UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended | Commission File No. 000-19860 |
SCHOLASTIC CORPORATION
(Exact name of Registrant as specified in its charter)
| Delaware | 13-3385513 | |
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(State or other jurisdiction of | (IRS Employer Identification No.) | ||
incorporation or organization) | |||
557 Broadway, New York, New York | 10012 | ||
(Address of principal executive offices) | (Zip Code) | ||
Registrant’s telephone number, including area code (212) 343-6100
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YesxS Noo£
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YesxS Noo£
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | ||
Non-accelerated filer | Smaller reporting company |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso£ NoxS
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.
| Title | |||||
| Number of shares outstanding | ||||
of each class | as of | ||||
Common Stock, $.01 par value |
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Class A Stock, $.01 par value | 1,656,200 | ||||
| 1 |
SCHOLASTIC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2013
INDEX
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| 2 |
PART I - FINANCIAL INFORMATION
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| Three months ended November 30, |
| Six months ended November 30, |
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| 2012 |
| 2011 |
| 2012 |
| 2011 |
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Revenues |
| $ | 616.2 |
| $ | 685.3 |
| $ | 909.8 |
| $ | 1,003.3 |
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Operating costs and expenses: |
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Cost of goods sold (exclusive of depreciation & amortization) |
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| 263.4 |
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| 285.7 |
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| 414.5 |
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| 446.1 |
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Selling, general and administrative expenses (exclusive of depreciation and amortization) |
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| 235.2 |
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| 237.9 |
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| 409.1 |
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| 413.6 |
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Depreciation and amortization |
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| 16.7 |
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| 15.5 |
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| 32.8 |
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| 30.6 |
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Loss on lease |
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| — |
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| 6.2 |
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| — |
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| 6.2 |
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Total operating costs and expenses |
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| 515.3 |
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| 545.3 |
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| 856.4 |
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| 896.5 |
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Operating income (loss) |
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| 100.9 |
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| 140.0 |
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| 53.4 |
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| 106.8 |
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Other income (expense) |
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| 0.0 |
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| 0.0 |
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| 0.0 |
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| 0.0 |
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Interest expense, net |
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| 3.7 |
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| 3.9 |
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| 7.4 |
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| 7.8 |
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Earnings (loss) from continuing operations before income taxes |
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| 97.2 |
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| 136.1 |
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| 46.0 |
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| 99.0 |
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Provision (benefit) for income taxes |
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| 35.3 |
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| 52.8 |
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| 16.1 |
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| 40.8 |
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Earnings (loss) from continuing operations |
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| 61.9 |
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| 83.3 |
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| 29.9 |
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| 58.2 |
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Earnings (loss) from discontinued operations, net of tax |
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| (0.1 | ) |
| (0.5 | ) |
| (0.2 | ) |
| (2.5 | ) |
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Net income (loss) |
| $ | 61.8 |
| $ | 82.8 |
| $ | 29.7 |
| $ | 55.7 |
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Basic and diluted earnings (loss) per Share of Class A and Common Stock |
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Basic: |
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Earnings (loss) from continuing operations |
| $ | 1.93 |
| $ | 2.66 |
| $ | 0.94 |
| $ | 1.86 |
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Earnings (loss) from discontinued operations, net of tax |
| $ | 0.00 |
| $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.08 | ) |
Net income (loss) |
| $ | 1.93 |
| $ | 2.64 |
| $ | 0.93 |
| $ | 1.78 |
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Diluted: |
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Earnings (loss) from continuing operations |
| $ | 1.89 |
| $ | 2.62 |
| $ | 0.92 |
| $ | 1.83 |
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Earnings (loss) from discontinued operations, net of tax |
| $ | 0.00 |
| $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.08 | ) |
Net income (loss) |
| $ | 1.89 |
| $ | 2.60 |
| $ | 0.91 |
| $ | 1.75 |
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Dividends declared per Class A and Common Share |
| $ | 0.125 |
| $ | 0.100 |
| $ | 0.250 |
| $ | 0.200 |
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See accompanying notes
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3 |
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| Three months ended November 30, |
| Six months ended November 30, |
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| 2012 |
| 2011 |
| 2012 |
| 2011 |
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Net income (loss) |
| $ | 61.8 |
| $ | 82.8 |
| $ | 29.7 |
| $ | 55.7 |
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Other comprehensive income (loss), net: |
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Foreign currency translation adjustments |
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| 2.5 |
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| (6.4 | ) |
| 7.6 |
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| (5.9 | ) |
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Pension and post-retirement adjustments: |
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Amortization of prior service cost (credit) |
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| (0.1 | ) |
| (0.2 | ) |
| (0.2 | ) |
| (0.3 | ) |
Amortization of unrecognized gain (loss) included in net periodic cost |
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| 1.4 |
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| 1.7 |
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| 2.6 |
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| 3.1 |
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Total other comprehensive income (loss) |
| $ | 3.8 |
| $ | (4.9 | ) | $ | 10.0 |
| $ | (3.1 | ) |
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Comprehensive income (loss) |
| $ | 65.6 |
| $ | 77.9 |
| $ | 39.7 |
| $ | 52.6 |
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SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - UNAUDITED
(Dollar amounts in millions)
| Three months ended | ||||||||
| August 31, 2013 | August 31, 2012 | |||||||
| Net income (loss) | $ | (29.9 | ) | $ | (32.1 | ) | ||
| Other comprehensive income (loss), net: | ||||||||
| Foreign currency translation adjustments | (5.6 | ) | 5.1 | |||||
| Pension and post-retirement adjustments: | ||||||||
| Amortization of prior service cost (credit) | (0.1 | ) | (0.1 | ) | ||||
| Amortization of unrecognized gain (loss) included in net periodic cost | 0.9 | 1.2 | ||||||
| Total other comprehensive income (loss) | $ | (4.8 | ) | $ | 6.2 | |||
| Comprehensive income (loss) | $ | (34.7 | ) | $ | (25.9 | ) | ||
See accompanying notes
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4 |
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| November 30, 2012 |
| May 31, 2012 |
| November 30, 2011 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
| $ | 257.3 |
| $ | 194.9 |
| $ | 114.0 |
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Accounts receivable, net |
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| 272.9 |
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| 314.1 |
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| 288.1 |
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Inventories, net |
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| 356.4 |
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| 295.3 |
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| 376.2 |
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Deferred income taxes |
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| 71.5 |
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| 71.4 |
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| 56.6 |
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Prepaid expenses and other current assets |
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| 50.6 |
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| 47.2 |
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| 45.6 |
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Current assets of discontinued operations |
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| 7.0 |
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| 7.0 |
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| 9.3 |
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Total current assets |
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| 1,015.7 |
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| 929.9 |
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| 889.8 |
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Property, plant and equipment, net |
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| 327.1 |
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| 327.2 |
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| 328.7 |
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Prepublication costs |
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| 133.9 |
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| 125.8 |
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| 118.4 |
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Royalty advances, net |
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| 37.6 |
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| 34.8 |
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| 37.0 |
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Production costs |
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| 2.1 |
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| 1.6 |
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| 7.1 |
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Goodwill |
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| 157.8 |
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| 157.7 |
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| 155.1 |
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Other intangibles |
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| 15.6 |
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| 16.7 |
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| 18.9 |
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Noncurrent deferred income taxes |
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| 42.6 |
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| 42.3 |
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| 20.0 |
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Other assets and deferred charges |
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| 36.6 |
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| 34.3 |
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| 35.9 |
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Total assets |
| $ | 1,769.0 |
| $ | 1,670.3 |
| $ | 1,610.9 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current Liabilities: |
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Lines of credit, short-term debt and current portion of long-term debt |
| $ | 0.7 |
| $ | 6.5 |
| $ | 5.7 |
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Capital lease obligations |
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| 0.7 |
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| 1.0 |
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| 0.6 |
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Accounts payable |
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| 208.1 |
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| 119.6 |
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| 146.0 |
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Accrued royalties |
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| 52.7 |
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| 92.7 |
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| 50.8 |
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Deferred revenue |
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| 105.2 |
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| 47.1 |
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| 92.2 |
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Other accrued expenses |
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| 195.2 |
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| 233.5 |
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| 205.1 |
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Current liabilities of discontinued operations |
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| 1.9 |
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| 2.1 |
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| 0.7 |
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Total current liabilities |
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| 564.5 |
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| 502.5 |
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| 501.1 |
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Noncurrent Liabilities: |
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Long-term debt |
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| 152.9 |
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| 152.8 |
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| 152.7 |
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Capital lease obligations |
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| 56.9 |
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| 56.4 |
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| 55.5 |
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Other noncurrent liabilities |
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| 118.0 |
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| 128.3 |
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| 110.1 |
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Total noncurrent liabilities |
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| 327.8 |
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| 337.5 |
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| 318.3 |
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Commitments and Contingencies: |
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| — |
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| — |
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| — |
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Stockholders’ Equity: |
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Preferred Stock, $1.00 par value |
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| — |
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| — |
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| — |
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Class A Stock, $.01 par value |
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| 0.0 |
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| 0.0 |
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| 0.0 |
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Common Stock, $.01 par value |
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| 0.4 |
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| 0.4 |
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| 0.4 |
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Additional paid-in capital |
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| 585.8 |
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| 583.0 |
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| 583.2 |
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Accumulated other comprehensive income (loss) |
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| (64.2 | ) |
| (74.2 | ) |
| (57.0 | ) |
Retained earnings |
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| 745.5 |
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| 723.9 |
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| 685.2 |
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Treasury stock at cost |
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| (390.8 | ) |
| (402.8 | ) |
| (420.3 | ) |
Total stockholders’ equity |
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| 876.7 |
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| 830.3 |
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| 791.5 |
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Total liabilities and stockholders’ equity |
| $ | 1,769.0 |
| $ | 1,670.3 |
| $ | 1,610.9 |
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SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(Dollar amounts in millions, except per share data)
| August 31, 2013 | May 31, 2013 | August 31, 2012 | ||||||||||
| ASSETS | ||||||||||||
| Current Assets: | ||||||||||||
| Cash and cash equivalents | $ | 15.8 | $ | 87.4 | $ | 193.1 | ||||||
| Accounts receivable, net | 211.6 | 214.9 | 211.5 | |||||||||
| Inventories, net | 374.6 | 278.1 | 396.4 | |||||||||
| Deferred income taxes | 79.2 | 79.2 | 71.5 | |||||||||
| Prepaid expenses and other current assets | 107.1 | 61.2 | 97.7 | |||||||||
| Current assets of discontinued operations | 0.4 | 0.4 | 8.1 | �� | ||||||||
| Total current assets | 788.7 | 721.2 | 978.3 | |||||||||
| Property, plant and equipment, net | 302.6 | 311.6 | 326.4 | |||||||||
| Prepublication costs | 148.9 | 147.3 | 129.1 | |||||||||
| Royalty advances, net | 37.9 | 37.0 | 35.4 | |||||||||
| Production costs | 2.3 | 1.7 | 2.1 | |||||||||
| Goodwill | 157.9 | 157.9 | 157.7 | |||||||||
| Other intangibles | 14.0 | 14.6 | 16.4 | |||||||||
| Noncurrent deferred income taxes | 14.7 | 14.9 | 42.6 | |||||||||
| Other assets and deferred charges | 39.4 | 34.8 | 34.8 | |||||||||
| Total assets | $ | 1,506.4 | $ | 1,441.0 | $ | 1,722.8 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
| Current Liabilities: | ||||||||||||
| Lines of credit, short-term debt and current portion of long-term debt | $ | 29.2 | $ | 2.0 | $ | 0.6 | ||||||
| Capital lease obligations | 0.1 | 0.2 | 0.8 | |||||||||
| Accounts payable | 207.3 | 156.2 | 211.3 | |||||||||
| Accrued royalties | 45.5 | 34.4 | 109.1 | |||||||||
| Deferred revenue | 81.9 | 48.1 | 72.4 | |||||||||
| Other accrued expenses | 160.0 | 179.5 | 188.1 | |||||||||
| Current liabilities of discontinued operations | 1.3 | 1.3 | 2.0 | |||||||||
| Total current liabilities | 525.3 | 421.7 | 584.3 | |||||||||
| Noncurrent Liabilities: | ||||||||||||
| Long-term debt | — | — | 152.8 | |||||||||
| Capital lease obligations | 57.7 | 57.5 | 56.7 | |||||||||
| Other noncurrent liabilities | 95.5 | 97.4 | 123.3 | |||||||||
| Total noncurrent liabilities | 153.2 | 154.9 | 332.8 | |||||||||
| Commitments and Contingencies: | — | — | — | |||||||||
| Stockholders’ Equity: | ||||||||||||
| Preferred Stock, $1.00 par value | — | — | — | |||||||||
| Class A Stock, $.01 par value | 0.0 | 0.0 | 0.0 | |||||||||
| Common Stock, $.01 par value | 0.4 | 0.4 | 0.4 | |||||||||
| Additional paid-in capital | 581.2 | 582.9 | 584.7 | |||||||||
| Accumulated other comprehensive income (loss) | (70.2 | ) | (65.4 | ) | (68.0 | ) | ||||||
| Retained earnings | 705.3 | 738.9 | 687.8 | |||||||||
| Treasury stock at cost | (388.8 | ) | (392.4 | ) | (399.2 | ) | ||||||
| Total stockholders’ equity | 827.9 | 864.4 | 805.7 | |||||||||
| Total liabilities and stockholders’ equity | $ | 1,506.4 | $ | 1,441.0 | $ | 1,722.8 | ||||||
See accompanying notes
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| Six months ended November 30, |
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| 2012 |
| 2011 |
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Cash flows - operating activities: |
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Net income (loss) |
| $ | 29.7 |
| $ | 55.7 |
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Earnings (loss) from discontinued operations, net of tax |
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| (0.2 | ) |
| (2.5 | ) |
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Earnings (loss) from continuing operations |
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| 29.9 |
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| 58.2 |
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Adjustments to reconcile earnings from continuing operations to net cash provided by (used in) operating activities of continuing operations: |
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Provision for losses on accounts receivable |
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| 4.5 |
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| 4.7 |
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Provision for losses on inventory |
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| 11.3 |
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| 11.6 |
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Provision for losses on royalty advances |
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| 2.6 |
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| 2.3 |
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Amortization of prepublication and production costs |
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| 23.8 |
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| 24.4 |
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Depreciation and amortization |
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| 32.8 |
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| 30.6 |
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Loss on leases |
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| — |
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| 6.2 |
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Stock-based compensation |
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| 4.2 |
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| 7.8 |
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Equity investment income |
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| (1.5 | ) |
| (1.7 | ) |
Changes in assets and liabilities: |
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Accounts receivable |
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| 42.0 |
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| (76.0 | ) |
Inventories |
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| (68.0 | ) |
| (83.5 | ) |
Other current assets |
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| (0.9 | ) |
| (8.1 | ) |
Deferred promotion costs |
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| (2.4 | ) |
| (1.8 | ) |
Royalty advances |
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| (5.1 | ) |
| (4.1 | ) |
Accounts payable |
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| 86.0 |
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| 25.3 |
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Other accrued expenses |
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| (39.2 | ) |
| 55.1 |
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Accrued royalties |
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| (40.9 | ) |
| 15.9 |
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Deferred revenue |
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| 57.8 |
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| 43.2 |
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Pension and post-retirement liability |
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| (7.8 | ) |
| (2.8 | ) |
Other noncurrent liability |
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| (2.0 | ) |
| (0.9 | ) |
Other, net |
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| 0.7 |
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| 2.7 |
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Total adjustments |
|
| 97.9 |
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| 50.9 |
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Net cash provided by (used in) operating activities of continuing operations |
|
| 127.8 |
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| 109.1 |
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Net cash provided by (used in) operating activities of discontinued operations |
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| (0.4 | ) |
| (1.3 | ) |
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Net cash provided by (used in) operating activities |
|
| 127.4 |
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| 107.8 |
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Cash flows - investing activities: |
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Prepublication and production expenditures |
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| (32.6 | ) |
| (25.4 | ) |
Additions to property, plant and equipment |
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| (30.4 | ) |
| (20.8 | ) |
Other |
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| (0.1 | ) |
| — |
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Net cash provided by (used in) investing activities of continuing operations |
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| (63.1 | ) |
| (46.2 | ) |
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|
|
|
|
|
Net cash provided by (used in) investing activities |
|
| (63.1 | ) |
| (46.2 | ) |
SCHOLASTIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED
(Dollar amounts in millions)
| Three months ended | ||||||||
| August 31, 2013 | August 31, 2012 | |||||||
| Cash flows - operating activities: | ||||||||
| Net income (loss) | $ | (29.9 | ) | $ | (32.1 | ) | ||
| Earnings (loss) from discontinued operations, net of tax | 0.2 | (0.4 | ) | |||||
| Earnings (loss) from continuing operations | (30.1 | ) | (31.7 | ) | ||||
| Adjustments to reconcile earnings from continuing operations to net cash provided by (used in) operating activities of continuing operations: | ||||||||
| Provision for losses on accounts receivable | 1.4 | 0.5 | ||||||
| Provision for losses on inventory | 4.8 | 5.4 | ||||||
| Provision for losses on royalty advances | 1.0 | 1.3 | ||||||
| Amortization of prepublication and production costs | 13.3 | 11.8 | ||||||
| Depreciation and amortization | 16.3 | 16.1 | ||||||
| Stock-based compensation | 1.1 | 2.0 | ||||||
| Non cash net (gain) loss on equity investments | (0.7 | ) | (0.5 | ) | ||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | (1.1 | ) | 106.2 | |||||
| Inventories | (105.0 | ) | (102.9 | ) | ||||
| Other current assets | (40.7 | ) | (45.0 | ) | ||||
| Deferred promotion costs | (5.5 | ) | (5.7 | ) | ||||
| Royalty advances | (1.8 | ) | (1.7 | ) | ||||
| Accounts payable | 52.5 | 90.1 | ||||||
| Other accrued expenses | (18.3 | ) | (46.9 | ) | ||||
| Accrued royalties | 11.3 | 15.8 | ||||||
| Deferred revenue | 34.0 | 25.1 | ||||||
| Pension and post-retirement liability | (3.1 | ) | (3.2 | ) | ||||
| Other noncurrent liability | (0.9 | ) | (0.9 | ) | ||||
| Other, net | 0.5 | (1.6 | ) | |||||
| Total adjustments | (40.9 | ) | 65.9 | |||||
| Net cash provided by (used in) operating activities of continuing operations | (71.0 | ) | 34.2 | |||||
| Net cash provided by (used in) operating activities of discontinued operations | 0.2 | (0.0 | ) | |||||
| Net cash provided by (used in) operating activities | (70.8 | ) | 34.2 | |||||
| Cash flows - investing activities: | ||||||||
| Prepublication and production expenditures | (15.7 | ) | (15.7 | ) | ||||
| Additions to property, plant and equipment | (7.3 | ) | (13.6 | ) | ||||
| Other | (1.0 | ) | (0.1 | ) | ||||
| Net cash provided by (used in) investing activities of continuing operations | (24.0 | ) | (29.4 | ) | ||||
| Net cash used in investing activities of discontinued operations | — | (0.9 | ) | |||||
| Net cash provided by (used in) investing activities | (24.0 | ) | (30.3 | ) | ||||
See accompanying notes
|
|
|
6 |
|
|
|
|
|
|
|
|
|
| Six months ended November 30, |
| ||||
|
| 2012 |
| 2011 |
| ||
Cash flows - financing activities: |
|
|
|
|
|
|
|
Repayment of term loan |
|
| — |
|
| (50.2 | ) |
Borrowings under lines of credit |
|
| 18.8 |
|
| 52.0 |
|
Repayment of lines of credit |
|
| (24.4 | ) |
| (45.0 | ) |
Repayment of capital lease obligations |
|
| (0.5 | ) |
| (0.2 | ) |
Reacquisition of common stock |
|
| (0.1 | ) |
| (5.0 | ) |
Proceeds pursuant to stock-based compensation plans |
|
| 11.3 |
|
| 3.4 |
|
Payment of dividends |
|
| (7.9 | ) |
| (6.2 | ) |
Other |
|
| (0.6 | ) |
| (0.6 | ) |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities of continuing operations |
|
| (3.4 | ) |
| (51.8 | ) |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
| (3.4 | ) |
| (51.8 | ) |
Effect of exchange rate changes on cash and cash equivalents |
|
| 1.5 |
|
| (1.1 | ) |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
| 62.4 |
|
| 8.7 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
| 194.9 |
|
| 105.3 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
| $ | 257.3 |
| $ | 114.0 |
|
|
|
|
|
|
|
|
|
See accompanying notes |
|
|
|
|
|
|
|
|
|
|
SCHOLASTIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED
(Dollar amounts in millions)
| Three months ended | ||||||||
| August 31, 2013 | August 31, 2012 | |||||||
| Cash flows - financing activities: | ||||||||
| Borrowings under credit agreement and revolving loan | 15.0 | — | ||||||
| Borrowings under lines of credit | 35.0 | 5.0 | ||||||
| Repayment of lines of credit | (22.9 | ) | (10.8 | ) | ||||
| Repayment of capital lease obligations | (0.1 | ) | (0.3 | ) | ||||
| Reacquisition of common stock | (0.4 | ) | — | |||||
| Proceeds pursuant to stock-based compensation plans | 1.3 | 2.8 | ||||||
| Payment of dividends | (4.0 | ) | (4.0 | ) | ||||
| Other | 0.1 | 0.6 | ||||||
| Net cash provided by (used in) financing activities of continuing operations | 24.0 | (6.7 | ) | |||||
| Effect of exchange rate changes on cash and cash equivalents | (0.8 | ) | 1.0 | |||||
| Net increase (decrease) in cash and cash equivalents | (71.6 | ) | (1.8 | ) | ||||
| Cash and cash equivalents at beginning of period | 87.4 | 194.9 | ||||||
| Cash and cash equivalents at end of period | $ | 15.8 | $ | 193.1 | ||||
See accompanying notes
| 7 |
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 financial statements 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. These financial statements have not been audited but reflect those adjustments consisting of normal recurring items that management considers necessary for a fair presentation of financial position, comprehensive income, results of operations and cash flows. These financial statements should be read in conjunction with the consolidated financial statements and related notes in the Annual Report on Form 10-K for the fiscal year ended May 31, 20122013 (the “Annual Report”).
The Company’s fiscal year is not a calendar year. Accordingly, references in this document to fiscal 20122013 relate to the twelve-month period ended May 31, 2012.2013.
Segment
The Company determined that a software business previously reported in theMedia, Licensing and Advertising segment should be reported in theChildren’s Book Publishing and Distribution segment consistent with changes in the Company’s internal reporting structure. All prior periods reflect this change.Reclassifications
Reclassifications
Certain reclassifications have been made to conform to the current year presentation.
Other Comprehensive Income (Loss)
The Company reported net amortization expense of prior service and gains and losses for pension and post-retirement benefit plans in Selling, general and administrative expenses of $1.3 and $2.4 for the three and six months ended November 30, 2012, respectively, and $1.5 and $2.8 for the three and six months ended November 30, 2011, respectively. These amounts had previously been recognized as a component of accumulated other comprehensive income.
Discontinued Operations
The Company closed or sold several operations during fiscal 2009, fiscal 20102012 and fiscal 2012, and presently holds for sale one facility.2013. All of these businesses are classified as discontinued operations in the Company’s financial statements. See Note 2, “Discontinued Operations,” for additional information.
Seasonality
The Company’sChildren’s Book Publishing and Distribution school-based book clubs, school-based book fairschannels and most of its magazines operate on a school-year basis; therefore, the Company’s business is highly seasonal. As a result, the Company’s revenues in the first and third quarters of the fiscal year generally are lower than its revenues in the other two fiscal quarters. Typically these school-based book club and book fairchannel revenues are greatest in the second and fourth quarters of the fiscal year, while revenues from the sale of instructional materials and educational technology products and services are highest in the first and fourth quarters. The Company generally experiences a loss from operations in the first and third quarters of each fiscal year.
Use of estimates
The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Regulation S-X. The preparation of these financial statements involves the use of estimates and assumptions by management, which affects the amounts reported in the condensed consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, and various other assumptions believed to be reasonable under the circumstances, all of which are necessary in order to form a basis for determining the carrying values of assets and liabilities. Actual results may differ from those estimates and assumptions. On an on-going basis, the Company evaluates the adequacy of its reserves and the estimates used in calculations,
|
|
|
8 |
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
including, but not limited to:
| · | ||
| Accounts receivable, returns and allowances |
| Pension and other post-retirement obligations |
| Uncertain tax positions |
| Inventory reserves |
| Gross profits for book fair operations during interim periods |
| Sales taxes |
| Royalty advance reserves |
| Customer reward programs |
| Impairment testing for goodwill, intangibles and other long-lived assets |
Restricted Cash
The condensed consolidated balance sheets include restricted cash of $1.8,$0.2, $1.0 and $0.5$0.8 at November 30, 2012,August 31, 2013, May 31, 20122013 and November 30, 2011,August 31, 2012, respectively, which is reported in “Other current assets.”
New Accounting Pronouncements
In October 2012, the FASB issued an update to the authoritative guidance related to fair value information that arises after the measurement date and its inclusion in the impairment analysis of unamortized film costs. The amendments in this update eliminate the rebuttable presumption that the conditions leading to the write off of unamortized film costs after the balance sheet date existed as of the balance sheet date. The amendments also eliminate the requirement that an entity incorporate into fair value measurements used in the impairment tests the effects of any changes in estimates resulting from the consideration of subsequent evidence if the information would not have been considered by market participants at the measurement date. The amendments are effective for impairment assessments performed on or after December 15, 2012. The Company has determined there is no impact on its consolidated financial position and results of operations as a result of this updated guidance.
In July 2012,2013, the FASBFinancial Accounting Standards Board (the “FASB”) issued an update to the authoritative guidance related to the impairment testingfinancial statement presentation of indefinite-lived intangible assets. Similaran unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists to address diversity in practice in the guidancepresentation of unrecognized tax benefits.
An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for goodwill impairment testing, companies will havea net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows:
To the option to first performextent a qualitative assessment to determine whether itnet operating loss carryforward, a similar tax loss, or a tax credit carryforward is more likely than not thatavailable at the fair valuereporting date under the tax law of the indefinite-lived intangibleapplicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is less than its carrying value. The guidance provides companies with a revised list of examples of eventsavailable is based on the unrecognized tax benefit and circumstances to consider, in their totality, to determine whether it is more likely than notdeferred tax asset that exist at the fair valuereporting date and should be made presuming disallowance of the asset is less than its carrying amount. Iftax position at the reporting date. No new disclosures are required as a company concludes thatresult of this is the case, the company is required to perform the quantitative impairment test by comparing the fair value with the carrying value. Otherwise, a company can skip the quantitative test. Companies are not required to perform the qualitative assessment and are permitted to skip the qualitative assessment for any indefinite-lived asset in any period and proceed directly to the quantitative impairment test. The company may resume performing the qualitative assessment in any subsequent period.update. The amendments in this update are effective prospectively for annual and interim impairment tests performed for fiscal yearsreporting periods beginning after SeptemberDecember 15, 2012. Early adoption2013 for all unrecognized tax benefits that exist at the effective date. This new guidance is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statementsnot yet effective for the most recent annual or interimfiscal period have not yet been issued.covered by this quarterly report. The Company is evaluating the impact ofthat this update will have on its consolidated financial position, and results of operations.operations and cash flows.
|
|
|
9 |
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
2. Discontinued Operations
The Company continuously evaluates its portfolio of businesses for both impairment and economic viability. The Company monitors the expected cash proceeds to be realized from the disposition of discontinued operations’ assets, and adjusts asset values accordingly.
The following table summarizes the operating results of the discontinued operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended November 30, |
| Six months ended November 30, |
| ||||||||
|
| 2012 |
| 2011 |
| 2012 |
| 2011 |
| ||||
Revenues |
| $ | 0.0 |
| $ | 0.0 |
| $ | 0.0 |
| $ | 0.1 |
|
Non-cash impairment |
|
| 0.0 |
|
| 0.0 |
|
| 0.0 |
|
| 0.9 |
|
Earnings (loss) before income taxes |
|
| (0.2 | ) |
| (0.7 | ) |
| (0.4 | ) |
| (3.3 | ) |
Income tax benefit (expense) |
|
| 0.1 |
|
| 0.2 |
|
| 0.2 |
|
| 0.8 |
|
Earnings (loss) from discontinued operations, net of tax |
| $ | (0.1 | ) | $ | (0.5 | ) | $ | (0.2 | ) | $ | (2.5 | ) |
| Three months ended | ||||||||||||
| August 31, 2013 | August 31, 2012 | |||||||||||
| Revenues | $ | 0.0 | $ | 0.2 | ||||||||
| Earnings (loss) before income taxes | 0.3 | (0.7 | ) | |||||||||
| Income tax benefit (provision) | (0.1 | ) | 0.3 | |||||||||
| Earnings (loss) from discontinued operations, net of tax | $ | 0.2 | $ | (0.4 | ) | |||||||
The following table sets forth the assets and liabilities of the discontinued operations included in the condensed consolidated balance sheets of the Company as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| November 30, 2012 |
| May 31, 2012 |
| November 30, 2011 |
| |||||||||
Accounts receivable, net |
|
| $ | 0.0 |
|
|
| $ | 0.0 |
|
|
| $ | 0.1 |
|
|
Inventories, net |
|
|
| 0.0 |
|
|
|
| 0.0 |
|
|
|
| 0.0 |
|
|
Other assets |
|
|
| 7.0 |
|
|
|
| 7.0 |
|
|
|
| 9.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets of discontinued operations |
|
| $ | 7.0 |
|
|
| $ | 7.0 |
|
|
| $ | 9.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
| $ | 0.1 |
|
|
| $ | 0.0 |
|
|
| $ | 0.1 |
|
|
Accrued expenses and other current liabilities |
|
|
| 1.8 |
|
|
|
| 2.1 |
|
|
|
| 0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities of discontinued operations |
|
| $ | 1.9 |
|
|
| $ | 2.1 |
|
|
| $ | 0.7 |
|
|
| August 31, 2013 | May 31, 2013 | August 31, 2012 | ||||||||||
| Accounts receivable, net | $ | 0.0 | $ | 0.0 | $ | 0.1 | ||||||
| Other assets | 0.4 | 0.4 | 8.0 | |||||||||
| Current assets of discontinued operations | $ | 0.4 | $ | 0.4 | $ | 8.1 | ||||||
| Accrued expenses and other current liabilities | 1.3 | 1.3 | 2.0 | |||||||||
| Current liabilities of discontinued operations | $ | 1.3 | $ | 1.3 | $ | 2.0 |
|
|
|
10 |
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
3. Segment Information
The Company categorizes its businesses into five reportable segments:Children’s Book Publishing and Distribution; Educational Technology and Services; Classroom and Supplemental Materials Publishing; Media, Licensing and Advertising;and International.This classification reflects the nature of products and services consistent with the method by which the Company’s chief operating decision-maker assesses operating performance and allocates resources.
| · | |
| Children’s Book Publishing and Distributionoperates as an integrated business which includes the publication and distribution of children’s books, media and |
| · | |
| Educational Technology and Services includes the production and distribution to schools of curriculum-based learning technology and materials for grades pre-kindergarten to 12 in the United States, together with related implementation and assessment services and school consulting services. This segment is comprised of one operating segment. |
| · | |
| Classroom and Supplemental Materials Publishing includes the publication and distribution to schools and libraries of children’s books, classroom magazines, supplemental classroom materials and print and on-line reference and non-fiction products for grades pre-kindergarten to 12 in the United States. This segment is comprised of two operating segments. |
| · | |
| Media, Licensing and Advertisingincludes the production and/or distribution of digital media, consumer promotions and merchandising and advertising revenue, including sponsorship programs. This segment is comprised of two operating segments. |
| · | |
| 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 |
| 11 |
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
| Children’s Book Publishing and Distribution (1) | Educational Technology and Services (1) | Classroom and Supplemental Materials Publishing(1) | Media, Licensing and Advertising (1) | Overhead (1) (2) | Total Domestic | International (1) | Total | |||||||||||||||||||||||||
| Three months ended | ||||||||||||||||||||||||||||||||
| August 31, 2013 | ||||||||||||||||||||||||||||||||
| Revenues | $ | 54.6 | $ | 94.8 | $ | 37.8 | $ | 10.4 | $ | — | $ | 197.6 | $ | 78.7 | $ | 276.3 | ||||||||||||||||
| Bad debt expense | 0.4 | 0.4 | — | — | — | 0.8 | 0.6 | 1.4 | ||||||||||||||||||||||||
| Depreciation and amortization(3) | 4.0 | 0.3 | 0.3 | 0.1 | 10.0 | 14.7 | 1.2 | 15.9 | ||||||||||||||||||||||||
| Amortization(4) | 4.0 | 6.0 | 2.3 | 0.5 | — | 12.8 | 0.5 | 13.3 | ||||||||||||||||||||||||
| Segment operating income (loss) | (61.5 | ) | 36.2 | (1.6 | ) | (1.9 | ) | (16.4 | ) | (45.2 | ) | (0.7 | ) | (45.9 | ) | |||||||||||||||||
| Segment assets at 8/31/13 | 464.2 | 207.8 | 153.6 | 25.1 | 407.7 | 1,258.4 | 247.6 | 1,506.0 | ||||||||||||||||||||||||
| Goodwill at 8/31/13 | 54.3 | 22.7 | 65.4 | 5.4 | — | 147.8 | 10.1 | 157.9 | ||||||||||||||||||||||||
| Expenditures for long-lived assets including royalty advances | 11.4 | 8.5 | 2.0 | 1.1 | 5.2 | 28.2 | 2.5 | 30.7 | ||||||||||||||||||||||||
| Long-lived assets at 8/31/13 | 163.6 | 118.6 | 90.5 | 12.2 | 236.2 | 621.1 | 64.4 | 685.5 | ||||||||||||||||||||||||
| Three months ended | ||||||||||||||||||||||||||||||||
| August 31, 2012 | ||||||||||||||||||||||||||||||||
| Revenues | $ | 70.9 | $ | 80.0 | $ | 37.9 | $ | 14.4 | $ | — | $ | 203.2 | $ | 90.2 | $ | 293.4 | ||||||||||||||||
| Bad debt expense | (0.2 | ) | 0.3 | (0.2 | ) | 0.0 | — | (0.1 | ) | 0.6 | 0.5 | |||||||||||||||||||||
| Depreciation and amortization(3) | 3.8 | 0.3 | 0.4 | 0.1 | 10.3 | 14.9 | 1.2 | 16.1 | ||||||||||||||||||||||||
| Amortization(4) | 3.5 | 5.5 | 1.7 | 0.5 | — | 11.2 | 0.6 | 11.8 | ||||||||||||||||||||||||
| Segment operating income (loss) | (54.9 | ) | 24.8 | (2.6 | ) | 0.2 | (17.3 | ) | (49.8 | ) | 2.8 | (47.0 | ) | |||||||||||||||||||
| Segment assets at 8/31/12 | 526.9 | 219.6 | 171.4 | 40.4 | 440.9 | 1,399.2 | 315.5 | 1,714.7 | ||||||||||||||||||||||||
| Goodwill at 8/31/12 | 54.3 | 22.7 | 65.4 | 5.4 | — | 147.8 | 9.9 | 157.7 | ||||||||||||||||||||||||
| Expenditures for long-lived assets including royalty advances | 15.1 | 8.2 | 1.8 | 1.1 | 7.5 | 33.7 | 2.4 | 36.1 | ||||||||||||||||||||||||
| Long-lived assets at 8/31/12 | 170.1 | 103.3 | 90.0 | 12.1 | 244.0 | 619.5 | 68.8 | 688.3 | ||||||||||||||||||||||||
| 12 |
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
|
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|
|
| Children’s |
| Educational |
| Classroom and |
| Media, |
| Overhead(1)(4) |
| Total |
| International(1)(5) |
| Total |
| ||||||||
Three months ended |
|
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|
November 30, 2012 |
|
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|
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|
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|
|
|
|
|
Revenues |
| $ | 350.1 |
| $ | 52.2 |
| $ | 53.2 |
| $ | 17.0 |
| $ | — |
| $ | 472.5 |
| $ | 143.7 |
| $ | 616.2 |
|
Bad debt expense |
|
| 1.8 |
|
| (0.2 | ) |
| 1.4 |
|
| — |
|
| — |
|
| 3.0 |
|
| 1.0 |
|
| 4.0 |
|
Depreciation and amortization(6) |
|
| 4.3 |
|
| 0.3 |
|
| 0.3 |
|
| 0.1 |
|
| 10.4 |
|
| 15.4 |
|
| 1.3 |
|
| 16.7 |
|
Amortization(7) |
|
| 3.8 |
|
| 5.2 |
|
| 1.9 |
|
| 0.8 |
|
| — |
|
| 11.7 |
|
| 0.3 |
|
| 12.0 |
|
Segment operating income (loss) |
|
| 68.9 |
|
| 5.3 |
|
| 7.4 |
|
| 1.4 |
|
| (6.8 | ) |
| 76.2 |
|
| 24.7 |
|
| 100.9 |
|
Expenditures for long-lived assets including royalty advances |
|
| 12.1 |
|
| 9.2 |
|
| 2.4 |
|
| 1.1 |
|
| 10.8 |
|
| 35.6 |
|
| 2.7 |
|
| 38.3 |
|
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|
Three months ended |
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|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
| $ | 393.0 |
| $ | 65.4 |
| $ | 58.7 |
| $ | 24.1 |
| $ | — |
| $ | 541.2 |
| $ | 144.1 |
| $ | 685.3 |
|
Bad debt expense |
|
| 1.6 |
|
| 0.4 |
|
| 0.5 |
|
| — |
|
| — |
|
| 2.5 |
|
| 0.8 |
|
| 3.3 |
|
Depreciation and amortization(6) |
|
| 3.8 |
|
| 0.4 |
|
| 0.2 |
|
| 0.3 |
|
| 9.4 |
|
| 14.1 |
|
| 1.4 |
|
| 15.5 |
|
Amortization(7) |
|
| 3.1 |
|
| 5.1 |
|
| 1.7 |
|
| 2.1 |
|
| — |
|
| 12.0 |
|
| 0.5 |
|
| 12.5 |
|
Loss on leases |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 6.2 |
|
| 6.2 |
|
| — |
|
| 6.2 |
|
Segment operating income (loss) |
|
| 108.7 |
|
| 14.6 |
|
| 10.3 |
|
| 2.5 |
|
| (22.7 | ) |
| 113.4 |
|
| 26.6 |
|
| 140.0 |
|
Expenditures for long-lived assets including royalty advances |
|
| 12.9 |
|
| 6.0 |
|
| 3.1 |
|
| 2.1 |
|
| 7.6 |
|
| 31.7 |
|
| 1.6 |
|
| 33.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Children’s |
| Educational |
| Classroom and |
| Media, |
| Overhead(1)(4) |
| Total |
| International(1)(5) |
| Total |
| ||||||||
Six months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
November 30, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
| $ | 421.2 |
| $ | 132.2 |
| $ | 91.1 |
| $ | 31.4 |
| $ | — |
| $ | 675.9 |
| $ | 233.9 |
| $ | 909.8 |
|
Bad debt expense |
|
| 1.6 |
|
| 0.1 |
|
| 1.2 |
|
| — |
|
| — |
|
| 2.9 |
|
| 1.6 |
|
| 4.5 |
|
Depreciation and amortization(6) |
|
| 8.1 |
|
| 0.6 |
|
| 0.7 |
|
| 0.2 |
|
| 20.7 |
|
| 30.3 |
|
| 2.5 |
|
| 32.8 |
|
Amortization(7) |
|
| 7.3 |
|
| 10.7 |
|
| 3.6 |
|
| 1.3 |
|
| — |
|
| 22.9 |
|
| 0.9 |
|
| 23.8 |
|
Loss on leases |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Segment operating income (loss) |
|
| 13.7 |
|
| 30.1 |
|
| 4.8 |
|
| 1.4 |
|
| (24.1 | ) |
| 25.9 |
|
| 27.5 |
|
| 53.4 |
|
Segment assets at 11/30/12 |
|
| 564.4 |
|
| 170.9 |
|
| 170.2 |
|
| 32.3 |
|
| 513.9 |
|
| 1,451.7 |
|
| 310.3 |
|
| 1,762.0 |
|
Goodwill at 11/30/12 |
|
| 54.3 |
|
| 22.7 |
|
| 65.4 |
|
| 5.4 |
|
| — |
|
| 147.8 |
|
| 10.0 |
|
| 157.8 |
|
Expenditures for long-lived assets including royalty advances |
|
| 27.2 |
|
| 17.4 |
|
| 4.2 |
|
| 3.1 |
|
| 18.3 |
|
| 70.2 |
|
| 5.1 |
|
| 75.3 |
|
Long-lived assets at 11/30/12 |
|
| 171.4 |
|
| 106.9 |
|
| 90.0 |
|
| 13.2 |
|
| 244.3 |
|
| 625.8 |
|
| 71.2 |
|
| 697.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
|
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|
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|
|
|
November 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
| $ | 470.5 |
| $ | 162.0 |
| $ | 104.4 |
| $ | 34.6 |
| $ | — |
| $ | 771.5 |
| $ | 231.8 |
| $ | 1,003.3 |
|
Bad debt expense |
|
| 1.6 |
|
| 0.7 |
|
| 0.9 |
|
| — |
|
| — |
|
| 3.2 |
|
| 1.5 |
|
| 4.7 |
|
Depreciation and amortization(6) |
|
| 7.5 |
|
| 0.7 |
|
| 0.5 |
|
| 0.4 |
|
| 18.6 |
|
| 27.7 |
|
| 2.9 |
|
| 30.6 |
|
Amortization(7) |
|
| 6.2 |
|
| 10.3 |
|
| 3.1 |
|
| 3.6 |
|
| — |
|
| 23.2 |
|
| 1.2 |
|
| 24.4 |
|
Loss on leases |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 6.2 |
|
| 6.2 |
|
| — |
|
| 6.2 |
|
Segment operating income (loss) |
|
| 58.5 |
|
| 53.4 |
|
| 12.4 |
|
| (2.1 | ) |
| (41.9 | ) |
| 80.3 |
|
| 26.5 |
|
| 106.8 |
|
Segment assets at 11/30/11 |
|
| 541.4 |
|
| 157.6 |
|
| 158.8 |
|
| 44.2 |
|
| 419.5 |
|
| 1,321.5 |
|
| 280.1 |
|
| 1,601.6 |
|
Goodwill at 11/30/11 |
|
| 54.3 |
|
| 22.7 |
|
| 64.0 |
|
| 5.4 |
|
| — |
|
| 146.4 |
|
| 8.7 |
|
| 155.1 |
|
Expenditures for long-lived assets including royalty advances |
|
| 21.1 |
|
| 11.3 |
|
| 4.4 |
|
| 4.0 |
|
| 12.6 |
|
| 53.4 |
|
| 3.9 |
|
| 57.3 |
|
Long-lived assets at 11/30/11 |
|
| 175.6 |
|
| 98.6 |
|
| 81.0 |
|
| 20.2 |
|
| 242.4 |
|
| 617.8 |
|
| 69.9 |
|
| 687.7 |
|
|
|
|
| (1) | |
| As discussed under “Discontinued Operations” in Note 1, “Basis of Presentation,” the Company closed or sold several operations during fiscal |
(2) |
|
|
|
| Overhead includes all domestic corporate amounts not allocated to segments, including expenses and costs related to the management of corporate assets. Unallocated assets are principally comprised of deferred income taxes and property, plant and equipment related to the Company’s headquarters in the metropolitan New York area, its fulfillment and distribution facilities located in Missouri and its facility located in Connecticut. Overhead also includes amounts previously allocated to the Children’s Book Publishing and Distribution segment for the computer club business that was discontinued in the fourth quarter of fiscal 2013. |
|
|
| Includes depreciation of property, plant and equipment and amortization of intangible assets. |
| Includes amortization of prepublication and production costs. |
4. Debt
The following table summarizes debt as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Carrying |
| Fair Value |
| Carrying |
| Fair Value |
| Carrying |
| Fair Value |
| ||||||
|
| November 30, 2012 |
| May 31, 2012 |
| November 30, 2011 |
| ||||||||||||
| |||||||||||||||||||
Lines of Credit (weighted average interest rates of 4.7%, 5.3% and 3.7%, respectively) |
| $ | 0.7 |
| $ | 0.7 |
| $ | 6.5 |
| $ | 6.5 |
| $ | 5.7 |
| $ | 5.7 |
|
Loan Agreement: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Loan |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Term Loan |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
5% Notes due 2013, net of discount |
|
| 152.9 |
|
| 155.1 |
|
| 152.8 |
|
| 155.4 |
|
| 152.7 |
|
| 153.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
| $ | 153.6 |
| $ | 155.8 |
| $ | 159.3 |
| $ | 161.9 |
| $ | 158.4 |
| $ | 159.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less lines of credit, short-term debt and current portion of long-term debt |
|
| (0.7 | ) |
| (0.7 | ) |
| (6.5 | ) |
| (6.5 | ) |
| (5.7 | ) |
| (5.7 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
| $ | 152.9 |
| $ | 155.1 |
| $ | 152.8 |
| $ | 155.4 |
| $ | 152.7 |
| $ | 153.8 |
|
| Carrying Value | Fair Value | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||
| August 31, 2013 | May 31, 2013 | August 31, 2012 | ||||||||||||||||||||||
| Unsecured lines of credit (weighted average interest rates of 3.6%, 9.0% and 4.9%, respectively) | $ | 14.2 | $ | 14.2 | $ | 2.0 | $ | 2.0 | $ | 0.6 | $ | 0.6 | ||||||||||||
| Loan Agreement: | ||||||||||||||||||||||||
| Revolving Loan (interest rates of 1.4%, n/a and n/a, respectively) | 15.0 | 15.0 | — | — | — | — | ||||||||||||||||||
| Term Loan | — | — | — | — | — | — | ||||||||||||||||||
| 5% Notes due 2013, net of discount | — | — | — | — | 152.8 | 153.6 | ||||||||||||||||||
| Total debt | $ | 29.2 | $ | 29.2 | $ | 2.0 | $ | 2.0 | $ | 153.4 | $ | 154.2 | ||||||||||||
| Less lines of credit, short-term debt and current portion of long-term debt | (29.2 | ) | (29.2 | ) | (2.0 | ) | (2.0 | ) | (0.6 | ) | (0.6 | ) | ||||||||||||
| Total long-term debt | $ | — | $ | — | $ | — | $ | — | $ | 152.8 | $ | 153.6 | ||||||||||||
|
|
|
13 |
Short-term debt’s
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
The carrying value of the Company’s short-term debt approximates its fair value. Fair values of the Notes were estimated based on market quotes, where available, or dealer quotes.
The following table sets forth the maturities of the Company’s debt obligations as of November 30, 2012,August 31, 2013, for the twelve-month periodsperiod ending November 30,August 31,
|
|
|
|
|
2013 |
| $ | 0.7 |
|
2014 |
|
| 152.9 |
|
Total debt |
| $ | 153.6 |
|
| 2014 | $ | 29.2 | ||
| 2015 | — | |||
| Total debt | $ | 29.2 |
Loan Agreement
On June 1, 2007,
Scholastic Corporation and Scholastic Inc. (each, a “Borrower” and together, the “Borrowers”) entered intoare parties to a $525.0$425.0 credit facility with certain banks (the(as amended, the “Loan Agreement”), consisting of a $325.0 revolving credit component (the “Revolving Loan”) and a $200.0 amortizing term loan component (the “Term Loan”). The Loan Agreement was amended on August 16, 2010, and again on October 25, 2011. The October 25, 2011 amendment extended the maturity of the Revolving Loan facility to June 1, 2014 from June 1, 2012 and provided for the repayment of the outstanding balance of the Term Loan on October 25, 2011.
The $325.0 Revolving Loanwhich allows the Company to borrow, repay or prepay and reborrow at any time prior to the statedDecember 5, 2017 maturity date, anddate. Under the proceeds may be used for general corporate purposes, including financing for acquisitions and share repurchases. The Loan Agreement, also provides for an increase in the aggregate Revolving Loan commitments of the lenders of up to an additional $150.0.
Interestinterest on the Revolving Loanamounts 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 Revolving 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 0.500% or (iii) the Eurodollar Rate for a one month interest period plus 1% plus, in each case, an applicable spread ranging from 0.18% to 0.60%, as determined by the Company’s prevailing consolidated debt to total capital ratio. | |
- or -
| · | ||
| ||
| A Eurodollar Rate equal to the London interbank offered rate (LIBOR) plus an applicable spread ranging from 1.18% to 1.60%, as determined by the Company’s prevailing consolidated debt to total capital ratio. |
As of November 30, 2012,August 31, 2013, the indicated spread on Base Rate Advances was 0.18% and the indicated spread on Eurodollar Rate Advances was 1.18%, both based on the Company’s prevailing consolidated debt to total capital ratio. There were no Revolving Loan Advances outstanding on November 30, 2012.
The Loan Agreement also provides for the payment of a facility fee ranging from 0.20% to 0.40% per annum based upon the Company’s prevailingconsolidated debt to total capital ratio.At November 30, 2012,August 31, 2013, the facility fee rate was 0.20%.
At November 30, 2012,
There were outstanding borrowings totaling $15.0 under the Loan Agreement as of August 31, 2013.
The Company had open standby letters of credit totaling $6.6, including $1.4 under the Loan Agreement.Agreementas of August 31, 2013.
The Loan Agreement contains certain covenants, including interest coverage and leverage ratio tests and certain limitations on the amount of dividends and other distributions, and at November 30, 2012,August 31, 2013, the Company was in compliance with these covenants.
See Note 16, “Subsequent Events,” for information concerning the December 5, 2012 amendment to the Loan Agreement.
|
|
|
14 |
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
Lines of Credit
As of November 30, 2012,August 31, 2013, the Company’s domestic credit lines available under unsecured money market bid rate credit lines totaled $20.0.$13.9. As of August 31, 2013, borrowings under these credit lines totaled $5.9. There were no outstanding borrowings under these credit lines at November 30, 2012, May 31, 20122013 and November 30, 2011.August 31, 2012. All loans made under these credit lines are at the sole discretion of the lender and at an interest rate and term agreed to at the time each loan is made, but not to exceed 364365 days. These credit lines may be renewed, if requested by the Company, at the option of the lender.
As of November 30, 2012,August 31, 2013, the Company had various local currency credit lines, with maximum available borrowings in amounts equivalent to $32.2,$30.0, underwritten by banks primarily in the United States, Canada and the United Kingdom. These credit lines are typically available for overdraft borrowings or loans up to 364 days and may be renewed, if requested by the Company, at the sole option of the lender. Borrowings and weighted average interest rates forOutstanding borrowings under these lines of credit are presented in the table above.
5% Notes duetotaled $8.3, $2.0 and $0.6 at August 31, 2013,
In April 2003, Scholastic Corporation issued $175.0 of 5% Notes (the “5% Notes”). The 5% Notes are senior unsecured obligations that mature on April 15, 2013. Interest on the 5% Notes is payable semi-annually on April 15 and October 15 of each year through maturity. The Company may at any time redeem all or a portion of the 5% Notes at a redemption price (plus accrued interest to the date of the redemption) equal to the greater of (i) 100% of the principal amount, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest discounted to the date of redemption.
As noted above under “Loan Agreement,” the Company amended the terms of the Revolving Loan to extend the maturity date from June 1, 2012 to June 1, 2014. The Company has the ability to use a portion of this credit facility to fully redeem the 5% Notes due May 31, 2013 and intends to draw on this credit facility for this purpose. Accordingly, the balance of the 5% Notes is excluded from current liabilities and classified as long-term debt on the Company’s condensed consolidated balance sheets at November 30,August 31, 2012, and May 31, 2012.respectively.
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 has occurred and the amount of such liability can be reasonably estimated. When only a range can be estimated, the most probable amount in the range is accrued unless no amount within the range is a better estimate than any other amount, in which case the minimum amount in the range is accrued. Legal costs associated with litigation loss contingencies are expensed in the period in which they are incurred. The Company does not expect, in the case of those various claims and lawsuits arising in the normal course of business where a loss is considered probable or reasonably possible, that the reasonably possible losses from such claims and lawsuits (either individually or in the aggregate) would have a material adverse effect on the Company’s consolidated financial position or results of operations.
Grolier Limited is an indirect subsidiary of Scholastic Corporation, located in the United Kingdom, which ceased operations in fiscal 2008 and the operations of which are included in discontinued operations. The Company is currently in the process of settling a Grolier Limited pension plan in effect at the time it ceased operations and is evaluating the potential pension liabilities under the plan relating to the status of the plan as a defined contribution or a defined benefit plan in the context of the conversion of the plan from a defined benefit to a defined contribution plan in 1986. TheBased on the information currently available to it, the Company isdoes not expect to incur any additional material liability in a position to estimate a range ofresolving this issue and settling the reasonably possible liability at this time.plan.
|
|
|
15 |
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
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 three and six-monththree-month periods ended November 30,August 31, 2013 and 2012, respectively:
| Three months ended | ||||||||
| August 31, 2013 | August 31, 2012 | |||||||
| Earnings (loss) from continuing operations attributable to Class A and Common Shares | $ | (30.1 | ) | $ | (31.7 | ) | ||
| Earnings (loss) from discontinued operations attributable to Class A and Common Shares, net of tax | 0.2 | (0.4 | ) | |||||
| Net income (loss) attributable to Class A and Common Shares | $ | (29.9 | ) | $ | (32.1 | ) | ||
| Weighted average Shares of Class A Stock and Common Stock outstanding for basic earnings (loss) per share (in millions) | 31.8 | 31.5 | ||||||
| Dilutive effect of Class A Stock and Common Stock potentially issuable pursuant to stock-based compensation plans (in millions) | * | * | ||||||
| Adjusted weighted average Shares of Class A Stock and Common Stock outstanding for diluted earnings (loss) per share (in millions) | * | * | ||||||
| Earnings (loss) per share of Class A Stock and Common Stock: | ||||||||
| Basic earnings (loss) per share: | ||||||||
| Earnings (loss) from continuing operations | $ | (0.94 | ) | $ | (1.01 | ) | ||
| Earnings (loss) from discontinued operations, net of tax | $ | 0.00 | $ | (0.01 | ) | |||
| Net income (loss) | $ | (0.94 | ) | $ | (1.02 | ) | ||
| Diluted earnings (loss) per share: | ||||||||
| Earnings (loss) from continuing operations | $ | (0.94 | ) | $ | (1.01 | ) | ||
| Earnings (loss) from discontinued operations, net of tax | $ | 0.00 | $ | (0.01 | ) | |||
| Net income (loss) | $ | (0.94 | ) | $ | (1.02 | ) | ||
* In each of the three month periods ended August 31, 2013 and 2011, respectively:2012, the Company experienced a loss from continuing operations and therefore did not report any dilutive share impact.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended November 30, |
| Six months ended November 30, |
| ||||||||
|
| 2012 |
| 2011 |
| 2012 |
| 2011 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations attributable to Class A and Common Shares |
| $ | 61.7 |
| $ | 82.9 |
| $ | 29.8 |
| $ | 57.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from discontinued operations attributable to Class A and Common Shares, net of tax |
|
| (0.1 | ) |
| (0.5 | ) |
| (0.2 | ) |
| (2.5 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Class A and Common Shares |
| $ | 61.6 |
| $ | 82.4 |
| $ | 29.6 |
| $ | 55.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average Shares of Class A Stock and Common Stock outstanding for basic earnings (loss) per share (in millions) |
|
| 31.9 |
|
| 31.2 |
|
| 31.7 |
|
| 31.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of Class A Stock and Common Stock potentially issuable pursuant to stock-based compensation plans (in millions) |
|
| 0.8 |
|
| 0.5 |
|
| 0.7 |
|
| 0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average Shares of Class A Stock and Common Stock outstanding for diluted earnings (loss) per share (in millions) |
|
| 32.7 |
|
| 31.7 |
|
| 32.4 |
|
| 31.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share of Class A Stock and Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations |
| $ | 1.93 |
| $ | 2.66 |
| $ | 0.94 |
| $ | 1.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from discontinued operations, net of tax |
| $ | 0.00 |
| $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.08 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | 1.93 |
| $ | 2.64 |
| $ | 0.93 |
| $ | 1.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations |
| $ | 1.89 |
| $ | 2.62 |
| $ | 0.92 |
| $ | 1.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from discontinued operations, net of tax |
| $ | 0.00 |
| $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.08 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | 1.89 |
| $ | 2.60 |
| $ | 0.91 |
| $ | 1.75 |
|
16 |
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
The following table sets forth Options outstanding pursuant to stock-based compensation plans as of the dates indicated:
| August 31, 2013 | August 31, 2012 | |||||||
| Options outstanding pursuant to stock-based compensation plans (in millions) | 4.0 | 5.1 | ||||||
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
In periods of Net loss, dilutive earnings per share are not reported as the effect of the potentially dilutive shares becomes anti-dilutive.
In a period in which the Company reports a discontinued operation, Earnings (loss) from continuing operations is used as the “control number” in determining whether potentially dilutive common shares are dilutive or anti-dilutive.
A portion of the Company’s restricted stock units (“RSUs”) which are granted to employees participate in earnings through cumulative non-forfeitable dividends payable to the employees upon vesting of the RSUs. Accordingly, the Company measures earnings per share based upon the two-classlower of the Two-class method or the Treasury Stock method. Since, under the Two-class method, losses are not allocated to the participating securities, in periods of loss the Two-class method is not applicable.
Earnings from continuing operations exclude earnings of $0.2 and $0.1 for the three and six months ended November 30, 2012, respectively, and $0.4 and $0.3 for the three and six months ended November 30, 2011, respectively, for earnings attributable to participating RSUs.
Potentially dilutive shares outstanding pursuant to compensation plans that were not included in the diluted earnings per share calculation because they were anti-dilutive were 1.6 million and 4.8 million for the three months ended November 30, 2012 and 2011, respectively, and 1.7 million and 4.6 million for the six months ended November 30, 2012 and 2011, respectively. Options outstanding pursuant to compensation plans were 4.3 million and 5.8 million as of November 30, 2012 and 2011, respectively.
As of November 30, 2012, $30.9August 31, 2013, $19.0 remains available for future purchases of common shares under the current repurchase authorization of the Board of Directors. See Note 12, “Treasury Stock,” for amore complete description of the Company’s share buy-back program.
7. Goodwill and Other Intangibles
Goodwill and other intangible assets with indefinite lives are reviewed annually for impairment or more frequently if impairment indicators arise.
The following table summarizes the activity in Goodwill for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
| Six months ended |
| Twelve months ended |
| Six months ended |
| |||
Gross beginning balance |
| $ | 178.5 |
| $ | 175.0 |
| $ | 175.0 |
|
Accumulated impairment |
|
| (20.8 | ) |
| (20.8 | ) |
| (20.8 | ) |
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
| $ | 157.7 |
| $ | 154.2 |
| $ | 154.2 |
|
Additions due to acquisition |
|
| — |
|
| 2.7 |
|
| — |
|
Foreign currency translation |
|
| 0.1 |
|
| 0.0 |
|
| 0.0 |
|
Other |
|
| — |
|
| 0.8 |
|
| 0.9 |
|
Gross ending balance |
| $ | 178.6 |
| $ | 178.5 |
| $ | 175.9 |
|
Accumulated impairment |
|
| (20.8 | ) |
| (20.8 | ) |
| (20.8 | ) |
Ending balance |
| $ | 157.8 |
| $ | 157.7 |
| $ | 155.1 |
|
On February 8, 2012, the Company acquired the business and certain assets of Weekly Reader, a publisher of weekly educational classroom magazines designed for children in grades Pre-K–12, for $2.0 in cash and $4.8 in assumed liabilities, which have been fulfilled by the Company. The Company utilized Level 3 fair value measurement inputs including internally-developed discounted cash flow forecasts and market comparisons of royalty rates to determine the fair value of the assets acquired and the amount to be allocated to goodwill. As a result, the Company recognized $1.4 of goodwill and $5.4 of intangible assets. The results of operations of this business subsequent to the acquisition date are included in theClassroom and Supplemental Materials Publishingsegment.
|
|
|
On January 3, 2012, the Company acquired Learners Publishing, a Singapore-based publisher of supplemental learning materials for English-Language Learners, for $2.8, net of cash acquired. The Company utilized Level 3 fair value measurement inputs, using its own assumptions, including internally-developed discounted cash flow forecasts, to determine the fair value of the assets acquired and the amount of goodwill to be allocated to the Learners Publishing business. As a result of this transaction, the Company recorded $1.3 of goodwill. The results of operations of this business subsequent to the acquisition date are included in theInternationalsegment.
The Company assesses goodwill annually or more frequently if impairment indicators are such that the goodwill is more likely than not impaired. In the current fiscal period, there are no indicators that the goodwill is more likely than not impaired. The Company continues to monitor theseimpairment indicators in light of reduced earnings, changes in market conditions, near and long-term demand for the Company’s products and other relevant factors.
The Company did not have any impairment indicators in the fiscal quarter ended August 31, 2013, but continues to closely monitor its book clubs reporting unit, as this reporting unit’s fair value is largely dependent upon the success of the Storia ereading app, which was launched in fiscal 2012. Should Storia not achieve its projected revenue, and the Company is unable to adjust its strategy to effectively compensate, there is a potential for an impairment of goodwill in this reporting unit in future periods.
The following table summarizes the activity in Goodwill for the periods indicated:
| Three months ended August 31, 2013 | Twelve months ended May 31, 2013 | Three months ended August 31, 2012 | ||||||||||
| Gross beginning balance | $ | 178.7 | $ | 178.5 | $ | 178.5 | ||||||
| Accumulated impairment | (20.8 | ) | (20.8 | ) | (20.8 | ) | ||||||
| Beginning balance | $ | 157.9 | $ | 157.7 | $ | 157.7 | ||||||
| Foreign currency translation | 0.0 | 0.0 | 0.0 | |||||||||
| Other | — | 0.2 | — | |||||||||
| Gross ending balance | $ | 178.7 | $ | 178.7 | $ | 178.5 | ||||||
| Accumulated impairment | (20.8 | ) | (20.8 | ) | (20.8 | ) | ||||||
| Ending balance | $ | 157.9 | $ | 157.9 | $ | 157.7 | ||||||
| 17 |
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
The following table summarizes the activity in Total other intangibles subject to amortization for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
| Six months ended |
| Twelve months ended |
| Six months ended |
| |||
Beginning balance - customer lists |
| $ | 4.3 |
| $ | 0.7 |
| $ | 0.7 |
|
Additions due to acquisition |
|
| 0.1 |
|
| 3.8 |
|
| — |
|
Amortization expense |
|
| (0.5 | ) |
| (0.2 | ) |
| (0.1 | ) |
Foreign currency translation |
|
| 0.0 |
|
| 0.0 |
|
| 0.0 |
|
Customer lists, net of accumulated amortization of $1.8, $1.3 and $1.2, respectively |
| $ | 3.9 |
| $ | 4.3 |
| $ | 0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance - other |
| $ | 10.4 |
| $ | 17.3 |
| $ | 17.3 |
|
Impairment charge |
|
| — |
|
| (5.4 | ) |
| — |
|
Amortization expense |
|
| (0.8 | ) |
| (1.4 | ) |
| (0.8 | ) |
Other |
|
| 0.1 |
|
| (0.1 | ) |
| — |
|
Other intangibles, net of accumulated amortization of $11.3, $10.5 and $5.0, respectively |
| $ | 9.7 |
| $ | 10.4 |
| $ | 16.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangibles subject to amortization |
| $ | 13.6 |
| $ | 14.7 |
| $ | 17.1 |
|
| Three months ended August 31, 2013 | Twelve months ended May 31, 2013 | Three months ended August 31, 2012 | ||||||||||
| Beginning balance - customer lists | $ | 3.4 | $ | 4.3 | $ | 4.3 | ||||||
| Additions | — | 0.1 | 0.1 | |||||||||
| Amortization expense | (0.2 | ) | (1.0 | ) | (0.2 | ) | ||||||
| Foreign currency translation | 0.0 | 0.0 | 0.0 | |||||||||
| Customer lists, net of accumulated amortization of $2.5, $2.3 and $1.5, respectively | $ | 3.2 | $ | 3.4 | $ | 4.2 | ||||||
| Beginning balance - other intangibles | $ | 9.2 | $ | 10.4 | $ | 10.4 | ||||||
| Additions | — | 0.2 | — | |||||||||
| Amortization expense | (0.4 | ) | (1.5 | ) | (0.3 | ) | ||||||
| Foreign currency translation | 0.0 | — | — | |||||||||
| Other | — | 0.1 | 0.1 | |||||||||
| Other intangibles, net of accumulated amortization of $12.4, $12.0 and $10.8, respectively | $ | 8.8 | $ | 9.2 | $ | 10.2 | ||||||
| Total other intangibles subject to amortization | $ | 12.0 | $ | 12.6 | $ | 14.4 | ||||||
| Trademarks and other | $ | 2.0 | $ | 2.0 | $ | 2.0 | ||||||
| Total other intangibles not subject to amortization | $ | 2.0 | $ | 2.0 | $ | 2.0 | ||||||
| Total other intangibles | $ | 14.0 | $ | 14.6 | $ | 16.4 | ||||||
Amortization expense for Total other intangibles was $1.3$0.6 and $0.9$0.5 for the sixthree months ended November 30,August 31, 2013 and 2012, and 2011, respectively.Intangible assets with definite lives consist principally of customer lists, covenants not to compete and publishing and trademark rights.rights. Intangible assets with definite lives are amortized over their estimated useful lives. The weighted-average remaining useful lives of all amortizable intangible assets is 89 years.
| 18 |
In fiscal 2012, due to declining revenues associated with certain publishing and trademark rightsSCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in theChildren’s Book Publishing and Distributionmillions, except per share data) segment, the Company determined that the intangible assets associated with these rights were not fully recoverable and recognized an impairment in amortization expense of $4.9 based upon the difference between the carrying value and the fair value of the assets, and reduced the expected useful life of these assets. The Company employed Level 3 fair value measurement techniques to determine the fair value of these assets, including the relief from royalty method.
|
|
|
The following table summarizes Other intangibles not subject to amortization at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
| November 30, 2012 |
| May 31, 2012 |
| November 30, 2011 |
| |||
Net carrying value by major class: |
|
|
|
|
|
|
|
|
|
|
Trademarks and other |
| $ | 2.0 |
| $ | 2.0 |
| $ | 1.8 |
|
Total |
| $ | 2.0 |
| $ | 2.0 |
| $ | 1.8 |
|
8.Investments
Included in “Other assets and deferred charges” on the Company’s condensed consolidated balance sheets were investments of $22.9, $20.6$21.9, $19.6 and $22.5$21.2 at November 30, 2012,August 31, 2013, May 31, 20122013 and November 30, 2011,August 31, 2012, respectively.
In the fiscal quarter ended August 31, 2013, the Company acquired a 20% interest in a software development business for $1.0 in cash, which is accounted for using the equity method of accounting. The Company owns a 15% non-controlling interest in a book distribution business located in the UK, which is accounted for as a cost-basis investment.
The Company’s 26.2% non-controlling interest in a children’s book publishing business located in the UK is accounted for using the equity method of accounting.
Income from equity investments totaled $1.5$0.7 and $0.5 for the sixthree months ended November 30,August 31, 2013 and 2012, and $1.7 for the six months ended November 30, 2011. The current year results include a $1.3 settlement received in the current fiscal period in respect of a former equity-method investment for product delivered to the investee in prior years.respectively.
The following table summarizes the Company’s investments as of the dates indicated:indicated:
|
|
|
|
|
|
|
|
|
|
|
|
| November 30, 2012 |
| May 31, 2012 |
| November 30, 2011 |
| |||
Cost method investments: |
|
|
|
|
|
|
|
|
|
|
UK - based |
| $ | 5.6 |
| $ | 5.2 |
| $ | 5.5 |
|
Total cost method investments |
| $ | 5.6 |
| $ | 5.2 |
| $ | 5.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Equity method investments: |
|
|
|
|
|
|
|
|
|
|
UK - based |
| $ | 17.3 |
| $ | 15.4 |
| $ | 15.7 |
|
U.S. - based |
|
| — |
|
| — |
|
| 1.3 |
|
Total equity method investments |
| $ | 17.3 |
| $ | 15.4 |
| $ | 17.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| $ | 22.9 |
| $ | 20.6 |
| $ | 22.5 |
|
| August 31, 2013 | May 31, 2013 | August 31, 2012 | ||||||||||
| Cost method investments: | ||||||||||||
| UK - based | $ | 4.7 | $ | 5.0 | $ | 5.5 | ||||||
| Total cost method investments | $ | 4.7 | $ | 5.0 | $ | 5.5 | ||||||
| Equity method investments: | ||||||||||||
| UK - based | $ | 16.2 | $ | 14.6 | $ | 15.7 | ||||||
| Other | 1.0 | — | — | |||||||||
| Total equity method investments | $ | 17.2 | $ | 14.6 | $ | 15.7 | ||||||
| Total | $ | 21.9 | $ | 19.6 | $ | 21.2 | ||||||
|
|
|
19 |
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
9.Employee Benefit Plans
The following tables settable sets forth components of the net periodic benefit costs for the periods indicated under the Company’s 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 the post-retirement benefits, consisting of certain healthcare and life insurance benefits, provided by the Company to its eligible retired United States-based employees (the “Post-Retirement Benefits”). The Pension Plans and Post-Retirement Benefits include participants associated with both continuing operations and discontinued operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pension Plans |
| Post-Retirement Benefits |
| ||||||||
|
| 2012 |
| 2011 |
| 2012 |
| 2011 |
| ||||
Components of net periodic benefit (credit) cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
| $ | 0.0 |
| $ | 0.0 |
| $ | 0.0 |
| $ | 0.0 |
|
Interest cost |
|
| 1.7 |
|
| 2.1 |
|
| 0.4 |
|
| 0.5 |
|
Expected return on assets |
|
| (2.6 | ) |
| (2.7 | ) |
| — |
|
| — |
|
Net amortization of prior service credit |
|
| — |
|
| — |
|
| (0.1 | ) |
| (0.2 | ) |
Amortization of (gain) loss |
|
| 0.5 |
|
| 0.3 |
|
| 0.9 |
|
| 1.0 |
|
Net periodic benefit (credit) cost |
| $ | (0.4 | ) | $ | (0.3 | ) | $ | 1.2 |
| $ | 1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pension Plans |
| Post-Retirement Benefits |
| ||||||||
|
| 2012 |
| 2011 |
| 2012 |
| 2011 |
| ||||
Components of net periodic benefit (credit) cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
| $ | 0.0 |
| $ | 0.0 |
| $ | 0.0 |
| $ | 0.0 |
|
Interest cost |
|
| 3.5 |
|
| 4.2 |
|
| 0.8 |
|
| 0.9 |
|
Expected return on assets |
|
| (5.3 | ) |
| (5.4 | ) |
| — |
|
| — |
|
Net amortization of prior service credit |
|
| — |
|
| — |
|
| (0.2 | ) |
| (0.3 | ) |
Amortization of (gain) loss |
|
| 1.1 |
|
| 0.7 |
|
| 1.9 |
|
| 2.1 |
|
Net periodic benefit (credit) cost |
| $ | (0.7 | ) | $ | (0.5 | ) | $ | 2.5 |
| $ | 2.7 |
|
| Pension Plans Three months ended | Post-Retirement Benefits Three months ended | |||||||||||||||
| August 31, 2013 | August 31, 2012 | August 31, 2013 | August 31, 2012 | |||||||||||||
| Components of net periodic benefit (credit) cost: | ||||||||||||||||
| Service cost | $ | — | $ | — | $ | 0.0 | $ | 0.0 | ||||||||
| Interest cost | 1.8 | 1.7 | 0.3 | 0.4 | ||||||||||||
| Expected return on assets | (3.1 | ) | (2.6 | ) | — | — | ||||||||||
| Net amortization of prior service credit | — | — | (0.0 | ) | (0.1 | ) | ||||||||||
| Amortization of loss | 0.4 | 0.5 | 0.6 | 0.9 | ||||||||||||
| Net periodic benefit (credit) cost | $ | (0.9 | ) | $ | (0.4 | ) | $ | 0.9 | $ | 1.2 | ||||||
The Company’s funding practice with respect to the Pension Plans is to contribute on an annual basis at least the minimum amounts required by applicable laws. For the sixthree months ended November 30, 2012,August 31, 2013, the Company contributed $5.1$1.7 to the U.S. Pension Plan and $0.6$0.3 to the UK Pension Plan.
The Company expects, based on actuarial calculations, to contribute cash of approximately $10.6$8.3 to the Pension Plans for the fiscal year ending May 31, 2013.2014.
10. 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, |
| ||||||||
|
| 2012 |
| 2011 |
| 2012 |
| 2011 |
| ||||
Stock option expense |
| $ | 0.6 |
| $ | 3.4 |
| $ | 1.6 |
| $ | 4.8 |
|
Restricted stock unit expense |
|
| 0.8 |
|
| 2.0 |
|
| 1.8 |
|
| 2.6 |
|
Management stock purchase plan |
|
| 0.6 |
|
| 0.2 |
|
| 0.6 |
|
| 0.2 |
|
Employee stock purchase plan |
|
| 0.1 |
|
| 0.1 |
|
| 0.2 |
|
| 0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
| $ | 2.1 |
| $ | 5.7 |
| $ | 4.2 |
| $ | 7.8 |
|
|
|
|
11. Severance
| Three months ended | ||||||||
| August 31, 2013 | August 31, 2012 | |||||||
| Stock option expense | $ | 0.2 | $ | 1.0 | ||||
| Restricted stock unit expense | 0.8 | 0.9 | ||||||
| Management stock purchase plan | 0.0 | 0.0 | ||||||
| Employee stock purchase plan | 0.1 | 0.1 | ||||||
| Total stock-based compensation expense | $ | 1.1 | $ | 2.0 | ||||
During each of the three month periods ended August 31, 2013 and Exit Costs
Severance expense incurred2012, shares of Common Stock issued by the Company was $2.1 during the six months ended November 30, 2012, $14.9 during the twelve months ended May 31, 2012 and $8.3 during the six months ended November 30, 2011.Corporation pursuant to its stock-based compensation plans were not material.
| 20 |
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
11. Accrued Severance
The table below provides information regarding Accrued severance, of $1.9, $2.7 and $2.4 as of November 30, 2012, May 31, 2012 and November 30, 2011, respectively,which is included in “Other accrued expenses” onin the Company’s condensed consolidated balance sheets. The table below provides information regarding
| Three months ended August 31, 2013 | Twelve months ended May 31, 2013 | Three months ended August 31, 2012 | ||||||||||
| Beginning balance | $ | 3.3 | $ | 2.7 | $ | 2.7 | ||||||
| Accruals | 2.3 | 13.4 | 1.3 | |||||||||
| Payments | (3.6 | ) | (12.8 | ) | (2.9 | ) | ||||||
| Ending balance | $ | 2.0 | $ | 3.3 | $ | 1.1 | ||||||
In the first quarter of fiscal 2014, the Company continued to implement cost savings initiatives, resulting in severance expense of $2.0. Severance expenses are reported in the Company’s condensed consolidated statements of operations.“Selling, general and administrative expenses.”
|
|
|
|
|
|
|
|
|
|
|
|
| Six months ended |
| Twelve months |
| Six months ended |
| |||
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
| $ | 2.7 |
| $ | 1.9 |
| $ | 1.9 |
|
Accruals |
|
| 2.1 |
|
| 14.9 |
|
| 8.3 |
|
Payments |
|
| (2.9 | ) |
| (14.1 | ) |
| (7.8 | ) |
Ending balance |
| $ | 1.9 |
| $ | 2.7 |
| $ | 2.4 |
|
12. Treasury Stock
The Board of Directors 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 remaining Board authorization:
|
|
|
|
|
Board Authorization |
| Amount |
| |
|
|
|
|
|
September 2010 |
| $ | 44.0 |
|
Less repurchases made from November 2011 through November 2012 |
|
| (13.1 | ) |
|
|
|
|
|
Remaining Board authorization at November 30, 2012 |
| $ | 30.9 |
|
| Board Authorization | Amount | |||
| September 2010 | $ | 44.0 | ||
| Less repurchases made under this authorization | (25.0 | ) | ||
| Remaining Board authorization at August 31, 2013 | $ | 19.0 | ||
The Company’s repurchase program may be suspended at any time without prior notice. There were $0.6 repurchases of Common Stock made during the first fiscal quarter of 2014.
|
|
|
21 |
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
13. 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 1Unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date. | |||||
| Level 2Observable inputs other than unadjusted quoted prices in active markets for identical assets or liabilities such as | |||||
o | Quoted prices for similar assets or liabilities in active markets | |||||
o | Quoted prices for identical or similar assets or liabilities in inactive markets | |||||
o | Inputs other than quoted prices that are observable for the asset or liability | |||||
o | Inputs that are derived principally from or corroborated by observable market data by correlation or other means | |||||
| Level 3Unobservable 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 5% Notes and its various lines of credit. See Note 4, “Debt,” for a more complete description of fair value measurements employed. The fair values of foreign currency forward contracts, used by the Company to manage the impact of foreign exchange rate changes to the financial statements, are based on quotations from financial institutions, a Level 2 fair value measure. See Note 15, “Derivatives and Hedging,” for a more complete description of fair value measurements employed.
Non-financial assets and liabilities for which the Company employs fair value measures on a non-recurring basis include:
| · | Long-lived assets | |
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| · | Investments | |
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| · | ||
| Assets acquired in a business combination | |
| Goodwill and indefinite-lived intangible assets | |
| Long-lived assets held for sale |
Level 2 and Level 3 inputs are employed by the Company in the fair value measurement of these assets and liabilities.
14. 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 the facts and circumstances known and applies that rate to its year-to-date earnings or losses. The Company’s effective tax rate is based on expected income and statutory tax rates and takes into consideration permanent differences between financial statement and tax return income applicable to the Company in the various jurisdictions in which the Company operates. The effect of discrete items, such as changes in estimates, changes in enacted tax laws or rates or tax status, and unusual or infrequently occurring events, is recognized in the interim period in which the discrete item occurs. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the result of new judicial interpretations or regulatory or tax law changes.
The Company’s annual effective tax rate for the fiscal year ending May 31, 2014 is currently expected to be approximately 40%.
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22 |
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
The Corporation,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 CorporationCompany file income tax returns in foreign jurisdictions. The Company is routinely audited by various tax authorities. The Company is currently under audit by theInternal Revenue Service for fiscal years ended May 31, 2007, 2008 and 2009. The Company is currently under audit by New York State for fiscal years ended May 31, 2006, 2007 and 2008 and by New York City for fiscal years ended May 31, 2005, 2006 and 2007. If any of these tax examinations are concluded within the next twelve months, the Company will make any necessary adjustments to its unrecognized tax benefits.
The Company’s annual effective tax rate for the fiscal year ending May 31, 2013 is currently expected to be approximately 40%.
Non-income Taxes
The Company is subject to tax examinations for sales-based taxes. A number of these examinations are ongoing and, in certain cases, have resulted in assessments from taxing authorities. Where a sales tax liability associated with these examinations and assessmentsrespect to a particular jurisdiction is probable and can be reliably estimated, the Company has made accruals for these matters which are reflected in the Company’s condensed consolidated financial statements.
15. 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. These derivative contracts are economic hedges and are not designated as cash flow hedges. The Company marks-to-market these instruments and records the changes in the fair value of these items in current earnings, and it recognizes the unrealized gain or loss in other current assets or liabilities. Unrealized gains of $0.1$0.4 and $0.8less than $0.1 were recognized at November 30,August 31, 2013 and 2012, and 2011, respectively.
16. Other Accrued Expenses
Other accrued expenses consist of the following as of the dates indicated:
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| November 30, 2012 |
| May 31, 2012 |
| November 30, 2011 |
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Accrued payroll, payroll taxes and benefits |
| $ | 45.7 |
| $ | 48.1 |
| $ | 45.2 |
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Accrued bonus and commissions |
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| 16.5 |
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| 57.3 |
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| 21.9 |
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Accrued other taxes |
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| 36.6 |
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| 42.8 |
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| 24.0 |
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Accrued advertising and promotions |
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| 41.1 |
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| 36.1 |
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| 35.5 |
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Accrued income taxes |
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| 11.3 |
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| 10.2 |
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| 28.2 |
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Accrued insurance |
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| 8.7 |
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| 8.4 |
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| 8.5 |
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Other accrued expenses |
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| 35.3 |
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| 30.6 |
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| 41.8 |
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Total accrued expenses |
| $ | 195.2 |
| $ | 233.5 |
| $ | 205.1 |
|
| August 31, 2013 | May 31, 2013 | August 31, 2012 | ||||||||||
| Accrued payroll, payroll taxes and benefits | $ | 40.3 | $ | 45.8 | $ | 44.1 | ||||||
| Accrued bonus and commissions | 20.7 | 22.0 | 25.6 | |||||||||
| Accrued other taxes | 24.4 | 29.3 | 37.2 | |||||||||
| Accrued advertising and promotions | 33.1 | 38.2 | 34.1 | |||||||||
| Accrued income taxes | 4.4 | 5.5 | 6.8 | |||||||||
| Accrued insurance | 8.9 | 8.7 | 8.6 | |||||||||
| Other accrued expenses | 28.2 | 30.0 | 31.7 | |||||||||
| Total accrued expenses | $ | 160.0 | $ | 179.5 | $ | 188.1 | ||||||
17. Subsequent Events
On December 19, 2012,September 18, 2013, the Company announced that the Board of Directors declared a cash dividend of $0.125$0.15 per Class A and Common share in respect of the thirdsecond quarter of fiscal 2013.2014. The dividend is payable on March 15,December 16, 2013 to stockholders of record on JanuaryOctober 31, 2013.
| 23 |
Effective December 5, 2012, Scholastic CorporationSCHOLASTIC CORPORATION
Item 2. Management’s Discussion and Scholastic Inc. (each, a “Borrower”Analysis of Financial Condition and together, the “Borrowers”) entered into an amendment to the Loan Agreement, dated June 1, 2007. The amendment (i) increased the Revolving Loan commitments from $325.0 to $425.0 (with the continued ability to increase that amount by up to an additional $150.0), (ii) extended the maturityResults of the $425.0 Revolving Loan until December 5, 2017 from June 1, 2014, (iii) amended a covenant in the Loan Agreement to permit certain sales, transfers and dispositions of assets by either Borrower or any subsidiary to any other Borrower or subsidiary and (iv) amended a covenant in the Loan Agreement to permit transactions between or among the Company and its wholly-owned subsidiaries not involving any other affiliates.Operations (“MD&A”)
|
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Overview and Outlook
Revenues
Revenue for the quarter ended November 30, 2012 decreased by $69.1 million, or 10.1%, to $616.2August 31, 2013 was $276.3 million, compared to $685.3$293.4 million in the prior fiscal year quarter. Net income for the quarter ended November 30, 2012 was $61.8 million, compared to $82.8 millionperiod. The Company reported a loss per share from continuing operations of $0.94 in the prior fiscal year period. Consolidated earningscurrent quarter, versus a loss per diluted share were $1.89, compared to $2.60 per diluted sharefrom continuing operations of $1.01 in the prior year period.
The
Current quarter results forwere largely driven by strong sales of the quarter ended November 30, 2012 primarily reflectCompany’s new educational technology programs and guided reading programs. Successful product launches inEducational Technology and Services drove segment revenue and operating profit growth of 19% and 46%, respectively. While these results were offset by the lower sales of higher margin educational technology products, which were affected by lower spending by school districts in the quarter, lower than anticipated sales of The Hunger Games trilogy and lower revenue in theChildren’s Book Clubs, as well as increased investmentsPublishing and Distribution,International andMedia, Licensing and Advertising segments in ecommerce and ebook initiativesthe first fiscal quarter compared to the prior fiscal period, the first quarter sales of the Hunger Games were within expectations. The Company typically records a loss in its fiscal first quarter, when most U.S. schools are not in session and its school book club and school book fairs school channels generate minimal revenue.
Recent successful product launches, includingSystem 44®Next Generation,MATH 180TM,iReadTM,Common Core Code XTM, andREAD 180for iPad®, demonstrate the Company’s ability to deepen engagement and grow the Company’s market reach among grade levels and subject areas. The Company’s suite of print and digital programs serves to help students reach higher goals and achieve college and career readiness under the new Common Core State Standards, and demand for the Company’s professional development and school improvement services also continues to grow from school districts that are in widely varying stages of implementing these standards. The Company expects this ongoing implementation process to result in a prolonged purchasing period for its instructional programs and services this school year.
Sales of the Hunger Games trilogy during the quarter ended August 31, 2013 were within Company expectations, and the Company anticipates additional interest in the trilogy in anticipation of the Catching Fire film release. Book fair bookings are as expected and, in preparation for the new school year, period.the Company has redesigned its book club flyers to feature grade-specific titles for children from pre-K to eighth grade. The Company expects these school channels will continue to help families find the right books at the right level for their children, which is increasingly important for students under the Common Core standards.
The Company is implementing cost savings initiativescontinues to offset pressures on operating income. With these cost savings actions, strong cash position and recently amended long-term credit agreement, the Company believes it has ample flexibility to continue investments in technology-based learning products, ebooks and ecommerce, as well as the continued expansion of publishing and product development in southeast Asia.
As previously announced, for fiscal 2013 the Company now expectsanticipate total revenuerevenues of approximately $1.8 billion to $1.9 billion and earnings per diluted share from continuing operations in the range of $1.40 to $1.60,$1.80, before the impact of one-time items associated with cost reduction programs, andor non-cash, non-operating items.
| 24 |
SCHOLASTIC CORPORATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations and Discontinued(“MD&A”)
Results of Operations – Consolidated
Revenues for the quarter ended November 30, 2012August 31, 2013 decreased by $69.1$17.1 million or 10.1%, to $616.2$276.3 million, compared to $685.3$293.4 million in the prior fiscal year quarter. Thisperiod. The reduction was due todriven by expected lower revenues infrom theChildren’s Book Publishing and Distribution segment, theEducational Technology and Services segment, theMedia, Licensing and Advertising segment, theClassroom and Supplemental Materials segment and theInternational segment Hunger Games trilogy of $42.9$26.2 million $13.2 million, $7.1 million, $5.5 million and $0.4 million, respectively. Revenues for the six months ended November 30, 2012 decreased by $93.5 million, or 9.3%, to $909.8 million, compared to $1,003.3 million in the prior year fiscal period, primarily due to lower revenues in theChildren’s Book Publishing and Distributionsegment, theEducational Technology and ServicesInternational segment, theClassroom and Supplemental Materialssegment and theMedia, Licensing and Advertising segmentsegment. Partially offsetting these declines were strong results from new product offerings in the Company’sEducational Technology and Services segment.MATH 180™,iRead™ andCommon Core Code X™,all of $49.3 million, $29.8 million, $13.3 million and $3.2 million, respectively. This was partially offset bywhich are new product offerings successfully launched for the current school year, resulted in increased revenues in theof $15.1 million. LowerInternational segment revenues also resulted from a strengthening of $2.1the dollar in the current fiscal period compared to the prior fiscal period and the absence of low margin software sales totaling $7.4 million.
Cost of goods sold as a percentage of revenue for the quarter ended November 30, 2012 increasedAugust 31, 2013 decreased to 42.7%49.9%, compared to 41.7%51.4% in the prior fiscal period. Of Company revenues for the quarter, 34.3% were from theEducational Technology and Services segment, compared to 27.3% in the prior fiscal period.The Educational Technology and Services segment experienced significantly higher gross margins than theChildren’s Book Publishing and Distribution segment. The Children’s Book Publishing and Distribution segment revenues decreased to 19.8% of total Company revenues in the quarter, compared to 24.2% in the prior fiscal period. This shift in the composition of revenues resulted in the overall improved gross margins.
Components of Cost of goods sold (exclusive of depreciation) for the three months ended August 31, 2013 and 2012 are as follows:
| Three months ended | ||||||||||||||||
| August 31, 2013 | August 31, 2012 | |||||||||||||||
| $ | % of Revenue | $ | % of Revenue | |||||||||||||
| Product, service and production costs | $ | 66.6 | 24.1 | % | $ | 72.5 | 24.7 | % | ||||||||
| Royalty costs | 17.4 | 6.3 | % | 23.2 | 7.9 | % | ||||||||||
| Prepublication and production amortization | 13.1 | 4.7 | % | 11.6 | 4.0 | % | ||||||||||
| Postage, freight, shipping, fulfillment and other | 40.8 | 14.8 | % | 43.5 | 14.8 | % | ||||||||||
| Total | $ | 137.9 | 49.9 | % | $ | 150.8 | 51.4 | % | ||||||||
Selling, general and administrative expenses (exclusive of depreciation and amortization) in the quarter ended August 31, 2013 decreased by $5.1 million to $168.4 million, compared to $173.5 million in the prior fiscal period. The Company experienced lower salaries and benefits of $3.7 million compared to the prior fiscal period as a result of prior cost savings initiatives. The Company recognized $2.0 million of severance costs related to cost saving initiatives implemented in the current fiscal quarter.
For the quarter ended August 31, 2013, net interest expense decreased to $1.9 million, compared to $3.7 million in the prior fiscal period, reflecting the April 2013 maturation of the Company’s 5% Notes.
The Company’s effective tax rate for the current fiscal quarter was 37.0%, compared to 37.5% in the prior fiscal period. The Company expects an effective tax rate of approximately 40% for fiscal 2014.
Earnings from discontinued operations, net of tax, for the quarter ended August 31, 2013 was $0.2 million, compared to a loss of $0.4 million in the prior fiscal period. The Company did not discontinue any operations in the current fiscal period.
| 25 |
SCHOLASTIC CORPORATION
Item 2. MD&A
Results of Continuing Operations
Children’s Book Publishing and Distribution
| Three months ended | ||||||||||||||||
| ($ amounts in millions) | August 31, 2013 | August 31, 2012 | $ change | % change | ||||||||||||
| Revenues | $ | 54.6 | $ | 70.9 | $ | (16.3 | ) | -23.0 | % | |||||||
| Cost of goods sold (exclusive of depreciation) | 36.6 | 41.9 | (5.3 | ) | -12.6 | % | ||||||||||
| Other operating expenses * | 75.5 | 80.1 | (4.6 | ) | -5.7 | % | ||||||||||
| Depreciation and amortization | 4.0 | 3.8 | 0.2 | 5.3 | % | |||||||||||
| Operating income (loss) | $ | (61.5 | ) | $ | (54.9 | ) | $ | (6.6 | ) | |||||||
| Operating margin | — | — | ||||||||||||||
| * | Other operating expenses include selling, general and administrative expenses, bad debt expenses and asset impairments where applicable. |
Revenues for the quarter ended August 31, 2013 decreased by $16.3 million to $54.6 million, compared to $70.9 million in the prior fiscal period. Lower revenues in the Company’s trade channel reflected decreased sales of the Hunger Games trilogy of $15.8 million compared to the prior fiscal period. The decrease in Hunger Games revenues includes $11.5 million of high margin digital products. Trade revenues from other titles increased in the quarter due to strong demand for Harry Potter titles and front list titles such asStar Wars: Jedi Academy by Jeffrey Brown, The Adventures of Captain Underpants: Color Editionby Dav Pilkey, andGeronimo Stilton and the Kingdom of Fantasy #5: The Volcano of Fire. Revenues from book fairs and book clubs, the segment’s school channels, decreased by $1.0 million due primarily to the timing of school openings. School channel revenues are not significant in the first quarter of the year, quarter.as schools are not in session.
Cost of goods sold for the quarter ended August 31, 2013 was $36.6 million, or 67.0% of revenues, compared to $41.9 million, or 59.1% of revenues, in the prior fiscal period. The absolute decrease in cost of goods sold of $5.3 million is due to the lower level of Hunger Games sales in the current period compared to the first quarter of fiscal 2013. Cost of goods sold as a percentage of revenue increased due to the aforementioned decrease in Hunger Games digital titles, which carry higher gross margins than physical product.
Other operating expenses declined to $75.5 million for the six monthsquarter ended November 30, 2012 increased to 45.6%,August 31, 2013, compared to 44.5% in the prior fiscal year period. The percentage increases in both periods were related to certain fixed costs over a lower revenue base and, to a lesser extent, unfavorable product mix.
Components of Cost of goods sold for the three and six months ended November 30, 2012 and 2011 are as follows:
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| Three months ended November 30, |
| Six months ended November 30, |
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| 2012 |
| 2011 |
| 2012 |
| 2011 |
| ||||
Product, service and production costs |
| $ | 154.7 |
| $ | 168.2 |
| $ | 227.3 |
| $ | 247.7 |
|
Royalty costs |
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| 28.2 |
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| 34.2 |
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| 51.4 |
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| 57.1 |
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Prepublication and production amortization |
|
| 12.3 |
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| 12.6 |
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| 23.9 |
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| 24.4 |
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Postage, freight, shipping, fulfillment and all other costs |
|
| 68.2 |
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| 70.7 |
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| 111.9 |
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| 116.9 |
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Total |
| $ | 263.4 |
| $ | 285.7 |
| $ | 414.5 |
| $ | 446.1 |
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Selling, general and administrative expenses decreased by $2.7 million to $235.2 million in the quarter, compared to $237.9$80.1 million in the prior fiscal year quarter. Selling, generalperiod, due to $1.7 million of lower promotional expenses and decreased administrative expensesexpenses.
Segment operating loss for the six monthsquarter ended November 30, 2012 decreasedAugust 31, 2013 increased by $4.5$6.6 million to $409.1$61.5 million, compared to $413.6$54.9 million in the prior fiscal year period. The decreases in both periods were primarily related to lower employee-related expenses, partially offset by increased promotional spending in theChildren’s Book Publishing and Distribution segment.
In the prior fiscal year period benefited from the Company recognized a loss on leases of $6.2 million for certain leased properties in lower Manhattan. The fair valuesuccess of the net rents to be received under sublease arrangements is less than the Company’s lease commitments for these properties over the remaining term of the leases and, accordingly, the Company recognized this lossHunger Games trilogy. The segment generally experiences losses in the threefirst quarter as the school channels are incurring expenses in preparation for the upcoming school year, but do not yet have significant revenues.
| 26 |
SCHOLASTIC CORPORATION
Item 2. MD&A
Educational Technology and six months ended November 30, 2011.Services
Net interest expense decreased to $3.7 million in
| Three months ended | ||||||||||||||||
| ($ amounts in millions) | August 31, 2013 | August 31, 2012 | $ change | % change | ||||||||||||
| Revenues | $ | 94.8 | $ | 80.0 | $ | 14.8 | 18.5 | % | ||||||||
| Cost of goods sold (exclusive of depreciation) | 28.1 | 25.7 | 2.4 | 9.3 | % | |||||||||||
| Other operating expenses * | 30.2 | 29.2 | 1.0 | 3.4 | % | |||||||||||
| Depreciation and amortization | 0.3 | 0.3 | — | 0.0 | % | |||||||||||
| Operating income (loss) | $ | 36.2 | $ | 24.8 | $ | 11.4 | ||||||||||
| Operating margin | 38.2 | % | 31.0 | % | ||||||||||||
| * | Other operating expenses include selling, general and administrative expenses, bad debt expenses and asset impairments where applicable. |
Revenues for the quarter ended November 30, 2012,August 31, 2013 increased by $14.8 million to $94.8 million, compared to $3.9$80.0 million in the prior fiscal year quarter, related to lower average borrowings. For the six months ended November 30, 2012, net interest expense decreased to $7.4period. The increase was driven by strong customer demand for newly launched products suchas MATH 180™,iRead™ andCommon Core Code X™. Collectively these new products accounted for $15.1 million compared to $7.8 millionof increased revenues in the priorcurrent period. Revenues from the Company’s curriculum technology reading platforms increased $1.8 million, as increased revenues from sales ofSystem 44®Next Generation were partially offset by revenue declines for Read 180. The current year’s success ofSystem 44®Next Generation, which was released late in fiscal year period, also related2013, continues the Company’s leading position as a provider of interventive reading technology solutions. Revenues from other products and services declined modestly.
Cost of goods sold increased to lower average borrowings.
The loss from discontinued operations, net of tax, was $0.1$28.1 million, or less than $0.01 per share, for the quarter ended November 30, 2012, compared to $0.5 million, or $0.02 per share, in the prior fiscal year quarter. Loss from discontinued operations for the six months ended November 30, 2012 was $0.2 million, or $0.01 per share, compared to $2.5 million, or $0.08 per share, for the prior fiscal period. The decrease in such loss reflects asset impairments recognized in the Company’s toy catalog business which was discontinued29.6% of revenues, in the quarter ended August 31, 2011.
Results2013, compared to $25.7 million, or 32.1% of Continuing Operations
Children’s Book Publishing and Distribution
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Revenues |
| $ | 350.1 |
| $ | 393.0 |
| $ | (42.9 | ) |
| -10.9 | % | $ | 421.2 |
| $ | 470.5 |
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Operating income (loss) |
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| 13.7 |
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Operating margin |
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| 3.3 | % |
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Revenuesrevenues in theChildren’s Book Publishing prior period. The modest decrease in Cost of goods sold as a percentage of revenue was primarily due to lower relative royalty and Distribution segmentother content costs for newly released products.
Other operating expenses for the quarter ended November 30, 2012 decreasedAugust 31, 2013 increased by $42.9$1.0 million or 10.9%, to $350.1$30.2 million, compared to $393.0$29.2 million in the prior fiscal year quarter. Revenues for the six months ended November 30, 2012 decreased by $49.3 million, or 10.5%, to $421.2 million, compared to $470.5 million in the prior fiscal year period. These decreases were related to declines in the Company’s book clubs business,The increase was due to lower revenue per order, as well as school closings after Superstorm Sandy, and lower revenues inhigher commission expense of $1.6 million associated with the Company’s trade business, reflecting lower sales of The Hunger Games trilogy compared to the trilogy’s strong results in the comparable prior year periods. This was partially offset by a modest increase in the Company’s book fairs business.increased revenues.
Segment operating income for the quarter ended November 30, 2012 decreasedAugust 31, 2013 increased by $39.8$11.4 million or 36.6%, to $68.9$36.2 million, compared to $108.7$24.8 million in the prior fiscal year quarter. Segment operating incomeperiod. The segment benefited from the anticipated strong demand for the six months ended November 30, 2012 decreased by $44.8 million, or 76.6%,new products referred to $13.7 million, compared to $58.5 million in the prior fiscal year period. The decreases in both periods were principally related to the lower revenues discussed above, as well as increased promotional expenses in the book clubs business and the Company’s continued investment in its digital initiatives.above. These new products:
| · | broaden the Company’s curriculum offering and market presence, notably in mathematics; | |
| · | assist educators in the implementation of Common Core State Standards; and | |
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· | enable more technology solutions to be incorporated in the classroom. |
| 27 |
Educational Technology and Services
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Revenues in theEducational Technology and Servicessegment for the quarter ended November 30, 2012 decreased by $13.2 million, or 20.2%, to $52.2 million, compared to $65.4 million in the prior year fiscal quarter. Revenues for the six months ended November 30, 2012 decreased by $29.8 million, or 18.4%, to $132.2 million, compared to $162.0 million in the prior fiscal year period. These decreases were primarily related to decreased sales of educational technology products due to lower spending by school districts, as well as a significant sale of adoption product in Texas in the prior year period. In addition, the prior year periods benefited from higher revenues related to the launch of READ180 Next Generation.SCHOLASTIC CORPORATION
Segment operating income for the quarter ended November 30, 2012 decreased by $9.3 million, or 63.7%, to $5.3 million, compared to $14.6 million in the prior year fiscal quarter. Segment operating income for the six months ended November 30, 2012 decreased by $23.3 million, or 43.6%, to $30.1 million, compared to $53.4 million in the prior fiscal year period. The decreases in both periods were primarily related to the lower revenues from sales of higher margin educational technology products.Item 2. MD&A
Classroom and Supplemental Materials Publishing
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Revenues |
| $ | 53.2 |
| $ | 58.7 |
| $ | (5.5 | ) |
| -9.4 | % | $ | 91.1 |
| $ | 104.4 |
| $ | (13.3 | ) |
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Operating income (loss) |
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| 10.3 |
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| -28.2 | % |
| 4.8 |
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| 12.4 |
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Operating margin |
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| 13.9 | % |
| 17.5 | % |
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| 5.3 | % |
| 11.9 | % |
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| ($ amounts in millions) | August 31, 2013 | August 31, 2012 | $ change | % change | ||||||||||||
| Revenues | $ | 37.8 | $ | 37.9 | $ | (0.1 | ) | -0.3 | % | |||||||
| Cost of goods sold (exclusive of depreciation) | 15.7 | 16.6 | (0.9 | ) | -5.4 | % | ||||||||||
| Other operating expenses * | 23.4 | 23.5 | (0.1 | ) | -0.4 | % | ||||||||||
| Depreciation and amortization | 0.3 | 0.4 | (0.1 | ) | -25.0 | % | ||||||||||
| Operating income (loss) | $ | (1.6 | ) | $ | (2.6 | ) | $ | 1.0 | ||||||||
| Operating margin | — | — | ||||||||||||||
| * | Other operating expenses include selling, general and administrative expenses, bad debt expenses and asset impairments where applicable. |
Revenues in theClassroom and Supplemental Materials Publishingsegment for the quarter ended November 30, 2012August 31, 2013 of $37.8 million were flat compared to prior period revenues of $37.9 million. The current period experienced higher revenues of $2.1 million for classroom books driven by demand for the Company’s customized digital and print institutional packages. Offsetting this was decreased by $5.5revenues from classroom magazines related to the absence of election year materials of $1.0 million and lower sales of branded library products of $1.0 million.
Cost of goods sold for the quarter ended August 31, 2013 was $15.7 million, or 9.4%, to $53.2 million,41.5% of revenue, compared to $58.7$16.6 million, or 43.8% of revenue, in the prior fiscal year quarter. Revenuesperiod. Reduced postage expense accounted for most of the six months ended November 30, 2012 decreased by $13.3 million, or 12.7%, to $91.1 million, compared to $104.4 million in the prior fiscal year period. The decreases in both fiscal periods were primarily related to the loss of revenue from significant non-recurring contracts with Reading is Fundamental, which were in place in the prior year period, partially offset by increased revenue in the Company’s classroom magazine business.decline.
Segment
Other operating incomeexpenses for the quarter ended November 30, 2012 decreased by $2.9August 31, 2013 were $23.4 million, or 28.2%,and were flat to $7.4 million, compared to $10.3 million in the prior fiscal year quarter. period.
Segment operating income for the six months ended November 30, 2012 decreased by $7.6 million, or 61.3%, to $4.8 million, compared to $12.4 million in the prior fiscal year period. The decreases in both fiscal periods were principally related to the revenue decrease noted above.
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International
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Revenues |
| $ | 143.7 |
| $ | 144.1 |
| $ | (0.4 | ) |
| -0.3 | % | $ | 233.9 |
| $ | 231.8 |
| $ | 2.1 |
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Operating income (loss) |
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| 24.7 |
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| 26.6 |
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Operating margin |
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| 17.2 | % |
| 18.5 | % |
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| 11.8 | % |
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Revenues in the Internationalsegmentloss for the quarter ended November 30, 2012 decreased by $0.4 millionAugust 31, 2013 improved modestly to $143.7 million, compared to $144.1 million in the prior fiscal year quarter, principally due to lower revenues in Canada of $5.7 million, primarily in the book clubs business, partially offset by increased revenues in the UK of $1.2 million, as well as the favorable impact of foreign exchange rates of $1.8 million. Revenues for the six months ended November 30, 2012 increased by $2.1 million to $233.9 million, compared to $231.8 million in the prior fiscal year period. This increase was primarily related to increased revenues in the Company’s UK trade business, partially offset by lower revenues in the Company’s Canadian book clubs business, as well as the negative impact of foreign currency exchange rates.
Segment operating income for the quarter ended November 30, 2012 decreased by $1.9 million, or 7.1%, to $24.7 million, compared to $26.6 million in the prior fiscal year quarter, primarily due to lower results in the Company’s Canadian business, as well as the negative impact of foreign currency exchange rates, partially offset by improved results in the Company’s UK business. Segment operating income for the six months ended November 30, 2012 increased by $1.0 million, or 3.8%, to $27.5 million, compared to $26.5 million in the prior fiscal year period. This increase was related to the higher revenues in the UK, partially offset by the negative effect of foreign currency exchange rates.
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Media, Licensing and Advertising
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| $ | 17.0 |
| $ | 24.1 |
| $ | (7.1 | ) |
| -29.5 | % | $ | 31.4 |
| $ | 34.6 |
| $ | (3.2 | ) |
| -9.2 | % |
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Operating income (loss) |
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| -44.0 | % |
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Operating margin |
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| 8.2 | % |
| 10.4 | % |
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Revenues in the Media, Licensing and Advertising segment for the quarter ended November 30, 2012 decreased by $7.1 million, or 29.5%, to $17.0 million, compared to $24.1 million in the prior fiscal year quarter. The decrease in revenues was primarily due to lower advertising revenues and reduced production revenues, as well as lower sales of console products. Revenues for the six months ended November 30, 2012 decreased by $3.2 million, or 9.2%, to $31.4 million, compared to $34.6 million in the prior fiscal year period. This decrease was primarily related to the planned reduction in custom publishing and reduced production revenues, partially offset by increased revenue from sales of audio books.
Segment operating income for the quarter ended November 30, 2012 decreased by $1.1 million, or 44.0%, to $1.4 million, compared to $2.5 million in the prior fiscal year quarter. The decrease was primarily related to the lower revenues noted above, partially offset by $1.3 million of settlement income. Segment operating income for the six months ended November 30, 2012 was $1.4$1.6 million, compared to an operating loss of $2.1$2.6 million in the prior fiscal year period. The improvementclassroom magazines business continues to experience improved circulation as customers seek supplemental content to meet Common Core State Standards.Additionally, the segment is relatedreceiving positive feedback from customers for recently launched customized digital and print instructional packages, broadening the offering to the higher audio book revenues noted above, as well as the $1.3 million settlement income noted above.classrooms.
| 28 |
SCHOLASTIC CORPORATION
OverheadItem 2. MD&A
Corporate overheadInternational
| Three months ended | ||||||||||||||||
| ($ amounts in millions) | August 31, 2013 | August 31, 2012 | $ change | % change | ||||||||||||
| Revenues | $ | 78.7 | $ | 90.2 | $ | (11.5 | ) | -12.7 | % | |||||||
| Cost of goods sold (exclusive of depreciation) | 38.4 | 46.1 | (7.7 | ) | -16.7 | % | ||||||||||
| Other operating expenses * | 39.8 | 40.1 | (0.3 | ) | -0.7 | % | ||||||||||
| Depreciation and amortization | 1.2 | 1.2 | — | 0.0 | % | |||||||||||
| Operating income (loss) | $ | (0.7 | ) | $ | 2.8 | $ | (3.5 | ) | ||||||||
| Operating margin | — | 3.1 | % | |||||||||||||
| * | Other operating expenses include selling, general and administrative expenses, bad debt expenses and asset impairments where applicable. |
Revenues for the quarter ended November 30, 2012August 31, 2013 decreased by $15.9$11.5 million to $6.8$78.7 million, compared to $22.7$90.2 million in the prior fiscal yearperiod. This decrease was due to lower Hunger Games revenues of $6.1 million across the segment; decreased low-margin revenues of $3.1 million from an Australian software business; and a negative foreign exchange impact of $4.3 million as the dollar strengthened against foreign currencies. Offsetting these declines were improved revenues from Asian markets of $1.7 million spread across the region.
Cost of goods sold for the quarter primarilyended August 31, 2013 was $38.4 million, or 48.8% of sales, compared to $46.1 million, or 51.1% of sales, in the prior fiscal period. The decrease as a percentage of revenue was due to the planned decline in low-margin revenues from the Australian software business.
Other operating expenses for the current quarter included $0.6 million of severance expense related to lower employee-related expenses. Corporate overheadcost savings initiatives in the Company’s Asia operations.
Segment operating results for the six monthsquarter ended November 30, 2012August 31, 2013 decreased by $17.8$3.5 million to $24.1a loss of $0.7 million, compared to $41.9income of $2.8 million in the prior fiscal yearperiod.The decrease is primarily due to the decrease in Hunger Games sales in the UK and Canada. The decrease in sales from the Australian software business did not significantly impact earnings, as these sales were low margin sales. The Company continues to invest in English language educational businesses, centered in Singapore, which it views as a future growth driver.
| 29 |
SCHOLASTIC CORPORATION
Item 2. MD&A
Media, Licensing and Advertising
| Three months ended | ||||||||||||||||
| ($ amounts in millions) | August 31, 2013 | August 31, 2012 | $ change | % change | ||||||||||||
| Revenues | $ | 10.4 | $ | 14.4 | $ | (4.0 | ) | -27.8 | % | |||||||
| Cost of goods sold (exclusive of depreciation) | 4.5 | 5.2 | (0.7 | ) | -13.5 | % | ||||||||||
| Other operating expenses * | 7.7 | 8.9 | (1.2 | ) | -13.5 | % | ||||||||||
| Depreciation and amortization | 0.1 | 0.1 | — | 0.0 | % | |||||||||||
| Operating income (loss) | $ | (1.9 | ) | $ | 0.2 | $ | (2.1 | ) | ||||||||
| Operating margin | — | 1.4 | % | |||||||||||||
| * | Other operating expenses include selling, general and administrative expenses, bad debt expenses and asset impairments where applicable. |
Revenues for the quarter ended August 31, 2013 decreased by $4.0 million to $10.4 million, compared to $14.4 million in the prior fiscal period. This decrease was related to decreased sales of the Hunger Games trilogy audio books of $4.3 million. Revenues for Company programming were flat, as a recent Netflix contract, which includes Goosebumps and Magic School Bus titles, largely offset lower prior period revenues of older Company programming.
Cost of goods sold was $4.5 million, or 43.3% of revenue, for the quarter ended August 31, 2013, compared to $5.2 million, or 36.1% of revenue, for the prior fiscal period. The absolute decline in Cost of goods sold is due to the reduced royalty expenses of $0.9 million associated with the sale of the Hunger Games audio titles.
Other operating expenses were $7.7 million for the quarter ended August 31, 2013, compared to $8.9 millionfor the prior fiscal period. The improvement was driven by lower administrative and technology costs.
Segment operating loss for the quarter ended August 31, 2013 was $1.9 million, compared to operating income of $0.2 million in the prior fiscal period. The decline was due entirely to the decrease in sales of the Hunger Games audio books. The segment continues to decrease its reliance on low-margin console products and is focusing its efforts on repurposing content for digital platforms, both internally and by partnering with distributors such as Netflix.
| 30 |
SCHOLASTIC CORPORATION
Item 2. MD&A
Overhead
Unallocated overhead expense for the quarter ended August 31, 2013 decreased $0.9 million to $16.4 million, from $17.3 million in the prior fiscal period, primarily relateddue to lower employee-related costs,expenses of $2.9 million, partially offset by increased consulting costs.$1.4 million of severance related to cost savings initiatives.
Seasonality
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Seasonality
The Company’sChildren’s Book Publishing and Distribution school-based book clubs, school-based book fairschannels and most of its magazines operate on a school-year basis; therefore, the Company’s business is highly seasonal. As a result, the Company’s revenues in the first and third quarters of the fiscal year generally are lower than its revenues in the other two fiscal quarters. Typically, these school-based book club and book fairchannel revenues are greatest in the second and fourth quarters of the fiscal year, while revenues from the sale of instructional materials and educational technology products and services are highest in the first and fourth quarters. The Company generally experiences a loss from operations in the first and third quarters of each fiscal year. Trade sales can vary throughoutthrough the year due to varying release dates of published titles.
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31 |
SCHOLASTIC CORPORATION
Item 2. MD&A
Liquidity and Capital Resources
The Company’s cash and cash equivalents totaled $257.3$15.8 million at November 30, 2012, compared to $194.9August 31, 2013, $87.4 million at May 31, 20122013 and $114.0$193.1 million at November 30, 2011.August 31, 2012.
Cash used in operating activities was $70.8 million for the quarter ended August 31, 2013, compared to cash provided by operating activities was $127.4of $34.2 million for the six months ended November 30, 2012, compared to $107.8 million in the prior fiscal year period, representing an increasea decrease in cash provided by operating activities of $19.6$105.0 million.
Primary drivers In the fourth quarter of fiscal 2012, the Company experienced strong sales of the improvement include:Hunger Games trilogy titles, and subsequently collected significant cash from these customers in the first quarter of fiscal 2013. Partially offsetting these collections were higher payouts for incentive compensation of $28.7 million in the first quarter of fiscal 2013. Net income and purchasing activity were consistent with the prior fiscal period. The Company’s book fairs and book clubs utilize the first quarter of the fiscal year to build inventory for the upcoming school year, and such inventory balances increased by over $100 million in both periods presented.
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Cash used in investing activities was $63.1$24.0 million for the six monthsquarter ended November 30, 2012,August 31, 2013, compared to $46.2$30.3 million in the prior year fiscal year period, representing an increaseperiod. The difference is attributable to higher spending on technology assets of $16.9 million. The$3.3 million and higher spending on book fairs fleet vehicles of $2.8 million in the prior fiscal period. In the current quarter, the Company continues to investinvested $1.0 million for a 20% interest in its ongoing digital initiatives.a software development entity.
Cash provided by financing activities was $24.0 million for the quarter ended August 31, 2013, compared to cash used in financing activities was $3.4 million for the six months ended November 30, 2012, compared to $51.8of $6.7 million for the prior fiscal period. Current year period, primarily reflecting Term Loan paymentsnet short-term borrowings totaled $27.1 million compared to net repayments of $5.8 million in the prior fiscal year period under the Company’s Loan Agreement discussed below and lower borrowings under lines of credit, as well as increased dividends, offset partially by an increase in proceedsperiod. Proceeds pursuant to employee stock based compensation plans.plans declined $1.5 million, in part due to a decrease in the amount of stock options held by employees.
Due to the seasonal nature of its business as discussed under “Seasonality” above, the Company usually experiences negative cash flows in the June through October time period. As a result of the Company’s business cycle, borrowings have historically increased during June, July and August, have generally peaked in September or October, and have been at their lowest point in May. In recent years, the Company had fixed debt in the form of the 5% Notes, which, while providing liquidity, resulted in high cash balances throughout the year. As the 5% Notes matured in fiscal 2013, the Company will experience lower average debt and lower average cash balances in fiscal 2014.
The Company’s operating philosophy is to use cash provided fromby operating activities to create value by paying down debt, reinvesting in existing businesses and, from time to time, making acquisitions that will complement its portfolio of businesses, as well as engaging in shareholder enhancement initiatives, such as share repurchases or dividend declarations. TheIn the first quarter of fiscal 2014, the Company believes that funds generated by its operations and funds available under its current credit facilities, afterpurchased $0.4 million of Company shares on the anticipated use of the credit facility to satisfy its repayment obligations in respect of the 5% Notes due in fiscal 2013, will be sufficient to finance its short-and long-term capital requirements.open market.
The Company has maintained, and expects to maintain for the foreseeable future, sufficient liquidity to fund on-goingongoing operations, including working capital requirements, pension contributions, dividends, currently authorized common share repurchases, debt service, planned capital expenditures and other investments. As of November 30, 2012,August 31, 2013, the Company’s primary sources of liquidity consisted of cash and cash equivalents of $257.3$15.8 million, cash from operations, and borrowingsfunding available under the Revolving Loan (as described under “Financing” below) totaling $325.0approximately $410.0 million, (which was increased to $425.0net of current borrowings of $15.0 million. Additionally, the Company has short-term credit facilities of $35.6 million, effective December 5, 2012), less the amount anticipated to be utilized to satisfy the outstanding 5% Notes.net of current borrowings of $14.2 million. The Company may at any time, but in any event not more than once in any calendar year, request that the aggregate availability of credit under the Revolving Loan be increased by an amount of $10.0 million or an integral multiple of $10.0 million (but not to exceed $150.0 million). Accordingly, the Company believes these sources of liquidity are sufficient to finance its on-goingongoing operating needs, as well as its financing and investing activities.
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32 |
The Company’s credit rating from Standard & Poor’s Rating Services is “BB-” and its credit rating from Moody’s Investors Service is “Ba1.” Both Moody’s Investors Service and Standard and Poor’s Rating Services have rated the outlook for the Company as “Stable.” The Company is currently compliant with its debt covenants and expects to remain compliant for the foreseeable future. The Company’s interest rates for the Loan Agreement are associated with certain leverage ratios, and, accordingly, a change in the Company’s credit rating does not result in an increase in interest costs under the Company’s Loan Agreement.SCHOLASTIC CORPORATION
Effective December 5, 2012, as discussed below, the Company amended its existing revolving credit facility, which was scheduled to mature on June 1, 2014, to extend the maturity date to December 5, 2017. The Company intends to draw on this credit facility to satisfy its repayment obligations in respect of the 5% Notes due April 2013.Item 2. MD&A
Financing
Loan Agreement
On June 1, 2007, Scholastic Corporation and Scholastic Inc. (each, a “Borrower” and together, the “Borrowers”) entered into a $525.0 million credit facility with certain banks (the “Loan Agreement”), consisting of a $325.0 million revolving credit component (the “Revolving Loan”) and a $200.0 million amortizing term loan component (the “Term Loan”), with the ability to increase the aggregate Revolving Loan commitments of the lenders by up to an additional $150.0 million. The Loan Agreement was amended on August 16, 2010, on October 25, 2011 and most recently on December 5, 2012. The amendment on October 25, 2011 extended the maturity of the Revolving Loan facility to June 1, 2014 from June 1, 2012 and provided for the repayment of the outstanding balance of the Term Loan on October 25, 2011. The amendment on December 5, 2012 (i) increased the Revolving Loan from $325.0 million to $425.0 million (with the continued ability to increase the aggregate Revolving Loan commitments of the lenders by up to an additional $150.0 million), (ii) extended the maturity of the $425.0 million Revolving Loan to December 5, 2017 from June 1, 2014, (iii) amended a covenant in the Loan Agreement to permit certain sales, transfers and dispositions of assets by either Borrower or any subsidiary to any other Borrower or subsidiary and (iv) amended a covenant in the Loan Agreement to permit transactions between or among the Company and its wholly-owned subsidiaries not involving any other affiliates.
The Revolving Loan allows the Company to borrow, repay or prepay and reborrow at any time prior to the stated maturity date, and the proceeds may be used for general corporate purposes, including financing for acquisitions and share repurchases. Interest on the Revolving Loan is due and payable in arrears on the last day of the interest period (defined as the period commencing on the date of the advance and ending on the last day of the period selected by the Borrower at the time each advance is made). The interest pricing under the Revolving Loan is dependent upon the Borrower’s election of a rate that is either:
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As of November 30, 2012, the indicated spread on Base Rate Advances was 0.18% and the indicated spread on Eurodollar Rate Advances was 1.18%, both based on the Company’s prevailing consolidated debt to total capital ratio.
The Loan Agreement also provides for the payment of a facility fee ranging from 0.20% to 0.40% per annum based upon the Company’s prevailing consolidated debt to total capital ratio. At November 30, 2012, the facility fee rate was 0.20%.
There were no outstanding borrowings under the Revolving Loan as of November 30, 2012.
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As of November 30, 2012, standby letters of credit outstanding under the Loan Agreement totaled $1.4 million. The Loan Agreement contains certain covenants, including interest coverage and leverage ratio tests and certain limitations on the amount of dividends and other distributions, and at November 30, 2012, the Company was in compliance with these covenants.
Lines of Credit
The Company has unsecured money market bid rate credit lines totaling $20.0 million. There were no outstanding borrowings under these credit lines at November 30, 2012, May 31, 2012 and November 30, 2011. 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 364 days. These credit lines may be renewed, if requested by the Company, at the option of the lender.
As of November 30, 2012, the Company also had various local currency credit lines, with maximum available borrowings in amounts equivalent to $32.2 million, underwritten by banks primarily in the United States, Canada and the United Kingdom. These credit lines are typically available for overdraft borrowings or loans up to 364 days and may be renewed, if requested by the Company, at the sole option of the lender. There were borrowings outstanding under these international facilities equivalent to $0.7 million at November 30, 2012 at a weighted average interest rate of 4.7%; $6.5 million at May 31, 2012 at a weighted average interest rate of 5.3%; and $5.7 million at November 30, 2011 at a weighted average interest rate of 3.7%.
5% Notes due 2013
In April 2003, Scholastic Corporation issued $175.0 million of 5% Notes (the “5% Notes”). The 5% Notes are senior unsecured obligations that mature on April 15, 2013. Interest on the 5% Notes is payable semi-annually on April 15 and October 15 of each year through maturity. The Company may at any time redeem all or a portion of the 5% Notes at a redemption price (plus accrued interest to the date of the redemption) equal to the greater of (i) 100% of the principal amount, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest discounted to the date of redemption. The Company did not make any repurchases of the 5% Notes during the six-month period ended November 30, 2012.
As discussed above, the Company amended its existing revolving credit facility, which was scheduled to mature on June 1, 2014, to extend the maturity date to December 5, 2017. The Company has the ability to use a portion of this credit facility to fully redeem the 5% Notes due April 2013 and intends to draw on this credit facility for this purpose. Accordingly, the balance of the Notes is excluded from current liabilities and classified as Long-term debt on the Company’s condensed consolidated balance sheets at November 30, 2012 and May 31, 2012.
At November 30, 2012, the Company had open standby letters of credit totaling $6.6 million issued under certain credit lines, including the $1.4$15.0 million under the Loan Agreement discussed above. These lettersas of credit are scheduled to expire within one year; however, the Company expects that substantially all of these letters of credit will be renewed, at similar terms, prior to expiration.
The Company’s total debt obligations were $153.6 million at November 30, 2012, $159.3 million at MayAugust 31, 2012 and $158.4 million at November 30, 2011.
2013.For a more complete description of the Company’s debt obligations,Loan Agreement seeNote 4 of Notes to condensed consolidated financial statements – unauditedCondensed Consolidated Financial Statements-Unaudited in Item 1, “Financial Statements.”
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New Accounting Pronouncements
Reference is made to Note 1 of Notes to condensed consolidated financial statements in Item 1, “Financial Statements,” for information concerning recent accounting pronouncements since the filing of the Company’s Annual Report.
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Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements.Additional written and oral forward-looking statements may be made by the Company from time to time inSecurities and Exchange Commission (“SEC”) filings and otherwise. The Company cautions readers that results or expectations expressed by forward-looking statements, including, without limitation, those relating to the Company’s future business prospects, plans, ecommerce and digital initiatives, such as Storia, new product introductions, strategies, Common Core State Standards, goals, revenues, improved efficiencies, general costs, manufacturing costs, medical costs, pension estimates, merit pay, operating margins, working capital, liquidity, capital needs, financing intentions, interest costs, cash flows and income, are subject to risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to factors including those noted in the Annual Report and other risks and factors identified from time to time in the Company’s filings with the SEC.
The Company disclaims any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.
| 33 |
SCHOLASTIC CORPORATION
Item 3. Quantitative and Qualitative Disclosures about Market Risk
SCHOLASTIC CORPORATION
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company conducts its business in various foreign countries, and as such, its cash flows and earnings are subject to fluctuations from changes in foreign currency exchange rates. Additionally, theThe Company sells products from its domestic operations to its foreign subsidiaries, creating additional currency risk. The Company manages its exposures to this market risk through internally established procedures and, when deemed appropriate, through the use of short-term forward exchange contracts. Ascontracts which were not significant as of November 30, 2012, the use of short-term forward exchange contracts was not significant.August 31, 2013. The Company does not enter into derivative transactions or use other financial instruments for trading or speculative purposes.
Market risks relating to the Company’s operations result primarily from changes in interest rates, which are managed through the mix of variable-rate versus fixed-rate borrowings. Additionally, financial instruments, including swap agreements, have been used to manage interest rate exposures. Less than 1% of the Company’s debt at November 30, 2012 bore interest at a variable rate and was sensitive to changes in interest rates, compared to approximately 4% at May 31, 2012 and November 30, 2011. The Company is subject to the risk that market interest rates and its cost of borrowing will increase and thereby increase the interest charged under its variable-rate debt.
Additional information relating to the Company’s outstanding financial instruments is included in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The following table sets forth information about the Company’s debt instruments as of November 30, 2012 (see Note 4 of Notes to condensed consolidated financial statements - unaudited in Item 1, “Financial Statements”):
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($ amounts in millions) |
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Debt Obligations |
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Lines of Credit |
| $ | 0.7 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 0.7 |
| $ | 0.7 |
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Average interest rate |
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| 4.7 | % |
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Long-term debt including current |
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Fixed-rate debt |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 153.0 | (2) | $ | — |
| $ | 153.0 |
| $ | 155.1 |
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| — |
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The following table sets forth information about the Company’s debt instruments as of August 31:
| ($ amounts in millions) | Fiscal Year Maturity | ||||||||||||||||||||||||
| 2014(1) | 2015 | 2016 | 2017 | 2018 | Thereafter | Total | Fair Value @ 8/31/13 | ||||||||||||||||||
| Debt Obligations | |||||||||||||||||||||||||
| Lines of Credit | $ | 14.2 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 14.2 | $ | 14.2 | |||||||||
| Average interest rate | 3.6 | % | — | — | — | — | — | ||||||||||||||||||
| Short-term debt | |||||||||||||||||||||||||
| Fixed-rate debt | $ | 15.0 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 15.0 | $ | 15.0 | |||||||||
| Average interest rate | 1.4 | % | — | — | — | — | — | ||||||||||||||||||
| (1) | |
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| 34 |
SCHOLASTIC CORPORATION
Item 4. Controls and Procedures
SCHOLASTIC CORPORATION
The Chief Executive Officer and the Chief Financial Officer of the Corporation, after conducting an evaluation, together with other members of the Company’s management, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures as of November 30, 2012,August 31, 2013, have concluded that the Corporation’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Corporation in its reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and accumulated and communicated to members of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. There was no change in the Corporation’s internal control over financial reporting that occurred during the quarter ended November 30, 2012August 31, 2013 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
| 35 |
SCHOLASTIC CORPORATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
SCHOLASTIC CORPORATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to repurchases of shares of Common Stock by the Corporation during the three months ended November 30, 2012:August 31, 2013:
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Issuer Purchases of Equity Securities |
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(Dollars in millions, except per share amounts) |
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Period |
| Total number of |
| Average |
| Total number of shares |
| Maximum number of shares (or |
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September 1, 2012 through September 30, 2012 |
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| $ | — |
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| $ | 31.4 |
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October 1, 2012 through October 31, 2012 |
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| $ | — |
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| $ | 31.4 |
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November 1, 2012 through November 30, 2012 |
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| 19,898 |
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| $ | 27.42 |
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| 19,898 |
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| $ | 30.9 |
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Total |
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| 19,898 |
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| $ | 27.42 |
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| 19,898 |
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| Issuer Purchases of Equity Securities | ||||||||||||||||
| (Dollars in millions, except per share amounts) | ||||||||||||||||
| Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Maximum number of shares (or approximate dollar value) that may yet be purchased under the plans or programs (i) | ||||||||||||
| June 1, 2013 through June 30, 2013 | — | $ | — | — | $ | 19.6 | ||||||||||
| July 1, 2013 through July 31, 2013 | — | $ | — | — | $ | 19.6 | ||||||||||
| August 1, 2013 through August 31, 2013 | 21,034 | $ | 29.60 | 21,034 | $ | 19.0 | ||||||||||
| Total | 21,034 | $ | 29.60 | 21,034 | $ | 19.0 | ||||||||||
(i) Represents the remaining amount under the $20 million Common share repurchase program announced on December 16, 2009 and the further $200 million Board authorization for Common share repurchases announced in connection with the modified Dutch auction tender offer commenced by the Company on September 28, 2010 and completed in November 2010. Approximately $156 million was used for repurchases in such tender offer, leaving, after subsequent additional open market repurchases of $13.1$24.4 million, $31.4$19.6 million at SeptemberJune 1, 20122013 for further repurchases, from time to time as conditions allow, on the open market or through negotiated private transactions, under the current Board authorizations.authorization.
| 36 |
SCHOLASTIC CORPORATION
| Exhibits: | |
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| 31.1 | |
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| Certification of the Chief Executive Officer of Scholastic Corporation filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of the Chief Financial Officer of Scholastic Corporation filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32 | Certifications of the Chief Executive Officer and Chief Financial Officer of Scholastic Corporation furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Document |
101.DEF | XBRL Taxonomy Extension Definitions Document |
101.LAB | XBRL Taxonomy Extension Labels Document |
101.PRE | XBRL Taxonomy Extension Presentation Document |
* Referenced exhibit is a management contract or compensation plan or arrangement described in Item 601(b)(10)(iii) of Regulation S-K.
| 37 |
SCHOLASTIC CORPORATION
SCHOLASTIC CORPORATION
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SCHOLASTIC CORPORATION | ||
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| Date: September 27, 2013 | By: | |
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| /s/ Richard Robinson |
Richard Robinson | ||
Chairman of the Board, | ||
President and Chief | ||
Executive Officer | ||
| Date: | By: | /s/ Maureen O’Connell |
Maureen O’Connell | ||
Executive Vice President, | ||
Chief Administrative Officer | ||
and Chief Financial Officer | ||
(Principal Financial Officer) |
| 38 |
SCHOLASTIC CORPORATION
QUARTERLY REPORT ON FORM 10-Q, DATED AUGUST 31, 2013
Exhibits Index
SCHOLASTIC CORPORATION
QUARTERLY REPORT ON FORM 10-Q, DATED NOVEMBER 30, 2012
Exhibits Index
Exhibit Number | Description of Document | |||
| 31.1 | ||||
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| Certification of the Chief Executive Officer of Scholastic Corporation filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
31.2 | Certification of the Chief Financial Officer of Scholastic Corporation filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
32 | Certifications of the Chief Executive Officer and Chief Financial Officer of Scholastic Corporation furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||
101.INS | XBRL Instance Document | |||
101.SCH | XBRL Taxonomy Extension Schema Document | |||
101.CAL | XBRL Taxonomy Extension Calculation Document | |||
101.DEF | XBRL Taxonomy Extension Definitions Document | |||
101.LAB | XBRL Taxonomy Extension Labels Document | |||
101.PRE | XBRL Taxonomy Extension Presentation Document | |||
* Referenced exhibit is a management contract or compensation plan or arrangement described in Item 601(b)(10)(iii) of Regulation S-K.
** In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed.”
41
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