|
|
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
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 |
| 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 |
|
See accompanying notes
|
|
SCHOLASTIC CORPORATION
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
|
|
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED
(Dollar amounts in millions)
|
|
| | | | | | | |
| 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 |
|
See accompanying notes
|
|
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.
On August 17, 2018, the SEC issued a final rule, Release No. 33-10532, Disclosure Update and Simplification, which amends certain of its disclosure requirements and became effective for the Company for the fiscal quarter ended February 28, 2019 and the Company has updated its Financial Statements accordingly.
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:
Variable consideration related to anticipated returns
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
10Variable consideration related to anticipated returns
Allocation of transaction price to performance obligations
|
|
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Dollar amounts in millions, except per share data) |
Impairment testing for goodwill, intangibles and other long-lived assets and investments
Assets and liabilities acquired in business combinations
Revenues for book fairs which have not reported final results
Allocation of transaction price to performance obligations
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.
Forthcoming Adoptions:
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.
The Company's assessment efforts to date have included reviewing the standard's provisions and gathering information to evaluate the landscape of its real estate, personal property, and other arrangements that may meet the definition of a lease. Based on these efforts, the Company currently anticipates that the adoption of ASU 2016-02 will result in a significant increase to its long-term assets and liabilities as most of its current operating lease commitments will be subject to balance sheet recognition. Recognition of lease expense in the condensed consolidated statement of operations is not anticipated to significantly change. The Company anticipates it will apply certain practical expedients permitted by the standard and intended to ease transition to the standard, which include allowing the Company to carryforward its original lease classification conclusions (i.e., finance or operating) without reassessment. The Company is also evaluating which, if any, other expedients it will elect upon adoption, including the use of hindsight in assessing factors that impact determination of the lease term, such as the likelihood that any renewal or purchase options are exercised.
ASU No. 2016-02, ASU No. 2018-10 and ASU No. 2018-11 are effective for the Company inbeginning of the first quarter of fiscal 2020 and are requiredwhich resulted in no impact to be applied using the modified retrospective approach for all leases existing as of the effective date.Company's financial statements.
2. REVENUES
Adoption of Topic 606,Disaggregated Revenue from Contracts with CustomersData
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("Topic 606"). ASU No. 2014-09, along with various amendments that comprise Topic 606, provide a single accounting model for revenue from contracts with customers and supersedes the previous revenue recognition guidance, including certain industry-specific and transaction-specific guidance. The core principle of Topic 606 is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.
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:
11 |
| | | | | | |
| 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 |
|
|
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
|
(1) - Includes Canada, UK, Australia and New Zealand.
(2) - Primarily includes markets in Asia.
retrospective method. The Company determined that the adoption of Topic 606 had the following impact: (i) a deferral of certain revenue associated with the Company's book fairs incentive program (reflected in Deferred revenue), (ii) recognition of a refund liability (recorded as an increase to Other accrued expenses) and a return asset (recorded as an increase to Prepaid expenses and other current assets) for the right to recover products from customers upon settling the refund liability based on expected returns and (iii) recognition of previously capitalized direct response advertising costs as incurred, primarily related to the magazines business.
Updates to Significant Accounting Policies
The Company updated its significant accounting policies as a result of the adoption of Topic 606 as follows:
Revenue Recognition - School-Based Book Fairs
Revenues associated with school-based book fairs relate to the sale of children's books and other products to book fair sponsors. In addition, the Company employs an incentive program to encourage the sponsorship of book fairs and increase the number of fairs held each school year. The Company identifies two performance obligations within its school-based book fair contracts which include the fulfillment of book fairs product and the fulfillment of product upon the redemption of incentive program credits by customers. The Company allocates the transaction price to each performance obligation and recognizes revenue at a point in time. The Company utilizes certain estimates based on historical experience and future expectations related to the participation in the incentive program as well as redemption patterns to determine the relative fair value of each performance obligation when allocating the transaction price. Changes in these estimates could impact the timing of the recognition of revenue. Revenues allocated to the book fair product will be recognized at the point at which product is delivered to the customer and control is transferred. The revenue allocated to the incentive program credits is recognized upon redemption of incentive credits and the transfer of control of the redeemed product. Incentive credits are generally redeemed within 12 months of issuance. Payment for school-based book fairs product is due at the completion of a customer's fair. The sale of school-based book fair product contains a right of return.
Estimated Returns
For sales that include a rightA liability for expected returns of return, which primarily include the trade$42.4, $34.5, and school-based book fair channels, the Company will estimate the transaction price and record revenues as variable consideration based on the amounts the Company expects to ultimately be entitled. In order to determine estimated returns, the Company utilizes historical return rates, sales patterns, types of products and expectations and recognizes a corresponding reduction to Revenues and Cost of goods sold. In addition, a refund liability$78.7 is recorded within Other accrued expenses for the consideration to which the Company believes it will not ultimately be entitledas of November 30, 2019, May 31, 2019, and November 30, 2018, respectively. In addition, a return asset of $2.6, $1.6, and $9.4 is recorded within Prepaid expenses and other current assets for the expected inventory to be returned.
The Company has elected to present sales and other related taxes on a net basis, excluded from revenues, and as such, these are included within Other accrued expenses until remitted to taxing authorities. Shipping and handling costs that are billed to customers are included in Revenues, with costs recorded in Cost of goods sold.
Transition
The Company applied Topic 606 to all contracts as of the date of initial adoption, June 1, 2018. The cumulative effect of adopting Topic 606 was a $46.5 decrease to the opening balance of Retained earnings as of June 1, 2018.
The cumulative effect of the changes made to the Company’s condensed consolidated balance sheet at June 1,November 30, 2019, May 31, 2019, and November 30, 2018, are as follows:
|
|
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
|
|
| | | | | | | | | | |
| 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 |
|
(1) - Primarily represents the reclassification of the Company’s accounting for estimated returns from a reduction to Accounts receivable, net, to a current liability within Other accrued expenses.
(2) - Represents the reclassification of a return asset from Inventory to Prepaid expenses and other current assets.
(3) - Primarily represents the adjustment for previously capitalized direct response advertising costs.
(4) - Represents the income tax impact of Topic 606 adjustments.
(5) - Represents the deferred revenue related to outstanding book fairs incentive credits as of June 1, 2018.
(6) - Represents a reduction to Other accrued expenses of $27.2 for outstanding book fair incentive credits as of June 1, 2018. This decrease was offset by a $28.3 increase for estimated returns recorded to Other accrued expenses.
Application of Topic 606 to the Current Fiscal Year
The comparative prior fiscal period information continues to be reported under the accounting standards in effect during those fiscal periods. The following table illustrates the amounts by which each summarized income statement line item was affected by the adoption of Topic 606:
|
| | | | | | | | | | | |
| | 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 | ) |
(1) - Represents incremental revenue and cost of goods sold related to the redemption of book fairs incentive program credits, partially offset by additional deferred revenue on incentive credits awarded during the period.
(2) - Represents direct response advertising costs being expensed as incurred.
(3) - Represents the income tax impact of Topic 606 adjustments.
|
|
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
|
Estimated Returns
As of February 28, 2019, a liability for expected returns of $97.3 is recorded within Other accrued expenses on the Company's condensed consolidated balance sheets. In addition, as of February 28, 2019, a return asset of $13.2 is recorded within Prepaid expenses and other current assetsrespectively, for the recoverable cost of product estimated to be returned by customers.
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.
Disaggregated Revenue Data
The following table presents the Company’s revenues disaggregated by region and channel:
|
| | | | | | |
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 |
|
(1) - Includes Canada, UK, Australia and New Zealand.
(2) - Primarily includes markets in Asia.
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 and Distribution operates as an integrated business which includes the publication and distribution of children’s books, ebooks, media and interactive products in the United States through its book clubs and book fairs in its school channels and through the trade channel. This segment is comprised of three operating segments.
Education 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 two 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 three operating segments.
| | | 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 |
|
|
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 |
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) | Impairment charges of $4.3 and $11.0 for the three and nine months ended February 28, 2018, respectively, relate to the prior fiscal year abandonment of legacy building improvements in connection with the Company's renovation of its headquarters in New York City. |
| |
(4) | 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 reportable segment include expenditures for long-lived assets of $1.5$4.2 and $3.6$1.6 for the three months ended February 28,November 30, 2019 and February 28, 2018, respectively, and $5.9$9.9 and $6.6$4.4 for the ninesix months ended February 28,November 30, 2019 and February 28, 2018, respectively. Other noncurrent assets for the International reportable segment include long-lived assets of $36.3$66.8 and $35.8$36.5 as of February 28,November 30, 2019 and February 28, 2018, respectively. |
4. DEBT
The following table summarizes the carrying value of the Company's debt as of the dates indicated: |
| | | | | | | | | | | |
| 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.
| |
• | 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. |
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.
|
|
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
|
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 |
|
|
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
|
|
| | | | | | | | | | | | | | |
| 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 Company experienced a Net loss for all periods presented and therefore did not report any dilutive share impact.
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) |
For the three and nine month periods ended February 28, 2019 and February 28, 2018, the Company experienced a Net loss and did not allocate any losses to the participating RSUs.
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.
Accumulated goodwill impairment totaled $39.6 as of February 28, 2019, May 31, 2018 and February 28, 2018.
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.
8. INVESTMENTS
Included in Other assets and deferred charges on the Company’s condensed consolidated balance sheets were investments of $36.7, $31.1 and $33.1 at February 28, 2019, May 31, 2018 and February 28, 2018, respectively.
The Company's 48.5% equity interest in Make Believe Ideas Limited ("MBI"), a UK-based children's book publishing company, is accounted for using the equity method of accounting. The purchase agreement provides
|
|
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED (Dollar amounts in millions, except per share data) |
that, subject to its provisions,8. INVESTMENTS
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 | | |
The Company’s 26.2% non-controlling interest in a separate children’s book publishing business located in the UK is accounted for using the equity method of accounting. The net carrying value of this investment was $23.7, $20.5 and $21.8 at February 28, 2019, May 31, 2018 and February 28, 2018, respectively. Equity method income from this investment is reported in the International segment.
The Company has other equity and cost method investments that had a net carrying value of less than $0.1 at February 28, 2019 and May 31, 2018, and $0.1atFebruary 28, 2018.
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 |
On July 20, 2016, the Board approved the termination of the U.S. Pension Plan, in which all benefit accruals were previously frozen as of June 1, 2009. Based on the U.S. Pension Plan’s funded status and the frozen benefit, it was determined that the on-going costs of maintaining the U.S. Pension Plan were growing at a greater rate than the benefit delivered to the Company’s employees and former employees, and the U.S. Pension Plan was terminated in fiscal 2018. During fiscal 2018, the U.S. Pension Plan made $37.8 of lump sum benefit payments to vested plan participants and purchased group annuity contracts for the remaining U.S. Pension Plan vested participants for a total cost of $86.3, paid to the respective insurers. As a result of the termination, pretax plan settlement charges of $55.0 were recognized for the nine months ended February 28, 2018. In December 2018, the U.S. Pension Plan disbursed the remaining plan assets as a transfer to eligible 401(k) plan participants’ accounts resulting in the final resolution of the plan.
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 |
|
|
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
|
|
| | | | | | | | | | | |
| 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 |
|
11.12. TREASURY STOCK
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.
12.13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
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 |
|
|
13.14. FAIR VALUE MEASUREMENTS
The Company determines the appropriate level in the fair value hierarchy for each fair value measurement of assets and liabilities carried at fair value on a recurring basis in the Company’s financial statements. The fair value hierarchy prioritizes the inputs, which refer to assumptions that market participants would use in pricing an asset or liability, based upon the highest and best use, into three levels as follows:
| |
• | Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date. |
Level 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 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, inputs other than quoted prices that are observable for the asset or liability and inputs derived principally from or corroborated by observable market 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. |
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.
14.15. INCOME TAXES AND OTHER TAXES
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.
On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was signed into law resulting in a significant change in the framework for U.S. corporate taxes. The Act reduced the U.S. federal corporate tax rate from 35% to 21%, required companies to calculate a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and created new taxes on certain foreign sourced earnings.
The Act also imposes a new minimum tax on Global Intangible Low-Taxed Income ("GILTI") earned by foreign subsidiaries. The FASB Staff Q&A, Topic 740 No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity may make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred.
|
|
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
|
In accordance with Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, which was also included in ASU No. 2018-05, Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (“SAB 118”), which was adopted by the Company upon issuance, any adjustments of the Company's provisional tax expense are recorded as a change in estimate. Despite the completion of the Company’s accounting for the Tax Act under SAB 118, many aspects of the law remain unclear and the Company expects ongoing guidance to be issued at both the federal and state levels and it will continue to monitor and assess the impact of any new developments.
In the period ended February 28, 2019, the Company finalized its calculations resulting in no transition tax and recorded a $0.5 adjustment to the Company’s previously recorded provisional tax expense. In addition, in the prior fiscal year quarter, the Company elected to recognize any potential tax on GILTI as a period expense in the period the tax is incurred.
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 StateOn 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 Wisconsin has assessed Scholastic Book Fairs, Inc. (“SBF”), a wholly owned subsidiarystate in the absence of the Company, $5.4, exclusive of penalties and interest, for sales tax in fiscal years 2003 through 2014. Based upon the facts and circumstances and the relevant lawsretailer having a physical presence in the State of Wisconsin,taxing state. As a result, the Company does not believe these assessments are meritednow has an obligation, at least on a going forward basis, to collect and believes it could prevailremit sales and use taxes, primarily in litigating this matter. However,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 has engagednot previously remitted sales or use taxes based on its having no physical presence in discussionssuch states. As of November 30, 2019, the Company’s school book club channel was remitting sales taxes in 44 states and the District of Columbia. Any on-going or future litigation with states relating to sales and use taxes could be impacted favorably or unfavorably by the state to resolve this matter and has recorded a chargeCourt’s decision in the secondfuture fiscal quarter of the current fiscal related to the proposed settlement of this assessment.periods.
15.16. DERIVATIVES AND HEDGING
The Company enters into foreign currency derivative contracts to economically hedge the exposure to foreign currency fluctuations associated with the forecasted purchase of inventory, 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.
|
|
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
|
16.17. OTHER ACCRUED EXPENSES
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 |
|
(1)Refer to Note 2, Revenues, for additional details regarding the impact of ASC 606 on Returns liability and Accrued advertising and promotions.
17.18. SUBSEQUENT EVENTS
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.
InDuring the third fiscal quarter ended November 30, 2019, the Company's Children's Book Publishing and Distribution revenuesCompany experienced increased with strong performancesales in the trade and book fair channels as well as in Asia with lower revenues in the book club channel. The Company's trade channel revenues increased 8% when compared to prior fiscal period results which included the release of frontlist titles including Fantastic BeastsTMBeasts™: The Crimes of Grindelwald. The increase in trade channel revenues was due to the completion of the acquisition of a majority interest in Make Believe Ideas, Ltd. (MBI), series publishing suchwhich had been treated as Wings of Fire, The Baby-Sitters Club graphic novels, and Dav Pilkey's Dog Man, as well as titles by Aaron Blabeyan equity method investment in the prior fiscal year, and the 20th anniversary publishing for Harry Potter, in addition to increased media sales of Scholastic's evergreen library of Clifford® programming. Trade publishing also performed well in International, though the strong U.S. dollar continued to affect revenues. In Education, revenues were ahead of the prior year with higher sales of Scholastic Edge and other core instruction programs, as well as supplemental print products and dealer trade sales ofrevenue from the Company's teaching resources line of products.
The Company continues to be subjectedbest selling titles and series. In respect to the book fair channel, actions taken by the Company to improve fair quality and selection and the introduction of an e-Wallet digital payment option at more fairs resulted in an increased number of transactions per fair and steps taken to contain costs resulted in an increase in fair profitability. Local currency revenues increased in Asia, especially China where the Company is expanding as a leading provider of implementing sales tax collectionseducational books for Book Clubs, resulting from the Supreme Court's Wayfair decision, higher labor costs in fulfillment, higher costs for paper and from printersEnglish language learning. Although book club channel revenues declined due to a lower number of teacher sponsors and the effect of sales tax collection, cost reductions mitigated the stronger U.S. dollar in International. Although revenues will not be recognized untilimpact on profitability during the first quarter of fiscal 2020, Education began customer presentations of Scholastic Literacy, a comprehensive core reading curriculum, and the market has responded positively to the program which has successfully competed in several reading adoptions.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 | % |
* Not meaningful
(1) InCost of goods sold for the first quarter ended November 30, 2019 was $264.3 million, or 44.3% of fiscal 2019, the Company adopted Topic 606, the applicationrevenues, compared to $262.4 million, or 43.4% of which resultedrevenues, in the deferralprior fiscal year quarter. The increase in Cost of revenue for incentive credits earned fromgoods sold as a percentage of revenues was primarily due to the holdingcompletion of school book fairs until such credits are redeemed. In addition, Topic 606 eliminated the deferralacquisition of certain advertising costsa majority interest in MBI and its full consolidation in the casefinancial statements. MBI manufacturing costs associated with specialty products represented a portion of the magazine business. Accordingly,increase in Cost of goods sold as a percentage of revenues.
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.
(2) Under the modified retrospective method of adoption for Topic 606, prior period amounts are not restated to reflect the new accounting treatment. Therefore, the Company has included an Adjusted 2019 column to exclude the impact of Topic 606 and provide a comparable period-over-period variance.
Management's Discussion and Analysis of Financial Condition and Results of Operations (adjusted amounts exclude the impact of Topic 606 for comparability purposes)
Adjusted Revenues forexpenses in the quarter ended February 28,November 30, 2019 increaseddecreased to $350.7$212.4 million, compared to $344.7$229.7 million in the prior fiscal year quarter. The Children's Book Publishing and Distribution segment adjusted revenues increased $8.2 million, driven by higher tradedecrease is primarily related to lower marketing expenses in the book club channel, revenue of $13.2 million,lower labor related expenses, including lower staffing levels related to technology services, as well as a decrease in net sales tax expense in the book club channel coupled with the prior period pretax charge related to a legacy sales tax assessment, partially offset by lower book fairs channel revenueequity method investment income due to the consolidation of $2.3 millionMBI.
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.
Adjusted Revenues for the ninesix months ended February 28,November 30, 2019 increaseddecreased to $1,172.1$379.9 million, compared to $1,132.2$393.4 million in the prior fiscal year period. The Children's Book Publishingdecrease is primarily related to lower marketing expenses in the book club and Distribution segment adjusted revenues increased $35.7 million, driven by higher tradeeducation channels and lower labor related expenses, as well as a decrease in net sales tax expense in the book club channel revenue of $38.9 million,coupled with the prior period pretax charge related to a legacy sales tax assessment, partially offset by lower equity method investment income due to the consolidation of MBI.
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.
Components of Cost of goods sold for the three and nine months ended February 28, 2019 and February 28, 2018 are as follows:
|
|
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 | % |
(1) Under the modified retrospective method of adoption for Topic 606, prior period amounts are not restated to reflect the new accounting treatment. Therefore, the Adjusted 2019 amounts are used to exclude the impact of Topic 606 and provide a comparable period-over-period variance.
Adjusted Cost of goods soldThe Company’s effective tax rate for the quarter ended February 28,November 30, 2019 was $174.9 million, or 49.9% of adjusted Revenues,32.2%, compared to $166.4 million, or 48.3% of revenues,27.2% in the prior fiscal year quarter. The increase in adjusted Cost of goods sold as a percentage of revenuesCompany’s effective tax rate for the six month period ended November 30, 2019 was due29.2%, compared to higher royalty costs31.3% in the trade channel, as certain bestselling book series command higher royalty rates, higher paper and printing costs and higher product costs as a resultprior fiscal year quarter. The Company’s annual effective tax rate, exclusive of product mix.discrete items, is expected to be approximately 32.4%.
Adjusted Cost of goods soldNet income for the ninequarter ended November 30, 2019 decreased by $0.5 million to $71.1 million, compared to Net income of $71.6 million in the prior fiscal year quarter. Earnings per basic and diluted share of Class A and Common Stock was $2.04 and $2.02, respectively, for the fiscal quarter ended November 30, 2019, compared to earnings per basic and diluted share of Class A and Common Stock of $2.03 and $1.99, respectively, in the prior fiscal year quarter.
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.
Adjusted Selling, general and administrative expenses inRevenues for the ninesix months ended February 28,November 30, 2019 increased by $9.6 million to $583.8$523.2 million, compared to $573.9$513.6 million in the prior fiscal year period. The increaseperiod, primarily related to higher employee-related expenses,trade channel revenues of $20.4 million, driven by the additional revenues from 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 inwith strong sales of core titles, including Dav Pilkey's Dog Man: For Whom the book club channel to achieve compliance with new state sales tax collection rulesBall Rolls, Guts by Raina Telgemeier and higher sales tax expense including a charge related to a proposed settlement of an outstanding sales tax assessment from prior fiscal years by the State of Wisconsin, partially offset by lower bad debt expense.
Depreciation and amortization expenses in the quarter ended February 28, 2019 increased to $13.7 million, compared to $11.0 million in the prior fiscal year quarter. The increase was primarily attributable to assets placed in service for capitalized strategic technology investments Wonky Donkey and assets related to the redesign and upgrade of the Company's headquarters in New York City.
Depreciation and amortization expenses in the nine months ended February 28, 2019 increased to $41.3 million, compared to $30.0 million in the prior fiscal year period. The increase was primarily attributable to assets placed in service for capitalized strategic technology investments and assets related to the redesign and upgrade of the Company's headquarters in New York City.Dinky Donkey titles,
There were no Asset impairments for the three and nine months ended February 28, 2019. Asset impairments for the three and nine months ended February 28, 2018 were $4.3 million and $11.0 million, respectively, due to impairment charges related to the abandonment of legacy building improvements in connection with the Company's renovation of its headquarters in New York City.
|
|
SCHOLASTIC CORPORATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) |
Net interest income inand the quarter ended February 28, 2019 was $1.0 million, comparedWings of Fireseries, and media and entertainment sales, partially offset by lower Harry Potter related sales due to Net interest income of $0.2 million in the prior fiscal year quarter.period release of Fantastic Beasts™: The $0.8Crimes of Grindelwald and the release of the Brian Selznick cover editions of Harry Potter. Book fair channel revenues increased $5.7 million increase was primarily driven by revenue associated with higher interest rates applied to the Company's cash and cash equivalents balances, while interest expense remained relatively flat due to the absencenet redemptions of long-term debt and comparable short-term debt balances.
Net interest incomeincentive credits as well as an increase in the nine months ended February 28, 2019 was $2.3 million,revenue per fair when compared to Net interest income of $0.5 million in the prior fiscal year period. The $1.8 million increase was primarily driven by higher
interest rates applied Company's cash and cash equivalents balances, while interest expense remained relatively flat due to the absence of long-term debt and comparable short term debt balances.
For the three and nine months ended February 28, 2018, the Company recognized settlement charges of $39.6 million and $55.0 million, respectively, related to the settlement of the U.S Pension Plan and the related purchase of insurance company group annuity contracts.
The Company’s effective tax rate, as adjusted, for the third quarter of fiscal 2019 was 36.0%, compared to 22.3% in the prior fiscal year quarter. The Company's effective tax rate, as adjusted, for the nine month period ended February 28, 2019 was 41.9%, compared to 23.8% in the prior fiscal year period. For the full fiscal year, the Company expects an effective tax rate, exclusive of discrete items, of approximately 30.0%.
Adjusted Net loss for the quarter ended February 28, 2019 decreased by $31.1 million to $18.1 million, compared to a Net loss of $49.2 million in the prior fiscal year quarter. Adjusted Loss per basic and diluted share of Class A and Common Stock was $0.52 for the fiscal quarter ended February 28, 2019, compared to a Loss per basic and diluted share of Class A Stock and Common Stock of $1.41 in the prior fiscal year quarter.
Adjusted Net loss for the nine months ended February 28, 2019 decreased by $48.3 million to $7.5 million, compared to a Net loss of $55.8 million in the prior fiscal year period. Adjusted Loss per basic and diluted share of Class A and Common Stock was $0.22 in the nine month period ended February 28, 2019, compared to a Loss per basic and diluted share of Class A Stock and Common Stock of $1.59 in the prior fiscal year period.
Results of Operations
Children’s Book Publishing and Distribution
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended February 28, |
($ 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 | % | | | | |
|
(1) In the first quarter of fiscal 2019, the Company adopted Topic 606, the application of which resulted in the deferral of revenue for incentive credits earned from the holding of school book fairs until such credits are redeemed.
|
|
SCHOLASTIC CORPORATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) |
(2) Under the modified retrospective method of adoption for Topic 606, prior period amounts are not restated to reflect the new accounting treatment. Therefore, the Company has included an Adjusted 2019 column to exclude the impact of Topic 606 and provide a comparable period-over-period variance.
(3) Other operating expenses include selling, general and administrative expenses, bad debt expenses and depreciation and amortization.
Adjusted Revenues for the quarter ended February 28, 2019 increased $8.2 million to $209.8 million, compared to $201.6 million in the prior fiscal year quarter, with continued growth inon lower fair count, due to improved fair quality and selection and the trade channelintroduction of $13.2 million driven by frontlist bestsellers as well as increased media sales ofan e-Wallet digital payment option at more fairs. Partially offsetting the Company's evergreen library of Clifford® programming. Key titles in the current period included Dav Pilkey's Dog Man: Brawl of the Wild, Wings of Fire #12 by Tui T. Sutherland, Kristy's Big Day (The Baby-Sitters Club Graphic Novel #6), Eva and Baby Mo: A Branches Book (Owl Diaries #10) and I Need a Hug, the new award winning book from author-illustrator Aaron Blabey. This increase was partially offset byhigher segment revenues were lower book club channel revenuesales of $2.7$16.5 million compared to the prior fiscal period, due to a decrease inlower sponsorship and the higher all-in cost to consumers from the collection of state and local sales tax as well as lower number of events and lower book fairs channel revenue of $2.3 million primarily due to a lower number of fairs, partially offset by an increase in revenue per fair.
Adjusted Revenues for the nine months ended February 28, 2019 increased $35.7 million to $719.9 million,event compared to $684.2 million in the prior fiscal year period primarily related to higher trade channel revenues of $38.9 million, driven by the success of Dav Pilkey's Dog Man: Lord of the Fleas and Dog Man: Brawl of the Wild, as well as J.K. Rowling's Fantastic Beasts: The Crimes of Grindelwald - The Original Screenplay, Harry Potter: The Illustrated Collection, The Wonky Donkey, Wings of Fire: The Hive Queen, Wings of Fire: The Lost Continent and higher sales of backlist series such as Dog Man, Harry Potter, The Baby-Sitters Club® graphic novels and graphic novels by Raina Telgemeier, including the titles Drama, Smile, Sisters and Ghosts. Book fairs channel revenues decreased $3.0 million as a result of a lower number of fairs, partially offset by an increase in revenue per fair. Book club channel revenues decreased $0.2 million due to lower revenue per event, partially offset by an increase in number of events.quarter.
Adjusted Cost of goods sold for the quarter ended February 28,November 30, 2019 was $99.7$171.5 million, or 47.5%41.5% of adjusted revenues, compared to $92.1$168.4 million, or 45.7%40.3% of revenues, in the prior fiscal year quarter. The increase in Cost of goods sold as a percentpercentage of revenues was primarily due to higher royaltythe completion of the acquisition of a majority interest in MBI and its full consolidation in the financial statements. MBI manufacturing costs associated with specialty products represented a portion of the increase in Cost of goods sold as certain bestselling book series command higher royalty rates, higher paper and printing costs and higher fulfillment costs.a percentage of revenues.
Adjusted Cost of goods sold for the ninesix months ended February 28,November 30, 2019 was $322.2$237.0 million, or 44.8%45.3% of adjusted revenues, compared to $296.8$224.2 million, or 43.4%43.7% of revenues, in the prior fiscal year period. The increase in Cost of goods sold as a percent of revenues was primarily due to the completion of the acquisition of a majority interest in MBI and its full consolidation in the financial statements. MBI manufacturing costs associated with specialty products represented a portion of the increase in Cost of goods sold as a percentage of revenues. The Company continues to monitor and employ strategies to offset increased costs associated with higher royalty costs, as certain bestselling book series command higher royalty rates, higher paper and printing costs partially offset bytariffs. The impact of tariffs may impact the favorable impact higher revenues had on fixed costs.cost of goods sold in the remaining fiscal year, especially in the domestic school-based channels.
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.
As adjusted, segmentSegment operating lossincome for the quarter ended February 28,November 30, 2019 was $2.1$109.6 million, compared to an operating lossincome of $1.0$106.3 million in the prior fiscal year quarter. The $1.1Despite the lower sales in the book club channel, the segment operating income increased by $3.3 million increase was primarily driven by higher employee-relatedas a result of cost reduction strategies adopted in the book club and book fair channels, coupled with lower labor related and distribution expenses sales tax accruals and additional costs being incurred in the book clubs related to achieving compliance with the new state sales tax collection rulesfair channel and higher sales tax expense, partially offset byrevenues in the higher trade channel revenues.channel.
As adjusted, segmentSegment operating income for the ninesix months ended February 28,November 30, 2019 was $56.4$67.9 million, compared to operating income of $55.1$60.3 million in the prior fiscal year period. The $1.3Despite the lower sales in the book club channel, the segment operating income increased by $7.6 million increase wasas a result of cost reduction strategies adopted in the book club and book fair channels, coupled with lower labor related and distribution expenses in the book fair channel and continued growth in the trade channel.
|
|
SCHOLASTIC CORPORATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) |
primarily driven by the higher trade channel revenues, partially offset by higher employee-related expenses and additional costs being incurred in book clubs related to achieving compliance with the new state sales tax collection rules and higher sales tax expense.
Education
| | | Three months ended February 28, | Three months ended November 30, | Six months ended November 30, |
($ 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 (3)(1) | 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 | % | | | | | | — | % | | — | % | | | | |