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
August 31,
2023 2022
Revenues $ 228.5 $ 262.9
Operating costs and expenses:
Cost of goods sold 130.0 144.5
Selling, general and administrative expenses 184.2 162.8
Depreciation and amortization 13.4 13.7
Total operating costs and expenses 327.6 321.0
Operating income (loss) ( 99.1 ) ( 58.1 )
Interest income (expense), net 1.4 0.2
Other components of net periodic benefit (cost) ( 0.3 ) 0.0
Earnings (loss) before income taxes ( 98.0 ) ( 57.9 )
Provision (benefit) for income taxes ( 23.8 ) ( 12.5 )
Net income (loss) ( 74.2 ) ( 45.4 )
Less: Net income (loss) attributable to noncontrolling interest — 0.1
Net income (loss) attributable to Scholastic Corporation $ ( 74.2 ) $ ( 45.5 )
Basic and diluted earnings (loss) per share of Class A and Common Stock
Basic $ ( 2.35 ) $ ( 1.33 )
Diluted $ ( 2.35 ) $ ( 1.33 )
See accompanying notes
3
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - UNAUDITED
(Dollar amounts in millions)
Three months ended
August 31,
2023 2022
Net income (loss) $ ( 74.2 ) $ ( 45.4 )
Other comprehensive income (loss), net:
Foreign currency translation adjustments 1.8 ( 9.6 )
Pension and postretirement adjustments (net of tax) 0.2 0.0
Total other comprehensive income (loss), net $ 2.0 $ ( 9.6 )
Comprehensive income (loss) $ ( 72.2 ) $ ( 55.0 )
Less: Net income (loss) attributable to noncontrolling interest — 0.1
Comprehensive income (loss) attributable to Scholastic Corporation $ ( 72.2 ) $ ( 55.1 )
See accompanying notes
4
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(Dollar amounts in millions, except per share data)
August 31, 2023 May 31, 2023 August 31, 2022
(unaudited) (audited) (unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 125.8 $ 224.5 $ 239.7
Accounts receivable, net 201.9 278.0 242.9
Inventories, net 353.2 334.5 379.1
Income tax receivable 33.4 8.9 40.4
Prepaid expenses and other current assets 70.4 47.0 89.4
Total current assets 784.7 892.9 991.5
Noncurrent Assets:
Property, plant and equipment, net 523.3 521.4 512.6
Prepublication costs, net 55.0 56.4 53.6
Operating lease right-of-use assets, net 96.4 85.7 77.9
Royalty advances, net 58.6 56.8 57.6
Goodwill 132.8 132.7 124.7
Noncurrent deferred income taxes 20.5 21.0 21.1
Other assets and deferred charges 101.0 99.8 92.7
Total noncurrent assets 987.6 973.8 940.2
Total assets $ 1,772.3 $ 1,866.7 $ 1,931.7
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Lines of credit and current portion of long-term debt $ 5.9 $ 6.0 $ 6.3
Accounts payable 167.7 170.9 208.9
Accrued royalties 72.0 52.8 85.0
Deferred revenue 171.1 169.1 182.6
Other accrued expenses 145.9 168.9 162.6
Accrued income taxes 13.2 13.4 1.7
Operating lease liabilities 22.9 21.2 21.2
Total current liabilities 598.7 602.3 668.3
Noncurrent Liabilities:
Long-term debt — — —
Operating lease liabilities 83.1 73.8 65.8
Other noncurrent liabilities 35.9 26.1 31.3
Total noncurrent liabilities 119.0 99.9 97.1
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, 29.3 , 30.0 , and 32.7 shares, respectively
0.4 0.4 0.4
Additional paid-in capital 632.7 632.2 629.5
Accumulated other comprehensive income (loss) ( 53.8 ) ( 55.8 ) ( 55.0 )
Retained earnings 955.1 1,035.6 924.1
Treasury stock, at cost: 13.6 , 12.9 and 10.2 shares, respectively
( 479.8 ) ( 449.5 ) ( 334.2 )
Total stockholders’ equity of Scholastic Corporation 1,054.6 1,162.9 1,164.8
Noncontrolling interest — 1.6 1.5
Total stockholders’ equity 1,054.6 1,164.5 1,166.3
Total liabilities and stockholders’ equity $ 1,772.3 $ 1,866.7 $ 1,931.7
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, 2022 1.7 $ 0.0 32.5 $ 0.4 $ 627.0 $ ( 45.4 ) $ 976.5 $ ( 341.5 ) $ 1,217.0 $ 1.4 $ 1,218.4
Net Income (loss) — — — — — — ( 45.5 ) — ( 45.5 ) 0.1 ( 45.4 )
Foreign currency translation adjustment — — — — — ( 9.6 ) — — ( 9.6 ) — ( 9.6 )
Pension and post-retirement adjustments (net of tax of $ 0.1 )
— — — — — 0.0 — — 0.0 — 0.0
Stock-based compensation — — — — 1.7 — — — 1.7 — 1.7
Proceeds pursuant to stock-based compensation plans — — — — 11.6 — — — 11.6 — 11.6
Purchases of treasury stock at cost — — ( 0.1 ) — — — — ( 5.1 ) ( 5.1 ) — ( 5.1 )
Treasury stock issued pursuant to equity-based plans — — 0.3 — ( 10.8 ) — — 12.4 1.6 — 1.6
Dividends ($ 0.20 per share)
— — — — — — ( 6.9 ) — ( 6.9 ) — ( 6.9 )
Balance at August 31, 2022 1.7 $ 0.0 32.7 $ 0.4 $ 629.5 $ ( 55.0 ) $ 924.1 $ ( 334.2 ) $ 1,164.8 $ 1.5 $ 1,166.3
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, 2023 1.7 $ 0.0 30.0 $ 0.4 $ 632.2 $ ( 55.8 ) $ 1,035.6 $ ( 449.5 ) $ 1,162.9 $ 1.6 $ 1,164.5
Net Income (loss) — — — — — — ( 74.2 ) — ( 74.2 ) ( 74.2 )
Foreign currency translation adjustment — — — — — 1.8 — — 1.8 — 1.8
Pension and post-retirement adjustments (net of tax of $ 0.1 )
— — — — — 0.2 — — 0.2 — 0.2
Stock-based compensation — — — — 2.3 — — — 2.3 — 2.3
Proceeds pursuant to stock-based compensation plans — — — — 3.0 — — — 3.0 — 3.0
Purchases of treasury stock at cost — — ( 0.8 ) — — — — ( 36.2 ) ( 36.2 ) — ( 36.2 )
Treasury stock issued pursuant to equity-based plans — — 0.1 — ( 4.3 ) — — 5.9 1.6 — 1.6
Dividends ($ 0.20 per share)
— — — — — — ( 6.3 ) — ( 6.3 ) — ( 6.3 )
Other (noncontrolling interest) — — — — ( 0.5 ) 0.0 — — ( 0.5 ) ( 1.6 ) ( 2.1 )
Balance at August 31, 2023 1.7 $ 0.0 29.3 $ 0.4 $ 632.7 $ ( 53.8 ) $ 955.1 $ ( 479.8 ) $ 1,054.6 $ — $ 1,054.6
See accompanying notes
6
SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED
(Dollar amounts in millions)
Three months ended
August 31, August 31,
2023 2022
Cash flows - operating activities:
Net income (loss) attributable to Scholastic Corporation $ ( 74.2 ) $ ( 45.5 )
Adjustments to reconcile Net income (loss) to net cash provided by (used in) operating activities:
Provision for losses on accounts receivable 0.6 ( 1.5 )
Provision for losses on inventory 6.2 4.2
Provision for losses on royalty advances 0.9 0.9
Amortization of prepublication costs 6.7 6.3
Depreciation and amortization 15.8 16.2
Amortization of pension and postretirement plans 0.1 ( 0.1 )
Deferred income taxes 0.5 0.1
Stock-based compensation 2.3 1.7
Income from equity-method investments ( 0.2 ) ( 0.1 )
Changes in assets and liabilities, net of amounts acquired:
Accounts receivable 75.8 54.6
Inventories ( 24.5 ) ( 105.9 )
Prepaid expenses and other current assets ( 23.4 ) ( 20.8 )
Income tax receivable ( 24.5 ) ( 13.7 )
Royalty advances ( 2.6 ) ( 9.7 )
Accounts payable ( 3.4 ) 48.9
Accrued income taxes ( 0.1 ) ( 0.9 )
Accrued royalties 19.2 24.5
Deferred revenue 2.0 10.4
Other accrued expenses ( 21.4 ) ( 28.7 )
Other, net 6.1 ( 1.2 )
Net cash provided by (used in) operating activities ( 38.1 ) ( 60.3 )
Cash flows - investing activities:
Prepublication expenditures ( 5.4 ) ( 4.8 )
Additions to property, plant and equipment ( 14.3 ) ( 11.4 )
Other investment and acquisition-related payments ( 2.1 ) —
Net cash provided by (used in) investing activities ( 21.8 ) ( 16.2 )
Cash flows - financing activities:
Borrowings under lines of credit, credit agreement and revolving loan 0.7 1.2
Repayments of lines of credit, credit agreement and revolving loan ( 0.9 ) ( 1.3 )
Repayment of capital lease obligations ( 0.6 ) ( 0.6 )
Reacquisition of common stock ( 35.9 ) ( 4.7 )
Proceeds pursuant to stock-based compensation plans 3.8 12.1
Payment of dividends ( 6.5 ) ( 5.1 )
Other 0.1 —
Net cash provided by (used in) financing activities ( 39.3 ) 1.6
Effect of exchange rate changes on cash and cash equivalents 0.5 ( 2.0 )
Net increase (decrease) in cash and cash equivalents ( 98.7 ) ( 76.9 )
Cash and cash equivalents at beginning of period 224.5 316.6
Cash and cash equivalents at end of period $ 125.8 $ 239.7
See accompanying notes
7
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 2024 relate to the twelve-month period ending May 31, 2024.
Noncontrolling Interest
On June 1, 2023, the Company acquired the remaining shares of Make Believe Ideas Limited ("MBI"), a UK-based children's book publishing company, which represented a 5.0 % noncontrolling interest, increasing the Company's total ownership from 95.0 % to 100 %.
Prior to June 1, 2023, the founder and chief executive officer of MBI retained a 5.0 % noncontrolling ownership interest in MBI. The Company fully consolidated MBI as of the acquisition date and the 5.0 % noncontrolling interest was 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, 2023. 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 fourth quarter. Trade sales can vary throughout the year due to varying release dates of published titles.
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
• Cost of goods sold from book fair operations during interim periods based on estimated gross profit rates
8
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
• 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
New Accounting Pronouncements
There were no new accounting pronouncements issued in the first quarter of fiscal 2024 which would impact the Company. Refer to the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2023 for more information on current applicable authoritative guidance and its impact on the Company's financial statements.
2. REVENUES
Disaggregated Revenue Data
The following table presents the Company’s segment revenues disaggregated by region and domestic channel:
Three months ended
August 31,
2023 2022
Book Clubs - U.S. $ 2.6 $ 6.3
Book Fairs - U.S. 27.3 28.3
Trade - U.S. 62.5 76.2
Trade - International (1)
10.4 13.9
Total Children's Book Publishing and Distribution $ 102.8 $ 124.7
Education Solutions - U.S. $ 66.0 $ 73.2
Total Education Solutions $ 66.0 $ 73.2
International - Major Markets (2)
$ 47.8 $ 53.4
International - Other Markets (3)
9.4 11.6
Total International $ 57.2 $ 65.0
Total (4)
$ 226.0 $ 262.9
(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.
(4) Total revenues of $ 228.5 in fiscal 2024 include rental income of $ 2.5 related to leased space in the Company's headquarters which was not allocated to a segment. In fiscal 2023, rental income of $ 1.5 was recognized as a reduction to Selling, general and administrative expenses.
Estimated Returns
A liability for expected returns of $ 33.1 , $ 34.9 , and $ 41.5 is recorded within Other accrued expenses as of August 31, 2023, May 31, 2023, and August 31, 2022, respectively. In addition, a return asset of $ 5.4 , $ 4.7 , and $ 7.8 is recorded within Prepaid expenses and other current assets as of August 31, 2023, May 31, 2023, and August 31, 2022, respectively, for the recoverable cost of product estimated to be returned by customers.
9
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
Contract Liabilities
The following table presents further detail regarding the Company's contract liabilities as of the dates indicated:
August 31, 2023 May 31, 2023 August 31, 2022
Book fairs incentive credits $ 96.1 $ 110.8 $ 84.4
Magazines+ subscriptions 24.2 5.0 24.7
U.S. digital subscriptions 26.8 22.8 23.8
U.S. education-related (1)
12.1 9.8 16.5
Media-related 0.0 0.0 15.6
Stored value cards 13.1 12.4 9.3
Other (2)
9.4 8.3 8.3
Total contract liabilities $ 181.7 $ 169.1 $ 182.6
(1) Primarily includes contract liabilities related to contracts with school districts and professional services.
(2) Primarily includes contract liabilities related to various international products and services.
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. As of August 31, 2023, contract liabilities of $ 171.1 are recorded within Deferred revenue on the Company's Condensed Consolidated Balance Sheet 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 remaining $ 10.6 of contract liabilities as of August 31, 2023 are recorded within Other noncurrent liabilities on the Company's Condensed Consolidated Balance Sheet as the associated performance obligations are expected to be satisfied, and related revenue recognized, in excess of one year. Contract liabilities of $ 169.1 and $ 182.6 as of May 31, 2023 and August 31, 2022, respectively, are recorded within Deferred revenue on the Company's Condensed Consolidated Balance Sheets. The Company recognized revenue which was included in the opening Deferred revenue balance in the amount of $ 32.3 for the three months ended August 31, 2023, and $ 30.8 for the three months ended August 31, 2022.
Allowance for Credit Losses
The Company recognizes an allowance for credit losses on customer 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 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 Sheets:
Allowance for Credit Losses
Balance as of June 1, 2023 $ 16.7
Provision (benefit) 0.6
Write-offs and other ( 0.2 )
Balance as of August 31, 2023 $ 17.1
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 primarily in the
10
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
United States through its school reading events business, which includes book clubs and book fairs channels, and through the trade channel. This segment is comprised of two 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 online 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 periods indicated:
Three months ended
August 31,
2023 2022
Revenues
Children's Book Publishing and Distribution $ 102.8 $ 124.7
Education Solutions 66.0 73.2
International 57.2 65.0
Total (1)
$ 226.0 $ 262.9
Operating income (loss)
Children's Book Publishing and Distribution $ ( 41.5 ) $ ( 30.1 )
Education Solutions ( 18.7 ) ( 4.3 )
International ( 8.2 ) ( 3.5 )
Overhead (2)
( 30.7 ) ( 20.2 )
Total $ ( 99.1 ) $ ( 58.1 )
(1) Total revenues of $ 228.5 in fiscal 2024 include rental income of $ 2.5 related to leased space in the Company's headquarters which was not allocated to a segment. In fiscal 2023, rental income of $ 1.5 was recognized as a reduction to Selling, general and administrative expenses.
(2) Overhead includes all domestic corporate amounts not allocated to segments, including expenses and costs related to the management of corporate assets.
4. DEBT
The following table summarizes the carrying value of the Company's debt as of the dates indicated:
August 31, 2023 May 31, 2023 August 31, 2022
US Revolving Credit Agreement $ — $ — $ —
Unsecured lines of credit 5.9 6.0 6.3
Total debt $ 5.9 $ 6.0 $ 6.3
Less lines of credit, short-term debt and current portion of long-term debt ( 5.9 ) ( 6.0 ) ( 6.3 )
Total long-term debt $ — $ — $ —
The Company's debt obligations as of August 31, 2023 have maturities of one year or less.
US Credit Agreement
On October 27, 2021, Scholastic 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 Credit Agreement provides for a $ 300.0 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. The Credit Agreement also provides 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.
On February 28, 2023, the Company entered into the First and Second Amendments to the Credit Agreement with the lenders from time to time party thereto, Truist Bank and Wells Fargo Bank, National Association, as co-syndication agents and Bank of America, N.A., as administrative agent (collectively the "Amendments"). The Amendments, among other things, (i) adjusted the credit spread adjustment for SOFR (the secured overnight financing rate as administered by the Federal Reserve Bank of New York) to 0.10 % (10 basis points) and (ii) transitioned the reference rate under the Credit Agreement for borrowings from LIBOR (the London interbank offered rate) to SOFR, together with various other conforming changes to accommodate such replacement.
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 SOFR (Daily Simple or Term), plus a SOFR adjustment of 0.10 % per annum and an applicable margin ranging from 1.35 % to 1.75 %, as determined by the Company’s prevailing Consolidated Leverage Ratio.
As of August 31, 2023, 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 August 31, 2023, 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 August 31, 2023, the Company had no outstanding borrowings under the Credit Agreement.
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 Company or its business. The Company was in compliance with required covenants for all periods presented.
At August 31, 2023, the Company had open standby letters of credit totaling $ 3.8 issued under certain credit lines, including $ 0.4 under the Credit Agreement and $ 3.4 under the domestic credit lines discussed below.
Lines of Credit
As of August 31, 2023, 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 August 31, 2023, May 31, 2023 and August 31, 2022. As of August 31, 2023, availability under these unsecured money market bid rate credit lines totaled $ 6.6 , excluding commitments of $ 3.4 . 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 August 31, 2023, the Company had various local currency international credit lines totaling $ 24.7 underwritten by banks primarily in the United States, Canada and the United Kingdom. Outstanding borrowings under these facilities were $ 5.9 at August 31, 2023 at a weighted average interest rate of 4.4 %, compared to outstanding borrowings of $ 6.0 at May 31, 2023 at a weighted average interest rate of 4.9 %, and $ 6.3 at August 31, 2022 at a weighted average interest rate of 5.8 %. As of August 31, 2023, the amounts available under these facilities totaled $ 18.8 . 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
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.
The Company expects to receive additional recoveries from its insurance programs related to an intellectual property legal settlement accrued during fiscal 2021, however, 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
August 31,
2023 2022
Net income (loss) attributable to Class A and Common Stockholders $ ( 74.2 ) $ ( 45.5 )
Weighted average Shares of Class A Stock and Common Stock outstanding for basic earnings (loss) per share (in millions) 31.6 34.3
Dilutive effect of Class A Stock and Common Stock potentially issuable pursuant to stock-based compensation plans (in millions)* — —
Adjusted weighted average Shares of Class A Stock and Common Stock outstanding for diluted earnings (loss) per share (in millions) 31.6 34.3
Earnings (loss) per share of Class A Stock and Common Stock:
Basic $ ( 2.35 ) $ ( 1.33 )
Diluted $ ( 2.35 ) $ ( 1.33 )
Anti-dilutive shares pursuant to stock-based compensation plans
0.7 0.5
* The Company experienced a net loss for all periods presented and therefore did not report any dilutive share impact
The following table sets forth options outstanding pursuant to stock-based compensation plans as of the dates indicated:
August 31, 2023 August 31, 2022
Options outstanding pursuant to stock-based compensation plans (in millions) 3.0 3.3
As of August 31, 2023, $ 85.7 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 12, Treasury Stock, for a more complete description of the Company’s share buy-back program.
11
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
7. ACQUISITIONS
On June 1, 2023, the Company acquired the remaining shares of Make Believe Ideas Limited, a UK-based children's book publishing company for $ 2.1 , increasing the Company's total ownership from 95.0 % to 100 %. The acquisition was accounted for as an equity transaction as there was no change in control. The carrying value of the noncontrolling interest at the acquisition date was $ 1.6 . The difference between the fair value of consideration paid and the carrying value was recognized as an adjustment to Additional paid-in capital of $ 0.5 .
8. 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:
August 31, 2023 May 31, 2023 August 31, 2022
Gross beginning balance $ 132.7 $ 164.9 $ 164.9
Accumulated impairment — ( 39.6 ) ( 39.6 )
Beginning balance $ 132.7 $ 125.3 $ 125.3
Additions — 7.6 —
Foreign currency translation 0.1 ( 0.2 ) ( 0.6 )
Ending balance $ 132.8 $ 132.7 $ 124.7
In fiscal 2023, the Company acquired Learning Ovations, Inc, a U.S.-based education technology business, which resulted in the recognition of $ 7.6 of Goodwill included in the Education Solutions segment.
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:
August 31, 2023 May 31, 2023 August 31, 2022
Beginning balance - Other intangibles subject to amortization $ 7.8 $ 6.0 $ 6.0
Additions — 4.1 —
Amortization expense ( 0.5 ) ( 2.2 ) ( 0.5 )
Foreign currency translation 0.0 ( 0.1 ) ( 0.2 )
Total other intangibles subject to amortization, net of accumulated amortization of $ 37.0 , $ 36.5 and $ 34.8 , respectively
$ 7.3 $ 7.8 $ 5.3
Total other intangibles not subject to amortization $ 2.1 $ 2.1 $ 2.1
Total other intangibles $ 9.4 $ 9.9 $ 7.4
In fiscal 2023, the Company acquired Learning Ovations, Inc., a U.S.-based education technology business, which resulted in the recognition of $ 4.1 of amortizable intangible assets. These intangible assets are amortized over the estimated useful life of 7 years.
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 5.3 years.
There were no impairment charges related to Intangible assets in any of the periods presented.
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SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
9. 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:
August 31, 2023 May 31, 2023 August 31, 2022 Segment
Equity method investments $ 32.3 $ 31.6 $ 28.7 International
Other equity investments 6.0 6.0 6.0 Children's Book Publishing & Distribution
Total Investments $ 38.3 $ 37.6 $ 34.7
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 $ 0.2 and $ 0.1 for the three months ended August 31, 2023 and August 31, 2022, respectively.
10. 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
August 31, August 31,
2023 2022 2023 2022
Components of net periodic benefit cost:
Interest cost $ 0.4 $ 0.3 $ 0.1 $ 0.1
Expected return on assets ( 0.3 ) ( 0.3 ) — —
Amortization of prior service (credit) loss 0.0 0.0 ( 0.2 ) ( 0.2 )
Amortization of net actuarial (gain) loss 0.3 0.1 — —
Total $ 0.4 $ 0.1 $ ( 0.1 ) $ ( 0.1 )
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 three months ended August 31, 2023, the Company contributed $ 0.3 to the UK Pension Plan. The Company expects, based on actuarial calculations, to contribute cash of approximately $ 1.2 to the UK Pension Plan for the fiscal year ending May 31, 2024.
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SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
11. STOCK-BASED COMPENSATION
The following table summarizes stock-based compensation expense included in Selling, general and administrative expenses for the periods indicated:
Three months ended
August 31,
2023 2022
Stock option expense $ 0.6 $ 0.6
Restricted stock unit expense 1.5 1.0
Management stock purchase plan 0.0 0.0
Employee stock purchase plan 0.2 0.1
Total stock-based compensation expense $ 2.3 $ 1.7
The following table sets forth Common Stock issued pursuant to stock-based compensation plans for the periods indicated:
Three months ended
August 31,
2023 2022
Common Stock issued pursuant to stock-based compensation plans (in millions) 0.1 0.3
12. TREASURY STOCK
The Board has authorized the Company to repurchase Common Stock, from time to time as conditions allow, on the open market or through privately negotiated transactions.
The table below represents the Board authorization at the dates indicated:
Authorization Amount
March 2023 $
50.0
July 2023 $
100.0
Total current Board authorizations $ 150.0
Less repurchases made under these authorizations $ ( 64.3 )
Remaining Board authorization at August 31, 2023 $ 85.7
Remaining Board authorization at August 31, 2023 represents the amount remaining under the current $ 100.0 Board authorization for Common share repurchases announced on July 19, 2023, which is available for further repurchases, from time to time as conditions allow, on the open market or through privately negotiated transactions
Repurchases of the Company's Common Stock were $ 36.2 , including excise tax on share repurchases of $ 0.3 , during the three months ende d August 31, 2023. The Company's repurchase program may be suspended at any time without prior notice.
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SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables summarize the activity in Accumulated other comprehensive income (loss), net of tax, by component, for the periods indicated:
Three months ended August 31, 2023
Foreign currency translation adjustments Retirement benefit plans Total
Beginning balance at June 1, 2023 $ ( 50.0 ) $ ( 5.8 ) $ ( 55.8 )
Other comprehensive income (loss) before reclassifications 1.8 — 1.8
Less amount reclassified from Accumulated other comprehensive income (loss):
Amortization of net actuarial loss (net of tax of $ 0.0 )
— 0.3 0.3
Amortization of prior service (credit) cost (net of tax of $ 0.1 )
— ( 0.1 ) ( 0.1 )
Other comprehensive income (loss) 1.8 0.2 2.0
Ending balance at August 31, 2023 $ ( 48.2 ) $ ( 5.6 ) $ ( 53.8 )
Three months ended August 31, 2022
Foreign currency translation adjustments Retirement benefit plans Total
Beginning balance at June 1, 2022 $ ( 44.6 ) $ ( 0.8 ) $ ( 45.4 )
Other comprehensive income (loss) before reclassifications ( 9.6 ) — ( 9.6 )
Less amount reclassified from Accumulated other comprehensive income (loss):
Amortization of net actuarial loss (net of tax of $ 0.0 )
— 0.1 0.1
Amortization of prior service (credit) cost (net of tax of $ 0.1 )
— ( 0.1 ) ( 0.1 )
Other comprehensive income (loss) ( 9.6 ) 0.0 ( 9.6 )
Ending balance at August 31, 2022 $ ( 54.2 ) $ ( 0.8 ) $ ( 55.0 )
The following table presents the impact on earnings of reclassifications out of Accumulated other comprehensive income (loss) for the periods indicated:
Three months ended Condensed Consolidated Statements of Operations line item
August 31, August 31,
2023 2022
Employee benefit plans:
Amortization of net actuarial loss $ 0.3 $ 0.1 Other components of net periodic benefit (cost)
Amortization of prior service (credit) loss ( 0.2 ) ( 0.2 ) Other components of net periodic benefit (cost)
Less: Tax effect 0.1 0.1 Provision (benefit) for income taxes
Total cost, net of tax $ 0.2 $ 0.0
14. FAIR VALUE MEASUREMENTS
The Company determines the appropriate level in the fair value hierarchy for each fair value measurement of assets and liabilities carried at fair value on a recurring basis in the Company’s financial statements. The fair value hierarchy prioritizes the inputs, which refer to assumptions that market participants would use in pricing an asset or liability, based upon the highest and best use, into three levels as follows:
• Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.
• Level 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.
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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.
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 9, Investments, for a more complete description of the fair value measurements employed.
15. INCOME TAXES AND OTHER TAXES
Income Taxes
In calculating the provision for income taxes on an interim basis, the Company uses an estimate of the annual effective tax rate based upon currently known facts and circumstances and applies that rate to its year-to-date earnings or losses. The Company’s effective tax rate is based on expected income and statutory tax rates and takes into consideration permanent differences between financial statement and tax return income applicable to the Company in the various jurisdictions in which the Company operates. The effect of discrete items, such as changes in estimates, changes in 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, for the three month period ended August 31, 2023 was 24.3 %, compared to 21.6 %, for the prior fiscal year period. The increase in the interim effective tax rate was primarily due to an excess tax benefit related to vested option exercises in the three months ended August 31, 2023.
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 Company was previously under audit for the fiscal 2015 through fiscal 2020 tax years and the examination was completed in fiscal 2023 with no impact to the financial results. The fiscal 2021 and fiscal 2022 tax years remain subject to audit.
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SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
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 Selling, general and administrative expenses. Future developments relating to the foregoing could result in adjustments being made to these accruals.
16. DERIVATIVES AND HEDGING
The Company enters into foreign currency derivative contracts to economically hedge the exposure to foreign currency fluctuations associated with the forecasted purchase of inventory, 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 August 31, 2023 and August 31, 2022 were
$ 22.8 and $ 21.3 , respectively. A net unrealized gain of $ 0.4 and $ 0.6 was recognized for the three months ended August 31, 2023 and August 31, 2022, respectively.
17. OTHER ACCRUED EXPENSES
Other accrued expenses consisted of the following as of the dates indicated:
August 31, 2023 May 31, 2023 August 31, 2022
Accrued payroll, payroll taxes and benefits $ 34.5 $ 29.2 $ 36.8
Accrued bonus and commissions 13.0 31.2 12.2
Returns liability 33.1 34.9 41.5
Accrued other taxes 16.0 24.8 21.1
Accrued advertising and promotions 8.5 7.3 9.9
Other accrued expenses 40.8 41.5 41.1
Total accrued expenses $ 145.9 $ 168.9 $ 162.6
18. SUBSEQUENT EVENTS
On September 20, 2023, the Board declared a quarterly cash dividend of $ 0.20 per share on the Company’s Class A and Common Stock for the second quarter of fiscal 2024. The dividend is payable on December 15, 2023 to shareholders of record as of the close of business on October 31, 2023.
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SCHOLASTIC CORPORATION
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.