 | | $ | 1,218.4 | |
| Net Income (loss) | — | | | — | | — | | | — | | | — | | | — | | | 86.3 | | | — | | | 86.3 | | 0.2 | | 86.5 | |
| Foreign currency translation adjustment | — | | | — | | — | | | — | | | — | | | (5.4) | | | — | | | — | | | (5.4) | | — | | (5.4) | |
| Pension and post-retirement adjustments (net of tax of $0.0) | — | | | — | | — | | | — | | | — | | | (5.0) | | | — | | | — | | | (5.0) | | — | | (5.0) | |
| Stock-based compensation | — | | | — | | — | | | — | | | 10.5 | | | — | | | — | | | — | | | 10.5 | | — | | 10.5 | |
| Proceeds pursuant to stock-based compensation plans | — | | | — | | — | | | — | | | 18.4 | | | — | | | — | | | — | | | 18.4 | | — | | 18.4 | |
| Purchases of treasury stock at cost | — | | | — | | (3.3) | | | — | | | — | | | — | | | — | | | (135.1) | | | (135.1) | | — | | (135.1) | |
| Treasury stock issued pursuant to equity-based plans | — | | | — | | 0.8 | | | — | | | (23.7) | | | — | | | — | | | 27.1 | | | 3.4 | | — | | 3.4 | |
| Dividends | — | | | — | | — | | | — | | | — | | | — | | | (27.2) | | | — | | | (27.2) | | — | | (27.2) | |
| | | | | | | | | | | | | | | | | | |
| Balance at May 31, 2023 | 1.7 | | | $ | 0.0 | | 30.0 | | | $ | 0.4 | | | $ | 632.2 | | | $ | (55.8) | | | $ | 1,035.6 | | | $ | (449.5) | | | $ | 1,162.9 | | $ | 1.6 | | $ | 1,164.5 | |
See accompanying notes
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (Amounts in millions)
Years ended May 31, |
| | 2023 | | 2022 | | 2021 |
| Cash flows - operating activities: | | | | | | | | |
| Net income (loss) attributable to Scholastic Corporation | $ | 86.3 | | | $ | 80.9 | | | $ | (11.0) | |
Adjustments to reconcile Net income (loss) to
net cash provided by (used in) operating activities: | | | | | | | | |
| Provision for losses on accounts receivable | | 3.3 | | | | 15.2 | | | | 5.2 | |
| Provision for losses on inventory | | 26.5 | | | | 27.7 | | | | 36.6 | |
| Provision for losses on royalty advances | | 4.2 | | | | 4.1 | | | | 5.4 | |
| | | | | | | | |
| Amortization of prepublication costs | | 25.1 | | | | 26.4 | | | | 25.4 | |
| Depreciation and amortization | | 64.6 | | | | 64.9 | | | | 64.9 | |
| Amortization of pension and postretirement plans | | (0.4) | | | | 0.0 | | | | — | |
| Deferred income taxes | | (0.7) | | | | 3.2 | | | | (8.0) | |
| Stock-based compensation | | 10.5 | | | | 7.8 | | | | 6.6 | |
| Income from equity investments | | (0.9) | | | | (2.0) | | | | (7.4) | |
| Non cash write off related to asset impairments and write downs | | — | | | | 0.4 | | | | 11.1 | |
| Non cash write off related to assets held for sale | | — | | | | 11.6 | | | | — | |
| (Gain) loss on sale of assets and other | | — | | | | (9.7) | | | | (10.4) | |
| Changes in assets and liabilities, net of amounts acquired: | | | | | | | | |
| Accounts receivable | | 15.0 | | | | (73.1) | | | | (14.6) | |
| Inventories | | (83.6) | | | | (46.7) | | | | (26.2) | |
| Income tax receivable | | 17.7 | | | | 62.0 | | | | 1.4 | |
| Prepaid expenses and other current assets | | 21.5 | | | | (22.2) | | | | (3.5) | |
| Assets held for sale | | — | | | | (3.7) | | | | — | |
| Royalty advances | | (12.0) | | | | (10.4) | | | | (8.5) | |
| Accounts payable | | 9.4 | | | | 27.4 | | | | (17.9) | |
| | | | | | | | |
| Accrued income taxes | | 10.9 | | | | (0.1) | | | | 1.3 | |
| Liabilities related to assets held for sale | | — | | | | 3.5 | | | | — | |
| Accrued royalties | | (7.6) | | | | 17.0 | | | | 6.2 | |
| Deferred revenue | | (2.9) | | | | 74.7 | | | | (19.5) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Other accrued expenses | | (15.3) | | | | (6.8) | | | | 36.5 | |
| Other, net | | (22.7) | | | | (26.1) | | | | (2.6) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Net cash provided by (used in) operating activities | | 148.9 | | | | 226.0 | | | | 71.0 | |
| Cash flows - investing activities: | | | | | | | | |
| Prepublication expenditures | | (26.9) | | | | (17.2) | | | | (20.7) | |
| Additions to property, plant and equipment | | (62.0) | | | | (42.0) | | | | (47.2) | |
| Proceeds from sale of assets | | — | | | | 16.0 | | | | 17.4 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Acquisition-related payments | | (10.7) | | | | — | | | | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Net cash provided by (used in) investing activities | | (99.6) | | | | (43.2) | | | | (50.5) | |
See accompanying notes
|
| | | | | | | | | | | |
| | | | (Amounts in millions) Years ended May 31, | |
| | 2017 | | 2016 | | 2015 |
| Cash flows - financing activities: | |
| | |
| | |
|
| Net (repayments) borrowings under credit agreement and revolving loan | — |
| | — |
| | (120.0 | ) |
| Borrowings under lines of credit | 28.3 |
| | 39.0 |
| | 350.9 |
|
| Repayments of lines of credit | (28.5 | ) | | (36.5 | ) | | (359.9 | ) |
| Repayment of capital lease obligations | (1.1 | ) | | (0.8 | ) | | (0.2 | ) |
| Reacquisition of common stock | (6.9 | ) | | (14.4 | ) | | (3.5 | ) |
| Proceeds pursuant to stock-based compensation plans | 25.4 |
| | 45.3 |
| | 26.0 |
|
| Payment of dividends | (20.8 | ) | | (20.5 | ) | | (19.7 | ) |
| Other | (0.5 | ) | | (0.1 | ) | | 2.1 |
|
| Net cash provided by (used in) financing activities of continuing operations | (4.1 | ) | | 12.0 |
| | (124.3 | ) |
| Net cash provided by (used in) financing activities of discontinued operations | — |
| | — |
| | (0.2 | ) |
| Net cash provided by (used in) financing activities | (4.1 | ) | | 12.0 |
| | (124.5 | ) |
| Effect of exchange rate changes on cash and cash equivalents | (0.1 | ) | | (0.7 | ) | | (1.8 | ) |
| Net increase (decrease) in cash and cash equivalents | 44.4 |
| | (107.1 | ) | | 485.9 |
|
| Cash and cash equivalents at beginning of period | 399.7 |
| | 506.8 |
| | 20.9 |
|
| Cash and cash equivalents at end of period | $ | 444.1 |
| | $ | 399.7 |
| | $ | 506.8 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | (Amounts in millions)
Years ended May 31, |
| | 2023 | | 2022 | | 2021 |
| Cash flows - financing activities: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Borrowings under lines of credit, credit agreement and revolving loan | | 3.5 | | | | 3.2 | | | | 4.0 | |
| Repayments of lines of credit, credit agreement and revolving loan | | (3.7) | | | | (186.2) | | | | (33.9) | |
| Repayment of capital lease obligations | | (2.3) | | | | (2.3) | | | | (2.3) | |
| Reacquisition of common stock | | (132.1) | | | | (33.4) | | | | — | |
| Proceeds pursuant to stock-based compensation plans | | 20.7 | | | | 10.2 | | | | 0.4 | |
| Payment of dividends | | (25.6) | | | | (20.7) | | | | (20.6) | |
| Other, net | | — | | | | — | | | | 0.1 | |
| | | | | | | | |
| | | | | | | | |
| Net cash provided by (used in) financing activities | | (139.5) | | | | (229.2) | | | | (52.3) | |
| Effect of exchange rate changes on cash and cash equivalents | | (1.9) | | | | (3.5) | | | | 4.5 | |
| Net increase (decrease) in cash and cash equivalents | | (92.1) | | | | (49.9) | | | | (27.3) | |
| Cash and cash equivalents at beginning of period | | 316.6 | | | | 366.5 | | | | 393.8 | |
| Cash and cash equivalents at end of period | $ | 224.5 | | | $ | 316.6 | | | $ | 366.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
| Supplemental Information: | | | | | | | | |
| Income tax payments (refunds) | $ | 2.5 | | | $ | (48.8) | | | $ | 1.3 | |
| Interest paid | | 1.5 | | | | 3.3 | | | | 5.4 | |
See accompanying notes
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Supplemental Information: | |
| | |
| | |
|
| Income taxes payments (refunds), net | $ | 3.0 |
| | $ | 183.3 |
| | $ | 34.2 |
|
| Interest paid | 1.4 |
| | 1.6 |
| | 3.2 |
|
| Non cash: Property, plant and equipment additions accrued in accounts payable | 14.4 |
| | — |
| | — |
|
See accompanying notes
Notes to Consolidated Financial Statements
(Amounts in millions, except share and per share data)
1. DESCRIPTION OF THE BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the business
Scholastic Corporation (the “Corporation” and together with its subsidiaries, “Scholastic” or the “Company”) is the world’s largest publisher and distributor of children’s books, a leading provider of print and digital instructional materials for Pre-Kgrades pre-kindergarten ("pre-K") to grade 12 and a producer of educational and entertaining children’s media. The Company creates quality books and ebooks, print and technology-based learning materials and programs, classroom magazines and other products that, in combination, offer schools, as well as parents and children, customized and comprehensive solutions to support children’s learning and reading both at school and at home. Since its founding in 1920, Scholastic has emphasized quality products and a dedication to reading, learning and learning.literacy. The Company is the leading operator of school-based book clubsclub and book fairs in the United States.fair proprietary channels. It distributes its products and services through these proprietary channels, as well as directly to schools and libraries, through retail stores and through the internet. The Company’s website, scholastic.com, is a leading site for teachers, classrooms and parents and an award-winning destination for children. Scholastic has operations in the United States and throughout the world including Canada, the United Kingdom, Australia, New Zealand and other parts of Asia and, through its export business, sells products in approximately 145 countries.120 international locations.
Basis of presentation
Principles of consolidation
The Consolidated Financial Statements include the accounts of the Corporation and all wholly-owned and majority-owned subsidiaries. All significant intercompany transactions are eliminated in consolidation. Certain reclassifications have been made to conform to the current year presentation.
Discontinued operationsNoncontrolling Interest
During the twelve month period endedAs of May 31, 2017,2023, the Company did not disposeowned a 95.0% majority ownership interest in Make Believe Ideas Limited ("MBI"), a UK-based children's book publishing company. The founder and chief executive officer of any componentsMBI retains a 5.0% noncontrolling ownership interest in MBI. The Company fully consolidated MBI as of the business that would meetacquisition date, and the criteria for discontinued operations reporting.5.0% noncontrolling interest is classified within stockholder's equity. See Note 22, "Subsequent Events".
The Company closed or sold several operations during fiscal 2015. During the fourth quarter of fiscal 2015, the Company sold its educational technology and services business, which, among other things, was engaged in the development and sale of technology-based reading and math improvement programs, as well as providing consulting and professional development services. Additionally during fiscal 2015, the Company completed a restructuring of the businesses comprising its former Media, Licensing and Advertising segment, including discontinuing its Soup2Nuts animation and audio production studio operations and Scholastic Interactive, as well as the print edition of a periodic consumer magazine.
All of these businesses are classified as discontinued operations in the Company’s financial statements for all periods presented.
Use of estimates
The Company’s Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States.States ("U.S. GAAP"). The preparation of these financial statements involves the use of estimates and assumptions by management, which affects the amounts reported in the Consolidated Financial Statements and accompanying notes. The Company bases its estimates on historical experience, current business factors and various other assumptions believed to be reasonable under the circumstances, all of which are necessary in order to form a basis for determining the carrying values of assets and liabilities. Actual results may differ from those estimates and assumptions. On an on-goingongoing basis, the Company evaluates the adequacy of its reserves and the estimates used in calculations, including, but not limited to:
Accounts receivable reserves for returns
•Accounts receivable allowance for doubtful accountscredit losses
•Pension and other post-retirement obligationspostretirement benefit plans
•Uncertain tax positions
•The timing and amount of future income taxes and related deductions
•Inventory reserves
•Cost of goods sold from book fair operations during interim periods determined based on estimated gross profit rates
•Sales tax contingencies
•Royalty advance reserves and royalty expense accruals
Unredeemed incentive programs
•Impairment testing for goodwill, for assessment and measurement, intangibles and other long-lived assets and investments.investments
•Assets and liabilities acquired in business combinations.combinations
Revenues for fairs which have not reported final fair results•Variable consideration related to anticipated returns
•Allocation of transaction price to contractual performance obligations
Summary of Significant Accounting Policies
Revenue recognition
The Company’s revenue recognition policies for its principal businesses are as follows:
School-Based Book Clubs– Revenue from school-based book clubs is recognized upon shipment of the products.
School-Based Book Fairs– Revenues associated with school-based book fairs arerelate to the sale of children's books and other products to book fair sponsors. In addition, the Company employs an incentive program to encourage the sponsorship of book fairs and increase the number of fairs held each school year. The Company identifies two potential performance obligations within its school-based book fair contracts, which include the fulfillment of book fairs product and the fulfillment of product upon the redemption of incentive program credits by customers. The Company allocates the transaction price to each performance obligation and recognizes revenue at a point in time. The Company utilizes certain estimates based on historical experience, redemption patterns and future expectations related to salesthe participation in the incentive program to determine the relative fair value of product. Bookeach performance obligation when allocating the transaction price. Changes in these estimates could impact the timing of the recognition of revenue. Revenue allocated to the book fairs are typically run by schools and/or parent teacher organizations over a five business-day period. The amount of revenueproduct is recognized for each fair represents the net amount of cash collected at the fair. Revenuepoint at which product is fullydelivered to the customer and control is transferred. The revenue allocated to the incentive program credits is recognized upon redemption of incentive credits and the transfer of control of the redeemed product. Incentive credits are generally redeemed within 12 months of issuance. Payment for school-based book fairs product is due at the completion of thea customer's fair. At the end of reporting periods, the Company defers estimated revenue for thoseRevenues associated with virtual fairs that have not been completed asare recognized upon shipment 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 revenue. The Company also estimates revenues for those fairs which have not reported final fair results.products and related incentive program credits are expensed upon issuance.
Trade–Revenue from the sale of children’s books for distribution in the retail channel is primarily recognized when risksperformance obligations are satisfied and benefits transfercontrol is transferred to the customer, or when the product is on sale and available to the public. For newly published titles, the Company, on occasion, contractually agrees with its customers when the publication may be first offered for sale to the public, or an agreed upon “Strict Laydown Date.”" For such titles, the risks and benefitscontrol of the publication areproduct is not deemed to be transferred to the customer until such time that the publication can contractually be sold to the public, and the Company defers revenue on sales of such titles until such time as the customer is permitted to sell the product to the public. Revenue for ebooks, which is generally the net amount received from the retailer, is recognized upon electronic delivery to the customer by the retailer. The sale of trade product generally includes a right of return.
A reserve for estimated returns is established at the time of sale and recognized as a reduction to revenue. Actual returns are charged to the reserve as received. Reserves for returns are based on historical return rates, sales patterns, type of product and expectations. In order to develop the estimate of returns that will be received subsequent to fiscal year end, management considers patterns of sales and returns in the months preceding the current fiscal year, as well as actual returns received subsequent to year end, available customer and market specific data and other return rate information that management believes is relevant. Actual returns could differ from the Company’s estimate.
Education– Revenue from the sale of educational materials is recognized upon shipment of the products, or upon acceptance of product by the customer, depending on individual customercontractual terms. RevenuesRevenue from digital products is deferred and recognized ratably over the subscription period. Revenue from professional development services areis recognized when the services have been provided to the customer. Revenue from contracts with multiple deliverables are recognized as each performance obligation is satisfied in which the transaction price is allocated on a relative standalone selling price basis.
Film Production and Licensing– Revenue from the sale of film rights, principally for the home video, streaming and domestic and foreign television markets, is deferred during production and recognized when the film hasor episodes have been delivered and isare available for showing or exploitation. Licensing revenue is recognized in accordance with royalty agreements at the time the licensed materials are available to the licensee and collections are reasonably assured.
Magazines – Revenue is deferred and recognized ratably over the subscription period, as the magazines are delivered.
Magazine AdvertisingExport – Revenue from the export channel 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 acknowledgedupon acceptance of the physical product or service. Certainby the customer.
The Company has elected to present sales and other related taxes on a net basis, excluded from revenues, may be deferred pending future deliverables.and as such, these are included within Other accrued expenses until remitted to taxing authorities.
Cash equivalents
Cash equivalents consist of short-term investments with original maturities of three months or less.
Accounts receivable
Accounts receivable are recognized net of allowancesan allowance for doubtful accounts and reserves for returns.credit losses. In the normal course of business, the Company extends credit to customers that satisfy predefined credit criteria. The Company is requiredrecognizes an allowance for credit losses on trade receivables that are expected to estimatebe incurred over the collectabilitylifetime of its receivables. Reserves for returns are based on historical return rates, sales patterns, type of product and expectations. In order to develop the estimate of returns that will be received subsequent to fiscal year end, management considers patterns of sales and returns in the months preceding the current fiscal year, as well as actual returns received subsequent to year end, available customer and market specific data and other return rate information that management believes is relevant.receivable. Reserves for estimated bad debtscredit losses are established at the time of sale and are based on an evaluation of accounts receivable aging,relevant information about past events, current conditions, and where applicable,supportable forecasts impacting its ultimate collectability, including specific reserves on a customer-by-customer basis, creditworthiness of the Company’s customers and prior collection experience to estimate the ultimate collectability of these receivables.experience. At the time the Company determines that a receivable balance, or any portion thereof, is deemed to be permanently uncollectible, the balance is then written off. Accounts receivable allowance for credit losses was $16.7
and $25.9 as of May 31, 2023 and 2022, respectively.
Estimated returns
For sales that include a right of return, the Company estimates the transaction price and records revenues as variable consideration based on the amounts the Company expects to ultimately be entitled. In order to determine estimated returns, the Company utilizes historical return rates, sales patterns, types of products and expectations and recognizes a corresponding reduction to Revenues and Cost of goods sold. Management also considers patterns of sales and returns in the months preceding the fiscal year, as well as actual returns received subsequent to the fiscal year, available customer and market specific data and other return rate information that management believes is relevant. In addition, a refund liability is recorded within Other accrued expenses for the consideration to which the Company believes it will not ultimately be entitled and a return asset is recorded within Prepaid expenses and other current assets for the expected inventory to be returned. Actual returns could differ from the Company's estimate.
Inventories
Inventories, consisting principally of books, are stated at the lower of cost, using the first-in, first-out method, or market.net realizable value. The Company records a reserve for excess and obsolete inventory based upon a calculation using the expected future sales of existing inventory driven by estimates around forecasted purchases, inventory consumption costs, and the sell-through rate of current fiscal year purchases. In accordance with the Company's inventory retention policy, expected future sales of existing inventory are compared against historical usage rates by channel the sales patterns of its productsfor reasonableness and any specifically identified excess or obsolete inventory.inventory, due to an anticipated lack of demand, will also be reserved.
Property, plant and equipment
Property, plant and equipment are stated at cost. Depreciation and amortization are recognized on a straight-line basis over the estimated useful lives of the assets. Buildings have an estimated useful life, for purposes of depreciation, of forty years. Building improvements are depreciated over the life of the improvement which typically does not exceed twenty-five years. Capitalized software, net of accumulated amortization, was $45.0$62.7 and $31.1$60.3 at May 31, 20172023 and 2016,2022, respectively. Capitalized software is amortized over a period of three to seventen years. Amortization expense for capitalized software was $12.9, $11.4$25.3, $26.4 and $17.7$27.6 for the fiscal years ended May 31, 2017, 20162023, 2022 and 2015,2021, respectively. Furniture, fixtures and equipment are depreciated over periods not exceeding ten years. Leasehold improvements are amortized over the life of the lease or the life of the assets, whichever is shorter. The Company evaluates the depreciation periods of property, plant and equipment to determine whether events or circumstances indicate that the asset’s carrying value is not recoverable or warrant revised estimates of useful lives.
Cloud Computing Arrangements
The Company incurs costs to implement cloud computing arrangements that are hosted by a third party vendor. Implementation costs incurred during the application development stage are capitalized and amortized over the term of the hosting arrangement on a straight-line basis. The Company capitalized $6.2 and $7.3 of costs incurred in fiscal 2023 and 2022, respectively, to implement cloud computing arrangements, primarily related to digital and consumer data platforms. These amounts are included within Other assets and deferred charges on the Company's Consolidated Balance Sheets.
Leases
The Company's lease arrangements primarily relate to corporate offices and warehouse facilities, and to a lesser
extent, certain equipment and other assets. The Company's leases generally have initial terms ranging from 3 to 10 years and certain leases include renewal or early-termination options, rent escalation clauses, and/or lease incentives. Lease agreementsrenewal rent payment terms generally reflect adjustments for market rates prevailing at the time of renewal. The Company's leases require fixed minimum rent payments and also often require the payment of certain other costs that do not relate specifically to its right to use an underlying leased asset, but are evaluatedassociated with the asset, such as real estate taxes, insurance, common area maintenance fees and/or certain other costs (referred to determine whether they are capitalcollectively herein as
"non-lease components"), which may be fixed or operating leases. When substantially allvariable in amount depending on the terms of the risks and benefitsrespective lease agreement. The Company's leases do not contain significant residual value guarantees or restrictive covenants.
The Company determines whether an arrangement contains a lease at the inception of property ownership have been transferredthe arrangement. If a lease is determined to exist, the term of such lease is assessed based on the date on which the underlying asset is made available for the Company's use by the lessor. The Company's assessment of the lease term reflects the non-cancelable term of the lease, inclusive of any rent-free periods and/or periods covered by early-termination options which the Company is reasonably certain of not exercising, as determinedwell as periods covered by renewal options which the test criteriaCompany is reasonably certain of exercising. The Company also determines lease classification as either operating or finance at lease commencement, which governs the pattern of expense recognition and the presentation reflected in the current authoritative guidance,Consolidated Statements of Operations over the lease term.
For leases with a term exceeding 12 months, a lease liability is recognized as a capital lease.
Capital leases are capitalizedrecorded on the Company's Consolidated Balance Sheet at lease commencement reflecting the lower of the net present value of its fixed minimum payment obligations over the total amountlease term. A corresponding right-of-use ("ROU") asset equal to the initial lease liability is also recorded, adjusted for any prepaid rent and/or initial direct costs incurred in connection with execution of rent payable under the leasing agreement (excludinglease and reduced by any lease incentives received. The Company includes fixed payment obligations related to non-lease components in the measurement of ROU assets and lease liabilities, as it elects to account for lease and non-lease components together as a single lease component. ROU assets associated with finance charges) orleases are presented separate from ROU assets associated with operating leases and are included within Property, plant and equipment, net on the fair marketCompany's Consolidated Balance Sheet. For purposes of measuring the present value of its fixed payment obligations for a given lease, the leased asset. CapitalCompany uses its incremental borrowing rate, determined based on information available at lease assetscommencement, as rates implicit in its leasing arrangements are typically not readily determinable. The Company's incremental borrowing rate reflects the rate it would pay to borrow on a secured basis, and incorporates the term and economic environment of the associated lease.
For operating leases, fixed lease payments are recognized as lease expense on a straight-line basis over the lease term. For finance leases, the initial ROU asset is depreciated on a straight-line basis in Depreciation and amortization expense, over a period consistent with the Company’s normal depreciation policy for tangible fixed assets, but not exceeding the lease term. Interest charges are expensed over the periodterm, along with recognition of interest expense associated with accretion of the lease in relation toliability, which is ultimately reduced by the carrying valuerelated fixed payments. For leases with a term of the capital lease obligation.
Rent expense for operating leases, which may include free rent12 months or less, any fixed escalation amounts in addition to minimum lease payments isare recognized on a straight-line basis over the duration of each lease term. term, and are not recognized on the Company's Consolidated Balance Sheet. Variable lease costs for both operating and finance leases, if any, are recognized as incurred.
Sublease rental income is recognized on a straight-line basis over the duration of each lease term. To the extent expected sublease income is less than expected rental payments, the Company recognizes a current loss on the difference betweenbased on the fair valuespresent value of the sublease and the rental payments. The Company also receivesminimum lease payments from retail stores that utilize the
Broadway facing space of the Company's headquarters location in New York City.under each lease. Lease payments received are presented as a reduction into rent expense in Selling, general and administrative expenses.
Prepublication costs
Prepublication costs are incurred in all of the Company’s reportable segments. Prepublication costs include costs incurred to create 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. Prepublication costs are amortized on a straight-line basis over a two-to-five-yeartwo-to-five-year period based on expected future revenues. The Company regularly reviews the recoverability of thethese capitalized costs based on expected future revenues.cash flows.
Long-lived assets
Long-lived assets, including operating lease right-of-use assets, property, plant, and equipment, prepublication costs and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. For the purposes of impairment testing, long-lived assets are grouped at the lowest level of identifiable cash flows. If impairment indicators are present, the Company performs a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the asset to its carrying amount. If it is determined that a long-lived asset is not recoverable, an impairment loss is recognized based on the excess of the carrying amount over the fair value of the asset. The fair values determined by the Company require significant judgment and include certain assumptions regarding future sales and expenses, discount rates and real estate market conditions.
Royalty advances
Royalty advances are incurred in all of the Company’s reportable segments, but are most prevalent in the Children’s Book Publishing and Distribution segment and enable the Company to obtain contractual commitments from authors to produce content. The Company regularly provides authors with advances against expected future royalty payments,
often before the books are written. Upon publication and sale of the books or other media, the authors generally will not receive further royalty payments until the contractual royalties earned from sales of such books or other media exceed such advances.
Royalty advances are initially capitalized and subsequently expensed as related revenues are earned or when the Company determines future recovery through earndowns is not probable. The Company has a long history of providing authors with royalty advances and it tracks each advance earned with respect to the sale of the related publication. The royalties earned are applied first against the remaining unearned portion of the advance. Historically, the longer the unearned portion of the advance remains outstanding, the less likely it is that the Company will recover the advance through the sale of the publication. The Company applies this historical experience to its existing outstanding royalty advances to estimate the likelihood of recoveries through earndowns. Additionally, the Company’s editorial staff regularly reviews its portfolio of royalty advances to determine if individual royalty advances are not recoverable through earndowns for discrete reasons, such as the death of an author prior to completion of a title or titles, a Company decision to not publish a title, poor market demand or other relevant factors that could impact recoverability. The reserve for royalty advances was $79.1 and $76.0 as of May 31, 2023 and 2022, respectively.
Goodwill and intangible assets
The Company records intangible assets based on their fair value on the date of acquisition. Goodwill is recorded as the difference between the fair value of the purchase consideration and the fair value of the net identifiable tangible and intangible assets acquired.
Goodwill and other intangible assets with indefinite lives are not amortized and are reviewed for impairment annually as of May 31 or more frequently if impairment indicators arise.
With regard to goodwill, the Company compares the estimated fair values of its identified reporting units to the carrying values of their net assets. The Company first performs a qualitative assessment to determine whether it is more likely than not that the fair values of its identified reporting units are less than their carrying values. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company performs the two-stepquantitative goodwill impairment test. The Company measures goodwill impairment by the amount the carrying value exceeds the fair value of a reporting unit. For each of the reporting units, the estimated fair value is determined utilizing the expected present value of the projected future cash flows of the reporting unit, in addition to comparisons to similar companies. The Company reviews its definition of reporting units annually or more frequently if conditions indicate that the reporting units may change. The Company evaluates its operating segments to determine if there are components one level below the operating segment.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 sevensix reporting units with goodwill subject to impairment testing.
With regard to other intangibles with indefinite lives, the Company determines the fair value by asset, which is then compared to its carrying value. The Company first performs a qualitative assessment to determine whether it is more likely than not that the fair value of the identified asset is less than its carrying value. If it is more likely than not that the fair value of the asset is less than its carrying amount, the Company performs a quantitative test. The estimated fair value is determined utilizing the expected present value of the projected future cash flows of the asset.
Intangible assets with definite lives consist principally of customer lists, intellectual property and other agreements and are amortized over their expected useful lives. Customer lists are amortized on a straight-line basis over five to ten years, while other agreements are amortized on a straight-line basis over their contractual term. Intellectual property assets are amortized over their remaining useful lives, which is approximately five years.
Income taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, for purposes of determining taxable income, deferred tax assets and liabilities are determined based on differences between the financial reporting and the tax basis of such assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to be realized.
The Company believes that its taxable earnings, during the periods when the temporary differences giving rise to deferred tax assets become deductible or when tax benefit carryforwards may be utilized, should be sufficient to realize the related future income tax benefits. For those jurisdictions where the expiration date of the tax benefit carryforwards or the projected taxable earnings indicates that realization is not likely, the Company establishes a valuation allowance.
In assessing the need for a valuation allowance, the Company estimates future taxable earnings, with consideration for the feasibility of on-goingongoing tax planning strategies and the realizability of tax benefit carryforwards, to determine which deferred tax assets are more likely than not to be realized in the future. Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates and future taxable earnings. In the event that actual results differ from these estimates in future periods, the Company may need to adjust the valuation allowance.
The Company accounts for uncertain tax positions using a two-step method. Recognition occurs when an entity concludes that a tax position, based solely on technical merits, is more likely than not to be sustained upon examination. If a tax position is more likely than not to be sustained upon examination, the amount recognized is the largest amount of benefit, determined on a cumulative probability basis, which is more likely than not to be realized upon settlement. The Company assesses all income tax positions and adjusts its reserves against these positions periodically based upon these criteria. The Company also assesses potential penalties and interest associated with these tax positions, and includes these amounts as a component of income tax expense.
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 expectedAny required adjustment to the income tax provision would be indefinitely invested,reflected in the period that the Company provides for income taxeschanges this assessment. The Company elects to recognize the tax on Global Intangible Low-Taxed Income (GILTI) earned by foreign subsidiaries as a period expense in the portion thatperiod the tax is not indefinitely invested.incurred.
Non-income Taxes
The Company is subject to tax examinations for sales-based taxes. A number of these examinations are ongoing and, in certain cases, have resulted in assessments from taxing authorities. Where a sales tax liability inwith 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.
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
Employee Benefit Plan Obligations
The rate assumptions discussed below impact the Company’s calculations of its UK pension and post-retirementU.S. postretirement obligations. The rates applied by the Company are based on the portfolios’UK pension plan asset portfolio's past average rates of return, discount rates and actuarial information and, with regard to the U.S. Pension Plan, assumptions related to the plan's expected termination.information. Any change in market performance, interest rate performance, assumed health care cost trend rate and compensation rates or, with regard to the U.S. Pension Plan, estimated lump sum payments and expected fair value of annuity contracts could result in significant changes in the Company’s UK pension plan and post-retirementU.S. postretirement obligations.
Pension obligations – Scholastic Corporation and certain of its subsidiaries haveCorporation's UK subsidiary has a defined benefit pension plansplan covering the majority of theirits employees who meet certain eligibility requirements. The Company’s pension plansplan and other post-retirementpostretirement benefits are accounted for using actuarial valuations.
UK Pension Plan
The Company’s UK Pension Plan calculations are based on three primary actuarial assumptions: the discount rate, the long-term expected rate of return on plan assets and the anticipated rate of compensation increases. The discount rate is used in the measurement of the projected, accumulated and vested benefit obligations and interest cost component of net periodic pension costs. The long-term expected return on plan assets is used to calculate the expected earnings from the investment or reinvestment of plan assets. The anticipated rate of compensation increase is used to estimate the increase in compensation for participants of the plan from their current age to their assumed retirement age. The estimated compensation amounts are used to determine the benefit obligations and the service cost component of net periodic pension costs.obligations.
U.S. Pension Plan
The Company's U.S. Pension Plan calculations are impacted by its expected termination which is considered imminent and likely to occur during fiscal 2018. As such, the Company utilized a discount rate and short-term expected rate of return on plan assets to arrive at an obligation for which additional estimates, related to the anticipated amount of lump sum payments to be distributed in fiscal 2018 and insurance company pricing on the portion of the obligation not distributed through lump sum payments, were used to calculate the benefit obligation. PensionOther postretirement benefits in the cash balance plan for employees located in the U.S. are based on formulas in which the employees’ balances are credited monthly with interest based on the average rate for one-year U.S. 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-retirementpostretirement benefits, consisting of healthcare and life insurance benefits, to eligible retired U.S.-basedUnited State-based employees. The post-retirementpostretirement medical plan benefits are funded on a pay-as-you-go basis, with the Companyemployee paying a portion of the premium and the employeeCompany paying the remainder. The Company calculates the existing benefit obligation is based on the discount rate and the assumed health care cost trend rate. The discount rate is used in the measurement of the projected and accumulated benefit obligations and the interest
cost component of net periodic post-retirementpostretirement benefit cost. The assumed health care cost trend rate is used in the measurement of the long-term expected increase in medical claims.
Foreign currency translation
The Company’s non-United States dollar-denominated assets and liabilities are translated into United States dollars at prevailing rates at the balance sheet date and the revenues, costs and expenses are translated at the weighted average rates prevailing during each reporting period. Net gains or losses resulting from the translation of the foreign financial statements and the effect of exchange rate changes on long-term intercompany balances are accumulated and charged directly to the foreign currency translation adjustment component of stockholders’ equity until such time as the operations are substantially liquidated or sold. The Company assesses foreign investment levels periodically to determine if all or a portion of the Company’s investments in foreign subsidiaries are indefinitely invested.
Shipping and handling costs
Amounts billed to customers for shipping and handling are classified as revenue. Costs incurred in shipping and handling are recognized in Cost of goods sold.
Advertising costs
Advertising costs
The are expensed by the Company incurs costsas incurred. Total advertising expense was $76.9, $69.5 and $60.1 for both direct-response and non-direct-response advertising. The Company capitalizes direct-response advertising costs for expenditures, primarily related to classroom magazines. The asset is amortized on a cost-pool-by-cost-pool basis over the period during which the future benefits are expected to be received. Included in Prepaid expenses and other current assets on the balance sheet is $6.0 and $6.0 of capitalized advertising costs as oftwelve months ended May 31, 20172023, 2022 and 2016,2021, respectively. The Company expenses non-direct-response advertising costs as incurred.
Stock-based compensation
The Company recognizes the cost of services received in exchange for any stock-based awards. The Company recognizes the cost on a straight-line basis over an award’s requisite service period, which is generally the vesting period, except for the grants to retirement-eligible employees, based on the award’s fair value at the date of grant.
The fair values of stock options granted by the Company are estimated at the date of grant using the Black-Scholes option-pricing model. The Company’s determination of the fair value of stock-based payment awards using this option-pricing model is affected by the price of the Common Stock as well as by assumptions regarding highly complex and subjective variables, including, but not limited to, the expected price volatility of the Common Stock over the terms of the awards, the risk-free interest rate, and actual and projected employee stock option exercise behaviors. Estimates of fair value are not intended to predict actual future events or the value that may ultimately be realized by those who receive these awards.
Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates, in order to derive the Company’s best estimate of awards ultimately expected to vest. In determining the estimated forfeiture rates for stock-based awards, the Company annually conducts an assessment of the actual number of equity awards that have been forfeited previously. When estimating expected forfeitures, the Company considers factors such as the type of award, the employee class and historical experience. The estimate of stock-based awards that will ultimately be forfeited requires significant judgment and, to the extent that actual results or updated estimates differ from current estimates, such amounts will be recognized as a cumulative adjustment in the period such estimates are revised.
The table set forth below provides the estimated fair value of options granted by the Company during fiscal years 2017, 20162023, 2022 and 20152021 and the significant weighted average assumptions used in determining such fair value under the Black-Scholes option-pricing model. The average expected life represents an estimate of the period of time stock options are expected to remain outstanding based on the historical exercise behavior of the option grantees. The risk-free interest rate was based on the U.S. Treasury yield curve corresponding to the expected life in effect at the time of the grant. The volatility was estimated based on historical volatility corresponding to the expected life.
| | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
| Estimated fair value of stock options granted | $ | 11.62 | | | $ | 8.04 | | | $ | 3.80 | |
| Assumptions: | | | | | |
| Expected dividend yield | 1.9 | % | | 1.8 | % | | 2.9 | % |
| Expected stock price volatility | 32.8 | % | | 31.9 | % | | 30.2 | % |
| Risk-free interest rate | 3.8 | % | | 0.9 | % | | 0.2 | % |
| Average expected life of options | 5 years | | 5 years | | 4 years |
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Estimated fair value of stock options granted | $ | 12.70 |
| | $ | 14.78 |
| | $ | 11.41 |
|
| Assumptions: | |
| | |
| | |
|
| Expected dividend yield | 1.5 | % | | 1.4 | % | | 1.8 | % |
| Expected stock price volatility | 36.6 | % | | 38.2 | % | | 38.2 | % |
| Risk-free interest rate | 1.5 | % | | 1.9 | % | | 2.2 | % |
| Average expected life of options | 6 years |
| | 6 years |
| | 6 years |
|
New Accounting Pronouncements
Current Fiscal Year Adoptions:
ASU 2017-07No. 2021-8
The Company adopted ASU No. 2021-8, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers" (ASU 2021-8), in the beginning of the second quarter of fiscal 2023. The updates in this guidance seek to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the following: 1. Recognition of an acquired contract liability and 2. Payment terms and their effect on subsequent revenue recognized by the acquirer. The amendments in ASU 2021-8 improve comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination. The amendments improve comparability by specifying for all acquired revenue contracts regardless of their timing of payment: (1) the circumstances in which the acquirer should recognize contract assets and contract liabilities that are acquired in a business combination and (2) how to measure those contract assets and contract liabilities. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The Company early adopted ASU 2021-8 and applied the amendments in accounting for the acquisition of Learning Ovations, Inc. during the second quarter of fiscal 2023, which was accounted for as a business combination under the acquisition method of accounting. The adoption of this ASU did not have a material impact to the Company's Consolidated Financial Statements.
ASU No. 2020-4 and ASU No. 2022-6
In March 2017,2020, the FASB issued ASU No. 2020-4, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Accounting Standards Board (the "FASB")Reporting" (ASU 2020-4), and in December 2022, the FASB issued Accounting Standards Update (the "ASU")ASU No. 2017-07, Compensation—Retirement Benefits2022-6, "Reference Rate Reform (Topic 715)848): ImprovingDeferral of the PresentationSunset Date for Topic 848" (ASU 2022-6). ASU 2020-4 provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. This guidance is elective and applies to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of Net Periodic Pension Costreference rate reform. ASU 2022-6 defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. During the third quarter of fiscal 2023, the Company adopted the expedient in accounting for the amendments to the Company's Credit Agreement which were made as a result of the replacement of LIBOR as a reference rate. Refer to Note 5, Debt, for further details regarding the interest rate effected by these amendments, which will be applied prospectively. The adoption of these ASUs did not have a material impact to the Company's Consolidated Financial Statements.
2. REVENUES
Disaggregated Revenue Data
The following table presents the Company’s segment revenues disaggregated by region and Net Periodic Postretirement Benefit Cost. The ASU requires entities to disaggregatedomestic channel during the service cost componentyear ended May 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
| Book Clubs - U.S. | $ | 117.8 | | | $ | 126.4 | | | $ | 145.4 | |
| Book Fairs - U.S. | | 553.1 | | | | 429.7 | | | | 164.3 | |
| Trade - U.S. | | 325.8 | | | | 344.0 | | | | 328.8 | |
Trade - International(1) | | 41.3 | | | | 46.4 | | | | 36.5 | |
| Total Children's Book Publishing and Distribution | | 1,038.0 | | | | 946.5 | | | | 675.0 | |
| | | | | | | | |
| Education Solutions - U.S. | | 386.6 | | | | 393.6 | | | | 312.3 | |
| Total Education Solutions | | 386.6 | | | | 393.6 | | | | 312.3 | |
| | | | | | | | |
International - Major Markets(2) | | 229.7 | | | | 237.1 | | | | 226.8 | |
International - Other Markets(3) | | 49.7 | | | | 65.7 | | | | 86.2 | |
| Total International | | 279.4 | | | | 302.8 | | | | 313.0 | |
| Total Revenues | $ | 1,704.0 | | | $ | 1,642.9 | | | $ | 1,300.3 | |
(1) Primarily includes foreign rights and certain product sales in the UK.
(2) Includes Canada, UK, Australia and New Zealand.
(3) Primarily includes markets in Asia.
In fiscal years 2023 and 2022, there were no customers that accounted for more than 10% of consolidated revenues. In fiscal 2021, the Company had one customer that accounted for more than 10% of consolidated revenues. Total revenues from this customer were $152.7, or approximately 12% of consolidated revenues, during the other componentsyear ended May 31, 2021. Approximately $119.7 was reported within the Children's Book Publishing & Distribution segment, $8.8 in the Education Solutions segment and $24.2 in the International segment.
Estimated Returns
A liability for expected returns of net periodic benefit costs$34.9 and present it with$42.2 was recorded within Other accrued expenses on the Company's Consolidated Balance Sheets as of May 31, 2023 and 2022, respectively. In addition, a return asset of $4.7 and $5.3 was recorded within Prepaid expenses and other current compensation costsassets as of May 31, 2023 and 2022, respectively, for related employees in the income statement, and present the other components elsewhere in the income statement and outsiderecoverable cost of income from operations if that subtotal is presented. The amendments in this update also allow only the service cost componentproduct estimated to be eligiblereturned by customers.
Deferred Revenue
The following table presents further detail regarding the Company's deferred revenue balance for capitalization when applicable.the years ended May 31:
| | | | | | | | | | | | | | | | | | | | |
| 2023 | 2022 |
| Book fairs incentive credits | $ | 110.8 | | | $ | 100.1 | | |
| Magazines+ subscriptions | | 5.0 | | | | 4.5 | | |
| U.S. digital subscriptions | | 22.8 | | | | 19.5 | | |
U.S. education-related(1) | | 9.8 | | | | 13.6 | | |
| Media-related | | 0.0 | | | | 15.8 | | |
| Stored value cards | | 12.4 | | | | 9.4 | | |
Other(2) | | 8.3 | | | | 9.9 | | |
| Total deferred revenue | $ | 169.1 | | | $ | 172.8 | | |
(1) Primarily includes deferred revenue related to contracts with school districts and professional services.
(2) Primarily includes deferred revenue related to various international products and services.
The ASU will be effective forCompany's deferred revenue consists of contract liabilities in respect to advance billings and payments received from customers in excess of revenue recognized and revenue allocated to outstanding book fairs incentive credits. These liabilities are recorded within Deferred revenue on the Company in the first quarter of fiscal 2019. Early adoption is permitted. The Company expects to early adopt this ASU in the first quarterCompany's Consolidated Balance Sheets and are classified as short term, as substantially all of the fiscal year ending May 31, 2018. Forassociated performance obligations are expected to be satisfied, and related revenue recognized, within one year. The amount of revenue recognized during the fiscal years ended May 31, 20172023 and 2016 service costs were less than $0.1. Therefore, a majority of the net periodic benefit costs of the Company will be presented below Operating income and before Earnings (loss) from continuing operations before income taxes. See note 13, "Employee Benefit Plans," for further information.
ASU 2017-04
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which removes step two from the goodwill impairment test (comparison of implied fair value of goodwill with the carrying amount of that goodwill for a reporting unit). Instead, an entity should measure its goodwill impairment by the amount the carry value exceeds the fair value of a reporting unit.
The ASU will be effective for the Company in the first quarter of fiscal 2021. The Company does not expect the amendments in this ASU to have a material impact on its consolidated financial position, results of operations and cash flows.
ASU 2016-16
In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory.” The ASU removes the prohibition against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The ASU, which is part of the FASB’s simplification initiative, is intended to reduce the complexity and diversity in practice related to the tax consequences of certain types of intra-entity asset transfers, particularly those involving intellectual property.
The ASU will be effective for the Company in the first quarter of fiscal 2019. The Company is evaluating the impact of this ASU on its consolidated financial position, results of operations and cash flows.
ASU 2016-18 and ASU 2016-15
In November 2016 and August 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash and ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (A Consensus of the FASB Emerging Issues Task Force), respectively, which address specific statement of cash flows classification issues.
The ASUs will be effective for the Company in the first quarter of fiscal 2019. The Company does not expect the amendments in this ASU to have a material impact on its statement of cash flows.
ASU 2016-13
In June 2016, the FASB issued Accounting Standards Update (the "ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326). This ASU introduces amendments to the accounting for credit losses on instruments defined2022 included within the ASU's scopeopening Deferred revenue balance was $146.4 and will impact both financial services and non-financial services entities. Due to its broad scope, which includes trade and lease receivables, this ASU states that it is likely that all entities will need to evaluate the impact of its amendments. Under the amendments, an entity will recognize, as an allowance, its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The ASU does not prescribe a specific method to make the estimate so its application will require significant judgment.$85.0, respectively.
The ASU will be effectiveAllowance for the Company in the first quarter of fiscal 2021. The Company is evaluating the impact of this ASU on its consolidated financial position, results of operations and cash flows.Credit Losses
ASU 2016-09
In March 2016, the FASB issued the ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this ASU require, among other things, that all income tax effects of awards be recognized in the income statement when the awards vest or are settled. The ASU permits an employer to repurchase a higher number of employee's shares for tax withholding purposes without triggering liability accounting. The ASU also allows for a policy election to account for forfeitures as they occur.
The ASU will be effective for the Company in the first quarter of fiscal 2018. The company will adopt the ASU under the prospective transition method. This ASU requires that the income tax effects of awards be recognized in the income statement when the awards vest or are settled. Currently these effects are accounted for as Additional paid-in capital. The ASU also eliminates the requirement to reclassify excess tax benefits from operating activities to financing activities on the statement of cash flows. For the twelve month periods ended May 31, 2017, 2016 and 2015, the Company had excess tax benefits of $0.8, $1.9 and $1.1, respectively. The Company will continue to estimate forfeitures at the time of grant.
ASU 2016-02
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The amendments in this ASU require, among other things, lessees to recognize a right-of-use asset and a lease liability in the balance sheet for all leases. The lease liability will be measured at the present value of the lease payments over the lease term. The right-of-use asset will be measured at the lease liability amount, adjusted for lease prepayments, lease incentives received and lessee's initial direct costs (e.g., commissions).
The ASU will be effective for the Company in the first quarter of fiscal 2020. The Company is evaluating the impact of this ASU on its consolidated financial position, results of operations and cash flows, and expects that there will be a significant increase to other assets and other liabilities.
ASU 2015-11
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, as part of its Simplification Initiative. Currently, inventory is measured at the lower of cost using the first-in, first-out method or market. The amendments in this ASU require entities that measure inventory using any method other than last-in, first-out or the retail inventory method to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. The amendments should be applied prospectively and earlier application is permitted as of the beginning of an interim or fiscal year period.
The ASU will be effective for the Company in the first quarter of fiscal 2018. The Company does not expect the amendments in this ASU to have a material impact on the consolidated financial position, results of operations and cash flows.
Topic 606, Revenue from Contracts with Customers
In May 2014, the FASB announced that it is amending the FASB Accounting Standards Codification ("ASC") by issuing ASU 2014-09, Topic 606, Revenue from Contracts with Customers (the "New Revenue Standard"). The amendments in this ASU provide a single model for use in accounting for revenue arising from contracts with customers and supersede current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the new ASU is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of the New Revenue Standard. In 2016, the FASB issued ASU 2016-08, ASU 2016-10, ASU 2016-11, and ASU 2016-12 to clarify, among other things, the implementation guidance related to principal versus agent considerations, identifying performance obligations, and accounting for licenses of intellectual property. The amendments in this update are to be applied on a retrospective basis, either to each prior reporting period presented or by presenting the cumulative effect of applying the update recognized at the date of initial application.
The New Revenue Standard will be effective for the Company in the first quarter of fiscal 2019. The Company is evaluating the adoption methodology and the impact of this ASU on its consolidated financial position, results of operations and cash flows, including assessing the impact of the guidance across all of its revenue streams. This includes a review of current accounting policies and practices to identify potential differences that would result from applying the guidance. While this evaluation is in progress, and the impact is not fully assessed, the Company believes this standard will result in changes relating to the reporting periods in which certain revenues associated with incentive programs within the Company's school channels are recognized.
2. DISCONTINUED OPERATIONS
The Company continuously evaluates its portfolio of businesses for both impairment and economic viability, as well as for possible strategic dispositions. The Company monitors the expected cash proceeds to be realized from the disposition of discontinued operations’ assets, and adjusts asset values accordingly. As a result, the Company closed or sold several operations during fiscal 2015. All of these businesses were classified as discontinued operations in the Company’s Consolidated Financial Statements.
During the twelve months ended May 31, 2017 and 2016 the Company did not dispose of any components of the business that would meet the criteria for discontinued operations reporting.
On May 29, 2015, the Company completed the sale of substantially all of the assets comprising its former educational technology and services (“Ed Tech”) business and categorized this business as a discontinued operation. In connection with the sale of the Ed Tech business to the purchaser, the Company entered into a transition services agreement
whereby the Company provided administrative, distribution and other services to the purchaser. Transition service fees under this agreement were recorded as a reduction to Selling, general and administrative expenses. All services under the transition services agreement were terminated on August 1, 2016. As of May 31, 2017, the Company had adequately fulfilled all service requirements and there were no hold backs from the escrow for breaches of representations and warranties or other claims.
During fiscal 2015, the Company completed a restructuring of the businesses comprising its former Media, Licensing and Advertising segment and discontinued a subscription-based print magazine business, the animation and audio production business, and the game console digital content business, all of which were previously reported in such segment.
The following table summarizespresents the operating results ofchange in the discontinued operationsallowance for the fiscal year ended May 31, 2017. Fiscal year 2017 operating results primarily relate to insignificant continuing cash flows from passive activities:
|
| | | | | | | | | | | |
| | Ed Tech | | All Other | | Total |
| Revenues | $ | 0.0 |
| | $ | 0.4 |
| | $ | 0.4 |
|
| Operating costs and expenses | 0.8 |
| | 0.1 |
| | 0.9 |
|
| Interest income (expense) | — |
| | 0.1 |
| | 0.1 |
|
| Earnings (loss) before income taxes | $ | (0.8 | ) | | $ | 0.4 |
| | $ | (0.4 | ) |
| Provision (benefit) for income taxes | (0.3 | ) | | 0.1 |
| | (0.2 | ) |
| Earnings (loss) from discontinued operations, net of tax | $ | (0.5 | ) | | $ | 0.3 |
| | $ | (0.2 | ) |
The following table summarizes the operating results of the discontinued operations for the fiscal year ended May 31, 2016: |
| | | | | | | | | | | |
| | Ed Tech | | All Other | | Total |
| Revenues | $ | 0.0 |
| | $ | 0.8 |
| | $ | 0.8 |
|
Operating costs and expenses (1) | 1.5 |
| | 1.2 |
| | 2.7 |
|
| Interest income (expense) | — |
| | 0.1 |
| | 0.1 |
|
| Gain (loss) on sale | (2.9 | ) | | — |
| | (2.9 | ) |
| Earnings (loss) before income taxes | $ | (4.4 | ) | | $ | (0.3 | ) | | $ | (4.7 | ) |
| Provision (benefit) for income taxes | (1.1 | ) | | (0.1 | ) | | (1.2 | ) |
| Earnings (loss) from discontinued operations, net of tax | $ | (3.3 | ) | | $ | (0.2 | ) | | $ | (3.5 | ) |
1) Gain (loss) on sale included the finalization of the working capital adjustments from the sale of the Ed Tech business, resulting in a payment to the purchaser of $2.9.
The following table summarizes the operating results of the discontinued operations for the fiscal year ended May 31, 2015:
|
| | | | | | | | | | | |
| | Ed Tech | | All Other | | Total |
| Revenues | $ | 217.4 |
| | $ | 11.7 |
| | $ | 229.1 |
|
Operating costs and expenses (1) | 208.8 |
| | 14.5 |
| | 223.3 |
|
| Interest income (expense) | — |
| | 0.1 |
| | 0.1 |
|
| Gain (loss) on sale | 454.0 |
| | — |
| | 454.0 |
|
| Earnings (loss) before income taxes | $ | 462.6 |
| | $ | (2.7 | ) | | $ | 459.9 |
|
| Provision (benefit) for income taxes | 181.8 |
| | (1.0 | ) | | 180.8 |
|
| Earnings (loss) from discontinued operations, net of tax | $ | 280.8 |
| | $ | (1.7 | ) | | $ | 279.1 |
|
(1) Operating costs and expenses included costs related to unabsorbed overhead burden associated with the former educational technology and services business of $15.8.
The following table sets forth the assets and liabilities of the discontinued operationscredit losses, which is included in Accounts Receivable, net on the Consolidated Balance Sheets of the Company as of May 31:Sheets:
| | | | | | | | |
| Allowance for Credit Losses |
| Balance as of June 1, 2022 | $ | 25.9 | |
| Current period provision | | 3.3 | |
| Write-offs and other | | (12.5) | |
| Balance as of May 31, 2023 | $ | 16.7 | |
|
| | | | | | | |
| | 2017 | | 2016 |
| Accounts receivable, net | $ | 0.0 |
| | $ | 0.0 |
|
| Prepaid expenses and other current assets | 0.4 |
| | 0.5 |
|
| Current assets of discontinued operations | $ | 0.4 |
| | $ | 0.5 |
|
| | | | |
| Accounts payable | — |
| | 0.0 |
|
| Accrued royalties | 0.5 |
| | 0.0 |
|
| Other accrued expenses | — |
| | 1.2 |
|
| Current liabilities of discontinued operations | $ | 0.5 |
| | $ | 1.2 |
|
As of May 31, 2017 and 2016, assets and liabilities of discontinued operations primarily related to insignificant continuing cash flows from passive activities.
3. SEGMENT INFORMATION
The Company categorizes its businesses into three reportable segments: Children’s Book Publishing and Distribution and Education Solutions, which comprise the Company's domestic operations, and International.
•Children’s Book Publishing and Distribution operates as an integrated business which includes the publication and distribution of children’s books, ebooks, media and interactive products in the United States through its book clubs and book fairs in its school channels and through the trade channel. This segment is comprised of three operating segments.
•Education Solutions includes the publication and distribution to schools and libraries of children’s books, classroom magazines, print and digital supplemental and core classroom materials and programs and related support services, 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 twoone operating segments.
segment.
•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.
The following table setstables set forth information for the Company’s segments for the three fiscal years ended May 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | 2022 | 2021 |
| Revenues | | | | | | | | | |
| Children's Book Publishing and Distribution | $ | 1,038.0 | | | $ | 946.5 | | | $ | 675.0 | | |
| Education Solutions | | 386.6 | | | | 393.6 | | | | 312.3 | | |
| International | | 279.4 | | | 302.8 | | | 313.0 | |
| Total | $ | 1,704.0 | | $ | 1,642.9 | | $ | 1,300.3 | |
| | | | | | | | | |
| Operating income (loss) | | | | | | | | | |
| Children's Book Publishing and Distribution | $ | 143.4 | | $ | 115.3 | | $ | 8.9 | |
| Education Solutions | | 58.4 | | | 81.8 | | | 57.7 | |
| International | | (3.6) | | | 3.3 | | | 21.2 | |
Overhead (1) | | (91.9) | | | (103.0) | | | (110.5) | |
| Total | $ | 106.3 | | $ | 97.4 | | $ | (22.7) | |
| | | | | | | | | |
Depreciation and amortization (2) | | | | | | | | | |
| Children's Book Publishing and Distribution | $ | 22.9 | | $ | 24.9 | | $ | 25.6 | |
| Education Solutions | | 20.2 | | | 15.1 | | | 12.7 | |
| International | | 5.1 | | | 6.2 | | | 6.6 | |
Overhead (1) | | 41.5 | | | 45.1 | | | 45.4 | |
| Total | $ | 89.7 | | $ | 91.3 | | $ | 90.3 | |
| | | | | | | | | |
| Segment assets at May 31 | | | | | | | | | |
| Children's Book Publishing and Distribution | $ | 599.9 | | $ | 559.4 | | | $ | 518.0 | |
| Education Solutions | | 290.8 | | | 289.4 | | | 239.8 | |
| International | | 260.0 | | | 258.3 | | | 302.1 | |
Overhead (1) | | 716.0 | | | 833.7 | | | 948.4 | |
| Total | $ | 1,866.7 | | $ | 1,940.8 | | $ | 2,008.3 | |
| (1) Overhead includes all domestic corporate amounts not allocated to segments, including expenses and costs related to the management of corporate assets. |
| (2) Includes depreciation of property, plant and equipment, amortization of intangible assets and prepublication, deferred financing and cloud computing costs. |
4. ASSET WRITE DOWN
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Children's Book Publishing & Distribution (1) | | Education (1) | | Overhead (1) (2) | | Total Domestic | | International (1) | | Total |
| 2017 | |
| | |
| | |
| | |
| | |
| | |
|
| Revenues | $ | 1,052.1 |
| | $ | 312.7 |
| | $ | — |
| | $ | 1,364.8 |
| | $ | 376.8 |
| | $ | 1,741.6 |
|
| Bad debts | 4.2 |
| | 1.1 |
| | — |
| | 5.3 |
| | 5.7 |
| | 11.0 |
|
Depreciation and amortization(3) | 22.5 |
| | 8.5 |
| | 23.6 |
| | 54.6 |
| | 7.4 |
| | 62.0 |
|
| Asset impairments | — |
| | 1.1 |
| | 5.7 |
| | 6.8 |
| | — |
| | 6.8 |
|
| Segment operating income (loss) | 143.1 |
| | 50.7 |
| | (123.6 | ) | | 70.2 |
| | 18.7 |
| | 88.9 |
|
| Segment assets at May 31, 2017 | 395.7 |
| | 200.6 |
| | 922.2 |
| | 1,518.5 |
| | 241.5 |
| | 1,760.0 |
|
| Goodwill at May 31, 2017 | 40.9 |
| | 68.0 |
| | — |
| | 108.9 |
| | 10.0 |
| | 118.9 |
|
Expenditures for other non-current assets(4) | 63.6 |
| | 21.8 |
| | 54.5 |
| | 139.9 |
| | 11.5 |
| | 151.4 |
|
Other non-current assets at May 31, 2017(4) | 140.2 |
| | 93.9 |
| | 418.2 |
| | 652.3 |
| | 67.1 |
| | 719.4 |
|
| 2016 | |
| | |
| | |
| | |
| | |
| | |
|
| Revenues | $ | 1,000.9 |
| | $ | 299.7 |
| | $ | — |
| | $ | 1,300.6 |
| | $ | 372.2 |
| | $ | 1,672.8 |
|
| Bad debts | 5.6 |
| | 1.8 |
| | — |
| | 7.4 |
| | 4.9 |
| | 12.3 |
|
Depreciation and amortization(3) | 26.5 |
| | 11.8 |
| | 19.0 |
| | 57.3 |
| | 8.0 |
| | 65.3 |
|
| Asset impairments | — |
| | 6.9 |
| | 7.5 |
| | 14.4 |
| | — |
| | 14.4 |
|
| Segment operating income (loss) | 120.6 |
| | 42.8 |
| | (107.2 | ) | | 56.2 |
| | 11.4 |
| | 67.6 |
|
| Segment assets at May 31, 2016 | 394.4 |
| | 172.8 |
| | 898.0 |
| | 1,465.2 |
| | 247.4 |
| | 1,712.6 |
|
| Goodwill at May 31, 2016 | 40.9 |
| | 65.4 |
| | — |
| | 106.3 |
| | 9.9 |
| | 116.2 |
|
Expenditures for other non-current assets(4) | 46.3 |
| | 9.1 |
| | 26.6 |
| | 82.0 |
| | 13.8 |
| | 95.8 |
|
Other non-current assets at May 31, 2016(4) | 144.4 |
| | 82.6 |
| | 379.2 |
| | 606.2 |
| | 66.6 |
| | 672.8 |
|
| 2015 | |
| | |
| | |
| | |
| | |
| | |
|
| Revenues | $ | 957.8 |
| | $ | 276.8 |
| | $ | — |
| | $ | 1,234.6 |
| | $ | 401.2 |
| | $ | 1,635.8 |
|
| Bad debts | 5.3 |
| | 1.9 |
| | — |
| | 7.2 |
| | 3.4 |
| | 10.6 |
|
Depreciation and amortization(3) | 35.4 |
| | 13.2 |
| | 21.3 |
| | 69.9 |
| | 8.4 |
| | 78.3 |
|
| Asset impairments | 10.2 |
| | — |
| | 2.9 |
| | 13.1 |
| | 2.7 |
| | 15.8 |
|
| Segment operating income (loss) | 94.6 |
| | 39.4 |
| | (121.7 | ) | | 12.3 |
| | 20.6 |
| | 32.9 |
|
| Segment assets at May 31, 2015 | 378.3 |
| | 178.3 |
| | 1,014.6 |
| | 1,571.2 |
| | 248.0 |
| | 1,819.2 |
|
| Goodwill at May 31, 2015 | 40.9 |
| | 65.4 |
| | — |
| | 106.3 |
| | 10.0 |
| | 116.3 |
|
Expenditures for other non-current assets(4) | 51.7 |
| | 11.1 |
| | 11.6 |
| | 74.4 |
| | 21.1 |
| | 95.5 |
|
Other non-current assets at May 31, 2015(4) | 140.2 |
| | 92.9 |
| | 378.5 |
| | 611.6 |
| | 68.5 |
| | 680.1 |
|
During fiscal 2022, the Company committed to a plan to cease operations and sell the direct sales business in Asia, including the sale of the Malaysia legal entity. The Company wrote down the related assets which were included in the International segment and consisted of accounts receivable, inventory, other current assets and long-lived assets, to their recoverable value which equated to the selling price of $3.7. The remaining assets, consisting of accounts receivable and inventory, were classified as held for sale and recorded as a current asset on the Company's Consolidated Balance Sheet at May 31, 2022. The Company recognized a loss of $15.1 in fiscal 2022 which was included in Gain (Loss) on assets held for sale within the Company's Consolidated Statement of Operations for the fiscal year ended May 31, 2022. The impact of the impairment was a loss per basic and diluted share of Class A and Common Stock of $0.33 and $0.32, respectively, in the twelve months ended May 31, 2022.
| |
(1) | As discussed in Note 2, “Discontinued Operations,” the Company closed or sold several operations during the fourth quarter of fiscal 2015. 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) | Overhead includes all domestic corporate amounts not allocated to operating 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, its facility located in Connecticut and unabsorbed burden associated with the former educational technology and services business. |
| |
(3) | Includes depreciation of property, plant and equipment and amortization of intangible assets and prepublication and production costs. |
| |
(4) |
During fiscal 2021, the Company committed to a plan to cease use of certain leased office space in New York City and consolidate into the company-owned New York headquarters building. The right-of-use (ROU) assets and the other long-lived assets associated with these operating leases were included in the Overhead segment. An impairment expense of $8.5 was recognized in fiscal 2021 of which $7.0 related to the ROU assets and $1.5 related to other long-lived assets, primarily leasehold improvements. The Company also committed to a plan to permanently close 13 of the 54 book fairs warehouses in the U.S. as part of a branch consolidation project. The ROU assets and the other long-lived assets associated with these warehouse operating leases were included in the Children’s Book Publishing and Distribution segment. An impairment expense of $2.6 was recognized in fiscal 2021, primarily related to the ROU Other non-current assets include property, plant and equipment, prepublication, production, royalty advances, goodwill, intangibles and investments. Expenditures for other non-current assets for the International reportable segment include expenditures for long-lived assets of $6.7, $10.3 and $9.6 for the fiscal years ended May 31, 2017, 2016 and 2015, respectively. Other non-current assets for the International reportable segment include long-lived assets of $33.4, $35.3 and $37.3 at May 31, 2017, 2016, and 2015, respectively.
|
assets. The impact of the total $11.1 impairment was a loss per basic and diluted share of Class A and Common Stock of $0.24 in the twelve months ended May 31, 2021.
4.
5. DEBT
The following table summarizes the Company's debt as of May 31:
| | | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying
Value | | Fair
Value | | Carrying
Value | | Fair
Value |
| | 2017 | | 2016 | | | 2023 | | 2022 |
| Loan Agreement: | |
| | |
| | |
| | |
| Loan Agreement: | | | | | | | | |
| Revolving Loan (interest rate of n/a and n/a, respectively) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
| Unsecured Lines of Credit (weighted average interest rates of 4.1% and 4.4%, respectively) | 6.2 |
| | 6.2 |
| | 6.3 |
| | 6.3 |
| |
| Revolving loan | | Revolving loan | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Unsecured lines of credit (weighted average interest rates of 4.9% and 5.4%, respectively) | | Unsecured lines of credit (weighted average interest rates of 4.9% and 5.4%, respectively) | | 6.0 | | | 6.0 | | | 6.5 | | | 6.5 | |
| UK long-term debt | | UK long-term debt | | — | | | — | | | — | | | — | |
| Total debt | $ | 6.2 |
|
| $ | 6.2 |
|
| $ | 6.3 |
|
| $ | 6.3 |
| Total debt | $ | 6.0 | | | $ | 6.0 | | | $ | 6.5 | | | $ | 6.5 | |
| Less lines of credit and current portion of long-term debt | (6.2 | ) | | (6.2 | ) | | (6.3 | ) | | (6.3 | ) | |
| Less: lines of credit and current portion of long-term debt | | Less: lines of credit and current portion of long-term debt | | (6.0) | | | (6.0) | | | (6.5) | | | (6.5) | |
| Total long-term debt | $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
| Total long-term debt | $ | — | | | $ | — | | | $ | — | | | $ | — | |
The Company's debt obligations as of May 31, 20172023 have maturities of one year or less.
Loan Agreement
On January 5, 2017,October 27, 2021, Scholastic Corporation and its principal operating subsidiary, Scholastic Inc. (each, a “Borrower” and together , the “Borrowers”) entered into a newan amended and restated 5-year credit facilityagreement with certaina syndicate of banks and Bank of America, N.A., as administrative agent (the “Loan“Credit Agreement”). The LoanCredit Agreement replaced the Company's then existing loan agreementprovides for a $300.0 unsecured revolving credit facility and has substantially similar terms, except that:
| |
(i) | the borrowing limit was reduced to $375.0 from $425.0;
|
| |
(ii) | the “starter” basket for permitted payments of dividends and other payments in respect of capital stock was increased to $275.0 from $75.0; and
|
| |
(iii) | the maturity date was extended to January 5, 2022.
|
The prior loan agreement, which was originally entered into in 2007 and had a maturity date of December 5, 2017, was terminated in connection with the entry into the new Loan Agreement.
The Loan Agreement allows the Company to borrow, repay or prepay and reborrow at any time prior to the January 5, 2022October 27, 2026 maturity date. The Credit Agreement also provides an unlimited basket for permitted payments of dividends and other distributions in respect of capital stock so long as the Corporation’s pro forma Consolidated Net Leverage Ratio, as defined, is not in excess of 2.75:1.
On February 28, 2023, the Company entered into the First and Second Amendments to the Credit Agreement with the lenders from time to time party thereto, Truist Bank and Wells Fargo Bank, National Association, as co-syndication agents and Bank of America, N.A., as administrative agent (collectively the "Amendments"). The Amendments, among other things, (i) adjusted the credit spread adjustment for SOFR (the secured overnight financing rate as administered by the Federal Reserve Bank of New York) to 0.10% (10 basis points) and (ii) transitioned the reference rate under the Credit Agreement for borrowings from LIBOR (the London interbank offered rate) to SOFR, together with various other conforming changes to accommodate such replacement.
Under the LoanCredit Agreement, interest on amounts borrowed thereunder 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 LoanCredit Agreement is dependent upon the Borrower’s election of a rate that is either:
A•a Base Rate equal to the higher of (i) the prime rate, (ii) the prevailing Federal Funds rate plus 0.50% or (iii) the Eurodollar Rate for a one month interest period plus 1%1.00% plus, in each case, an applicable spreadmargin ranging from 0.175%0.35% to 0.60%0.75%, as determined by the Company’s prevailing consolidated debt to total capital ratio.
Consolidated Leverage Ratio (as defined in the Credit Agreement);
- or -
A•a Eurodollar Rate equal to the London interbank offered rate (LIBOR)SOFR (Daily Simple or Term), plus a SOFR adjustment of 0.10% per annum and an applicable spreadmargin ranging from 1.175%1.35% to 1.60%1.75%, as determined by the Company’s prevailing consolidated debt to total capital ratio.
Consolidated Leverage Ratio.
As of May 31, 2017,2023, the indicated spreadapplicable margin on Base Rate Advances was 0.175%0.35% and the indicated spreadapplicable margin on Eurodollar Advances was 1.175%1.35%, both based on the Company’s prevailing consolidated debt to total capital ratio.Consolidated Leverage Ratio.
The LoanCredit Agreement also provides for the payment of a facilitycommitment fee in respect of the aggregate unused amount of revolving credit commitments ranging from 0.20% to 0.40%0.30% per annum based upon the Company’sCorporation’s then prevailing consolidated debt to total capital ratio. AtConsolidated Leverage Ratio. As of May 31, 2017,2023, the facilitycommitment fee rate was 0.20%.
A portion of the revolving credit facility, up to a maximum of $50.0, is available for the issuance of letters of credit. In addition, a portion of the revolving credit facility, up to a maximum of $15.0, is available for swingline loans. The Loan
Credit Agreement has an accordion feature which permits the Company, provided certain conditions are satisfied, to increase the facility by up to an additional $150.0.
As of May 31, 2017 and May 31, 2016,2023, the Company had no outstanding borrowings under the LoanCredit Agreement.
The Credit Agreement contains certain financial covenants related to leverage and interest coverage ratios (as defined in the Credit Agreement), limitations on the amount of dividends and other distributions, and other limitations on fundamental changes to the Company or its business. The Company was in compliance with required covenants for all periods presented.
At May 31, 2017,2023, the Company had open standby letters of credit totaling $5.3$3.8 issued under certain credit lines, including $0.4 under the Loan Agreement and $4.9$3.4 under the domestic credit lines discussed below.
UK Loan Agreements
On January 24, 2020, Scholastic Limited UK entered into a term loan facility to fund the construction of the new UK facility in Warwickshire. The Loan Agreement contains certain covenants, including interest coverageterm loan facility was repaid and leverage ratio testsclosed on March 31, 2022.
On September 23, 2019, Scholastic Limited UK entered into a term loan agreement to borrow £2.0 to fund a land purchase in connection with the construction of the new UK facility in Warwickshire. The loan agreement was repaid and certain limitationsclosed on the amount of dividends and other distributions, and at May 31, 2017, the Company was in compliance with these covenants.12, 2022.
Lines of Credit
As of May 31, 2017,2023, the Company’s domestic credit lines available under unsecured money market bid rate credit lines totaled $25.0.$10.0. There were no outstanding borrowings under these credit lines as of May 31, 20172023 and May 31, 2016.2022. As of May 31, 2017,2023, availability under these unsecured money market bid rate credit lines totaled $20.1.$6.6, excluding commitments of $3.4.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.
As of May 31, 2017,2023, the Company had equivalent various local currency international credit lines totaling $23.4,$24.5, underwritten by banks primarily in the United States, Canada and the United Kingdom. Outstanding borrowings under these facilities were equivalent to $6.2$6.0 at May 31, 20172023 at a weighted average interest rate of 4.1%4.9%, compared to outstanding borrowings equivalent to $6.3of $6.5 at May 31, 20162022 at a weighted average interest rate of 4.4%5.4%. As of May 31, 2017,2023, the equivalent amounts available under these facilities totaled $17.2.$18.5. 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.
5.6. 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 ten 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, 2017, 2016 and 2015 was $24.9, $25.7 and $24.2, respectively. Net rent expense represents rent expense reduced for sublease income and lease payments received.
Amortization of assets under capital leases covering land, buildings and equipment was $1.1, $0.8 and $0.2 for the fiscal years ended May 31, 2017, 2016 and 2015, respectively, and is included in Depreciation and amortization expense.
The following table sets forth the aggregate minimum future annual rental commitments at May 31, 2017 under non-cancelable operating leases for the fiscal years ending May 31:
|
| | | | | | |
| | Operating Leases | Capital Leases |
| 2018 | $ | 30.0 |
| $ | 1.4 |
|
| 2019 | 21.0 |
| 1.3 |
|
| 2020 | 15.6 |
| 1.2 |
|
| 2021 | 9.7 |
| 1.1 |
|
| 2022 | 6.6 |
| 1.0 |
|
| Thereafter | 7.6 |
| 2.5 |
|
| Total minimum lease payments | $ | 90.5 |
| $ | 8.5 |
|
| Less minimum sublease income and lease payments to be received | 41.2 |
| — |
|
| Minimum lease payments, net of sublease income | $ | 49.3 |
| $ | 8.5 |
|
| Less amount representing interest | | (0.9 | ) |
| Present value of net minimum capital lease payments | | 7.6 |
|
| Less current maturities of capital lease obligations | | 1.1 |
|
| Long-term capital lease obligations | | $ | 6.5 |
|
OtherContractual Commitments
The following table sets forth the aggregate minimum future contractual commitments at May 31, 20172023 relating to royalty advances and minimum print quantities for the fiscal years ending May 31:
|
| | | | | | | |
| | Royalty Advances | | Minimum Print Quantities |
| 2018 | $ | 8.4 |
| | $ | 45.5 |
|
| 2019 | 6.3 |
| | 46.3 |
|
| 2020 | 1.9 |
| | 47.1 |
|
| 2021 | 2.3 |
| | — |
|
| 2022 | 0.4 |
| | — |
|
| Thereafter | 0.1 |
| | — |
|
| Total commitments | $ | 19.4 |
| | $ | 138.9 |
|
| | | | | | | | | | | | | | | | | |
| | Royalty Advances | | Minimum Print Quantities |
| 2024 | $ | 28.9 | | | $ | 0.3 | |
| 2025 | | 10.5 | | | | 0.1 | |
| 2026 | | 1.4 | | | | 0.1 | |
| 2027 | | 0.2 | | | | — | |
| 2028 | | 0.1 | | | | — | |
| Thereafter | | 0.2 | | | | — | |
| Total commitments | $ | 41.3 | | | $ | 0.5 | |
The Company had open standby letters of credit of $5.3$3.8 and $4.1 issued under certain credit lines as of May 31, 20172023 and 2016.2022, respectively, in support of its insurance programs. 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 their expiration.
Contingencies
Legal Matters
Various claims and lawsuits arising in the normal course of business are pending against the Company. The Company accrues a liability for such matters when it is probable that a liability has occurred and the amount of such liability can be reasonably estimated. When only a range can be estimated, the most probable amount in the range is accrued unless no amount within the range is a better estimate than any other amount, in which case the minimum amount in the range is accrued. Legal costs associated with litigation loss contingencies are expensed in the period in which they are incurred. The Company does not expect, in the case of those 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.
During fiscal 2023, the Company received $5.0 in recoveries from its insurance programs related to photo litigation settlements accrued and paid in prior periods. The recoveries were recognized as an offset to the legal settlements and reflected in Selling, general and administrative expenses in the Company's Consolidated Statement of Operations. 6.
During fiscal 2022, the Company received $6.6 in recoveries from its insurance programs related to an intellectual property legal settlement, which was accrued in fiscal 2021. The recoveries were recognized as an offset to the legal settlement and reflected in Selling, general and administrative expenses in the Company's Consolidated Statement of Operations. While the Company expects to receive additional recoveries from its insurance programs, it is premature to determine with any level of probability or accuracy the amount of those recoveries at this time.
7. INVESTMENTS
IncludedInvestments are included in the Other assets and deferred charges section ofon the Consolidated Balance Sheets. The following table summarizes the Company’s Consolidated Balance Sheets were investments of $28.6 and $26.2 atfor the fiscal years ended May 31, 2017 and May 31, 2016, respectively.2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | Segment |
| Equity method investments | $ | 31.6 | | | $ | 31.0 | | | International |
| Other equity investments | | 6.0 | | | | 6.0 | | | Children's Book Publishing & Distribution |
| Total investments | $ | 37.6 | | | $ | 37.0 | | | |
The Company's 48.5%Company’s 26.2% equity interest in Make Believe Ideas Limited (MBI), a UK-based children's book publishing company, is accounted for using the equity method of accounting. Under the purchase agreement, and subject to its provisions, the Company will purchase the remaining outstanding shares in MBI following the completion of MBI's accounts for the calendar year 2018. Equity method income from this investment is reported in the International segment. The net carrying value of this investment was $8.6 and $8.0 at May 31, 2017 and May 31, 2016, respectively.
The Company’s 26.2% non-controlling interest in a separate children’s book publishing business located in the UK is accounted for using the equity method of accounting. Equity method income from this investment is reported in the International segment.
The netCompany has a 4.6% ownership interest in a financing and production company that makes film, television, and digital programming designed for the youth market. This equity investment does not have a readily determinable fair value and the Company has elected to apply the measurement alternative, and report this investment at cost, less impairment, on the Company's Consolidated Balance Sheets. There have been no impairments or adjustments to the carrying value of this investment was $20.0 and $18.1 at May 31, 2017 and May 31, 2016, respectively.investment.
The Company has other equity and cost method investments that hadwith a net carrying value of less than $0.1 and $0.1 at May 31, 20172023 and May 31, 2016, respectively.2022.
Income from equity investments reported in "Selling,Selling, general and administrative expenses"expenses in the Consolidated Statements of Operations totaled $5.3$0.9 for the year ended May 31, 2017, $3.5 for the year ended May 31, 2016 and2023, $2.0 for the year ended May 31, 2015.
For2022 and $7.4 for the year ended May 31, 2016, the2021. The Company recognized a pretax gain of $2.2 on the sale of a cost method investment in China. Fordid not receive dividends for the year ended May 31, 2015,2023 and received dividends of $1.4 for the Company recognized a pretax gain of $0.6 on the sale of a UK-based cost method investment that had previously been determined to be other than temporarily impaired.year ended May 31, 2022.
7.
8. PROPERTY, PLANT AND EQUIPMENT
The following table summarizes the major classes of assets at cost and accumulated depreciation for the fiscal years ended May 31:
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 |
| Land | $ | 79.5 | | | $ | 79.6 | |
| Buildings | | 231.7 | | | | 232.5 | |
| Capitalized software | | 270.2 | | | | 243.6 | |
| Furniture, fixtures and equipment | | 212.9 | | | | 206.5 | |
| Building and leasehold improvements | | 218.7 | | | | 214.9 | |
| Construction in progress | | 46.0 | | | | 33.9 | |
| Total at cost | $ | 1,059.0 | | | $ | 1,011.0 | |
| Less: Accumulated depreciation and amortization | | (537.6) | | | | (494.0) | |
| Property, plant and equipment, net | $ | 521.4 | | | $ | 517.0 | |
|
| | | | | | | |
| | 2017 | | 2016 |
| Land | $ | 77.5 |
| | $ | 77.4 |
|
| Buildings | 239.7 |
| | 240.4 |
|
| Capitalized software | 202.0 |
| | 196.0 |
|
| Furniture, fixtures and equipment | 224.7 |
| | 221.5 |
|
| Building and leasehold improvements | 176.9 |
| | 141.7 |
|
| Total at cost | 920.8 |
| | 877.0 |
|
| Less: Accumulated depreciation and amortization | (445.5 | ) | | (439.4 | ) |
| Property, plant and equipment, net | $ | 475.3 |
| | $ | 437.6 |
|
| | | | | | | | | | | | | | | | | |
| Included in Other assets and deferred charges | 2023 | | 2022 |
| Capitalized Cloud Computing Arrangements | $ | 32.2 | | | $ | 32.3 | |
Depreciation and amortization expense related to property, plant, and equipment were $36.2, $36.7was $52.5, $54.8 and $46.0$58.3 for the fiscal years ended May 31, 2017, 20162023, 2022 and 2015,2021, respectively. DuringAmortization expense related to cloud computing arrangements was $6.3, $3.9 and $0.7 for the twelve monthsfiscal years ended May 31, 2017, the Company capitalized $34.2 of building improvements not yet being depreciated related to the investment plan to create premium retail space2023, 2022 and modernize the Company's headquarters office space and recognized a pretax impairment charge related to certain website development assets of $5.7. 2021, respectively.
In the fourth quarter of fiscal 2016,2021, the Company recognized a pretax impairment charge of $7.5$1.5 related to its plan to cease use of certain leased office space in New York City and consolidate into its company-owned New York headquarters building. Refer to Note 4, "Asset Write Down", for further discussion regarding the impairment.
The following table presents long-lived assets and related additions by reportable segment for the fiscal years ended May 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Additions | | | Long-lived assets (1) |
| | 2023 | | | 2022 | | | 2023 | | | 2022 |
| Children's Book Publishing and Distribution | | $ | 10.6 | | | | $ | 5.7 | | | | $ | 34.4 | | | | $ | 32.3 | |
| Education Solutions | | 0.3 | | | | 0.5 | | | | 2.1 | | | | 2.7 | |
| International | | 4.4 | | | | 3.9 | | | | 25.1 | | | | 25.0 | |
Overhead (2) | | 22.3 | | | | 4.3 | | | | 397.1 | | | | 396.7 | |
Total (3) | | $ | 37.6 | | | | $ | 14.4 | | | | $ | 458.7 | | | | $ | 456.7 | |
| (1) Long-lived assets consist of property, plant and equipment, net, excluding capitalized software. |
| (2) Overhead includes all domestic corporate amounts not allocated to segments, including expenses and costs related to the management of corporate assets. |
| (3) Long-lived assets held in the United States were $432.8 and $431.3 as of May 31, 2023 and 2022, respectively. Long-lived assets held outside the United States were $25.9 and $25.4 as of May 31, 2023 and 2022, respectively. |
Sale of Long-Lived Assets
Refer to Note 4, Asset Write Down and Sale, for details regarding the disposition of the direct sales business in Asia completed during fiscal 2023.
During the fourth quarter of fiscal 2022, the Company sold the UK distribution center located in Witney to consolidate the operations into a new facility in Warwickshire. The long-lived assets related to the abandonmentWitney facility, which consisted of legacybuilding and building improvements, were included in the International segment. These assets had a carrying value of $2.1 and were classified as held for sale as of the third quarter of fiscal 2020. The net proceeds from the sale were $5.6 and the Company recognized a gain on sale of $3.5. This amount is included within Gain (loss) on sale of assets and other within the Company's Consolidated Statements of Operations.
During the second quarter of fiscal 2022, the Company sold a facility, which included office and warehouse space, located in Lake Mary, Florida as part of an initiative to rightsize its real estate footprint to reduce occupancy costs. The long-lived assets, which consisted of land, building, building improvements, furniture and fixtures, were included in the Children's Book Publishing and Distribution segment. These assets had a carrying value of $4.2 and were classified as held for sale as of the third quarter of fiscal 2021. The net proceeds from the sale were $10.4 and the Company recognized a gain on sale of $6.2. This amount is included within Gain (loss) on sale of assets and other within the Company's Consolidated Statements of Operations.
During the third quarter of fiscal 2021, the Company sold the UK distribution center located in Southam. The long-lived assets related to the Southam facility, which consisted of land, building and building improvements, were included in the International segment. The assets had a carrying value of $1.3 and were classified as held for sale as of the fiscal year ended May 31, 2020. The net proceeds from the sale were $5.1 and the Company recognized a gain on sale of $3.8. This amount is included within Gain (loss) on sale of assets and other within the Company's Consolidated Statements of Operations.
During the first quarter of fiscal 2021, the Company-owned facility located in Danbury, Connecticut was sold and the Company relocated the book fairs warehousing and distribution operations conducted in Danbury to a leased warehouse in Easton, Pennsylvania. The long-lived assets related to the Danbury facility, which consisted of land, building, and building improvements, were included in the Overhead segment. These assets had a carrying value of $5.7 and were classified as held for sale as of the fiscal year ended May 31, 2020. The net proceeds from the sale were $12.3 and the Company recognized a gain on sale of $6.6. This amount is included within Gain (loss) on sale of assets and other within the Company's Consolidated Statements of Operations.
9. LEASES
The following table summarizes right-of-use assets and lease liabilities recorded on the Company's Consolidated Balance Sheet for the fiscal years ended May 31, 2023 and May 31, 2022:
| | | | | | | | | | | | | | | | | | | | |
| May 31, 2023 | May 31, 2022 | | Location within Consolidated Balance Sheet |
| Operating leases | $ | 85.7 | | $ | 81.9 | | | Operating lease right-of-use assets, net |
| Finance leases | | 6.1 | | | 8.1 | | | Property, plant and equipment, net |
| Total lease assets | $ | 91.8 | | $ | 90.0 | | | |
| | | | | | |
| Operating leases: | | | | | | |
| Current portion | $ | 21.2 | | $ | 20.8 | | | Current portion of operating lease liabilities |
| Non-current portion | | 73.8 | | | 69.8 | | | Long-term operating lease liabilities |
| Total operating lease liabilities | $ | 95.0 | | $ | 90.6 | | | |
| | | | | | |
| Finance leases: | | | | | | |
| Current portion | $ | 2.2 | | $ | 2.3 | | | Other accrued expenses |
| Non-current portion | | 4.6 | | | 6.7 | | | Other noncurrent liabilities |
| Total finance lease liabilities | $ | 6.8 | | $ | 9.0 | | | |
| Total lease liabilities | $ | 101.8 | | $ | 99.6 | | | |
In fiscal 2021, the Company recognized a pretax impairment charge of $9.6 related to operating lease right-of-use assets in connection with the Company's renovationits plan to cease use of its headquarters locationcertain leased office space in New York City.City and consolidate into its company-owned New York headquarters building and its plan to permanently close 13 of its 54 book fair warehouses in the U.S. as part of a branch consolidation project. Refer to Note 4, "Asset Write Down", for further discussion regarding the impairment.
The following table summarizes the lease expense activity for the fiscal years ended May 31:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Location within Consolidated Statements of Operations |
| 2023 | 2022 | 2021 |
| Operating lease expense | $ | 26.6 | | $ | 25.9 | | $ | 28.3 | | Selling, general and administrative expenses |
| Finance lease costs : | | | | | | | |
| Depreciation of leased assets | | 2.1 | | | 2.2 | | | 2.3 | | Depreciation and amortization |
| Accretion of lease liabilities | | 0.3 | | | 0.4 | | | 0.4 | | Interest expense |
| | | | | | | |
| | | | | | | |
| Total lease expense | $ | 29.0 | | $ | 28.5 | | $ | 31.0 | | |
The following table summarizes certain cash flows information related to the Company's leases for the fiscal years ended May 31:
| | | | | | | | | | | | | | | | | | | | |
| 2023 | 2022 | 2021 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
| Operating cash flows from operating leases | $ | 25.9 | | $ | 31.4 | | $ | 27.4 | |
| Operating cash flows from finance leases | | 0.3 | | | 0.4 | | | 0.4 | |
| Financing cash flows from finance leases | | 2.3 | | | 2.3 | | | 2.3 | |
| Noncash transactions: | | | | | | |
| Lease assets obtained in exchange for new lease liabilities | | 27.4 | | | 31.8 | | | 13.7 | |
The following table provides the maturities of the Company's lease liabilities recorded on the Company's Consolidated Balance Sheet for the fiscal year ended May 31, 2023:
| | | | | | | | | | | | | | | | | |
| Operating Leases | | Finance Leases |
| Fiscal 2024 | $ | 25.4 | | | $ | 2.4 | |
| Fiscal 2025 | | 20.6 | | | | 1.6 | |
| Fiscal 2026 | | 15.8 | | | | 1.2 | |
| Fiscal 2027 | | 13.6 | | | | 1.1 | |
| Fiscal 2028 | | 11.5 | | | | 0.8 | |
| Thereafter | | 25.4 | | | | 0.3 | |
| Total lease payments | $ | 112.3 | | | $ | 7.4 | |
| Less: interest | | (17.3) | | | | (0.6) | |
| Total lease liabilities | $ | 95.0 | | | $ | 6.8 | |
The following table summarizes the weighted-average remaining lease terms and weighted-average discount rates related to the Company's leases recorded on the Company's Consolidated Balance Sheet for the fiscal years ended May 31, 2023 and May 31, 2022:
| | | | | | | | | | | |
| 2023 | | 2022 |
| Weighted-average remaining lease term (years): | | | |
| Operating Leases | 6.1 | | 6.3 |
| Finance Leases | 4.2 | | 4.9 |
| Weighted-average discount rate: | | | |
| Operating Leases | 5.1 | % | | 4.3 | % |
| Finance Leases | 4.0 | % | | 4.0 | % |
10. ACQUISITIONS
8.
On September 1, 2022, the Company acquired 100% of the share capital of Learning Ovations, Inc., a U.S.-based education technology business and developer of a literacy assessment and instructional system, for $11.1, net of cash acquired. The Company accounted for the acquisition as a business combination under the acquisition method of accounting. Fair values were assigned to the assets and liabilities acquired, including cash, receivables, and technology/know-how. The receivables acquired had a fair value of $0.1 and have been substantially collected as of May 31, 2023. The Company utilized internally-developed discounted cash flow forecasts to determine the fair value of the technology/know-how using a discount rate of 17.5% to account for the relative risks of the estimated future cash flows. The Company classified this as a Level 3 fair value measurement due to the use of these significant unobservable inputs. The fair values of the net assets were $3.6 which included $4.1 of amortizable intangible assets attributable to the technology/know-how and a $0.6 deferred tax liability. This acquisition resulted in $7.6 of goodwill that was assigned to the Company's Education Solutions segment and is not deductible for tax purposes. The results of operations of this business subsequent to the acquisition are included in the Education Solutions segment. The transaction was not determined to be material to the Company's results and therefore pro forma financial information is not presented.
There were no acquisitions during fiscal 2022.
11. GOODWILL AND OTHER INTANGIBLES
The following table summarizes the activity in Goodwill for the fiscal years ended May 31:
| | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 |
| Gross beginning balance | $ | 164.9 | | | $ | 165.9 | |
| Accumulated impairment | | (39.6) | | | | (39.6) | |
| Beginning balance | $ | 125.3 | | | $ | 126.3 | |
| Additions | | 7.6 | | | | — | |
| | | | | |
| Foreign currency translation | | (0.2) | | | | (1.0) | |
| | | | | |
| Gross ending balance | | 172.3 | | | | 164.9 | |
| Accumulated impairment | | (39.6) | | | | (39.6) | |
| Ending balance | $ | 132.7 | | | $ | 125.3 | |
|
| | | | | | | |
| | 2017 | | 2016 |
| Gross beginning balance | $ | 155.8 |
| | $ | 155.9 |
|
| Accumulated impairment | (39.6 | ) | | (39.6 | ) |
| Beginning balance | 116.2 |
| | 116.3 |
|
| Additions | 2.8 |
| | — |
|
| Foreign currency translation | (0.1 | ) | | (0.1 | ) |
| Gross ending balance | 158.5 |
| | 155.8 |
|
| Accumulated impairment | (39.6 | ) | | (39.6 | ) |
| Ending balance | $ | 118.9 |
| | $ | 116.2 |
|
In fiscal 2017,2023, the Company purchasedacquired Learning Ovations, Inc, a digital phonicsU.S.-based education technology business, resultingwhich resulted in the recognition of $2.8$7.6 of Goodwill. See note 9, "Acquisitions,"Goodwill included in the Education Solutions segment. Refer to Note 10, Acquisitions, for more information.further details regarding the acquisition.
There were no impairment charges related to Goodwill in any of the periods presented. The Company performed a qualitative assessment for the fiscal 2023 annual impairment test and concluded that goodwill is not impaired.
The following table presents Goodwill by segment as of May 31:
| | | | | | | | | | | | | | | | | | | | |
| 2023 | 2022 |
| Children's Book Publishing and Distribution | $ | 46.9 | | | $ | 47.0 | | |
| Education Solutions | | 75.8 | | | | 68.3 | | |
| International | | 10.0 | | | 10.0 | |
| Total | $ | 132.7 | | $ | 125.3 | |
The following table summarizes Other intangibles for the fiscal years ended May 31:
| | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 |
| Other intangibles subject to amortization - beginning balance | $ | 6.0 | | | $ | 8.4 | |
| Additions | | 4.1 | | | | — | |
| | | | | |
| Amortization expense | | (2.2) | | | | (2.0) | |
| Foreign currency translation | | (0.1) | | | | (0.4) | |
| | | | | |
| | | | | |
| Total other intangibles subject to amortization, net of accumulated amortization of $36.5 and $34.3, respectively | $ | 7.8 | | | $ | 6.0 | |
| | | | | |
| Total other intangibles not subject to amortization | | 2.1 | | | | 2.1 | |
| Total other intangibles | $ | 9.9 | | | $ | 8.1 | |
|
| | | | | | | |
| | 2017 | | 2016 |
| Other intangibles subject to amortization - beginning balance | $ | 4.7 |
| | $ | 4.7 |
|
| Additions | 7.0 |
| | 2.4 |
|
| Amortization expense | (2.5 | ) | | (2.2 | ) |
| Foreign currency translation | (0.2 | ) | | (0.2 | ) |
| Total other intangibles subject to amortization, net of accumulated amortization of $22.0 and $19.5, respectively | $ | 9.0 |
| | $ | 4.7 |
|
| | | | |
| Total other intangibles not subject to amortization | $ | 2.1 |
| | $ | 2.1 |
|
| Total other intangibles | $ | 11.1 |
| | $ | 6.8 |
|
In fiscal 2017,2023, the Company purchased a digital phonics business and the assets ofacquired Learning Ovations, Inc., a U.S.-based book faireducation technology business, resultingwhich resulted in the recognition of $6.8 and $0.2$4.1 of amortizable intangible assets, respectively. In fiscal 2016, the Company purchased a UK-based book fair business and the assets of a U.S.-based book fair business resulting in the Company recognizing $1.9 and $0.5 of amortizableassets. These intangible assets respectively.are amortized over the estimated useful life of 7 years. Refer to Note 10, Acquisitions, for further details regarding the acquisition.
There were no additions to intangible assets for the fiscal year ended May 31, 2022.
Amortization expense for Other intangibles totaled $2.5, $2.2, $2.0 and $1.9$2.2 for the fiscal years ended May 31, 2017, 20162023, 2022 and 2015,2021, respectively.
The following table reflects the estimated amortization expense for intangibles for the next fivefuture fiscal years ending May 31:
|
| | | |
| 2018 | $ | 2.0 |
|
| 2019 | 1.9 |
|
| 2020 | 1.9 |
|
| 2021 | 1.6 |
|
| 2022 | 1.4 |
|
| | | | | | | | |
| 2024 | $ | 2.1 | |
| 2025 | | 1.8 | |
| 2026 | | 0.9 | |
| 2027 | | 0.9 | |
| 2028 | | 0.9 | |
| Thereafter | | 1.2 | |
Intangible assets with indefinite lives consist principally of trademark and tradename rights. Intangible assets with definite lives consist principally of customer lists, intellectual property, tradenames, technology/know-how and other agreements. Intangible assets with definite lives are amortized over their estimated useful lives. The weighted-average remaining useful lives of all amortizable intangible assets is approximately 5 years.5.1 years.
9. ACQUISITIONS
In fiscal 2017, the Company acquired 100%There were no impairment charges related to Intangible assets in any of the share capital of Ooka Island Inc., a Canadian-based digital phonics business, for $9.7, net of cash acquired. Fair values were assigned to the assets and liabilities acquired, including
inventory, receivables, payables and intellectual property. The Company utilized internally-developed discounted cash flow forecasts to determine the fair value of the intellectual property. The fair values of the net assets were $6.9 which included $6.8 of amortizable intangible assets attributable to the intellectual property, resulting in $2.8 of goodwill that is expected to be deductible for tax purposes. The results of operations of this business subsequent to the acquisition are included in the Education segment.
The Company also purchased the assets of a U.S.-based book fair business in fiscal 2017 for approximately $0.4. The acquisition resulted in $0.2 of amortizable intangible assets. The results of operations of this business subsequent to the acquisition are included in the Children's Book Publishing and Distribution segment.
In fiscal 2016, the Company acquired 100% of the share capital of Troubadour, Limited, a book fairs business located in the United Kingdom, for £2.1 million, net of cash acquired, which was equivalent to approximately $3.2. Fair values were assigned to the assets and liabilities acquired, including inventory, trade receivables and payables, a customer list and fixed assets, in addition to cash. The Company utilized internally-developed discounted cash flow forecasts to determine the fair value of the customer list. The fair values of the net assets were $3.2 which included $1.9 of amortizable intangible assets attributable to the customer list. The results of operations of this business subsequent to the acquisition are included in the International segment.
The Company also purchased the assets of a U.S.-based book fairs business in fiscal 2016 for approximately $0.5. The acquisition resulted in $0.5 of amortizable intangible assets. The results of operations of this business subsequent to the acquisition were included in the Children's Book Publishing and Distribution segment.
The transactions in fiscal 2017 and 2016 were not determined to be material individually or in the aggregate to the Company's results and therefore pro forma financial information is notperiods presented.
10.
12. TAXES
The components of earnings from continuing operationsEarnings (loss) before income taxes for the fiscal years ended May 31 are:were:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
| United States | $ | 106.3 | | | $ | 76.9 | | | $ | (45.8) | |
| Non-United States | | 6.1 | | | | 12.8 | | | | 27.6 | |
| Total | $ | 112.4 | | | $ | 89.7 | | | $ | (18.2) | |
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| United States | $ | 78.7 |
| | $ | 62.1 |
| | $ | 27.4 |
|
| Non-United States | 9.2 |
| | 6.6 |
| | 2.5 |
|
| Total | $ | 87.9 |
| | $ | 68.7 |
| | $ | 29.9 |
|
The provision (benefit) for income taxes from continuing operations for the fiscal years ended May 31 consistsconsisted of the following components:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
| Current | | | | | | | | |
| Federal | $ | 26.4 | | | $ | (2.1) | | | $ | 2.3 | |
| State and local | | 1.6 | | | | 0.6 | | | | (0.3) | |
| Non-United States | | 1.6 | | | | 3.0 | | | | 6.0 | |
| Total Current | $ | 29.6 | | | $ | 1.5 | | | $ | 8.0 | |
| | | | | | | | |
| Deferred | | | | | | | | |
| Federal | $ | (6.6) | | | $ | 6.1 | | | $ | (10.9) | |
| State and local | | 3.9 | | | | 2.4 | | | | (1.3) | |
| Non-United States | | (1.0) | | | | (1.3) | | | | (3.1) | |
| Total Deferred | $ | (3.7) | | | $ | 7.2 | | | $ | (15.3) | |
| | | | | | | | |
| Total Current and Deferred | $ | 25.9 | | | $ | 8.7 | | | $ | (7.3) | |
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Federal | |
| | |
| | |
|
| Current | $ | 8.3 |
| | $ | (4.0 | ) | | $ | 3.3 |
|
| Deferred | 17.7 |
| | 19.2 |
| | 5.3 |
|
| Total federal | $ | 26.0 |
| | $ | 15.2 |
| | $ | 8.6 |
|
| State and local | |
| | |
| | |
|
| Current | $ | 1.8 |
| | $ | 4.1 |
| | $ | 1.2 |
|
| Deferred | 2.2 |
| | 1.8 |
| | 0.9 |
|
| Total state and local | $ | 4.0 |
| | $ | 5.9 |
| | $ | 2.1 |
|
| Non-United States | |
| | |
| | |
|
| Current | $ | 5.4 |
| | $ | 4.1 |
| | $ | 4.7 |
|
| Deferred | — |
| | (0.5 | ) | | (1.0 | ) |
| Total non-United States | $ | 5.4 |
| | $ | 3.6 |
| | $ | 3.7 |
|
| Total | |
| | |
| | |
|
| Current | $ | 15.5 |
| | $ | 4.2 |
| | $ | 9.2 |
|
| Deferred | 19.9 |
| | 20.5 |
| | 5.2 |
|
| Total current and deferred | $ | 35.4 |
| | $ | 24.7 |
| | $ | 14.4 |
|
Effective Tax Rate Reconciliation
A reconciliation of the significant differences between the effective income tax rate and the federal statutory rate on earnings from continuing operationsEarnings (loss) before income taxes for the fiscal years ended May 31 iswas as follows: | | | | 2017 | | 2016 | | 2015 | | 2023 | | 2022 | | 2021 |
| Computed federal statutory provision | 35.0 | % | | 35.0 | % | | 35.0 | % | Computed federal statutory provision | | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State income tax provision, net of federal income tax benefit | 3.3 |
| | 3.7 |
| | 4.2 |
| State income tax provision, net of federal income tax benefit | | 4.6 | | | 3.1 | | | (10.4) | |
| Difference in effective tax rates on earnings of foreign subsidiaries | 0.0 |
| | 1.2 |
| | 3.7 |
| Difference in effective tax rates on earnings of foreign subsidiaries | | 0.0 | | | (0.2) | | | 7.0 | |
| Charitable contributions | (0.3 | ) | | (0.4 | ) | | (1.1 | ) | |
| Tax credits | (0.5 | ) | | (0.3 | ) | | (0.5 | ) | |
| Rate differential on net operating loss carrybacks | | Rate differential on net operating loss carrybacks | | — | | | — | | | 19.3 | |
| GILTI inclusion | | GILTI inclusion | | 0.4 | | | — | | | (2.7) | |
| Foreign derived intangible income deduction | | Foreign derived intangible income deduction | | (1.7) | | | — | | | — | |
| | Various tax credits | | Various tax credits | | (1.5) | | | (1.9) | | | 6.5 | |
| Valuation allowances | 0.1 |
| | (0.7 | ) | | 2.4 |
| Valuation allowances | | — | | | 0.2 | | | 25.7 | |
| Uncertain Positions | 2.9 |
| | 3.9 |
| | 11.5 |
| |
| Other - net | (0.2 | ) | | (6.4 | ) | | (7.0 | ) | |
| Uncertain positions | | Uncertain positions | | (0.8) | | | (8.1) | | | (14.6) | |
| | Equity and other compensation | | Equity and other compensation | | 2.9 | | | 1.2 | | | (8.7) | |
| Return to provision adjustments | | Return to provision adjustments | | (1.3) | | | (4.4) | | | — | |
| Other, net | | Other, net | | (0.6) | | | (1.2) | | | (3.0) | |
| Effective tax rates | 40.3 | % | | 36.0 | % | | 48.2 | % | Effective tax rates | | 23.0 | % | | 9.7 | % | | 40.1 | % |
| Total provision for income taxes | $ | 35.4 |
| | $ | 24.7 |
| | $ | 14.4 |
| |
| Total provision (benefit) for income taxes | | Total provision (benefit) for income taxes | $ | 25.9 | | | $ | 8.7 | | | $ | (7.3) | |
The tax provision for the fiscal year ended May 31, 2016 was favorably impacted by settlement with the Internal Revenue Service ( the "IRS"). During the third quarter of fiscal 2016, the Company reached a settlement with the IRS for fiscal years ended May 31, 2011, 2012 and 2013, and the Company recognized previously unrecognized tax benefits of $4.9, inclusive of interest, as a result of this settlement. Subsequent periods remain open.
Unremitted Earnings
At May 31, 2017, the Company had not provided U.S. income taxes on accumulated but undistributed earnings of its non-U.S. subsidiaries of approximately $63.2 to the extent that such earnings are expected to be indefinitely reinvested. However, if any portion were to be distributed, the related U.S. tax liability may be reduced by foreign income taxes paid on those earnings. Determining the unrecognized deferred tax liability related to those investments in these non-U.S. subsidiaries is not practicable. 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. The Company is permanently reinvested in certain foreign subsidiaries representing a portion of the Company's investments in foreign subsidiaries. Any required adjustment to the income tax provision would be reflected in the period that the Company changes this assessment. As of May 31, 2023, there have been no adjustments to the income tax provision related to unremitted earnings.
Deferred Taxes
The significant components for deferred income taxes for the fiscal years ended May 31 including deferred income taxes related to discontinued operations, arewere as follows:
| | | | | | | | 2023 | | 2022 |
| | 2017 | | 2016 | |
| Deferred tax assets | |
| | |
| |
| Deferred tax assets: | | Deferred tax assets: | | | | |
| Tax uniform capitalization | $ | 9.5 |
| | $ | 6.2 |
| Tax uniform capitalization | $ | 18.0 | | | $ | 9.8 | |
| Prepublication expenses | 14.8 |
| | 26.4 |
| Prepublication expenses | | 1.4 | | | 0.6 | |
| Inventory reserves | 24.6 |
| | 25.1 |
| Inventory reserves | | 20.7 | | | 21.3 | |
| Allowance for doubtful accounts | 3.3 |
| | 4.2 |
| |
| Allowance for credit losses | | Allowance for credit losses | | 2.2 | | | 4.0 | |
| Deferred revenue | | Deferred revenue | | 3.8 | | | 2.5 | |
| Stock based compensation | | Stock based compensation | | 4.5 | | | 8.0 | |
| Other reserves | 26.0 |
| | 26.3 |
| Other reserves | | 5.9 | | | 8.4 | |
| Post-retirement, post-employment and pension obligations | 12.5 |
| | 15.9 |
| |
| Postretirement, post employment and pension obligations | | Postretirement, post employment and pension obligations | | 2.2 | | | 2.3 | |
| Tax carryforwards | 31.1 |
| | 32.2 |
| Tax carryforwards | | 25.2 | | | 35.2 | |
| Lease accounting | (0.4 | ) | | (0.4 | ) | |
| Other - net | 10.2 |
| | 12.0 |
| |
| Lease liabilities | | Lease liabilities | | 24.2 | | | 22.8 | |
| Other | | Other | | 13.6 | | | 15.7 | |
| Gross deferred tax assets | 131.6 |
| | 147.9 |
| Gross deferred tax assets | $ | 121.7 | | | $ | 130.6 | |
| Valuation allowance | (26.8 | ) | | (28.4 | ) | Valuation allowance | | (18.1) | | | (23.1) | |
| Total deferred tax assets | $ | 104.8 |
| | $ | 119.5 |
| Total deferred tax assets | $ | 103.6 | | | $ | 107.5 | |
| Deferred tax liabilities | |
| | |
| |
| Prepaid expenses | (0.4 | ) | | (0.6 | ) | |
| Deferred tax liabilities: | | Deferred tax liabilities: | | | | |
| Depreciation and amortization | (50.7 | ) | | (50.4 | ) | Depreciation and amortization | | (45.2) | | | (66.4) | |
| Lease right-of-use assets | | Lease right-of-use assets | | (21.8) | | | (20.7) | |
| Research and development costs capitalized | | Research and development costs capitalized | | (12.1) | | | — | |
| Other | | Other | | (3.5) | | | (2.5) | |
| Total deferred tax liability | $ | (51.1 | ) | | $ | (51.0 | ) | Total deferred tax liability | $ | (82.6) | | | $ | (89.6) | |
| Total net deferred tax assets | $ | 53.7 |
| | $ | 68.5 |
| Total net deferred tax assets | $ | 21.0 | | | $ | 17.9 | |
Total netThe Company regularly assesses the realizability of deferred tax assets considering all available evidence including, to the extent applicable, the nature, frequency and severity of $53.7 at May 31, 2017prior cumulative losses, forecasts of future taxable income, tax filing status, duration of statutory carryforward periods, tax planning strategies and $68.5 at May 31, 2016, respectively, are reported in noncurrent assets.
historical experience. For the fiscal year ended May 31, 2017,2023, the valuation allowance decreased by $1.6$5.0 primarily due to the disposition of the direct sales business in Asia and for the write-off of the related foreign net operating losses. For the fiscal year ended May 31, 2016,2022, there was no significant change to the valuation allowance increasedas the release of a prior fiscal year foreign net operating loss was offset by $0.1. an accrual related to foreign tax credits.
The valuation allowance is based on the Company’s assessment that it is more likely than not that certain deferredCompany has tax assets will not be realized in the foreseeable future. The valuation allowance at May 31, 2017 relates to the Company's totaleffected federal, state and foreign net operating loss carryforwards of $112.3 principally in$0.3, $3.2 and $19.9, respectively, for the UK, which do not expire and otherfiscal year ended May 31, 2023. In addition, the Company has certain tax carryforwards related to tax credits of $1.8 for the fiscal year ended May 31, 2023. Certain state net operating loss carryforwards, in Asiaif not utilized, expire at various times, primarily between fiscal year 2024 and Canada.fiscal year 2043. Certain foreign net operating loss carryforwards, if not utilized, also expire at various times. Approximately half of the foreign net operating loss carryforwards expire between fiscal year 2024 and fiscal year 2043 and the remaining carryforwards do not have an expiration date.
Unrecognized tax benefits
The benefits of uncertain tax positions are recorded in the financial statements only after determining a more likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from taxing authorities, in which case such benefits are included in long-term income taxes payable and reduced by the 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.credits. The interest and penalties related to these uncertain tax positions are recorded as part of the Company’s income tax expense and constitute part of Other noncurrent liabilities on the Company’s Consolidated Balance Sheets.
The total amount of unrecognized tax benefits at May 31, 2017, 20162023, 2022, and 20152021 were $14.1,$2.0, excluding $1.7$0.1 accrued for interest and penalties, $17.9,$3.1, excluding $2.3$0.3 accrued for interest and penalties, and $17.3,$12.3, excluding $1.6$2.6 accrued for interest and penalties, respectively. Of the total amount of unrecognized tax benefits at May 31, 2017, 20162023, 2022, and 2015, $14.1, $17.02021, $2.0, $3.1 and $14.6,$12.3, respectively, would impact the Company’s effective tax rate.
During the years presented, the Company recognized interest and penalties related to unrecognized tax benefits in the provision for taxes in the Consolidated Financial Statements. The Company recognized a benefit of $0.6, an expense$0.1, a benefit of $0.7,$2.3, and an expense of $0.5 for the years ended May 31, 2017, 20162023, 2022, and 2015,2021, respectively.
AThe table below presents a reconciliation of the unrecognized tax benefits for the fiscal years ended May 31 is as follows:indicated:
|
| | | |
| Gross unrecognized benefits at May 31, 2014 | $ | 14.4 |
|
| Decreases related to prior year tax positions | (0.7 | ) |
| Increase related to prior year tax positions | — |
|
| Increases related to current year tax positions | 3.6 |
|
| Settlements during the period | — |
|
| Lapse of statute of limitation | — |
|
| Gross unrecognized benefits at May 31, 2015 | $ | 17.3 |
|
| Decreases related to prior year tax positions | (6.2 | ) |
| Increase related to prior year tax positions | 4.3 |
|
| Increases related to current year tax positions | 5.4 |
|
| Settlements during the period | (2.9 | ) |
| Lapse of statute of limitation | — |
|
| Gross unrecognized benefits at May 31, 2016 | $ | 17.9 |
|
| Decreases related to prior year tax positions | (6.3 | ) |
| Increase related to prior year tax positions | 0.1 |
|
| Increases related to current year tax positions | 3.0 |
|
| Settlements during the period | (0.6 | ) |
| Lapse of statute of limitation | — |
|
| Gross unrecognized benefits at May 31, 2017 | $ | 14.1 |
|
| | | | | | | | |
| Gross unrecognized benefits at May 31, 2020 | $ | 10.2 | |
| Decreases related to prior year tax positions | | (0.2) | |
| Increase related to prior year tax positions | | 2.6 | |
| Increases related to current year tax positions | | 0.2 | |
| Settlements during the period | | (0.2) | |
| Lapse of statute of limitation | | (0.3) | |
| Gross unrecognized benefits at May 31, 2021 | $ | 12.3 | |
| Decreases related to prior year tax positions | | (6.8) | |
| Increase related to prior year tax positions | | 0.5 | |
| Increases related to current year tax positions | | 0.6 | |
| Settlements during the period | | (3.5) | |
| Lapse of statute of limitation | | — | |
| Gross unrecognized benefits at May 31, 2022 | $ | 3.1 | |
| Decreases related to prior year tax positions | | (1.7) | |
| Increase related to prior year tax positions | | 0.1 | |
| Increases related to current year tax positions | | 0.5 | |
| Settlements during the period | | — | |
| Lapse of statute of limitation | | — | |
| Gross unrecognized benefits at May 31, 2023 | $ | 2.0 | |
Unrecognized tax benefits for the Company decreased by $3.8 for the year ended May 31, 2017 and increased by $0.6 for the year ended May 31, 2016. 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. However, given the number of years remaining subject to examination and the number of matters being examined, the Company is unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.Income Tax Returns
The Company, including its domestic subsidiaries, files a consolidated U.S. income tax return, and also files tax returns in various states and other local jurisdictions. Also, certain subsidiaries of the Company file income tax returns in foreign jurisdictions. The Company is routinely audited by various tax authorities. The Company was previously under audit for the fiscal 2015 through fiscal 2020 tax years and the examination was completed in the second quarter of fiscal 2023 with no impact to the financial results. The fiscal 2021 and fiscal 2022 tax years remain subject to audit.
Tax Legislation Updates
In response to the COVID-19 pandemic, the U.S. government enacted the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which, among other things, included provisions related to the carry back of net operating losses and the Employee Retention Credit. The Company applied these provisions as applicable. During the first quarter of fiscal 2022, the Company received a federal tax refund of $63.1 primarily related to the carry back of net operating losses generated in the U.S. In fiscal 2021, the Company applied for employee retention credits in the U.S. and received all amounts as of May 31, 2023.
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. The Company assesses sales tax contingencies for each jurisdiction in which it operates, considering all relevant facts including statutes, regulations, case law and experience. Where a sales tax liability in respect to a jurisdiction is probable and can be reliably estimated for such jurisdiction, 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.
The State of Wisconsin has assessed Scholastic Book Fairs, Inc. (“SBF”), a wholly owned subsidiary of During fiscal 2023, the Company $5.4, exclusiverecognized a benefit of penalties and interest, for$1.8 related to a favorable settlement of certain legacy sales tax in fiscal years 2004 through 2014. Based upon the facts and circumstances and the relevant laws in the State of Wisconsin, the Company does not believe these assessments are merited and has elected to litigate these assessments. While the Company believes it will prevail in this litigation and accordingly has not recognized a liability for these assessments, the results of litigation cannot be assured and it is reasonably possible that SBF could be found liable for all or a portion of the amounts assessed.matters.
11.13. CAPITAL STOCK AND STOCK-BASED AWARDS
Class A Stock and Common Stock
Capital stock consisted of the following as of May 31, 2017:2023:
| | | | | | | | | | | | | | | | | |
| Class A Stock | | Common Stock | | Preferred Stock |
| Authorized | 4,000,000 | | | 70,000,000 | | | 2,000,000 | |
| Reserved for Issuance | — | | | 7,005,664 | | | — | |
| Outstanding | 1,656,200 | | | 30,004,691 | | | — | |
|
| | | | | | | | |
| | Class A Stock | | Common Stock | | Preferred Stock |
| Authorized | 4,000,000 |
| | 70,000,000 |
| | 2,000,000 |
|
| Reserved for Issuance | 244,506 |
| | 6,822,489 |
| | — |
|
| Outstanding | 1,656,200 |
| | 33,383,303 |
| | — |
|
The only voting rights vested in the holders of Common Stock, except as required by law, are the election of such number of directors as shall equal at least one-fifth of the members of the Board. The Class A Stockholders are entitled to elect all other directors and to vote on all other matters. The Class A Stockholders and the holders of Common Stock are 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 on the same basis to dividends and distributions when andor if declared by the Board.
The Company issues shares of Common Stock from its Treasury stock to meet its share-based payment requirements, net of shares required to be withheld to cover the recipient's tax obligations.
Preferred Stock
The Company's Preferred Stock may be issued in one or more series, with the rights of each series, including voting rights, to be determined by the Board before each issuance. To date, no shares of Preferred Stock have been issued.
Stock-based awards
At May 31, 2017,2023, the Company maintained twofour stockholder-approved stock-based compensation plans with regard to the Common Stock: the
•Scholastic Corporation 20012021 Stock Incentive Plan (the “2001 Plan”"2021 Plan"), under which no further awards can be made; and the ;
•Scholastic Corporation 2011 Stock Incentive Plan (the “2011 Plan”). , under which no further grants can be made;
•Scholastic Corporation 2017 Outside Directors Stock Incentive Plan (the “2017 Directors Plan”); and
•Scholastic Corporation 2007 Outside Directors Stock Incentive Plan (the “2007 Directors Plan”), under which no further grants can be made.
In September 2021, the Class A Stockholders approved the 2021 Plan which provides for the issuance of certain equity awards, including non-qualified stock options, time-vested restricted stock units, performance-based restricted stock units, incentive stock options and other equity awards. There are 2,500,000 shares available for issuance pursuant to awards granted under the 2021 Plan.
The 2011 Plan was adoptedapproved by the Class A Stockholders in JulySeptember 2011 and provides for the issuance of certain equity awards, including non-qualified stock options, time-vested restricted stock units, performance-based restricted
stock units, all of which have been issued by the Company to date, and incentive stock options; non-qualified stock options; restricted stock;options and other stock-basedequity awards. OnIn September 24, 2014, the stockholdersClass A Stockholders approved anthe second amendment to the 2011 Plan increasing the shares available for issuance pursuant to awards granted under the 2011 planPlan by 2,475,000 shares. In September 2018, the Class A Stockholders approved the third amendment to the 2011 Plan increasing the shares available for issuance pursuant to awards granted under the 2011 Plan by 2,540,000 shares, for a total of 7,115,000 shares available for issuance under the 2011 Plan. No further awards can be granted under the 2011 Plan.
The Company’s stock-based awards vest over periods not exceedingto exceed four years. Provisions inyears and the Company’s stock-based compensationCompany's equity plans allow forpermit the acceleration of vesting upon retirement for certain retirement-eligibleeligible employees, as well as for certain other events.
Stock Options– At May 31, 2017,2023, non-qualified stock options to purchase 185,212 shares617,607 and 2,110,7662,365,853 shares of Common Stock were outstanding under the 2001 Plan2021 and the 2011 Plan, respectively. During fiscal 2017, 507,9772023, 294,486 options were granted under the 20112021 Plan at a weighted average exercise price of $39.42.$41.86.
At May 31, 2017, 1,397,8182023, 1,621,732 shares of Common Stock were available for additional awardsissuance under the 20112021 Plan.
In September 2017, the Class A Stockholders approved the 2017 Directors Plan which has 400,000 shares of Common Stock reserved for issuance and provides for the automatic grant to each non-employee director, on the date of each annual meeting of stockholders, of stock options and/or restricted stock units with a value equal to a fixed dollar amount. The total dollar amount, as well as the relative percentage of stock options and restricted stock units, is determined annually by the Board (or Committee designated by the Board) in advance of the grant date. In July 2022, the Board approved the fiscal 2023 grant to each non-employee director, on the date of the 2022 annual meeting of stockholders, of stock options and restricted stock units having a combined value, as determined by the Board, of one hundred thousand dollars ($100,000), (based on the fair market value on the date of grant), with 60% of such award to be awarded as restricted stock units and 40% of such award to be awarded as stock options, such grant to vest in its entirety on the earlier of the first anniversary of the date of grant or the date of the next annual meeting of stockholders following the date of grant.
In September 2007, the stockholdersClass A Stockholders approved the Scholastic Corporation 2007 Outside Directors Stock Incentive Plan (the “2007 Directors Plan”).Plan. From September 2007 through September 2011, the 2007 Directors Plan provided for the automatic grant to each non-employee director, on the date of each annual meeting of stockholders, of non-qualified stock options 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 JulySeptember 2012, the BoardClass A Stockholders approved an amendedamendment and restatedrestatement of the 2007 Outside Directors stock incentive Plan (the “Amended 2007 Directors Plan”), which was approved by the stockholders in September 2012. The Amended 2007 Directors Plan providesprovided 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 dollarThe total amount, as well as the splitrelative percentage of such amount between stock options and restricted stock units, willwere to 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 iswas 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 December 2015, the Board approved an amendment number 2 to the Amended 2007 Directors Plan to provide that a non-employee director elected between annual meetings of stockholders would receive a grant at the time of such election equal to a pro rata portion of the most recent annual grant of stock options and restricted stock units, based on the number of regular Board meetings remaining to be held for the annual period during which such election occurred. In July 2016, stock options and restricted stock units with a value of seventy thousand dollars for each non-employee director, with 40% of such value in the form of options and 60% in the form of restricted stock units, were approved, and, on September 21, 2016,
During fiscal 2023, an aggregate of 14,78420,510 options at ana weighted average exercise price of $38.56$42.40 per share and 7,6239,905 restricted stock units were granted to the non-employee directors under the Amended 20072017 Directors Plan.Plan, such grant to vest in its entirety on the earlier of the first anniversary of the date of grant or the date of the next annual meeting of Stockholders following the date of grant. As of May 31, 2017, 153,3402023, non-qualified stock options to purchase 160,124 and 44,817 shares were outstanding under the Amended2017 Directors Plan and 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 ofrespectively. At May 31, 2017, there2023, 147,736 shares of Common Stock were 244,506 Class A Options to Mr. Robinson outstandingavailable for issuance under the Class A Plan, and no shares of Class A Stock remained available for additional awards under the Class A2017 Directors Plan.
Stock Options - Generally, stock options granted under the variousCompany's equity plans may not be exercised for a minimum of one year after the date of grant and expire approximatelyseven to ten years after the date of grant. The intrinsic value of thesecertain stock options is tax deductible by the Company forupon exercise, if compliant with current tax purposes upon exercise.law. 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 for certain retirement-eligible employees, as well as in certain other events.
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 StockCompany's equity plans for the fiscal years ended May 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
| Total intrinsic value of stock options exercised | $ | 8.2 | | | $ | 5.1 | | | $ | 0.1 | |
| Total stock-based compensation cost (pretax) | | 10.5 | | | | 7.8 | | | | 6.6 | |
| Tax benefits (shortfalls) related to stock-based compensation cost | | (7.8) | | | | 2.3 | | | | (3.7) | |
| Weighted average grant date fair value per option | $ | 11.62 | | | $ | 8.04 | | | $ | 3.80 | |
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Total intrinsic value of stock options exercised | $ | 11.0 |
| | $ | 14.6 |
| | $ | 5.8 |
|
| Stock-based compensation cost (pretax) | $ | 10.1 |
| | $ | 9.7 |
| | $ | 11.3 |
|
| Tax benefits related to stock-based compensation cost | $ | 0.8 |
| | $ | 1.8 |
| | $ | 2.1 |
|
| Weighted average grant date fair value per option | $ | 12.70 |
| | $ | 14.78 |
| | $ | 11.41 |
|
Pretax stock-based compensation cost is recognized in Selling, general and administrative expenses. As of May 31, 2017,2023, the total pretax compensation cost not yet recognized by the Company with regard to outstanding unvested stock options was $3.0.$3.4. The weighted average period over which this compensation cost is expected to be recognized is 2.0.years. In fiscal 2017 and fiscal 2016, there were no stock-based compensation costs recognized in discontinued operations. In fiscal 2015, stock-based compensation cost included $2.5 of expense recognized in discontinued operations.1.7 years.
The following table sets forth the stock option activity forunder the Class A Stock and Common StockCompany's equity plans for the fiscal year ended May 31, 2017:2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Options | | Weighted
Average
Exercise Price | | Average Remaining
Contractual
Term (in years) | | Aggregate
Intrinsic Value (in millions) |
| Outstanding at May 31, 2022 | | 4,257,925 | | | $ | 30.54 | | | | | | | |
| | | | | | | | | | | |
| Granted | | 314,996 | | | | 41.90 | | | | | | | |
| Exercised | | (689,711) | | | | 31.28 | | | | | | | |
| Expired, canceled and forfeited | | (694,809) | | | | 39.06 | | | | | | | |
| Outstanding at May 31, 2023 | | 3,188,401 | | | $ | 29.63 | | | | 4.6 | | $ | 41.3 | |
| Exercisable at May 31, 2023 | | 1,717,085 | | | $ | 31.16 | | | | 4.2 | | $ | 19.7 | |
|
| | | | | | | | | | | | |
| | Options | | Weighted Average Exercise Price | | Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value |
| Outstanding at May 31, 2016 | 3,025,046 |
| | $ | 32.10 |
| | | | | |
|
| Granted | 522,761 |
| | $ | 39.39 |
| | | | | |
|
| Exercised | (833,046 | ) | | $ | 30.97 |
| | | | | |
|
| Expired, cancellations and forfeitures | (20,937 | ) | | $ | 38.68 |
| | | | | |
|
| Outstanding at May 31, 2017 | 2,693,824 |
| | $ | 33.81 |
| | 6.3 | | $ | 24.0 |
|
| Exercisable at May 31, 2017 | 1,446,554 |
| | $ | 30.14 |
| | 4.6 | | $ | 18.0 |
|
Restricted Stock Units– In addition to stock options, the Company has issued restricted stock units to certain officers and key executivessenior management under the 2021 Plan and the 2011 Plan (“RSUs”).Plan. The RSUs automaticallyrestricted stock units convert to shares of Common Stock on a one-for-one basis as the award vests,upon vesting, which for time-vested restricted stock units is typically over a four-year periodin three or four equal annual installments beginning thirteen months fromwith the grant date and thereafter annually on thefirst anniversary of the grant date. Theredate of grant. During fiscal 2023, there were 37,79141,177 and 99,237 shares of Common Stock issued upon the vesting of RSUs during fiscal 2017.restricted stock units under the 2021 Plan and 2011 Plan, respectively. The Company measures the value of RSUsrestricted stock units at fair value based on
the number of RSUsunits granted and the price of the underlying Common Stock on the grant date. The Company amortizes the fair value of outstanding Stock Unitsrestricted stock units 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 RSUrestricted stock unit award activity for the fiscal years ended May 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2023 | | | 2022 | | | 2021 |
| Granted | | 139,111 | | | | 178,461 | | | | 137,106 | |
| Weighted average grant date price per unit | $ | 41.99 | | | $ | 34.45 | | | $ | 21.24 | |
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| RSUs granted | | 52,331 |
| | | 74,536 |
| | | 66,146 |
|
| Weighted average grant date price per unit | $ | 39.22 |
| | $ | 43.10 |
| | $ | 33.80 |
|
As of May 31, 2017,2023, the total pretax compensation cost not yet recognized by the Company with regard to unvested RSUsrestricted stock units was $1.6.$4.6. The weighted average period over which this compensation cost is expected to be recognized is 1.61.5 years.
Management Stock Purchase Plan- The Company maintains athe Scholastic Corporation Management Stock Purchase Plan (“MSPP”(the “MSPP”), which allowspermits certain members of senior management to defer up to 100% of theirhis or her annual cash bonus payments in the form of restricted stock units (“MSPP Stock Units”(the "MSPP RSUs”) which are purchased by the employee at a 25% discount from the lowest closing price of the Common Stock on NASDAQ on any day during the fiscal quarter in which such bonuses are payable.awarded. The MSPP Stock UnitsRSUs are converted into shares of Common Stock on a one-for-one basis at the end of the applicable deferral period.period, which must be a minimum of three years. The Company measures the value of MSPP Stock UnitsRSUs based on the number of awards granted and the price of the underlying Common Stock on the grant date, giving effect to the 25% discount. The Company amortizes this discount as stock-based compensation
expense over the vesting term 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 MSPP Stock UnitRSUs activity for the fiscal years ended May 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2023 | | | 2022 | | | 2021 |
| MSPP RSUs allocated | | 37,865 | | | | 33,761 | | | | 5,665 | |
| Purchase price per unit | $ | 25.51 | | | $ | 24.67 | | | $ | 16.88 | |
|
| | | | | | | | | | |
| | 2017 | | 2016 | 2015 |
| MSPP Stock Units allocated | | 42,565 |
| | | 58,633 |
| | 67,027 |
|
| Purchase price per unit | $ | 28.49 |
| | $ | 30.38 |
| $ | 23.79 |
|
At May 31, 2017,2023, there were 334,744242,672 shares of Common Stock remaining authorized for issuance under the MSPP.
As of May 31, 2017,2023, the total pretax compensation cost not yet recognized by the Company with regard to unvested MSPP Stock Units under the MSPPRSUs was less than $0.1.$0.2. The weighted average period over which this compensation cost is expected to be recognized is 1.72.2 years.
The following table sets forth the RSUrestricted stock unit and MSPP Stock UnitRSUs activity for the year ended May 31, 2017:2023:
| | | | | | | | | | | | | | | | | |
| Restricted stock units and MSPP RSUs | | | | Weighted
Average grant
date fair value |
| Nonvested as of May 31, 2022 | 317,593 | | | | $ | 30.17 | |
| Granted | 176,976 | | | | | 37.00 | |
| Vested | (153,543) | | | | | 31.59 | |
| Forfeited | (8,440) | | | | | 33.18 | |
| Nonvested as of May 31, 2023 | 332,586 | | | | $ | 33.08 | |
|
| | | | | | |
| | Stock Units/RSUs | | Weighted Average grant date fair value |
| Nonvested as of May 31, 2016 | 273,263 |
| | $ | 23.79 |
|
| Granted | 94,896 |
| | $ | 26.14 |
|
| Vested | (58,084 | ) | | $ | 35.67 |
|
| Forfeited | — |
| | $ | — |
|
| Nonvested as of May 31, 2017 | 310,075 |
| | $ | 22.28 |
|
The total fair value of shares vested during the fiscal years ended May 31, 2017, 20162023, 2022 and 20152021 was $2.1, $3.4$4.9, $2.8 and $3.3,$3.2, respectively.
Employee Stock Purchase Plan
-The Company maintains anthe Scholastic Corporation 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. The purchase of Common Stock occursNASDAQ 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 participatedbegan participating in the plan.ESPP.
The following table sets forth the ESPP share activity for the fiscal years ended May 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2023 | | | 2022 | | | 2021 |
| Shares issued | | 80,897 | | | | 59,322 | | | | 67,097 | |
| Weighted average purchase price per share | $ | 29.07 | | | $ | 32.52 | | | $ | 22.19 | |
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Shares issued | | 42,799 |
| | | 43,141 |
| | | 55,501 |
|
| Weighted average purchase price per share | $ | 35.58 |
| | $ | 33.65 |
| | $ | 31.98 |
|
At May 31, 2017,2023, there were 520,469148,923 shares of Common Stock remaining authorized for issuance under the ESPP.
12.
14. TREASURY STOCK
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:
| | | | | | | | | | | |
| Authorizations | Amount | |
| March 2020 | | 50.0 | | |
| December 2022 | | 48.8 | | |
| March 2023 | | 50.0 | | |
| Total current Board authorizations | $ | 148.8 | | |
| Less repurchases made under the authorizations as of May 31, 2023 | $ | (127.2) | | |
| Remaining Board authorization at May 31, 2023 | $ | 21.6 | | |
|
| | | | |
| Authorization | Amount | |
| July 2015 | 50.0 |
| |
| Less repurchases made under the authorization as of May 31, 2017 | (11.4 | ) | |
| Remaining Board authorization at May 31, 2017 | $ | 38.6 |
| |
Remaining Board authorization at May 31, 2023 represents the amount remaining under the current $50.0 Board authorization for Common share repurchases announced on March 22, 2023, which is available for further repurchases, from time to time as conditions allow, on the open market or through negotiated private transactions. See Note 22, "Subsequent Events", for additional Board authorization for Common share repurchases.
On July
Pursuant to a Board authorization on October 19, 2022, the Company commenced a modified Dutch auction tender offer on October 25, 2022, which expired on November 22, 2015,2022. Pursuant to this offer, the Board authorized $50.0Company purchased 533,793 of its Common shares at a price of $40.00 per share for a total cost of $23.3, including related fees and expenses. The Common shares purchased represented approximately 1.6% of the share buy-back program, to beCommon shares outstanding as of November 21, 2022. The Company funded with available cash. the purchase of the shares in the tender offer using cash on hand.
During the twelve months ended May 31, 2017,2023, there were $135.1 repurchases of the CompanyCompany's Common Stock, which included the shares repurchased approximately 0.2 million sharesthrough the modified Dutch auction tender offer and excise tax on the open market for approximately $6.9 at an average costshare repurchases of $38.80 per share.$0.6. The Company’sCompany's repurchase program may be suspended at any time without prior notice.
13.15. EMPLOYEE BENEFIT PLANS
Pension Plans
The Company has a cash balance retirement plan (the “U.S. Pension Plan”), which covers the majority of United States employees who meet certain eligibility requirements. The Company funds all of the contributions for the U.S. 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 U.S. 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 further benefits will accrue to employees under the U.S. Pension Plan.
The Company has a defined benefit pension plan (the “UK Pension Plan”) that covers certain employees located in the United Kingdom who meet various eligibility 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 the Company.
On July 20, 2016, the Board approved the termination of the U.S. The Company’s UK Pension Plan (the "Expected Termination"), in which all benefit accruals were previously frozen as of June 1, 2009. Based on the U.S. Pension Plan’s current funded status and the frozen benefit, it was determined that the on-going costs of maintaining the U.S. Pension Plan were growing at a greater rate than the benefit delivered to the Company’s employees and former employees. An application was filed with the IRS for an advance determination as to whether the U.S. Pension Plan met the qualification requirements of Internal Revenue Code section 401(a). Upon approval of the IRS the assets of the U.S. Pension Plan will be distributed either via a lump sum payment to each eligible active and deferred vested participant or to another qualified retirement plan designated by the participant, or via an annuity contract underwritten by a highly rated insurance company. All participants currently receiving a periodic benefit will continue to receive their benefit payments without disruption. The Company expects that completion of the process for terminating the pension plan, which involves several regulatory steps and approvals, will take place in fiscal 2018.
As of May 31, 2017, the Expected Termination is considered imminent and it is likely to occur during fiscal 2018. As such, the actuarial assumptions were updated based on the short-term nature of the plan. A short-term expected rate of return on plan assets was used rather than a long-term return for the U.S. Pension Plan, as the assets are expected to be distributed within the next fiscal year. The pension benefit obligation for the U.S. Pension Plan included estimates for the anticipated amount of lump sum payments to be distributed in fiscal 2018 as well as estimates for insurance
company pricing on the portion of the obligation not distributed through lump sum payments. Therefore the U.S. pension benefit obligation measured as of May 31, 2017 includes an estimate for the expected fair value of annuity contracts in addition to the obligation derived from actuarial assumptions. The net funded status of the U.S. Pension Plan was also classified as a short-term asset.
The Company’s pension plans havehas a measurement date of May 31.
Post-RetirementPostretirement Benefits
The Company provides post-retirementpostretirement benefits to eligible retired United States-based employees (the “Post-Retirement“US Postretirement Benefits”) consisting of certain healthcare and life insurance benefits. Employees may becomebecame eligible for these benefits after completing certain minimum age and service requirements. Effective June 1, 2009, the Company modified the terms of the Post-RetirementPostretirement Benefits, effectively excluding a large percentage of employees from the plan. AtThe Company’s postretirement benefit plan has a measurement date of May 31, 2017,31.
In fiscal 2021, the Company had no unrecognizedmade a change in benefits for certain US postretirement benefit plan participants. Beginning January 1, 2021, the plan established Health Reimbursement Accounts (HRAs) to provide these participants with additional flexibility to choose healthcare options based on individual needs. As a result of this change, the Company remeasured its US Postretirement Benefits obligation as of November 30, 2020, and recognized a reduction of $7.6 to its benefit obligation and a reduction to its accumulated comprehensive loss of $7.6 in fiscal 2021. The related prior service credit.credit is being amortized as a Component of net periodic benefit (cost) over the average remaining life expectancy of plan participants of approximately 12.0 years.
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 sponsors of retiree health care benefit plans providing a benefit that is at least actuarially equivalent to Medicare Part D. The Company has determined that the Post-Retirement BenefitsUS Postretirement benefits provided to its retiree population are in aggregate the actuarial equivalent of the benefits under Medicare Part D. As a result, in fiscal 2017, 20162023, 2022 and 2015,2021, the Company recognized a
cumulative reduction of its accumulated post-retirementpostretirement benefit obligation of $2.5, $3.1$0.1, $0.2 and $3.0,$0.2, respectively, due to the Federal subsidy under the Medicare Act.
The Company’s post-retirement benefit plan has a measurement date of May 31.
The following table sets forth the weighted average actuarial assumptions utilized to determine the benefit obligations for the U.S.UK Pension Plan and the UK Pension Plan (collectively the “Pension Plans”), including the Post-RetirementUS Postretirement Benefits at May 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | UK Pension Plan | | US Postretirement Benefits |
| | | 2023 | | 2022 | | 2021 | | 2023 | | 2022 | | 2021 |
| Weighted average assumptions used to determine benefit obligations: | | | | | | | | | | | | |
| Discount rate | | 5.4 | % | | 3.5 | % | | 2.0 | % | | 5.3 | % | | 4.3 | % | | 2.5 | % |
| Rate of compensation increase | | 4.0 | % | | 4.1 | % | | 4.1 | % | | — | | | — | | | — | |
| Weighted average assumptions used to determine net periodic benefit cost: | | | | | | | | | | | | |
| Discount rate | | 1.9 | % | | 1.6 | % | | 2.1 | % | | 3.9 | % | | 1.7 | % | | 1.5 | % |
| Expected long-term return on plan assets | | 4.4 | % | | 3.1 | % | | 2.2 | % | | — | | | — | | | — | |
| Rate of compensation increase | | 4.1 | % | | 4.1 | % | | 3.6 | % | | — | | | — | | | — | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Pension Plan | | UK Pension Plan | | Post-Retirement Benefits |
| | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| Weighted average assumptions used to determine benefit obligations: | | | | | | | |
| | |
| | |
| | |
| | |
| | |
|
| Discount rate | 2.4 | % | | 3.5 | % | | 3.8 | % | | 2.5 | % | | 3.5 | % | | 3.5 | % | | 3.7 | % | | 3.7 | % | | 3.8 | % |
| Rate of compensation increase | — |
| | — |
| | — |
| | 4.1 | % | | 3.8 | % | | 4.1 | % | | — |
| | — |
| | — |
|
| Weighted average assumptions used to determine net periodic benefit cost: | | | | | | | | | | | | | | | | | |
| Discount rate | 3.5 | % | | 3.8 | % | | 3.9 | % | | 3.5 | % | | 3.5 | % | | 4.2 | % | | 3.7 | % | | 3.8 | % | | 4.0 | % |
Expected short-term return on plan assets
| 4.8 | % | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| — |
| — |
| — |
|
| Expected long-term return on plan assets | — |
| | 4.8 | % | | 5.4 | % | | 3.9 | % | | 4.2 | % | | 5.1 | % | | — |
| | — |
| | — |
|
| Rate of compensation increase | — |
| | — |
| | — |
| | 3.8 | % | | 4.1 | % | | 4.2 | % | | — |
| | — |
| | — |
|
To develop the expected long-term rate of return on plan assets assumption for the UK Pension Plans,Plan, 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 on plan assets of 3.9%4.4% for the UK Pension Plan. In fiscal 2017, the U.S. Pension Plan utilized a short-term rate of return assumption due to the Expected Termination.
The following table sets forth the change in benefit obligation for the UK Pension PlansPlan and Post-RetirementUS Postretirement Benefits at May 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | UK Pension Plan | | US Postretirement Benefits |
| | | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | | | | | |
| Change in benefit obligation: | | | | | | | | | | | | |
| Benefit obligation at beginning of year | | $ | 31.9 | | | $ | 47.0 | | | $ | 9.4 | | | $ | 12.1 | |
| | | | | | | | | | | | |
| Interest cost | | | 1.0 | | | | 0.8 | | | | 0.3 | | | | 0.2 | |
| Plan participants’ contributions | | | — | | | | — | | | | 0.0 | | | 0.1 | |
| Actuarial losses (gains) | | | (6.7) | | | | (9.6) | | | | (0.8) | | | | (1.9) | |
| Foreign currency translation | | | (0.3) | | | | (5.3) | | | | — | | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Benefits paid, including expenses | | | (0.8) | | | | (1.0) | | | | (0.9) | | | | (1.1) | |
| Benefit obligation at end of year | | $ | 25.1 | | | $ | 31.9 | | | $ | 8.0 | | | $ | 9.4 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Pension Plan | | UK Pension Plan | | Post-Retirement Benefits |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| Change in benefit obligation: | | | | | |
| | |
| | |
| | |
|
| Benefit obligation at beginning of year | $ | 125.0 |
| | $ | 130.0 |
| | $ | 39.8 |
| | $ | 43.1 |
| | $ | 38.3 |
| | $ | 36.3 |
|
| Service cost | — |
| | — |
| | — |
| | — |
| | 0.0 |
| | 0.0 |
|
| Interest cost | 3.2 |
| | 4.6 |
| | 1.2 |
| | 1.5 |
| | 0.9 |
| | 1.4 |
|
| Plan participants’ contributions | — |
| | — |
| | — |
| | — |
| | 0.2 |
| | 0.3 |
|
| Actuarial losses (gains) | 9.2 |
| | 1.2 |
| | 6.3 |
| | (1.5 | ) | | (8.2 | ) | | 3.0 |
|
| Foreign currency translation | — |
| | — |
| | (4.3 | ) | | (2.3 | ) | | — |
| | — |
|
| Benefits paid, including expenses | (9.6 | ) | | (10.8 | ) | | (1.3 | ) | | (1.0 | ) | | (2.4 | ) | | (2.7 | ) |
| Benefit obligation at end of year | $ | 127.8 |
| | $ | 125.0 |
| | $ | 41.7 |
| | $ | 39.8 |
| | $ | 28.8 |
| | $ | 38.3 |
|
The Expected Termination resultednet actuarial gain included in anthe projected benefit obligation for the UK Pension in fiscal 2023 was primarily due to the significant increase in discount rate and impact of inflation. The net actuarial lossesgain included in the projected benefit obligation for the U.S.UK Pension Plan in fiscal 2017 when compared2022 was primarily due to a significant increase in the discount rate.
The net actuarial gain included in the projected benefit obligation for the US Postretirement Benefits in fiscal 2023 was primarily attributable to the prior period.increase in discount rate and updated census data. The increase primarily related to premiums associated with insurance company pricingnet actuarial gain included in the projected benefit obligation for the obligations that will not be distributed through lump sum payments.US Postretirement Benefits in fiscal 2022 was primarily due to updated census data and a significant increase in the discount rate.
The following table sets forth the change in plan assets for the UK Pension Plans and Post-Retirement BenefitsPlan at May 31:
| | | | | | | | | | | | | | | | | | | | |
| | | UK Pension Plan |
| | | 2023 | | 2022 |
| Change in plan assets: | | | | | | |
| Fair value of plan assets at beginning of year | | $ | 30.4 | | | $ | 40.8 | |
| Actual return on plan assets | | | (10.9) | | | | (6.2) | |
| Employer contributions | | | 1.1 | | | | 1.6 | |
| | | | | | |
| Benefits paid, including expenses | | | (0.8) | | | | (1.1) | |
| | | | | | |
| Foreign currency translation | | | (0.2) | | | | (4.7) | |
| Fair value of plan assets at end of year | | $ | 19.6 | | | $ | 30.4 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Pension Plan | | UK Pension Plan | | Post-Retirement Benefits |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| Change in plan assets: | | | | | |
| | |
| | |
| | |
|
| Fair value of plan assets at beginning of year | $ | 135.1 |
| | $ | 143.2 |
| | $ | 29.1 |
| | $ | 30.5 |
| | $ | — |
| | $ | — |
|
| Actual return on plan assets | 7.0 |
| | 2.6 |
| | 3.5 |
| | (0.0 | ) | | — |
| | — |
|
| Employer contributions | — |
| | — |
| | 1.1 |
| | 1.3 |
| | 2.2 |
| | 2.4 |
|
| Benefits paid, including expenses | (9.6 | ) | | (10.7 | ) | | (1.3 | ) | | (1.0 | ) | | (2.4 | ) | | (2.7 | ) |
| Plan participants’ contributions | — |
| | — |
| | — |
| | — |
| | 0.2 |
| | 0.3 |
|
| Foreign currency translation | — |
| | — |
| | (3.2 | ) | | (1.7 | ) | | — |
| | — |
|
| Fair value of plan assets at end of year | $ | 132.5 |
| | $ | 135.1 |
| | $ | 29.2 |
| | $ | 29.1 |
| | $ | — |
| | $ | — |
|
The following table sets forth the net funded status of the UK Pension PlansPlan and Post-RetirementUS Postretirement Benefits and the related amounts recognized on the Company’s Consolidated Balance Sheets at May 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | UK Pension Plan | | US Postretirement Benefits |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Current liabilities | $ | — | | | $ | — | | | $ | (1.0) | | | $ | (1.1) | |
| Non-current liabilities | | (5.5) | | | | (1.5) | | | | (7.0) | | | | (8.3) | |
| Net funded balance | $ | (5.5) | | | $ | (1.5) | | | $ | (8.0) | | | $ | (9.4) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Pension Plan | | UK Pension Plan | | Post-Retirement Benefits |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| Current assets | $ | 4.7 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Non-current assets | — |
| | 10.1 |
| | — |
| | — |
| | — |
| | — |
|
| Current liabilities | — |
| | — |
| | — |
| | — |
| | (2.1 | ) | | (2.6 | ) |
| Non-current liabilities | — |
| | — |
| | (12.5 | ) | | (10.7 | ) | | (26.7 | ) | | (35.7 | ) |
| Net funded balance | $ | 4.7 |
| | $ | 10.1 |
| | $ | (12.5 | ) | | $ | (10.7 | ) | | $ | (28.8 | ) | | $ | (38.3 | ) |
The Expected Termination resulted in the net funded balance for the U.S. Pension Plan to be classified as a Current asset based on the expectation that all assets will be distributed during fiscal 2018.
The following amounts were recognized in Accumulated other comprehensive income (loss) for the UK Pension PlansPlan and Post-RetirementUS Postretirement Benefits inon the Company’s Consolidated Balance Sheets at May 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 |
| | | UK Pension
Plan | | US Postretirement
Benefits | | Total | | UK Pension
Plan | | US Postretirement
Benefits | | Total |
| Actuarial gain (loss) | | $ | (12.4) | | | $ | 1.3 | | | $ | (11.1) | | | $ | (7.4) | | | $ | 0.4 | | | $ | (7.0) | |
| Prior service credit (cost) | | | 0.0 | | | | 7.5 | | | | 7.5 | | | | (0.0) | | | | 8.4 | | | | 8.4 | |
Amount recognized in
Accumulated comprehensive
income (loss) net of tax | | | (12.4) | | | | 6.6 | | | | (5.8) | | | | (7.4) | | | | 6.6 | | | | (0.8) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | U.S. Pension Plan | | UK Pension
Plan | | Post -
Retirement
Benefits | | Total | | U.S. Pension Plan | | UK Pension
Plan | | Post -
Retirement
Benefits | | Total |
| Net actuarial gain (loss) | $ | (51.3 | ) | | $ | (16.3 | ) | | $ | (3.3 | ) | | $ | (70.9 | ) | | $ | (44.0 | ) | | $ | (13.2 | ) | | $ | (11.9 | ) | | $ | (69.1 | ) |
Amount recognized in Accumulated comprehensive income (loss) before tax | $ | (51.3 | ) | | $ | (16.3 | ) | | $ | (3.3 | ) | | $ | (70.9 | ) | | $ | (44.0 | ) | | $ | (13.2 | ) | | $ | (11.9 | ) | | $ | (69.1 | ) |
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, 2018 is $2.3. The Expected Termination has not triggered settlement accounting in fiscal 2017.
The estimated net loss 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, 2018 is $0.1.
Income tax expense of $0.4, income tax benefit of $1.8$2.2, $2.2 and income tax benefit of $2.5$2.0 were recognized in Accumulated other comprehensive loss at May 31, 2017, 20162023, 2022 and 2015,2021, respectively.
The following table sets forth the projected benefit obligations, accumulated benefit obligations and the fair value of plan assets with respect to the UK Pension Plans for the fiscal years endedPlan as of May 31:
| | | | | | | | | | | | | | | | | | | | |
| | UK Pension Plan |
| | | 2023 | | 2022 |
| Projected benefit obligations | | $ | 25.1 | | | $ | 31.9 | |
| Accumulated benefit obligations | | | 25.0 | | | | 31.6 | |
| | | | | | |
| Fair value of plan assets | | | 19.6 | | | | 30.4 | |
|
| | | | | | | | | | | | | | | |
| | U.S. Pension Plan | | UK Pension Plan |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Projected benefit obligations | $ | 127.8 |
| | $ | 125.0 |
| | $ | 41.7 |
| | $ | 39.8 |
|
| Accumulated benefit obligations | 127.8 |
| | 125.0 |
| | 40.9 |
| | 39.1 |
|
| Fair value of plan assets | 132.5 |
| | 135.1 |
| | 29.2 |
| | 29.1 |
|
The following table sets forth the net periodic (benefit) costbenefit (cost) for the UK Pension PlansPlan and Post-RetirementUS Postretirement Benefits for the fiscal years ended May 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | UK Pension Plan | | US Postretirement Benefits |
| | | 2023 | | 2022 | | 2021 | | 2023 | | 2022 | | 2021 |
| Components of net (benefit) cost: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Interest cost | | | 1.0 | | | | 0.8 | | | | 0.7 | | | | 0.3 | | | | 0.2 | | | | 0.3 | |
| Expected return on assets | | | (1.3) | | | | (1.2) | | | | (0.9) | | | | — | | | | — | | | | — | |
| Amortization of prior service (credit) loss | | | 0.0 | | | | 0.0 | | | | 0.0 | | | | (0.8) | | | | (0.8) | | | | (0.6) | |
| | | | | | | | | | | | | | | | | | |
| Amortization of net actuarial (gain) loss | | | 0.5 | | | | 0.9 | | | | 0.6 | | | | — | | | | — | | | | — | |
| Net periodic (benefit) cost | | $ | 0.2 | | | $ | 0.5 | | | $ | 0.4 | | | $ | (0.5) | | | $ | (0.6) | | | $ | (0.3) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Pension Plan | | UK Pension Plan | | Post - Retirement Benefits |
| | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
Components of net (benefit) cost: | | | | | | | |
| | |
| | |
| | |
| | |
| | |
|
| Service cost | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.0 |
| | $ | 0.0 |
| | $ | 0.0 |
|
| Interest cost | 3.2 |
| | 4.6 |
| | 5.0 |
| | 1.2 |
| | 1.5 |
| | 1.7 |
| | 0.9 |
| | 1.4 |
| | 1.3 |
|
| Expected return on assets | (6.1 | ) | | (6.5 | ) | | (7.8 | ) | | (1.0 | ) | | (1.3 | ) | | (1.5 | ) | | — |
| | — |
| | — |
|
Net amortization and deferrals | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (0.1 | ) | | (0.2 | ) |
Lump sum settlement charge | — |
| | — |
| | 4.3 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Amortization of net actuarial loss | 0.9 |
| | 0.8 |
| | 0.7 |
| | 0.8 |
| | 0.9 |
| | 0.7 |
| | 0.4 |
| | 2.8 |
| | 1.3 |
|
| Net periodic (benefit) cost | $ | (2.0 | ) | | $ | (1.1 | ) | | $ | 2.2 |
| | $ | 1.0 |
| | $ | 1.1 |
| | $ | 0.9 |
| | $ | 1.3 |
| | $ | 4.1 |
| | $ | 2.4 |
|
On May 31, 2016, the Company changed the approach usedActuarial gains and losses are amortized using a corridor approach. The gain or loss corridor is equal to measure service and interest costs for pension and other postretirement benefits. The Company previously measured service and interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. The Company elected to measure service and interest costs by applying the specific spot rates along that yield curve to the plans’ liability cash flows. This change did not affect the measurement10% of the Company's plan obligations.
On May 31, 2017, the Expected Terminationgreater of the U.S. Pension Plan is considered imminentprojected benefit obligation and it is likely to occur during fiscal 2018. As such, the Company included estimates for the anticipated amountmarket-related value of lump sum payments to be distributedassets. Gains and losses in fiscal 2018 as well as estimated insurance company pricing on the portionexcess of the obligation notcorridor are amortized over the future working lifetime.
distributed through lump sum payments. This change does affect the measurement of the Company's U.S. Pension Plan obligations as of May 31, 2017, however the Net periodic benefit for the U.S. Pension Plan for the period ended May 31, 2017 was not affected.
Plan Assets
The Company’s investment policy with regard to the assets in the UK Pension PlansPlan 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 UK Pension PlansPlan by asset category at May 31:
| | | | | | | | | | | | | | |
| | UK Pension Plan |
| | 2023 | | 2022 |
| Equity securities | | 29.6 | % | | 56.1 | % |
| | | | |
| Cash and cash equivalents | | 5.1 | % | | 1.1 | % |
| Liability-driven instruments | | 41.7 | % | | 23.2 | % |
| Real estate | | 6.8 | % | | 5.7 | % |
| Other | | 16.8 | % | | 13.9 | % |
| | | 100.0 | % | | 100.0 | % |
|
| | | | | | | | | | | |
| | U.S. Pension Plan | | UK Pension Plan |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Equity securities | 13.4 | % | | 28.3 | % | | 38.8 | % | | 36.8 | % |
| Debt securities | 76.5 | % | | 69.2 | % | | 32.8 | % | | 33.8 | % |
| Real estate | — | % | | — | % | | 6.9 | % | | 7.5 | % |
| Other | 10.1 | % | | 2.5 | % | | 21.5 | % | | 21.9 | % |
| | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
The weighted average asset allocation for the U.S. Pension Plan's Other investments includes cash resulting from the timing of the transfer of certain assets.
The following table sets forth the targeted weighted average asset allocations for the UK Pension PlansPlan included in the Company’s investment policy:
| | | | | | | | |
| | UK Pension Plan |
| Equity securities | | 30 | % |
| Cash and cash equivalents | | 5 | % |
| Liability-driven instruments | | 42 | % |
| Real estate | | 7 | % |
| Other | | 16 | % |
| Total | | 100 | % |
|
| | | | | |
| | U.S.
Pension
Plan | | UK Pension Plan |
| Equity | 15 | % | | 40 | % |
| Debt and cash equivalents | 85 | % | | 30 | % |
| Real estate and other | 0 | % | | 30 | % |
| | 100 | % | | 100 | % |
The fair values of the Company’s Pension Plans’Plan assets are measured using Level 1, Level 2 and Level 3 fair value measurements. For a more complete description of fair value measurements see Note 20, “Fair Value Measurements.”
The following table sets forth the measurement of the Company’s Pension Plans’Plan assets at fair value by asset category at the respective dates:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Assets at Fair Value as of May 31, 2023 |
| UK Pension Plan |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Cash and cash equivalents | $ | 1.0 | | | $ | — | | | $ | — | | | $ | 1.0 | |
| Equity securities: | | | | | | | | | | | |
U.S. (1) | | 1.1 | | | | — | | | | — | | | | 1.1 | |
International (2) | | 4.7 | | | | — | | | | — | | | | 4.7 | |
Pooled, Common and Collective Funds (3) (4) | | — | | | | 8.2 | | | | — | | | | 8.2 | |
| | | | | | | | | | | |
| Annuities | | — | | | | — | | | | 3.3 | | | | 3.3 | |
Real estate (5) | | 1.3 | | | | — | | | | — | | | | 1.3 | |
| Total | $ | 8.1 | | | $ | 8.2 | | | $ | 3.3 | | | $ | 19.6 | |
| | | | | | | | | | | | | | | | | | Assets at Fair Value as of May 31, 2022 |
| | Assets at Fair Value as of May 31, 2017 | | UK Pension Plan |
| | U.S.
Pension
Plan | | UK
Pension
Plan | | U.S.
Pension
Plan | | UK
Pension
Plan | | U.S.
Pension
Plan | | UK
Pension
Plan | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| | Level 1 | | Level 2 | | Level 3 | | | |
| Cash and cash equivalents | $ | 18.4 |
| | $ | 0.5 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 18.9 |
| Cash and cash equivalents | $ | 0.3 | | | $ | — | | | $ | — | | | $ | 0.3 | |
| Equity securities: | | | | | |
| | | | |
| | | | |
| Equity securities: | | | | | | |
U.S. (1) | 12.7 |
| | 1.0 |
| | — |
| | — |
| | — |
| | — |
| | 13.7 |
| U.S. (1) | | 2.4 | | | — | | | — | | | 2.4 | |
International (2) | — |
| | — |
| | — |
| | 10.3 |
| | — |
| | — |
| | 10.3 |
| International (2) | | 14.7 | | | — | | | — | | | 14.7 | |
Pooled, Common and Collective Funds (3) | — |
| | — |
| | 101.4 |
| | — |
| | — |
| | — |
| | 101.4 |
| |
Fixed Income (4) | — |
| | — |
| | — |
| | 9.6 |
| | — |
| | — |
| | 9.6 |
| |
Pooled, Common and Collective Funds (3) (4) | | Pooled, Common and Collective Funds (3) (4) | | — | | | 7.1 | | | — | | | 7.1 | |
| | Annuities | — |
| | — |
| | — |
| | — |
| | — |
| | 5.8 |
| | 5.8 |
| Annuities | | — | | | — | | | 4.2 | | | 4.2 | |
Real estate (5) | — |
| | — |
| | — |
| | 2.0 |
| | — |
| | — |
| | 2.0 |
| Real estate (5) | | 1.7 | | | — | | | — | | | 1.7 | |
| Total | $ | 31.1 |
| | $ | 1.5 |
| | $ | 101.4 |
| | $ | 21.9 |
| | $ | — |
| | $ | 5.8 |
| | $ | 161.7 |
| Total | $ | 19.1 | | | $ | 7.1 | | | $ | 4.2 | | | $ | 30.4 | |
71
companies. There are no restrictions on these investments.
(2) Funds which invest in a diversified portfolio of publicly traded common stocks of non-U.S. companies, primarily in Europe and
Asia. There are no restrictions on these investments.
(3) Funds which invest in UK government bonds and bond index-linked investments and interest rate and inflation swaps. There are |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Assets at Fair Value as of May 31, 2016 |
| | U.S.
Pension
Plan | | UK
Pension
Plan | | U.S.
Pension
Plan | | UK
Pension
Plan | | U.S.
Pension
Plan | | UK
Pension
Plan | | Total |
| | Level 1 | | Level 2 | | Level 3 | | |
| Cash and cash equivalents | $ | 3.3 |
| | $ | 0.9 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4.2 |
|
| Equity securities: | | | | | | | |
| | | | |
| | |
|
U.S. (1) | 34.1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 34.1 |
|
International (2) | 4.2 |
| | — |
| | — |
| | 10.7 |
| | — |
| | — |
| | 14.9 |
|
Pooled, Common and Collective Funds (3) | — |
| | — |
| | 93.5 |
| | — |
| | — |
| | — |
| | 93.5 |
|
Fixed Income (4) | — |
| | — |
| | — |
| | 9.8 |
| | — |
| | — |
| | 9.8 |
|
| Annuities | — |
| | — |
| | — |
| | — |
| | — |
| | 5.5 |
| | 5.5 |
|
Real estate (5) | — |
| | — |
| | — |
| | 2.2 |
| | — |
| | — |
| | 2.2 |
|
| Total | $ | 41.6 |
| | $ | 0.9 |
| | $ | 93.5 |
| | $ | 22.7 |
| | $ | — |
| | $ | 5.5 |
| | $ | 164.2 |
|
(4) Funds which invest in bond index funds available to certain qualified retirement plans but not traded openly on any
| |
(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 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 bond index funds available to certain qualified retirement plans but not traded openly in any public exchanges. |
| |
(4) | 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. |
| |
(5) | 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. |
public exchanges. There are no restrictions on these investments.
(5) 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.
The Company has purchased annuities to service fixed payments to certain retired plan participants in the UK. These annuities are purchased from investment grade counterparties. These annuities are not traded on open markets and are therefore valued based upon the actuarial determined valuation, and related assumptions, of the underlying projected benefit obligation, a Level 3 valuation technique. The fair value of these assets was $5.8$3.3 and $5.5$4.2 at May 31, 20172023 and May 31, 2016,2022, respectively.
The following table summarizes the changes in fair value of these Level 3 assets for the fiscal years ended May 31, 20172023 and 2016:2022:
|
| | | |
| Balance at May 31, 2015 | $ | 6.1 |
|
| Actual Return on Plan Assets: | |
|
| Relating to assets still held at May 31, 2016 | 0.0 |
|
| Relating to assets sold during the year | — |
|
| Purchases, sales and settlements, net | (0.3 | ) |
| Transfers in and/or out of Level 3 | — |
|
| Foreign currency translation | (0.3 | ) |
| Balance at May 31, 2016 | $ | 5.5 |
|
| Actual Return on Plan Assets: | |
|
| Relating to assets still held at May 31, 2017 | 1.2 |
|
| Relating to assets sold during the year | — |
|
| Purchases, sales and settlements, net | (0.3 | ) |
| Transfers in and/or out of Level 3 | — |
|
| Foreign currency translation | (0.6 | ) |
| Balance at May 31, 2017 | $ | 5.8 |
|
| | | | | | | | |
| | |
| Balance at May 31, 2021 | $ | 6.0 | |
| Actual Return on Plan Assets: | | |
| Relating to assets still held at May 31, 2021 | | (1.2) | |
| Relating to assets sold during the year | | — | |
| Purchases, sales and settlements, net | | — | |
| Transfers in and/or out of Level 3 | | — | |
| Foreign currency translation | | (0.6) | |
| | |
| Balance at May 31, 2022 | $ | 4.2 | |
| | |
| Actual Return on Plan Assets: | | |
| Relating to assets still held at May 31, 2022 | | (0.9) | |
| Relating to assets sold during the year | | — | |
| Purchases, sales and settlements, net | | — | |
| Transfers in and/or out of Level 3 | | — | |
| Foreign currency translation | | (0.0) | |
| Balance at May 31, 2023 | $ | 3.3 | |
Contributions
In fiscal 2018,2024, the Company expects to make contributions of $1.1$1.2 to the UK Pension Plans.Plan.
Estimated future benefit payments
The following table sets forth the expected future benefit payments under the UK Pension PlansPlan and the Post-RetirementUS Postretirement Benefits by fiscal year:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | UK Pension Plan | | US Postretirement Benefits |
| | Pension benefits | | Benefit
payments | | Medicare
subsidy
receipts |
| 2024 | $ | 1.2 | | | $ | 1.1 | | | $ | 0.0 | |
| 2025 | | 1.5 | | | | 1.0 | | | | 0.0 | |
| 2026 | | 1.4 | | | | 0.9 | | | | 0.0 | |
| 2027 | | 1.4 | | | | 0.9 | | | | 0.0 | |
| 2028 | | 1.4 | | | | 0.8 | | | | 0.0 | |
| 2029 - 2033 | | 7.6 | | | | 3.1 | | | | 0.1 | |
|
| | | | | | | | | | | | | | | | |
| | | U.S.
Pension
Plan | | UK
Pension
Plan | | Post - Retirement |
| | | Pension Benefits | | Benefit Payments | | Medicare Subsidy Receipts |
| 2018 | | $ | 127.8 |
| | $ | 0.8 |
| | $ | 2.3 |
| | $ | 0.2 |
|
| 2019 | | — |
| | 1.0 |
| | 2.3 |
| | 0.2 |
|
| 2020 | | — |
| | 0.9 |
| | 2.3 |
| | 0.3 |
|
| 2021 | | — |
| | 1.0 |
| | 2.3 |
| | 0.3 |
|
| 2022 | | — |
| | 1.3 |
| | 2.2 |
| | 0.3 |
|
| 2023-2027 | | — |
| | 7.3 |
| | 10.6 |
| | 1.3 |
|
Estimated future benefit payments for the U.S. Pension Plan are impacted by the Expected Termination and all benefits are expected to be paid in fiscal 2018.
Assumed health care cost trend rates at May 31:
| | | | 2017 | | 2016 | | 2023 | | 2022 |
| Health care cost trend rate assumed for the next fiscal year | 7.0 | % | | 7.0 | % | Health care cost trend rate assumed for the next fiscal year | 6.0 | % | | 5.8 | % |
| Rate to which the cost trend is assumed to decline (the ultimate trend rate) | 5.0 | % | | 5.0 | % | Rate to which the cost trend is assumed to decline (the ultimate trend rate) | 5.0 | % | | 5.0 | % |
| Year that the rate reaches the ultimate trend rate | 2024 |
| | 2024 |
| Year that the rate reaches the ultimate trend rate | 2028 | | 2026 |
Assumed health care cost trend rates could have a significant effect on the amounts reported for the post-retirement health care plan. A one percentage point change in assumed health care cost trend rates would have the following effects:
|
| | | | | | | |
| | 2017 | | 2016 |
| Total service and interest cost - 1% increase | $ | 0.1 |
| | $ | 0.2 |
|
| Total service and interest cost - 1% decrease | (0.1 | ) | | (0.1 | ) |
| Post-retirement benefit obligation - 1% increase | 3.0 |
| | 4.3 |
|
| Post-retirement benefit obligation - 1% decrease | (2.6 | ) | | (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 $7.1, $6.8$8.1, $7.2 and $7.9$6.0 for fiscal years 2017, 20162023, 2022 and 2015,2021, respectively.
14. ACCRUED SEVERANCE
The table below provides information regarding Accrued severance, which is included in “Other accrued expenses” on the Company’s Consolidated Balance Sheets.
|
| | | | | | | |
| | 2017 | | 2016 |
| Beginning balance | $ | 4.4 |
| | $ | 2.0 |
|
| Accruals | 14.9 |
| | 11.9 |
|
| Payments | (12.7 | ) | | (9.5 | ) |
| Ending balance | $ | 6.6 |
| | $ | 4.4 |
|
The Company implemented cost reduction programs in fiscal 2017, recognizing severance expense of $12.9. The Company implemented cost reduction and restructuring programs in fiscal 2016, recognizing severance expense of $9.5.
15.16. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the impact on earnings of reclassifications out of Accumulated other comprehensive income (loss) for the fiscal years ended May 31: |
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | Pension
Plans | | Post -
Retirement
Benefits | | Pension
Plans | | Post -
Retirement
Benefits | | Pension
Plans | | Post -
Retirement
Benefits |
| Service cost | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.0 |
| | $ | — |
| | $ | 0.0 |
|
| Net amortization and deferrals | — |
| | — |
| | — |
| | (0.1 | ) | | — |
| | (0.2 | ) |
| Lump sum settlement charge | — |
| | — |
| | — |
| | — |
| | 4.3 |
| | — |
|
| Amortization of net actuarial loss | 1.7 |
| | 0.4 |
| | 1.7 |
| | 2.8 |
| | 1.4 |
| | 1.3 |
|
| Tax benefit | (0.4 | ) | | (0.1 | ) | | (0.3 | ) | | (1.1 | ) | | (2.0 | ) | | (0.4 | ) |
Amounts reclassified from Accumulated other
comprehensive income (loss) | $ | 1.3 |
| | $ | 0.3 |
| | $ | 1.4 |
| | $ | 1.6 |
| | $ | 3.7 |
| | $ | 0.7 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
| | UK Pension
Plan | | US Postretirement
Benefits | | UK Pension
Plan | | US Postretirement
Benefits | | UK Pension
Plan | | US Postretirement
Benefits |
| Amortization of prior service (credit) loss | $ | 0.0 | | | $ | (0.8) | | | $ | 0.0 | | | $ | (0.8) | | | $ | 0.0 | | | $ | (0.6) | |
| | | | | | | | | | | | | | | | | |
| Amortization of net actuarial loss (gain) | | 0.5 | | | | — | | | | 0.9 | | | | — | | | | 0.6 | | | | — | |
| Tax (benefit) expense | | — | | | | 0.2 | | | | — | | | | 0.2 | | | | — | | | | 0.1 | |
| Amounts reclassified from Accumulated other comprehensive income (loss) | $ | 0.5 | | | $ | (0.6) | | | $ | 0.9 | | | $ | (0.6) | | | $ | 0.6 | | | $ | (0.5) | |
The amounts reclassified out of Accumulated other comprehensive income (loss) were recognized in Selling, general and administrative expense.Other components of net periodic benefit (cost) for all periods presented.
The following tables summarize the activity in Accumulated other comprehensive income (loss), net of tax, by component for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency translation adjustments | | UK Pension
Plan | | US Postretirement
Benefits | | Total |
Balance at May 31, 2021 (1) | $ | (30.1) | | | $ | (10.4) | | | $ | 5.8 | | | $ | (34.7) | |
| Other comprehensive income (loss) before reclassifications | $ | (14.5) | | | $ | 2.1 | | | $ | 1.4 | | | $ | (11.0) | |
| Less: amount reclassified from Accumulated other comprehensive income (loss) (net of taxes) | | | | | | | | | | | |
| | | | | | | | | | | |
| Amortization of net actuarial loss | $ | — | | | $ | 0.9 | | | $ | — | | | $ | 0.9 | |
| Amortization of prior service (credit) cost | | — | | | | 0.0 | | | | (0.6) | | | | (0.6) | |
| Other comprehensive income (loss) | | (14.5) | | | | 3.0 | | | | 0.8 | | | | (10.7) | |
Balance at May 31, 2022 (1) | $ | (44.6) | | | $ | (7.4) | | | $ | 6.6 | | | $ | (45.4) | |
| Other comprehensive income (loss) before reclassifications | $ | (5.4) | | | $ | (5.5) | | | $ | 0.6 | | | $ | (10.3) | |
| Less: amount reclassified from Accumulated other comprehensive income (loss) (net of taxes) | | | | | | | | | | | |
| | | | | | | | | | | |
| Amortization of net actuarial loss | $ | — | | | $ | 0.5 | | | $ | — | | | $ | 0.5 | |
| Amortization of prior service (credit) cost | | — | | | | 0.0 | | | | (0.6) | | | | (0.6) | |
| Other comprehensive income (loss) | | (5.4) | | | | (5.0) | | | | 0.0 | | | | (10.4) | |
Balance at May 31, 2023 (1) | $ | (50.0) | | | $ | (12.4) | | | $ | 6.6 | | | $ | (55.8) | |
|
| | | | | | | | | | | | | | | |
| | Foreign currency translation adjustments | | Pension
Plans | | Post -
Retirement
Benefits | | Total |
Balance at May 31, 2015(1) | $ | (31.9 | ) | | $ | (38.0 | ) | | $ | (7.1 | ) | | $ | (77.0 | ) |
| Other comprehensive income (loss) before reclassifications | (8.1 | ) | | (2.8 | ) | | $ | (1.8 | ) | | $ | (12.7 | ) |
Less: amount reclassified from Accumulated other
comprehensive income (loss) (net of taxes) | | | | | | | |
| Lump Sum Settlement charge | — |
| | — |
| | — |
| | — |
|
| Amortization of net actuarial loss | — |
| | 1.4 |
| | 1.6 |
| | 3.0 |
|
| Net prior service credit | — |
| | — |
| | (0.0 | ) | | (0.0 | ) |
| Other comprehensive income (loss) | (8.1 | ) | | (1.4 | ) | | (0.2 | ) | | (9.7 | ) |
Balance at May 31, 2016(1) | $ | (40.0 | ) | | $ | (39.4 | ) | | $ | (7.3 | ) | | $ | (86.7 | ) |
| Other comprehensive income (loss) before reclassifications | $ | (5.3 | ) | | $ | (8.8 | ) | | $ | 5.0 |
| | $ | (9.1 | ) |
Less: amount reclassified from Accumulated other
comprehensive income (loss) (net of taxes) | | | | | | | |
| Lump Sum Settlement charge | — |
| | — |
| | — |
| | — |
|
| Amortization of net actuarial loss | — |
| | 1.3 |
| | 0.3 |
| | 1.6 |
|
| Net prior service credit | — |
| | — |
| | — |
| | — |
|
| Other comprehensive income (loss) | (5.3 | ) | | (7.5 | ) | | 5.3 |
| | (7.5 | ) |
Balance at May 31, 2017 (1) | $ | (45.3 | ) | | $ | (46.9 | ) | | $ | (2.0 | ) | | $ | (94.2 | ) |
(1) Obligations underAccumulated other comprehensive income (loss) related to the UK Pension PlansPlan and Post-RetirementUS Postretirement Benefits are reported net of taxes of $22.0, $22.4$2.2, $2.2 and $20.6$2.0 at May 31, 2017, 20162023, 2022, and 2015,2021, respectively.
16.
17. 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: |
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Earnings (loss) from continuing operations attributable to Class A and Common Shares | $ | 52.4 |
| | $ | 43.9 |
| | $ | 15.4 |
|
| Earnings (loss) from discontinued operations attributable to Class A and Common Shares, net of tax | (0.2 | ) | | (3.5 | ) | | 279.1 |
|
| Net income (loss) attributable to Class A and Common Shares | 52.2 |
| | 40.4 |
| | 294.5 |
|
Weighted average Shares of Class A Stock and Common Stock outstanding for basic earnings (loss) per share (in millions) | 34.7 |
| | 34.1 |
| | 32.7 |
|
| Dilutive effect of Class A Stock and Common Stock potentially issuable pursuant to stock-based compensation plans (in millions) | 0.7 |
| | 0.8 |
| | 0.7 |
|
| Adjusted weighted average Shares of Class A Stock and Common Stock outstanding for diluted earnings (loss) per share (in millions) | 35.4 |
| | 34.9 |
| | 33.4 |
|
| | |
| | |
| | |
|
| Earnings (loss) per share of Class A Stock and Common Stock | | | | | |
| Basic earnings (loss) per share: | | | | | |
| Earnings (loss) from continuing operations | $ | 1.51 |
| | $ | 1.29 |
| | $ | 0.47 |
|
| Earnings (loss) from discontinued operations, net of tax | $ | (0.00 | ) | | $ | (0.11 | ) | | $ | 8.53 |
|
| Net income (loss) | $ | 1.51 |
| | $ | 1.18 |
| | $ | 9.00 |
|
| Diluted earnings (loss) per share: |
|
| | |
| | |
|
| Earnings (loss) from continuing operations | $ | 1.48 |
| | $ | 1.26 |
| | $ | 0.46 |
|
| Earnings (loss) from discontinued operations, net of tax | $ | (0.01 | ) | | $ | (0.10 | ) | | $ | 8.34 |
|
| Net income (loss) | $ | 1.47 |
| | $ | 1.16 |
| | $ | 8.80 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Net income (loss) attributable to Class A and Common Shares | $ | 86.3 | | | $ | 80.6 | | | $ | (11.0) | |
Weighted average Shares of Class A Stock and Common Stock
outstanding for basic earnings (loss) per share (in millions) | | 33.8 | | | | 34.5 | | | | 34.3 | |
| Dilutive effect of Class A Stock and Common Stock potentially issuable pursuant to stock-based compensation plans (in millions)* | | 0.9 | | | | 1.1 | | | | — | |
| Adjusted weighted average Shares of Class A Stock and Common Stock outstanding for diluted earnings (loss) per share (in millions) | | 34.7 | | | | 35.6 | | | | 34.3 | |
| | | | | | | | |
| Earnings (loss) per share of Class A Stock and Common Stock | | | | | | | | |
| Basic earnings (loss) per share | $ | 2.56 | | | $ | 2.33 | | | $ | (0.32) | |
| Diluted earnings (loss) per share | $ | 2.49 | | | $ | 2.27 | | | $ | (0.32) | |
| | | | | | | | |
| Anti-dilutive shares pursuant to stock-based compensation plans | | 0.6 | | | | 1.6 | | | | 2.0 | |
Earnings from continuing operations exclude earnings of $0.1, $0.1 and $0.1*The Company experienced a net loss for the fiscal yearsyear ended May 31, 2017, 20162021 and 2015, respectively, for earnings attributable to participating RSUs.therefore did not report any dilutive share impact.
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. There were 0.4 million potentially anti-dilutive shares outstanding pursuant to compensation plans as of May 31, 2017.
A portion of the Company’s Restricted Stock Units ("RSUs") which are granted to employees participate in earnings through cumulative dividends which are payable and non-forfeitable to the employees upon vesting of the RSUs. Accordingly, theThe Company measures diluted earnings per share based upon the lower of the Two-class method orusing the Treasury Stock method.
The following table sets forth Options outstanding pursuant to stock-based compensation plans for the fiscal years ended May 31:
| | | | | | | | | | | |
| | 2023 | | 2022 |
| Options outstanding pursuant to stock-based compensation plans (in millions) | 3.2 | | 4.3 |
|
| | | |
| | 2017 | | 2016 |
| Options outstanding pursuant to stock-based compensation plans (in millions) | 2.7 | | 3.0 |
As of May 31, 2017, $38.62023, $21.6 remains available for future purchases of common shares under the current repurchase authorization of the Board of Directors.
See Note 12,14, “Treasury Stock,” and Note 22, "Subsequent Events," for a more complete description of the Company’s share buy-back program.
17.18. OTHER ACCRUED EXPENSES
Other accrued expenses consistconsisted of the following at May 31:
| | | | | | | | | | | | | | | | | |
| | | 2023 | | | 2022 |
| | | | | |
| Accrued payroll, payroll taxes and benefits | $ | 29.2 | | | $ | 32.2 | |
| Accrued bonus and commissions | | 31.2 | | | | 44.2 | |
| Accrued other taxes | | 24.8 | | | | 26.8 | |
| Returns liability | | 34.9 | | | | 42.2 | |
| Accrued advertising and promotions | | 7.3 | | | | 10.3 | |
| | | | | |
| | | | | |
| Other accrued expenses | | 41.5 | | | | 37.6 | |
| Total accrued expenses | $ | 168.9 | | | $ | 193.3 | |
|
| | | | | | | |
| | 2017 | | 2016 |
| | | | |
| Accrued payroll, payroll taxes and benefits | $ | 48.5 |
| | $ | 44.9 |
|
| Accrued bonus and commissions | 33.8 |
| | 28.2 |
|
| Accrued other taxes | 26.1 |
| | 30.4 |
|
| Accrued advertising and promotions | 34.9 |
| | 35.7 |
|
| Accrued insurance | 7.6 |
| | 7.7 |
|
| Other accrued expenses | 27.1 |
| | 29.0 |
|
| Total accrued expenses | $ | 178.0 |
| | $ | 175.9 |
|
18. OTHER FINANCIAL DATA | | | | | | | | | | | | | | | | | |
| | 2023 | | | 2022 |
| Beginning balance | $ | 3.0 | | | $ | 3.7 | |
| Accruals | | 2.3 | | | | 8.1 | |
| Payments | | (5.0) | | | | (8.8) | |
| Ending balance | $ | 0.3 | | | $ | 3.0 | |
Other financial data consistedThe Company implemented cost reduction programs in fiscal 2022, recognizing severance and related charges of the following for the fiscal years ended May 31: $6.2.
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Advertising expense | $ | 121.0 |
| | $ | 127.3 |
| | $ | 129.7 |
|
| Amortization of prepublication and production costs | 23.3 |
| | 26.4 |
| | 30.4 |
|
| Foreign currency transaction gain (loss) | 1.0 |
| | (0.5 | ) | | 0.1 |
|
| Purchases related to contractual commitments for minimum print quantities | 53.1 |
| | 48.7 |
| | 68.2 |
|
|
| | | | | | | |
| | 2017 | | 2016 |
| Royalty advances allowance for reserves | $ | 93.8 |
| | $ | 90.1 |
|
| Accounts receivable reserve for returns | 36.3 |
| | 32.1 |
|
| Accounts receivable allowance for doubtful accounts | 13.7 |
| | 16.1 |
|
| Unredeemed credits issued in conjunction with the Company’s school-based book club and book fair operations (included in other accrued expenses) | 8.7 |
| | 8.9 |
|
19. DERIVATIVES AND HEDGING
The Company enters into foreign currency derivative contracts to economically hedge the exposure to foreign currency fluctuations associated with the forecasted purchase of inventory, the foreign exchange risk associated with certain receivables denominated in foreign currencies and certain future commitments for foreign expenditures. 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 Selling, general and administrative expenses, and it recognizes the unrealized gain or loss in other current assets or other current liabilities. The notional values of the contracts as of May 31, 20172023 and 20162022 were $36.5$22.8 and $31.8,$24.3, respectively. Net unrealized gains of $0.8$0.5 and unrealized losses of $0.5$0.1 were recognized at May 31, 20172023 and May 31, 2016,2022, respectively.
20. FAIR VALUE MEASUREMENTS
The Company determines the appropriate level in the fair value hierarchy for each fair value measurement of assets and liabilities carried at fair value on a recurring basis in the Company’s financial statements. The fair value hierarchy prioritizes the inputs, which 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:
•Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.
•Level 2 Observable inputs other than unadjusted quoted prices in active markets for identical assets or liabilities such as
as:
| |
◦ | Quoted prices for similar assets or liabilities in active markets |
| |
◦ | Quoted prices for identical or similar assets or 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 |
◦Quoted prices for similar assets or liabilities in active markets
◦Quoted prices for identical or similar assets or 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
•Level 3 Unobservable inputs in which there is little 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 various lines of credit.credit and long term debt. The fair value of the Company's debt approximates the carrying value for all periods presented. For a more complete description of fair value measurements employed, see Note 4, “Debt.” The fair values of foreign currency forward contracts, used by the Company to manage the impact of foreign exchange rate changes to the financial statements, are based on quotations from financial institutions, a Level 2 fair value measure. See Note 19, “Derivatives and Hedging,” for a more complete description of fair value measurements employed.
Non-financial assets and liabilities for which the Company employs fair value measures on a non-recurring basis include:
•Long-lived assets
Investments•Operating lease right-of-use (ROU) assets
•Investments
•Assets acquired in a business combination
Goodwill, definite•Impairment assessment of goodwill and indefinite-lived intangible assets
•Long-lived assets held for sale
Level 2 and Level 3 inputs are employed by the Company in the fair value measurement of these assets and liabilities. For the fair value measurements employed by the Company for goodwill, see Note 8,11, “Goodwill and Other Intangibles." For theThe Company employs fair value measurements employed by the Company for certain property, plant and equipment, production assets, investments and prepublication assets and the Company assessed future expected cash flows attributable to these assets. See Note 7, "Investments", for a more complete description of the fair value measurements employed. During fiscal 2022, operating lease ROU assets were recorded at fair value in connection with an impairment and fair value was determined using the discounted cash flow method. See Note 4, "Asset Write Down", for a more complete description of the impairment recognized in the year ended May 31, 2022. See Note 10, "Acquisitions", for a more complete description of the assets acquired in a business combination in the year ended May 31, 2023.
The following tables present non-financial assets that were measured and recognized at fair value on a non-recurring basis and the total impairment losses and additions recognized on those assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net carrying
value as of | | Fair value measured and recognized using | | Impairment losses
for fiscal year ended | | Additions due to acquisitions |
| | May 31, 2023 | | Level 1 | | Level 2 | | Level 3 | | May 31, 2023 | |
| Goodwill | $ | 7.6 | | | S | — | | | $ | — | | | $ | 7.6 | | | $ | — | | | $ | 7.6 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Intangible assets | | 3.6 | | | | — | | | | — | | | | 4.1 | | | | — | | | | 4.1 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Net carrying
value as of | | Fair value measured and recognized using | | Impairment losses for fiscal year ended | | Additions due to other investments and acquisitions |
| | May 31, 2017 | | Level 1 | | Level 2 | | Level 3 | | May 31, 2017 | |
| Goodwill | $ | 2.8 |
| | $ | — |
| | $ | — |
| | $ | 2.8 |
| | $ | — |
| | $ | 2.8 |
|
| Prepublication assets | — |
| | — |
| | — |
| | — |
| | 1.1 |
| | — |
|
| Property, plant and equipment, net | — |
| | — |
| | — |
| | — |
| | 5.7 |
| | — |
|
| Intangible assets | 6.8 |
| |
|
| |
|
| | 7.0 |
| | — |
| | 7.0 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net carrying
value as of | | Fair value measured and recognized using | | Impairment losses
for fiscal year ended | | Additions due to acquisitions |
| | May 31, 2022 | | Level 1 | | Level 2 | | Level 3 | | May 31, 2022 | |
| | | | | | | | | | | | | | | | | |
Accounts Receivable (1) | $ | 1.4 | | | $ | — | | | $ | — | | | $ | 1.4 | | | $ | 9.3 | | | $ | — | |
Inventory (1) | | 2.3 | | | | — | | | | — | | | | 2.3 | | | | 1.6 | | | | — | |
| | | | | | | | | | | | | | | | | |
Other Assets (1) | | — | | | | — | | | | — | | | | — | | | | 0.7 | | | | — | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Operating lease right-of-use assets, net | | — | | | | — | | | | — | | | | — | | | | 0.4 | | | | — | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| (1) These assets are related to the direct sales business in Asia. Refer to Note 4, "Asset Write Down", for a more complete description. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net carrying
value as of | | Fair value measured and
recognized using | | Impairment losses
for fiscal year ended | | Additions due to acquisitions |
| | May 31, 2021 | | Level 1 | | Level 2 | | Level 3 | | May 31, 2021 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Operating lease right-of-use assets, net | $ | 8.1 | | | $ | — | | | $ | — | | | $ | 9.1 | | | $ | 9.6 | | | $ | — | |
| Property, plant and equipment, net | | — | | | | — | | | | — | | | | — | | | | 1.5 | | | | — | |
| | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Net carrying
value as of | | Fair value measured and recognized using | | Impairment losses for fiscal year ended | | Additions due to other investments and acquisitions |
| | May 31, 2016 | | Level 1 | | Level 2 | | Level 3 | | May 31, 2016 | |
| Property, plant and equipment, net | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 7.5 |
| | $ | — |
|
| Prepublication assets | — |
| | — |
| | — |
| | — |
| | 6.9 |
| | — |
|
| Intangible assets | 1.9 |
| | — |
| | — |
| | 2.4 |
| | — |
| | 2.4 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Net carrying
value as of | | Fair value measured and
recognized using | | Impairment losses for fiscal year ended | | Additions due to other investments and acquisitions |
| | May 31, 2015 | | Level 1 | | Level 2 | | Level 3 | | May 31, 2015 | |
| Goodwill | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 5.4 |
| | $ | — |
|
| Property, plant and equipment, net | — |
| | — |
| | — |
| | — |
| | 7.5 |
| | — |
|
| Prepublication assets | — |
| | — |
| | — |
| | — |
| | 2.9 |
| | — |
|
21. RELATED PARTY TRANSACTIONS
On January 12, 2022, the Company entered into a share repurchase agreement to purchase shares of its common stock from the Estate of M. Richard Robinson, Jr. in a privately negotiated transaction. Pursuant to the repurchase agreement, the Company purchased 300,000 shares of common stock on January 19, 2022 at a price of $40.65 per share, representing an aggregate purchase price of $12.2. The price per share paid represented a 4.2% discount to the closing price of the stock, $42.43, on the date of execution of the repurchase agreement. The repurchase was made pursuant to the Company’s current share repurchase program as previously approved by the Board. The aforementioned transaction was approved by the Board upon the recommendation of the Audit Committee.
22. SUBSEQUENT EVENTS
On June 1, 2023, the Company acquired the remaining shares of Make Believe Ideas Limited for £1.6, increasing the Company's total ownership to 100%.
On July 19, 2017,2023, the Board of Directors declared a regularquarterly cash dividend of $0.15$0.20 per share on the Company's Class A and Common share in respect ofStock for the first quarter of fiscal 2018.2024. The dividend is payable on September 15, 20172023 to shareholders of record as of the close of business on August 31, 2017.2023.
On July 19, 2023, the Board also authorized an increase of $100.0 for Common share repurchases under the Company's share buy-back program, resulting in a current Board authorization of $119.2, which includes $21.6 remaining from the previous Board authorization less share repurchases of $2.4 subsequent to May 31, 2023.
Report of Independent Registered Public Accounting Firm
THE BOARD OF DIRECTORS AND STOCKHOLDERSTo the Board of Directors and Stockholders of Scholastic Corporation
OF SCHOLASTIC CORPORATIONOpinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Scholastic Corporation (the Company) as of May 31, 20172023 and 2016, and2022, the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity and cash flows for each of the three fiscal years in the period ended May 31, 2017. Our audits also included2023, and the related notes and financial statement schedule listed in the Index at Item 15(c) (collectively referred to as the “consolidated financial statements”). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Scholastic Corporationthe Company at May 31, 20172023 and 2016,2022, and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended May 31, 2017,2023, 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) (PCAOB), Scholastic Corporation’sthe Company's internal control over financial reporting as of May 31, 2017,2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated July 24, 201721, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
| | | | | | | | |
| Revenue Recognition - allocation of contract transaction price to identified performance obligations |
| Description of the Matter | | As described in Note 1 to the consolidated financial statements, the Company identifies two performance obligations within its school-based book fair contracts, which include (i) the fulfillment of book fairs product and (ii) the fulfillment of product upon the redemption of incentive program credits by customers. The Company allocates the transaction price to each performance obligation based on a relative standalone selling price. Changes in the allocation of the transaction price could impact the timing of the recognition of revenue.
Considering the nature and volume of school-based book fair transactions, we identified the allocation of the transaction price to the identified performance obligations within school-based book fair contracts as a critical audit matter because the estimation of standalone selling price for the incentive program credits required especially challenging auditor effort and judgment in evaluating the methodology used to establish standalone selling price. Estimating standalone selling price for the incentive program credits utilizes estimates of a standardized value per credit. The standardized value per credit is based on historical experience of issuance and redemption patterns related to the incentive program, adjusted to normalize the data and to align with expectations of future redemptions. Changes in those assumptions can have a material effect on the amount of revenue recognized in the current or future periods. |
| How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s allocation of transaction price to the two performance obligations. We tested management’s review controls over the significant assumptions, such as adjustments made to historical experience and redemption patterns, and completeness and accuracy of the data used in the calculation.
To test the allocation of revenue recognized in current and future periods, our audit procedures included, among others, evaluating the methodology used and analyzing the historical experience and redemption patterns, particularly the adjustments made to normalize the data and to align with expectations of future redemptions. We tested the accuracy and completeness of the underlying historical incentive credit program data used in management’s calculation. To test the accuracy and completeness of historical incentive program issuance and redemption data used in the analysis, we agreed the total incentive program activity to the source system and for a sample of transactions performed transactional testing to source documents. We also evaluated the appropriateness of management’s adjustments to historical data by gaining an understanding of the nature of the adjustments, performing a sensitivity analysis and tracing the adjustments to the historical data to source documents. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since at least 1938, but we are unable to determine the specific year.
New York, New York
July 24, 201721, 2023
Report of Independent Registered Public Accounting Firm
THE BOARD OF DIRECTORS AND STOCKHOLDERSTo the Board of Directors and Stockholders of Scholastic Corporation
OF SCHOLASTIC CORPORATION
Opinion on Internal Control Over Financial Reporting
We have audited Scholastic Corporation’s internal control over financial reporting as of May 31, 2017,2023, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Scholastic Corporation’sCorporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of May 31, 2023, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of May 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity and cash flows for each of the three fiscal years in the period ended May 31, 2023, and the related notes and financial statement schedule listed in the Index at Item 15(c) and our report dated July 21 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’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’sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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, 2017, 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, 2017 and 2016, 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, 2017, and our report dated July 24, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New York, New York
July 24, 201721, 2023
|
| | | | |
| Supplementary Financial Information |
|
| Summary of Quarterly Results of Operations
(Unaudited, amounts in millions except per share data)
|
|
| | | | | | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Fiscal Year Ended May 31, |
| 2017 | |
| | |
| | |
| | |
| | |
|
| Revenues | $ | 282.7 |
| | $ | 623.1 |
| | $ | 336.2 |
| | $ | 499.6 |
| | $ | 1,741.6 |
|
| Cost of goods sold | 169.7 |
| | 271.3 |
| | 160.3 |
| | 213.2 |
| | 814.5 |
|
| Earnings (loss) from continuing operations | (39.5 | ) | | 67.9 |
| | (15.5 | ) | | 39.6 |
| | 52.5 |
|
| Earnings (loss) from discontinued operations, net of tax | (0.1 | ) | | 0.0 |
| | 0.1 |
| | (0.2 | ) | | (0.2 | ) |
| Net income (loss) | (39.6 | ) | | 67.9 |
| | (15.4 | ) | | 39.4 |
| | 52.3 |
|
| Earnings (loss) per share of Class A and Common Stock: | | | | | | | | | |
|
| Basic: | | | | | | | | | |
|
Earnings (loss) from continuing operations (1) | (1.15 | ) | | 1.96 |
| | (0.45 | ) | | 1.13 |
| | 1.51 |
|
Earnings (loss) from discontinued operations, net of tax (1) | (0.00 | ) | | 0.00 |
| | 0.01 |
| | (0.01 | ) | | (0.00 | ) |
Net income (loss) (1) | (1.15 | ) | | 1.96 |
| | (0.44 | ) | | 1.12 |
| | 1.51 |
|
| Diluted: | | | | | | | | | |
Earnings (loss) from continuing operations (1) | (1.15 | ) | | 1.92 |
| | (0.45 | ) | | 1.11 |
| | 1.48 |
|
Earnings (loss) from discontinued operations, net of tax (1) | (0.00 | ) | | 0.00 |
| | 0.01 |
| | (0.01 | ) | | (0.01 | ) |
Net income (loss) (1) | (1.15 | ) | | 1.92 |
| | (0.44 | ) | | 1.10 |
| | 1.47 |
|
| 2016 | |
| | |
| | |
| | |
| | |
|
| Revenues | $ | 191.2 |
| | $ | 601.8 |
| | $ | 366.0 |
| | $ | 513.8 |
| | $ | 1,672.8 |
|
| Cost of goods sold | 114.5 |
| | 257.1 |
| | 178.0 |
| | 212.7 |
| | 762.3 |
|
| Earnings (loss) from continuing operations | (48.9 | ) | | 65.2 |
| | (7.2 | ) | | 34.9 |
| | 44.0 |
|
| Earnings (loss) from discontinued operations, net of tax | (0.5 | ) | | (0.3 | ) | | (1.8 | ) | | (0.9 | ) | | (3.5 | ) |
| Net income (loss) | (49.4 | ) | | 64.9 |
| | (9.0 | ) | | 34.0 |
| | 40.5 |
|
| Earnings (loss) per share of Class A and Common Stock: | | | | | | | | | |
|
| Basic: | | | | | | | | | |
|
Earnings (loss) from continuing operations (1) | (1.46 | ) | | 1.90 |
| | (0.21 | ) | | 1.02 |
| | 1.29 |
|
Earnings (loss) from discontinued operations, net of tax (1) | (0.02 | ) | | (0.01 | ) | | (0.05 | ) | | (0.03 | ) | | (0.11 | ) |
Net income (loss) (1) | (1.48 | ) | | 1.89 |
| | (0.26 | ) | | 0.99 |
| | 1.18 |
|
| Diluted: | | | | | | | | | |
Earnings (loss) from continuing operations (1) | (1.46 | ) | | 1.85 |
| | (0.21 | ) | | 1.00 |
| | 1.26 |
|
Earnings (loss) from discontinued operations, net of tax (1) | (0.02 | ) | | (0.01 | ) | | (0.05 | ) | | (0.03 | ) | | (0.10 | ) |
Net income (loss) (1) | (1.48 | ) | | 1.84 |
| | (0.26 | ) | | 0.97 |
| | 1.16 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | | Fiscal Year Ended May 31, |
| 2023 | | | | | | | | | | | | | | |
| Revenues | $ | 262.9 | | | $ | 587.9 | | | $ | 324.9 | | | $ | 528.3 | | | $ | 1,704.0 | |
| Cost of goods sold | | 144.5 | | | | 260.4 | | | | 161.1 | | | | 220.4 | | | | 786.4 | |
| Net income (loss) | | (45.4) | | | | 75.4 | | | | (19.3) | | | | 75.8 | | | | 86.5 | |
| Net income (loss) attributable to Scholastic Corporation | | (45.5) | | | | 75.3 | | | | (19.2) | | | | 75.7 | | | | 86.3 | |
| Net income (loss) per share of Class A and Common Stock: | | | | | | | | | | | | | | |
Basic (1) | $ | (1.33) | | | $ | 2.17 | | | $ | (0.57) | | | $ | 2.33 | | | $ | 2.56 | |
Diluted (1) | $ | (1.33) | | | $ | 2.12 | | | $ | (0.57) | | | $ | 2.26 | | | $ | 2.49 | |
| 2022 | | | | | | | | | | | | | | |
| Revenues | $ | 259.8 | | | $ | 524.2 | | | $ | 344.5 | | | $ | 514.4 | | | $ | 1,642.9 | |
| Cost of goods sold | | 133.3 | | | | 238.0 | | | | 169.6 | | | | 224.6 | | | | 765.5 | |
| Net income (loss) | | (24.4) | | | | 68.4 | | | | (15.1) | | | | 52.1 | | | | 81.0 | |
| Net income (loss) attributable to Scholastic Corporation | | (24.2) | | | | 68.3 | | | | (15.3) | | | | 52.1 | | | | 80.9 | |
| Net income (loss) per share of Class A and Common Stock: | | | | | | | | | | | | | | |
Basic (1) | $ | (0.70) | | | $ | 1.97 | | | $ | (0.44) | | | $ | 1.51 | | | $ | 2.33 | |
Diluted (1) | $ | (0.70) | | | $ | 1.91 | | | $ | (0.44) | | | $ | 1.46 | | | $ | 2.27 | |
(1) The sum of the quarters may not equal the full year basic and diluted earnings per share since each quarter is calculated separately.
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, 2017,2023, 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 the 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 (2013)(2013 framework), concluded that the Corporation’s internal control over financial reporting was effective as of May 31, 2017.2023.
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, 2017,2023, 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, 20172023 that materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
Item 9B | Other Information
None.
Item 9C | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
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 20, 20172023 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 20, 20172023 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 20, 20172023 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 20, 20172023 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 20, 20172023 to be filed pursuant to Regulation 14A under the Exchange Act.
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, 2017, 20162023, 2022 and 20152021; |
| |
| Consolidated Statements of Comprehensive Income (Loss) for the years ended May 31, 2017, 20162023, 2022 and 20152021; |
| |
| Consolidated Balance Sheets at May 31, 20172023 and 20162022; |
| |
| Consolidated Statement of Changes in Stockholders’ Equity for the years ended May 31, 2017, 20162023, 2022 and 20152021; |
| |
| Consolidated Statements of Cash Flows for the years ended May 31, 2017, 20162023, 2022 and 20152021; and |
| |
| 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: |
| |
2.13.1 | Stock and Asset Purchase Agreement dated as of April 23, 2015, by and among Houghton Mifflin Harcourt Publishing Company, as Purchaser, Scholastic Corporation, as Parent Seller, and Scholastic Inc., as Seller (incorporated by reference to the Corporation's Annual Report on Form 10-K as filed with the SEC on July 29, 2015, SEC File No. 000-19860) (the "2015 10-K"). |
| |
3.1 | |
| |
| 3.2 | |
| |
| 4.1 |
| | | | | | | | | | 10.1 | Amended and Restated Credit Agreement dated as of October 27, 2021 (the “Credit Agreement”) among Scholastic Corporation and Scholastic Inc., as Borrowers, the lenders from time to time party thereto, Wells Fargo Bank, National Association and Truist Bank as Co-Syndication Agents, Fifth Third Bank, National Association, HSBC Bank USA, National Association, and Citibank, N.A. as Co-Agents and Bank of America, N.A., as Administrative Agent (incorporated by reference to the Corporation's Quarterly Report on Form 10-Q as filed with the SEC on March 24, 2023, SEC File No. 000-19860 (the "February 28, 2023 10-Q"). | | | | | | 10.2 | First Amendment, dated as of February 28, 2023, to the Amended and Restated Credit Agreement dated as of October 27, 2021 (the “Credit Agreement”) by and between Scholastic Corporation and Scholastic Inc., the lenders from time to time party thereto, and Bank of America, N.A., as administrative agent (incorporated by reference to the Corporation's Quarterly Report on Form 10-Q as filed with the SEC on March 24, 2023, SEC File No. 000-19860 (the "February 28, 2023 10-Q"). | | | | | | 10.3 | | | | | | 10.4*
| | | | | | 10.2*10.5* | | | | | | 10.3*10.6* | 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(the "November 30, 2012 10-Q”), and Amendment No. 1, effective as of May 21, 2013 (incorporated by reference to the Corporation's Annual Report on Form 10-K as filed with the SEC on July 25, 2013, 10-K)SEC file No. 000-19860 (the "2013 10-K”)),and Amendment No. 2, effective as of December 16, 2015 (incorporated by reference to the Corporation's Quarterly Report on Form 10-Q as filed with the SEC on December 18, 2015, SEC FIleFile No. 000-19860). | | | | | 10.4*10.7* | | | | | | 10.5*10.8* | | | | | | 10.6*10.9*
| | | | 10.7* | Form of Non-Qualified Stock Option Agreement under the 2001 Plan (incorporated by reference to the August 31, 2009 10-Q). | | | 10.8* | 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 22, 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). | | | 10.9* | 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). | | | 10.10*
| Scholastic Corporation 2011 Stock Incentive Plan (incorporated by reference to the November"November 30, 2011 10-Q) 10-Q")).Amendment No. 1 to the Scholastic Corporation 2011 Stock Incentive Plan (incorporated by reference to the 2013 10-K) and , Amendment No. 2 to the Scholastic Corporation 2011 Stock Incentive Plan (incorporated by reference to the Corporation's Quarterly Report on Form 10-Q as filed with the SEC on December 22, 2014, SEC File No. 000-19860), and Amendment No. 3 to the Scholastic Corporation 2011 Stock Incentive Plan (incorporated by reference to the Corporation's Quarterly Report on Form 10-Q as filed with the SEC on December 20, 2018, SEC file No. 000-19860). | | |
| | | | | | | | | | | | 10.13*10.12* | Severance Agreement, dated September 26, 2013, between | | | | | | 10.13* | | | | | | | 10.14* | | | | | | | 10.15* | | | | | | 10.14*10.16* | | | | | | | 10.17* | | | | | | | 10.18* | |
| | | | '10.1510.19* | Credit | | | | | | 10.20* | Amended and Restated Employment Agreement between Scholastic Corporation and Scholastic Inc.Peter Warwick, effective August 1, 2021 (incorporated by reference to the August 31, as borrowers, the Initial Lenders named therein, Bank of America, N.A., as administrative agent, Merrill Lynch, Pierce, Fenner and Smith Incorporated and Well Fargo Securities, LLC as joint lead arrangers and joint bookrunners, Wells Fargo N.A., Capital One N.A., Fifth Third Bank and HSBC Bank USA, N.A., as syndicate agents, and Branch Banking and Trust Company, as documentation agent.2022 10-Q). | | | | | 2110.21* | | | | | | | 10.22* | | | | | | | 10.23* | | | | | | | 10.24* | | | | | | | 10.25* | | | | | | | 10.26* | | | | | | | 21 | | | | | | | 23 | | | | | |
| | | | | | | | | | 31.1 | | | | | | | 31.2 | | | | | | | 32 | | | | | | | 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 ** |
| | | | | | * | 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.” | |
Item 16 | Summary
None.
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 24, 201721, 2023 | SCHOLASTIC CORPORATION | | | | | | By: /s/ Richard RobinsonPeter Warwick | | | Richard Robinson, Chairman of the Board,
President and Chief Executive Officer |
Power of Attorney KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard RobinsonPeter Warwick 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 | | Date | | | | | | | /s/ Peter Warwick | | President and Chief Executive Officer and Director
(principal executive officer) | | July 21, 2023 | | Peter Warwick | | | | | | | | | /s/ Kenneth J. Cleary | | Chief Financial Officer
(principal financial officer) | | July 21, 2023 | | Kenneth J. Cleary | | | | | | | | | /s/ Paul Hukkanen | | Senior Vice President and Chief Accounting Officer
(principal accounting officer) | | July 21, 2023 | | Paul Hukkanen | | | | | | | | | /s/ Andrés Alonso | | Director | | July 21, 2023 | | Andrés Alonso | | | | | | | | Signature | | Title | | Date | | | | | | /s/ Richard Robinson | | Chairman of the Board, President and
Chief Executive Officer and Director
(principal executive officer)
| | July 24, 2017 | Richard Robinson | | | | | | | | /s/ Maureen O’Connell | | Executive Vice President, Chief Administrative
Officer and Chief Financial Officer
(principal financial officer)
| | July 24, 2017 | Maureen O’Connell | | | | | | | | /s/ Kenneth Cleary | | Senior Vice President, Chief Accounting Officer
(principal accounting officer)
| | July 24, 2017 | Kenneth Cleary | | | | | | | | /s/ Andrés Alonso | | Director | | July 24, 2017 | Andrés Alonso | | | | | | | | | | | /s/ James W. Barge | | Director | | July 24, 201721, 2023 | | James W. Barge | | | | | | | | /s/ Marianne Caponnetto | | Director | | July 24, 2017 | Marianne Caponnetto | | | | | | | | | /s/ John L. Davies | | Director | | July 24, 201721, 2023 | | John L. Davies | | | | | | | | /s/ Andrew S. HeddenRobert L. Dumont | | Director | | July 24, 201721, 2023 | Andrew S. HeddenRobert L. Dumont | | |
| | | | | | /s/ Linda Li | | Director | | July 21, 2023 | | Linda Li | | | | | | | | Signature/s/ Iole Lucchese | | TitleDirector | | DateJuly 21, 2023 | | Iole Lucchese | | | | | /s/ Peter Warwick | | Director | | July 24, 2017 | Peter Warwick/s/ Verdell Walker | | Director | | July 21, 2023 | | Verdell Walker | | | | | /s/ Margaret A. Williams | | Director | | July 24, 2017 | Margaret A. Williams | | | | | | | | | /s/ David J. Young | | Director | | July 24, 201721, 2023 | | David J. Young | | | | | | | |
Scholastic Corporation Financial Statement Schedule ANNUAL REPORT ON FORM 10-K
YEAR ENDED May 31, 20172023
ITEM 15(c)
Schedule II Valuation and Qualifying Accounts and Reserves | | | | | | | | | | | | | | | | | | | | | | | | | | | (Amounts in millions) |
| | | | | | | | | Years ended May 31, |
| | | Balance at Beginning of Year | | Expensed | | Write-Offs and Other | | Balance at End of Year | | 2017 | |
| | |
| | |
| | | |
| | Allowance for doubtful accounts | $ | 16.1 |
| | $ | 11.0 |
| | $ | 13.4 |
| | | $ | 13.7 |
| | Reserve for returns | 32.1 |
| | 80.4 |
| | 76.2 |
| (1) | | 36.3 |
| | Reserves for obsolescence | 73.9 |
| | 16.0 |
| | 18.0 |
| | | 71.9 |
| | Reserve for royalty advances | 90.1 |
| | 4.3 |
| | 0.6 |
| | | 93.8 |
| | 2016 | | | | | | | | |
| | Allowance for doubtful accounts | $ | 14.9 |
| | $ | 12.3 |
| | $ | 11.1 |
| | | $ | 16.1 |
| | Reserve for returns | 27.9 |
| | 56.6 |
| | 52.4 |
| (1) | | 32.1 |
| | Reserves for obsolescence | 81.1 |
| | 12.0 |
| | 19.2 |
| | | 73.9 |
| | Reserve for royalty advances | 86.8 |
| | 4.1 |
| | 0.8 |
| | | 90.1 |
| | 2015 | | | | | | | | |
| | Allowance for doubtful accounts | $ | 15.6 |
| | $ | 10.6 |
| | $ | 11.3 |
| | | $ | 14.9 |
| | Reserve for returns | 27.0 |
| | 53.9 |
| | 53.0 |
| (1) | | 27.9 |
| | Reserves for obsolescence | 81.8 |
| | 21.7 |
| | 22.4 |
| | | 81.1 |
| | Reserve for royalty advances | 85.3 |
| | 3.6 |
| | 2.1 |
| | | 86.8 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Amounts in millions) | | | | | | | | | | Years ended May 31, | | | Balance at Beginning of Year | | Expensed | | Write-Offs and Other | | Balance at End of Year | | 2023 | | | | | | | | | | | | | Allowance for credit losses | $ | 25.9 | | | $ | 3.3 | | | $ | 12.5 | | | $ | 16.7 | | | Returns liability | | 42.2 | | | | 60.2 | | | | 67.5 | | (1) | | 34.9 | | | Reserves for obsolescence | | 106.6 | | | | 26.5 | | | | 32.2 | | | | 100.9 | | | Reserve for royalty advances | | 76.0 | | | | 4.2 | | | | 1.1 | | | | 79.1 | | | 2022 | | | | | | | | | | | | | Allowance for credit losses | $ | 21.4 | | | $ | 15.2 | | | $ | 10.7 | | | $ | 25.9 | | | Returns liability | | 45.2 | | | | 58.8 | | | | 61.8 | | (1) | | 42.2 | | | Reserves for obsolescence | | 99.6 | | | | 27.7 | | | | 20.7 | | | | 106.6 | | | Reserve for royalty advances | | 115.5 | | | | 4.1 | | | | 43.6 | | (2) | | 76.0 | | | 2021 | | | | | | | | | | | | | Allowance for credit losses | $ | 19.9 | | | $ | 5.2 | | | $ | 3.7 | | | $ | 21.4 | | | Returns liability | | 43.5 | | | | 66.0 | | | | 64.3 | | (1) | | 45.2 | | | Reserves for obsolescence | | 91.1 | | | | 36.6 | | | | 28.1 | | | | 99.6 | | | Reserve for royalty advances | | 109.5 | | | | 5.4 | | | | (0.6) | | | | 115.5 | |
| | (1) | Represents actual returns charged to the reserve |
(1)Represents actual returns charged to the reserve.
(2)Primarily represents write-offs for fully reserved advances.
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