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,
2021 2020 2021 2020
Revenues $ 524.2 $ 406.2 $ 784.0 $ 621.4
Operating costs and expenses:
Cost of goods sold 238.0 189.7 371.3 304.7
Selling, general and administrative expenses 188.3 151.9 331.9 293.6
Depreciation and amortization 14.5 15.8 29.4 31.3
Total operating costs and expenses 440.8 357.4 732.6 629.6
Operating income (loss) 83.4 48.8 51.4 ( 8.2 )
Interest income (expense), net ( 0.5 ) ( 1.2 ) ( 1.8 ) ( 2.4 )
Other components of net periodic benefit (cost) 0.0 ( 0.0 ) 0.0 ( 0.2 )
Gain (loss) on sale of assets and other 6.2 ( 0.0 ) 6.2 6.6
Earnings (loss) before income taxes 89.1 47.6 55.8 ( 4.2 )
Provision (benefit) for income taxes 20.7 12.4 11.8 0.4
Net income (loss) 68.4 35.2 44.0 ( 4.6 )
Less: Net income (loss) attributable to noncontrolling interest 0.1 0.1 ( 0.1 ) 0.1
Net income (loss) attributable to Scholastic Corporation $ 68.3 $ 35.1 $ 44.1 $ ( 4.7 )
Basic and diluted earnings (loss) per share of Class A and Common Stock
Basic $ 1.97 $ 1.02 $ 1.27 $ ( 0.14 )
Diluted $ 1.91 $ 1.02 $ 1.24 $ ( 0.14 )
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,
2021 2020 2021 2020
Net income (loss) $ 68.4 $ 35.2 $ 44.0 $ ( 4.6 )
Other comprehensive income (loss), net:
Foreign currency translation adjustments ( 4.4 ) 0.4 ( 10.2 ) 11.1
Pension and postretirement adjustments (net of tax) 0.5 5.4 0.6 5.5
Total other comprehensive income (loss), net $ ( 3.9 ) $ 5.8 $ ( 9.6 ) $ 16.6
Comprehensive income (loss) $ 64.5 $ 41.0 $ 34.4 $ 12.0
Less: Net income (loss) attributable to noncontrolling interest 0.1 0.1 ( 0.1 ) 0.1
Comprehensive income (loss) attributable to Scholastic Corporation $ 64.4 $ 40.9 $ 34.5 $ 11.9
See accompanying notes
4
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(Dollar amounts in millions, except per share data)
November 30, 2021 May 31, 2021 November 30, 2020
(unaudited) (audited) (unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 300.7 $ 366.5 $ 356.6
Accounts receivable, net 370.5 256.1 304.7
Inventories, net 279.3 269.7 306.5
Income tax receivable 12.6 88.8 91.9
Prepaid expenses and other current assets 64.4 47.2 51.4
Total current assets 1,027.5 1,028.3 1,111.1
Noncurrent Assets:
Property, plant and equipment, net 535.8 556.9 567.6
Prepublication costs, net 60.6 65.7 68.1
Operating lease right-of-use assets, net 67.3 78.6 90.2
Royalty advances, net 52.1 43.8 43.5
Goodwill 125.7 126.3 125.6
Noncurrent deferred income taxes 25.3 25.4 19.8
Other assets and deferred charges 86.4 83.3 81.0
Total noncurrent assets 953.2 980.0 995.8
Total assets $ 1,980.7 $ 2,008.3 $ 2,106.9
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Lines of credit and current portion of long-term debt $ 14.3 $ 182.9 $ 19.8
Accounts payable 180.5 138.0 165.5
Accrued royalties 63.6 45.5 60.1
Deferred revenue 192.3 99.1 150.7
Other accrued expenses 193.6 202.0 183.0
Accrued income taxes 4.6 3.0 3.1
Operating lease liabilities 22.8 25.0 24.4
Total current liabilities 671.7 695.5 606.6
Noncurrent Liabilities:
Long-term debt — 7.3 175.0
Operating lease liabilities 55.4 67.4 71.6
Other noncurrent liabilities 43.6 55.8 65.8
Total noncurrent liabilities 99.0 130.5 312.4
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, 32.9 , 32.7 , and 32.6 shares, respectively
0.4 0.4 0.4
Additional paid-in capital 625.1 626.5 624.3
Accumulated other comprehensive income (loss) ( 44.3 ) ( 34.7 ) ( 41.7 )
Retained earnings 950.1 916.4 933.1
Treasury stock, at cost: 10.0 , 10.2 and 10.3 shares, respectively
( 322.5 ) ( 327.8 ) ( 329.7 )
Total stockholders’ equity of Scholastic Corporation 1,208.8 1,180.8 1,186.4
Noncontrolling interest 1.2 1.5 1.5
Total stockholders’ equity 1,210.0 1,182.3 1,187.9
Total liabilities and stockholders’ equity $ 1,980.7 $ 2,008.3 $ 2,106.9
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, 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
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, 2021 1.7 $ 0.0 32.7 $ 0.4 $ 626.5 $ ( 34.7 ) $ 916.4 $ ( 327.8 ) $ 1,180.8 $ 1.5 $ 1,182.3
Net Income (loss) — — — — — — ( 24.2 ) — ( 24.2 ) ( 0.2 ) ( 24.4 )
Foreign currency translation adjustment — — — — — ( 5.8 ) — — ( 5.8 ) — ( 5.8 )
Pension and post-retirement adjustments (net of tax of $ 0.1 )
— — — — — 0.1 — — 0.1 — 0.1
Stock-based compensation — — — — 1.5 — — — 1.5 — 1.5
Proceeds pursuant to stock-based compensation plans — — — — 0.5 — — — 0.5 — 0.5
Treasury stock issued pursuant to equity-based plans — — 0.1 — ( 0.9 ) — — 1.5 0.6 — 0.6
Dividends ($ 0.15 per share)
— — — — — — ( 5.2 ) — ( 5.2 ) — ( 5.2 )
Balance at August 31, 2021 1.7 $ 0.0 32.8 $ 0.4 $ 627.6 $ ( 40.4 ) $ 887.0 $ ( 326.3 ) $ 1,148.3 $ 1.3 $ 1,149.6
Net Income (loss) — — — — — — 68.3 — 68.3 0.1 68.4
Foreign currency translation adjustment — — — — — ( 4.4 ) — — ( 4.4 ) — ( 4.4 )
Pension and post-retirement adjustments (net of tax of $( 0.1 ))
— — — — — 0.5 — — 0.5 — 0.5
Stock-based compensation — — — — 3.0 — — — 3.0 — 3.0
Proceeds pursuant to stock-based compensation plans — — — — 2.5 — — — 2.5 — 2.5
Purchases of treasury stock at cost — — ( 0.1 ) — — — — ( 4.2 ) ( 4.2 ) — ( 4.2 )
Treasury stock issued pursuant to equity-based plans — — 0.2 — ( 8.0 ) — — 8.0 — — —
Dividends ($ 0.15 per share)
— — — — — — ( 5.2 ) — ( 5.2 ) — ( 5.2 )
Other (noncontrolling interest) — — — — — — — — — ( 0.2 ) ( 0.2 )
Balance at November 30, 2021 1.7 $ 0.0 32.9 $ 0.4 $ 625.1 $ ( 44.3 ) $ 950.1 $ ( 322.5 ) $ 1,208.8 $ 1.2 $ 1,210.0
See accompanying notes
7
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED
(Dollar amounts in millions)
Six months ended
November 30, November 30,
2021 2020
Cash flows - operating activities:
Net income (loss) attributable to Scholastic Corporation $ 44.1 $ ( 4.7 )
Adjustments to reconcile Net income (loss) to net cash provided by (used in) operating activities:
Provision for losses on accounts receivable 5.8 3.5
Provision for losses on inventory 9.0 6.4
Provision for losses on royalty advances 1.7 2.8
Amortization of prepublication costs 13.5 12.7
Depreciation and amortization 32.9 33.4
Amortization of pension and postretirement plans ( 0.0 ) ( 0.1 )
Deferred income taxes ( 0.5 ) ( 0.6 )
Stock-based compensation 4.5 3.7
Income from equity-method investments ( 1.6 ) ( 5.4 )
(Gain) loss on sale of assets ( 6.2 ) ( 6.6 )
Changes in assets and liabilities, net of amounts acquired:
Accounts receivable ( 124.6 ) ( 63.0 )
Inventories ( 23.0 ) ( 36.6 )
Prepaid expenses and other current assets ( 17.9 ) ( 7.9 )
Income tax receivable 76.2 ( 1.8 )
Royalty advances ( 10.6 ) ( 5.8 )
Accounts payable 44.7 11.1
Accrued income taxes 1.8 1.5
Accrued royalties 19.1 21.4
Deferred revenue 94.0 33.0
Other, net ( 21.3 ) 23.1
Net cash provided by (used in) operating activities 141.6 20.1
Cash flows - investing activities:
Prepublication expenditures ( 8.7 ) ( 10.2 )
Additions to property, plant and equipment ( 18.8 ) ( 26.2 )
Net proceeds from sale of assets 10.4 12.3
Other ( 0.1 ) —
Net cash provided by (used in) investing activities ( 17.2 ) ( 24.1 )
Cash flows - financing activities:
Borrowings under lines of credit, credit agreement and revolving loan 1.8 2.1
Repayments of lines of credit, credit agreement and revolving loan ( 177.0 ) ( 26.9 )
Repayment of capital lease obligations ( 1.1 ) ( 1.2 )
Reacquisition of common stock ( 4.2 ) —
Proceeds pursuant to stock-based compensation plans 3.0 —
Payment of dividends ( 10.3 ) ( 10.3 )
Other ( 0.1 ) 0.1
Net cash provided by (used in) financing activities ( 187.9 ) ( 36.2 )
Effect of exchange rate changes on cash and cash equivalents ( 2.3 ) 3.0
Net increase (decrease) in cash and cash equivalents ( 65.8 ) ( 37.2 )
Cash and cash equivalents at beginning of period 366.5 393.8
Cash and cash equivalents at end of period $ 300.7 $ 356.6
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 2022 relate to the twelve-month period ending May 31, 2022.
Certain prior period amounts have been reclassified to conform with the current year presentation.
Noncontrolling Interest
The Company owns a 95.0 % majority ownership interest in Make Believe Ideas Limited ("MBI"), a UK-based children's book publishing company. The founder and chief executive officer of MBI retains a 5.0 % noncontrolling ownership interest in MBI. The Company fully consolidated MBI as of the acquisition date, and the 5.0 % noncontrolling interest is classified within stockholder's equity.
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, 2021. 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 Solutions businesses operate on a school-year basis; therefore, the Company’s business is highly seasonal. As a result, the Company’s revenues in the first and third quarters of the fiscal year generally are lower than its revenues in the other two fiscal quarters. Typically, school-based channels and magazine revenues are minimal in the first quarter of the fiscal year as schools are not in session. Education channel revenues are generally higher in the first and fourth quarters. Trade sales can vary throughout the year due to varying release dates of published titles. Presently, there remain uncertainties concerning the timing of and any patterns which may emerge with respect to school instruction, whether in-school, remote or hybrid for the school year, and the nature and continuing magnitude of the negative impact of COVID-19 into and beyond the third quarter of fiscal 2022.
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 credit losses
• Pension and postretirement benefit plans
• Uncertain tax positions
• The timing and amount of future income taxes and related deductions
• Inventory reserves
9
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
• Cost of goods sold from book fair operations during interim periods based on estimated gross profit rates
• Sales tax contingencies
• Royalty advance reserves and royalty expense accruals
• Impairment testing for goodwill, intangible and other long-lived assets and investments
• Assets and liabilities acquired in business combinations
• Variable consideration related to anticipated returns
• Allocation of transaction price to contractual performance obligations
Sale of Long-lived Assets
During the second quarter of fiscal 2022, the Company sold a facility, which included office and warehouse space, located in Lake Mary, Florida as part of an initiative to rightsize its real estate footprint to reduce occupancy costs. The long-lived assets, which consisted of land, building, building improvements, furniture and fixtures, were included in the Children's Book Publishing and Distribution segment. These assets had a carrying value of $ 4.2 and were classified as held for sale as of the third quarter of fiscal 2021. The net proceeds from the sale were $ 10.4 and the Company recognized a gain on sale of $ 6.2 . This amount is included within Gain (loss) on sale of assets and other within the Company's Condensed Consolidated Statements of Operations.
During the first quarter of fiscal 2021, the Company-owned facility located in Danbury, Connecticut was sold and the Company relocated the book fairs warehousing and distribution operations conducted in Danbury to a warehouse in Easton, Pennsylvania. The long-lived assets related to the Danbury facility, which consisted of land, building, and building improvements, were included in the Overhead segment. These assets had a carrying value of $ 5.7 and were classified as held for sale as of the fiscal year ended May 31, 2020. The net proceeds from the sale were $ 12.3 and the Company recognized a gain on sale of $ 6.6 . This amount is included within Gain (loss) on sale of assets and other within the Company's Condensed Consolidated Statements of Operations.
Assets Held For Sale
During the third quarter of fiscal 2020, the Company committed to a plan to sell the UK distribution center located in Witney to consolidate the operations into a new facility in Warwickshire. These assets are included in the International segment. The long-lived assets which consist of 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, 2021, the carrying amount was $ 2.1 which is included in Property, plant and equipment, net within the Company's Condensed Consolidated Balance Sheets. During the second quarter of fiscal 2022, the Company entered into a purchase and sale agreement for this facility and expects a gain on the sale to be recognized in the fourth quarter of fiscal 2022.
New Accounting Pronouncements
There were no new accounting pronouncements issued in the second quarter of fiscal 2022 which would impact the Company. Refer to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2021 for more information on current applicable authoritative guidance and its impact on the Company's financial statements.
Current Fiscal Year Adoptions:
ASU No. 2019-12
The Company adopted ASU No. 2019-12 as of the beginning of the first quarter of fiscal 2022 which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes , and clarifies certain aspects of the current guidance to promote consistency among reporting entities. Most amendments within ASU No. 2019-12 are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. As of the first quarter of fiscal 2022, the Company adopted the applicable amendments of the ASU using the modified retrospective basis for those amendments that are not applied on a prospective basis. The adoption of ASU No. 2019-12 did not have a material impact on the Company's Condensed Consolidated Financial Statements.
10
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
2. REVENUES
Disaggregated Revenue Data
Effective June 1, 2021, the former “Education” reportable segment was renamed as the “Education Solutions” reportable segment, in connection with the consolidation of the segment’s multiple channels into a single Education Solutions group.
The following table presents the Company’s segment revenues disaggregated by region and domestic channel:
Three months ended Six months ended
November 30, November 30,
2021 2020 2021 2020
Book Clubs - U.S. $ 51.9 $ 67.0 $ 58.7 $ 72.8
Book Fairs - U.S. 176.2 47.7 192.2 60.9
Trade - U.S. 109.4 116.4 189.5 182.2
Trade - International (1)
15.0 12.9 27.9 20.4
Total Children's Book Publishing and Distribution $ 352.5 $ 244.0 $ 468.3 $ 336.3
Education Solutions - U.S. $ 79.5 $ 67.5 $ 159.6 $ 121.1
Total Education Solutions $ 79.5 $ 67.5 $ 159.6 $ 121.1
International - Major Markets (2)
$ 78.8 $ 73.1 $ 126.3 $ 123.1
International - Other Markets (3)
13.4 21.6 29.8 40.9
Total International $ 92.2 $ 94.7 $ 156.1 $ 164.0
Total Revenues $ 524.2 $ 406.2 $ 784.0 $ 621.4
(1) Primarily includes foreign rights and certain product sales in the UK.
(2) Includes Canada, UK, Australia and New Zealand.
(3) Primarily includes markets in Asia.
Estimated Returns
A liability for expected returns of $ 50.7 , $ 45.2 , and $ 54.5 is recorded within Other accrued expenses as of November 30, 2021, May 31, 2021, and November 30, 2020, respectively. In addition, a return asset of $ 5.0 , $ 3.4 , and $ 3.3 is recorded within Prepaid expenses and other current assets as of November 30, 2021, May 31, 2021, and November 30, 2020, 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 $ 27.9 and $ 24.2 for the three months ended November 30, 2021 and November 30, 2020, respectively, and $ 43.2 and $ 41.1 for the six months ended November 30, 2021 and November 30, 2020, 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. The Company reviews new information as it becomes available and makes adjustments to the reserves accordingly. At the time the Company determines that a receivable balance, or any portion thereof, is deemed to be permanently uncollectible, the balance is then
11
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
written off.
The following table presents the change in the allowance for credit losses, which is included in Accounts Receivable, net on the Condensed Consolidated Balance Sheet:
Allowance for Credit Losses
Balance as of June 1, 2021 $ 21.4
Current period provision 1.6
Write-offs and other ( 1.2 )
Balance as of August 31, 2021 $ 21.8
Current period provision 4.2
Write-offs and other ( 3.1 )
Balance as of November 30, 2021 $ 22.9
3. SEGMENT INFORMATION
The Company categorizes its businesses into three reportable segments: Children’s Book Publishing and Distribution, Education Solutions and International .
• Children’s Book Publishing and Distribution operates as an integrated business which includes the publication and distribution of children’s books, ebooks, media and interactive products in the United States through its book clubs and book fairs in its school channels and through the trade channel. This segment is comprised of three operating segments.
• Education Solutions includes the publication and distribution to schools and libraries of children’s books, classroom magazines, print and digital supplemental and core classroom materials and 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 one operating segment.
• International includes the publication and distribution of products and services outside the United States by the Company’s international operations and its export businesses. This segment is comprised of three operating segments.
The following table sets forth the Company's revenue and operating income (loss) by segment for the fiscal quarters ended November 30, 2021 and November 30, 2020:
Three months ended Six months ended
November 30, November 30,
2021 2020 2021 2020
Revenues
Children's Book Publishing and Distribution $ 352.5 $ 244.0 $ 468.3 $ 336.3
Education Solutions 79.5 67.5 159.6 121.1
International 92.2 94.7 156.1 164.0
Total $ 524.2 $ 406.2 $ 784.0 $ 621.4
Operating income (loss)
Children's Book Publishing and Distribution $ 85.2 $ 35.4 $ 63.5 $ 6.4
Education Solutions 15.6 10.3 22.9 7.9
International 8.7 17.9 7.0 22.7
Overhead (1)
( 26.1 ) ( 14.8 ) ( 42.0 ) ( 45.2 )
Total $ 83.4 $ 48.8 $ 51.4 $ ( 8.2 )
(1) Overhead includes all domestic corporate amounts not allocated to segments, including expenses and costs related to the management of corporate assets.
12
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, 2021 May 31, 2021 November 30, 2020
US Revolving Credit Agreement $ — $ 175.0 $ 175.0
Unsecured lines of credit 7.5 7.9 8.4
UK Loan 6.8 7.3 11.4
Total debt $ 14.3 $ 190.2 $ 194.8
Less lines of credit, short-term debt and current portion of long-term debt ( 14.3 ) ( 182.9 ) ( 19.8 )
Total long-term debt $ — $ 7.3 $ 175.0
The Company's debt obligations as of November 30, 2021 have maturities of one year or less.
US Credit Agreement
On October 27, 2021, Scholastic Corporation (the “Corporation”) and its principal operating subsidiary, Scholastic Inc., entered into an amended and restated 5-year credit agreement with a syndicate of banks and Bank of America, N.A., as administrative agent (the “Credit Agreement”). The arrangement was accounted for as a debt modification. The revised terms of the amended Credit Agreement include the following:
• an increase in borrowing limits to $ 300.0 from $ 250.0 , as amended on December 16, 2020 ;
• the elimination of the required securitization of the Company’s inventory and accounts receivable;
• an unlimited basket for permitted payments of dividends and other distributions in respect of capital stock so long as the Corporation’s pro forma Consolidated Net Leverage Ratio, as defined, is not in excess of 2.75 :1;
• the elimination of a minimum liquidity covenant;
• the removal of an interest rate floor; and
• the extension of the maturity date to October 27, 2026.
The Credit Agreement provides for an unsecured revolving credit facility and allows the Company to borrow, repay or prepay and reborrow at any time prior to the October 27, 2026 maturity date. Under the Credit 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 Credit 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 plus 1.00 % plus, in each case, an applicable margin ranging from 0.35 % to 0.75 %, as determined by the Company’s prevailing Consolidated Leverage Ratio (as defined in the Credit Agreement);
- or -
• a Eurodollar Rate equal to the London interbank offered rate (LIBOR), plus an applicable margin ranging from 1.35 % to 1.75 %, as determined by the Company’s prevailing Consolidated Leverage Ratio.
As of November 30, 2021, the applicable margin on Base Rate Advances was 0.35 % and the applicable margin on Eurodollar Advances was 1.35 %, both based on the Company’s prevailing Consolidated Leverage Ratio.
The Credit Agreement provides for payment of a commitment fee in respect of the aggregate unused amount of revolving credit commitments ranging from 0.20 % per annum to 0.30 % per annum based upon the Corporation’s then prevailing Consolidated Leverage Ratio. As of November 30, 2021, the commitment 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 Credit Agreement has an accordion feature which permits the Company, provided certain conditions are satisfied, to increase the facility by up to an additional $ 150.0 .
As of November 30, 2021, the Company had no outstanding borrowings under the Credit Agreement. During the first and second quarters of fiscal 2022, the Company paid down $ 100.0 and $ 75.0 , respectively, of the remaining borrowings as of the beginning of the fiscal year.
The Credit Agreement contains certain financial covenants related to leverage and interest coverage ratios (as defined in the Credit Agreement), limitations on the amount of dividends and other distributions, and other limitations on fundamental changes to the Corporation or its business. The Company was in compliance with required covenants for all periods presented.
At November 30, 2021, the Company had open standby letters of credit totaling $ 4.3 issued under certain credit lines, including $ 0.4 under the Credit Agreement and $ 3.9 under the domestic credit lines discussed below.
UK Loan Agreements
On January 24, 2020, Scholastic Limited UK entered into a term loan facility to fund the construction of the new UK facility in Warwickshire. As of November 30, 2021, the borrowing limit was £ 3.2 . The loan had an original maturity date of July 31, 2021, which was extended to July 31, 2022 in May 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 was charged at 1.77 % per annum over the Base Rate until July 31, 2021 and 2.25 % per annum over the Base Rate thereafter. The Base Rate is currently equal to 0.10 % per annum and is subject to change. As of November 30, 2021, the Company had $ 4.2 outstanding on the loan and no remaining available credit under this facility.
On September 23, 2019, Scholastic Limited UK entered into a term loan agreement to borrow £ 2.0 to fund a land purchase in connection with the construction of the new UK facility in Warwickshire. The loan had an original maturity date of July 31, 2021, which was extended to July 31, 2022 in May 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 was charged at 1.77 % per annum over the Base Rate until July 31, 2021 and 2.25 % per annum over the Base Rate thereafter. The Base Rate is currently equal to 0.10 % per annum and is subject to change. As of November 30, 2021, the Company had $ 2.6 outstanding on the loan.
Lines of Credit
As of November 30, 2021, 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, 2021, May 31, 2021 and November 30, 2020. As of November 30, 2021, 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, 2021, the Company had various local currency international credit lines totaling $ 34.2 underwritten by banks primarily in the United States, Canada and the United Kingdom. Outstanding borrowings under these facilities were $ 7.5 at November 30, 2021 at a weighted average interest rate of 4.7 %, $ 7.9 at May 31, 2021 at a weighted average interest rate of 4.7 %, and $ 8.4 at November 30, 2020 at a weighted average interest rate of 4.4 %. As of November 30, 2021, the amounts available under these facilities totaled $ 26.7 . These credit lines are typically available for overdraft borrowings or loans up to 364 days and may be renewed, if requested by the Company, at the sole option of the lender.
5. COMMITMENTS AND CONTINGENCIES
COVID-19
The COVID-19 pandemic and actions taken, or which may be taken in the future following any changes in 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 2022.
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SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
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.
On July 20, 2021, the Company, along with its co-defendants in a certain legal proceeding, executed a settlement agreement regarding certain licenses and trademarks related to intellectual property used in formerly owned products, which were included in the sale of the educational technology and services business that occurred in fiscal 2015. Without admitting to the allegations raised, the agreement required the Company to pay $ 20.0 in a one-time cash payment to avoid the uncertainties of trial and the additional costs of preparing for and presenting an on-going legal defense in this matter. The Company recognized an accrual for the settlement amount in fiscal 2021 as the events that gave rise to the litigation had taken place prior to May 31, 2021. The settlement was paid in September 2021. The Company received $ 6.6 in recoveries from its insurance programs during the first quarter of fiscal 2022, which was recognized as an offset to the legal settlement and reflected in Selling, general and administrative expenses in the Company's Condensed Consolidated Statement of Operations. While the Company expects to receive additional recoveries from its insurance programs, it is premature to determine with any level of probability or accuracy the amount of those recoveries at this time.
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,
2021 2020 2021 2020
Net income (loss) attributable to Class A and Common Stockholders $ 68.0 $ 35.1 $ 43.9 $ ( 4.7 )
Weighted average Shares of Class A Stock and Common Stock outstanding for basic earnings (loss) per share (in millions) 34.6 34.3 34.6 34.3
Dilutive effect of Class A Stock and Common Stock potentially issuable pursuant to stock-based compensation plans (in millions) * 1.0 0.1 0.9 —
Adjusted weighted average Shares of Class A Stock and Common Stock outstanding for diluted earnings (loss) per share (in millions) 35.6 34.4 35.5 34.3
Earnings (loss) per share of Class A Stock and Common Stock:
Basic $ 1.97 $ 1.02 $ 1.27 $ ( 0.14 )
Diluted $ 1.91 $ 1.02 $ 1.24 $ ( 0.14 )
* 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 $ 0.3 and less than $ 0.1 for the three month periods ended November 30, 2021 and November 30, 2020, respectively, and $ 0.2 for the six month period ended November 30, 2021, 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 certain participating restricted stock units.
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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, 2021 November 30, 2020
Options outstanding pursuant to stock-based compensation plans (in millions) 4.9 5.2
There were 1.7 million of potentially anti-dilutive shares pursuant to stock-based compensation plans as of November 30, 2021.
A portion of the Company’s Restricted Stock Units ("RSUs"), which are granted to employees, participate in earnings through cumulative dividends. These dividends 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, 2021, $ 63.1 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, 2021 May 31, 2021 November 30, 2020
Gross beginning balance $ 165.9 $ 164.5 $ 164.5
Accumulated impairment ( 39.6 ) ( 39.6 ) ( 39.6 )
Beginning balance $ 126.3 $ 124.9 $ 124.9
Foreign currency translation ( 0.6 ) 1.4 0.7
Ending balance $ 125.7 $ 126.3 $ 125.6
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, 2021 May 31, 2021 November 30, 2020
Beginning balance - Other intangibles subject to amortization $ 8.4 $ 10.5 $ 10.5
Adjustments — ( 0.5 ) —
Amortization expense ( 1.0 ) ( 2.2 ) ( 1.2 )
Foreign currency translation ( 0.3 ) 0.6 0.4
Total other intangibles subject to amortization, net of accumulated amortization of $ 33.3 , $ 32.3 and $ 31.3 , respectively
$ 7.1 $ 8.4 $ 9.7
Total other intangibles not subject to amortization $ 2.1 $ 2.1 $ 2.1
Total other intangibles $ 9.2 $ 10.5 $ 11.8
There were no additions to intangible assets within the six months ended November 30, 2021 and November 30, 2020.
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.
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SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
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 4.7 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, 2021 May 31, 2021 November 30, 2020 Segment
Equity method investments $ 33.7 $ 34.3 $ 32.5 International
Other equity investments 6.0 6.0 6.0 Children's Book Publishing & Distribution
Total Investments $ 39.7 $ 40.3 $ 38.5
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 Condensed 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 $ 0.5 and $ 4.6 for the three months ended November 30, 2021 and November 30, 2020, respectively, and $ 1.6 and $ 5.4 for the six months ended November 30, 2021 and November 30, 2020, 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,
2021 2020 2021 2020
Components of net periodic benefit cost:
Interest cost $ 0.3 $ 0.1 $ 0.0 $ 0.1
Expected return on assets ( 0.3 ) ( 0.2 ) — —
Amortization of prior service (credit) loss 0.0 0.0 ( 0.2 ) ( 0.2 )
Amortization of net actuarial (gain) loss 0.2 0.2 — 0.0
Total $ 0.2 $ 0.1 $ ( 0.2 ) $ ( 0.1 )
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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,
2021 2020 2021 2020
Components of net periodic benefit cost:
Interest cost $ 0.5 $ 0.3 $ 0.1 $ 0.2
Expected return on assets ( 0.6 ) ( 0.4 ) — —
Amortization of prior service (credit) loss 0.0 0.0 ( 0.4 ) ( 0.2 )
Amortization of net actuarial (gain) loss 0.4 0.3 — 0.0
Total $ 0.3 $ 0.2 $ ( 0.3 ) $ 0.0
Actuarial gains and losses are amortized using a corridor approach. The gain or loss corridor is equal to 10% of the greater of the projected benefit obligation and the market-related value of assets. Gains and losses in excess of the corridor are amortized over the future working lifetime.
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, 2021, the Company contributed $ 0.8 to the UK Pension Plan. The Company expects, based on actuarial calculations, to contribute cash of approximately $ 1.6 to the UK Pension Plan for the fiscal year ending May 31, 2022.
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,
2021 2020 2021 2020
Stock option expense $ 1.8 $ 2.5 $ 2.5 $ 2.8
Restricted stock unit expense 0.9 0.5 1.6 0.7
Management stock purchase plan 0.3 0.0 0.3 0.0
Employee stock purchase plan 0.0 0.0 0.1 0.1
Total stock-based compensation expense $ 3.0 $ 3.0 $ 4.5 $ 3.6
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,
2021 2020 2021 2020
Common Stock issued pursuant to stock-based compensation plans (in millions) 0.2 0.1 0.3 0.1
In September 2021, the Class A Stockholders approved the 2021 Stock Incentive Plan (the "2021 Plan") which provides for the issuance of certain equity awards, including non-qualified stock options, time-vested restricted stock units, performance-based restricted stock units, incentive stock options and other equity awards. There are 2,500,000 shares available for issuance pursuant to awards granted under the 2021 Plan. No further awards can be granted under the 2011 Stock Incentive Plan.
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.
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SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
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, 2021 $ 100.0
Less repurchases made under these authorizations $ ( 36.9 )
Remaining Board authorization at November 30, 2021 $ 63.1
Remaining Board authorization at November 30, 2021 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.
Repurchases of the Company's Common Stock were $ 4.2 during the three and six months ended November 30, 2021. The Company's repurchase program may be suspended at any time without prior notice.
12. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables summarize the activity in Accumulated other comprehensive income (loss), net of tax, by component, for the periods indicated:
Three months ended November 30, 2021
Foreign currency translation adjustments Retirement benefit plans Total
Beginning balance at September 1, 2021 $ ( 35.9 ) $ ( 4.5 ) $ ( 40.4 )
Other comprehensive income (loss) before reclassifications ( 4.4 ) 0.5 ( 3.9 )
Less amount reclassified from Accumulated other comprehensive income (loss):
Amortization of net actuarial (gain) loss (net of tax of $ 0.0 )
— 0.2 0.2
Amortization of prior service (credit) cost (net of tax of $ 0.0 )
— ( 0.2 ) ( 0.2 )
Other comprehensive income (loss) ( 4.4 ) 0.5 ( 3.9 )
Ending balance at November 30, 2021 $ ( 40.3 ) $ ( 4.0 ) $ ( 44.3 )
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 )
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SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
Six months ended November 30, 2021
Foreign currency translation adjustments Retirement benefit plans Total
Beginning balance at June 1, 2021 $ ( 30.1 ) $ ( 4.6 ) $ ( 34.7 )
Other comprehensive income (loss) before reclassifications ( 10.2 ) 0.5 ( 9.7 )
Less amount reclassified from Accumulated other comprehensive income (loss):
Amortization of net actuarial (gain) loss (net of tax of $ 0.0 )
0.4 0.4
Amortization of prior service (credit) cost (net of tax of $ 0.1 )
( 0.3 ) ( 0.3 )
Other comprehensive income (loss) ( 10.2 ) 0.6 ( 9.6 )
Ending balance at November 30, 2021 $ ( 40.3 ) ( 4.0 ) ( 44.3 )
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 )
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,
2021 2020 2021 2020
Employee benefit plans:
Amortization of net actuarial (gain) loss $ 0.2 $ 0.2 $ 0.4 $ 0.3 Other components of net periodic benefit (cost)
Amortization of prior service (credit) loss ( 0.2 ) ( 0.2 ) ( 0.4 ) ( 0.2 ) Other components of net periodic benefit (cost)
Less: Tax effect 0.0 0.1 0.1 0.1 Provision (benefit) for income taxes
Total cost, net of tax $ 0.0 $ 0.1 $ 0.1 $ 0.2
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.
• 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.
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SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
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.
Non-financial assets for which the Company employs fair value measures on a non-recurring basis include:
• Long-lived assets, including held for sale
• Operating lease right-of-use (ROU) assets
• Investments
• Assets acquired in a business combination
• Impairment assessment of goodwill and intangible assets
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 filed its Federal income tax return and benefited from the provisions in the CARES Act 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. The Company also took advantage of the 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 has deferred employer-side social security payments resulting in a future liability. As of November 30, 2021 the Company has a current liability of $ 3.2 and a non-current liability of $ 3.8 . In fiscal 2021, the Company applied for employee retention credits in the U.S. and the related receivable was $ 11.9 as of November 30, 2021. During the first quarter of fiscal 2022, the Company received a federal tax refund of $ 63.1 primarily related to the carry back of net operating losses generated in the U.S.
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 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.
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SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
The Company's interim effective tax rate, inclusive of discrete items, for the three and six months period ended November 30, 2021 was 23.2 % and 21.1 %, respectively, compared to 26.1 % and 9.5 %, respectively, for the prior fiscal year period. The interim effective tax rate for the six months ended November 30, 2021 varies from the statutory rate primarily due to the release of an uncertain tax position in the current fiscal quarter related to an effective settlement recognized as part of ongoing audit, offset by the state income effective tax rate.
The Company, including its domestic subsidiaries, files a consolidated U.S. income tax return, and also files tax returns in various states and other local jurisdictions. Also, certain subsidiaries of the Company file income tax returns in foreign jurisdictions. The Company is routinely audited by various tax authorities. The IRS is currently examining the US income tax returns for the fiscal 2015 through fiscal 2020 tax years. As of November 30, 2021, there is approximately $ 20.0 in receivables from the IRS related to the years under audit included in Income tax receivable in the Company’s Condensed Consolidated Balance Sheet.
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 recognizes the unrealized gain or loss in Other current assets or Other current liabilities. The notional values of the contracts as of November 30, 2021 and November 30, 2020 were $ 27.3 and $ 29.2 , respectively. A net unrealized gain of $ 0.6 and a net unrealized loss of $ 1.1 were recognized for the six months ended November 30, 2021 and November 30, 2020, respectively.
16. OTHER ACCRUED EXPENSES
Other accrued expenses consisted of the following as of the dates indicated:
November 30, 2021 May 31, 2021 November 30, 2020
Accrued payroll, payroll taxes and benefits $ 35.1 $ 32.4 $ 38.6
Accrued bonus and commissions 15.7 23.0 10.6
Returns liability 50.7 45.2 54.5
Accrued other taxes 36.1 31.4 24.5
Accrued advertising and promotions 15.5 12.6 12.7
Other accrued expenses 40.5 57.4 42.1
Total accrued expenses $ 193.6 $ 202.0 $ 183.0
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 2022. The dividend is payable on March 15, 2022 to shareholders of record as of the close of business on January 31, 2022.
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SCHOLASTIC CORPORATION
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, 2021 were $524.2 million, compared to $406.2 million in the prior fiscal year quarter, an increase of $118.0 million. The Company reported net earnings per diluted share of Class A and Common Stock of $1.91 in the second quarter of fiscal 2022, compared to $1.02 in the prior fiscal year quarter.
During the second quarter ended November 30, 2021, increased revenues were primarily driven by the U.S. book fairs and education channels. With schools back in session, the demand for in-person book fairs returned and customer engagement improved, resulting in increased fair count and revenue per fair. Comprehensive instruction offerings, including PreK On My Way TM , and professional learning services continued to drive revenue in the quarter; however, the primary driver of the revenue increase in the education channel was revenues from the Company’s new Rising Voices Library ® offering which meets the increasing demand for culturally responsive content and instruction. Also during the quarter, the live-action movie adaptation of Clifford the Big Red Dog ® from Paramount was released as was Cat Kid Comic Club ® : Perspectives , the second title in the bestselling series by Dav Pilkey, and J.K. Rowling’s The Christmas Pig . However, revenues in trade publishing were lower than the prior fiscal year quarter due to the successful introduction of J.K. Rowling’s The Ickabog and Harry Potter ® illustrated editions in the prior period. Internationally, Canada performed well with higher revenues in all channels; however, Australia and New Zealand experienced additional lockdowns during their school year resulting in lower revenues and the Asia markets continued to be impacted by COVID-related shutdowns and recently adopted restrictive regulations in China. Operating income improved $34.6 million over the prior fiscal year quarter as a result of the higher sales volume as the Company recovers from the pandemic. The Company experienced and will continue to experience higher inflationary pressures in printing, paper, transportation and labor costs, which partially offset the increases in revenues.
The Company expects the U.S. book fairs business to continue its momentum into the spring season. The Company is carefully monitoring the impact any COVID variant may have on the school market’s ability to host in-person fairs and remains optimistic that wide-scale school closures are unlikely. In its U.S. book clubs, the Company will focus on clearing a backlog in orders that resulted from the industry-wide labor shortages and a separate systems issue impacting order flow, and will re-engage sponsors at the start of the new calendar year. The Education Solutions segment is well-positioned to take advantage of new literacy opportunities in K-12 that may arise from the federal stimulus funds education landscape. In addition, the Company has successfully been awarded the contract for the New Worlds Reading Initiative throughout the state of Florida, a five-year agreement with the University of Florida's Lastinger Center for Learning that will begin shipping in December. Internationally, the Company is optimistic that schools in Australia and New Zealand will experience fewer COVID-related interruptions after they return from summer break in January 2022. Throughout the remainder of the fiscal year, the Company's financial results will reflect the increasing impact of rising cost pressures in paper, printing, and freight as current period inventory, with an associated higher cost of product, is sold. Similarly, the Company expects higher labor costs due to continuing inflationary pressures and on-going labor shortages, especially in its warehouse and distribution operations. The Company’s management is taking actions, when available, to mitigate these rising costs and continues to identify further opportunities for incremental cost savings through process improvements and automation, proactive resource allocation, diversifying its vendor base and pricing and product rationalization.
Results of Operations
Consolidated
Revenues for the quarter ended November 30, 2021 increased to $524.2 million, compared to $406.2 million in the prior fiscal year quarter. The Children's Book Publishing and Distribution segment revenues increased by $108.5 million, primarily driven by higher book fairs channel revenues resulting from increased fair count and higher revenue per fair due to increased demand and improved customer engagement as schools re-opened for the fall season. The revenue increase was partially offset by lower trade channel revenues due to the successful introduction of J.K. Rowling’s The Ickabog and Harry Potter illustrated editions in the prior fiscal year quarter, as well as lower book clubs channel revenues due to the current shipping backlog. In the Education Solutions segment, revenues increased by $12.0 million, primarily driven by revenues from the Company’s new Rising Voices Library offering which meets the increasing demand for culturally responsive content and instruction, coupled with higher sales of instructional products and programs and professional learning services, as well as increased circulation revenue from the Magazines+ business. In local currency, the International segment revenues decreased by $5.3 million, primarily driven by lower sales in Asia as the local markets continued to be impacted by COVID-related shutdowns and the recently adopted restrictive regulations in China. Revenues also
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SCHOLASTIC CORPORATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
decreased in Australia and New Zealand, primarily in the school-based channels, due to additional lockdowns imposed by the COVID variant, partially offset by higher sales in Canada across all channels. International segment revenues were impacted by favorable foreign exchange of $2.8 million in the quarter ended November 30, 2021.
Revenues for the six months ended November 30, 2021 increased to $784.0 million, compared to $621.4 million in the prior fiscal year period. The Children's Book Publishing and Distribution segment revenues increased by $132.0 million primarily driven by higher book fairs channel revenues, particularly in the second quarter, resulting from increased fair count and higher revenue per fair due to increased demand and improved customer engagement as schools re-opened for the fall season. Additionally, trade channel revenues were higher, primarily due to increased sales of backlist titles from best-selling series, including Harry Potter and Dog Man ® , and new releases of frontlist titles including J.K. Rowling’s The Christmas Pig and Dav Pilkey's Cat Kid Comic Club ® : Perspectives, partially offset by lower revenues in the book clubs channel due to the shipping backlog. In the Education Solutions segment, revenues increased by $38.5 million primarily driven by higher sales of instructional products and programs, including the early childhood curriculum program PreK On My Way, and professional learning services, coupled with revenues from the Company’s new Rising Voices Library ® offering which meets the increasing demand for culturally responsive content and instruction. In addition, revenues increased as a result of higher circulation revenue from the Magazines+ business and higher sales of digital products, including Scholastic Literacy Pro ® and Scholastic F.I.R.S.T. ® . In local currency, the International segment revenues decreased by $14.3 million primarily driven by lower sales in Asia as the local markets continued to be impacted by COVID-related shutdowns and the restrictive regulations in China. Revenues also decreased in Australia and New Zealand in the school-based channels due to additional lockdowns imposed by the COVID variant, partially offset by higher sales in Canada across all channels. International segment revenues were impacted by favorable foreign exchange of $6.4 million in the six months ended November 30, 2021.
Components of Cost of goods sold for the three and six months ended November 30, 2021 and November 30, 2020 are as follows:
Three months ended Six months ended
November 30, November 30, November 30, November 30,
2021 2020 2021 2020
($ amounts in millions) $ % of Revenue $ % of Revenue $ % of Revenue $ % of Revenue
Product, service and production costs $ 136.5 26.0 % $ 104.5 25.8 % $ 212.8 27.1 % $ 165.6 26.6 %
Royalty costs 45.0 8.6 % 40.3 9.9 % 72.8 9.3 % 63.7 10.3 %
Prepublication amortization 6.9 1.3 % 6.6 1.6 % 13.8 1.8 % 13.1 2.1 %
Postage, freight, shipping, fulfillment and other 49.6 9.5 % 38.3 9.4 % 71.9 9.2 % 62.3 10.0 %
Total $ 238.0 45.4 % $ 189.7 46.7 % $ 371.3 47.4 % $ 304.7 49.0 %
Cost of goods sold for the quarter ended November 30, 2021 was $238.0 million, or 45.4% of revenues, compared to $189.7 million, or 46.7% of revenues, in the prior fiscal year quarter. Cost of goods sold was impacted by inflationary pressures including higher costs due to shortages in labor and transportation and supply chain issues impacting paper and printing costs. The Company expects inflationary pressures to continue to negatively impact costs during fiscal 2022 and Cost of goods sold will reflect the higher costs as current period inventory is sold using the first-in, first-out method. The increased costs due to inflationary pressures were more than offset by lower royalty costs due to the substantial increase in book fairs channel revenues which have a higher mix of non-royalty bearing titles. In addition, the quarter benefited from higher revenue per unit shipped primarily in the education channel.
Cost of goods sold for the six months ended November 30, 2021 was $371.3 million, or 47.4% of revenues, compared to $304.7 million, or 49.0% of revenues, in the prior fiscal year period. Cost of goods sold was impacted by inflationary pressures including higher costs due to shortages in labor and transportation and supply chain issues impacting paper and printing costs. The Company expects inflationary pressures to continue to negatively impact costs during fiscal 2022 and Cost of goods sold will reflect the higher costs as current period inventory is sold using the first-in, first-out method. The increased costs due to inflationary pressures were more than offset by lower royalty costs due to the substantial increase in book fairs channel
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SCHOLASTIC CORPORATION