UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended August 31, | Commission File No. 000-19860 |
SCHOLASTIC CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware | 13-3385513 | |
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(State or other jurisdiction of | (IRS Employer Identification No.) | ||
incorporation or organization) | |||
557 Broadway, New York, New York | 10012 | ||
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (212) 343-6100
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YesxS Noo£
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YesxS Noo£
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | ||
Non-accelerated filer | Smaller reporting company |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso£ NoxS
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.
Title | |||||
| Number of shares outstanding | ||||
of each class | as of August 31, | ||||
Common Stock, $.01 par value |
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Class A Stock, $.01 par value | 1,656,200 |
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SCHOLASTIC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2013
INDEX
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PART I - FINANCIAL INFORMATION
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SCHOLASTIC CORPORATION |
(Dollar amounts in millions, except per share data) |
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| Three months ended |
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| August 31, |
| August 31, |
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| 2012 |
| 2011 |
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Revenues |
| $ | 293.6 |
| $ | 318.0 |
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Operating costs and expenses: |
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Cost of goods sold (exclusive of depreciation and amortization) |
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| 151.1 |
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| 160.4 |
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Selling, general and administrative expenses (exclusive of depreciation and amortization) |
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| 173.9 |
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| 175.7 |
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Depreciation and amortization |
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| 16.1 |
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| 15.1 |
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Total operating costs and expenses |
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| 341.1 |
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| 351.2 |
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Operating income (loss) |
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| (47.5 | ) |
| (33.2 | ) |
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Interest expense, net |
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| (3.7 | ) |
| (3.9 | ) |
Earnings (loss) from continuing operations before income taxes |
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| (51.2 | ) |
| (37.1 | ) |
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Provision (benefit) for income taxes |
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| (19.2 | ) |
| (12.0 | ) |
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Earnings (loss) from continuing operations |
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| (32.0 | ) |
| (25.1 | ) |
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Earnings (loss) from discontinued operations, net of tax |
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| (0.1 | ) |
| (2.0 | ) |
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Net income (loss) |
| $ | (32.1 | ) | $ | (27.1 | ) |
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Basic and diluted earnings (loss) per Share of Class A and Common Stock |
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Basic: |
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Earnings (loss) from continuing operations |
| $ | (1.02 | ) | $ | (0.81 | ) |
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Earnings (loss) from discontinued operations, net of tax |
| $ | (0.00 | ) | $ | (0.06 | ) |
Net income (loss) |
| $ | (1.02 | ) | $ | (0.87 | ) |
Diluted: |
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Earnings (loss) from continuing operations |
| $ | (1.02 | ) | $ | (0.81 | ) |
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Earnings (loss) from discontinued operations, net of tax |
| $ | (0.00 | ) | $ | (0.06 | ) |
Net income (loss) |
| $ | (1.02 | ) | $ | (0.87 | ) |
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Dividends declared per Class A and Common share |
| $ | 0.125 |
| $ | 0.100 |
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See accompanying notes
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| Three months ended |
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| August 31, |
| August 31, |
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| 2012 |
| 2011 |
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Net income (loss) |
| $ | (32.1 | ) | $ | (27.1 | ) |
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Other comprehensive income (loss), net: |
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Foreign currency translation adjustments |
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| 5.1 |
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| 0.5 |
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Pension and post-retirement adjustments: |
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Amortization of prior service cost (credit) |
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| (0.1 | ) |
| (0.1 | ) |
Amortization of unrecognized gain (loss) included in net periodic cost |
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| 1.2 |
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| 1.4 |
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Total other comprehensive income (loss) |
| $ | 6.2 |
| $ | 1.8 |
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Comprehensive income (loss) |
| $ | (25.9 | ) | $ | (25.3 | ) |
See accompanying notes
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See accompanying notes
SCHOLASTIC CORPORATION | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollar amounts in millions, except per share data) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| August 31, 2012 |
| May 31, 2012 |
| August 31, 2011 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
| $ | 193.1 |
| $ | 194.9 |
| $ | 33.7 |
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Accounts receivable, net |
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| 211.6 |
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| 314.1 |
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| 217.1 |
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Inventories, net |
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| 396.4 |
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| 295.3 |
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| 422.8 |
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Deferred income taxes |
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| 71.5 |
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| 71.4 |
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| 56.2 |
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Prepaid expenses and other current assets |
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| 97.7 |
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| 47.2 |
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| 100.3 |
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Current assets of discontinued operations |
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| 7.0 |
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| 7.0 |
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| 9.6 |
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Total current assets |
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| 977.3 |
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| 929.9 |
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| 839.7 |
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Property, plant and equipment, net |
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| 327.3 |
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| 327.2 |
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| 331.3 |
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Prepublication costs |
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| 129.2 |
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| 125.8 |
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| 116.9 |
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Royalty advances, net |
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| 35.4 |
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| 34.8 |
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| 34.6 |
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Production costs |
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| 2.1 |
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| 1.6 |
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| 7.5 |
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Goodwill |
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| 157.7 |
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| 157.7 |
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| 154.2 |
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Other intangibles |
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| 16.4 |
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| 16.7 |
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| 19.4 |
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Noncurrent deferred income taxes |
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| 42.6 |
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| 42.3 |
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| 20.2 |
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Other assets and deferred charges |
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| 34.8 |
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| 34.3 |
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| 35.3 |
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Total assets |
| $ | 1,722.8 |
| $ | 1,670.3 |
| $ | 1,559.1 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current Liabilities: |
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Lines of credit, short-term debt and current portion of long-term debt |
| $ | 0.6 |
| $ | 6.5 |
| $ | 47.4 |
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Capital lease obligations |
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| 0.8 |
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| 1.0 |
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| 0.5 |
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Accounts payable |
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| 211.3 |
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| 119.6 |
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| 181.2 |
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Accrued royalties |
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| 109.1 |
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| 92.7 |
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| 52.7 |
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Deferred revenue |
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| 72.4 |
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| 47.1 |
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| 75.9 |
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Other accrued expenses |
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| 188.1 |
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| 233.5 |
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| 169.7 |
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Current liabilities of discontinued operations |
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| 2.0 |
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| 2.1 |
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| 1.2 |
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Total current liabilities |
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| 584.3 |
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| 502.5 |
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| 528.6 |
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Noncurrent Liabilities: |
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Long-term debt |
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| 152.8 |
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| 152.8 |
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| 152.6 |
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Capital lease obligations |
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| 56.7 |
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| 56.4 |
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| 55.3 |
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Other noncurrent liabilities |
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| 123.3 |
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| 128.3 |
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| 107.5 |
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Total noncurrent liabilities |
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| 332.8 |
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| 337.5 |
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| 315.4 |
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Commitments and Contingencies: |
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| — |
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| — |
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Stockholders’ Equity: |
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Preferred Stock, $1.00 par value |
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| — |
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Class A Stock, $.01 par value |
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| 0.0 |
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| 0.0 |
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| 0.0 |
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Common Stock, $.01 par value |
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| 0.4 |
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| 0.4 |
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| 0.4 |
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Additional paid-in capital |
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| 584.7 |
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| 583.0 |
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| 578.2 |
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Accumulated other comprehensive income (loss) |
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| (68.0 | ) |
| (74.2 | ) |
| (52.1 | ) |
Retained earnings |
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| 687.8 |
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| 723.9 |
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| 605.6 |
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Treasury stock at cost |
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| (399.2 | ) |
| (402.8 | ) |
| (417.0 | ) |
Total stockholders’ equity |
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| 805.7 |
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| 830.3 |
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| 715.1 |
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Total liabilities and stockholders’ equity |
| $ | 1,722.8 |
| $ | 1,670.3 |
| $ | 1,559.1 |
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See accompanying notes
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See accompanying notes
SCHOLASTIC CORPORATION | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollar amounts in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Three months ended |
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| August 31, 2012 |
| August 31, 2011 |
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Cash flows - operating activities: |
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Net income (loss) |
| $ | (32.1 | ) | $ | (27.1 | ) |
Earnings (loss) from discontinued operations, net of tax |
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| (0.1 | ) |
| (2.0 | ) |
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Earnings (loss) from continuing operations |
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| (32.0 | ) |
| (25.1 | ) |
Adjustments to reconcile earnings from continuing operations to net cash provided by (used in) operating activities of continuing operations: |
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Provision for losses on accounts receivable |
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| 0.5 |
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| 1.4 |
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Provision for losses on inventory |
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| 5.4 |
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| 5.9 |
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Provision for losses on royalty advances |
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| 1.3 |
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| 1.2 |
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Amortization of prepublication and production costs |
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| 11.8 |
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| 11.9 |
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Depreciation and amortization |
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| 16.1 |
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| 15.1 |
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Stock-based compensation |
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| 2.0 |
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| 2.2 |
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Non cash net gain on equity investments |
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| (0.5 | ) |
| (0.4 | ) |
Changes in assets and liabilities: |
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Accounts receivable |
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| 106.3 |
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| 2.0 |
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Inventories |
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| (102.9 | ) |
| (121.3 | ) |
Other current assets |
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| (44.6 | ) |
| (24.3 | ) |
Deferred promotion costs |
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| (5.7 | ) |
| (4.3 | ) |
Royalty advances |
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| (1.7 | ) |
| (0.3 | ) |
Accounts payable |
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| 90.1 |
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| 60.7 |
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Other accrued expenses |
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| (46.9 | ) |
| (18.3 | ) |
Accrued royalties |
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| 15.8 |
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| 17.3 |
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Deferred revenue |
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| 25.1 |
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| 26.8 |
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Pension and post-retirement liability |
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| (3.2 | ) |
| (0.7 | ) |
Other noncurrent liability |
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| (0.9 | ) |
| (0.4 | ) |
Other, net |
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| (1.6 | ) |
| 1.0 |
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Total adjustments |
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| 66.4 |
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| (24.5 | ) |
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Net cash provided by (used in) operating activities of continuing operations |
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| 34.4 |
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| (49.6 | ) |
Net cash provided by (used in) operating activities of discontinued operations |
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| (0.2 | ) |
| 0.3 |
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Net cash provided by (used in) operating activities |
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| 34.2 |
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| (49.3 | ) |
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Cash flows - investing activities: |
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Prepublication and production expenditures |
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| (15.7 | ) |
| (11.5 | ) |
Additions to property, plant and equipment |
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| (14.5 | ) |
| (7.2 | ) |
Other |
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| (0.1 | ) |
| — |
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Net cash provided by (used in) investing activities of continuing operations |
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| (30.3 | ) |
| (18.7 | ) |
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Net cash provided by (used in) investing activities |
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| (30.3 | ) |
| (18.7 | ) |
See accompanying notes
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See accompanying notes
SCHOLASTIC CORPORATION | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollar amounts in millions) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Three months ended |
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| August 31, 2012 |
| August 31, 2011 |
| ||
Cash flows - financing activities: |
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|
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|
|
|
Repayment of term loan |
|
| — |
|
| (10.7 | ) |
Borrowings under lines of credit |
|
| 5.0 |
|
| 18.5 |
|
Repayment of lines of credit |
|
| (10.8 | ) |
| (9.6 | ) |
Repayment of capital lease obligations |
|
| (0.3 | ) |
| (0.1 | ) |
Proceeds pursuant to stock-based compensation plans |
|
| 2.8 |
|
| 1.3 |
|
Payment of dividends |
|
| (4.0 | ) |
| (3.1 | ) |
Other |
|
| 0.6 |
|
| (0.3 | ) |
|
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Net cash provided by (used in) financing activities of continuing operations |
|
| (6.7 | ) |
| (4.0 | ) |
|
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|
Net cash provided by (used in) financing activities |
|
| (6.7 | ) |
| (4.0 | ) |
Effect of exchange rate changes on cash and cash equivalents |
|
| 1.0 |
|
| 0.4 |
|
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Net increase (decrease) in cash and cash equivalents |
|
| (1.8 | ) |
| (71.6 | ) |
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Cash and cash equivalents at beginning of period |
|
| 194.9 |
|
| 105.3 |
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Cash and cash equivalents at end of period |
| $ | 193.1 |
| $ | 33.7 |
|
See accompanying notes
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See accompanying notes
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollar amounts in millions, except per share data) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
1. Basis of Presentation
Principles of consolidation
The accompanying condensed consolidated financial statements include the accounts of Scholastic Corporation (the “Corporation”) and all wholly-owned and majority-owned subsidiaries (collectively, “Scholastic” or the “Company”). Intercompany transactions are eliminated in consolidation. These financial statements have not been audited but reflect those adjustments consisting of normal recurring items that management considers necessary for a fair presentation of financial position, results of operations and cash flows. These financial statements should be read in conjunction with the consolidated financial statements and related notes in the Annual Report on Form 10-K for the fiscal year ended May 31, 2012 (the “Annual Report”).
The Company’s fiscal year is not a calendar year. Accordingly, references in this document to fiscal 2012 relate to the twelve-month period ended May 31, 2012.
Segment
The Company determined that a software business previously reported in theMedia, Licensing and Advertising segment should be reported in theChildren’s Book Publishing and Distribution segment consistent with changes in the Company’s internal reporting structure. All prior periods reflect this change.
Other Comprehensive Income (Loss)
The Company reported net amortization expense of prior service and gains and losses for pension and post-retirement benefit plans in Selling, general and administrative expenses of $1.1 and $1.3 for the three months ended August 31, 2012 and 2011, respectively. These amounts had previously been recognized as a component of accumulated other comprehensive income.
Discontinued Operations
The Company closed or sold several operations during fiscal 2009, fiscal 2010 and fiscal 2012, and presently holds for sale one facility. All of these businesses are classified as discontinued operations in the Company’s financial statements. See Note 2, “Discontinued Operations,” for additional information.
Seasonality
The Company’s school-based book clubs, school-based book fairs and most of its magazines operate on a school-year basis; therefore, the Company’s business is highly seasonal. As a result, the Company’s revenues in the first and third quarters of the fiscal year generally are lower than its revenues in the other two fiscal quarters. Typically, school-based book club and book fair revenues are greatest in the second and fourth quarters of the fiscal year, while revenues from the sale of instructional materials and educational technology products and services are highest in the first and fourth quarters. The Company generally experiences a loss from operations in the first and third quarters of each fiscal year.
Use of estimates
1. Basis of Presentation
Principles of consolidation
The accompanying condensed consolidated financial statements include the accounts of Scholastic Corporation (the “Corporation”) and all wholly-owned and majority-owned subsidiaries (collectively, “Scholastic” or the “Company”). Intercompany transactions are eliminated in consolidation. These financial statements have not been audited but reflect those adjustments consisting of normal recurring items that management considers necessary for a fair presentation of financial position, results of operations and cash flows. These financial statements should be read in conjunction with the consolidated financial statements and related notes in the Annual Report on Form 10-K for the fiscal year ended May 31, 2013 (the “Annual Report”).
The Company’s fiscal year is not a calendar year. Accordingly, references in this document to fiscal 2013 relate to the twelve-month period ended May 31, 2013.
Reclassifications
Certain reclassifications have been made to conform to the current year presentation.
Discontinued Operations
The Company closed or sold several operations during fiscal 2012 and fiscal 2013. All of these businesses are classified as discontinued operations in the Company’s financial statements. See Note 2, “Discontinued Operations,” for additional information.
Seasonality
The Company’sChildren’s Book Publishing and Distribution school-based channels and most of its magazines operate on a school-year basis; therefore, the Company’s business is highly seasonal. As a result, the Company’s revenues in the first and third quarters of the fiscal year generally are lower than its revenues in the other two fiscal quarters. Typically these school-based channel revenues are greatest in the second and fourth quarters of the fiscal year, while revenues from the sale of instructional materials and educational technology products and services are highest in the first and fourth quarters. The Company generally experiences a loss from operations in the first and third quarters of each fiscal year.
Use of estimates
The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Regulation S-X. The preparation of these financial statements involves the use of estimates and assumptions by management, which affects the amounts reported in the condensed consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience, current business factors, and various other assumptions believed to be reasonable under the circumstances, all of which are necessary in order to form a basis for determining the carrying values of assets and liabilities. Actual results may differ from those estimates and assumptions. On an on-going basis, the Company evaluates the adequacy of its reserves and the estimates used in calculations,
8 |
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
including, but not limited to:
| Restricted Cash
| |||||||||||||||||||||||||||
The condensed consolidated balance sheets include restricted cash of $0.2, $1.0 and $0.8 at August 31, 2013, May 31, 2013 and August 31, 2012, respectively, which is reported in “Other current assets.”
|
|
In July 2013, the Financial Accounting Standards Board (the “FASB”) issued an update to the authoritative guidance related to the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists to address diversity in practice in the presentation of unrecognized tax benefits. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and
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Restricted Cash
The condensed consolidated balance sheets include restricted cash of $0.8, $1.0 and $0.2 at August 31, 2012, May 31, 2012 and August 31, 2011, respectively, which is reported in “Other current assets.”
New Accounting Pronouncements
In July 2012, the FASB issued an update to the authoritative guidance related to the impairment testing of indefinite-lived intangible assets. Similar to the guidance for goodwill impairment testing, companies will have the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying value. The guidance provides companies with a revised list of examples of events and circumstances to consider, in their totality, to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount. If a company concludes that this is the case, the company is required to perform the quantitative impairment test by comparing the fair value with the carrying value. Otherwise, a company can skip the quantitative test. Companies are not required to perform the qualitative assessment and are permitted to skip the qualitative assessment for any indefinite-lived asset in any period and proceed directly to the quantitative impairment test. The company may resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued. The Company is evaluating the impact of this update on its consolidated financial position and results of operations.
In June 2011, the FASB issued an update related to the reporting of other comprehensive income. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments also require the presentation on the face of the financial statements of reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where the components of net income and the components of other comprehensive income are presented. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. In December 2011, the FASB issued an update that effectively deferred the requirements related to the presentation of reclassification adjustments out of accumulated other comprehensive income. The amendments will be temporary to allow the FASB time to re-deliberate the presentation requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements for public, private and non-profit entities. The Company adopted this update during the current fiscal quarter and has presented a separate statement of comprehensive income.
SCHOLASTIC CORPORATION |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED |
(Dollar amounts in millions, except per share data) |
2. Discontinued Operations
The Company continuously evaluates its portfolio of businesses for both impairment and economic viability. The Company monitors the expected cash proceeds to be realized from the disposition of discontinued operations’ assets, and adjusts asset values accordingly.
The following table summarizes the operating results of the discontinued operations for the periods indicated:
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| Three months ended |
| ||||
|
| August 31, |
| August 31, |
| ||
Revenues |
| $ | 0.0 |
| $ | 0.1 |
|
Non-cash impairment |
|
| — |
|
| 0.9 |
|
Earnings (loss) before income taxes |
|
| (0.1 | ) |
| (2.6 | ) |
Income tax benefit (expense) |
|
| 0.0 |
|
| 0.6 |
|
Earnings (loss) from discontinued operations, net of tax |
| $ | (0.1 | ) | $ | (2.0 | ) |
The following table sets forth the assets and liabilities of the discontinued operations included in the condensed consolidated balance sheets of the Company as of the dates indicated:
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| August 31, 2012 |
| May 31, 2012 |
| August 31, 2011 |
| |||||||||
Accounts receivable, net |
|
| $ | 0.0 |
|
|
| $ | 0.0 |
|
|
| $ | 0.1 |
|
|
Inventories, net |
|
|
| 0.0 |
|
|
|
| 0.0 |
|
|
|
| 0.3 |
|
|
Other assets |
|
|
| 7.0 |
|
|
|
| 7.0 |
|
|
|
| 9.2 |
|
|
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Current assets of discontinued operations |
|
| $ | 7.0 |
|
|
| $ | 7.0 |
|
|
| $ | 9.6 |
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Accounts payable |
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| $ | 0.0 |
|
|
| $ | 0.0 |
|
|
| $ | 0.1 |
|
|
Accrued expenses and other current liabilities |
|
|
| 2.0 |
|
|
|
| 2.1 |
|
|
|
| 1.1 |
|
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Current liabilities of discontinued operations |
|
| $ | 2.0 |
|
|
| $ | 2.1 |
|
|
| $ | 1.2 |
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2. Discontinued Operations
The Company continuously evaluates its portfolio of businesses for both impairment and economic viability. The Company monitors the expected cash proceeds to be realized from the disposition of discontinued operations’ assets, and adjusts asset values accordingly. The following table summarizes the operating results of the discontinued operations for the periods indicated:
The following table sets forth the assets and liabilities of the discontinued operations included in the condensed consolidated balance sheets of the Company as of the dates indicated:
SCHOLASTIC CORPORATION | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollar amounts in millions, except per share data) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
3. Segment Information
3. Segment Information
The Company categorizes its businesses into five reportable segments:Children’s Book Publishing and Distribution; Educational Technology and Services; Classroom and Supplemental Materials Publishing; Media, Licensing and Advertising;and International. This classification reflects the nature of products and services consistent with the method by which the Company’s chief operating decision-maker assesses operating performance and allocates resources.
| Children’s Book Publishing and | ||||||||||||
| Distribution; Educational Technology and | ||||||||||||
| Services; Classroom and Supplemental Materials | ||||||||||||
| Publishing; Media, Licensing and | ||||||||||||
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SCHOLASTIC CORPORATION | |||||||||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED | |||||||||||||
(Dollar amounts in millions, except per share data) | |||||||||||||
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| Children’s |
| Educational |
| Class room and |
| Media, |
| Overhead(1)(4) |
| Total |
| International(1)(5) |
| Total |
| ||||||||
Three months ended |
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August 31, 2012 |
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Revenues |
| $ | 71.1 |
| $ | 80.0 |
| $ | 37.9 |
| $ | 14.4 |
| $ | — |
| $ | 203.4 |
| $ | 90.2 |
| $ | 293.6 |
|
Bad debt expense |
|
| (0.2 | ) |
| 0.3 |
|
| (0.2 | ) |
| 0.0 |
|
| — |
|
| (0.1 | ) |
| 0.6 |
|
| 0.5 |
|
Depreciation and |
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|
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amortization(6) |
|
| 3.8 |
|
| 0.3 |
|
| 0.4 |
|
| 0.1 |
|
| 10.3 |
|
| 14.9 |
|
| 1.2 |
|
| 16.1 |
|
Amortization(7) |
|
| 3.5 |
|
| 5.5 |
|
| 1.7 |
|
| 0.5 |
|
| — |
|
| 11.2 |
|
| 0.6 |
|
| 11.8 |
|
Segment operating income (loss) |
|
| (55.2 | ) |
| 24.8 |
|
| (2.6 | ) |
| 0.0 |
|
| (17.3 | ) |
| (50.3 | ) |
| 2.8 |
|
| (47.5 | ) |
Segment assets at 8/31/12 |
|
| 526.4 |
|
| 219.6 |
|
| 171.4 |
|
| 41.5 |
|
| 441.4 |
|
| 1,400.3 |
|
| 315.5 |
|
| 1,715.8 |
|
Goodwill at 8/31/12 |
|
| 54.3 |
|
| 22.7 |
|
| 65.4 |
|
| 5.4 |
|
| — |
|
| 147.8 |
|
| 9.9 |
|
| 157.7 |
|
Expenditures for long-lived assets including royalty advances |
|
| 15.1 |
|
| 8.2 |
|
| 1.8 |
|
| 2.0 |
|
| 7.5 |
|
| 34.6 |
|
| 2.4 |
|
| 37.0 |
|
Long-lived assets at 8/31/12 |
|
| 170.1 |
|
| 103.3 |
|
| 90.0 |
|
| 13.1 |
|
| 244.0 |
|
| 620.5 |
|
| 68.8 |
|
| 689.3 |
|
|
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|
Three months ended |
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August 31, 2011 |
|
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Revenues |
| $ | 77.5 |
| $ | 96.6 |
| $ | 45.7 |
| $ | 10.5 |
| $ | — |
| $ | 230.3 |
| $ | 87.7 |
| $ | 318.0 |
|
Bad debt expense |
|
| — |
|
| 0.3 |
|
| 0.4 |
|
| — |
|
| — |
|
| 0.7 |
|
| 0.7 |
|
| 1.4 |
|
Depreciation and amortization(6) |
|
| 3.7 |
|
| 0.3 |
|
| 0.3 |
|
| 0.1 |
|
| 9.2 |
|
| 13.6 |
|
| 1.5 |
|
| 15.1 |
|
Amortization(7) |
|
| 3.1 |
|
| 5.2 |
|
| 1.4 |
|
| 1.5 |
|
| — |
|
| 11.2 |
|
| 0.7 |
|
| 11.9 |
|
Segment operating income (loss) |
|
| (50.2 | ) |
| 38.8 |
|
| 2.1 |
|
| (4.6 | ) |
| (19.2 | ) |
| (33.1 | ) |
| (0.1 | ) |
| (33.2 | ) |
Segment assets at 8/31/11 |
|
| 506.5 |
|
| 185.8 |
|
| 149.8 |
|
| 40.6 |
|
| 396.6 |
|
| 1,279.3 |
|
| 270.2 |
|
| 1,549.5 |
|
Goodwill at 8/31/11 |
|
| 54.3 |
|
| 21.9 |
|
| 64.0 |
|
| 5.4 |
|
| — |
|
| 145.6 |
|
| 8.6 |
|
| 154.2 |
|
Expenditures for long-lived assets including royalty advances |
|
| 8.2 |
|
| 5.3 |
|
| 1.3 |
|
| 1.9 |
|
| 5.0 |
|
| 21.7 |
|
| 2.3 |
|
| 24.0 |
|
Long-lived assets at 8/31/11 |
|
| 172.5 |
|
| 97.1 |
|
| 79.7 |
|
| 20.2 |
|
| 244.6 |
|
| 614.1 |
|
| 71.0 |
|
| 685.1 |
|
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SCHOLASTIC CORPORATION | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollar amounts in millions, except per share data) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Carrying Value | Fair Value | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||
August 31, 2013 | May 31, 2013 | August 31, 2012 | ||||||||||||||||||||||
Unsecured lines of credit (weighted average interest rates of 3.6%, 9.0% and 4.9%, respectively) | $ | 14.2 | $ | 14.2 | $ | 2.0 | $ | 2.0 | $ | 0.6 | $ | 0.6 | ||||||||||||
Loan Agreement: | ||||||||||||||||||||||||
Revolving Loan (interest rates of 1.4%, n/a and n/a, respectively) | 15.0 | 15.0 | — | — | — | — | ||||||||||||||||||
Term Loan | — | — | — | — | — | — | ||||||||||||||||||
5% Notes due 2013, net of discount | — | — | — | — | 152.8 | 153.6 | ||||||||||||||||||
Total debt | $ | 29.2 | $ | 29.2 | $ | 2.0 | $ | 2.0 | $ | 153.4 | $ | 154.2 | ||||||||||||
Less lines of credit, short-term debt and current portion of long-term debt | (29.2 | ) | (29.2 | ) | (2.0 | ) | (2.0 | ) | (0.6 | ) | (0.6 | ) | ||||||||||||
Total long-term debt | $ | — | $ | — | $ | — | $ | — | $ | 152.8 | $ | 153.6 |
13 |
(4)
Overhead includes all domestic corporate amounts not allocated to segments, including expenses and costs related to the management of corporate assets. Unallocated assets are principally comprised of deferred income taxes and property, plant and equipment related to the Company’s headquarters in the metropolitan New York area, its fulfillment and distribution facilities located in Missouri and its facility located in Connecticut. Overhead also includes amounts previously allocated to the Media, Licensing and Advertising segment for the Company’s direct-to-home toy catalog business that was discontinued in the first quarter of fiscal 2012.
(5)
Includes assets and results of operations acquired in a business acquisition as of January 3, 2012.
(6)
Includes depreciation of property, plant and equipment and amortization of intangible assets.
(7)
Includes amortization of prepublication and production costs.
4. Debt
The following table summarizes debt as of the dates indicated:
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| Carrying |
| Fair Value |
| Carrying |
| Fair Value |
| Carrying |
| Fair Value |
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| August 31, 2012 |
| May 31, 2012 |
| August 31, 2011 |
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Lines of Credit (weighted average interest rates of |
| $ | 0.6 |
| $ | 0.6 |
| $ | 6.5 |
| $ | 6.5 |
| $ | 7.9 |
| $ | 7.9 |
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Loan Agreement: |
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Revolving Loan |
|
| — |
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| — |
|
| — |
|
| — |
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| — |
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| — |
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Term Loan (interest rates of n/a, n/a |
|
| — |
|
| — |
|
| — |
|
| — |
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| 39.5 |
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| 39.5 |
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5% Notes due 2013, net of discount |
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| 152.8 |
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| 153.6 |
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| 152.8 |
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| 155.4 |
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| 152.6 |
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| 153.0 |
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Total debt |
| $ | 153.4 |
| $ | 154.2 |
| $ | 159.3 |
| $ | 161.9 |
| $ | 200.0 |
| $ | 200.4 |
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Less lines of credit, short-term debt and current |
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| (0.6 | ) |
| (0.6 | ) |
| (6.5 | ) |
| (6.5 | ) |
| (47.4 | ) |
| (47.4 | ) |
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Total long-term debt |
| $ | 152.8 |
| $ | 153.6 |
| $ | 152.8 |
| $ | 155.4 |
| $ | 152.6 |
| $ | 153.0 |
|
SCHOLASTIC CORPORATION |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED |
(Dollar amounts in millions, except per share data) |
Short-term debt’s
The carrying value approximates fair value. Fair value of the Company’s short-term debt approximates its fair value.
The following table sets forth the maturities of the Company’s debt obligations as of August 31, 2013, for the twelve-month period ending August 31,
2014 | $ | 29.2 | ||
2015 | — | |||
Total debt | $ | 29.2 |
Loan Agreement
Scholastic Corporation and Scholastic Inc. (each, a “Borrower” and together, the “Borrowers”) are parties to a $425.0 credit facility with certain banks (as amended, the “Loan Agreement”), which allows the Company to borrow, repay or prepay and reborrow at any time prior to the December 5, 2017 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 approximates its carrying value due to its variable interest rate and consistent credit rating. Fair values of the Notes were estimated based on market quotes, where available, or dealer quotes.
The following table sets forth the maturities of the Company’s debt obligations as of August 31, 2012, for the twelve-month periods ending August 31,
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2013 |
| $ | 0.6 |
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2014 |
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| 152.8 |
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Total debt |
| $ | 153.4 |
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Loan Agreement
On June 1, 2007, Scholastic Corporation and Scholastic Inc. (each, a “Borrower” and together, the “Borrowers”) entered into a $525.0 credit facility with certain banks (the “Loan Agreement”), consisting of a $325.0 revolving credit component (the “Revolving Loan”) and a $200.0 amortizing term loan component (the “Term Loan”). The Loan Agreement was amended on August 16, 2010, and again on October 25, 2011. The October 25, 2011 amendment extended the maturity of the Revolving Loan facility to June 1, 2014 from June 1, 2012 and provided for the repayment of the outstanding balance of the Term Loan on October 25, 2011.
The $325.0 Revolving Loan allows the Company to borrow, repay or prepay and reborrow at any time prior to the stated maturity date, and the proceeds may be used for general corporate purposes, including financing for acquisitions and share repurchases. The Loan Agreement also provides for an increase in the aggregate Revolving Loan commitments of the lenders of up to an additional $150.0.
Interest on the Revolving Loan is due and payable in arrears on the last day of the interest period (defined as the period commencing on the date of the advance and ending on the last day of the period selected by the Borrower at the time each advance is made). The interest pricing under the Revolving Loan is dependent upon the Borrower’s election of a rate that is either:
- or -
As of August 31, 2013, the indicated spread on Base Rate Advances was 0.18% and the indicated spread on Eurodollar Rate Advances was 1.18%, both based on the Company’s prevailing consolidated debt to total capital ratio. | ||||||||||
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As of August 31, 2012, the indicated spread on Base Rate Advances was 0.18% and the indicated spread on Eurodollar Rate Advances was 1.18%, both based on the Company’s prevailing consolidated debt to total capital ratio. There were no Revolving Loan Advances outstanding on August 31, 2012.
The Loan Agreement also provides for the payment of a facility fee ranging from 0.20% to 0.40% per annum based upon the Company’s prevailing consolidated debt to total capital ratio. At August 31, 2012, the facility fee rate was 0.20%.
At August 31, 2012, the Company had open standby letters of credit totaling $6.6, including $1.4 under the Loan Agreement.
The Loan Agreement contains certain covenants, including interest coverage and leverage ratio tests and certain limitations on the amount of dividends and other distributions, and at August 31, 2012,
There were outstanding borrowings totaling $15.0 under the Loan Agreement as of August 31, 2013.
The Company had open standby letters of credit totaling $6.6, including $1.4 under the Loan Agreementas of August 31, 2013.
The Loan Agreement contains certain covenants, including interest coverage and leverage ratio tests and certain limitations on the amount of dividends and other distributions, and at August 31, 2013, the Company was in compliance with these covenants.
14 |
SCHOLASTIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
(Dollar amounts in millions, except per share data)
Lines of Credit
As of August 31, 2012, the Company’s domestic credit lines available under unsecured money market bid rate credit lines totaled $20.0. There were no outstanding borrowings under these credit lines at August 31, 2012, May 31, 2012 and August 31, 2011. All loans made under these credit lines are at the sole discretion of the lender and at an interest rate and term agreed to at the time each loan is made, but not to exceed 365 days. These credit lines may be renewed, if requested by the Company, at the option of the lender.
As of August 31, 2012, the Company had various local currency credit lines, with maximum available borrowings in amounts equivalent to $33.8, underwritten by banks primarily in the United States, Canada, Australia and the United Kingdom. These credit lines are typically available for overdraft borrowings or loans up to 364 days and may be renewed, if requested by the Company, at the sole option of the lender. Borrowings and weighted average interest rates for these lines of credit are presented in the table above.
5% Notes due 2013
In April 2003, Scholastic Corporation issued $175.0 of 5% Notes (the “5% Notes”). The 5% Notes are senior unsecured obligations that mature on April 15, 2013. Interest on the 5% Notes is payable semi-annually on April 15 and October 15 of each year through maturity. The Company may at any time redeem all or a portion of the 5% Notes at a redemption price (plus accrued interest to the date of the redemption) equal to the greater of (i) 100% of the principal amount, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest discounted to the date of redemption.
As noted above under “Loan Agreement,” the Company amended the terms of the Revolving Loan to extend the maturity date from June 1, 2012 to June 1, 2014. The Company has the ability to use a portion of this credit facility to fully redeem the 5% Notes due 2013 and intends to draw on this credit facility for this purpose. Accordingly, the balance of the 5% Notes is excluded from current liabilities and classified as long-term debt on the Company’s condensed consolidated balance sheet at August 31, 2012 and May 31, 2012.
5. Commitments and Contingencies
Various claims and lawsuits arising in the normal course of business are pending against the Company. The Company accrues a liability for such matters when it is probable that a liability has occurred and the amount of such liability can be reasonably estimated. When only a range can be estimated, the most probable amount in the range is accrued unless no amount within the range is a better estimate than any other amount, in which case the minimum amount in the range is accrued. Legal costs associated with litigation loss contingencies are expensed in the period in which they are incurred. The Company does not expect, in the case of those various claims and lawsuits arising in the normal course of business where a loss is considered probable or reasonably possible, that the reasonably possible losses from such claims and lawsuits (either individually or in the aggregate) would have a material adverse effect on the Company’s consolidated financial position or results of operations.
Grolier Limited is an indirect subsidiary of Scholastic Corporation, located in the United Kingdom, which ceased operations in fiscal 2008 and the operations of which are included in discontinued operations. The Company is currently in the process of settling a Grolier Limited pension plan in effect at the time it ceased operations and is evaluating the potential pension liabilities under the plan relating to the status of the plan as a defined contribution or a defined benefit plan in the context of the conversion of the plan from a defined benefit to a defined contribution plan in 1986. The Company is not in a position to estimate a range of the reasonably possible liability at this time.
| ||
Lines of Credit
As of August 31, 2013, the Company’s domestic credit lines available under unsecured money market bid rate credit lines totaled $13.9. As of August 31, 2013, borrowings under these credit lines totaled $5.9. There were no outstanding borrowings under these credit lines at May 31, 2013 and August 31, 2012. All loans made under these credit lines are at the sole discretion of the lender and at an interest rate and term agreed to at the time each loan is made, but not to exceed 365 days. These credit lines may be renewed, if requested by the Company, at the option of the lender. As of August 31, 2013, the Company had various local currency credit lines, with maximum available borrowings in amounts equivalent to $30.0, underwritten by banks primarily in the United States, Canada and the United Kingdom. These credit lines are typically available for overdraft borrowings or loans up to 364 days and may be renewed, if requested by the Company, at the sole option of the lender. Outstanding borrowings under these lines of credit totaled $8.3, $2.0 and $0.6 at August 31, 2013, May 31, 2013 and August 31, 2012, respectively. 5. Commitments and Contingencies Various claims and lawsuits arising in the normal course of business are pending against the Company. The Company accrues a liability for such matters when it is probable that a liability has occurred and the amount of such liability can be reasonably estimated. When only a range can be estimated, the most probable amount in the range is accrued unless no amount within the range is a better estimate than any other amount, in which case the minimum amount in the range is accrued. Legal costs associated with litigation loss contingencies are expensed in the period in which they are incurred. The Company does not expect, in the case of those various claims and lawsuits arising in the normal course of business where a loss is considered probable or reasonably possible, that the reasonably possible losses from such claims and lawsuits (either individually or in the aggregate) would have a material adverse effect on the Company’s consolidated financial position or results of operations. Grolier Limited is an indirect subsidiary of Scholastic Corporation, located in the United Kingdom, which ceased operations in fiscal 2008 and the operations of which are included in discontinued operations. The Company is currently in the process of settling a Grolier Limited pension plan in effect at the time it ceased operations and is evaluating the potential pension liabilities under the plan relating to the status of the plan as a defined contribution or a defined benefit plan in the context of the conversion of the plan from a defined benefit to a defined contribution plan in 1986. Based on the information currently available to it, the Company does not expect to incur any additional material liability in resolving this issue and settling the plan.
SCHOLASTIC CORPORATION | ||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED | ||
(Dollar amounts in millions, except per share data) | ||
6. Earnings (Loss) Per Share
6. Earnings (Loss) Per Share
The following table summarizes the reconciliation of the numerators and denominators for the basic and diluted earnings (loss) per share computation for the three-month periods ended August 31, 2013 and 2012, respectively:
Three months ended | ||||||||
August 31, 2013 | August 31, 2012 | |||||||
Earnings (loss) from continuing operations attributable to Class A and Common Shares | $ | (30.1 | ) | $ | (31.7 | ) | ||
Earnings (loss) from discontinued operations attributable to Class A and Common Shares, net of tax | 0.2 | (0.4 | ) | |||||
Net income (loss) attributable to Class A and Common Shares | $ | (29.9 | ) | $ | (32.1 | ) | ||
Weighted average Shares of Class A Stock and Common Stock outstanding for basic earnings (loss) per share (in millions) | 31.8 | 31.5 | ||||||
Dilutive effect of Class A Stock and Common Stock potentially issuable pursuant to stock-based compensation plans (in millions) | * | * | ||||||
Adjusted weighted average Shares of Class A Stock and Common Stock outstanding for diluted earnings (loss) per share (in millions) | * | * | ||||||
Earnings (loss) per share of Class A Stock and Common Stock: | ||||||||
Basic earnings (loss) per share: | ||||||||
Earnings (loss) from continuing operations | $ | (0.94 | ) | $ | (1.01 | ) | ||
Earnings (loss) from discontinued operations, net of tax | $ | 0.00 | $ | (0.01 | ) | |||
Net income (loss) | $ | (0.94 | ) | $ | (1.02 | ) | ||
Diluted earnings (loss) per share: | ||||||||
Earnings (loss) from continuing operations | $ | (0.94 | ) | $ | (1.01 | ) | ||
Earnings (loss) from discontinued operations, net of tax | $ | 0.00 | $ | (0.01 | ) | |||
Net income (loss) | $ | (0.94 | ) | $ | (1.02 | ) |
* In each of the three month periods ended August 31, 2013 and 2012, and 2011, respectively:
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| Three months ended |
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| August 31, 2012 |
| August 31, 2011 |
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Earnings (loss) from continuing operations attributable to Class A and Common Shares |
| $ | (31.9 | ) | $ | (25.0 | ) |
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Earnings (loss) from discontinued operations attributable to Class A and Common Shares, net of tax |
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| (0.1 | ) |
| (2.0 | ) |
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Net income (loss) attributable to Class A and Common Shares |
| $ | (32.0 | ) | $ | (27.0 | ) |
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Weighted average Shares of Class A Stock and Common Stock outstanding for basic earnings (loss) per share (in millions) |
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| 31.5 |
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| 31.0 |
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Dilutive effect of Class A Stock and Common Stock potentially issuable pursuant to stock-based compensation plans (in millions) |
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| * |
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| * |
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Adjusted weighted average Shares of Class A Stock and Common Stock outstanding for diluted earnings (loss) per share (in millions) |
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| * |
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| * |
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Earnings (loss) per share of Class A Stock and Common Stock: |
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Basic earnings (loss) per share: |
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Earnings (loss) from continuing operations |
| $ | (1.02 | ) | $ | (0.81 | ) |
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Earnings (loss) from discontinued operations, net of tax |
| $ | (0.00 | ) | $ | (0.06 | ) |
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Net income (loss) |
| $ | (1.02 | ) | $ | (0.87 | ) |
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Diluted earnings (loss) per share: |
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Earnings (loss) from continuing operations |
| $ | (1.02 | ) | $ | (0.81 | ) |
|
|
|
|
|
|
|
|
Earnings (loss) from discontinued operations, net of tax |
| $ | (0.00 | ) | $ | (0.06 | ) |
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | (1.02 | ) | $ | (0.87 | ) |
* In the three months ended August 31, 2012 and 2011, the Company experienced a loss from continuing operations and therefore did not report any dilutive share impact.
| ||||
SCHOLASTIC CORPORATION | ||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED | ||||
(Dollar amounts in millions, except per share data) | ||||
In periods of Net loss, dilutive earnings per share are not reported as the effect of the potentially dilutive shares becomes anti-dilutive.
In a period in which the Company reports a discontinued operation, Earnings (loss) from continuing operations is used as the “control number” in determining whether potentially dilutive common shares are dilutive or anti-dilutive.
A portion of the Company’s restricted stock units (“RSUs”) which are granted to employees participate in earnings through cumulative non-forfeitable dividends payable to the employees upon vesting of the RSUs. Accordingly, the Company measures earnings per share based upon the two-class method.
Loss from continuing operations exclude losses of less than $0.1 for the three months ended August 31, 2012 and 2011, respectively, for earnings attributable to participating RSUs.
Potentially dilutive shares outstanding pursuant to compensation plans that were not included in the diluted earnings per share calculation because they were anti-dilutive were 2.8 million and 4.5 million for the three months ended August 31, 2012 and 2011, respectively. Options outstanding pursuant to compensation plans were 5.1 million and 6.0 million as of August 31, 2012 and 2011, respectively.
As of August 31, 2012, $31.4 remains available for future purchases of common shares under the current repurchase authorization of the Board of Directors. See Note 12, “Treasury Stock,” for a more complete description of the Company’s share buy-back program.
7. Goodwill and Other Intangibles
Goodwill and other intangible assets with indefinite lives are reviewed annually for impairment or more frequently if impairment indicators arise.
The following table summarizes the activity in Goodwill for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Twelve months ended |
| Three months ended |
| |||
|
| August 31, 2012 |
| May 31, 2012 |
| August 31, 2011 |
| |||
Gross beginning balance |
| $ | 178.5 |
| $ | 175.0 |
| $ | 175.0 |
|
Accumulated impairment |
|
| (20.8 | ) |
| (20.8 | ) |
| (20.8 | ) |
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
| $ | 157.7 |
| $ | 154.2 |
| $ | 154.2 |
|
Additions due to acquisition |
|
| — |
|
| 2.7 |
|
| — |
|
Impairment charge |
|
| — |
|
| — |
|
| — |
|
Foreign currency translation |
|
| 0.0 |
|
| 0.0 |
|
| 0.0 |
|
Other |
|
| — |
|
| 0.8 |
|
| — |
|
Gross ending balance |
| $ | 178.5 |
| $ | 178.5 |
| $ | 175.0 |
|
Accumulated impairment |
|
| (20.8 | ) |
| (20.8 | ) |
| (20.8 | ) |
Ending balance |
| $ | 157.7 |
| $ | 157.7 |
| $ | 154.2 |
|
On February 8, 2012, the Company acquired the business and certain assets of Weekly Reader, a publisher of weekly educational classroom magazines designed for children in grades Pre-K–12, for $2.0 in cash and $4.8 in assumed liabilities, which have been fulfilled by the Company. The Company utilized internally-developed discounted cash flow forecasts and market comparisons of royalty rates to determine the fair value of the assets acquired and the amount to be allocated to goodwill. As a result, the Company recognized $1.4 of goodwill and $5.4 of intangible assets. The results of operations of this business subsequent to the acquisition date are included in theClassroom and Supplemental Materials Publishingsegment, and certain assets will benefit theChildren’s Book Publishing and Distribution segment.
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The following table sets forth Options outstanding pursuant to stock-based compensation plans as of the dates indicated:
In periods of Net loss, dilutive earnings per share are not reported as the effect of the potentially dilutive shares becomes anti-dilutive. In a period in which the Company reports a discontinued operation, Earnings (loss) from continuing operations is used as the “control number” in determining whether potentially dilutive common shares are dilutive or anti-dilutive. A portion of the Company’s restricted stock units (“RSUs”) which are granted to employees participate in earnings through cumulative non-forfeitable dividends payable to the employees upon vesting of the RSUs. Accordingly, the Company measures earnings per share based upon the lower of the Two-class method or the Treasury Stock method. Since, under the Two-class method, losses are not allocated to the participating securities, in periods of loss the Two-class method is not applicable. As of August 31, 2013, $19.0 remains available for future purchases of common shares under the current repurchase authorization of the Board of Directors. See Note 12, “Treasury Stock,” for amore complete description of the Company’s share buy-back program. 7. Goodwill and Other Intangibles Goodwill and other intangible assets with indefinite lives are reviewed annually for impairment or more frequently if impairment indicators arise. The Company assesses goodwill annually or more frequently if impairment indicators are such that the goodwill is more likely than not impaired. The Company continues to monitor impairment indicators in light of reduced earnings, changes in market conditions, near and long-term demand for the Company’s products and other relevant factors. The Company did not have any impairment indicators in the fiscal quarter ended August 31, 2013, but continues to closely monitor its book clubs reporting unit, as this reporting unit’s fair value is largely dependent upon the success of the Storia ereading app, which was launched in fiscal 2012. Should Storia not achieve its projected revenue, and the Company is unable to adjust its strategy to effectively compensate, there is a potential for an impairment of goodwill in this reporting unit in future periods. The following table summarizes the activity in Goodwill for the periods indicated:
SCHOLASTIC CORPORATION | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollar amounts in millions, except per share data) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
On January 3, 2012, the Company acquired Learners Publishing, a Singapore-based publisher of supplemental learning materials for English-Language Learners, for $2.8, net of cash acquired. The Company utilized Level 3 fair value measurement inputs, using its own assumptions, including internally-developed discounted cash flow forecasts, to determine the fair value of the assets acquired and the amount of goodwill to be allocated to the Learners Publishing business. As a result of this transaction, the Company recorded $1.3 of goodwill. The results of operations of this business subsequent to the acquisition date are included in theInternationalsegment.
The following table summarizes the activity in Total other intangibles subject to amortization for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Twelve months ended |
| Three months ended |
| |||
|
| August 31, 2012 |
| May 31, 2012 |
| August 31, 2011 |
| |||
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
Beginning balance - customer lists |
| $ | 4.3 |
| $ | 0.7 |
| $ | 0.7 |
|
Additions due to acquisition |
|
| 0.1 |
|
| 3.8 |
|
| — |
|
Amortization expense |
|
| (0.2 | ) |
| (0.2 | ) |
| 0.0 |
|
Foreign currency translation |
|
| 0.0 |
|
| 0.0 |
|
| 0.0 |
|
Customer lists, net of accumulated amortization of $1.5, $1.3 and $1.1, respectively |
| $ | 4.2 |
| $ | 4.3 |
| $ | 0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance - other |
| $ | 10.4 |
| $ | 17.3 |
| $ | 17.3 |
|
Additions due to acquisition |
|
| — |
|
| — |
|
| — |
|
Impairment charge |
|
| — |
|
| (5.4 | ) |
| — |
|
Amortization expense |
|
| (0.3 | ) |
| (1.4 | ) |
| (0.4 | ) |
Other |
|
| 0.1 |
|
| (0.1 | ) |
| — |
|
Other intangibles, net of accumulated amortization of $10.8, $10.5 and $4.5, respectively |
| $ | 10.2 |
| $ | 10.4 |
| $ | 16.9 |
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangibles subject to amortization |
| $ | 14.4 |
| $ | 14.7 |
| $ | 17.6 |
|
Amortization expense for Total other intangibles was $0.5 and $0.4 for the three months ended August 31, 2012 and 2011, respectively. Intangible assets with definite lives consist principally of customer lists, covenants not to compete and publishing and trademark rights. Intangible assets with definite lives are amortized over their estimated useful lives. The weighted-average remaining useful lives of all amortizable intangible assets is 9 years.
In fiscal 2012, due to declining revenues associated with certain publishing and trademark rights in theChildren’s Book Publishing and Distribution segment, the Company determined that the intangible assets associated with these rights were not fully recoverable and recognized an impairment in amortization expense of $4.9 based upon the difference between the carrying value and the fair value of the assets, and reduced the expected useful life of these assets. The Company employed Level 3 fair value measurement techniques to determine the fair value of these assets, including the relief from royalty method.
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The following table summarizes the activity in Total other intangibles subject to amortization for the periods indicated:
Amortization expense for Total other intangibles was $0.6 and $0.5 for the three months ended August 31, 2013 and 2012, respectively.Intangible assets with definite lives consist principally of customer lists, covenants not to competeand trademark rights. Intangible assets with definite lives are amortized over their estimated useful lives. The weighted-average remaining useful lives of all amortizable intangible assets is 9 years.
SCHOLASTIC CORPORATION | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollar amounts in millions, except per share data) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The following table summarizes Other intangibles not subject to amortization at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
| August 31, 2012 |
| May 31, 2012 |
| August 31, 2011 |
| |||
Net carrying value by major class: |
|
|
|
|
|
|
|
|
|
|
Trademarks and other |
| $ | 2.0 |
| $ | 2.0 |
| $ | 1.8 |
|
Total |
| $ | 2.0 |
| $ | 2.0 |
| $ | 1.8 |
|
8. Investments
Included in “Other assets and deferred charges” on the Company’s condensed consolidated balance sheets were investments of $21.2, $20.6 and $21.2 at August 31, 2012, May 31, 2012 and August 31, 2011, respectively.
The Company owns a non-controlling interest in a book distribution business located in the UK, which is accounted for as a cost-basis investment.
The Company’s 26.2% non-controlling interest in a children’s book publishing business located in the UK is accounted for using the equity method of accounting.
Income from equity investments totaled $0.5 for the three months ended August 31, 2012 and $0.4 for the three months ended August 31, 2011.
The following table summarizes the Company’s investments as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
| August 31, 2012 |
| May 31, 2012 |
| August 31, 2011 |
| |||
Cost method investments: |
|
|
|
|
|
|
|
|
|
|
UK - based |
| $ | 5.5 |
| $ | 5.2 |
| $ | 5.7 |
|
Total cost method investments |
| $ | 5.5 |
| $ | 5.2 |
| $ | 5.7 |
|
|
|
|
|
|
|
|
|
|
|
|
Equity method investments: |
|
|
|
|
|
|
|
|
|
|
UK - based |
| $ | 15.7 |
| $ | 15.4 |
| $ | 14.2 |
|
U.S. - based |
|
| — |
|
| — |
|
| 1.3 |
|
Total equity method investments |
| $ | 15.7 |
| $ | 15.4 |
| $ | 15.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| $ | 21.2 |
| $ | 20.6 |
| $ | 21.2 |
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
8.Investments
Included in “Other assets and deferred charges” on the Company’s condensed consolidated balance sheets were investments of $21.9, $19.6 and $21.2 at August 31, 2013, May 31, 2013 and August 31, 2012, respectively. In the fiscal quarter ended August 31, 2013, the Company acquired a 20% interest in a software development business for $1.0 in cash, which is accounted for using the equity method of accounting. The Company owns a 15% non-controlling interest in a book distribution business located in the UK, which is accounted for as a cost-basis investment. The Company’s 26.2% non-controlling interest in a children’s book publishing business located in the UK is accounted for using the equity method of accounting. Income from equity investments totaled $0.7 and $0.5 for the three months ended August 31, 2013 and 2012, respectively. The following table summarizes the Company’s investments as of the dates indicated:
SCHOLASTIC CORPORATION | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollar amounts in millions, except per share data) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
9. Employee Benefit Plans
The following table sets forth components of the net periodic benefit costs for the periods indicated under the Company’s cash balance retirement plan for its United States employees meeting certain eligibility requirements (the “U.S. Pension Plan”) and the defined benefit pension plan of Scholastic Ltd., an indirect subsidiary of Scholastic Corporation located in the United Kingdom (the “UK Pension Plan” and, together with the U.S. Pension Plan, the “Pension Plans”). Also included are the post-retirement benefits, consisting of certain healthcare and life insurance benefits, provided by the Company to its eligible retired United States-based employees (the “Post-Retirement Benefits”). The Pension Plans and Post-Retirement Benefits include participants associated with both continuing operations and discontinued operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pension Plans |
| Post-Retirement Benefits |
| ||||||||
|
| August 31, 2012 |
| August 31, 2011 |
| August 31, 2012 |
| August 31, 2011 |
| ||||
Components of net periodic benefit (credit) cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
| $ | — |
| $ | — |
| $ | 0.0 |
| $ | 0.0 |
|
Interest cost |
|
| 1.7 |
|
| 2.1 |
|
| 0.4 |
|
| 0.5 |
|
Expected return on assets |
|
| (2.6 | ) |
| (2.7 | ) |
| — |
|
| — |
|
Net amortization of prior service credit |
|
| — |
|
| — |
|
| (0.1 | ) |
| (0.2 | ) |
Amortization of loss |
|
| 0.5 |
|
| 0.3 |
|
| 0.9 |
|
| 1.0 |
|
Net periodic benefit (credit) cost |
| $ | (0.4 | ) | $ | (0.3 | ) | $ | 1.2 |
| $ | 1.3 |
|
The Company’s funding practice with respect to the Pension Plans is to contribute on an annual basis at least the minimum amounts required by applicable laws. For the three months ended August 31, 2012, the Company contributed $1.9 to the U.S. Pension Plan and $0.5 to the UK Pension Plan.
The Company expects, based on actuarial calculations, to contribute cash of approximately $10.6 to the Pension Plans for the fiscal year ending May 31, 2013.
10. Stock-Based Compensation
The following table summarizes stock-based compensation expense included in Selling, general and administrative expenses for the periods indicated:
|
|
|
|
|
|
|
|
|
| Three months ended |
| ||||
|
| August 31, 2012 |
| August 31, 2011 |
| ||
Stock option expense |
| $ | 1.0 |
| $ | 1.5 |
|
Restricted stock unit expense |
|
| 0.9 |
|
| 0.7 |
|
Management stock purchase plan |
|
| 0.0 |
|
| 0.0 |
|
Employee stock purchase plan |
|
| 0.1 |
|
| 0.0 |
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
| $ | 2.0 |
| $ | 2.2 |
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
9.Employee Benefit Plans
The following table sets forth components of the net periodic benefit costs for the periods indicated under the Company’s cash balance retirement plan for its United States employees meeting certain eligibility requirements (the “U.S. Pension Plan”) and the defined benefit pension plan of Scholastic Ltd., an indirect subsidiary of Scholastic Corporation located in the United Kingdom (the “UK Pension Plan” and, together with the U.S. Pension Plan, the “Pension Plans”). Also included are the post-retirement benefits, consisting of certain healthcare and life insurance benefits, provided by the Company to its eligible retired United States-based employees (the “Post-Retirement Benefits”). The Pension Plans and Post-Retirement Benefits include participants associated with both continuing operations and discontinued operations.
The Company’s funding practice with respect to the Pension Plans is to contribute on an annual basis at least the minimum amounts required by applicable laws. For the three months ended August 31, 2013, the Company contributed $1.7 to the U.S. Pension Plan and $0.3 to the UK Pension Plan. The Company expects, based on actuarial calculations, to contribute cash of approximately $8.3 to the Pension Plans for the fiscal year ending May 31, 2014. 10. Stock-Based Compensation The following table summarizes stock-based compensation expense included in Selling, general and administrative expenses for the periods indicated:
During each of the three month periods ended August 31, 2013 and 2012, shares of Common Stock issued by the Corporation pursuant to its stock-based compensation plans were not material.
SCHOLASTIC CORPORATION | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollar amounts in millions, except per share data) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
11. Severance and Exit Costs
Severance expense incurred by the Company was $1.3 during the three months ended August 31, 2012, $14.9 during the twelve months ended May 31, 2012 and $3.3 during the three months ended August 31, 2011. Accrued severance of $1.1, $2.7 and $2.4 as of August 31, 2012, May 31, 2012 and August 31, 2011, respectively, is included in “Other accrued expenses” on the Company’s condensed consolidated balance sheets. The table below provides information regarding the severance expense reported in the Company’s condensed consolidated statements of operations.
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Twelve months |
| Three months ended |
| |||
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
| $ | 2.7 |
| $ | 1.9 |
| $ | 1.9 |
|
Accruals |
|
| 1.3 |
|
| 14.9 |
|
| 3.3 |
|
Payments |
|
| (2.9 | ) |
| (14.1 | ) |
| (2.8 | ) |
Ending balance |
| $ | 1.1 |
| $ | 2.7 |
| $ | 2.4 |
|
12. Treasury Stock
The Board of Directors has authorized the Company to repurchase Common Stock, from time to time as conditions allow, on the open market or through negotiated private transactions. The table below represents the remaining Board authorization:
|
|
|
|
|
Board Authorization |
| Amount |
| |
|
|
|
|
|
September 2010 |
| $ | 44.0 |
|
Less repurchases made from November 2011 through August 2012 |
|
| (12.6 | ) |
|
|
|
|
|
Remaining Board authorization at August 31, 2012 |
| $ | 31.4 |
|
The Company’s repurchase program may be suspended at any time without prior notice. No repurchases of Common Stock were made during the first fiscal quarter of 2013.
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
11. Accrued Severance
The table below provides information regarding Accrued severance, which is included in “Other accrued expenses” in the Company’s condensed consolidated balance sheets.
In the first quarter of fiscal 2014, the Company continued to implement cost savings initiatives, resulting in severance expense of $2.0. Severance expenses are reported in “Selling, general and administrative expenses.” 12. Treasury Stock The Board of Directors has authorized the Company to repurchase Common Stock, from time to time as conditions allow, on the open market or through negotiated private transactions. The table below represents the remaining Board authorization:
The Company’s repurchase program may be suspended at any time without prior notice. There were $0.6 repurchases of Common Stock made during the first fiscal quarter of 2014.
SCHOLASTIC CORPORATION | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollar amounts in millions, except per share data) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
13. Fair Value Measurements
13. Fair Value Measurements
The Company determines the appropriate level in the fair value hierarchy for each fair value measurement of assets and liabilities carried at fair value on a recurring basis in the Company’s financial statements. The fair value hierarchy prioritizes the inputs, which refer to assumptions that market participants would use in pricing an asset or liability, based upon the highest and best use, into three levels as follows:
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The Company’s financial assets and liabilities measured at fair value consisted of cash and cash equivalents, debt and foreign currency forward contracts. Cash and cash equivalents are comprised of bank deposits and short-term investments, such as money market funds, the fair value of which is based on quoted market prices, a Level 1 fair value measure. The Company employs Level 2 fair value measurements for the disclosure of the fair value of its 5% Notes and its various lines of credit. See Note 4, “Debt,” for a more complete description of fair value measurements employed. The fair values of foreign currency forward contracts, used by the Company to manage the impact of foreign exchange rate changes to the financial statements, are based on quotations from financial institutions, a Level 2 fair value measure. See Note 15, “Derivatives and Hedging,” for a more complete description of fair value measurements employed.
Non-financial assets and liabilities for which the Company employs fair value measures on a non-recurring basis include:
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14. Income Taxes and Other Taxes
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In calculating the provision for income taxes on an interim basis, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances known and applies that rate to its year-to-date earnings or losses. The Company’s effective tax rate is based on expected income and statutory tax rates and takes into consideration permanent differences between financial statement and tax return income applicable to the Company in the various jurisdictions in which the Company operates. The effect of discrete items, such as changes in estimates, changes in enacted tax laws or rates or tax status, and unusual or infrequently occurring events, is recognized in the interim period in which the discrete item occurs. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the result of new judicial interpretations or regulatory or tax law changes.
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14. Income Taxes and Other Taxes
Income Taxes
In calculating the provision for income taxes on an interim basis, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances known and applies that rate to its year-to-date earnings or losses. The Company’s effective tax rate is based on expected income and statutory tax rates and takes into consideration permanent differences between financial statement and tax return income applicable to the Company in the various jurisdictions in which the Company operates. The effect of discrete items, such as changes in estimates, changes in enacted tax laws or rates or tax status, and unusual or infrequently occurring events, is recognized in the interim period in which the discrete item occurs. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the result of new judicial interpretations or regulatory or tax law changes.
The Company’s annual effective tax rate for the fiscal year ending May 31, 2013 is currently expected to be approximately 39.8%the fiscal year ending May 31, 2014 is currently expected to be approximately 40%.
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SCHOLASTIC CORPORATION | ||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED | ||||
(Dollar amounts in millions, except per share data) | ||||
The Corporation, 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 Corporation file income tax returns in foreign jurisdictions. The Company is routinely audited by various tax authorities. The Company is currently under audit by the Internal Revenue Service for fiscal years ended May 31, 2007, 2008 and 2009. The Company is currently under audit by New York State for fiscal years ended May 31, 2006, 2007 and 2008, and by New York City for fiscal years ended May 31, 2005, 2006 and 2007. If any of these tax examinations are concluded within the next twelve months, the Company will make any necessary adjustments to its unrecognized tax benefits.
Non-income Taxes
The Company is subject to tax examinations for sales-based taxes. A number of these examinations are ongoing and, in certain cases, have resulted in assessments from taxing authorities. Where a liability associated with these examinations and assessments is probable and can be reliably estimated, the Company has made accruals for these matters which are reflected in the Company’s condensed consolidated financial statements.
15. Derivatives and Hedging
The Company enters into foreign currency derivative contracts to economically hedge the exposure to foreign currency fluctuations associated with the forecasted purchase of inventory and the foreign exchange risk associated with certain receivables denominated in foreign currencies. These derivative contracts are economic hedges and are not designated as cash flow hedges. The Company marks-to-market these instruments and records the changes in the fair value of these items in current earnings, and it recognizes the unrealized gain or loss in other current assets or liabilities. Unrealized gains of less than $0.1 and $0.1 were recognized at August 31, 2012 and 2011, respectively.
16. Subsequent Events
On September 19, 2012, the Company announced that the Board of Directors declared a cash dividend of $0.125 per Class A and Common share in respect of the second quarter of fiscal 2013. The dividend is payable on December 17, 2012 to shareholders of record on October 31, 2012.
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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 is currently under audit by theInternal Revenue Service for fiscal years ended May 31, 2007, 2008 and 2009. The Company is currently under audit by New York State for fiscal years ended May 31, 2006, 2007 and 2008 and by New York City for fiscal years ended May 31, 2005, 2006 and 2007. If any of these tax examinations are concluded within the next twelve months, the Company will make any necessary adjustments to its unrecognized tax benefits.
Non-income Taxes The Company is subject to tax examinations for sales-based taxes. A number of these examinations are ongoing and, in certain cases, have resulted in assessments from taxing authorities. Where a sales tax liability with respect to a particular jurisdiction is probable and can be reliably estimated, the Company has made accruals for these matters which are reflected in the Company’s condensed consolidated financial statements. 15. Derivatives and Hedging The Company enters into foreign currency derivative contracts to economically hedge the exposure to foreign currency fluctuations associated with the forecasted purchase of inventory and the foreign exchange risk associated with certain receivables denominated in foreign currencies. These derivative contracts are economic hedges and are not designated as cash flow hedges. The Company marks-to-market these instruments and records the changes in the fair value of these items in current earnings, and it recognizes the unrealized gain or loss in other current assets or liabilities. Unrealized gains of $0.4 and less than $0.1 were recognized at August 31, 2013 and 2012, respectively. 16. Other Accrued Expenses Other accrued expenses consist of the following as of the dates indicated:
17. Subsequent Events On September 18, 2013, the Company announced that the Board of Directors declared a cash dividend of $0.15 per Class A and Common share in respect of the second quarter of fiscal 2014. The dividend is payable on December 16, 2013 to stockholders of record on October 31, 2013.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Overview and Outlook
The Company’s first quarter is generally its smallest revenue period as most schools are not in session, resulting in a seasonal loss.
Revenues for the quarter ended August 31, 2012 decreased by $24.4 million, or 7.7%, to $293.6 million, compared to $318.0 million in the prior fiscal year quarter. Lower educational technology product sales in theEducational Technology and Services segment and lower revenues in theClassroom and Supplemental Materials Publishing segment resulted from slower spending by school districts in the fiscal 2013 first quarter, due to uncertainties about the federal budget and the upcoming Common Core State Standards, as well as from difficult prior year comparisons, due to new product launches affecting the first quarter of the prior year, as well as significant, federally funded contracts with Reading is Fundamental in the prior year. Trade revenues also decreased in theChildren’s Book Publishing and Distribution segment primarily as a result of lower sales of the Harry Potter titles compared to the prior year first quarter in which the final Harry Potter movie was released. Although sales of The Hunger Games in the U.S. held level relative to the prior fiscal year quarter, they have substantially decreased, as anticipated, from their peak sales during the fourth quarter of fiscal 2012. Continued sales growth of The Hunger Games abroad and in audio formats, however, contributed to higher profits in theInternational andMedia, Licensing and Advertising segments.
For the quarter ended August 31, 2012, the net loss was $32.1 million, compared to a net loss of $27.1 million in the prior fiscal year quarter, due to the foregoing factors.
During the quarter, the Company prepared for its broad launch of Storia™, its children’s ereading app and ebook system, in tandem with this year’s school openings, and it continues to invest in new education products and is on schedule to introduce MATH 180™ and System 44 Next Generation®, among others, in fiscal 2014. The Company continues to anticipate total revenues of approximately $1.9 billion to $2.0 billion and earnings per diluted share from continuing operations in the range of $2.20 to $2.40, before the impact of any one-time items associated with cost reduction programs or non-cash, non-operating items.
Results of Continuing Operations and Discontinued Operations
Revenues for the quarter ended August 31, 2012 decreased by $24.4 million, or 7.7%, to $293.6 million, compared to $318.0 million in the prior fiscal year quarter. This was due to lower revenues in theEducational Technology and Services, Classroom and Supplemental Materials PublishingandChildren’s Book Publishing and Distribution segments of $16.6 million, $7.8 million and $6.4 million, respectively, partially offset by higher revenues in theMedia, Licensing and Advertising andInternational segments of $3.9 million and $2.5 million, respectively.
Cost of goods sold as a percentage of revenue for the quarter ended August 31, 2012 increased slightly to 51.5%, compared to 50.4% in the prior fiscal year quarter, primarily due to the effect of prepublication and production amortization on lower revenues in the current fiscal quarter, as well as unfavorable product mix related to fewer sales of higher margin educational technology products in the current fiscal quarter.
Components of Cost of goods sold for the three months ended August 31, 2012 and 2011 are as follows:
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Product, service and production costs |
| $ | 72.6 |
| $ | 79.5 |
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| 23.2 |
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| 22.9 |
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Prepublication and production amortization |
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| 11.7 |
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all other costs |
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| 43.6 |
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| 46.2 |
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| $ | 151.1 |
| $ | 160.4 |
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Selling, general and administrative expenses decreased to $173.9 million in the quarter, compared to $175.7 million in the prior fiscal year quarter, due to lower bad debt expenses, primarily in the Company’sClassroom and Supplemental Materials Publishing segment, as well as lower employee-related expenses.
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Overview and Outlook
Revenue for the quarter ended August 31, 2013 was $276.3 million, compared to $293.4 million in the prior fiscal period. The Company reported a loss per share from continuing operations of $0.94 in the current quarter, versus a loss per share from continuing operations of $1.01 in the prior year period. Current quarter results were largely driven by strong sales of the Company’s new educational technology programs and guided reading programs. Successful product launches inEducational Technology and Services drove segment revenue and operating profit growth of 19% and 46%, respectively. While these results were offset by the lower sales of the Hunger Games trilogy in theChildren’s Book Publishing and Distribution,International andMedia, Licensing and Advertising segments in the first fiscal quarter compared to the prior fiscal period, the first quarter sales of the Hunger Games were within expectations. The Company typically records a loss in its fiscal first quarter, when most U.S. schools are not in session and its school book club and school book fairs school channels generate minimal revenue. Recent successful product launches, includingSystem 44®Next Generation,MATH 180TM,iReadTM,Common Core Code XTM, andREAD 180for iPad®, demonstrate the Company’s ability to deepen engagement and grow the Company’s market reach among grade levels and subject areas. The Company’s suite of print and digital programs serves to help students reach higher goals and achieve college and career readiness under the new Common Core State Standards, and demand for the Company’s professional development and school improvement services also continues to grow from school districts that are in widely varying stages of implementing these standards. The Company expects this ongoing implementation process to result in a prolonged purchasing period for its instructional programs and services this school year. Sales of the Hunger Games trilogy during the quarter ended August 31, 2013 were within Company expectations, and the Company anticipates additional interest in the trilogy in anticipation of the Catching Fire film release. Book fair bookings are as expected and, in preparation for the new school year, the Company has redesigned its book club flyers to feature grade-specific titles for children from pre-K to eighth grade. The Company expects these school channels will continue to help families find the right books at the right level for their children, which is increasingly important for students under the Common Core standards. The Company continues to anticipate total revenues of approximately $1.8 billion and earnings per diluted share from continuing operations in the range of $1.40 to $1.80, before the impact of one-time items associated with cost reduction programs, or non-cash, non-operating items.
SCHOLASTIC CORPORATION Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) Results of Operations – Consolidated Revenues for the quarter ended August 31, 2013 decreased by $17.1 million to $276.3 million, compared to $293.4 million in the prior fiscal period. The reduction was driven by expected lower revenues from the Hunger Games trilogy of $26.2 million in theChildren’s Book Publishing and Distributionsegment, theInternationalsegment and theMedia, Licensing and Advertising segment. Partially offsetting these declines were strong results from new product offerings in the Company’sEducational Technology and Services segment.MATH 180™,iRead™ andCommon Core Code X™,all of which are new product offerings successfully launched for the current school year, resulted in increased revenues of $15.1 million. LowerInternational segment revenues also resulted from a strengthening of the dollar in the current fiscal period compared to the prior fiscal period and the absence of low margin software sales totaling $7.4 million. Cost of goods sold as a percentage of revenue for the quarter ended August 31, 2013 decreased to 49.9%, compared to 51.4% in the prior fiscal period. Of Company revenues for the quarter, 34.3% were from theEducational Technology and Services segment, compared to 27.3% in the prior fiscal period.The Educational Technology and Services segment experienced significantly higher gross margins than theChildren’s Book Publishing and Distribution segment. The Children’s Book Publishing and Distribution segment revenues decreased to 19.8% of total Company revenues in the quarter, compared to 24.2% in the prior fiscal period. This shift in the composition of revenues resulted in the overall improved gross margins. Components of Cost of goods sold (exclusive of depreciation) for the three months ended August 31, 2013 and 2012 are as follows:
Selling, general and administrative expenses (exclusive of depreciation and amortization) in the quarter ended August 31, 2013 decreased by $5.1 million to $168.4 million, compared to $173.5 million in the prior fiscal period. The Company experienced lower salaries and benefits of $3.7 million compared to the prior fiscal period as a result of prior cost savings initiatives. The Company recognized $2.0 million of severance costs related to cost saving initiatives implemented in the current fiscal quarter. For the quarter ended August 31, 2013, net interest expense decreased to $1.9 million, compared to $3.7 million in the prior fiscal period, reflecting the April 2013 maturation of the Company’s 5% Notes. The Company’s effective tax rate for the current fiscal quarter was 37.0%, compared to 37.5% in the prior fiscal period. The Company expects an effective tax rate of approximately 40% for fiscal 2014. Earnings from discontinued operations, net of tax, for the quarter ended August 31, 2013 was $0.2 million, compared to a loss of $0.4 million in the prior fiscal period. The Company did not discontinue any operations in the current fiscal period.
SCHOLASTIC CORPORATION Item 2. MD&A | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest expense decreased slightly to $3.7 million in the quarter ended August 31, 2012, compared to $3.9 million in the prior fiscal year quarter, related to lower debt levels.
The loss from discontinued operations, net of tax, was $0.1 million, or less than $0.01 per share, for the quarter ended August 31, 2012, compared to $2.0 million, or $0.06 per share, in the prior fiscal year quarter. The decrease in such loss reflects asset impairments recognized in the Company’s toy catalog business which was discontinued in the quarter ended August 31, 2011.
Results of Continuing Operations
Children’s Book Publishing and Distribution
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SCHOLASTIC CORPORATION Item 2. MD&A Media, Licensing and Advertising
Revenues for the quarter ended August 31, 2013 decreased by $4.0 million to $10.4 million, compared to $14.4 million in the prior fiscal period. This decrease was related to decreased sales of the Hunger Games trilogy audio books of $4.3 million. Revenues for Company programming were flat, as a recent Netflix contract, which includes Goosebumps and Magic School Bus titles, largely offset lower prior period revenues of older Company programming. Cost of goods sold was $4.5 million, or 43.3% of revenue, for the quarter ended August 31, 2013, compared to $5.2 million, or 36.1% of revenue, for the prior fiscal period. The absolute decline in Cost of goods sold is due to the reduced royalty expenses of $0.9 million associated with the sale of the Hunger Games audio titles. Other operating expenses were $7.7 million for the quarter ended August 31, 2013, compared to $8.9 millionfor the prior fiscal period. The improvement was driven by lower administrative and technology costs. Segment operating loss for the quarter ended August 31, 2013 was $1.9 million, compared to operating income of $0.2 million in the prior fiscal period. The decline was due entirely to the decrease in sales of the Hunger Games audio books. The segment continues to decrease its reliance on low-margin console products and is focusing its efforts on repurposing content for digital platforms, both internally and by partnering with distributors such as Netflix.
SCHOLASTIC CORPORATION Item 2. MD&A Overhead Unallocated overhead expense for the quarter ended August 31, 2013 decreased $0.9 million to $16.4 million, from $17.3 million in the prior fiscal period, primarily due to lower employee-related expenses of $2.9 million, partially offset by $1.4 million of severance related to cost savings initiatives. Seasonality The Company’sChildren’s Book Publishing and Distribution school-based channels and most of its magazines operate on a school-year basis; therefore, the Company’s business is highly seasonal. As a result, the Company’s revenues in the first and third quarters of the fiscal year generally are lower than its revenues in the other two fiscal quarters. Typically, these school-based channel revenues are greatest in the second and fourth quarters of the fiscal year, while revenues from the sale of instructional materials and educational technology products and services are highest in the first and fourth quarters. The Company generally experiences a loss from operations in the first and third quarters of each fiscal year. Trade sales can vary through the year due to varying release dates of published titles.
The Company disclaims any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.
The Chief Executive Officer and the Chief Financial Officer of the Corporation, after conducting an evaluation, together with other members of the Company’s management, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures as of August 31, 2013, have concluded that the Corporation’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Corporation in its reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and accumulated and communicated to members of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. There was no change in the Corporation’s internal control over financial reporting that occurred during the quarter ended August 31, 2013 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
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SCHOLASTIC CORPORATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The following table provides information with respect to repurchases of shares of Common Stock by the Corporation during the three months ended August 31, 2013:
(i) Represents the remaining amount under the $20 million Common share repurchase program announced on December 16, 2009 and the further $200 million Board authorization for Common share repurchases announced in connection with the modified Dutch auction tender offer commenced by the Company on September 28, 2010 and completed in November 2010. Approximately $156 million was used for repurchases in such tender offer, leaving, after subsequent additional open market repurchases of $24.4 million, $19.6 million at June 1, 2013 for further repurchases, from time to time as conditions allow, on the open market or through negotiated private transactions, under the current Board authorization.
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Exhibits:
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SCHOLASTIC CORPORATION
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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QUARTERLY REPORT ON FORM 10-Q, DATED AUGUST 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| * In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed.” |
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