UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
| For the quarterly period ended | November 30, 2019 | Commission File No. | 000-19860 | |
SCHOLASTIC CORPORATION
(Exact name of Registrant as specified in its charter)
| Delaware | 13-3385513 | ||
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | ||
| 557 Broadway, | |||
| New York | 10012 | ||
| (Address of principal executive offices) | (Zip Code) | ||
Registrant’s telephone number, including area code (212) 343-6100
| Title of Class | Trading Symbol | Name of Each Exchange on Which Registered |
| Common Stock, $0.01 par value | SCHL | The NASDAQ Stock Market LLC |
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.
Yesx☒Noo☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yesx☒Noo☐
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.
Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso☐Nox☒
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.
date:
| Title of each class | Number of shares outstanding | |
| as of | ||
| Common Stock, $.01 par value | ||
| Class A Stock, $.01 par value | 1,656,200 | |
SCHOLASTIC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28,NOVEMBER 30, 2019
INDEX
| Page | |||
PART I - FINANCIAL INFORMATION
| Item 1. Financial Statements |
SCHOLASTIC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED (Dollar amounts in millions, except per share data) |
| Three months ended | Nine months ended | Three months ended | Six months ended | |||||||||||||||||||||||
| February 28, | February 28, | November 30, | November 30, | |||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
| Revenues | $ | 360.1 | $ | 344.7 | $ | 1,183.2 | $ | 1,132.2 | $597.2 | $604.7 | $829.8 | $823.1 | ||||||||||||||
| Operating costs and expenses: | ||||||||||||||||||||||||||
| Cost of goods sold | 176.9 | 166.4 | 564.6 | 535.6 | 264.3 | 262.4 | 401.4 | 387.7 | ||||||||||||||||||
| Selling, general and administrative expenses | 190.9 | 186.7 | 584.3 | 573.9 | 212.4 | 229.7 | 379.9 | 393.4 | ||||||||||||||||||
| Depreciation and amortization | 13.7 | 11.0 | 41.3 | 30.0 | 15.4 | 14.4 | 30.8 | 27.6 | ||||||||||||||||||
| Asset impairments | — | 4.3 | — | 11.0 | ||||||||||||||||||||||
| Total operating costs and expenses | 381.5 | 368.4 | 1,190.2 | 1,150.5 | 492.1 | 506.5 | 812.1 | 808.7 | ||||||||||||||||||
| Operating income (loss) | (21.4 | ) | (23.7 | ) | (7.0 | ) | (18.3 | ) | 105.1 | 98.2 | 17.7 | 14.4 | ||||||||||||||
| Interest income (expense), net | 1.0 | 0.2 | 2.3 | 0.5 | 0.0 | 0.5 | 0.7 | 1.3 | ||||||||||||||||||
| Other components of net periodic benefit (cost) | (0.4 | ) | (39.8 | ) | (1.1 | ) | (55.4 | ) | (0.2) | (0.3) | (0.6 | ) | (0.7) | |||||||||||||
| Earnings (loss) before income taxes | (20.8 | ) | (63.3 | ) | (5.8 | ) | (73.2 | ) | 104.9 | 98.4 | 17.8 | 15.0 | ||||||||||||||
| Provision (benefit) for income taxes | (8.2 | ) | (14.1 | ) | (3.5 | ) | (17.4 | ) | 33.8 | 26.8 | 5.2 | 4.7 | ||||||||||||||
| Net income (loss) | $ | (12.6 | ) | $ | (49.2 | ) | $ | (2.3 | ) | $ | (55.8 | ) | 71.1 | 71.6 | 12.6 | 10.3 | ||||||||||
| Less: Net income attributable to noncontrolling interests | 0.1 | — | 0.1 | — | ||||||||||||||||||||||
| Net income (loss) attributable to Scholastic Corporation | $71.0 | $71.6 | $12.5 | $10.3 | ||||||||||||||||||||||
Basic and diluted earnings (loss) per Share of Class A and Common Stock | ||||||||||||||||||||||||||
| Basic | $ | (0.36 | ) | $ | (1.41 | ) | $ | (0.07 | ) | $ | (1.59 | ) | $2.04 | $2.03 | $0.36 | $0.29 | ||||||||||
| Diluted | $ | (0.36 | ) | $ | (1.41 | ) | $ | (0.07 | ) | $ | (1.59 | ) | $2.02 | $1.99 | $0.35 | $0.29 | ||||||||||
See accompanying notes
SCHOLASTIC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - UNAUDITED (Dollar amounts in millions) |
| Three months ended | Nine months ended | Three months ended | Six months ended | |||||||||||||||||||||
| February 28, | February 28, | November 30, | November 30, | |||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||
| Net income (loss) | $ | (12.6 | ) | $ | (49.2 | ) | $ | (2.3 | ) | $ | (55.8 | ) | $71.1 | $71.6 | $12.6 | $10.3 | ||||||||
| Other comprehensive income (loss), net: | ||||||||||||||||||||||||
| Foreign currency translation adjustments | 1.7 | 2.2 | (2.0 | ) | 6.0 | 3.9 | (0.6) | 1.9 | (3.7) | |||||||||||||||
| Pension and postretirement adjustments (net of tax) | 0.2 | 22.2 | 3.1 | 31.7 | 0.2 | 2.7 | 0.4 | 2.9 | ||||||||||||||||
| Total other comprehensive income (loss), net | $ | 1.9 | $ | 24.4 | $ | 1.1 | $ | 37.7 | 4.1 | 2.1 | 2.3 | (0.8) | ||||||||||||
| Comprehensive income (loss) | $ | (10.7 | ) | $ | (24.8 | ) | $ | (1.2 | ) | $ | (18.1 | ) | 75.2 | 73.7 | 14.9 | 9.5 | ||||||||
| Less: Net income attributable to noncontrolling interests | 0.1 | — | 0.1 | — | ||||||||||||||||||||
| Comprehensive income (loss) attributable to Scholastic Corporation | $75.1 | $73.7 | $14.8 | $9.5 | ||||||||||||||||||||
See accompanying notes
| SCHOLASTIC CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED (Dollar amounts in millions, except per share data) |
| November 30, 2019 (unaudited) | May 31, 2019 (audited) | November 30, 2018 (unaudited) | ||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $277.8 | $334.1 | $358.1 | |||||
| Accounts receivable, net | 325.1 | 250.1 | 377.3 | |||||
| Inventories, net | 357.8 | 323.7 | 365.6 | |||||
| Prepaid expenses and other current assets | 61.9 | 52.7 | 71.3 | |||||
| Total current assets | 1,022.6 | 960.6 | 1,172.3 | |||||
| Noncurrent Assets: | ||||||||
| Property, plant and equipment, net | 578.5 | 577.7 | 571.3 | |||||
| Prepublication costs, net | 71.3 | 70.2 | 62.1 | |||||
| Operating lease right-of-use assets, net | 76.4 | — | — | |||||
| Royalty advances, net | 52.3 | 47.5 | 48.9 | |||||
| Goodwill | 125.4 | 125.2 | 119.1 | |||||
| Noncurrent deferred income taxes | 37.3 | 37.0 | 41.4 | |||||
| Other assets and deferred charges | 67.9 | 60.3 | 66.8 | |||||
| Total noncurrent assets | 1,009.1 | 917.9 | 909.6 | |||||
| Total assets | $2,031.7 | $1,878.5 | $2,081.9 | |||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Lines of credit and current portion of long-term debt | $13.5 | $7.3 | $13.5 | |||||
| Accounts payable | 188.9 | 195.3 | 250.3 | |||||
| Accrued royalties | 54.7 | 41.9 | 58.5 | |||||
| Deferred revenue | 190.5 | 130.8 | 187.2 | |||||
| Other accrued expenses | 178.2 | 164.8 | 227.8 | |||||
| Accrued income taxes | 1.4 | 1.4 | 2.1 | |||||
| Operating lease liabilities | 23.5 | — | — | |||||
| Total current liabilities | 650.7 | 541.5 | 739.4 | |||||
| Noncurrent Liabilities: | ||||||||
| Long-term debt | 2.6 | — | — | |||||
| Operating lease liabilities | 56.0 | — | — | |||||
| Other noncurrent liabilities | 61.1 | 64.2 | 57.9 | |||||
| Total noncurrent liabilities | 119.7 | 64.2 | 57.9 | |||||
| Commitments and Contingencies (see Note 5) | ||||||||
| 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 | 0.0 | |||||
| Common Stock, $0.01 par value: Authorized, 70.0 shares; Issued, 42.9 shares; Outstanding, 33.0, 33.4 and 33.6 shares, respectively | 0.4 | 0.4 | 0.4 | |||||
| Additional paid-in capital | 621.3 | 620.8 | 617.9 | |||||
| Accumulated other comprehensive income (loss) | (57.4) | (59.7) | (56.5) | |||||
| Retained earnings | 1,014.7 | 1,012.6 | 1,018.4 | |||||
| Treasury stock, at cost: 9.9, 9.5 and 9.3 shares, respectively | (319.0) | (302.6) | (295.6) | |||||
| Total stockholders’ equity of Scholastic Corporation | 1,260.0 | 1,271.5 | 1,284.6 | |||||
| Noncontrolling interest | 1.3 | 1.3 | — | |||||
| Total stockholders’ equity | 1,261.3 | 1,272.8 | 1,284.6 | |||||
| Total liabilities and stockholders’ equity | $2,031.7 | $1,878.5 | $2,081.9 | |||||
| February 28, 2019 | May 31, 2018 | February 28, 2018 | |||||||||
| (Unaudited) | (Unaudited) | ||||||||||
| ASSETS | |||||||||||
| Current Assets: | |||||||||||
| Cash and cash equivalents | $ | 338.1 | $ | 391.9 | $ | 362.6 | |||||
| Accounts receivable, net | 317.3 | 204.9 | 186.0 | ||||||||
| Inventories, net | 356.8 | 294.9 | 356.9 | ||||||||
| Prepaid expenses and other current assets | 84.8 | 66.6 | 100.1 | ||||||||
| Total current assets | 1,097.0 | 958.3 | 1,005.6 | ||||||||
| Noncurrent Assets: | |||||||||||
| Property, plant and equipment, net | 574.9 | 555.6 | 530.6 | ||||||||
| Prepublication costs, net | 65.3 | 55.3 | 48.8 | ||||||||
| Royalty advances, net | 52.3 | 44.8 | 50.3 | ||||||||
| Goodwill | 119.1 | 119.2 | 119.1 | ||||||||
| Noncurrent deferred income taxes | 43.6 | 25.2 | 17.8 | ||||||||
| Other assets and deferred charges | 70.9 | 67.0 | 61.5 | ||||||||
| Total noncurrent assets | 926.1 | 867.1 | 828.1 | ||||||||
| Total assets | $ | 2,023.1 | $ | 1,825.4 | $ | 1,833.7 | |||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current Liabilities: | |||||||||||
| Lines of credit and current portion of long-term debt | $ | 11.0 | $ | 7.9 | $ | 7.7 | |||||
| Accounts payable | 215.3 | 198.9 | 208.4 | ||||||||
| Accrued royalties | 76.8 | 34.6 | 63.2 | ||||||||
| Deferred revenue | 154.7 | 24.7 | 56.5 | ||||||||
| Other accrued expenses | 236.2 | 177.9 | 162.6 | ||||||||
| Accrued income taxes | 2.1 | 1.8 | 1.2 | ||||||||
| Total current liabilities | 696.1 | 445.8 | 499.6 | ||||||||
| Noncurrent Liabilities: | |||||||||||
| Long-term debt | — | — | — | ||||||||
| Other noncurrent liabilities | 57.9 | 58.8 | 66.5 | ||||||||
| Total noncurrent liabilities | 57.9 | 58.8 | 66.5 | ||||||||
| Commitments and Contingencies (see Note 5) | — | — | — | ||||||||
| 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 | 0.0 | ||||||||
| Common Stock, $0.01 par value: Authorized, 70.0 shares; Issued, 42.9 shares; Outstanding, 33.6, 33.3 and 33.1 shares, respectively | 0.4 | 0.4 | 0.4 | ||||||||
| Additional paid-in capital | 619.4 | 614.4 | 614.6 | ||||||||
| Accumulated other comprehensive income (loss) | (54.6 | ) | (55.7 | ) | (56.5 | ) | |||||
| Retained earnings | 1,000.5 | 1,065.2 | 1,019.6 | ||||||||
| Treasury stock, at cost: 9.3, 9.6 and 9.8 shares, respectively | (296.6 | ) | (303.5 | ) | (310.5 | ) | |||||
| Total stockholders’ equity | 1,269.1 | 1,320.8 | 1,267.6 | ||||||||
| Total liabilities and stockholders’ equity | $ | 2,023.1 | $ | 1,825.4 | $ | 1,833.7 | |||||
See accompanying notes
| SCHOLASTIC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED (Dollar amounts in millions, except per share data) |
| Class A Stock | Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Treasury Stock At Cost | Total Stockholders' Equity | 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 | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 1, 2018 | 1.7 | $ | 0.0 | 33.3 | $ | 0.4 | $ | 614.4 | $ | (55.7 | ) | $ | 1,065.2 | $ | (303.5 | ) | $ | 1,320.8 | 1.7 | $0.0 | 33.3 | $0.4 | $614.4 | $(55.7) | $1,065.2 | $(303.5) | $1,320.8 | $0.0 | $1,320.8 | ||||||||||||||||||||||||||||||||||
| Net Income (loss) | — | — | — | — | — | — | (61.3 | ) | — | (61.3 | ) | — | — | — | — | — | — | (61.3 | ) | — | (61.3 | ) | — | (61.3 | ) | ||||||||||||||||||||||||||||||||||||||
| Adoption of ASC 606 (net of tax $16.0) | (46.5 | ) | (46.5 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adoption of ASC 606 ( net of tax of $16.0) | — | — | — | — | — | — | (46.5 | ) | — | (46.5 | ) | — | (46.5 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | (3.1 | ) | — | — | (3.1 | ) | — | — | — | — | — | (3.1 | ) | — | — | (3.1 | ) | — | (3.1 | ) | ||||||||||||||||||||||||||||||||||||||
| Pension and post-retirement adjustments (net of tax of $0.0) | — | — | — | — | — | 0.2 | — | — | 0.2 | — | — | — | — | — | 0.2 | — | — | 0.2 | — | 0.2 | |||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 1.5 | — | — | — | 1.5 | — | — | — | — | 1.5 | — | — | — | 1.5 | — | 1.5 | |||||||||||||||||||||||||||||||||||||||||||
| Proceeds pursuant to stock-based compensation plans | — | — | — | — | 2.8 | — | — | — | 2.8 | — | — | — | — | 2.8 | — | — | — | 2.8 | — | 2.8 | |||||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock at cost | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock issued pursuant to equity-based plans | — | — | 0.1 | — | (3.2 | ) | — | — | 3.5 | 0.3 | — | — | 0.1 | — | (3.2 | ) | — | — | 3.5 | 0.3 | — | 0.3 | |||||||||||||||||||||||||||||||||||||||||
| Dividends ($0.15 per share) | — | — | — | — | — | — | (5.3 | ) | — | (5.3 | ) | — | — | — | — | — | — | (5.3 | ) | — | (5.3 | ) | — | (5.3 | ) | ||||||||||||||||||||||||||||||||||||||
| Balance at August 31, 2018 | 1.7 | $ | 0.0 | 33.4 | $ | 0.4 | $ | 615.5 | $ | (58.6 | ) | $ | 952.1 | $ | (300.0 | ) | $ | 1,209.4 | 1.7 | $0.0 | 33.4 | $0.4 | $615.5 | $(58.6) | $952.1 | $(300.0) | $1,209.4 | $0.0 | $1,209.4 | ||||||||||||||||||||||||||||||||||
| Net Income (loss) | — | — | — | — | — | — | 71.6 | — | 71.6 | — | — | — | — | — | — | 71.6 | — | 71.6 | — | 71.6 | |||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | (0.6 | ) | — | — | (0.6 | ) | — | — | — | — | — | (0.6 | ) | — | — | (0.6 | ) | — | (0.6 | ) | ||||||||||||||||||||||||||||||||||||||
| Pension and post-retirement adjustments (net of tax of $0.8) | — | — | — | — | — | 2.7 | — | — | 2.7 | — | — | — | — | — | 2.7 | — | — | 2.7 | — | 2.7 | |||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation plans | — | — | — | — | 3.7 | — | — | — | 3.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 3.7 | — | — | — | 3.7 | — | 3.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds pursuant to stock-based compensation plans | — | — | — | — | 2.5 | — | — | — | 2.5 | — | — | — | — | 2.5 | — | — | — | 2.5 | — | 2.5 | |||||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock at cost | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Treasury stock issued pursuant to equity-based plans | — | — | 0.2 | — | (3.8 | ) | — | — | 4.4 | 0.6 | — | — | 0.2 | — | (3.8 | ) | — | — | 4.4 | 0.6 | — | 0.6 | |||||||||||||||||||||||||||||||||||||||||
| Dividends ($0.15 per share) | — | — | — | — | — | — | (5.3 | ) | — | (5.3 | ) | — | — | — | — | — | — | (5.3 | ) | — | (5.3 | ) | — | (5.3 | ) | ||||||||||||||||||||||||||||||||||||||
| Balance at November 30, 2018 | 1.7 | $ | 0.0 | 33.6 | $ | 0.4 | $ | 617.9 | $ | (56.5 | ) | $ | 1,018.4 | $ | (295.6 | ) | $ | 1,284.6 | 1.7 | $0.0 | 33.6 | $0.4 | $617.9 | $(56.5) | $1,018.4 | $(295.6) | $1,284.6 | $0.0 | $1,284.6 | ||||||||||||||||||||||||||||||||||
| Net Income (loss) | — | — | — | — | — | (12.6 | ) | — | (12.6 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | 1.7 | — | — | 1.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pension and post-retirement adjustments (net of tax of $0.0) | — | — | — | — | — | 0.2 | — | — | 0.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation plans | — | — | — | — | 1.6 | — | — | — | 1.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds pursuant to stock-based compensation plans | — | — | — | — | 0.5 | — | — | — | 0.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock at cost | — | — | (0.1 | ) | — | — | — | — | (2.0 | ) | (2.0 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock issued pursuant to equity-based plans | — | — | 0.1 | — | (0.6 | ) | — | — | 1.0 | 0.4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends ($0.15 per share) | — | — | — | — | — | — | (5.3 | ) | — | (5.3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at February 28, 2019 | 1.7 | $ | 0.0 | 33.6 | $ | 0.4 | $ | 619.4 | $ | (54.6 | ) | $ | 1,000.5 | $ | (296.6 | ) | $ | 1,269.1 | |||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes
| 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 June 1, 2019 | 1.7 | $0.0 | 33.4 | $0.4 | $620.8 | $(59.7) | $1,012.6 | $(302.6) | $1,271.5 | $1.3 | $1,272.8 | ||||||||||||||||||||
| Net Income (loss) | — | — | — | — | — | — | (58.5 | ) | — | (58.5 | ) | — | (58.5 | ) | |||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | (2.0 | ) | — | — | (2.0 | ) | — | (2.0 | ) | |||||||||||||||||
| Pension and post-retirement adjustments (net of tax of $0.0) | — | — | — | — | — | 0.2 | — | — | 0.2 | — | 0.2 | ||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 1.5 | — | — | — | 1.5 | — | 1.5 | ||||||||||||||||||||
| Purchases of treasury stock at cost | — | — | (0.3 | ) | — | — | — | — | (12.6 | ) | (12.6 | ) | — | (12.6 | ) | ||||||||||||||||
| Treasury stock issued pursuant to equity-based plans | — | — | 0.0 | — | (0.1 | ) | — | — | 0.6 | 0.5 | — | 0.5 | |||||||||||||||||||
| Dividends ($0.15 per share) | — | — | — | — | — | — | (5.2 | ) | — | (5.2 | ) | — | (5.2 | ) | |||||||||||||||||
| Noncontrolling interest in Make Believe Ideas | — | — | — | — | — | — | — | — | — | (0.0 | ) | — | |||||||||||||||||||
| Balance at August 31, 2019 | 1.7 | $0.0 | 33.1 | $0.4 | $622.2 | $(61.5) | $948.9 | $(314.6) | $1,195.4 | $1.3 | $1,196.7 | ||||||||||||||||||||
| Net Income (loss) | — | — | — | — | — | — | 71.0 | — | 71.0 | — | 71.0 | ||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | 3.9 | — | — | 3.9 | — | 3.9 | ||||||||||||||||||||
| Pension and post-retirement adjustments (net of tax of $0.0) | — | — | — | — | — | 0.2 | — | — | 0.2 | — | 0.2 | ||||||||||||||||||||
| Stock-based compensation plans | — | — | — | — | 0.9 | — | — | — | 0.9 | — | 0.9 | ||||||||||||||||||||
| Proceeds pursuant to stock-based compensation plans | — | — | — | — | 0.3 | — | — | — | 0.3 | — | 0.3 | ||||||||||||||||||||
| Purchases of treasury stock at cost | — | — | (0.1 | ) | — | — | — | — | (7.1 | ) | (7.1 | ) | — | (7.1 | ) | ||||||||||||||||
| Treasury stock issued pursuant to equity-based plans | — | — | — | — | (2.1 | ) | — | — | 2.7 | 0.6 | — | 0.6 | |||||||||||||||||||
| Dividends ($0.15 per share) | — | — | — | — | — | — | (5.2 | ) | — | (5.2 | ) | — | (5.2 | ) | |||||||||||||||||
| Noncontrolling interest in Make Believe Ideas | — | — | — | — | — | — | — | — | — | 0.0 | — | ||||||||||||||||||||
| Balance at November 30, 2019 | 1.7 | $0.0 | 33.0 | $0.4 | $621.3 | $(57.4) | $1,014.7 | $(319.0) | $1,260.0 | $1.3 | $1,261.3 | ||||||||||||||||||||
See accompanying notes
| SCHOLASTIC CORPORATION |
| 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 June 1, 2017 | 1.7 | $ | 0.0 | 33.4 | $ | 0.4 | $ | 606.8 | $ | (94.2 | ) | $ | 1,091.2 | $ | (296.3 | ) | $ | 1,307.9 | ||||||||||||||
| Net Income (loss) | — | — | — | — | — | — | (63.7 | ) | — | (63.7 | ) | |||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | 3.7 | — | — | 3.7 | |||||||||||||||||||||||
| Pension and post-retirement adjustments (net of tax of $0.1) | — | — | — | — | — | 0.5 | — | — | 0.5 | |||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 1.5 | — | — | — | 1.5 | |||||||||||||||||||||||
| Proceeds pursuant to stock-based compensation plans | — | — | — | — | 2.8 | — | — | — | 2.8 | |||||||||||||||||||||||
| Purchases of treasury stock at cost | — | — | (0.1 | ) | — | — | — | — | (4.7 | ) | (4.7 | ) | ||||||||||||||||||||
| Treasury stock issued pursuant to equity-based plans | — | — | 0.1 | — | (2.6 | ) | — | — | 2.9 | 0.3 | ||||||||||||||||||||||
| Dividends ($0.15 per share) | — | — | — | — | — | — | (5.3 | ) | — | (5.3 | ) | |||||||||||||||||||||
| Balance at August 31, 2017 | 1.7 | $ | 0.0 | 33.4 | $ | 0.4 | $ | 608.5 | $ | (90.0 | ) | $ | 1,022.2 | $ | (298.1 | ) | $ | 1,243.0 | ||||||||||||||
| Net Income (loss) | — | — | — | — | — | — | 57.1 | — | 57.1 | |||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | 0.1 | — | — | 0.1 | |||||||||||||||||||||||
| Pension and post-retirement adjustments (net of tax of $6.3) | — | — | — | — | — | 9.0 | — | — | 9.0 | |||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 6.0 | — | — | — | 6.0 | |||||||||||||||||||||||
| Proceeds pursuant to stock-based compensation plans | — | — | — | — | 1.1 | — | — | — | 1.1 | |||||||||||||||||||||||
| Purchases of treasury stock at cost | — | — | (0.3 | ) | — | — | — | — | (8.6 | ) | (8.6 | ) | ||||||||||||||||||||
| Treasury stock issued pursuant to equity-based plans | — | — | 0.1 | — | (3.3 | ) | — | — | 3.5 | 0.2 | ||||||||||||||||||||||
| Dividends ($0.15 per share) | — | — | — | — | — | — | (5.2 | ) | — | (5.2 | ) | |||||||||||||||||||||
| Balance at November 30, 2017 | 1.7 | $ | 0.0 | 33.2 | $ | 0.4 | $ | 612.3 | $ | (80.9 | ) | $ | 1,074.1 | $ | (303.2 | ) | $ | 1,302.7 | ||||||||||||||
| Net Income (loss) | — | — | — | — | — | — | (49.2 | ) | — | (49.2 | ) | |||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | 2.2 | — | — | 2.2 | |||||||||||||||||||||||
| Pension and post-retirement adjustments (net of tax of $14.5) | — | — | — | — | — | 22.2 | — | — | 22.2 | |||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 1.6 | — | — | — | 1.6 | |||||||||||||||||||||||
| Proceeds pursuant to stock-based compensation plans | — | — | — | — | 5.0 | — | — | — | 5.0 | |||||||||||||||||||||||
| Purchases of treasury stock at cost | — | — | (0.3 | ) | — | — | — | — | (11.9 | ) | (11.9 | ) | ||||||||||||||||||||
| Treasury stock issued pursuant to equity-based plans | — | — | 0.2 | — | (4.3 | ) | — | — | 4.6 | 0.3 | ||||||||||||||||||||||
| Dividends ($0.15 per share) | — | — | — | — | — | — | (5.3 | ) | — | (5.3 | ) | |||||||||||||||||||||
| Balance at February 28, 2018 | 1.7 | $ | 0.0 | 33.1 | $ | 0.4 | $ | 614.6 | $ | (56.5 | ) | $ | 1,019.6 | $ | (310.5 | ) | $ | 1,267.6 | ||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED (Dollar amounts in millions) |
| Nine months ended | Six months ended | |||||||||||
| February 28, | November 30, | |||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||
| Cash flows - operating activities: | ||||||||||||
| Net income (loss) | $ | (2.3 | ) | $ | (55.8 | ) | ||||||
| Net income (loss) attributable to Scholastic Corporation | $12.5 | $10.3 | ||||||||||
| Adjustments to reconcile Net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||
| Provision for losses on accounts receivable | 5.7 | 7.9 | 4.3 | 4.1 | ||||||||
| Provision for losses on inventory | 12.2 | 11.5 | 7.9 | 7.7 | ||||||||
| Provision for losses on royalty advances | 3.0 | 3.3 | 2.4 | 2.0 | ||||||||
| Amortization of prepublication and production costs | 16.6 | 16.4 | 13.0 | 10.7 | ||||||||
| Depreciation and amortization | 43.7 | 32.2 | 32.1 | 29.1 | ||||||||
| Pension settlement | — | 55.0 | ||||||||||
| Amortization of pension and postretirement actuarial gains and losses | 0.5 | 1.8 | 0.4 | 0.4 | ||||||||
| Deferred income taxes | (2.6 | ) | 15.5 | (0.3) | (0.3) | |||||||
| Stock-based compensation | 6.8 | 9.1 | 2.4 | 5.2 | ||||||||
| Income from equity investments | (5.7 | ) | (3.7 | ) | (3.0) | (4.5) | ||||||
| Write off related to asset impairments | — | 11.0 | ||||||||||
| Changes in assets and liabilities: | ||||||||||||
| Changes in assets and liabilities, net of amounts acquired: | ||||||||||||
| Accounts receivable | (87.9 | ) | 8.6 | (78.3) | (147.5) | |||||||
| Inventories | (77.9 | ) | (82.0 | ) | (41.5) | (82.8) | ||||||
| Prepaid expenses and other current assets | (24.7 | ) | (57.8 | ) | (11.1) | (16.8) | ||||||
| Income tax receivable | 1.9 | 7.1 | ||||||||||
| Royalty advances | (10.7 | ) | (11.5 | ) | (7.3) | (6.3) | ||||||
| Accounts payable | 29.4 | 63.4 | (4.6) | 62.7 | ||||||||
| Other accrued expenses | (9.6 | ) | (15.8 | ) | ||||||||
| Returns liability | 69.0 | — | ||||||||||
| Accrued income taxes | 0.4 | (1.8 | ) | (0.1) | 0.3 | |||||||
| Accrued royalties | 42.5 | 28.1 | 12.7 | 24.2 | ||||||||
| Deferred revenue | 43.9 | 31.8 | 59.6 | 76.8 | ||||||||
| Pension and postretirement obligations | (2.0 | ) | (3.9 | ) | ||||||||
| Other noncurrent liabilities | 1.1 | 1.6 | ||||||||||
| Other, net | 9.1 | 0.0 | ||||||||||
| Total adjustments | 62.8 | 120.7 | ||||||||||
| Other assets and liabilities | 11.3 | 57.1 | ||||||||||
| Net cash provided by (used in) operating activities | 60.5 | 64.9 | 14.3 | 39.5 | ||||||||
| Cash flows - investing activities: | ||||||||||||
| Prepublication and production expenditures | (32.3 | ) | (22.4 | ) | (14.4) | (20.6) | ||||||
| Additions to property, plant and equipment (including capitalized software) | (71.0 | ) | (92.4 | ) | ||||||||
| Other investment and acquisition related payments | (0.5 | ) | (2.0 | ) | ||||||||
| Additions to property, plant and equipment | (30.7) | (51.3) | ||||||||||
| Acquisition of land | (3.3) | — | ||||||||||
| Other investment and acquisition-related payments | — | (0.6) | ||||||||||
| Net cash provided by (used in) investing activities | (103.8 | ) | (116.8 | ) | (48.4) | (72.5) | ||||||
| Cash flows - financing activities: | ||||||||||||
| Proceeds from long-term debt | 2.5 | — | ||||||||||
| Repayments of long-term debt | — | — | ||||||||||
| Borrowings under lines of credit | 20.3 | 29.3 | ||||||||||
| Repayments of lines of credit | (14.2) | (23.2) | ||||||||||
| Repayment of capital lease obligations | (0.9) | (0.7) | ||||||||||
| Reacquisition of common stock | (19.6) | — | ||||||||||
| Proceeds pursuant to stock-based compensation plans | 0.3 | 5.2 | ||||||||||
| Payment of dividends | (10.5) | (10.6) | ||||||||||
| Net cash provided by (used in) financing activities | (22.1) | 0.0 | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (0.1) | (0.8) | ||||||||||
| Net increase (decrease) in cash and cash equivalents | (56.3) | (33.8) | ||||||||||
| Cash and cash equivalents at beginning of period | 334.1 | 391.9 | ||||||||||
| Cash and cash equivalents at end of period | $277.8 | $358.1 | ||||||||||
See accompanying notes
| Nine months ended | |||||||
| February 28, | February 28, | ||||||
| 2019 | 2018 | ||||||
| Cash flows - financing activities: | |||||||
| Borrowings under lines of credit | 48.5 | 40.4 | |||||
| Repayments of lines of credit | (46.6 | ) | (37.8 | ) | |||
| Repayment of capital lease obligations | (1.1 | ) | (0.9 | ) | |||
| Reacquisition of common stock | (2.0 | ) | (23.8 | ) | |||
| Proceeds pursuant to stock-based compensation plans | 5.8 | 8.9 | |||||
| Payment of dividends | (15.8 | ) | (15.8 | ) | |||
| Other | 1.3 | (1.2 | ) | ||||
| Net cash provided by (used in) financing activities | (9.9 | ) | (30.2 | ) | |||
| Effect of exchange rate changes on cash and cash equivalents | (0.6 | ) | 0.6 | ||||
| Net increase (decrease) in cash and cash equivalents | (53.8 | ) | (81.5 | ) | |||
| Cash and cash equivalents at beginning of period | 391.9 | 444.1 | |||||
| Cash and cash equivalents at end of period | $ | 338.1 | $ | 362.6 | |||
SCHOLASTIC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Dollar amounts in millions, except per share data) |
1. BASIS OF PRESENTATION
Principles of consolidation
The accompanying condensed consolidated interim financial statements (referred to as the “Financial Statements” herein) include the accounts of Scholastic Corporation (the “Corporation”) and all wholly-owned and majority-owned subsidiaries (collectively, “Scholastic” or the “Company”). Intercompany transactions are eliminated in consolidation.
The Company’s fiscal year is not a calendar year. Accordingly, references in this document to fiscal 20192020 relate to the twelve-month period ending May 31, 2019.
2020. Certain reclassifications have been made to conform to the current year presentation.
Interim Financial Statements
The accompanying unaudited condensed consolidated interim financial statements (referred to as the “Financial Statements” herein)Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information, and should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 20182019. The Financial Statements presented in this Quarterly Report on Form 10-Q are unaudited; however, in the opinion of management, the Financial Statements reflect all adjustments, consisting solely of normal, recurring adjustments, necessary for the fair presentation of the Financial Statements for the periods presented.
Seasonality
The Company’s Children’s Book Publishing and Distributionschool-based book fairsclub and book clubfair channels and most of its Educationbusinesses 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 generally lower than its revenues in the other two fiscal quarters. Typically, school-based channelchannels and classroom magazine revenues are minimal in the first quarter of the fiscal year as schools are not in session. Trade sales can vary throughout the year due to varying release dates of published titles. The Company generally experiences a loss from operations in the first and third quarters of each fiscal year.
Use of estimates
The preparation of these Financial Statements involves the use of estimates and assumptions by management, which affects the amounts reported in the 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 certain assets and liabilities. Actual results may differ from those estimates and assumptions. On an on-going basis, the Company evaluates the adequacy of its reserves and the estimates used in these calculations, including, but not limited to:
Accounts receivable allowance for doubtful accounts
Pension and other postretirement obligationsbenefit plans
Uncertain tax positions
The timing and amount of future income taxes and related deductions
Inventory reserves
Cost of goods sold from book fair operations during interim periods based on estimated gross profit rates
Sales tax contingencies
Royalty advance reserves and royalty expense accruals
Impairment testing for goodwill, intangible and other long-lived assets and investments
Assets and liabilities acquired in business combinations
Allocation of transaction price to performance obligations
SCHOLASTIC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Dollar amounts in millions, except per share data) |
New Accounting Pronouncements
There are no new accounting pronouncements in the second fiscal quarter of 2020 which would impact the
Company. Refer to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2019 for more
information on current applicable authoritative guidance and its impact on the Company's financial statements.
Current Fiscal Year Adoptions:
Topic 606, Revenue from Contracts with Customers842, Leases
Refer to Note 2, Revenues,10, Leases, for a discussion of the Company's revenue recognitionlease accounting following the adoption of Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers2016-02, Leases (Topic 606), and related amendments,842) in the first quarter of fiscal 2019.2020.
ASU No. 2016-02, ASU No. 2018-10 and ASU No. 2018-112018-15
In February 2016,August 2018, the Financial Accounting Standards Board (the "FASB") issued ASU No. 2016-02, Leases (Topic 842)2018-15, Intangibles- Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The Company adopted ASU No. 2018-15 as of the beginning of the first quarter of fiscal 2020 using the prospective approach. In the second fiscal quarter, the Company capitalized approximately $6.2 of cloud computing costs which supersedes existing guidance on accounting for leases in ASC Topic 840, Leases. The amendments in this ASU, among other things, require lessees to account for leases as either finance leases or operating leases and generally require all leases to be recorded on the balance sheet, through the recognition of right-of-usehave not yet been placed into service. This amount is included within Other assets and corresponding lease liabilities. The lease liability should be measured atdeferred charges within the present valueCompany's Condensed Consolidated Balance Sheets and within the operating section of the lease payments over the lease term. The right-of-use asset should be measured at the lease liability amount, adjusted for lease prepayments, lease incentives received and lessee's initial direct costs (e.g., commissions). The guidance also requires specific qualitative and quantitative disclosures about leasing activities.Company's Condensed Consolidated Statement of Cash Flows.
ASU No. 2018-02
In JulyFebruary 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases and2018-02, Income Statement-Reporting Comprehensive Income (Topic 220)-Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The Company adopted ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which provide an additional (and optional) transition method whereby the new lease standard is applied at the adoption date and recognized2018-02 as an adjustment to retained earnings.
2. REVENUES
The Company adopted Topic 606 on June 1, 2018following table presents the Company’s disaggregated revenues by region and elected to apply Topic 606 using the modified
domestic channel:
| Three months ended | Six months ended | |||||
| November 30, | November 30, | |||||
| 2019 | 2018 | 2019 | 2018 | |||
| U.S. Book Clubs | $85.9 | $101.3 | $93.9 | $110.4 | ||
| U.S. Book Fairs | 224.1 | 220.7 | 251.6 | 245.9 | ||
| U.S. Trade | 93.5 | 95.9 | 161.2 | 157.3 | ||
| U.S. Education | 69.8 | 71.4 | 118.2 | 119.3 | ||
Non-U.S. Major Markets(1) | 94.6 | 88.0 | 150.9 | 138.3 | ||
Non-U.S. Other Markets(2) | 29.3 | 27.4 | 54.0 | 51.9 | ||
| Total Revenues | $597.2 | $604.7 | $829.8 | $823.1 | ||
(1) - Includes Canada, UK, Australia and New Zealand.
Estimated Returns
| As reported - May 31, 2018 | Adjustments due to adoption | June 1, 2018 | ||||||||
| Accounts receivable, net | $ | 204.9 | $ | 31.1 | (1) | $ | 236.0 | |||
| Inventories, net | 294.9 | (1.9 | ) | (2) | 293.0 | |||||
| Prepaid expenses and other current assets | 66.6 | (4.3 | ) | (2)(3) | 62.3 | |||||
| Noncurrent deferred income taxes | 25.2 | 16.0 | (4) | 41.2 | ||||||
| Deferred revenue | 24.7 | 86.3 | (5) | 111.0 | ||||||
| Other accrued expenses | 177.9 | 1.1 | (6) | 179.0 | ||||||
| Retained earnings | 1,065.2 | (46.5 | ) | 1,018.7 | ||||||
| As reported | Adjustments | Without adoption of Topic 606 | |||||||||
| Three months ended February 28, 2019 | |||||||||||
| Revenues | $ | 360.1 | $ | (9.4 | ) | (1) | $ | 350.7 | |||
| Cost of goods sold | 176.9 | (2.0 | ) | (1) | 174.9 | ||||||
| Selling, general and administrative expenses | 190.9 | 0.1 | (2) | 191.0 | |||||||
| Depreciation and amortization | 13.7 | — | 13.7 | ||||||||
| Operating income (loss) | (21.4 | ) | (7.5 | ) | (28.9 | ) | |||||
| Interest income (expense), net | 1.0 | — | 1.0 | ||||||||
| Other components of net periodic benefit (cost) | (0.4 | ) | — | (0.4 | ) | ||||||
| Provision (benefit) for income taxes | (8.2 | ) | (2.0 | ) | (3) | (10.2 | ) | ||||
| Net income (loss) | $ | (12.6 | ) | $ | (5.5 | ) | $ | (18.1 | ) | ||
| Basic earnings (loss) per share: | $ | (0.36 | ) | $ | (0.16 | ) | $ | (0.52 | ) | ||
| Diluted earnings (loss) per share: | $ | (0.36 | ) | $ | (0.16 | ) | $ | (0.52 | ) | ||
| Nine months ended February 28, 2019 | |||||||||||
| Revenues | $ | 1,183.2 | $ | (11.1 | ) | (1) | $ | 1,172.1 | |||
| Cost of goods sold | 564.6 | (3.5 | ) | (1) | 561.1 | ||||||
| Selling, general and administrative expenses | 584.3 | (0.5 | ) | (2) | 583.8 | ||||||
| Depreciation and amortization | 41.3 | — | 41.3 | ||||||||
| Operating income (loss) | (7.0 | ) | (7.1 | ) | (14.1 | ) | |||||
| Interest income (expense), net | 2.3 | — | 2.3 | ||||||||
| Other components of net periodic benefit (cost) | (1.1 | ) | — | (1.1 | ) | ||||||
| Provision (benefit) for income taxes | (3.5 | ) | (1.9 | ) | (3) | (5.4 | ) | ||||
| Net income (loss) | $ | (2.3 | ) | $ | (5.2 | ) | $ | (7.5 | ) | ||
| Basic earnings (loss) per share: | $ | (0.07 | ) | $ | (0.15 | ) | $ | (0.22 | ) | ||
| Diluted earnings (loss) per share: | $ | (0.07 | ) | $ | (0.15 | ) | $ | (0.22 | ) | ||
Deferred Revenue
The Company's contract liabilities consist of advance billings and payments received from customers in excess of revenue recognized and revenue allocated to outstanding book fairs incentive credits. These liabilities are
SCHOLASTIC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Dollar amounts in millions, except per share data) |
recorded within Deferred revenue on the Company's condensed consolidated balance sheetsCondensed Consolidated Balance Sheets and are classified as short term, as substantially all of the associated performance obligations are expected to be satisfied, and related revenue recognized, within one year. The Company recognized revenue which was included in the opening deferred revenue balance in the amount of revenue recognized in$46.9 and $30.8 for the three and nine months ended February 28,November 30, 2019 included withinand 2018, respectively, and $74.0 and $62.7 for the opening Deferred revenue balance was $28.3six months ended November 30, 2019 and $91.0,2018, respectively.
| Three months ended February 28, | 2019 | 2018 | ||||
| Book Clubs | $ | 55.0 | $ | 57.7 | ||
| Book Fairs | 97.4 | 91.5 | ||||
| Trade | 65.6 | 52.4 | ||||
| Total Children's Book Publishing & Distribution | 218.0 | 201.6 | ||||
| Education | 60.3 | 59.5 | ||||
Major Markets(1) | 54.5 | 55.3 | ||||
Other Markets(2) | 27.3 | 28.3 | ||||
| Total International | 81.8 | 83.6 | ||||
| Total Revenues | $ | 360.1 | $ | 344.7 | ||
| Nine months ended February 28, | 2019 | 2018 | ||||
| Book Clubs | $ | 165.4 | $ | 165.6 | ||
| Book Fairs | 343.3 | 334.6 | ||||
| Trade | 222.9 | 184.0 | ||||
| Total Children's Book Publishing & Distribution | 731.6 | 684.2 | ||||
| Education | 179.7 | 171.4 | ||||
Major Markets(1) | 192.7 | 195.6 | ||||
Other Markets(2) | 79.2 | 81.0 | ||||
| Total International | 271.9 | 276.6 | ||||
| Total Revenues | $ | 1,183.2 | $ | 1,132.2 | ||
3. SEGMENT INFORMATION
The Company categorizes its businesses into three3 reportable segments: Children’s Book Publishing and Distribution, andEducation whichcompriseand 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 3 operating segments. |
| • | Education includes the publication and distribution to schools and libraries of children’s books, classroom magazines, print and digital supplemental and core classroom materials 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 3 operating segments. |
| • | Internationalincludes 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 3 operating segments. |
The following table sets forth information for the Company's domestic operations; segments for the fiscal quarters ended November 30, 2019 and International.
2018:
| Children’s Book Publishing & Distribution | Education | Overhead (1) | Total Domestic | International | Total | |||||||
| Three months ended November 30, 2019 | ||||||||||||
| Revenues | $413.6 | $69.9 | $0.0 | $483.5 | $113.7 | $597.2 | ||||||
| Bad debt expense | 1.1 | 0.8 | — | 1.9 | 0.8 | 2.7 | ||||||
Depreciation and amortization (2) | 6.5 | 3.4 | 10.9 | 20.8 | 1.8 | 22.6 | ||||||
| Segment operating income (loss) | 109.6 | 6.2 | (22.4) | 93.4 | 11.7 | 105.1 | ||||||
Expenditures for other noncurrent assets (3) | 14.7 | 5.0 | 10.6 | 30.3 | 5.8 | 36.1 | ||||||
| Three months ended November 30, 2018 | ||||||||||||
| Revenues | $417.9 | $71.5 | $0.0 | $489.4 | $115.3 | $604.7 | ||||||
| Bad debt expense | 1.6 | 0.7 | — | 2.3 | 0.4 | 2.7 | ||||||
Depreciation and amortization (2) | 5.9 | 2.1 | 10.8 | 18.8 | 1.8 | 20.6 | ||||||
| Segment operating income (loss) | 106.3 | 8.3 | (29.4) | 85.2 | 13.0 | 98.2 | ||||||
Expenditures for other noncurrent assets (3) | 20.2 | 5.0 | 15.1 | 40.3 | 3.1 | 43.4 | ||||||
The following table sets forth information for the Company's segments for the fiscal periods ended November 30, 2019 and 2018:
SCHOLASTIC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Dollar amounts in millions, except per share data) |
| Children’s Book Publishing & Distribution | Education | Overhead (1) | Total Domestic | International | Total | Children’s Book Publishing & Distribution | Education | Overhead (1) | Total Domestic | International | Total | |||||||||||||||||||||||||||||
| Three months ended February 28, 2019 | ||||||||||||||||||||||||||||||||||||||||
| Six months ended November 30, 2019 | ||||||||||||||||||||||||||||||||||||||||
| Revenues | $ | 218.0 | $ | 60.3 | $ | — | $ | 278.3 | $ | 81.8 | $ | 360.1 | $523.2 | $118.3 | $0.0 | $641.5 | $188.3 | $829.8 | ||||||||||||||||||||||
| Bad debt expense | 0.8 | 0.5 | — | 1.3 | 0.3 | 1.6 | 1.6 | 0.8 | — | 2.4 | 1.9 | 4.3 | ||||||||||||||||||||||||||||
Depreciation and amortization (2) | 5.9 | 2.6 | 10.4 | 18.9 | 1.6 | 20.5 | 13.2 | 6.5 | 21.9 | 41.6 | 3.5 | 45.1 | ||||||||||||||||||||||||||||
| Asset impairments | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Segment operating income (loss) | 4.4 | 0.3 | (23.1 | ) | (18.4 | ) | (3.0 | ) | (21.4 | ) | 67.9 | (7.2 | ) | (51.0 | ) | 9.7 | 8.0 | 17.7 | ||||||||||||||||||||||
Expenditures for other noncurrent assets (4) | 17.3 | 5.5 | 15.3 | 38.1 | 2.7 | 40.8 | ||||||||||||||||||||||||||||||||||
| Three months ended February 28, 2018 | ||||||||||||||||||||||||||||||||||||||||
| Segment assets at November 30, 2019 | 674.6 | 196.1 | 846.8 | 1,717.5 | 314.2 | 2,031.7 | ||||||||||||||||||||||||||||||||||
| Goodwill at November 30, 2019 | 47.2 | 68.2 | — | 115.4 | 10.0 | 125.4 | ||||||||||||||||||||||||||||||||||
Expenditures for other noncurrent assets (3) | 28.7 | 9.6 | 18.2 | 56.5 | 12.7 | 69.2 | ||||||||||||||||||||||||||||||||||
Other noncurrent assets at November 30, 2019 (3) | $219.6 | $122.4 | $514.3 | $856.3 | $98.6 | $954.9 | ||||||||||||||||||||||||||||||||||
| Six months ended November 30, 2018 | ||||||||||||||||||||||||||||||||||||||||
| Revenues | $ | 201.6 | $ | 59.5 | $ | — | $ | 261.1 | $ | 83.6 | $ | 344.7 | $513.6 | $119.4 | $0.0 | $633.0 | $190.1 | $823.1 | ||||||||||||||||||||||
| Bad debt expense | 0.7 | 0.4 | — | 1.1 | 0.6 | 1.7 | 2.4 | 0.7 | — | 3.1 | 1.0 | 4.1 | ||||||||||||||||||||||||||||
Depreciation and amortization (2) | 5.8 | 1.9 | 7.5 | 15.2 | 1.8 | 17.0 | 11.6 | 4.1 | 20.7 | 36.4 | 3.4 | 39.8 | ||||||||||||||||||||||||||||
Asset impairments (3) | — | — | 4.3 | 4.3 | — | 4.3 | ||||||||||||||||||||||||||||||||||
| Segment operating income (loss) | (1.0 | ) | (0.1 | ) | (23.3 | ) | (24.4 | ) | 0.7 | (23.7 | ) | 60.3 | (6.6 | ) | (50.3 | ) | 3.4 | 11.0 | 14.4 | |||||||||||||||||||||
Expenditures for other noncurrent assets (4) | 17.7 | 4.5 | 29.7 | 51.9 | 5.7 | 57.6 | ||||||||||||||||||||||||||||||||||
| Segment assets at November 30, 2018 | 622.4 | 175.9 | 990.6 | 1,788.9 | 293.0 | 2,081.9 | ||||||||||||||||||||||||||||||||||
| Goodwill at November 30, 2018 | 40.9 | 68.2 | — | 109.1 | 10.0 | 119.1 | ||||||||||||||||||||||||||||||||||
Expenditures for other noncurrent assets (3) | 31.0 | 10.1 | 40.6 | 81.7 | 7.4 | 89.1 | ||||||||||||||||||||||||||||||||||
Other noncurrent assets at November 30, 2018 (3) | $164.1 | $109.6 | $499.8 | $773.5 | $78.0 | $851.5 | ||||||||||||||||||||||||||||||||||
| Children’s Book Publishing & Distribution | Education | Overhead (1) | Total Domestic | International | Total | ||||||||||||||||||
| Nine months ended February 28, 2019 | |||||||||||||||||||||||
| Revenues | $ | 731.6 | $ | 179.7 | $ | — | $ | 911.3 | $ | 271.9 | $ | 1,183.2 | |||||||||||
| Bad debt expense | 3.2 | 1.2 | — | 4.4 | 1.3 | 5.7 | |||||||||||||||||
Depreciation and amortization (2) | 17.5 | 6.7 | 31.1 | 55.3 | 5.0 | 60.3 | |||||||||||||||||
| Asset impairments | — | — | — | — | — | — | |||||||||||||||||
| Segment operating income (loss) | 64.7 | (6.3 | ) | (73.4 | ) | (15.0 | ) | 8.0 | (7.0 | ) | |||||||||||||
| Segment assets at February 28, 2019 | 585.2 | 173.6 | 977.9 | 1,736.7 | 286.4 | 2,023.1 | |||||||||||||||||
| Goodwill at February 28, 2019 | 40.9 | 68.2 | — | 109.1 | 10.0 | 119.1 | |||||||||||||||||
Expenditures for other noncurrent assets (4) | 48.3 | 15.6 | 55.9 | 119.8 | 10.1 | 129.9 | |||||||||||||||||
Other noncurrent assets at February 28, 2019 (4) | 170.4 | 112.3 | 502.8 | 785.5 | 80.3 | 865.8 | |||||||||||||||||
| Nine months ended February 28, 2018 | |||||||||||||||||||||||
| Revenues | $ | 684.2 | $ | 171.4 | $ | — | $ | 855.6 | $ | 276.6 | $ | 1,132.2 | |||||||||||
| Bad debt expense | 3.4 | 1.4 | — | 4.8 | 3.1 | 7.9 | |||||||||||||||||
Depreciation and amortization (2) | 17.0 | 5.4 | 20.7 | 43.1 | 5.2 | 48.3 | |||||||||||||||||
Asset impairments (3) | — | — | 11.0 | 11.0 | — | 11.0 | |||||||||||||||||
| Segment operating income (loss) | 55.1 | (8.7 | ) | (77.3 | ) | (30.9 | ) | 12.6 | (18.3 | ) | |||||||||||||
| Segment assets at February 28, 2018 | 503.7 | 170.2 | 886.1 | 1,560.0 | 273.7 | 1,833.7 | |||||||||||||||||
| Goodwill at February 28, 2018 | 40.9 | 68.2 | — | 109.1 | 10.0 | 119.1 | |||||||||||||||||
Expenditures for other noncurrent assets (4) | 45.9 | 11.5 | 78.4 | 135.8 | 10.7 | 146.5 | |||||||||||||||||
Other noncurrent assets at February 28, 2018 (4) | 155.2 | 96.5 | 466.5 | 718.2 | 75.5 | 793.7 | |||||||||||||||||
| (1) | Overhead includes all domestic corporate amounts not allocated to segments, including expenses and costs related to the management of corporate assets. Unallocated assets are principally comprised of deferred income taxes and property, plant and equipment related to the Company’s headquarters in the metropolitan New York area, its fulfillment and distribution facilities located in Missouri, its facility located in Connecticut and certain technology assets. |
| (2) | Includes depreciation of property, plant and equipment and amortization of intangible assets and prepublication and production costs. |
| (3) |
| Other noncurrent assets include property, plant and equipment, prepublication assets, production assets, royalty advances, goodwill, intangible assets and investments. Expenditures for other noncurrent assets for the International |
| February 28, 2019 | May 31, 2018 | February 28, 2018 | |||||||||
| Revolving Loan | $ | — | $ | — | $ | — | |||||
| Unsecured lines of credit (weighted average interest rates of 4.3%, 2.9% and 3.7%, respectively) | 11.0 | 7.9 | 7.7 | ||||||||
| Total debt | $ | 11.0 | $ | 7.9 | $ | 7.7 | |||||
SCHOLASTIC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Dollar amounts in millions, except per share data) |
4. DEBT
The fairfollowing table summarizes the carrying value of the Company's debt approximatesas of the carrying value for all periods presented. The Company's debt obligations have maturities of one year or less.dates indicated:
| November 30, 2019 | May 31, 2019 | November 30, 2018 | ||||||
| Revolving Loan | — | — | — | |||||
| Unsecured lines of credit (weighted average interest rates of 3.8%, 4.1% and 3.8%, respectively) | $13.5 | $7.3 | $13.5 | |||||
| UK long-term debt (average interest rate of 2.5%, n/a and n/a, respectively) | 2.6 | — | — | |||||
| Total debt | $16.1 | $7.3 | $13.5 | |||||
Less lines of credit, short-term debt and current portion of long-term debt | (13.5 | ) | (7.3 | ) | (13.5 | ) | ||
| Total long-term debt | $2.6 | $0.0 | $0.0 | |||||
UK Loan Agreement
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 a new UK facility. The loan has a maturity date of July 31, 2021. Under the agreement, the principal balance is due in full in a single payment on the last day of the term and interest on the amount borrowed is due and payable quarterly. The interest is charged at 1.77% per annum over the Base Rate. The Base Rate is currently equal to 0.75% per annum and is subject to change. As of November 30, 2019, the Company had $2.6 outstanding on the loan.
US Loan Agreement
On January 5, 2017, Scholastic Corporation and Scholastic Inc. (each, a “Borrower” and together, the “Borrowers”) are parties toentered into a $375.05-year credit facility with certain banks (the “Loan Agreement”),. The Loan Agreement replaced the Company's then existing loan agreement and has substantially similar terms, except that:
| • | the borrowing limit was reduced to $375.0 from $425.0; |
•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
•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 on January 5, 2017 in connection with the entry into the new Loan Agreement and was treated as a debt modification.
The Loan Agreement allows the Company to borrow, repay or prepay and reborrow at any time prior to the January 5, 2022 maturity date. Under the Loan 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 Loan Agreement is dependent upon the Borrower’s election of a rate that is either:
| • | A Base Rate equal to the higher of (i) the prime rate, (ii) the prevailing Federal Funds rate plus 0.50% or (iii) the Eurodollar Rate for a one month interest period plus 1% plus, in each case, an applicable spread ranging from 0.175% to 0.60%, as determined by the Company’s prevailing consolidated debt to total capital ratio. |
- or -
| • | A Eurodollar Rate equal to the London interbank offered rate (LIBOR) plus an applicable spread ranging from 1.175% to 1.60%, as determined by the Company’s prevailing consolidated debt to total capital ratio. |
As of February 28,November 30, 2019, the indicated spread on Base Rate Advances was 0.175% and the indicated spread on Eurodollar Advances was 1.175%, both based on the Company’s prevailing consolidated debt to total capital ratio.
SCHOLASTIC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Dollar amounts in millions, except per share data) |
The Loan Agreement also provides for the payment of a facility fee in respect of the aggregate amount of revolving credit commitments ranging from 0.20% to 0.40% per annum based upon the Company’s prevailing consolidated debt to total capital ratio. At February 28,November 30, 2019, the facility 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 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 February 28,November 30, 2019, the Company had no outstanding borrowings under the Loan Agreement. At February 28,November 30, 2019, the Company had open standby letters of credit totaling $5.3 issued under certain credit lines, including $0.4 under the Loan Agreement and $4.9 under the domestic credit lines discussed below.
The Loan Agreement contains certain covenants, including interest coverage and leverage ratio tests and certain limitations on the amount of dividends and other distributions. Thedistributions and the Company was in compliance with these covenants for all periods presented.
Lines of Credit
As of February 28,November 30, 2019, the Company’s domestic credit lines available under unsecured money market bid rate credit lines totaled $25.0. There were no outstanding borrowings under these credit lines as of February 28,November 30, 2019, May 31, 20182019 or February 28,November 30, 2018. As of February 28,November 30, 2019, availability under these unsecured money market bid rate credit lines totaled $20.1.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 February 28,November 30, 2019, the Company had various local currency credit lines totaling $24.1$31.1 underwritten by banks primarily in the United States, Canada and the United Kingdom. Outstanding borrowings under these facilities were $11.0$13.5 at February 28,November 30, 2019 at a weighted average interest rate of 4.3%3.8%, $7.9$7.3 at May 31, 2019 at a weighted average interest rate of 4.1%, and $13.5 at November 30, 2018 at a weighted average interest rate of 2.9% and $7.7 at February 28, 2018 at a weighted average interest rate of 3.7%3.8%. As of February 28,November 30, 2019, the amounts available under these facilities totaled $13.1.$17.6. 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. COMMITMENTS AND CONTINGENCIES
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 exists 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.
In the current fiscal year, based on the status of negotiations, an alleged patent infringement claim settlement became probable and estimable. As such, an accrual of $1.5 was recognized in the Financial Statements in the first quarter of fiscal 2020. The settlement was subsequently concluded in the second quarter.
On June 21, 2018, the U.S. Supreme Court issued its opinion in South Dakota v. Wayfair, Inc. et. al., reversing prior precedent, in particular Quill Corp. v. North Dakota (1992), which held that states could not constitutionally require retailers to collect and remit sales or use taxes in respect to mail order or internet sales made to residents of a state in the absence of the retailer having a physical presence in the taxing state. As a result, the Company will now havehas an obligation, at least on a go forward basis, based on each state's enforcement date, to collect and remit sales and use taxes, primarily in respect to sales made through its school book club channel, as well as certain sales made through its ecommerce internet sites, to residents in states that the Company hashad not previously remitted sales or use taxes based on having no physical presence in such states. In the majority opinion, several factors were discussed in support of the Court’s reasoning that the collection of sales and use taxes from out-of-state retailers did not constitute an undue burden on interstate commerce, including the fact
SCHOLASTIC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Dollar amounts in millions, except per share data) |
that South Dakota did not require retroactive application of its statute. However, the question of retroactive application, as well as certain other factors noted in the opinion, will beare subject to how the states, on a state-by-state basis, interpret and apply the Court’s decision in their implementation of their respective state laws or regulations addressing the collection of sales and use taxes from out-of-state retailers. As a result, howthe effect of the decision will affecton the Company will dependdepends on the positions taken by the states, on a state-by-state basis, relating to the retroactive application of the obligation to collect such taxes, as well as other factors noted in the opinion.
The Company continues to monitor its compliance based on anticipated enforcement dates and an assumption as to each state's likely interpretation and application of the Court's decision. As the Company continues to monitor each state, the staggered enforcement dates, and the progress towards compliance, expenses will be incurred by the Company.
As of February 28,November 30, 2019, the Company’s school book club channel remits sales taxes in 3844 states and the District of Columbia compared to nine13 states in the prior fiscal year and, as a result, the Company has incurred additional costs for the three and nine monthsquarter ended February 28, 2019 related to sales tax on the associated revenue.November 30, 2018. Any on-going or future litigation with states relating to sales and use taxes could be impacted favorably or unfavorably by legislative action in future fiscal periods.
6. 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 periods indicated:
| Three months ended November 30, | Six months ended November 30, | ||||||
| 2019 | 2018 | 2019 | 2018 | ||||
| Net income (loss) attributable to Class A and Common Stockholders | $70.9 | $71.4 | $12.5 | $10.3 | |||
| Weighted average Shares of Class A Stock and Common Stock outstanding for basic earnings (loss) per share (in millions) | 34.8 | 35.2 | 34.8 | 35.2 | |||
| Dilutive effect of Class A Stock and Common Stock potentially issuable pursuant to stock-based compensation plans (in millions) | 0.3 | 0.7 | 0.4 | 0.6 | |||
| Adjusted weighted average Shares of Class A Stock and Common Stock outstanding for diluted earnings (loss) per share (in millions) | 35.1 | 35.9 | 35.2 | 35.8 | |||
| Earnings (loss) per share of Class A Stock and Common Stock: | |||||||
| Basic | $2.04 | $2.03 | $0.36 | $0.29 | |||
| Diluted | $2.02 | $1.99 | $0.35 | $0.29 | |||
| Three months ended February 28, | Nine months ended February 28, | |||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||
| Net income (loss) attributable to Class A and Common Shares | $ | (12.6 | ) | $ | (49.2 | ) | $ | (2.3 | ) | $ | (55.8 | ) | ||
| Weighted average Shares of Class A Stock and Common Stock outstanding for basic earnings (loss) per share (in millions) | 35.3 | 34.9 | 35.2 | 35.1 | ||||||||||
| Dilutive effect of Class A Stock and Common Stock potentially issuable pursuant to stock-based compensation plans (in millions) * | — | — | — | — | ||||||||||
| Adjusted weighted average Shares of Class A Stock and Common Stock outstanding for diluted earnings (loss) per share (in millions) | 35.3 | 34.9 | 35.2 | 35.1 | ||||||||||
| Earnings (loss) per share of Class A Stock and Common Stock: | ||||||||||||||
| Basic | $ | (0.36 | ) | $ | (1.41 | ) | $ | (0.07 | ) | $ | (1.59 | ) | ||
| Diluted | $ | (0.36 | ) | $ | (1.41 | ) | $ | (0.07 | ) | $ | (1.59 | ) | ||
The following table sets forth options outstanding pursuant to stock-based compensation plans as of the dates indicated:
| November 30, 2019 | November 30, 2018 | ||
| Options outstanding pursuant to stock-based compensation plans (in millions) | 3.0 | 2.9 | |
| February 28, 2019 | February 28, 2018 | ||||
| Options outstanding pursuant to stock-based compensation plans (in millions) | 2.9 | 3.1 | |||
Net income attributable to Class A and Common Stockholders excludes earnings attributable to participating Restricted Stock Units of $0.1 and $0.2 for the three months ended November 30, 2019 and 2018, respectively, and less than $0.1 for the six months ended November 30, 2019 and 2018, respectively.
There were 0.71.8 million of potentially anti-dilutive shares pursuant to stock-based compensation plans as of February 28,November 30, 2019.
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, the Company measures earnings per share based upon the lower of the Two-class method or the Treasury Stock method.
SCHOLASTIC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Dollar amounts in millions, except per share data) |
As of February 28,November 30, 2019, $59.4$33.2 remained available for future purchases of common shares under the repurchase authorization of the Board of Directors (the "Board") in effect on that date. See Note 11,12, Treasury Stock, for a more complete description of the Company’s share buy-back program.
SCHOLASTIC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Dollar amounts in millions, except per share data) |
7. GOODWILL AND OTHER INTANGIBLES
The Company assesses goodwill and other intangible assets with indefinite lives for impairment annually or more frequently if impairment indicators are such that the goodwill is more likely than not impaired.arise. The Company continues to monitormonitors impairment indicators in light of changes in market conditions, near and long-term demand for the Company’s products and other relevant factors.
The following table summarizes the activity in Goodwill for the periods indicated:
| November 30, 2019 | May 31, 2019 | November 30, 2018 | ||||||
| Gross beginning balance | $164.8 | $158.8 | $158.8 | |||||
| Accumulated impairment | (39.6 | ) | (39.6 | ) | (39.6 | ) | ||
| Beginning balance | $125.2 | $119.2 | $119.2 | |||||
| Additions | — | 6.3 | — | |||||
| Foreign currency translation | 0.2 | (0.3 | ) | (0.1 | ) | |||
| Ending balance | $125.4 | $125.2 | $119.1 | |||||
| Nine months ended February 28, | Twelve months ended May 31, | Nine months ended February 28, | |||||||||
| 2019 | 2018 | 2018 | |||||||||
| Gross beginning balance | $ | 158.8 | $ | 158.5 | $ | 158.5 | |||||
| Accumulated impairment | (39.6 | ) | (39.6 | ) | (39.6 | ) | |||||
| Beginning balance | $ | 119.2 | $ | 118.9 | $ | 118.9 | |||||
| Foreign currency translation | (0.1 | ) | 0.2 | 0.2 | |||||||
| Other | — | 0.1 | — | ||||||||
| Ending balance | $ | 119.1 | $ | 119.2 | $ | 119.1 | |||||
In the fourth quarter of fiscal 2019, the Company completed the purchase of a majority-ownership position in Make Believe Ideas Limited, a UK-based children's book publishing business, resulting in the recognition of $6.3 of Goodwill in the Children’s Book Publishing and Distribution segment.
There were no goodwill impairment losses duringcharges related to Goodwill in any of the nine months ended February 28, 2019 and February 28, 2018.periods presented.
The following table summarizes the activity in other intangibles included in Other assets and deferred charges on the Company’s condensed consolidated balance sheetsFinancial Statements for the periods indicated:
| November 30, 2019 | May 31, 2019 | November 30, 2018 | ||||||
| Beginning balance other intangibles subject to amortization | $12.2 | $10.1 | $10.1 | |||||
| Additions | — | 4.5 | 0.6 | |||||
| Amortization expense | (1.5 | ) | (2.8 | ) | (1.3 | ) | ||
| Foreign currency translation | 0.0 | (0.2 | ) | (0.1 | ) | |||
| Other | — | 0.6 | — | |||||
| Total other intangibles subject to amortization, net of accumulated amortization of $28.4, $26.9 and $25.4, respectively | 10.7 | 12.2 | 9.3 | |||||
| Total other intangibles not subject to amortization | 2.1 | 2.1 | 2.1 | |||||
| Total other intangibles | $12.8 | $14.3 | $11.4 | |||||
| Nine months ended February 28, | Twelve months ended May 31, | Nine months ended February 28, | |||||||||
| 2019 | 2018 | 2018 | |||||||||
| Beginning balance other intangibles subject to amortization | $ | 10.1 | $ | 9.0 | $ | 9.0 | |||||
| Additions | 0.6 | 3.3 | 1.5 | ||||||||
| Amortization expense | (2.0 | ) | (2.1 | ) | (1.6 | ) | |||||
| Foreign currency translation | 0.0 | (0.1 | ) | 0.1 | |||||||
| Total other intangibles subject to amortization, net of accumulated amortization of $26.1, $24.1 and $23.6, respectively | $ | 8.7 | $ | 10.1 | $ | 9.0 | |||||
| Total other intangibles not subject to amortization | $ | 2.1 | $ | 2.1 | $ | 2.1 | |||||
| Total other intangibles | $ | 10.8 | $ | 12.2 | $ | 11.1 | |||||
In the fourth quarter of fiscal 2019, the Company completed the purchase of a majority interest in Make Believe Ideas Limited, included within the Children's Book Publishing and Distribution segment, which resulted in $3.9 of amortizable intangible assets. In the first quarter of fiscal 2019, the Company also purchased a UK-based book club business and a U.S.-based book fair business resulting in the recognition of $0.6 of definite-lived intangible assets. The results of operations of these businesses are included within the International and Children's Book Publishing &and Distribution segments, respectively.
Intangible assets with definite lives consist principally of customer lists and intellectual property rights. Intangible assets with definite lives are amortized over their estimated useful lives. The weighted-average remaining useful life of all definite-lived intangible assets is approximately 3.55.4 years. Intangible assets with indefinite lives consist principally of trademarks.
There were no impairment charges related to Intangible assets in any of the periods presented.
SCHOLASTIC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Dollar amounts in millions, except per share data) |
Investments are included in Other assets and deferred charges on the Company will purchaseCompany’s Financial Statements. The following table summarizes the remaining outstanding shares in MBI following the completion of MBI's accounts for the calendar year 2018 and subject to the provisionsCompany’s investments as of the purchase agreement. The net carrying value of this investment was $13.0, $10.6 and $11.2 at February 28, 2019, May 31, 2018 and February 28, 2018, respectively. Equity method income from this investment is reported in the International segment.dates indicated:
| November 30, 2019 | May 31, 2019 | November 30, 2018 | Segment | ||||
| Equity method investments | $26.0 | $23.4 | $34.3 | International | |||
| Other equity investments | 6.0 | 6.0 | 0.0 | Children's Book Publishing & Distribution | |||
| Total Investments | $32.0 | $29.4 | $34.3 | ||||
Income from equity investments is reported in Selling, general and administrative expenses in the condensed consolidated statementsCondensed Consolidated Statements of operationsOperations and totaled $1.2$2.0 and $1.0$2.5 for the three months ended February 28,November 30, 2019 and February 28, 2018, respectively, and $5.7$3.0 and $3.7$4.5 for the ninesix months ended February 28,November 30, 2019 and February 28, 2018, respectively.
Equity method investments
Make Believe Ideas Limited
On March 27, 2019, the Company completed the purchase of a majority-ownership position in Make Believe Ideas Limited ("MBI"), a UK-based children's book publishing business, by acquiring an additional 46.5% equity interest in MBI to bring the Company's total ownership interest to 95.0%. Prior to March 27, 2019, the Company accounted for its 48.5% equity interest under the equity method of accounting and income from this investment was reported in the International segment.
Other equity investments
In the fourth quarter of fiscal 2019, the Company acquired 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. In the current fiscal quarter there have been no impairments or adjustments to the carrying value of this investment.
9. EMPLOYEE BENEFIT PLANS
The following table sets forth the components of net periodic benefit (cost) for the periods indicated under the Company’s terminated cash balance retirement plan for its United States employees meeting certain eligibility requirements (the “U.S. Pension Plan”) and the defined benefit pension plan of Scholastic Ltd., an indirect subsidiary of Scholastic Corporation located in the United Kingdom (the “UK Pension Plan”) and together with the U.S. Pension Plan, the “Pension Plans”). Also included are postretirement benefits plan, consisting of certain healthcare and life insurance benefits provided by the Company to its eligible retired United States-based employees (the “Postretirement Benefits”)., for the periods indicated:
| UK Pension Plan | Postretirement Benefits | ||||||||||
| Three months ended November 30, | Three months ended November 30, | ||||||||||
| 2019 | 2018 | 2019 | 2018 | ||||||||
| Components of net periodic (benefit) cost: | |||||||||||
| Service cost | $0.0 | $0.0 | $0.0 | $0.0 | |||||||
| Interest cost | 0.2 | 0.3 | 0.1 | 0.2 | |||||||
| Expected return on assets | (0.3 | ) | (0.3 | ) | — | — | |||||
| Net amortization of prior service credit | 0.0 | — | (0.1 | ) | (0.1 | ) | |||||
| Amortization of (gains) losses | 0.3 | 0.2 | 0.0 | — | |||||||
| Net periodic (benefit) cost | $0.2 | $0.2 | $0.0 | $0.1 | |||||||
| U.S. Pension Plan | UK Pension Plan | Postretirement Benefits | |||||||||||||||||||||
| Three months ended February 28, | Three months ended February 28, | Three months ended February 28, | |||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||
| Components of net periodic (benefit) cost: | |||||||||||||||||||||||
| Service cost | $ | — | $ | — | $ | — | $ | — | $ | 0.0 | $ | 0.0 | |||||||||||
| Interest cost | — | 0.5 | 0.3 | 0.3 | 0.2 | 0.2 | |||||||||||||||||
| Expected return on assets | — | (1.1 | ) | (0.3 | ) | (0.3 | ) | — | — | ||||||||||||||
| Net amortization of prior service credit | — | — | — | — | 0.0 | — | |||||||||||||||||
| Benefit cost of settlement event | — | 39.6 | — | — | — | — | |||||||||||||||||
| Amortization of (gains) losses | — | 0.3 | 0.2 | 0.3 | — | 0.0 | |||||||||||||||||
| Net periodic (benefit) cost | $ | — | $ | 39.3 | $ | 0.2 | $ | 0.3 | $ | 0.2 | $ | 0.2 | |||||||||||
SCHOLASTIC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Dollar amounts in millions, except per share data) |
| U.S. Pension Plan | UK Pension Plan | Postretirement Benefits | UK Pension Plan | Postretirement Benefits | |||||||||||||||||||||||||||||
| Nine months ended February 28, | Nine months ended February 28, | Nine months ended February 28, | Six months ended November 30, | Six months ended November 30, | |||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||
| Components of net periodic (benefit) cost: | |||||||||||||||||||||||||||||||||
| Service cost | $ | — | $ | — | $ | — | $ | — | $ | 0.0 | $ | 0.0 | $0.0 | $0.0 | $0.0 | $0.0 | |||||||||||||||||
| Interest cost | — | 1.9 | 0.8 | 0.8 | 0.6 | 0.7 | 0.4 | 0.5 | 0.3 | 0.4 | |||||||||||||||||||||||
| Expected return on assets | — | (4.0 | ) | (0.8 | ) | (0.8 | ) | — | — | (0.5) | (0.5) | — | — | ||||||||||||||||||||
| Net amortization of prior service credit | — | — | — | — | (0.1 | ) | — | 0.0 | — | (0.1) | (0.1) | ||||||||||||||||||||||
| Benefit cost of settlement event | — | 55.0 | — | — | — | — | |||||||||||||||||||||||||||
Amortization of (gains) losses | — | 0.9 | 0.6 | 0.9 | — | 0.0 | 0.5 | 0.4 | — | — | |||||||||||||||||||||||
| Net periodic (benefit) cost | $ | — | $ | 53.8 | $ | 0.6 | $ | 0.9 | $ | 0.5 | $ | 0.7 | $0.4 | $0.4 | $0.2 | $0.3 | |||||||||||||||||
The Company’s funding practice with respect to the UK Pension Plan is to contribute on an annual basis at least the minimum amounts required by applicable law. For the ninesix months ended February 28,November 30, 2019, the Company contributed $0.8$0.6 to the UK Pension Plan. The Company expects, based on actuarial calculations, to contribute cash of approximately $1.1 to the UK Pension Plan for the fiscal year ending May 31, 2019.2020.
In the second quarter of fiscal 2019, the Company announced a change in benefits for certain postretirement benefit plan participants. Beginning January 1, 2019, the plan will establishestablished 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, theThe Company remeasured its Postretirement Benefitbenefits obligation as of November 30, 2018, and recognized a reduction of $2.7 to its benefit obligation and a reduction to its accumulated comprehensive loss of $2.7 in the second quarter of fiscal 2019. The related prior service credit will be amortized as a Componentcomponent of netNet periodic benefit (cost) over the average remaining life expectancylifetime of plan participants of approximately 13 years.13.0 years.
10. LEASES
The Company's lease arrangements primarily relate to corporate offices and warehouse facilities, and to a lesser extent, certain equipment and other assets. The Company's leases generally have initial terms ranging from 3 to 10 years and certain leases include renewal or early-termination options, rent escalation clauses, and/or lease incentives. Lease renewal rent payment terms generally reflect adjustments for market rates prevailing at the time of renewal. The Company's leases require fixed minimum rent payments and also often require the payment of certain other costs that do not relate specifically to its right to use an underlying leased asset, but are associated with the asset such as real estate taxes, insurance, common area maintenance fees and/or certain other costs (referred to collectively herein as "non-lease components"), which may be fixed or variable in amount depending on the terms of the respective lease agreement. The Company's leases do not contain significant residual value guarantees or restrictive covenants.
The Company determines whether an arrangement contains a lease at the inception of the arrangement. If a lease is determined to exist, it's related term is assessed based on the date in which the underlying asset is made available for the Company's use by the lessor. The Company's assessment of the lease term reflects the non-cancelable term of the lease, inclusive of any rent-free periods and/or periods covered by early-termination options which the Company is reasonably certain of not exercising, as well as periods covered by renewal options which the Company is reasonably certain of exercising. The Company also determines lease classification as either operating or finance at lease commencement, which governs the pattern of expense recognition and the presentation reflected in the Condensed Consolidated Statements of Operations over the lease term.
For leases with a term exceeding 12 months, a lease liability is recorded on the Company's Condensed Consolidated Balance Sheet at lease commencement reflecting the present value of its fixed minimum payment obligations over the lease term. A corresponding right-of-use ("ROU") asset equal to the initial lease liability is also recorded, adjusted for any prepaid rent and/or initial direct costs incurred in connection with execution of the lease and reduced by any lease incentives received. The Company includes fixed payment obligations related to non-lease components in the measurement of ROU assets and lease liabilities, as it elects to account for lease and non-lease components together as a single lease component. ROU assets associated with finance leases are presented separate from operating leases ROU assets and are included within Property, plant and
SCHOLASTIC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Dollar amounts in millions, except per share data) |
equipment, net on the Company's Condensed Consolidated Balance Sheet. For purposes of measuring the present value of its fixed payment obligations for a given lease, the Company uses its incremental borrowing rate, determined based on information available at lease commencement, as rates implicit in its leasing arrangements are typically not readily determinable. The Company's incremental borrowing rate reflects the rate it would pay to borrow on a secured basis, and incorporates the term and economic environment of the associated lease.
For operating leases, fixed lease payments are recognized as lease expense on a straight-line basis over the lease term. For finance leases, the initial ROU asset is depreciated on a straight-line basis over the lease term, along with recognition of interest expense associated with accretion of the lease liability, which is ultimately reduced by the related fixed payments. For leases with a term of 12 months or less (referred to as a "short-term lease"), any fixed lease payments are recognized on a straight-line basis over the lease term, and are not recognized on the Condensed Consolidated balance sheet. Variable lease costs for both operating and finance leases, if any, are recognized as incurred.
The following table summarizes right-of-use assets and lease liabilities recorded on the Company's Condensed Consolidated Balance Sheet as of November 30, 2019:
| November 30, 2019 | Location within Condensed Consolidated Balance Sheet | ||
| Operating leases | $76.4 | Operating lease right-of-use assets, net | |
| Finance leases | 11.1 | Property, plant and equipment, net | |
| Total lease assets | $87.5 | ||
| Operating leases : | |||
| Current portion | 23.5 | Current portion of operating lease liabilities | |
| Non-current portion | 56.0 | Long-term operating lease liabilities | |
| Total operating lease liabilities | $79.5 | ||
| Finance leases : | |||
| Current portion | 2.0 | Other accrued expenses | |
| Non-current portion | 9.8 | Other noncurrent liabilities | |
| Total finance lease liabilities | $11.8 | ||
| Total lease liabilities | $91.3 | ||
The following table summarizes the activity as a result of the adoption of ASC 842 for the three and six months ended November 30, 2019:
| Three Months Ended November 30, 2019 | Six Months Ended November 30, 2019 | Location within Condensed Consolidated Statement of Operations | ||||
| Operating lease expense | $7.1 | $14.2 | Selling, general and administrative expenses | |||
| Finance lease costs : | ||||||
| Depreciation of leased assets | 0.5 | 0.9 | Selling, general and administrative expenses | |||
| Accretion of lease liabilities | 0.1 | 0.2 | Interest income (expense), net | |||
| Total lease expense | $7.7 | $15.3 | ||||
The following table summarizes certain cash flows information related to the Company's leases for the six months ended November 30, 2019:
| Six Months Ended November 30, 2019 | |
| Cash paid for amounts included in the measurement of lease liabilities: | |
| Operating cash flows from operating leases | $3.2 |
| Operating cash flows from finance leases | 0.2 |
| Financing cash flows from finance leases | 0.9 |
SCHOLASTIC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Dollar amounts in millions, except per share data) |
The following table provides a maturity analysis summary of the Company's lease liabilities recorded on the Company's Condensed Consolidated Balance Sheet as of November 30, 2019:
| Operating | Finance | ||
| Leases | Leases | ||
Remainder of Fiscal 2020 (1) | $14.0 | $1.2 | |
| Fiscal 2021 | 23.0 | 2.4 | |
| Fiscal 2022 | 18.6 | 2.3 | |
| Fiscal 2023 | 12.8 | 2.1 | |
| Fiscal 2024 | 7.3 | 2.0 | |
| Fiscal 2025 and thereafter | 11.4 | 3.3 | |
| Total lease payments | 87.1 | 13.3 | |
| Less: interest | (7.6) | (1.5) | |
| Total lease liabilities | $79.5 | $11.8 | |
(1) Fiscal 2020 includes the remaining six months of the current fiscal year ending May 31, 2020.
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 Condensed Consolidated Balance Sheet as of November 30, 2019:
| Operating | Finance | ||
| Leases | Leases | ||
| Weighted-average remaining lease term (years) | 4.3 | 6.2 | |
| Weighted-average discount rate | 3.9% | 3.8% | |
11. STOCK-BASED COMPENSATION
The following table summarizes stock-based compensation expense included in Selling, general and administrative expenses for the periods indicated:
| Three months ended November 30, | Six months ended November 30, | ||||||
| 2019 | 2018 | 2019 | 2018 | ||||
| Stock option expense | $0.4 | $2.8 | $1.0 | $3.6 | |||
| Restricted stock unit expense | 0.4 | 0.7 | 1.2 | 1.3 | |||
| Management stock purchase plan | 0.0 | 0.2 | 0.0 | 0.2 | |||
| Employee stock purchase plan | 0.1 | 0.0 | 0.2 | 0.1 | |||
| Total stock-based compensation expense | $0.9 | $3.7 | $2.4 | $5.2 | |||
| Three months ended February 28, | Nine months ended February 28, | |||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||
| Stock option expense | $ | 0.7 | $ | 0.8 | $ | 4.3 | $ | 6.2 | ||||||
| Restricted stock unit expense | 0.7 | 0.6 | 2.0 | 2.0 | ||||||||||
| Management stock purchase plan | 0.0 | 0.1 | 0.2 | 0.7 | ||||||||||
| Employee stock purchase plan | 0.2 | 0.1 | 0.3 | 0.2 | ||||||||||
| Total stock-based compensation expense | $ | 1.6 | $ | 1.6 | $ | 6.8 | $ | 9.1 | ||||||
The following table sets forth Common Stock issued pursuant to stock-based compensation plans for the periods indicated:
| Three months ended November 30, | Six months ended November 30, | ||||||
| 2019 | 2018 | 2019 | 2018 | ||||
| Common Stock issued pursuant to stock-based compensation plans (in millions) | 0.1 | 0.2 | 0.1 | 0.3 | |||
| Three months ended February 28, | Nine months ended February 28, | ||||||||||
| 2019 | 2018 | 2019 | 2018 | ||||||||
| Common Stock issued pursuant to stock-based compensation plans (in millions) | 0.1 | 0.2 | 0.4 | 0.4 | |||||||
The Board has authorized the Company to repurchase Common Stock, from time to time as conditions allow, on the open market or through negotiated private transactions.
The table below represents the Board authorizations at the dates indicated:
SCHOLASTIC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Dollar amounts in millions, except per share data) |
| Authorizations | Amount | ||
| July 2015 | $ | 50.0 | |
| March 2018 | 50.0 | ||
| Total current Board authorizations | $ | 100.0 | |
| Less repurchases made under these authorizations | $ | (40.6 | ) |
| Remaining Board authorization at February 28, 2019 | $ | 59.4 | |
| Authorizations | Amount |
| July 2015 | $50.0 |
| March 2018 | 50.0 |
| Total current Board authorizations at June 1, 2019 | $100.0 |
| Less repurchases made under these authorizations | (66.8) |
| Remaining Board authorization at November 30, 2019 | $33.2 |
Repurchases of Common Stock were $2.0$7.1 and $19.6 during the three and nine month periodssix months ended February 28,November 30, 2019. The Company’s repurchase program may be suspended at any time without prior notice.
The following tables summarize the activity in Accumulated other comprehensive income (loss), net of tax, by component, for the periods indicated:
| Three months ended November 30, 2019 | ||||||||
| Foreign currency translation adjustments | Retirement benefit plans | Total | ||||||
| Beginning balance at September 1, 2019 | $(49.1) | $(12.4) | $(61.5) | |||||
| Other comprehensive income (loss) before reclassifications | 3.9 | — | 3.9 | |||||
| Less amount reclassified from Accumulated other comprehensive income (loss): | ||||||||
| Amortization of gains and losses (net of tax of $0.0) | — | 0.3 | 0.3 | |||||
| Amortization of prior service credit (net of tax of $0.0) | — | (0.1 | ) | (0.1 | ) | |||
| Other comprehensive income (loss) | 3.9 | 0.2 | 4.1 | |||||
| Ending balance at November 30, 2019 | $(45.2) | $(12.2) | $(57.4) | |||||
| Three months ended November 30, 2018 | ||||||||
| Foreign currency translation adjustments | Retirement benefit plans | Total | ||||||
| Beginning balance at September 1, 2018 | $(45.0) | $(13.6) | $(58.6) | |||||
| Other comprehensive income (loss) before reclassifications | (0.6 | ) | — | (0.6 | ) | |||
| Less amount reclassified from Accumulated other comprehensive income (loss): | ||||||||
| Amortization of gains and losses (net of tax of $0.0) | — | 0.2 | 0.2 | |||||
| Postretirement benefit plan remeasurement (net of tax of $0.7) | — | 2.0 | 2.0 | |||||
| Amortization of prior service credit (net of tax of $0.0) | — | (0.1 | ) | (0.1 | ) | |||
| Other reclassifications (net of tax of $0.2) | — | 0.6 | 0.6 | |||||
| Other comprehensive income (loss) | (0.6 | ) | 2.7 | 2.1 | ||||
| Ending balance at November 30, 2018 | $(45.6) | $(10.9) | $(56.5) | |||||
| Three months ended February 28, 2019 | |||||||||||
| Foreign currency translation adjustments | Retirement benefit plans | Total | |||||||||
| Beginning balance at December 1, 2018 | $ | (45.6 | ) | $ | (10.9 | ) | $ | (56.5 | ) | ||
| Other comprehensive income (loss) before reclassifications | 1.7 | — | 1.7 | ||||||||
| Less amount reclassified from Accumulated other comprehensive income (loss): | |||||||||||
| Amortization of gains and losses (net of tax of $0.0) | — | 0.2 | 0.2 | ||||||||
| Amortization of prior service credit (net of tax of $0.0) | — | 0.0 | 0.0 | ||||||||
| Other comprehensive income (loss) | 1.7 | 0.2 | 1.9 | ||||||||
| Ending balance at February 28, 2019 | $ | (43.9 | ) | $ | (10.7 | ) | $ | (54.6 | ) | ||
| Three months ended February 28, 2018 | |||||||||||
| Foreign currency translation adjustments | Retirement benefit plans | Total | |||||||||
| Beginning balance at December 1, 2017 | $ | (41.5 | ) | $ | (39.4 | ) | $ | (80.9 | ) | ||
| Other comprehensive income (loss) before reclassifications | 2.2 | — | 2.2 | ||||||||
| Less amount reclassified from Accumulated other comprehensive income (loss): | |||||||||||
| Benefit from settlement (net of tax of $15.8) | — | 23.8 | 23.8 | ||||||||
| Amortization of gains and losses (net of tax of $0.1) | — | 0.5 | 0.5 | ||||||||
| Other reclassifications (net of tax of $1.4) | — | (2.1 | ) | (2.1 | ) | ||||||
| Other comprehensive income (loss) | 2.2 | 22.2 | 24.4 | ||||||||
| Ending balance at February 28, 2018 | $ | (39.3 | ) | $ | (17.2 | ) | $ | (56.5 | ) | ||
SCHOLASTIC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Dollar amounts in millions, except per share data) |
| Six months ended November 30, 2019 | |||||||
| Foreign currency translation adjustments | Retirement benefit plans | Total | |||||
| Beginning balance at June 1, 2019 | $(47.1) | $(12.6) | $(59.7) | ||||
| Other comprehensive income (loss) before reclassifications | 1.9 | — | 1.9 | ||||
| Less amount reclassified from Accumulated other comprehensive income (loss): | |||||||
| Amortization of gains and losses (net of tax of $0.0) | — | 0.5 | 0.5 | ||||
| Amortization of prior service credit (net of tax of $0.0) | — | (0.1) | (0.1) | ||||
| Other comprehensive income (loss) | 1.9 | 0.4 | 2.3 | ||||
| Ending balance at November 30, 2019 | $(45.2) | $(12.2) | $(57.4) | ||||
| Six months ended November 30, 2018 | |||||||
| Foreign currency translation adjustments | Retirement benefit plans | Total | |||||
| Beginning balance at June 1, 2018 | $(41.9) | $(13.8) | $(55.7) | ||||
| Other comprehensive income (loss) before reclassifications | (3.7) | — | (3.7) | ||||
| Less amount reclassified from Accumulated other comprehensive income (loss): | |||||||
| Amortization of gains and losses (net of tax of $0.0) | — | 0.4 | 0.4 | ||||
| Postretirement benefit plan remeasurement (net of tax of $0.7) | — | 2.0 | 2.0 | ||||
| Amortization of prior service credit (net of tax of $0.0) | — | (0.1) | (0.1) | ||||
| Other reclassifications (net of tax of $0.2) | — | 0.6 | 0.6 | ||||
| Other comprehensive income (loss) | (3.7) | 2.9 | (0.8) | ||||
| Ending balance at November 30, 2018 | $(45.6) | $(10.9) | $(56.5) | ||||
| Nine months ended February 28, 2019 | |||||||||||
| Foreign currency translation adjustments | Retirement benefit plans | Total | |||||||||
| Beginning balance at June 1, 2018 | $ | (41.9 | ) | $ | (13.8 | ) | $ | (55.7 | ) | ||
| Other comprehensive income (loss) before reclassifications | (2.0 | ) | — | (2.0 | ) | ||||||
| Less amount reclassified from Accumulated other comprehensive income (loss): | |||||||||||
| Amortization of gains and losses (net of tax of $0.0) | — | 0.6 | 0.6 | ||||||||
| Postretirement benefit plan remeasurement (net of tax of $0.8) | — | 2.0 | 2.0 | ||||||||
| Amortization of prior service credit (net of tax of $0.0) | — | (0.1 | ) | (0.1 | ) | ||||||
| Other reclassifications (net of tax of $0.0) | — | 0.6 | 0.6 | ||||||||
| Other comprehensive income (loss) | (2.0 | ) | 3.1 | 1.1 | |||||||
| Ending balance at February 28, 2019 | $ | (43.9 | ) | $ | (10.7 | ) | $ | (54.6 | ) | ||
| Nine months ended February 28, 2018 | |||||||||||
| Foreign currency translation adjustments | Retirement benefit plans | Total | |||||||||
| Beginning balance at June 1, 2017 | $ | (45.3 | ) | $ | (48.9 | ) | $ | (94.2 | ) | ||
| Other comprehensive income (loss) before reclassifications | 6.0 | — | 6.0 | ||||||||
| Less amount reclassified from Accumulated other comprehensive income (loss): | |||||||||||
| Benefit from settlement (net of tax of $22.0) | — | 33.0 | 33.0 | ||||||||
| Amortization of gains and losses (net of tax of $0.4) | — | 1.4 | 1.4 | ||||||||
| Other reclassifications (net of tax of $1.9) | — | (2.7 | ) | (2.7 | ) | ||||||
| Other comprehensive income (loss) | 6.0 | 31.7 | 37.7 | ||||||||
| Ending balance at February 28, 2018 | $ | (39.3 | ) | $ | (17.2 | ) | $ | (56.5 | ) | ||
The following table presents the impact on earnings of reclassifications out of Accumulated other comprehensive income (loss) for the periods indicated:
| Three months ended November 30, | Six months ended November 30, | Condensed Consolidated Statements of Operations line item | ||||||
| 2019 | 2018 | 2019 | 2018 | |||||
| Employee benefit plans: | ||||||||
| Amortization of unrecognized (gain) loss | $0.3 | $0.2 | $0.5 | $0.4 | Other components of net periodic benefit (cost) | |||
| Amortization of prior service credit | (0.1) | (0.1) | (0.1) | (0.1) | Other components of net periodic benefit (cost) | |||
| Less: Tax effect | 0.0 | 0.0 | 0.0 | 0.0 | Provision (benefit) for income taxes | |||
| Total cost, net of tax | $0.2 | $0.1 | $0.4 | $0.3 | ||||
| Three months ended February 28, | Nine months ended February 28, | Condensed consolidated statements of operations line item | ||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Employee benefit plans: | ||||||||||||||||
| Amortization of unrecognized (gain) loss | $ | 0.2 | $ | 0.6 | 0.6 | 1.8 | Other components of net periodic benefit (cost) | |||||||||
| Settlement charge | — | 39.6 | — | 55.0 | Other components of net periodic benefit (cost) | |||||||||||
| Amortization of prior service credit | 0.0 | — | (0.1 | ) | — | Other components of net periodic benefit (cost) | ||||||||||
| Less: Tax effect | 0.0 | (15.9 | ) | 0.0 | (22.4 | ) | Provision (benefit) for income taxes | |||||||||
| Total cost, net of tax | $ | 0.2 | $ | 24.3 | $ | 0.5 | $ | 34.4 | ||||||||
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 2Observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in inactive markets, |
SCHOLASTIC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Dollar amounts in millions, except per share data) |
| • | 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. The fair values of foreign currency forward contracts, used by the Company to manage the impact of foreign exchange rate changes, are based on quotations from financial institutions, a Level 2 fair value measure. See Note 15,16, Derivatives and Hedging, for a more complete description of the 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
Assets and liabilities acquired in a business combination
Impairment assessment of Goodwill and definite 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 and other intangible assets see Note 7, Goodwill and Other Intangibles.assets. For the fair value measurements employed by the Company for certain property, plant and equipment, production assets, investments and prepublication assets, the Company assessesassessed future expected cash flows attributable to these assets.
Income Taxes
In calculating the provision for income taxes on an interim basis, the Company uses an estimate of the annual effective tax rate based upon currently known facts and circumstances and applies that rate to its year-to-date earnings or losses. The Company’s effective tax rate is based on expected income and statutory tax rates and takes into consideration permanent differences between financial statement and tax return income applicable to the Company in the various jurisdictions in which the Company operates. The effect of discrete items, such as changes in estimates, changes in enacted tax laws or rates or tax status, and unusual or infrequently occurring events, is recognized in the interim period in which the discrete item occurs. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the result of new judicial interpretations or regulatory or tax law changes.
The Company’s annual effective tax rate, exclusive of discrete items, is expected to be approximately 30.0%32.4%. The interim effective tax rate, inclusive of discrete items, was 39.4%32.2% for the three month period ended February 28,November 30, 2019 and 60.3%29.2% for the ninesix month period ended February 28,November 30, 2019. The rate differential between the interim effective tax rate, inclusive of discrete items, for the three and nine month periods ended February 28, 2019, compared to the expected annual effective tax rate is primarily due to the calculated tax provision as applied to the seasonal pre-tax loss for the periods presented.
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.
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 factorsfacts including statutes, regulations, case law and experience. Where a sales tax liability inwith respect to a jurisdiction is probable and can be reasonablyreliably estimated for such jurisdiction, the Company has made accruals for these matters which are reflected in the Company’s Condensed Consolidated Financial Statements. These amounts are included in the Financial
SCHOLASTIC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Dollar amounts in millions, except per share data) |
Statements in Selling, general and administrative expenses. Future developments relating to the foregoing could result in adjustments being made to these accruals.
The Company enters into foreign currency derivative contracts to economically hedge the exposure to foreign currency fluctuations associated with the forecasted purchase of inventory, and the foreign exchange risk associated with certain receivables denominated in foreign currencies 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 in the Condensed consolidated statement of operations, and it recognizes the unrealized gain or loss in other current assets or other current liabilities. The notional values of the open contracts as of February 28,November 30, 2019 and February 28,November 30, 2018 were $30.0$26.0 and $27.5,$30.0, respectively. Unrealized gains of $0.3 and unrealized losses of $0.3$0.9 were recognized for the nine month periodssix months ended February 28,November 30, 2019 and February 28,November 30, 2018, respectively.
Other accrued expenses consistconsisted of the following as of the dates indicated:
| November 30, 2019 | May 31, 2019 | November 30, 2018 | ||||||
| Accrued payroll, payroll taxes and benefits | $41.7 | $41.2 | $42.3 | |||||
| Accrued bonus and commissions | 13.3 | 13.7 | 16.8 | |||||
| Returns liability | 42.4 | 34.5 | 78.7 | |||||
| Accrued other taxes | 30.2 | 29.3 | 31.3 | |||||
| Accrued advertising and promotions | 12.3 | 9.6 | 9.2 | |||||
| Other accrued expenses | 38.3 | 36.5 | 49.5 | |||||
| Total accrued expenses | $178.2 | $164.8 | $227.8 | |||||
| February 28, 2019 | May 31, 2018 | February 28, 2018 | |||||||||
| Accrued payroll, payroll taxes and benefits | $ | 45.2 | $ | 47.1 | $ | 44.8 | |||||
| Accrued bonus and commissions | 13.0 | 22.4 | 19.9 | ||||||||
Returns liability(1) | 97.3 | — | — | ||||||||
| Accrued other taxes | 23.5 | 25.7 | 23.4 | ||||||||
Accrued advertising and promotions(1) | 10.2 | 35.8 | 35.8 | ||||||||
| Accrued insurance | 8.5 | 7.8 | 8.1 | ||||||||
| Other accrued expenses | 38.5 | 39.1 | 30.6 | ||||||||
| Total accrued expenses | $ | 236.2 | $ | 177.9 | $ | 162.6 | |||||
The Board declared a quarterly cash dividend of $0.15 per share on the Company’s Class A and Common Stock for the fourththird quarter of fiscal 2019.2020. The dividend is payable on June 17, 2019March 16, 2020 to shareholders of record as of the close of business on April 30, 2019.January 31, 2020.
| SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) |
Overview and Outlook
Revenues for the quarter ended February 28,November 30, 2019 were $360.1$597.2 million, compared to $344.7$604.7 million in the prior fiscal year quarter, an increasea decrease of $15.4$7.5 million. The Company reported a net lossearnings per diluted share of Class A and Common Stock of $0.36$2.02 in the thirdsecond quarter of fiscal 2019,2020, compared to a net lossearnings per diluted share of $1.41$1.99 in the prior fiscal year quarter.
Results of Operations – Consolidated
Revenues for the quarter ended November 30, 2019 decreased to $597.2 million, compared to $604.7 million in the prior fiscal year. The Children's Book Publishing and Distribution segment revenues decreased by $4.3 million, due to the release of Fantastic Beasts™: The Crimes of Grindelwald in the prior fiscal year period, as well as lower revenues of $15.4 million in the book club channel primarily due to lower sponsorship and the higher all in cost to consumers from the collection of state and local sales tax, partially offset by increased trade channel revenue, driven by the completion of the acquisition of a majority interest in MBI and its full consolidation in the financial statements and by sales of the Company's best-selling titles and series, and higher revenues in the book fairs channel. In the currentEducation segment, revenues decreased by $1.6 million, primarily driven by lower revenues from custom publishing programs. In local currency, the International segment revenues increased by $0.3 million, primarily driven by higher revenues in Australia and New Zealand due to local trade publishing, as well as in Asia due to sales in China of educational books for English language learning, partially offset by lower revenues in Canada. International segment revenues were impacted by unfavorable foreign exchange of $1.9 million.
Revenues for the six months ended November 30, 2019 increased to $829.8 million, compared to $823.1 million in the prior fiscal year period. The Children's Book Publishing and Distribution segment revenue increased $9.6 million, driven by higher trade revenue of $20.4 million resulting from the Company adopted a new accounting pronouncement, Topic 606 - Revenue from Contracts with Customers (Topic 606). See Note 2 of Notes to condensed consolidated financial statements - "unaudited" in Item 1, “Financial Statements" for further details. The Company applied Topic 606 on a modified retrospective basis; therefore, prior fiscal quarter results are not comparable. The table below provides a summarycompletion of the impactacquisition of a majority interest in MBI and the adoption had oncontinued success of the Company's best-selling titles and series, as well as higher revenues in the book fairs channel of $5.7 million, partially offset by lower book clubs revenues of $16.5 million. In the Education segment, revenues decreased $1.1 million due to lower revenues from custom publishing programs. In local currency, the International segment revenues increased by $2.7 million, primarily driven by higher revenues in Australia and New Zealand due to local trade publishing, as well as in Asia due to sales in China of educational books for English language learning, partially offset by lower revenues in Canada. International segment revenues were impacted by unfavorable foreign exchange of $4.5 million.
Components of Cost of goods sold for the three and nine month periodssix months ended February 28,November 30, 2019 for comparison to prior periods:and November 30, 2018 are as follows:
| Three months ended February 28, | ||||||||||||||||||||
| ($ amounts in millions) | 2019 | Accounting Adoption (1) | Adjusted 2019 (2) | 2018 | $ change | % change | ||||||||||||||
| Revenues | $ | 360.1 | $ | (9.4 | ) | $ | 350.7 | $ | 344.7 | $ | 6.0 | 1.7 | % | |||||||
| Cost of goods sold | 176.9 | (2.0 | ) | 174.9 | 166.4 | 8.5 | 5.1 | % | ||||||||||||
| Selling, general and administrative expenses | 190.9 | 0.1 | 191.0 | 186.7 | 4.3 | 2.3 | % | |||||||||||||
| Depreciation and amortization | 13.7 | — | 13.7 | 11.0 | 2.7 | 24.5 | % | |||||||||||||
| Asset impairments | — | — | — | 4.3 | 4.3 | — | % | |||||||||||||
| Operating income (loss) | (21.4 | ) | (7.5 | ) | (28.9 | ) | (23.7 | ) | (5.2 | ) | (21.9 | )% | ||||||||
| Interest income (expense), net | 1.0 | — | 1.0 | 0.2 | 0.8 | * | ||||||||||||||
| Other components of net periodic benefit (cost) | (0.4 | ) | — | (0.4 | ) | (39.8 | ) | 39.4 | 99.0 | % | ||||||||||
| Provision (benefit) for income taxes | (8.2 | ) | (2.0 | ) | (10.2 | ) | (14.1 | ) | 3.9 | 27.7 | % | |||||||||
| Net income (loss) | $ | (12.6 | ) | $ | (5.5 | ) | $ | (18.1 | ) | $ | (49.2 | ) | $ | 31.1 | 63.2 | % | ||||
| Basic earnings (loss) per share: | $ | (0.36 | ) | $ | (0.16 | ) | $ | (0.52 | ) | $ | (1.41 | ) | $ | 0.89 | * | |||||
| Diluted earnings (loss) per share: | $ | (0.36 | ) | $ | (0.16 | ) | $ | (0.52 | ) | $ | (1.41 | ) | $ | 0.89 | * | |||||
| SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) |
| Nine months ended February 28, | ||||||||||||||||||||
| ($ amounts in millions) | 2019 | Accounting Adoption (1) | Adjusted 2019 (2) | 2018 | $ change | % change | ||||||||||||||
| Revenues | $ | 1,183.2 | $ | (11.1 | ) | $ | 1,172.1 | $ | 1,132.2 | $ | 39.9 | 3.5 | % | |||||||
| Cost of goods sold | 564.6 | (3.5 | ) | 561.1 | 535.6 | 25.5 | 4.8 | % | ||||||||||||
| Selling, general and administrative expenses | 584.3 | (0.5 | ) | 583.8 | 573.9 | 9.9 | 1.7 | % | ||||||||||||
| Depreciation and amortization | 41.3 | — | 41.3 | 30.0 | 11.3 | 37.7 | % | |||||||||||||
| Asset impairments | — | — | — | 11.0 | (11.0 | ) | — | % | ||||||||||||
| Operating income (loss) | (7.0 | ) | (7.1 | ) | (14.1 | ) | (18.3 | ) | 4.2 | 23.0 | % | |||||||||
| Interest income (expense), net | 2.3 | — | 2.3 | 0.5 | 1.8 | * | ||||||||||||||
| Other components of net periodic benefit (cost) | (1.1 | ) | — | (1.1 | ) | (55.4 | ) | 54.3 | 98.0 | % | ||||||||||
| Provision (benefit) for income taxes | (3.5 | ) | (1.9 | ) | (5.4 | ) | (17.4 | ) | 12.0 | 69.0 | % | |||||||||
| Net income (loss) | $ | (2.3 | ) | $ | (5.2 | ) | $ | (7.5 | ) | $ | (55.8 | ) | $ | 48.3 | 86.6 | % | ||||
| Basic earnings (loss) per share: | $ | (0.07 | ) | $ | (0.15 | ) | $ | (0.22 | ) | $ | (1.59 | ) | $ | 1.37 | * | |||||
| Diluted earnings (loss) per share: | $ | (0.07 | ) | $ | (0.15 | ) | $ | (0.22 | ) | $ | (1.59 | ) | $ | 1.37 | * | |||||
| Three months ended November 30, | Six months ended November 30, | ||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | ||||||||||||||||
| ($ amounts in millions) | $ | % of Revenue | $ | % of Revenue | $ | % of Revenue | $ | % of Revenue | |||||||||||
| Product, service and production costs | $152.5 | 25.5 | % | $148.8 | 24.6 | % | $220.7 | 26.5 | % | $208.6 | 25.4 | % | |||||||
| Royalty costs | 40.5 | 6.8 | % | 42.3 | 7.0 | % | 62.8 | 7.6 | % | 63.2 | 7.7 | % | |||||||
| Prepublication and production amortization | 7.1 | 1.2 | % | 5.6 | 0.9 | % | 13.7 | 1.7 | % | 11.0 | 1.3 | % | |||||||
| Postage, freight, shipping, fulfillment and other | 64.2 | 10.8 | % | 65.7 | 10.9 | % | 104.2 | 12.6 | % | 104.9 | 12.7 | % | |||||||
| Total | $264.3 | 44.3 | % | $262.4 | 43.4 | % | $401.4 | 48.4 | % | $387.7 | 47.1 | % | |||||||
Cost of goods sold for the threesix months ended November 30, 2019 was $401.4 million, or 48.4% of revenues, compared $387.7 million, or 47.1% of revenues, in the prior fiscal year period. The increase in Cost of goods sold as a percentage of revenues was primarily due to the completion of the acquisition of a majority interest in MBI and nine month periods ended February 28, 2019, direct response advertisingits full consolidation in the financial statements. MBI manufacturing costs were expensedassociated with specialty products represented a portion of the increase in Cost of goods sold as incurred within a percentage of revenues. The Company continues to monitor and employ strategies to offset increased costs associated with higher tariffs. The impact of tariffs will likely impact the cost of goods sold in the remaining fiscal year, especially in the domestic school-based channels.
Selling, general and administrative expenses.
Selling, general and lower book club channel revenue of $2.7 million. The Education segment revenues increased $0.8 million, primarily driven by higher revenue from sales of Scholastic Edge and other core instruction programs, as well as supplemental print products and dealer trade sales ofadministrative expenses in the Company's teaching resources line of products. The International segment adjusted revenues decreased $3.0 million, reflecting an increase of $1.5 million in local currency revenues primarily driven by higher trade channel revenue, which was more than offset by an unfavorable impact of foreign currency translation of $4.5 million.
Depreciation and amortization expenses in the quarter ended November 30, 2019 increased to $15.4 million, compared to $14.4 million in the prior fiscal year quarter. The increase was primarily attributable to upgraded point-of-sale machines placed into service in the book fairsfair channel revenueand assets placed in service for capitalized strategic technology investments.
Depreciation and amortization expenses in the six months ended November 30, 2019 increased to $30.8 million, compared to $27.6 million in the prior fiscal year period. The increase was primarily attributable to upgraded point-of-sale machines placed into service in the book fair channel and assets placed in service for capitalized strategic technology investments.
Net interest income in the quarter ended November 30, 2019 was less than $0.1 million compared to Net interest income of $3.0$0.5 million in the prior fiscal year quarter. The decrease in Net interest income is primarily due to lower U.S. interest rates and book club channel revenue of $0.2 million. The Education segment revenue increased $8.3 million, primarilylower short-term investment balances driven, in part, by higher sales of Scholastic Edge and classroom collections and higher revenue from custom publishing programs. The International segment adjusted revenue decreased $4.1 million, reflecting an increase of $6.7 million in local currency revenues, primarily driven by higher trade channel revenue, which was more than offset by the unfavorable impact of foreign currency translation of $10.8 million.common stock repurchases.
| SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) |
Net interest income in the six months ended November 30, 2019 was $0.7 million, compared to net interest income of $1.3 million in the prior fiscal year period. The decrease in Net interest income is primarily due to lower U.S. interest rates and lower short-term investment balances driven, in part, by higher common stock repurchases. The Company expects a continued decrease in Net interest income in future periods.
| Three months ended February 28, | Nine months ended February 28, | ||||||||||||||||||||||||||
Adjusted 2019 (1) | 2018 | Adjusted 2019 (1) | 2018 | ||||||||||||||||||||||||
| ($ amounts in millions) | $ | % of Revenue | $ | % of Revenue | $ | % of Revenue | $ | % of Revenue | |||||||||||||||||||
| Product, service and production costs | $ | 93.4 | 26.6 | % | $ | 86.1 | 25.0 | % | $ | 300.5 | 25.6 | % | $ | 283.2 | 25.0 | % | |||||||||||
| Royalty costs | 24.5 | 7.0 | % | 22.4 | 6.5 | % | 87.7 | 7.5 | % | 77.6 | 6.9 | % | |||||||||||||||
| Prepublication and production amortization | 6.2 | 1.8 | % | 5.5 | 1.6 | % | 17.2 | 1.5 | % | 16.3 | 1.4 | % | |||||||||||||||
| Postage, freight, shipping, fulfillment and other | 50.8 | 14.5 | % | 52.4 | 15.2 | % | 155.7 | 13.3 | % | 158.5 | 14.0 | % | |||||||||||||||
| Total | $ | 174.9 | 49.9 | % | $ | 166.4 | 48.3 | % | $ | 561.1 | 47.9 | % | $ | 535.6 | 47.3 | % | |||||||||||
Net income for the six months ended February 28,November 30, 2019 was $561.1increased by $2.3 million or 47.9%to $12.6 million, compared to Net income of adjusted revenues, compared $535.6$10.3 million or 47.3% of revenues, in the prior fiscal year period. The increase in adjusted CostEarnings per basic and diluted share of goods sold as a percentage of revenues was due to higher royalty costsClass A and Common Stock were $0.36 and $0.35, respectively, in the trade channel, as certain bestselling book series command higher royalty ratessix month period ended November 30, 2019, compared to earnings per basic and higher paperdiluted share of Class A Stock and printing costs, partially offset byCommon Stock of $0.29 and $0.29, respectively, in the favorable impact higher revenues had on fixed costs.prior fiscal year period.
Results of Operations
Children’s Book Publishing and Distribution
| Three months ended November 30, | Six months ended November 30, | ||||||||||||||||||||||
| ($ amounts in millions) | 2019 | 2018 | $ change | % change | 2019 | 2018 | $ change | % change | |||||||||||||||
| Revenues | $413.6 | $417.9 | $(4.3) | (1.0 | )% | $523.2 | $513.6 | $9.6 | 1.9 | % | |||||||||||||
| Cost of goods sold | 171.5 | 168.4 | 3.1 | 1.8 | % | 237.0 | 224.2 | 12.8 | 5.7 | % | |||||||||||||
Other operating expenses (1) | 132.5 | 143.2 | (10.7) | (7.5 | )% | 218.3 | 229.1 | (10.8) | (4.7 | )% | |||||||||||||
| Operating income (loss) | $109.6 | $106.3 | $3.3 | 3.1 | % | $67.9 | $60.3 | $7.6 | 12.6 | % | |||||||||||||
| Operating margin | 26.5 | % | 25.4 | % | 13.0 | % | 11.7 | % | |||||||||||||||
(1) Other operating expenses include selling, general and administrative expenses, inbad debt expenses and depreciation and amortization.
Revenues for the quarter ended February 28,November 30, 2019 increaseddecreased by $4.3 million to $191.0$413.6 million, compared to $186.7$417.9 million in the prior fiscal year quarter. The increasedecrease was primarily relateddriven by book club channel sales, which decreased $15.4 million due to lower sponsorship and the higher employee-related expenses,all-in cost to consumers from the collection of state and local sales tax, as well as a lower number of events and revenue per event compared to the prior fiscal year quarter. Trade channel revenues increased by $7.7 million, primarily driven by the completion of the acquisition of a majority interest in MBI and its full consolidation in the financial statements, as well as higher costs being incurred inrevenues from Dav Pilkey's Dog Man series, continued sales of titles such as Guts by Raina Telgemeier, The Baby-Sitters Club: Boy-Crazy Stacey graphic novel, Allies by Alan Gratz and Call Down the book club channel to achieve compliance with new state sales tax collection rulesHawk (The Dreamer Trilogy, Book 1) by Maggie Stiefvater and higher media licensing sales, tax expense.partially offset by lower Harry Potter related sales due to the prior fiscal year period release of Fantastic Beasts™: The Crimes of Grindelwald. Book fair channel revenue increased $3.4 million primarily driven by higher net redemptions of incentive credits, as well as an increase in revenue per fair when compared to the prior fiscal year quarter, on lower fair count, due to improved fair quality and selection as well as the introduction of an e-Wallet digital payment option at more fairs.
| SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) |
| Three months ended February 28, | |||||||||||||||||||||||
| ($ amounts in millions) | 2019 | Accounting Adoption (1) | Adjusted 2019 (2) | 2018 | $ change | % change | |||||||||||||||||
| Revenues | $ | 218.0 | $ | (8.2 | ) | $ | 209.8 | $ | 201.6 | $ | 8.2 | 4.1 | % | ||||||||||
| Cost of goods sold | 101.4 | (1.7 | ) | 99.7 | 92.1 | 7.6 | 8.3 | % | |||||||||||||||
Other operating expenses (3) | 112.2 | — | 112.2 | 110.5 | 1.7 | 1.5 | % | ||||||||||||||||
| Operating income (loss) | $ | 4.4 | $ | (6.5 | ) | $ | (2.1 | ) | $ | (1.0 | ) | $ | (1.1 | ) | 110.0 | % | |||||||
| Operating margin | 2.0 | % | — | % | — | % | |||||||||||||||||
| Nine months ended February 28, | |||||||||||||||||||||||
| ($ amounts in millions) | 2019 | Accounting Adoption (1) | Adjusted 2019 (2) | 2018 | $ change | % change | |||||||||||||||||
| Revenues | $ | 731.6 | (11.7 | ) | $ | 719.9 | $ | 684.2 | $ | 35.7 | 5.2 | % | |||||||||||
| Cost of goods sold | 325.6 | (3.4 | ) | 322.2 | 296.8 | 25.4 | 8.6 | % | |||||||||||||||
Other operating expenses (3) | 341.3 | — | 341.3 | 332.3 | 9.0 | 2.7 | % | ||||||||||||||||
| Operating income (loss) | $ | 64.7 | $ | (8.3 | ) | $ | 56.4 | $ | 55.1 | $ | 1.3 | 2.4 | % | ||||||||||
| Operating margin | 8.8 | % | 7.8 | % | 8.1 | % | |||||||||||||||||
Other operating expenses for the quarter ended February 28,November 30, 2019 increaseddecreased to $112.2$132.5 million compared to $110.5$143.2 million in the prior fiscal year quarter. The increasedecrease was primarily driven by higher employee-relatedlower marketing expenses higher marketingand net sales tax expense in the tradebook club channel as well as lower labor related and additional costs being incurreddistribution expenses in the book clubs to achieve compliance with new state sales tax collection rules and higher sales tax expense.fair channel.
Other operating expenses for the ninesix months ended February 28,November 30, 2019 increaseddecreased to $341.3$218.3 million, compared to $332.3$229.1 million in the prior fiscal year period. The increasedecrease was primarily driven by higher operatinglower marketing expenses in the book fairs channel, as well as increased employee-related expenses, higher depreciation expense in the book fair channel and additional costs being incurred in book clubs to achieve compliance with new statenet sales tax collection rules and higher sales tax expense, partially offset by lower marketing expense in the book club channel as well as lower labor related and distribution expenses in the book fair channel.
| SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) |
Education
| Three months ended February 28, | Three months ended November 30, | Six months ended November 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| ($ amounts in millions) | 2019 | Accounting Adoption (1) | Adjusted 2019 (2) | 2018 | $ change | % change | 2019 | 2018 | $ change | % change | 2019 | 2018 | $ change | % change | ||||||||||||||||||||||||||||||||||
| Revenues | $ | 60.3 | $ | — | $ | 60.3 | $ | 59.5 | $ | 0.8 | 1.3 | % | $69.9 | $71.5 | $(1.6) | (2.2 | )% | $118.3 | $119.4 | $ | (1.1 | ) | (0.9 | )% | ||||||||||||||||||||||||
| Cost of goods sold | 20.6 | — | 20.6 | 19.0 | 1.6 | 8.4 | % | 23.2 | 22.0 | 1.2 | 5.5 | % | 44.1 | 41.9 | 2.2 | 5.3 | % | |||||||||||||||||||||||||||||||
Other operating expenses | 39.4 | 0.1 | 39.5 | 40.6 | (1.1 | ) | (2.7 | )% | 40.5 | 41.2 | (0.7) | (1.7 | )% | 81.4 | 84.1 | (2.7) | (3.2 | )% | ||||||||||||||||||||||||||||||
| Operating income (loss) | $ | 0.3 | $ | (0.1 | ) | $ | 0.2 | $ | (0.1 | ) | $ | 0.3 | * | $6.2 | $8.3 | $(2.1) | (25.3 | )% | $(7.2) | $(6.6) | $(0.6) | * | ||||||||||||||||||||||||||
| Operating margin | 0.5 | % | 0.3 | % | — | % | 8.9 | % | 11.6 | % | — | % | — | % | ||||||||||||||||||||||||||||||||||
| Nine months ended February 28, | |||||||||||||||||||||||
| ($ amounts in millions) | 2019 | Accounting Adoption (1) | Adjusted 2019 (2) | 2018 | $ change | % change | |||||||||||||||||
| Revenues | $ | 179.7 | $ | — | $ | 179.7 | $ | 171.4 | $ | 8.3 | 4.8 | % | |||||||||||
| Cost of goods sold | 62.5 | — | 62.5 | 58.7 | 3.8 | 6.5 | % | ||||||||||||||||
Other operating expenses (3) | 123.5 | (0.5 | ) | 123.0 | 121.4 | 1.6 | 1.3 | % | |||||||||||||||
| Operating income (loss) | $ | (6.3 | ) | $ | 0.5 | $ | (5.8 | ) | $ | (8.7 | ) | $ | 2.9 | 33.3 | % | ||||||||
| Operating margin | — | % | — | % | — | % | |||||||||||||||||
(1) In the first quarter of fiscal 2019, the Company adopted Topic 606, the application of which resulted in the deferral of certain advertising costs in the case of the magazine business. Accordingly, for the three and nine month periods ended February 28, 2019, direct response advertising costs were expensed as incurred within Selling, general and administrative expenses
Revenues for the quarter ended February 28,November 30, 2019 increaseddecreased to $60.3$69.9 million, compared to $59.5$71.5 million in the prior fiscal year quarter. The $0.8$1.6 million increasedecrease was primarily driven by higher revenuelower revenues from sales of Scholastic Edge and other core instructioncustom publishing programs, as well as supplemental printpartially offset by an increase in revenues from classroom book collection products and dealer trade sales of the Company's teaching resources line of products.professional learning consulting services.
Revenues for the ninesix months ended February 28,November 30, 2019 increaseddecreased to $179.7$118.3 million, compared to $171.4$119.4 million in the prior fiscal year period. The $8.3$1.1 million increasedecrease was primarily driven by higherlower revenues from sales of Scholastic Edge and other core instructioncustom publishing programs, partially offset by an increase in revenues from classroom magazines, supplemental printbook collection products and dealer trade sales of the Company's teaching resources line of products, leveled book room as well as higher sales of custom publishing programs.professional learning consulting services.
Cost of goods sold for the quarter ended February 28,November 30, 2019 was $20.6$23.2 million, or 34.2%33.2% of revenues, compared to $19.0$22.0 million, or 31.9%30.8% of revenues, in the prior fiscal year quarter. The increase in costCost of goods sold as a percentpercentage of revenues was primarily due to an increase in the amortization of prepublication costs related to newly released programs and unfavorable product mix.digital subscription components of the recently launched Scholastic Literacy product.
Cost of goods sold for the ninesix months ended February 28,November 30, 2019 was $62.5$44.1 million, or 34.8%37.3% of revenues, which was relatively flat when compared to $58.7$41.9 million, or 34.2%35.1% of revenues, in the prior fiscal year period. The increase in Cost of goods sold as a percentage of revenues was primarily due to an increase in the amortization of prepublication costs related to digital subscription components of the recently launched Scholastic Literacy product.
Other operating expenses decreased to $39.5$81.4 million for the six months ended November 30, 2019, compared to $84.1 million in the prior fiscal year period. The $2.7 million decrease was primarily related to lower marketing expenses and decreased employee-related costs.
Segment operating income for the quarter ended February 28,November 30, 2019 which was comparable with$6.2 million, compared to operating income of $8.3 million in the prior fiscal year quarter. The decrease was primarily driven by modestly lower revenues and an increase in the amortization of $40.6 million.prepublication costs related to digital subscription components of the recently launched Scholastic Literacy product.
Segment operating loss for the six months ended November 30, 2019 was $7.2 million, compared to an operating loss of $6.6 million in the prior fiscal year period. The increase in operating loss was primarily driven by modestly lower revenues and an increase in the amortization of prepublication costs related to digital subscription components of the recently launched Scholastic Literacy product.
| SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) |
International
| Three months ended February 28, | Three months ended November 30, | Six months ended November 30, | ||||||||||||||||||||||||||||||||||||||||||||
| ($ amounts in millions) | 2019 | Accounting Adoption (1) | Adjusted 2019 (2) | 2018 | $ change | % change | 2019 | 2018 | $ change | % change | 2019 | 2018 | $ change | % change | ||||||||||||||||||||||||||||||||
| Revenues | $ | 81.8 | $ | (1.2 | ) | $ | 80.6 | $ | 83.6 | $ | (3.0 | ) | (3.6 | )% | $113.7 | $115.3 | $(1.6) | (1.4 | )% | $188.3 | $190.1 | $(1.8) | (0.9 | )% | ||||||||||||||||||||||
| Cost of goods sold | 44.1 | (0.3 | ) | 43.8 | 41.8 | 2.0 | 4.8 | % | 59.3 | 60.4 | (1.1) | (1.8 | )% | 98.0 | 98.7 | (0.7) | (0.7 | )% | ||||||||||||||||||||||||||||
Other operating expenses | 40.7 | — | 40.7 | 41.1 | (0.4 | ) | (1.0 | )% | 42.7 | 41.9 | 0.8 | 1.9 | % | 82.3 | 80.4 | 1.9 | 2.4 | % | ||||||||||||||||||||||||||||
| Operating income (loss) | $ | (3.0 | ) | $ | (0.9 | ) | $ | (3.9 | ) | $ | 0.7 | $ | (4.6 | ) | — | % | $11.7 | $13.0 | $(1.3) | (10.0 | )% | $8.0 | $11.0 | $(3.0) | (27.3 | )% | ||||||||||||||||||||
| Operating margin | — | % | — | % | 0.8 | % | 10.3 | % | 11.3 | % | 4.2 | % | 5.8 | % | ||||||||||||||||||||||||||||||||