Item 1. Financial Statements
Item 1. Financial Statements
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(Dollar amounts in millions, except per share data)
Three months ended Six months ended
November 30, November 30, November 30, November 30,
2020 2019 2020 2019
Revenues $ 406.2 $ 597.2 $ 621.4 $ 829.8
Operating costs and expenses:
Cost of goods sold 199.3 264.3 322.5 401.4
Selling, general and administrative expenses 137.0 210.6 258.5 373.7
Depreciation and amortization 15.8 15.4 31.3 30.8
Severance 5.3 1.8 17.3 6.2
Total operating costs and expenses 357.4 492.1 629.6 812.1
Operating income (loss) 48.8 105.1 ( 8.2 ) 17.7
Interest income (expense), net ( 1.2 ) 0.0 ( 2.4 ) 0.7
Other components of net periodic benefit (cost) ( 0.0 ) ( 0.2 ) ( 0.2 ) ( 0.6 )
Gain (loss) on sale of assets and other ( 0.0 ) — 6.6 —
Earnings (loss) before income taxes 47.6 104.9 ( 4.2 ) 17.8
Provision (benefit) for income taxes 12.4 33.8 0.4 5.2
Net income (loss) 35.2 71.1 ( 4.6 ) 12.6
Less: Net income (loss) attributable to noncontrolling interest 0.1 0.1 0.1 0.1
Net income (loss) attributable to Scholastic Corporation $ 35.1 $ 71.0 $ ( 4.7 ) $ 12.5
Basic and diluted earnings (loss) per Share of Class A and Common Stock
Basic $ 1.02 $ 2.04 $ ( 0.14 ) $ 0.36
Diluted $ 1.02 $ 2.02 $ ( 0.14 ) $ 0.35
See accompanying notes
3
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - UNAUDITED
(Dollar amounts in millions)
Three months ended Six months ended
November 30, November 30, November 30, November 30,
2020 2019 2020 2019
Net income (loss) $ 35.2 $ 71.1 $ ( 4.6 ) $ 12.6
Other comprehensive income (loss), net:
Foreign currency translation adjustments 0.4 3.9 11.1 1.9
Pension and postretirement adjustments (net of tax) 5.4 0.2 5.5 0.4
Total other comprehensive income (loss), net $ 5.8 $ 4.1 $ 16.6 $ 2.3
Comprehensive income (loss) $ 41.0 $ 75.2 $ 12.0 $ 14.9
Less: Net income (loss) attributable to noncontrolling interest 0.1 0.1 0.1 0.1
Comprehensive income (loss) attributable to Scholastic Corporation $ 40.9 $ 75.1 $ 11.9 $ 14.8
See accompanying notes
4
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(Dollar amounts in millions, except per share data)
November 30, 2020 (unaudited) May 31, 2020 (audited) November 30, 2019 (unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 356.6 $ 393.8 $ 277.8
Accounts receivable, net 304.7 239.8 325.1
Inventories, net 306.5 270.6 357.8
Income tax receivable 91.9 90.0 8.4
Prepaid expenses and other current assets 51.4 41.1 53.5
Total current assets 1,111.1 1,035.3 1,022.6
Noncurrent Assets:
Property, plant and equipment, net 567.6 576.9 578.5
Prepublication costs, net 68.1 70.6 71.3
Operating lease right-of-use assets, net 90.2 95.3 76.4
Royalty advances, net 43.5 39.9 52.3
Goodwill 125.6 124.9 125.4
Noncurrent deferred income taxes 19.8 18.6 37.3
Other assets and deferred charges 81.0 72.1 67.9
Total noncurrent assets 995.8 998.3 1,009.1
Total assets $ 2,106.9 $ 2,033.6 $ 2,031.7
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Lines of credit and current portion of long-term debt $ 19.8 $ 7.9 $ 13.5
Accounts payable 165.5 153.6 188.9
Accrued royalties 60.1 37.8 54.7
Deferred revenue 150.7 116.5 190.5
Other accrued expenses 183.0 161.5 178.2
Accrued income taxes 3.1 1.4 1.4
Operating lease liabilities 24.4 22.8 23.5
Total current liabilities 606.6 501.5 650.7
Noncurrent Liabilities:
Long-term debt 175.0 210.6 2.6
Operating lease liabilities 71.6 75.7 56.0
Other noncurrent liabilities 65.8 65.2 61.1
Total noncurrent liabilities 312.4 351.5 119.7
Commitments and Contingencies (see Note 5) — — —
Stockholders’ Equity:
Preferred Stock, $ 1.00 par value: Authorized, 2.0 shares; Issued and Outstanding, none
$ — $ — $ —
Class A Stock, $ 0.01 par value: Authorized, 4.0 shares; Issued and Outstanding, 1.7 shares
0.0 0.0 0.0
Common Stock, $ 0.01 par value: Authorized, 70.0 shares; Issued, 42.9 shares; Outstanding, 32.6 , 32.5 , and 33.0 shares, respectively
0.4 0.4 0.4
Additional paid-in capital 624.3 622.4 621.3
Accumulated other comprehensive income (loss) ( 41.7 ) ( 58.3 ) ( 57.4 )
Retained earnings 933.1 948.0 1,014.7
Treasury stock, at cost: 10.3 , 10.4 and 9.9 shares, respectively
( 329.7 ) ( 333.3 ) ( 319.0 )
Total stockholders’ equity of Scholastic Corporation 1,186.4 1,179.2 1,260.0
Noncontrolling interest 1.5 1.4 1.3
Total stockholders’ equity 1,187.9 1,180.6 1,261.3
Total liabilities and stockholders’ equity $ 2,106.9 $ 2,033.6 $ 2,031.7
See accompanying notes
5
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED
(Dollar amounts in millions, except per share data)
Class A Stock Common Stock Additional Paid-in Capital Accumulated
Other Comprehensive
Income (Loss) Retained
Earnings Treasury Stock
At Cost Total
Stockholders'
Equity of Scholastic Corporation Noncontrolling Interest Total
Stockholders'
Equity
Shares Amount Shares Amount
Balance at June 1, 2019 1.7 $ 0.0 33.4 $ 0.4 $ 620.8 $ ( 59.7 ) $ 1,012.6 $ ( 302.6 ) $ 1,271.5 $ 1.3 $ 1,272.8
Net Income (loss) — — — — — — ( 58.5 ) — ( 58.5 ) 0.0 ( 58.5 )
Foreign currency translation adjustment — — — — — ( 2.0 ) — — ( 2.0 ) — ( 2.0 )
Pension and post-retirement adjustments (net of tax of $ 0.0 )
— — — — — 0.2 — — 0.2 — 0.2
Stock-based compensation — — — — 1.5 — — — 1.5 — 1.5
Purchases of treasury stock at cost — — ( 0.3 ) — — — — ( 12.6 ) ( 12.6 ) — ( 12.6 )
Treasury stock issued pursuant to equity-based plans — — 0.0 — ( 0.1 ) — — 0.6 0.5 — 0.5
Dividends ($ 0.15 per share)
— — — — — — ( 5.2 ) — ( 5.2 ) — ( 5.2 )
Balance at August 31, 2019 1.7 $ 0.0 33.1 $ 0.4 $ 622.2 $ ( 61.5 ) $ 948.9 $ ( 314.6 ) $ 1,195.4 $ 1.3 $ 1,196.7
Net Income (loss) — — — — — — 71.0 — 71.0 0.0 71.0
Foreign currency translation adjustment — — — — — 3.9 — — 3.9 — 3.9
Pension and post-retirement adjustments (net of tax of $ 0.0 )
— — — — — 0.2 — — 0.2 — 0.2
Stock-based compensation — — — — 0.9 — — — 0.9 — 0.9
Proceeds pursuant to stock-based compensation plans — — — — 0.3 — — — 0.3 — 0.3
Purchases of treasury stock at cost — — ( 0.1 ) — — — — ( 7.1 ) ( 7.1 ) — ( 7.1 )
Treasury stock issued pursuant to equity-based plans — — 0.0 — ( 2.1 ) — — 2.7 0.6 — 0.6
Dividends ($ 0.15 per share)
— — — — — — ( 5.2 ) — ( 5.2 ) — ( 5.2 )
Balance at November 30, 2019 1.7 $ 0.0 33.0 $ 0.4 $ 621.3 $ ( 57.4 ) $ 1,014.7 $ ( 319.0 ) $ 1,260.0 $ 1.3 $ 1,261.3
See accompanying notes
6
Class A Stock Common Stock Additional Paid-in Capital Accumulated
Other Comprehensive
Income (Loss) Retained
Earnings Treasury Stock
At Cost Total
Stockholders'
Equity of Scholastic Corporation Noncontrolling Interest Total
Stockholders'
Equity
Shares Amount Shares Amount
Balance at June 1, 2020 1.7 $ 0.0 32.5 $ 0.4 $ 622.4 $ ( 58.3 ) $ 948.0 $ ( 333.3 ) $ 1,179.2 $ 1.4 $ 1,180.6
Net Income (loss) — — — — — — ( 39.8 ) — ( 39.8 ) 0.0 ( 39.8 )
Foreign currency translation adjustment — — — — — 10.7 — — 10.7 — 10.7
Pension and post-retirement adjustments (net of tax of $ 0.0 )
— — — — — 0.1 — — 0.1 — 0.1
Stock-based compensation — — — — 0.6 — — — 0.6 — 0.6
Treasury stock issued pursuant to equity-based plans — — 0.0 — ( 0.2 ) — — 0.5 0.3 — 0.3
Dividends ($ 0.15 per share)
— — — — — — ( 5.1 ) — ( 5.1 ) — ( 5.1 )
Balance at August 31, 2020 1.7 $ 0.0 32.5 $ 0.4 $ 622.8 $ ( 47.5 ) $ 903.1 $ ( 332.8 ) $ 1,146.0 $ 1.4 $ 1,147.4
Net Income (loss) — — — — — — 35.1 — 35.1 0.1 35.2
Foreign currency translation adjustment — — — — — 0.4 — — 0.4 — 0.4
Pension and post-retirement adjustments (net of tax of $ 1.8 )
— — — — — 5.4 — — 5.4 — 5.4
Stock-based compensation — — — — 3.0 — — — 3.0 — 3.0
Treasury stock issued pursuant to equity-based plans — — 0.1 — ( 1.5 ) — — 3.1 1.6 — 1.6
Dividends ($ 0.15 per share)
— — — — — — ( 5.1 ) — ( 5.1 ) — ( 5.1 )
Balance at November 30, 2020 1.7 $ 0.0 32.6 $ 0.4 $ 624.3 $ ( 41.7 ) $ 933.1 $ ( 329.7 ) $ 1,186.4 $ 1.5 $ 1,187.9
See accompanying notes
7
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED
(Dollar amounts in millions)
Six months ended
November 30, November 30,
2020 2019
Cash flows - operating activities:
Net income (loss) attributable to Scholastic Corporation $ ( 4.7 ) $ 12.5
Adjustments to reconcile Net income (loss) to net cash provided by (used in) operating activities:
Provision for losses on accounts receivable 3.5 4.3
Provision for losses on inventory 6.4 7.9
Provision for losses on royalty advances 2.8 2.4
Amortization of prepublication costs 12.7 13.0
Depreciation and amortization 33.4 32.1
Amortization of pension and postretirement actuarial gains and losses ( 0.1 ) 0.4
Deferred income taxes ( 0.6 ) ( 0.3 )
Stock-based compensation 3.7 2.4
Income from equity-method investments ( 5.4 ) ( 3.0 )
(Gain) loss on sale of assets ( 6.6 ) —
Changes in assets and liabilities, net of amounts acquired:
Accounts receivable ( 63.0 ) ( 78.3 )
Inventories ( 36.6 ) ( 41.5 )
Prepaid expenses and other current assets ( 7.9 ) ( 11.1 )
Income tax receivable ( 1.8 ) 1.9
Royalty advances ( 5.8 ) ( 7.3 )
Accounts payable 11.1 ( 4.6 )
Accrued income taxes 1.5 ( 0.1 )
Accrued royalties 21.4 12.7
Deferred revenue 33.0 59.6
Other assets and liabilities 23.1 11.3
Net cash provided by (used in) operating activities 20.1 14.3
Cash flows - investing activities:
Prepublication expenditures ( 10.2 ) ( 14.4 )
Additions to property, plant and equipment ( 26.2 ) ( 30.7 )
Net proceeds from sale of assets 12.3 —
Acquisition of land — ( 3.3 )
Net cash provided by (used in) investing activities ( 24.1 ) ( 48.4 )
Cash flows - financing activities:
Borrowings under lines of credit, credit agreement and revolving loan 2.1 22.8
Repayments of lines of credit, credit agreement and revolving loan ( 26.9 ) ( 14.2 )
Repayment of capital lease obligations ( 1.2 ) ( 0.9 )
Reacquisition of common stock — ( 19.6 )
Proceeds pursuant to stock-based compensation plans — 0.3
Payment of dividends ( 10.3 ) ( 10.5 )
Other 0.1 —
Net cash provided by (used in) financing activities ( 36.2 ) ( 22.1 )
Effect of exchange rate changes on cash and cash equivalents 3.0 ( 0.1 )
Net increase (decrease) in cash and cash equivalents ( 37.2 ) ( 56.3 )
Cash and cash equivalents at beginning of period 393.8 334.1
Cash and cash equivalents at end of period $ 356.6 $ 277.8
See accompanying notes
8
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
1. BASIS OF PRESENTATION
Principles of consolidation
The accompanying condensed consolidated interim financial statements (referred to as the “Financial Statements” herein) include the accounts of Scholastic Corporation (the “Corporation”) and all wholly-owned and majority-owned subsidiaries (collectively, “Scholastic” or the “Company”). Intercompany transactions are eliminated in consolidation.
The Company’s fiscal year is not a calendar year. Accordingly, references in this document to fiscal 2021 relate to the twelve-month period ending May 31, 2021. Certain prior period amounts have been reclassified to conform with the current year presentation.
Interim Financial Statements
The accompanying Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information, and should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2020. The Financial Statements presented in this Quarterly Report on Form 10-Q are unaudited; however, in the opinion of management, the Financial Statements reflect all adjustments, consisting solely of normal, recurring adjustments, necessary for the fair presentation of the Financial Statements for the periods presented.
Seasonality
The Company’s Children’s Book Publishing and Distribution school-based book club and book fair channels and most of its Education businesses operate on a school-year basis; therefore, the Company’s business is highly seasonal. As a result, the Company’s revenues in the first and third quarters of the fiscal year generally are lower than its revenues in the other two fiscal quarters. Typically, school-based channels and magazine revenues are minimal in the first quarter of the fiscal year as schools are not in session. Trade sales can vary throughout the year due to varying release dates of published titles. While the Company generally experiences a loss from operations in the first and third quarters of each fiscal year, the second quarter of fiscal 2021, ending November 30, 2020, which is traditionally an income quarter, was negatively impacted by the COVID-19 pandemic, particularly in the book fairs channel. Presently, there remain many uncertainties concerning the timing of and any patterns which may emerge from school instruction, whether in-school, remote or hybrid, for the remaining school year, and the nature and continuing magnitude of the negative impact of COVID-19 into and beyond the third quarter of fiscal 2021 will depend on the actual timing and emerging patterns of such school instruction throughout the United States.
Use of estimates
The preparation of these Financial Statements involves the use of estimates and assumptions by management, which affects the amounts reported in the Financial Statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, and various other assumptions believed to be reasonable under the circumstances, all of which are necessary, in order to form a basis for determining the carrying values of certain assets and liabilities. Actual results may differ from those estimates and assumptions. On an on-going basis, the Company evaluates the adequacy of its reserves and the estimates used in these calculations, including, but not limited to:
• Accounts receivable allowance for doubtful accounts
• Pension and postretirement benefit plans
• Uncertain tax positions
• The timing and amount of future income taxes and related deductions
• Inventory reserves
• Cost of goods sold from book fair operations during interim periods based on estimated gross profit rates
• Sales tax contingencies
• Royalty advance reserves and royalty expense accruals
9
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
• Impairment testing for goodwill, intangible and other long-lived assets and investments
• Assets and liabilities acquired in business combinations
• Variable consideration related to anticipated returns
• Allocation of transaction price to performance obligations
Sale of Long-lived Assets
During the second quarter of fiscal 2021, there were no sales of long-lived assets.
During the first quarter of fiscal 2021, the company-owned facility located in Danbury, Connecticut was sold and the Company relocated the book fairs warehousing and distribution operations conducted in Danbury to a warehouse in Allentown, Pennsylvania. The long-lived assets related to the Danbury facility, which consisted of land, building, and building improvements, were included in the Overhead segment. These assets had a carrying value of $ 5.7 and were classified as held for sale for the fiscal year ended May 31, 2020. The net proceeds from the sale were $ 12.3 and the Company recognized a gain on sale of $ 6.6 . This amount is included within Gain (loss) on sale of assets and other within the Company's Condensed Consolidated Statements of Operations.
Assets Held For Sale
The Company committed to a plan to sell the UK distribution centers located in Witney and Southam to consolidate the operations into a new facility in Warwickshire which is currently under construction. These assets are included in the International segment. The Company expects the sale of these facilities to be completed within one year and to recognize a gain on sale. The long-lived assets which consist of land, building, and building improvements are classified as held for sale. These assets are carried at the lower of carrying value or fair value less costs to sell and no additional depreciation is being recognized. As of November 30, 2020, the carrying amounts totaled $ 3.3 which are included in Property, plant and equipment, net within the Company's Condensed Consolidated Balance Sheets.
The Company will continue to identify opportunities to reduce its real estate footprint related to owned and leased properties.
New Accounting Pronouncements
There were no new accounting pronouncements in the second fiscal quarter of 2021 which would impact the Company. Refer to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2020 for more information on current applicable authoritative guidance and its impact on the Company's financial statements.
Current Fiscal Year Adoptions:
ASU No. 2016-13
In June 2016, the FASB issued ASU No. 2016-13, "Measurement of Credit Losses on Financial Instruments" (ASU 2016-13). ASU 2016-13, which was further updated and clarified by the FASB through the issuance of additional related ASUs, amends the guidance surrounding measurement and recognition of credit losses on financial assets measured at amortized cost, including trade receivables and debt securities, by requiring recognition of an allowance for credit losses expected to be incurred over an asset's lifetime based on relevant information about past events, current conditions, and supportable forecasts impacting its ultimate collectability. This "expected loss" model may result in earlier recognition of credit losses than the current "as incurred" model, under which losses were recognized only upon an occurrence of an event that gave rise to the incurrence of a probable loss. The Company adopted ASU 2016-13 as of the beginning of the first quarter of fiscal 2021 which did not have a material impact on the Company’s Consolidated Financial Statements. Refer to Note 2, Revenues, for further discussion of the Company's accounting policy and disclosures related to the allowance for credit losses.
ASU No. 2017-04
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which removes step two from the goodwill impairment test (comparison of implied fair value of goodwill with the carrying amount of that goodwill for a reporting unit). Instead, an entity will measure its goodwill impairment by the amount the carrying value exceeds the fair value of a reporting unit.
10
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
The Company adopted ASU 2017-04 as of the beginning of the first quarter of fiscal 2021 which resulted in no impact to the Company's Consolidated Financial Statements.
2. REVENUES
Disaggregated Revenue Data
The following table presents the Company’s disaggregated revenues by region and domestic channel:
Three months ended Six months ended
November 30, November 30, November 30, November 30,
2020 2019 2020 2019
U.S. Book Clubs $ 66.9 $ 85.9 $ 72.7 $ 93.9
U.S. Book Fairs 47.7 224.1 60.9 251.6
U.S. Trade 116.4 93.5 182.2 161.2
U.S. Education 67.3 69.8 120.8 118.2
Non-U.S. Major Markets (1)
83.1 94.6 139.7 150.9
Non-U.S. Other Markets (2)
24.8 29.3 45.1 54.0
Total Revenues $ 406.2 $ 597.2 $ 621.4 $ 829.8
(1) - Includes Canada, UK, Australia and New Zealand.
(2) - Primarily includes markets in Asia.
Estimated Returns
A liability for expected returns of $ 54.5 , $ 43.5 , and $ 42.4 is recorded within Other accrued expenses as of November 30, 2020, May 31, 2020, and November 30, 2019, respectively. In addition, a return asset of $ 3.3 , $ 2.7 , and $ 2.6 is recorded within Prepaid expenses and other current assets as of November 30, 2020, May 31, 2020, and November 30, 2019, respectively, for the recoverable cost of product estimated to be returned by customers.
Deferred Revenue
The Company's contract liabilities consist of advance billings and payments received from customers in excess of revenue recognized and revenue allocated to outstanding book fairs incentive credits. These liabilities are recorded within Deferred revenue on the Company's Condensed Consolidated Balance Sheets and are classified as short term, as substantially all of the associated performance obligations are expected to be satisfied, and related revenue recognized, within one year. The Company recognized revenue which was included in the opening deferred revenue balance in the amount of $ 24.2 and $ 46.9 for the three months ended November 30, 2020 and November 30, 2019, respectively, and $ 41.1 and $ 74.0 for the six months ended November 30, 2020 and November 30, 2019, respectively.
Allowance for Credit Losses
The Company recognizes an allowance for credit losses on trade receivables that are expected to be incurred over the lifetime of the receivable. Reserves for estimated credit losses are established at the time of sale and are based on relevant information about past events, current conditions, and supportable forecasts impacting its ultimate collectability, including specific reserves on a customer-by-customer basis, creditworthiness of the Company’s customers and prior collection experience. At the time the Company determines that a receivable balance, or any portion thereof, is deemed to be permanently uncollectible, the balance is then written off.
11
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
The following table presents the change in the allowance for credit losses, which is included in Accounts Receivable, net on the Condensed Consolidated Balance Sheets:
Allowance for Credit Losses
Balance as of June 1, 2020 $ 19.9
Current period provision 1.4
Write-offs and other ( 0.4 )
Balance as of August 31, 2020 $ 20.9
Current period provision 2.1
Write-offs and other ( 1.8 )
Balance as of November 30, 2020 $ 21.2
3. SEGMENT INFORMATION
The Company categorizes its businesses into three reportable segments: Children’s Book Publishing and Distribution, Education and International .
• Children’s Book Publishing and Distribution operates as an integrated business which includes the publication and distribution of children’s books, ebooks, media and interactive products in the United States through its book clubs and book fairs in its school channels and through the trade channel. This segment is comprised of three operating segments.
• Education includes the publication and distribution to schools and libraries of children’s books, classroom magazines, print and digital supplemental and core classroom materials and related support services, and print and on-line reference and non-fiction products for grades pre-kindergarten to 12 in the United States. This segment is comprised of three operating segments.
• International includes the publication and distribution of products and services outside the United States by the Company’s international operations, and its export and foreign rights businesses. This segment is comprised of three operating segments.
The following table sets forth information for the Company's segments for the fiscal quarters ended November 30, 2020 and November 30, 2019:
Children’s
Book
Publishing &
Distribution Education Overhead (1)
Total
Domestic International Total
Three months ended
November 30, 2020
Revenues $ 240.3 $ 67.5 $ — $ 307.8 $ 98.4 $ 406.2
Bad debt expense ( 0.1 ) 1.3 — 1.2 0.9 2.1
Depreciation and amortization (2)
6.6 3.3 11.9 21.8 1.6 23.4
Segment operating income (loss) 37.7 11.9 ( 20.0 ) 29.6 19.2 48.8
Expenditures for other noncurrent assets (3)
9.6 3.2 8.1 20.9 3.1 24.0
Three months ended
November 30, 2019
Revenues $ 413.6 $ 69.9 $ — $ 483.5 $ 113.7 $ 597.2
Bad debt expense 1.1 0.8 — 1.9 0.8 2.7
Depreciation and amortization (2)
6.5 3.4 10.9 20.8 1.8 22.6
Segment operating income (loss) 109.6 6.2 ( 22.4 ) 93.4 11.7 105.1
Expenditures for other noncurrent assets (3)
14.7 5.0 10.6 30.3 5.8 36.1
12
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
The following table sets forth information for the Company's segments for the fiscal periods ended November 30, 2020 and November 30, 2019:
Children’s
Book
Publishing &
Distribution Education Overhead (1)
Total
Domestic International Total
Six months ended
November 30, 2020
Revenues $ 331.2 $ 121.1 $ — $ 452.3 $ 169.1 $ 621.4
Bad debt expense 0.1 1.4 — 1.5 2.0 3.5
Depreciation and amortization (2)
13.2 6.4 23.4 43.0 3.1 46.1
Segment operating income (loss) 8.5 9.7 ( 50.8 ) ( 32.6 ) 24.4 ( 8.2 )
Segment assets at November 30, 2020 607.1 212.8 957.4 1,777.3 329.6 2,106.9
Goodwill at November 30, 2020 47.3 68.2 — 115.5 10.1 125.6
Expenditures for other noncurrent assets (3)
21.7 6.3 18.9 46.9 6.6 53.5
Other non-current assets at November 30, 2020 (3)
171.0 123.7 487.2 781.9 86.4 868.3
Six months ended
November 30, 2019
Revenues $ 523.2 $ 118.3 $ — $ 641.5 $ 188.3 $ 829.8
Bad debt expense 1.6 0.8 — 2.4 1.9 4.3
Depreciation and amortization (2)
13.2 6.5 21.9 41.6 3.5 45.1
Segment operating income (loss) 67.9 ( 7.2 ) ( 51.0 ) 9.7 8.0 17.7
Segment assets at November 30, 2019 674.6 196.1 846.8 1,717.5 314.2 2,031.7
Goodwill at November 30, 2019 47.2 68.2 — 115.4 10.0 125.4
Expenditures for other noncurrent assets (3)
28.7 9.6 18.2 56.5 12.7 69.2
Other non-current assets at November 30, 2019 (3)
219.6 122.4 514.3 856.3 98.6 954.9
(1) Overhead includes all domestic corporate amounts not allocated to segments, including expenses and costs related to the management of corporate assets. Unallocated assets are principally comprised of deferred income taxes and property, plant and equipment related to the Company’s headquarters in the metropolitan New York area, its fulfillment and distribution facilities located in Missouri, and certain technology assets.
(2) Includes depreciation of property, plant and equipment and amortization of intangible assets, prepublication costs and cloud computing costs.
(3) Other noncurrent assets include property, plant and equipment, prepublication assets, cloud computing costs, royalty advances, goodwill, intangible assets and investments. Expenditures for other noncurrent assets for the International segment include expenditures for long-lived assets of $ 1.5 and $ 4.2 for the three months ended November 30, 2020 and 2019, respectively, and $ 3.5 and $ 9.9 for the six months ended November 30, 2020 and 2019. Other noncurrent assets for the International segment include long-lived assets of $ 46.6 and $ 66.8 as of November 30, 2020 and 2019, respectively.
13
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
4. DEBT
The following table summarizes the carrying value of the Company's debt as of the dates indicated:
November 30, 2020 May 31, 2020 November 30, 2019
US Revolving Loan $ 175.0 $ 200.0 $ —
Unsecured lines of credit (weighted average interest rates of 4.4 %, 4.6 % and 3.8 %, respectively)
8.4 7.9 13.5
UK Loan 11.4 10.6 2.6
Total debt $ 194.8 $ 218.5 $ 16.1
Less lines of credit, short-term debt and current portion of long-term debt ( 19.8 ) ( 7.9 ) ( 13.5 )
Total long-term debt $ 175.0 $ 210.6 $ 2.6
The following table sets forth the maturities of the carrying values of the Company’s debt obligations as of November 30, 2020 for the twelve-month periods ended November 30:
2021 $ 19.8
2022 175.0
2023 —
2024 —
2025 —
Thereafter —
Total debt $ 194.8
US Loan Agreement
On December 16, 2020, the Company entered into an amendment to its existing loan agreement, which includes adjustments to, and suspension of, certain covenant thresholds, as well as a reduction in maximum commitments to $ 250.0 . The amendment was executed in order to avoid noncompliance with certain covenants in the existing agreement at November, 30, 2020 due to the temporary impacts of COVID-19. Refer to Note 17, Subsequent Events, for further discussion of Amendment No. 1 to the Loan Agreement which temporarily supersedes certain terms described below for the existing loan agreement.
On January 5, 2017, Scholastic Corporation and Scholastic Inc. (each, a “Borrower” and together, the “Borrowers”) entered into a 5-year credit facility with certain banks (the “Loan Agreement”). The Loan Agreement replaced the Company's then existing loan agreement and has substantially similar terms, except that:
• the borrowing limit was reduced to $ 375.0 from $ 425.0 ;
• the “starter” basket for permitted payments of dividends and other payments in respect of capital stock
was increased to $ 275.0 from $ 75.0 ; and
• the maturity date was extended to January 5, 2022.
The prior loan agreement, which was originally entered into in 2007 and had a maturity date of December 5, 2017, was terminated on January 5, 2017 in connection with the entry into the new Loan Agreement and was treated as a debt modification.
The Loan Agreement allows the Company to borrow, repay or prepay and reborrow at any time prior to the January 5, 2022 maturity date. Under the Loan Agreement, interest on amounts borrowed thereunder is due and payable in arrears on the last day of the interest period (defined as the period commencing on the date of the advance and ending on the last day of the period selected by the Borrower at the time each advance is made). The interest pricing under the Loan Agreement is dependent upon the Borrower’s election of a rate that is either:
• A Base Rate equal to the higher of (i) the prime rate, (ii) the prevailing Federal Funds rate plus 0.50 % or (iii) the Eurodollar Rate for a one month interest period plus 1.00 % plus, in each case, an applicable spread ranging from 0.175 % to 0.60 %, as determined by the Company’s prevailing consolidated debt to total capital ratio.
14
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
- or -
• A Eurodollar Rate equal to the London interbank offered rate (LIBOR) plus an applicable spread ranging from 1.175 % to 1.60 %, as determined by the Company’s prevailing consolidated debt to total capital ratio.
As of November 30, 2020, the indicated spread on Base Rate Advances was 0.175 % and the indicated spread on Eurodollar Advances was 1.175 %, both based on the Company’s prevailing consolidated debt to total capital ratio.
The Loan Agreement also provides for the payment of a facility fee in respect of the aggregate amount of revolving credit commitments ranging from 0.20 % to 0.40 % per annum based upon the Company’s prevailing consolidated debt to total capital ratio. At November 30, 2020, the facility fee rate was 0.20 %.
A portion of the revolving credit facility, up to a maximum of $ 50.0 , is available for the issuance of letters of credit. In addition, a portion of the revolving credit facility, up to a maximum of $ 15.0 , is available for swingline loans. The Loan Agreement has an accordion feature which permits the Company, provided certain conditions are satisfied, to increase the facility by up to an additional $ 150.0 .
As of November 30, 2020, the Company had outstanding borrowings of $ 175.0 under the Loan Agreement. The Company incurred this obligation in the fourth quarter of fiscal 2020 as a precautionary measure due to the uncertainty resulting from the COVID-19 pandemic. While this obligation is not due until the January 5, 2022 maturity date, the Company may, from time to time, make payments to reduce this obligation when cash from operations becomes available for this purpose. No borrowings were outstanding under the Loan Agreement as of November 30, 2019.
At November 30, 2020, the Company had open standby letters of credit totaling $ 4.3 issued under certain credit lines, including $ 0.4 under the Loan Agreement and $ 3.9 under the domestic credit lines discussed below.
UK Loan Agreement
On September 23, 2019, Scholastic Limited UK entered into a term loan agreement to borrow £ 2.0 to fund a land purchase in connection with the construction of a new UK facility. The loan has a maturity date of July 31, 2021. Under the agreement, the principal balance is due in full in a single payment on the last day of the term and interest on the amount borrowed is due and payable quarterly. The interest is charged at 1.77 % per annum over the Base Rate. The Base Rate is currently equal to 0.10 % per annum and is subject to change. As of November 30, 2020, the Company had $ 2.7 outstanding on the loan.
On January 24, 2020, Scholastic Limited UK entered into a term loan facility with a borrowing limit of £ 6.6 to fund the construction of the new UK facility. The loan has a maturity date of July 31, 2021. Under the agreement, the principal balance is due in full in a single payment on the last day of the term and interest on the amount borrowed is due and payable quarterly. The interest is charged at 1.77 % per annum over the Base Rate. The Base Rate is currently equal to 0.10 % per annum and is subject to change. As of November 30, 2020, the Company had $ 8.7 outstanding on the loan and no remaining available credit under this facility.
Lines of Credit
As of November 30, 2020, the Company’s domestic credit lines available under unsecured money market bid rate credit lines totaled $ 10.0 . There were no outstanding borrowings under these credit lines as of November 30, 2020, May 31, 2020 and November 30, 2019. As of November 30, 2020, availability under these unsecured money market bid rate credit lines totaled $ 6.1 . All loans made under these credit lines are at the sole discretion of the lender and at an interest rate and term agreed to at the time each loan is made, but not to exceed 365 days. These credit lines may be renewed, if requested by the Company, at the option of the lender.
As of November 30, 2020, the Company had various local currency international credit lines totaling $ 36.7 underwritten by banks primarily in the United States, Canada and the United Kingdom. Outstanding borrowings under these facilities were $ 8.4 at November 30, 2020 at a weighted average interest rate of 4.4 %, $ 7.9 at May 31, 2020 at a weighted average interest rate of 4.6 %, and $ 13.5 at November 30, 2019 at a weighted average interest rate of 3.8 %. As of November 30, 2020, the amounts available under these facilities totaled $ 28.3 . These
15
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
credit lines are typically available for overdraft borrowings or loans up to 364 days and may be renewed, if requested by the Company, at the sole option of the lender.
5. COMMITMENTS AND CONTINGENCIES
COVID-19
The COVID-19 pandemic and actions taken, or which may be taken in the future following any easing of current restrictions based on the future course of the pandemic, by governments, businesses and individuals to limit the spread of the virus may continue to have an adverse effect on the Company’s results of operations and financial condition.
The Company is not currently aware of any loss contingencies related to the foregoing that would require recognition in the second quarter of fiscal 2021.
Legal Matters
Various claims and lawsuits arising in the normal course of business are pending against the Company. The Company accrues a liability for such matters when it is probable that a liability has occurred and the amount of such liability can be reasonably estimated. When only a range can be estimated, the most probable amount in the range is accrued unless no amount within the range is a better estimate than any other amount, in which case the minimum amount in the range is accrued. Legal costs associated with litigation 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.
6. EARNINGS (LOSS) PER SHARE
The following table summarizes the reconciliation of the numerators and denominators for the basic and diluted earnings (loss) per share computation for the periods indicated:
Three months ended Six months ended
November 30, November 30,
2020 2019 2020 2019
Net income (loss) attributable to Class A and Common Stockholders $ 35.1 $ 70.9 $ ( 4.7 ) $ 12.5
Weighted average Shares of Class A Stock and Common Stock outstanding for basic earnings (loss) per share (in millions) 34.3 34.8 34.3 34.8
Dilutive effect of Class A Stock and Common Stock potentially issuable pursuant to stock-based compensation plans (in millions) * 0.1 0.3 * 0.4
Adjusted weighted average Shares of Class A Stock and Common Stock outstanding for diluted earnings (loss) per share (in millions) 34.4 35.1 34.3 35.2
Earnings (loss) per share of Class A Stock and Common Stock:
Basic $ 1.02 $ 2.04 $ ( 0.14 ) $ 0.36
Diluted $ 1.02 $ 2.02 $ ( 0.14 ) $ 0.35
* The Company experienced a net loss for the six month period ended November 30, 2020 and therefore did not report any dilutive share impact.
Net income (loss) attributable to Class A and Common Stockholders excludes earnings of less than $ 0.1 and $ 0.1 for the three month periods ended November 30, 2020 and November 30, 2019, respectively, and less than $ 0.1 for the six month period ended November 30, 2019, for earnings attributable to participating restricted stock units. The Company experienced a loss for the six month period ended November 30, 2020 and therefore did not allocate any loss to the participating restricted stock units.
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:
November 30, 2020 November 30, 2019
Options outstanding pursuant to stock-based compensation plans (in millions) 5.2 3.0
On October 1, 2020, the Company made an additional stock option grant to employees as a non-cash incentive.
There were 2.8 million of potentially anti-dilutive shares pursuant to stock-based compensation plans as of November 30, 2020.
A portion of the Company’s Restricted Stock Units ("RSUs") which are granted to employees participate in earnings through cumulative dividends which are payable and non-forfeitable to the employees upon vesting of the RSUs. Accordingly, the Company measures earnings per share based upon the lower of the Two-class method or the Treasury Stock method.
As of November 30, 2020, $ 67.3 remained available for future purchases of common shares under the repurchase authorization of the Board of Directors (the "Board") in effect on that date. See Note 11, Treasury Stock, for a more complete description of the Company’s share buy-back program.
7. GOODWILL AND OTHER INTANGIBLES
The Company assesses goodwill and other intangible assets with indefinite lives for impairment annually or more frequently if indicators arise. The Company monitors impairment indicators in light of changes in market conditions, near and long-term demand for the Company’s products and other relevant factors.
The following table summarizes the activity in Goodwill for the periods indicated:
November 30, 2020 May 31, 2020 November 30, 2019
Gross beginning balance $ 164.5 $ 164.8 $ 164.8
Accumulated impairment ( 39.6 ) ( 39.6 ) ( 39.6 )
Beginning balance $ 124.9 $ 125.2 $ 125.2
Additions — — —
Foreign currency translation 0.7 ( 0.3 ) 0.2
Ending balance $ 125.6 $ 124.9 $ 125.4
There were no impairment charges related to Goodwill in any of the periods presented.
The following table summarizes the activity in other intangibles included in Other assets and deferred charges on the Company’s Financial Statements for the periods indicated:
November 30, 2020 May 31, 2020 November 30, 2019
Beginning balance other intangibles subject to amortization $ 10.5 $ 12.2 $ 12.2
Additions — 1.6 —
Amortization expense ( 1.2 ) ( 3.2 ) ( 1.5 )
Foreign currency translation 0.4 ( 0.1 ) 0.0
Total other intangibles subject to amortization, net of accumulated amortization of $ 31.3 , $ 30.1 and $ 28.4 , respectively
$ 9.7 $ 10.5 $ 10.7
Total other intangibles not subject to amortization $ 2.1 $ 2.1 $ 2.1
Total other intangibles $ 11.8 $ 12.6 $ 12.8
There were no additions to intangible assets within the six months ended November 30, 2020.
17
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
In fiscal 2020, the Company purchased a U.S.-based book fair business resulting in $ 1.6 of amortizable intangible assets.
Intangible assets with indefinite lives consist principally of trademark and tradename rights. Intangible assets with definite lives consist principally of customer lists, intellectual property, tradenames and other agreements. Intangible assets with definite lives are amortized over their estimated useful lives. The weighted-average remaining useful lives of all amortizable intangible assets is approximately 5.6 years.
There were no impairment charges related to Intangible assets in any of the periods presented.
8. INVESTMENTS
Investments are included in Other assets and deferred charges on the Condensed Consolidated Balance Sheets. The following table summarizes the Company’s investments as of the dates indicated:
November 30, 2020 May 31, 2020 November 30, 2019 Segment
Equity method investments $ 32.5 $ 25.0 $ 26.0 International
Other equity investments 6.0 6.0 6.0 Children's Book Publishing & Distribution
Total Investments $ 38.5 $ 31.0 $ 32.0
The Company’s 26.2 % equity interest in a children’s book publishing business located in the UK is accounted for using the equity method of accounting. Equity method income from this investment is reported in the International segment.
The Company has a 4.6 % ownership interest in a financing and production company that makes film, television, and digital programming designed for the youth market. This equity investment does not have a readily determinable fair value and the Company has elected to apply the measurement alternative and report this investment at cost, less impairment on the Company's Consolidated Balance Sheets. There have been no impairments or adjustments to the carrying value of this investment.
Income from equity investments is reported in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and totaled $ 4.6 and $ 2.0 for the three months ended November 30, 2020 and November 30, 2019, respectively, and $ 5.4 and $ 3.0 for the six months ended November 30, 2020 and November 30, 2019, respectively.
9. EMPLOYEE BENEFIT PLANS
The following table sets forth the components of net periodic benefit cost for the periods indicated under the Company’s defined benefit pension plan of Scholastic Ltd., an indirect subsidiary of Scholastic Corporation located in the United Kingdom (the “UK Pension Plan”), and the postretirement benefits plan, consisting of certain healthcare and life insurance benefits provided by the Company to its eligible retired United States-based employees (the “US Postretirement Benefits”), for the periods indicated:
UK Pension Plan US Postretirement Benefits
Three months ended Three months ended
November 30, November 30, November 30, November 30,
2020 2019 2020 2019
Components of net periodic benefit cost:
Interest cost $ 0.1 $ 0.2 $ 0.1 $ 0.1
Expected return on assets ( 0.2 ) ( 0.3 ) — —
Net amortization of prior service (credit) cost 0.0 0.0 ( 0.2 ) ( 0.1 )
Amortization of (gains) losses 0.2 0.3 0.0 0.0
Total $ 0.1 $ 0.2 $ ( 0.1 ) $ 0.0
18
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
UK Pension Plan US Postretirement Benefits
Six months ended Six months ended
November 30, November 30, November 30, November 30,
2020 2019 2020 2019
Components of net periodic benefit cost:
Interest cost $ 0.3 $ 0.4 $ 0.2 $ 0.3
Expected return on assets ( 0.4 ) ( 0.5 ) — —
Net amortization of prior service (credit) cost 0.0 0.0 ( 0.2 ) ( 0.1 )
Amortization of (gains) losses 0.3 0.5 0.0 0.0
Total $ 0.2 $ 0.4 $ 0.0 $ 0.2
The Company’s funding practice with respect to the UK Pension Plan is to contribute on an annual basis at least the minimum amounts required by applicable law. For the six months ended November 30, 2020, the Company contributed $ 0.6 to the UK Pension Plan. The Company expects, based on actuarial calculations, to contribute cash of approximately $ 1.0 to the UK Pension Plan for the fiscal year ending May 31, 2021.
In the second quarter of fiscal 2021, the Company announced a change in benefits for certain US postretirement benefit plan participants. Beginning January 1, 2021, the plan will establish Health Reimbursement Accounts (HRAs) to provide these participants with additional flexibility to choose healthcare options based on individual needs. As a result of this change, the Company remeasured its Postretirement Benefit obligation as of November 30, 2020, and recognized a reduction of $ 7.6 to its benefit obligation and a reduction to its accumulated comprehensive loss of $ 7.6 in the second quarter of fiscal 2021. The related prior service credit will be amortized as a Component of net periodic benefit (cost) over the average remaining life expectancy of plan participants of approximately 12 years.
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 Six months ended
November 30, November 30, November 30, November 30,
2020 2019 2020 2019
Stock option expense $ 2.5 $ 0.4 $ 2.8 $ 1.0
Restricted stock unit expense 0.5 0.4 0.7 1.2
Management stock purchase plan 0.0 0.0 0.0 0.0
Employee stock purchase plan 0.0 0.1 0.1 0.2
Total stock-based compensation expense $ 3.0 $ 0.9 $ 3.6 $ 2.4
On October 1, 2020, the Company made an additional stock option grant to employees as a non-cash incentive.
The following table sets forth Common Stock issued pursuant to stock-based compensation plans for the periods indicated:
Three months ended Six months ended
November 30, November 30, November 30, November 30,
2020 2019 2020 2019
Common Stock issued pursuant to stock-based compensation plans (in millions) 0.1 0.1 0.1 0.1
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SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
11. TREASURY STOCK
The Board has authorized the Company to repurchase Common Stock, from time to time as conditions allow, on the open market or through negotiated private transactions.
The table below represents the Board authorizations at the dates indicated:
Authorizations Amount
March 2018 $ 50.0
March 2020 50.0
Total current Board authorizations at June 1, 2020 $ 100.0
Less repurchases made under these authorizations $ ( 32.7 )
Remaining Board authorization at November 30, 2020 $ 67.3
Remaining Board authorization at November 30, 2020 represents the amount remaining under the Board authorization for Common share repurchases on March 21, 2018 and the current $ 50.0 Board authorization for Common share repurchases announced on March 18, 2020, which is available for further repurchases, from time to time as conditions allow, on the open market or through negotiated private transactions.
There were no repurchases of the Company's Common Stock for the three and six months ended November 30, 2020. The Company’s repurchase program is temporarily suspended at this time due to COVID-19 uncertainties.
12. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
T he following tables summarize the activity in Accumulated other comprehensive income (loss), net of tax, by component, for the periods indicated:
Three months ended November 30, 2020
Foreign currency translation adjustments Retirement benefit plans Total
Beginning balance at September 1, 2020 $ ( 39.3 ) $ ( 8.2 ) $ ( 47.5 )
Other comprehensive income (loss) before reclassifications 0.4 5.3 5.7
Less amount reclassified from Accumulated other comprehensive income (loss):
Amortization of gains and losses (net of tax of $ 0.0 )
— 0.2 0.2
Amortization of prior service credit (net of tax of $ 0.1 )
— ( 0.1 ) ( 0.1 )
Other comprehensive income (loss) 0.4 5.4 5.8
Ending balance at November 30, 2020 $ ( 38.9 ) $ ( 2.8 ) $ ( 41.7 )
Three months ended November 30, 2019
Foreign currency translation adjustments Retirement benefit plans Total
Beginning balance at September 1, 2019 $ ( 49.1 ) $ ( 12.4 ) $ ( 61.5 )
Other comprehensive income (loss) before reclassifications 3.9 — 3.9
Less amount reclassified from Accumulated other comprehensive income (loss):
Amortization of gains and losses (net of tax of $ 0.0 )
— 0.3 0.3
Amortization of prior service credit (net of tax of $ 0.0 )
— ( 0.1 ) ( 0.1 )
Other comprehensive income (loss) 3.9 0.2 4.1
Ending balance at November 30, 2019 $ ( 45.2 ) $ ( 12.2 ) $ ( 57.4 )
20
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
Six months ended November 30, 2020
Foreign currency translation adjustments Retirement benefit plans Total
Beginning balance at June 1, 2020 $ ( 50.0 ) $ ( 8.3 ) $ ( 58.3 )
Other comprehensive income (loss) before reclassifications 11.1 5.3 16.4
Less amount reclassified from Accumulated other comprehensive income (loss):
Amortization of gains and losses (net of tax of $ 0.0 )
— 0.3 0.3
Amortization of prior service credit (net of tax of $ 0.1 )
— ( 0.1 ) ( 0.1 )
Other comprehensive income (loss) 11.1 5.5 16.6
Ending balance at November 30, 2020 $ ( 38.9 ) $ ( 2.8 ) $ ( 41.7 )
Six months ended November 30, 2019
Foreign currency translation adjustments Retirement benefit plans Total
Beginning balance at June 1, 2019 $ ( 47.1 ) $ ( 12.6 ) $ ( 59.7 )
Other comprehensive income (loss) before reclassifications 1.9 — 1.9
Less amount reclassified from Accumulated other comprehensive income (loss):
Amortization of gains and losses (net of tax of $ 0.0 )
— 0.5 0.5
Amortization of prior service credit (net of tax of $ 0.0 )
— ( 0.1 ) ( 0.1 )
Other comprehensive income (loss) 1.9 0.4 2.3
Ending balance at November 30, 2019 $ ( 45.2 ) $ ( 12.2 ) $ ( 57.4 )
The following table presents the impact on earnings of reclassifications out of Accumulated other comprehensive income (loss) for the periods indicated:
Three months ended Six months ended Condensed Consolidated Statements of Operations line item
November 30, November 30, November 30, November 30,
2020 2019 2020 2019
Employee benefit plans:
Amortization of unrecognized (gain) loss $ 0.2 $ 0.3 $ 0.3 $ 0.5 Other components of net periodic benefit (cost)
Amortization of prior service credit ( 0.2 ) ( 0.1 ) ( 0.2 ) ( 0.1 ) Other components of net periodic benefit (cost)
Less: Tax effect 0.1 0.0 0.1 0.0 Provision (benefit) for income taxes
Total cost, net of tax $ 0.1 $ 0.2 $ 0.2 $ 0.4
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 1 Unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.
• Level 2 Observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs derived principally from or corroborated by observable market data.
21
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
• Level 3 Unobservable inputs in which there is little or no market data available, which are significant to the fair value measurement and require the Company to develop its own assumptions.
The Company’s financial assets and liabilities measured at fair value consisted of cash and cash equivalents, debt and foreign currency forward contracts. Cash and cash equivalents are comprised of bank deposits and short-term investments, such as money market funds, the fair value of which is based on quoted market prices, a Level 1 fair value measure. The Company employs Level 2 fair value measurements for the disclosure of the fair value of its various lines of credit and long term debt. The fair value of the Company's debt approximates the carrying value for all periods presented. The fair values of foreign currency forward contracts, used by the Company to manage the impact of foreign exchange rate changes, are based on quotations from financial institutions, a Level 2 fair value measure. See Note 15, Derivatives and Hedging, for a more complete description of the fair value measurements employed.
Non-financial assets for which the Company employs fair value measures on a non-recurring basis include:
• Long-lived assets
• Investments
• Assets acquired in a business combination
• Impairment assessment of Goodwill and 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. For the fair value measurements employed by the Company for certain property, plant and equipment, investments and prepublication assets, the Company assessed future expected cash flows attributable to these assets. See Note 8, Investments, for a more complete description of the fair value measurements employed.
14. INCOME TAXES AND OTHER TAXES
Tax Legislation Updates
In response to the COVID-19 pandemic, many governments have enacted or are contemplating additional measures to provide aid and economic stimulus. These measures may include deferring the due dates of tax payments or other changes to their income and non-income-based tax laws as well as providing direct government assistance through grants and forgivable loans.
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer-side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company expects to benefit from certain provisions in the CARES Act, including the provision to carry back net operating losses generated in the U.S. to previous periods which were taxed at the higher 35% federal corporate tax rate and provisions related to the Employee Retention Credit, which was created by the CARES Act to encourage entities to keep employees on their payroll despite experiencing economic hardship due to the COVID-19 pandemic. The Company is deferring employer-side social security payments which have resulted in a long term liability of $ 8.7 as of November 30, 2020. Internationally, the Company is applying for employee retention credits when applicable and appropriate.
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. The Tax Cuts and Jobs Act, among other things, reduced the U.S. federal corporate tax rate from 35% to 21% and imposed a new minimum tax on Global Intangible Low-Taxed Income ("GILTI") earned by foreign subsidiaries. On July 20, 2020, final regulations were issued for GILTI which include a high-tax exception for income earned by foreign subsidiaries if the foreign tax rate is in excess of 90% of the U.S. tax rate of 21%. While the Company does not anticipate a material impact on the overall income tax provision, the final regulations, specifically the high-tax exception, will reduce taxable income.
22
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
Income Taxes
In calculating the provision for income taxes on an interim basis, the Company uses an estimate of the annual effective tax rate based upon currently known facts and circumstances and applies that rate to its year-to-date earnings or losses. The Company’s effective tax rate is based on expected income and statutory tax rates and takes into consideration permanent differences between financial statement and tax return income applicable to the Company in the various jurisdictions in which the Company operates. The effect of discrete items, such as changes in estimates, changes in enacted tax laws or rates or tax status, and unusual or infrequently occurring events, is recognized in the interim period in which the discrete item occurs. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the result of new judicial interpretations or regulatory or tax law changes.
The Company's interim effective tax rate, inclusive of discrete items, was 26.1 % for the three month period ended November 30, 2020 and 9.5 % for the six month period ended November 30, 2020. The effective tax rate for the six month period ended November 30, 2020 varies from the statutory tax rate primarily due to employee stock option cancellations and additional GILTI inclusions.
The Company, including its domestic subsidiaries, files a consolidated U.S. income tax return, and also files tax returns in various states and other local jurisdictions. Also, certain subsidiaries of the Company file income tax returns in foreign jurisdictions. The Company is routinely audited by various tax authorities and the fiscal 2015 through fiscal 2019 tax years remain open. The Company has been notified by the IRS that there will be an examination of the income tax return for fiscal 2015.
Non-income Taxes
The Company is subject to tax examinations for sales-based taxes. A number of these examinations are ongoing and, in certain cases, have resulted in assessments from taxing authorities. The Company assesses sales tax contingencies for each jurisdiction in which it operates, considering all relevant facts including statutes, regulations, case law and experience. Where a sales tax liability with respect to a jurisdiction is probable and can be reliably estimated for such jurisdiction, the Company has made accruals for these matters which are reflected in the Company’s Condensed Consolidated Financial Statements. These amounts are included in the Financial Statements in Selling, general and administrative expenses. Future developments relating to the foregoing could result in adjustments being made to these accruals.
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, the foreign exchange risk associated with certain receivables denominated in foreign currencies and certain future commitments for foreign expenditures. These derivative contracts are economic hedges and are not designated as cash flow hedges.
The Company marks-to-market these instruments and records the changes in the fair value of these items in Selling, general and administrative expenses and it recognizes the unrealized gain or loss in Other current assets or Other current liabilities. The notional values of the contracts as of November 30, 2020 and November 30, 2019 were $ 29.2 and $ 26.0 , respectively. A net unrealized loss of $ 1.1 and a net unrealized gain $ 0.3 were recognized for the six months ended November 30, 2020 and November 30, 2019, respectively.
23
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
16. OTHER ACCRUED EXPENSES
Other accrued expenses consisted of the following as of the dates indicated:
November 30, 2020 May 31, 2020 November 30, 2019
Accrued payroll, payroll taxes and benefits $ 38.6 $ 38.8 $ 41.7
Accrued bonus and commissions 10.6 12.1 13.3
Returns liability 54.5 43.5 42.4
Accrued other taxes 24.5 22.9 30.2
Accrued advertising and promotions 12.7 9.9 12.3
Other accrued expenses 42.1 34.3 38.3
Total accrued expenses $ 183.0 $ 161.5 $ 178.2
17. SUBSEQUENT EVENTS
The Board declared a quarterly cash dividend of $ 0.15 per share on the Company’s Class A and Common Stock for the third quarter of fiscal 2021. The dividend is payable on March 15, 2021 to shareholders of record as of the close of business on January 29, 2021.
On December 16, 2020, the Company and its principal operating subsidiary, Scholastic Inc., entered into an amendment to its existing credit agreement with a syndicate of banks and Bank of America, N.A., as administrative agent, which includes adjustments to, and suspension of, certain covenant thresholds.
The principal revised terms of the credit agreement effected by the amendment include the following:
• The aggregate maximum commitments of the lenders have been reduced to $ 250.0 , of which a maximum of $ 225.0 is available until the Company satisfies the pre-amendment covenants in the credit agreement and a new covenant requiring Consolidated Liquidity (as defined) of a minimum amount of $ 200.0 ;
• The minimum interest coverage covenant is suspended until after the end of the Company’s fourth fiscal quarter ending May 31, 2021;
• The securitization of the Company’s inventory and accounts receivable;
• A modified limitation on asset sales (not to exceed 10 % of Consolidated Total Assets, as defined, excluding sale of collateral);
• A facility fee rate of 0.40 %;
• A limitation on Acquisitions (as defined) to an aggregate amount of $ 25.0 per fiscal year;
• Modification of the interest rate and fees during the remaining period of the credit facility, pursuant to which the revised interest rate is equal to 2.25 % for any Eurodollar Rate Advance and 1.25 % with respect to any Base Rate Advance, until receipt of the Company's financial statements and related certificates for the fiscal year ending May 31, 2021, and 1.60 % for any Eurodollar Rate Advance and 0.60 % for any Base Rate Advance drawn after the delivery by the Company of its financial statements and related certificates for the fiscal year ending May 31, 2021.
• A limit on quarterly cash dividends of $ 5.2 per fiscal quarter plus the dollar amount of all cash dividends payable (at the rate applicable as of the First Amendment Effective Date) in such fiscal quarter in respect of capital stock of the Company issued after the First Amendment Effective Date as a result of the regular vesting or exercise of issued and outstanding stock awards in the normal course of business. Other restricted payments (e.g., for share repurchases, etc.) are limited to the "builder basket" and leverage construct in the pre-amendment credit agreement together with an additional requirement that the Company have Consolidated Liquidity (as defined) that exceeds $ 300.0 . Prior to the Agent's receipt of the Company's financial statements for the fiscal year ending May 31, 2021, use of this restricted payment basket (apart from dividends) is capped at $ 30.0 .
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
Overview and Outlook
Revenues for the second quarter ended November 30, 2020 were $406.2 million, compared to $597.2 million in the prior fiscal year quarter, a decrease of $191.0 million. The Company reported net earnings per diluted share of Class A and Common Stock of $1.02 in the second quarter of fiscal 2021, compared to $2.02 in the prior fiscal year quarter.
During the second quarter ended November 30, 2020, the Company continued to reduce its operating costs, right-size its employee base, and match inventory purchases to customer demand to help mitigate the impact of lower fairs’ revenues on its profitability and cash position. While the book fairs channel continued to have a significant decline in sales, as schools were generally not hosting in-person book fairs as a result of coronavirus concerns and restrictions and the resulting patterns of school instruction, operating income improved over the prior fiscal year quarter for a majority of the Company's other businesses in the U.S. and internationally. The trade channel continued to exceed prior fiscal year quarter results as new titles were released in the fiscal quarter ended November 30, 2020, including Dav Pilkey's Dog Man: Grime and Punishment and The Ickabog ® by J.K. Rowling, in addition to increased sales of other best-selling trade titles. The Company also benefited from higher revenues within the Education segment, excluding the custom publishing magazine business which is winding down, from products including Grab and Go reading packs, teaching resources workbooks, and digital product subscriptions.
The Company has identified opportunities for additional savings in the second half of the fiscal year, which cost-cutting actions, along with the continued expectation of increased performance in the Company’s trade and education businesses, are expected to help mitigate the impact of lower expected book fairs revenues in the third fiscal quarter. Scheduled new releases in the second half of fiscal 2021 are expected to continue to position the trade business for further growth, and the Company’s growing media and entertainment business, through its production partnerships and the licensing of the Company's content and characters, is expected to continue to complement the Company’s book sales.
Results of Operations
Consolidated
Revenues for the quarter ended November 30, 2020 decreased to $406.2 million, compared to $597.2 million in the prior fiscal year. The Children's Book Publishing and Distribution segment revenues decreased by $173.3 million, primarily driven by lower book fairs channel revenues due to lower in-person fair count as schools were not hosting fairs on-site due to COVID-19, partially offset by increased trade channel revenues driven by the release of a number of best-selling frontlist titles combined with higher backlist sales from best-selling series. In the Education segment, revenues decreased by $2.4 million, primarily due to the wind down of the custom publishing magazine business, partially offset by increased sales of Grab and Go reading packs and digital product subscriptions as well as higher sales in the teaching resources business. In local currency, the International segment revenues decreased by $17.8 million, primarily driven by lower revenues in the book fairs channels in Canada and the UK and lower direct-to-home sales in Asia, partially offset by increased revenues in the trade channel across all international markets. International segment revenues were impacted by favorable foreign exchange of $2.5 million in the quarter ended November 30, 2020.
Revenues for the six months ended November 30, 2020 decreased to $621.4 million, compared to $829.8 million in the prior fiscal year period. The Children's Book Publishing and Distribution segment revenues decreased by $192.0 million, primarily driven by lower book fairs channel revenues due to lower in-person fair count as schools were not hosting fairs on-site due to COVID-19, partially offset by increased trade channel revenues driven by the release of a number of best-selling frontlist titles combined with higher backlist sales from best-selling series. In the Education segment, revenues increased by $2.8 million, primarily due to higher sales of digital products in literacy programs and take-home Grab and Go reading packs, as well as higher sales in the teaching resources business, partially offset by the wind down of the customer publishing magazine business. In local currency, the International segment revenues decreased by $22.1 million, primarily driven by lower revenues in the school-based channels in Canada, lower book fairs channel revenues in the UK and lower direct-to-home sales in Asia, partially offset by increased revenues in the trade channel across all international markets. International segment revenues were impacted by favorable foreign exchange of $2.9 million in the period.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.