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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
Quarterly Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended
February 29, 2020
 
Commission File No.
000-19860
 
SCHOLASTIC CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware
 
13-3385513
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer Identification No.)
557 Broadway,
 

New York,
New York
 
10012
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code (212) 343-6100
Title of Class
Trading Symbol
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value
SCHL
The NASDAQ Stock Market LLC
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes No
 
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date:
Title of each class
 
Number of shares outstanding as of February 29, 2020
Common Stock, $.01 par value
 
32,614,515
Class A Stock, $.01 par value
 
1,656,200
MASTERSCHLREDBARLOGOA06.JPG

1



SCHOLASTIC CORPORATION
 
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED FEBRUARY 29, 2020

INDEX
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2



PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements

SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(Dollar amounts in millions, except per share data)
 

 
Three months ended

Nine months ended
 
February 29,

February 28,

February 29,

February 28,
 
2020
 
2019
 
2020
 
2019
Revenues
$373.3
 
$360.1
 
$1,203.1
 
$1,183.2
Operating costs and expenses:
 
 
 
 
 

 
 
  Cost of goods sold
183.0
 
176.9
 
584.4
 
564.6
  Selling, general and administrative expenses
194.9
 
190.9
 
574.8
 
584.3
  Depreciation and amortization
15.4
 
13.7
 
46.2
 
41.3
  Asset impairments and write downs
40.0
 

 
40.0

 

Total operating costs and expenses
433.3
 
381.5
 
1,245.4
 
1,190.2
Operating income (loss)
(60.0)
 
(21.4)
 
(42.3)
 
(7.0)
Interest income (expense), net
0.3
 
1.0
 
1.0
 
2.3
Other components of net periodic benefit (cost)
(0.4)
 
(0.4)
 
(1.0)
 
(1.1)
Earnings (loss) before income taxes
(60.1)
 
(20.8)
 
(42.3)
 
(5.8)
Provision (benefit) for income taxes
(16.8)
 
(8.2)
 
(11.6)
 
(3.5)
Net income (loss)
(43.3)
 
(12.6)
 
(30.7)
 
(2.3)
Less: Net income attributable to noncontrolling interest
0.0

 

 
0.1

 

Net income (loss) attributable to Scholastic Corporation
$(43.3)
 
$(12.6)
 
$(30.8)
 
$(2.3)
Basic and diluted earnings (loss) per Share of Class A
and Common Stock
 

 
 

 
 

 
 

Basic
$(1.25)
 
$(0.36)
 
$(0.89)
 
$(0.07)
Diluted
$(1.25)
 
$(0.36)
 
$(0.89)
 
$(0.07)

See accompanying notes

3



SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - UNAUDITED
(Dollar amounts in millions)
 
 
Three months ended
 
Nine months ended
 
February 29,
 
February 28,
 
February 29,
 
February 28,
 
2020
 
2019
 
2020
 
2019
Net income (loss)
$(43.3)
 
$(12.6)
 
$(30.7)
 
$(2.3)
Other comprehensive income (loss), net:
 
 
 

 
 
 
 

   Foreign currency translation adjustments
(2.3)
 
1.7
 
(0.4)
 
(2.0)
   Pension and postretirement adjustments (net of tax)
0.3
 
0.2
 
0.7
 
3.1
Total other comprehensive income (loss), net
$(2.0)
 
$1.9
 
$0.3
 
$1.1
Comprehensive income (loss)
$(45.3)
 
$(10.7)
 
$(30.4)
 
$(1.2)
Less: Net income attributable to noncontrolling interest
0.0
 

 
0.1

 

Comprehensive income (loss) attributable to Scholastic Corporation
$(45.3)
 
$(10.7)
 
$(30.5)
 
$(1.2)

 See accompanying notes


4



SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(Dollar amounts in millions, except per share data)
 
February 29, 2020 (unaudited)
 
May 31, 2019 (audited)
 
February 28, 2019 (unaudited)
ASSETS
 

 
 

 
 

Current Assets:
 

 
 

 
 

Cash and cash equivalents
$263.8
 
$334.1
 
$338.1
Accounts receivable, net
281.2
 
250.1
 
317.3
Inventories, net
307.7
 
323.7
 
356.8
Prepaid expenses and other current assets
88.5
 
52.7
 
84.8
Total current assets
941.2
 
960.6
 
1,097.0
Noncurrent Assets:
 
 
 
 
 
Property, plant and equipment, net
579.1
 
577.7
 
574.9
Prepublication costs, net
70.8
 
70.2
 
65.3
Operating lease right-of-use assets, net
71.7
 

 

Royalty advances, net
51.1
 
47.5
 
52.3
Goodwill
125.3
 
125.2
 
119.1
Noncurrent deferred income taxes
37.1
 
37.0
 
43.6
Other assets and deferred charges
72.1
 
60.3
 
70.9
Total noncurrent assets
1,007.2
 
917.9
 
926.1
Total assets
$1,948.4
 
$1,878.5
 
$2,023.1
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

 
 

Current Liabilities:
 

 
 

 
 

Lines of credit and current portion of long-term debt
$9.7
 
$7.3
 
$11.0
Accounts payable
187.9
 
195.3
 
215.3
Accrued royalties
77.3
 
41.9
 
76.8
Deferred revenue
158.1
 
130.8
 
154.7
Other accrued expenses
170.9
 
164.8
 
236.2
Accrued income taxes
3.7
 
1.4
 
2.1
Operating lease liabilities
22.7
 

 

Total current liabilities
630.3
 
541.5
 
696.1
Noncurrent Liabilities:
 
 
 
 
 
Long-term debt
6.4
 

 

Operating lease liabilities
52.0
 

 

Other noncurrent liabilities
60.4
 
64.2
 
57.9
Total noncurrent liabilities
118.8
 
64.2
 
57.9
Commitments and Contingencies (see Note 6)

 

 

Stockholders’ Equity:
 
 
 
 
 
Preferred Stock, $1.00 par value: Authorized, 2.0 shares; Issued and Outstanding, none

 

 

Class A Stock, $0.01 par value: Authorized, 4.0 shares; Issued and Outstanding, 1.7 shares
0.0
 
0.0
 
0.0
Common Stock, $0.01 par value: Authorized, 70.0 shares; Issued, 42.9 shares; Outstanding, 32.6, 33.4 and 33.6 shares, respectively
0.4
 
0.4
 
0.4
Additional paid-in capital
621.9
 
620.8
 
619.4
Accumulated other comprehensive income (loss)
(59.4)
 
(59.7)
 
(54.6)
Retained earnings
966.2
 
1,012.6
 
1,000.5
Treasury stock, at cost: 10.3, 9.5 and 9.3 shares, respectively
(331.2)
 
(302.6)
 
(296.6)
Total stockholders’ equity of Scholastic Corporation
1,197.9
 
1,271.5
 
1,269.1
  Noncontrolling interest
1.4
 
1.3
 

Total stockholders’ equity
1,199.3
 
1,272.8
 
1,269.1
Total liabilities and stockholders’ equity
$1,948.4
 
$1,878.5
 
$2,023.1

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, 2018
1.7
 
$0.0
33.3
 
$0.4
 
$614.4
 
$(55.7)
 
$1,065.2
 
$(303.5)
 
$1,320.8
 
$0.0
 
$1,320.8
Net Income (loss)

 


 

 

 

 
(61.3
)
 

 
(61.3
)
 

 
(61.3
)
Adoption of ASC 606 ( net of tax of $16.0)

 


 

 

 

 
(46.5
)
 

 
(46.5
)
 

 
(46.5
)
Foreign currency translation adjustment

 


 

 

 
(3.1
)
 

 

 
(3.1
)
 

 
(3.1
)
Pension and post-retirement adjustments (net of tax of $0.0)

 


 

 

 
0.2

 

 

 
0.2

 

 
0.2

Stock-based compensation

 


 

 
1.5

 

 

 

 
1.5

 

 
1.5

Proceeds pursuant to stock-based compensation plans

 


 

 
2.8

 

 

 

 
2.8

 

 
2.8

Treasury stock issued pursuant to equity-based plans

 

0.1

 

 
(3.2
)
 

 

 
3.5

 
0.3

 

 
0.3

Dividends ($0.15 per share)

 


 

 

 

 
(5.3
)
 

 
(5.3
)
 

 
(5.3
)
Balance at August 31, 2018
1.7

 
$0.0
33.4

 
$0.4
 
$615.5
 
$(58.6)
 
$952.1
 
$(300.0)
 
$1,209.4
 
$0.0
 
$1,209.4
Net Income (loss)

 


 

 

 

 
71.6

 

 
71.6

 

 
71.6

Foreign currency translation adjustment

 


 

 

 
(0.6
)
 

 

 
(0.6
)
 

 
(0.6
)
Pension and post-retirement adjustments (net of tax of $0.8)

 


 

 

 
2.7

 

 

 
2.7

 

 
2.7

Stock-based compensation

 


 

 
3.7

 

 

 

 
3.7

 

 
3.7

Proceeds pursuant to stock-based compensation plans

 


 

 
2.5

 

 

 

 
2.5

 

 
2.5

Purchases of treasury stock at cost

 


 

 

 

 

 

 

 

 

Treasury stock issued pursuant to equity-based plans

 

0.2

 

 
(3.8
)
 

 

 
4.4

 
0.6

 

 
0.6

Dividends ($0.15 per share)

 


 

 

 

 
(5.3
)
 

 
(5.3
)
 

 
(5.3
)
Balance at November 30, 2018
1.7

 
$0.0
33.6

 
$0.4
 
$617.9
 
$(56.5)
 
$1,018.4
 
$(295.6)
 
$1,284.6
 
$0.0
 
$1,284.6
Net Income (loss)

 


 

 

 

 
(12.6
)
 

 
(12.6
)
 

 
(12.6
)
Foreign currency translation adjustment

 


 

 

 
1.7

 

 

 
1.7

 

 
1.7

Pension and post-retirement adjustments (net of tax of $0.0)

 


 

 

 
0.2

 

 

 
0.2

 

 
0.2

Stock-based compensation

 


 

 
1.6

 

 

 

 
1.6

 

 
1.6

Proceeds pursuant to stock-based compensation plans

 


 

 
0.5

 

 

 

 
0.5

 

 
0.5

Purchases of treasury stock at cost

 

(0.1
)
 

 

 

 

 
(2.0
)
 
(2.0
)
 

 
(2.0
)
Treasury stock issued pursuant to equity-based plans

 

0.1

 

 
(0.6
)
 

 

 
1.0

 
0.4

 

 
0.4

Dividends ($0.15 per share)

 


 

 

 

 
(5.3
)
 

 
(5.3
)
 

 
(5.3
)
Balance at February 28, 2019
1.7

 
$0.0
33.6

 
$0.4
 
$619.4
 
$(54.6)
 
$1,000.5
 
$(296.6)
 
$1,269.1
 
$0.0
 
$1,269.1

See accompanying notes






6



SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED
(Dollar amounts in millions, except per share data)

 
Class A Stock
Common Stock
Additional Paid-in Capital
Accumulated
Other Comprehensive
Income (Loss)
Retained
Earnings
Treasury Stock
At Cost
Total
Stockholders'
Equity of Scholastic Corporation
 
Noncontrolling interest
 
Total
Stockholders'
Equity
 
Shares
 
Amount
Shares
 
Amount
Balance at June 1, 2019
1.7

 
$0.0
33.4

 
$0.4
 
$620.8
 
$(59.7)
 
$1,012.6
 
$(302.6)
 
$1,271.5
 
$1.3
 
$1,272.8
Net Income (loss)

 


 

 

 

 
(58.5
)
 

 
(58.5
)
 

 
(58.5
)
Foreign currency translation adjustment

 


 

 

 
(2.0
)
 

 

 
(2.0
)
 

 
(2.0
)
Pension and post-retirement adjustments (net of tax of $0.0)

 


 

 

 
0.2

 

 

 
0.2

 

 
0.2

Stock-based compensation

 


 

 
1.5

 

 

 

 
1.5

 

 
1.5

Purchases of treasury stock at cost

 

(0.3
)
 

 

 

 

 
(12.6
)
 
(12.6
)
 

 
(12.6
)
Treasury stock issued pursuant to equity-based plans

 

0.0

 

 
(0.1
)
 

 

 
0.6

 
0.5

 

 
0.5

Dividends ($0.15 per share)

 


 

 

 

 
(5.2
)
 

 
(5.2
)
 

 
(5.2
)
Noncontrolling interest in Make Believe Ideas

 


 

 

 

 

 

 

 
(0.0
)
 

Balance at August 31, 2019
1.7

 
$0.0
33.1

 
$0.4
 
$622.2
 
$(61.5)
 
$948.9
 
$(314.6)
 
$1,195.4
 
$1.3
 
$1,196.7
Net Income (loss)

 


 

 

 

 
71.0

 

 
71.0

 

 
71.0

Foreign currency translation adjustment

 


 

 

 
3.9

 

 

 
3.9

 

 
3.9

Pension and post-retirement adjustments (net of tax of $0.0)

 


 

 

 
0.2

 

 

 
0.2

 

 
0.2

Stock-based compensation

 


 

 
0.9

 

 

 

 
0.9

 

 
0.9

Proceeds pursuant to stock-based compensation plans

 


 

 
0.3

 

 

 

 
0.3

 

 
0.3

Purchases of treasury stock at cost

 

(0.1
)
 

 

 

 

 
(7.1
)
 
(7.1
)
 

 
(7.1
)
Treasury stock issued pursuant to equity-based plans

 


 

 
(2.1
)
 

 

 
2.7

 
0.6

 

 
0.6

Dividends ($0.15 per share)

 


 

 

 

 
(5.2
)
 

 
(5.2
)
 

 
(5.2
)
Noncontrolling interest in Make Believe Ideas

 


 

 

 

 

 

 

 
0.0

 

Balance at November 30, 2019
1.7

 
$0.0
33.0

 
$0.4
 
$621.3
 
$(57.4)
 
$1,014.7
 
$(319.0)
 
$1,260.0
 
$1.3
 
$1,261.3
Net Income (loss)

 


 
 
 

 

 
(43.3
)
 

 
(43.3
)
 

 
(43.3
)
Foreign currency translation adjustment

 


 

 

 
(2.3
)
 

 

 
(2.3
)
 

 
(2.3
)
Pension and post-retirement adjustments (net of tax of $0.0)

 


 

 

 
0.3

 

 

 
0.3

 

 
0.3

Stock-based compensation

 


 

 
0.7

 

 

 

 
0.7

 

 
0.7

Proceeds pursuant to stock-based compensation plans

 


 

 
0.4

 

 

 

 
0.4

 

 
0.4

Purchases of treasury stock at cost

 

(0.4
)
 

 

 

 

 
(13.0
)
 
(13.0
)
 

 
(13.0
)
Treasury stock issued pursuant to equity-based plans

 

0.0

 

 
(0.5
)
 

 

 
0.8

 
0.3

 

 
0.3

Dividends ($0.15 per share)

 


 

 

 

 
(5.2
)
 

 
(5.2
)
 

 
(5.2
)
Noncontrolling interest in Make Believe Ideas

 


 

 

 

 

 

 

 
0.1

 
0.1

Balance at February 29, 2020
1.7

 
$0.0
32.6

 
$0.4
 
$621.9
 
$(59.4)
 
$966.2
 
$(331.2)
 
$1,197.9
 
$1.4
 
$1,199.3

See accompanying notes

7



SCHOLASTIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED
(Dollar amounts in millions)
 
 
Nine months ended
 
February 29,
 
February 28,
 
2020
 
2019
Cash flows - operating activities:
 

 
 
Net income (loss) attributable to Scholastic Corporation
$(30.8)
 
$(2.3)
Adjustments to reconcile Net income (loss) to net cash provided by (used in) operating activities:
 

 
 

   Provision for losses on accounts receivable
7.3
 
5.7
   Provision for losses on inventory
13.7
 
12.2
   Provision for losses on royalty advances
3.8
 
3.0
   Amortization of prepublication and production costs
19.7
 
16.6
   Depreciation and amortization
48.1
 
43.7
   Amortization of pension and postretirement actuarial gains and losses
0.7
 
0.5
   Deferred income taxes
(0.2)
 
(2.6)
   Stock-based compensation
3.1
 
6.8
   Income from equity investments
(3.6)
 
(5.7)
   Non cash write off related to asset impairments and write downs
40.0
 

Changes in assets and liabilities, net of amounts acquired:
 
 
 
   Accounts receivable
(38.9)
 
(87.9)
   Inventories
(36.2)
 
(77.9)
   Prepaid expenses and other current assets
(35.9)
 
(24.5)
   Royalty advances
(9.1)
 
(10.7)
   Accounts payable
(0.1)
 
29.4
   Accrued income taxes
2.3
 
0.2
   Accrued royalties
35.6
 
42.5
   Deferred revenue
27.5
 
43.9
   Other assets and liabilities
(3.0)
 
67.6
Net cash provided by (used in) operating activities
44.0
 
60.5
 
 
 
 
Cash flows - investing activities:
 

 
 

Prepublication and production expenditures
(21.5)
 
(32.3)
Additions to property, plant and equipment
(48.4)
 
(71.0)
Acquisition of land
(3.3)
 

Other investment and acquisition-related payments
(1.2)
 
(0.5)
Net cash provided by (used in) investing activities
(74.4)
 
(103.8)
 
 
 
 
Cash flows - financing activities:
 

 
 

Proceeds from long-term debt
6.4
 

Repayments of long-term debt

 

Borrowings under lines of credit
22.5
 
48.5
Repayments of lines of credit
(19.7)
 
(46.6)
Repayment of capital lease obligations
(1.5)
 
(1.1)
Reacquisition of common stock
(32.2)
 
(2.0)
Proceeds pursuant to stock-based compensation plans
0.7
 
5.8
Payment of dividends
(15.7)
 
(15.8)
Other
(0.2)
 
1.3
Net cash provided by (used in) financing activities
(39.7)
 
(9.9)
Effect of exchange rate changes on cash and cash equivalents
(0.2)
 
(0.6)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(70.3)
 
(53.8)
Cash and cash equivalents at beginning of period
334.1
 
391.9
Cash and cash equivalents at end of period
$263.8
 
$338.1

 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 2020 relate to the twelve-month period ending May 31, 2020. Certain reclassifications have been made to conform to the current year presentation.

Interim Financial Statements

The accompanying Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information, and should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2019. The Financial Statements presented in this Quarterly Report on Form 10-Q are unaudited; however, in the opinion of management, the Financial Statements reflect all adjustments, consisting solely of normal, recurring adjustments, necessary for the fair presentation of the Financial Statements for the periods presented. 

Seasonality
 
The Company’s Children’s Book Publishing and Distribution school-based book club and book fair channels and most of its Education businesses operate on a school-year basis; therefore, the Company’s business is highly seasonal. As a result, the Company’s revenues in the first and third quarters of the fiscal year generally are lower than its revenues in the other two fiscal quarters. Typically, school-based channels and magazine revenues are minimal in the first quarter of the fiscal year as schools are not in session. Trade sales can vary throughout the year due to varying release dates of published titles. The Company generally experiences a loss from operations in the first and third quarters of each fiscal year.

Use of estimates
 
The preparation of these Financial Statements involves the use of estimates and assumptions by management, which affects the amounts reported in the Financial Statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, and various other assumptions believed to be reasonable under the circumstances, all of which are necessary, in order to form a basis for determining the carrying values of certain assets and liabilities. Actual results may differ from those estimates and assumptions. On an on-going basis, the Company evaluates the adequacy of its reserves and the estimates used in these calculations, including, but not limited to:
Accounts receivable allowance for doubtful accounts
Pension and postretirement benefit plans
Uncertain tax positions
The timing and amount of future income taxes and related deductions
Inventory reserves
Cost of goods sold from book fair operations during interim periods based on estimated gross profit rates
Sales tax contingencies
Royalty advance reserves and royalty expense accruals
Impairment testing for goodwill, intangible and other long-lived assets and investments
Assets and liabilities acquired in business combinations
Variable consideration related to anticipated returns
Allocation of transaction price to performance obligations



9

SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)



Assets Held For Sale
The Company committed to a plan to sell the company-owned facility located in Danbury, Connecticut to relocate the book fairs warehousing and distribution operations conducted in Danbury to a warehouse in Allentown, Pennsylvania. This asset is included in the Overhead segment. The Company also committed to a plan to sell the UK distribution centers located in Witney and Southam to consolidate the operations into a new facility in Warwickshire which is currently under construction. These assets are included in the International segment. The Company expects the sale of these facilities to be completed within one year and to recognize a gain on sale. The long-lived assets which consist of land, building, and building improvements are classified as held for sale. These assets are carried at the lower of carrying value or fair value less costs to sell and no additional depreciation is being recognized. As of February 29, 2020, the carrying amounts totaled $8.8.

New Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes. The updates in this guidance remove the following exceptions: 1. Exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income); 2. Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; 3. Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; 4. Exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.

The guidance also simplifies the accounting for income taxes by: 1. Requiring an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax; 2. Requiring an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction; 3. Specifying an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements; 4. Requiring an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The guidance further provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax and provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination or a separate transaction.

The ASU will be effective for the Company in the first quarter of fiscal 2022. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. An entity that elects to early adopt in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period and an entity that elects early adoption must adopt all the amendments in the same period. The Company is evaluating the impact of this ASU on its consolidated Financial Statements.

Current Fiscal Year Adoptions

Topic 842, Leases
Refer to Note 11, Leases, for a discussion of the Company's lease accounting following the adoption of ASU No. 2016-02, Leases (Topic 842) in the first quarter of fiscal 2020.

ASU No. 2018-15
In August 2018, the FASB issued ASU No. 2018-15, Intangibles- Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The Company adopted ASU No. 2018-15 as of the beginning of the first quarter of fiscal 2020 using the prospective approach. In the third fiscal quarter, the Company capitalized approximately $9.5 of cloud computing costs which have not yet been placed into service. This amount is included within Other assets and deferred charges within the Company's Condensed Consolidated Balance Sheets and within the operating activities section of the Company's Condensed Consolidated Statement of Cash Flows.




10

SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)



ASU No. 2018-02
In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220)-Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The Company adopted ASU No. 2018-02 as of the beginning of the first quarter of fiscal 2020 which resulted in no impact to the Company's financial statements.

2. REVENUES

Disaggregated Revenue Data

The following table presents the Company’s disaggregated revenues by region and domestic channel:
 
Three months ended
Nine months ended
 
February 29,
February 28,
February 29,
February 28,
 
2020
2019
2020
2019
  U.S. Book Clubs
$43.4
$55.0
$137.3
$165.4
  U.S. Book Fairs
100.1
97.4
351.7
343.3
  U.S. Trade
70.4
65.6
231.6
222.9
  U.S. Education
74.3
60.3
192.5

179.7

  Non-U.S. Major Markets(1)
59.2
54.0
210.1
192.2
  Non-U.S. Other Markets(2)
25.9
27.8
79.9
79.7
Total Revenues
$373.3
$360.1
$1,203.1
$1,183.2

(1) - Includes Canada, UK, Australia and New Zealand.
(2) - Primarily includes markets in Asia.

Estimated Returns
A liability for expected returns of $40.6, $34.5, and $97.3 is recorded within Other accrued expenses as of February 29, 2020, May 31, 2019, and February 28, 2019, respectively. In addition, a return asset of $2.5, $1.6, and $13.2 is recorded within Prepaid expenses and other current assets as of February 29, 2020, May 31, 2019, and February 28, 2019, respectively, for the recoverable cost of product estimated to be returned by customers.

Deferred Revenue
The Company's contract liabilities consist of advance billings and payments received from customers in excess of revenue recognized and revenue allocated to outstanding book fairs incentive credits. These liabilities are recorded within Deferred revenue on the Company's Condensed Consolidated Balance Sheets and are classified as short term, as substantially all of the associated performance obligations are expected to be satisfied, and related revenue recognized, within one year. The Company recognized revenue which was included in the opening deferred revenue balance in the amount of $33.0 and $28.3 for the three months ended February 29, 2020 and February 28, 2019, respectively, and $107.0 and $91.0 for the nine months ended February 29, 2020 and February 28, 2019, respectively.

3. SEGMENT INFORMATION

The Company categorizes its businesses into three reportable segments: Children’s Book Publishing and Distribution, Education and International.
 
Children’s Book Publishing and Distribution operates as an integrated business which includes the publication and distribution of children’s books, ebooks, media and interactive products in the United States through its book clubs and book fairs in its school channels and through the trade channel. This segment is comprised of three operating segments.

Education includes the publication and distribution to schools and libraries of children’s books, classroom magazines, print and digital supplemental and core classroom materials and related support services, and print and on-line reference and non-fiction products for grades pre-kindergarten to 12 in the United States. This segment is comprised of three operating segments.


11

SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)



International includes the publication and distribution of products and services outside the United States by the Company’s international operations, and its export and foreign rights businesses. This segment is comprised of three operating segments.

The following table sets forth information for the Company's segments for the fiscal quarters ended February 29, 2020 and February 28, 2019:
 
Children’s
Book
Publishing &
Distribution
 
Education
 
Overhead (1)
 
Total
Domestic
 
International
 
Total
Three months ended 
 February 29, 2020
 

 
 

 
 

 
 

 
 

 
 
Revenues
$220.2
 
$74.3
 

 
$294.5
 
$78.8
 
$373.3
Bad debt expense
1.2
 
0.7
 

 
1.9
 
1.1
 
3.0
Depreciation and amortization (2)
6.7
 
3.3
 
10.8
 
20.8
 
1.9
 
22.7
Asset impairments and write downs

 

 
40.0
 
40.0
 

 
40.0
Segment operating income (loss)
2.2
 
9.8
 
(68.3)
 
(56.3)
 
(3.7)
 
(60.0)
Expenditures for other noncurrent assets (3)

11.5
 
5.4
 
19.4
 
36.3
 
5.4
 
41.7
Three months ended 
 February 28, 2019
 

 
 

 
 

 
 

 
 

 
 

Revenues
$218.0
 
$60.3
 

 
$278.3
 
$81.8
 
$360.1
Bad debt expense
0.8
 
0.5
 

 
1.3
 
0.3
 
1.6
Depreciation and amortization (2)
5.9
 
2.6
 
10.4
 
18.9
 
1.6
 
20.5
Asset impairments and write downs

 

 

 

 

 

Segment operating income (loss)
4.4
 
0.3
 
(23.1)
 
(18.4)
 
(3.0)
 
(21.4)
Expenditures for other noncurrent assets (3)
17.3
 
5.5
 
15.3
 
38.1
 
2.7
 
40.8

The following table sets forth information for the Company's segments for the fiscal periods ended February 29, 2020 and February 28, 2019:

12

SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)



 
Children’s
Book
Publishing &
Distribution
 
Education
 
Overhead (1)
 
Total
Domestic
 
International
 
Total
Nine months ended 
 February 29, 2020
 

 
 

 
 

 
 

 
 

 
 

Revenues
$743.4
 
$192.6
 

 
$936.0
 
$267.1
 
$1,203.1
Bad debt expense
2.8

 
1.5

 

 
4.3

 
3.0

 
7.3

Depreciation and amortization (2)
19.9

 
9.8

 
32.7

 
62.4

 
5.4

 
67.8

Asset impairments and write downs

 

 
40.0

 
40.0

 

 
40.0

Segment operating income (loss)
70.1

 
2.6

 
(119.3
)
 
(46.6
)
 
4.3

 
(42.3
)
Segment assets at February 29, 2020
594.1

 
208.5

 
853.9

 
1,656.5

 
291.9

 
1,948.4

Goodwill at February 29, 2020
47.1

 
68.2

 

 
115.3

 
10.0

 
125.3

Expenditures for other noncurrent assets (3)

40.2

 
15.0

 
37.6

 
92.8

 
18.1

 
110.9

Other noncurrent assets at
February 29, 2020
(3)
$183.0
 
$123.1
 
$499.1
 
$805.2
 
$76.6
 
$881.8
Nine months ended 
 February 28, 2019
 

 
 

 
 

 
 

 
 

 
 

Revenues
$731.6
 
$179.7
 

 
$911.3
 
$271.9
 
$1,183.2
Bad debt expense
3.2

 
1.2

 

 
4.4

 
1.3

 
5.7

Depreciation and amortization (2)
17.5

 
6.7

 
31.1

 
55.3

 
5.0

 
60.3

Asset impairments and write downs

 

 

 

 

 

Segment operating income (loss)
64.7

 
(6.3
)
 
(73.4
)
 
(15.0
)
 
8.0

 
(7.0
)
Segment assets at February 28, 2019
585.2

 
173.6

 
977.9

 
1,736.7

 
286.4

 
2,023.1

Goodwill at February 28, 2019
40.9

 
68.2

 

 
109.1

 
10.0

 
119.1

Expenditures for other noncurrent assets (3)
48.3

 
15.6

 
55.9

 
119.8

 
10.1

 
129.9

Other noncurrent assets at
February 28, 2019
(3)
$170.4
 
$112.3
 
$502.8
 
$785.5
 
$80.3
 
$865.8

(1)
Overhead includes all domestic corporate amounts not allocated to segments, including expenses and costs related to the management of corporate assets. Unallocated assets are principally comprised of deferred income taxes and property, plant and equipment related to the Company’s headquarters in the metropolitan New York area, its fulfillment and distribution facilities located in Missouri, its facility located in Connecticut and certain technology assets.
(2)
Includes depreciation of property, plant and equipment and amortization of intangible assets and prepublication and production costs.
(3)
Other noncurrent assets include property, plant and equipment, prepublication assets, production assets, cloud computing costs, royalty advances, goodwill, intangible assets and investments. Expenditures for other noncurrent assets for the International segment include expenditures for long-lived assets of $4.3 and $1.5 for the three months ended February 29, 2020 and February 28, 2019, respectively, and $14.2 and $5.9 for the nine months ended February 29, 2020 and February 28, 2019, respectively. Other noncurrent assets for the International segment include long-lived assets of $44.1 and $36.3 as of February 29, 2020 and February 28, 2019, respectively.

4. ASSET WRITE DOWN

During the third quarter, the Company implemented new systems, processes and a centralized management structure to better coordinate demand planning and procurement activity across North America, and to optimize inventory utilization and management. As a result of the foregoing, the Company determined that substantial quantities of inventory will not be required to meet future profitable demand, and will be donated, liquidated or disposed. Accordingly, a $40.0 non cash write down was recognized in the current period for this excess inventory and associated costs. The inventory cost, net of reserves, was $37.6. In addition, $1.6 and $0.8 of author advances and prepublication costs, respectively, were written down as they were directly related to the inventory. The related impact was a loss per basic and diluted share of Class A and Common Stock of $0.84 in the three and nine month periods ended February 29, 2020.


13

SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)



5. DEBT

The following table summarizes the carrying value of the Company's debt as of the dates indicated:
 
February 29, 2020
 
May 31, 2019
 
February 28, 2019
Revolving Loan

 

 

Unsecured lines of credit (weighted average interest rates of 4.6%, 4.1% and 4.3%, respectively)
$9.7
 
$7.3
 
$11.0
UK long-term debt (average interest rate of 2.5%, n/a and n/a, respectively)
6.4

 

 

Total debt
$16.1
 
$7.3
 
$11.0
Less lines of credit, short-term debt and current
    portion of long-term debt
(9.7
)
 
(7.3
)
 
(11.0
)
Total long-term debt
$6.4
 
$0.0
 
$0.0


UK Loan Agreement

On September 23, 2019, Scholastic Limited UK entered into a term loan agreement to borrow £2.0 to fund a land purchase in connection with the construction of a new UK facility. The loan has a maturity date of July 31, 2021. Under the agreement, the principal balance is due in full in a single payment on the last day of the term and interest on the amount borrowed is due and payable quarterly. The interest is charged at 1.77% per annum over the Base Rate. The Base Rate is currently equal to 0.75% per annum and is subject to change. As of February 29, 2020, the Company had $2.6 outstanding on the loan.

On January 24, 2020, Scholastic Limited UK entered into a term loan facility with a borrowing limit of £6.6 to fund the construction of the new UK facility. The loan has a maturity date of July 31, 2021. Under the agreement, the principal balance is due in full in a single payment on the last day of the term and interest on the amount borrowed is due and payable quarterly. The interest is charged at 1.77% per annum over the Base Rate. The Base Rate is currently equal to 0.75% per annum and is subject to change. As of February 29, 2020, the Company had $3.8 outstanding on the loan and the remaining available credit under this facility is $4.6.

US Loan Agreement

On January 5, 2017, Scholastic Corporation and Scholastic Inc. (each, a “Borrower” and together, the “Borrowers”) entered into a 5-year credit facility with certain banks (the “Loan Agreement”). The Loan Agreement replaced the Company's then existing loan agreement and has substantially similar terms, except that:
the borrowing limit was reduced to $375.0 from $425.0;
the “starter” basket for permitted payments of dividends and other payments in respect of capital stock
was increased to $275.0 from $75.0; and
the maturity date was extended to January 5, 2022.

The prior loan agreement, which was originally entered into in 2007 and had a maturity date of December 5, 2017, was terminated on January 5, 2017 in connection with the entry into the new Loan Agreement and was treated as a debt modification.
The Loan Agreement allows the Company to borrow, repay or prepay and reborrow at any time prior to the January 5, 2022 maturity date. Under the Loan Agreement, interest on amounts borrowed thereunder is due and payable in arrears on the last day of the interest period (defined as the period commencing on the date of the advance and ending on the last day of the period selected by the Borrower at the time each advance is made). The interest pricing under the Loan Agreement is dependent upon the Borrower’s election of a rate that is either:
A Base Rate equal to the higher of (i) the prime rate, (ii) the prevailing Federal Funds rate plus 0.50% or (iii) the Eurodollar Rate for a one month interest period plus 1% plus, in each case, an applicable spread ranging from 0.175% to 0.60%, as determined by the Company’s prevailing consolidated debt to total capital ratio.
- or - 

14

SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)



A Eurodollar Rate equal to the London interbank offered rate (LIBOR) plus an applicable spread ranging from 1.175% to 1.60%, as determined by the Company’s prevailing consolidated debt to total capital ratio.

As of February 29, 2020, the indicated spread on Base Rate Advances was 0.175% and the indicated spread on Eurodollar Advances was 1.175%, both based on the Company’s prevailing consolidated debt to total capital ratio.
The Loan Agreement also provides for the payment of a facility fee in respect of the aggregate amount of revolving credit commitments ranging from 0.20% to 0.40% per annum based upon the Company’s prevailing consolidated debt to total capital ratio. At February 29, 2020, the facility fee rate was 0.20%.
A portion of the revolving credit facility, up to a maximum of $50.0, is available for the issuance of letters of credit. In addition, a portion of the revolving credit facility, up to a maximum of $15.0, is available for swingline loans. The Loan Agreement has an accordion feature which permits the Company, provided certain conditions are satisfied, to increase the facility by up to an additional $150.0.

As of February 29, 2020, the Company had no outstanding borrowings under the Loan Agreement. At February 29, 2020, the Company had open standby letters of credit totaling $5.3 issued under certain credit lines, including $0.4 under the Loan Agreement and $4.9 under the domestic credit lines discussed below. The Loan Agreement contains certain covenants, including interest coverage and leverage ratio tests and certain limitations on the amount of dividends and other distributions and the Company was in compliance with these covenants for all periods presented.

Lines of Credit
As of February 29, 2020, the Company’s domestic credit lines available under unsecured money market bid rate credit lines totaled $25.0. There were no outstanding borrowings under these credit lines as of February 29, 2020, May 31, 2019 and February 28, 2019. As of February 29, 2020, availability under these unsecured money market bid rate credit lines totaled $20.1. All loans made under these credit lines are at the sole discretion of the lender and at an interest rate and term agreed to at the time each loan is made, but not to exceed 365 days. These credit lines may be renewed, if requested by the Company, at the option of the lender.

As of February 29, 2020, the Company had various local currency credit lines totaling $25.5 underwritten by banks primarily in the United States, Canada and the United Kingdom. Outstanding borrowings under these facilities were $9.7 at February 29, 2020 at a weighted average interest rate of 4.6%, $7.3 at May 31, 2019 at a weighted average interest rate of 4.1%, and $11.0 at February 28, 2019 at a weighted average interest rate of 4.3%. As of February 29, 2020, the amounts available under these facilities totaled $15.8. 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.

6. 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 exists and the amount of such liability can be reasonably estimated. When only a range can be estimated, the most probable amount in the range is accrued unless no amount within the range is a better estimate than any other amount, in which case the minimum amount in the range is accrued. Legal costs associated with litigation are expensed in the period in which they are incurred. The Company does not expect, in the case of those various claims and lawsuits arising in the normal course of business where a loss is considered probable or reasonably possible, that the reasonably possible losses from such claims and lawsuits (either individually or in the aggregate) would have a material adverse effect on the Company’s consolidated financial position or results of operations.

In the third quarter, the Company entered into settlement agreements related to photo copyright infringement cases. The Company recognized $2.4 in total, of which $1.4 remained accrued as of February 29, 2020.


15

SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)



In the first quarter, based on the status of negotiations, an alleged patent infringement claim settlement became probable and estimable. As such, an accrual of $1.5 was recognized in the Financial Statements in the first quarter of fiscal 2020. The settlement was subsequently concluded in the second quarter of fiscal 2020.

Sales Tax Matters
On June 21, 2018, the U.S. Supreme Court issued its opinion in South Dakota v. Wayfair, Inc. et. al., reversing prior precedent, in particular Quill Corp. v. North Dakota (1992), which held that states could not constitutionally require retailers to collect and remit sales or use taxes in respect to mail order or internet sales made to residents of a state in the absence of the retailer having a physical presence in the taxing state. As a result, the Company now has an obligation, at least on a go forward basis, based on each state's enforcement date, to collect and remit sales and use taxes, primarily in respect to sales made through its school book club channel, as well as certain sales made through its ecommerce internet sites, to residents in states that the Company had not previously remitted sales or use taxes based on having no physical presence in such states. In the majority opinion, several factors were discussed in support of the Court’s reasoning that the collection of sales and use taxes from out-of-state retailers did not constitute an undue burden on interstate commerce, including the fact that South Dakota did not require retroactive application of its statute. However, the question of retroactive application, as well as certain other factors noted in the opinion, are subject to how the states, on a state-by-state basis, interpret and apply the Court’s decision in their implementation of their respective state laws or regulations addressing the collection of sales and use taxes from out-of-state retailers. As a result, the effect of the decision on the Company depends on the positions taken by the states, on a state-by-state basis, relating to the retroactive application of the obligation to collect such taxes, as well as other factors noted in the opinion.

The Company continues to monitor its compliance based on anticipated enforcement dates and an assumption as to each state's likely interpretation and application of the Court's decision. As the Company continues to monitor each state, the staggered enforcement dates, and the progress towards compliance, expenses will be incurred by the Company.

As of February 29, 2020, the Company’s school book club channel remits sales taxes in 44 states and the District of Columbia compared to 38 states and the District of Columbia in the prior fiscal year quarter ended February 28, 2019. The Company remits sales tax to all required states. Any on-going or future litigation with states relating to sales and use taxes could be impacted favorably or unfavorably by legislative action in future fiscal periods.

COVID-19
During and subsequent to the third quarter of the current fiscal year, the novel coronavirus strain, known as COVID-19, continues to spread across the globe at an increasing rate. Measures taken by governmental authorities and private actors to limit the spread of this virus may interfere with the ability of the Company's employees, suppliers, and other business providers to carry out their assigned tasks or supply materials at ordinary levels of performance relative to the conduct of the business which may cause a material curtailment to certain business operations. Moreover, as a large part of the Company's business involves sales of books and other products in schools and school facilities, as well as through school districts, if COVID-19 related measures result in widespr