Notes to Consolidated Financial Statements
(Amounts in millions, except share and per share data)
1. DESCRIPTION OF THE BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the business
Scholastic Corporation (the “Corporation” and together with its subsidiaries, “Scholastic” or the “Company”) is the world’s largest publisher and distributor of children’s books, a leading provider of print and digital instructional materials for grades pre-kindergarten ("pre-K") to grade 12 and a producer of educational and entertaining children’s media. The Company creates quality books and ebooks, print and technology-based learning materials and programs, classroom magazines and other products that, in combination, offer schools, as well as parents and children, customized and comprehensive solutions to support children’s learning and reading both at school and at home. Since its founding in 1920, Scholastic has emphasized quality products and a dedication to reading, learning and literacy. The Company is the leading operator of school-based book club and book fair proprietary channels. It distributes its products and services through these channels, as well as directly to schools and libraries, through retail stores and through the internet. The Company’s website, scholastic.com, is a leading site for teachers, classrooms and parents and an award-winning destination for children. Scholastic has operations in the United States and throughout the world including Canada, the United Kingdom, Australia, New Zealand and Asia and, through its export business, sells products in approximately 165 countries.
Basis of presentation
Principles of consolidation
The Consolidated Financial Statements include the accounts of the Corporation and all wholly-owned and majority-owned subsidiaries. All significant intercompany transactions are eliminated in consolidation. Certain reclassifications have been made to conform to the current year presentation.
Use of estimates
The Company’s Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). The preparation of these financial statements involves the use of estimates and assumptions by management, which affects the amounts reported in the 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, including, but not limited to:
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Accounts receivable allowance for doubtful accounts
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Pension and postretirement benefit plans
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Uncertain tax positions
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The timing and amount of future income taxes and related deductions
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Cost of goods sold from book fair operations during interim periods based on estimated gross profit rates
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Sales tax contingencies
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Royalty advance reserves and royalty expense accruals
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Impairment testing for goodwill, intangibles and other long-lived assets and investments
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Assets and liabilities acquired in business combinations
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Variable consideration related to anticipated returns
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Allocation of transaction price to contractual performance obligations
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Summary of Significant Accounting Policies
Revenue recognition
The Company’s revenue recognition policies for its principal businesses are as follows:
School-Based Book Clubs – Revenue from school-based book clubs is recognized upon shipment of the products.
School-Based Book Fairs – Revenues associated with school-based book fairs relate to the sale of children's books and other products to book fair sponsors. In addition, the Company employs an incentive program to encourage the sponsorship of book fairs and increase the number of fairs held each school year. The Company identifies two potential performance obligations within its school-based book fair contracts, which include the fulfillment of book fairs product and the fulfillment of product upon the redemption of incentive program credits by customers. The Company allocates the transaction price to each performance obligation and recognizes revenue at a point in time. The Company utilizes certain estimates based on historical experience, redemption patterns and future expectations related to the participation in the incentive program to determine the relative fair value of each performance obligation when allocating the transaction price. Changes in these estimates could impact the timing of the recognition of revenue. Revenue allocated to the book fairs product is recognized at the point at which product is delivered to the customer and control is transferred. The revenue allocated to the incentive program credits is recognized upon redemption of incentive credits and the transfer of control of the redeemed product. Incentive credits are generally redeemed within 12 months of issuance. Payment for school-based book fairs product is due at the completion of a customer's fair.
Trade – Revenue from the sale of children’s books for distribution in the retail channel is primarily recognized when performance obligations are satisfied and control is transferred to the customer, or when the product is on sale and available to the public. For newly published titles, the Company, on occasion, contractually agrees with its customers when the publication may be first offered for sale to the public, or an agreed upon “Strict Laydown Date." For such titles, the control of the product is not deemed to be transferred to the customer until such time that the publication can contractually be sold to the public, and the Company defers revenue on sales of such titles until such time as the customer is permitted to sell the product to the public. Revenue for ebooks, which is generally the net amount received from the retailer, is recognized upon electronic delivery to the customer by the retailer. The sale of trade product generally includes a right of return.
Education – Revenue from the sale of educational materials is recognized upon shipment of the products, or upon acceptance of product by the customer depending on individual contractual terms. Revenue from digital products is deferred and recognized ratably over the subscription period. Revenue from professional development services is recognized when the services have been provided to the customer.
Film Production and Licensing – Revenue from the sale of film rights, principally for the home video and domestic and foreign television markets, is recognized when the film has been delivered and is available for showing or exploitation. Licensing revenue is recognized in accordance with royalty agreements at the time the licensed materials are available to the licensee and collections are reasonably assured.
Magazines – Revenue is deferred and recognized ratably over the subscription period, as the magazines are delivered.
Magazine Custom Publishing – Revenue is recognized when the Company has satisfied its obligations under the program and the customer has acknowledged acceptance of the product or service. Certain revenues may be deferred pending future deliverables.
Direct Sales – Revenue from the direct sales channel is recognized upon acceptance of the physical product by the customer.
The Company has elected to present sales and other related taxes on a net basis, excluded from revenues, and as such, these are included within Other accrued expenses until remitted to taxing authorities.
Cash equivalents
Cash equivalents consist of short-term investments with original maturities of three months or less.
Accounts receivable
Accounts receivable are recognized net of allowances for doubtful accounts. In the normal course of business, the Company extends credit to customers that satisfy predefined credit criteria. The Company is required to estimate the collectability of its receivables. Reserves for estimated bad debts are established at the time of sale and are based on an evaluation of accounts receivable aging, and, where applicable, specific reserves on a customer-by-customer basis, creditworthiness of the Company’s customers and prior collection experience to estimate the ultimate collectability of these receivables. At the time the Company determines that a receivable balance, or any portion thereof, is deemed to be permanently uncollectible, the balance is then written off. Accounts receivable allowance for doubtful accounts was $19.9 and $11.6 as of May 31, 2020 and 2019, respectively.
Estimated returns
For sales that include a right of return, the Company will estimate the transaction price and record revenues as variable consideration based on the amounts the Company expects to ultimately be entitled. In order to determine estimated returns, the Company utilizes historical return rates, sales patterns, types of products and expectations and recognizes a corresponding reduction to Revenues and Cost of goods sold. Management also considers patterns of sales and returns in the months preceding the fiscal year, as well as actual returns received subsequent to the fiscal year, available customer and market specific data and other return rate information that management believes is relevant. In addition, a refund liability is recorded within Other accrued expenses for the consideration to which the Company believes it will not ultimately be entitled and a return asset is recorded within Prepaid expenses and other current assets for the expected inventory to be returned. Actual returns could differ from the Company's estimate.
Inventories
Inventories, consisting principally of books, are stated at the lower of cost, using the first-in, first-out method, or net realizable value. The Company records a reserve for excess and obsolete inventory based upon a calculation using the historical usage by channel, expected future sales of existing inventory and specifically identified obsolete inventory.
Property, plant and equipment
Property, plant and equipment are stated at cost. Depreciation and amortization are recognized on a straight-line basis over the estimated useful lives of the assets. Buildings have an estimated useful life, for purposes of depreciation, of forty years. Building improvements are depreciated over the life of the improvement which typically does not exceed twenty-five years. Capitalized software, net of accumulated amortization, was $52.3 and $43.9 at May 31, 2020 and 2019, respectively. Capitalized software is amortized over a period of three to seven years. Amortization expense for capitalized software was $22.2, $25.4 and $16.3 for the fiscal years ended May 31, 2020, 2019 and 2018, respectively. Furniture, fixtures and equipment are depreciated over periods not exceeding ten years. Leasehold improvements are amortized over the life of the lease or the life of the assets, whichever is shorter. The Company evaluates the depreciation periods of property, plant and equipment to determine whether events or circumstances indicate that the asset’s carrying value is not recoverable or warrant revised estimates of useful lives.
Leases
The Company adopted ASU No. 2016-02, “Leases (Topic 842),” as of the beginning of the first quarter of fiscal 2020. Refer to "New Accounting Pronouncements" section below, specifically Current Fiscal Year Adoptions for further details.
The Company's lease arrangements primarily relate to corporate offices and warehouse facilities, and to a lesser
extent, certain equipment and other assets. The Company's leases generally have initial terms ranging from 3 to 10 years and certain leases include renewal or early-termination options, rent escalation clauses, and/or lease incentives. Lease renewal rent payment terms generally reflect adjustments for market rates prevailing at the time of renewal. The Company's leases require fixed minimum rent payments and also often require the payment of certain other costs that do not relate specifically to its right to use an underlying leased asset, but are associated with the asset, such as real estate taxes, insurance, common area maintenance fees and/or certain other costs (referred to collectively herein as "non-lease components"), which may be fixed or variable in amount depending on the terms of the respective lease agreement. The Company's leases do not contain significant residual value guarantees or restrictive covenants.
The Company determines whether an arrangement contains a lease at the inception of the arrangement. If a lease is determined to exist, the term of such lease is assessed based on the date on which the underlying asset is made available for the Company's use by the lessor. The Company's assessment of the lease term reflects the non-cancelable term of the lease, inclusive of any rent-free periods and/or periods covered by early-termination options
which the Company is reasonably certain of not exercising, as well as periods covered by renewal options which the Company is reasonably certain of exercising. The Company also determines lease classification as either operating or finance at lease commencement, which governs the pattern of expense recognition and the presentation reflected in the Consolidated Statements of Operations over the lease term.
For leases with a term exceeding 12 months, a lease liability is recorded on the Company's Consolidated Balance Sheet at lease commencement reflecting the present value of its fixed minimum payment obligations over the lease term. A corresponding right-of-use ("ROU") asset equal to the initial lease liability is also recorded, adjusted for any prepaid rent and/or initial direct costs incurred in connection with execution of the lease and reduced by any lease incentives received. The Company includes fixed payment obligations related to non-lease components in the measurement of ROU assets and lease liabilities, as it elects to account for lease and non-lease components together as a single lease component. ROU assets associated with finance leases are presented separate from ROU assets associated with operating leases and are included within Property, plant and equipment, net on the Company's Consolidated Balance Sheet. For purposes of measuring the present value of its fixed payment obligations for a given lease, the Company uses its incremental borrowing rate, determined based on information available at lease commencement, as rates implicit in its leasing arrangements are typically not readily determinable. The Company's incremental borrowing rate reflects the rate it would pay to borrow on a secured basis, and incorporates the term and economic environment of the associated lease.
For operating leases, fixed lease payments are recognized as lease expense on a straight-line basis over the lease
term. For finance leases, the initial ROU asset is depreciated on a straight-line basis over the lease term, along
with recognition of interest expense associated with accretion of the lease liability, which is ultimately reduced
by the related fixed payments. For leases with a term of 12 months or less, any fixed lease payments are recognized on a straight-line basis over the lease term, and are not recognized on the Company's Consolidated Balance Sheet. Variable lease costs for both operating and finance leases, if any, are recognized as incurred.
Sublease rental income is recognized on a straight-line basis over the duration of each lease term. To the extent expected sublease income is less than expected rental payments, the Company recognizes a loss on the difference between the present value of the minimum lease payments under each lease. Lease payments received are presented as a reduction to rent expense in Selling, general and administrative expenses.
Prepublication costs
Prepublication costs are incurred in all of the Company’s reportable segments. Prepublication costs include costs incurred to create and develop the art, prepress, editorial, digital conversion and other content required for the creation of the master copy of a book or other media. Prepublication costs are amortized on a straight-line basis over a two-to-five-year period based on expected future revenues. The Company regularly reviews the recoverability of these capitalized costs based on expected future cash flows.
Royalty advances
Royalty advances are incurred in all of the Company’s reportable segments, but are most prevalent in the Children’s Book Publishing and Distribution segment and enable the Company to obtain contractual commitments from authors to produce content. The Company regularly provides authors with advances against expected future royalty payments, often before the books are written. Upon publication and sale of the books or other media, the authors generally will not receive further royalty payments until the contractual royalties earned from sales of such books or other media exceed such advances.
Royalty advances are initially capitalized and subsequently expensed as related revenues are earned or when the Company determines future recovery through earndowns is not probable. The Company has a long history of providing authors with royalty advances and it tracks each advance earned with respect to the sale of the related publication. The royalties earned are applied first against the remaining unearned portion of the advance. Historically, the longer the unearned portion of the advance remains outstanding, the less likely it is that the Company will recover the advance through the sale of the publication. The Company applies this historical experience to its existing outstanding royalty advances to estimate the likelihood of recoveries through earndowns. Additionally, the Company’s editorial staff regularly reviews its portfolio of royalty advances to determine if individual royalty advances are not recoverable through earndowns for discrete reasons, such as the death of an author prior to completion of a title or titles, a Company decision to not publish a title, poor market demand or other relevant factors that could impact recoverability. The reserve for royalty advances was $109.5 and $102.9 as of May 31, 2020 and 2019, respectively.
Goodwill and intangible assets
Goodwill and other intangible assets with indefinite lives are not amortized and are reviewed for impairment annually as of May 31 or more frequently if impairment indicators arise.
With regard to goodwill, the Company compares the estimated fair values of its identified reporting units to the carrying values of their net assets. The Company first performs a qualitative assessment to determine whether it is more likely than not that the fair values of its identified reporting units are less than their carrying values. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company performs the two-step goodwill impairment test. For each of the reporting units, the estimated fair value is determined utilizing the expected present value of the projected future cash flows of the reporting unit, in addition to comparisons to similar companies. The Company reviews its definition of reporting units annually or more frequently if conditions indicate that the reporting units may change. The Company evaluates its operating segments to determine if there are components one level below the operating segment. A component is present if discrete financial information is available, and segment management regularly reviews the operating results of the business. If an operating segment only contains a single component, that component is determined to be a reporting unit for goodwill impairment testing purposes. If an operating segment contains multiple components, the Company evaluates the economic characteristics of these components. Any components within an operating segment that share similar economic characteristics are aggregated and deemed to be a reporting unit for goodwill impairment testing purposes. Components within the same operating segment that do not share similar economic characteristics are deemed to be individual reporting units for goodwill impairment testing purposes. The Company has seven reporting units with goodwill subject to impairment testing.
With regard to other intangibles with indefinite lives, the Company first performs a qualitative assessment to determine whether it is more likely than not that the fair value of the identified asset is less than its carrying value. If it is more likely than not that the fair value of the asset is less than its carrying amount, the Company performs a quantitative test. The estimated fair value is determined utilizing the expected present value of the projected future cash flows of the asset.
Intangible assets with definite lives consist principally of customer lists, intellectual property and other agreements and are amortized over their expected useful lives. Customer lists are amortized on a straight-line basis over five to ten years, while other agreements are amortized on a straight-line basis over their contractual term. Intellectual property assets are amortized over their remaining useful lives, which is approximately five years.
Income taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, for purposes of determining taxable income, deferred tax assets and liabilities are determined based on differences between the financial reporting and the tax basis of such assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to be realized.
The Company believes that its taxable earnings, during the periods when the temporary differences giving rise to deferred tax assets become deductible or when tax benefit carryforwards may be utilized, should be sufficient to realize the related future income tax benefits. For those jurisdictions where the expiration date of the tax benefit carryforwards or the projected taxable earnings indicates that realization is not likely, the Company establishes a valuation allowance.
In assessing the need for a valuation allowance, the Company estimates future taxable earnings, with consideration for the feasibility of on-going tax planning strategies and the realizability of tax benefit carryforwards, to determine which deferred tax assets are more likely than not to be realized in the future. Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates and future taxable earnings. In the event that actual results differ from these estimates in future periods, the Company may need to adjust the valuation allowance.
The Company accounts for uncertain tax positions using a two-step method. Recognition occurs when an entity concludes that a tax position, based solely on technical merits, is more likely than not to be sustained upon examination. If a tax position is more likely than not to be sustained upon examination, the amount recognized is the largest amount of benefit, determined on a cumulative probability basis, which is more likely than not to be realized upon settlement. The Company assesses all income tax positions and adjusts its reserves against these positions periodically based upon these criteria. The Company also assesses potential penalties and interest associated with these tax positions, and includes these amounts as a component of income tax expense.
The Company assesses foreign investment levels periodically to determine if all or a portion of the Company’s investments in foreign subsidiaries are indefinitely invested. Any required adjustment to the income tax provision would be reflected in the period that the Company changes this assessment. The Company elects to recognize the tax on Global Intangible Low-Taxed Income (GILTI) earned by foreign subsidiaries as a period expense in the period the tax is incurred.
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 jurisdiction is probable and can be reliably estimated, the Company has made accruals for these matters which are reflected in the Company’s Consolidated Financial Statements. These amounts are included in the Consolidated Financial Statements in Selling, general and administrative expenses. Future developments relating to the foregoing could result in adjustments being made to these accruals.
Other noncurrent liabilities
The rate assumptions discussed below impact the Company’s calculations of its UK pension and U.S. postretirement obligations. The rates applied by the Company are based on the UK pension plan asset portfolio's past average rates of return, discount rates and actuarial information. Any change in market performance, interest rate performance, assumed health care cost trend rate and compensation rates could result in significant changes in the Company’s UK pension plan and U.S. postretirement obligations.
Pension obligations – Scholastic Corporation's UK subsidiary has a defined benefit pension plan covering the majority of its employees who meet certain eligibility requirements. The Company’s pension plan and other postretirement benefits are accounted for using actuarial valuations.
The Company’s UK Pension Plan calculations are based on three primary actuarial assumptions: the discount rate, the long-term expected rate of return on plan assets and the anticipated rate of compensation increases. The discount rate is used in the measurement of the projected, accumulated and vested benefit obligations and interest cost component of net periodic pension costs. The long-term expected return on plan assets is used to calculate the expected earnings from the investment or reinvestment of plan assets. The anticipated rate of compensation increase is used to estimate the increase in compensation for participants of the plan from their current age to their assumed retirement age. The estimated compensation amounts are used to determine the benefit obligations and the service cost component of net periodic pension costs.
Other postretirement benefits – The Company provides postretirement benefits, consisting of healthcare and life insurance benefits, to eligible retired U.S.-based employees. The postretirement medical plan benefits are funded on a pay-as-you-go basis, with the Company paying a portion of the premium and the employee paying the remainder. The existing benefit obligation is based on the discount rate and the assumed health care cost trend rate. The discount rate is used in the measurement of the projected and accumulated benefit obligations and the service and interest cost component of net periodic postretirement benefit cost. The assumed health care cost trend rate is used in the measurement of the long-term expected increase in medical claims.
Foreign currency translation
The Company’s non-United States dollar-denominated assets and liabilities are translated into United States dollars at prevailing rates at the balance sheet date and the revenues, costs and expenses are translated at the weighted average rates prevailing during each reporting period. Net gains or losses resulting from the translation of the foreign financial statements and the effect of exchange rate changes on long-term intercompany balances are accumulated and charged directly to the foreign currency translation adjustment component of stockholders’ equity until such time as the operations are substantially liquidated or sold. The Company assesses foreign investment levels periodically to determine if all or a portion of the Company’s investments in foreign subsidiaries are indefinitely invested.
Shipping and handling costs
Amounts billed to customers for shipping and handling are classified as revenue. Costs incurred in shipping and handling are recognized in Cost of goods sold.
Advertising costs
Advertising costs are expensed by the Company as incurred. Total advertising expense was $85.2, $106.8 and $110.0 for the twelve months ended May 31, 2020, 2019 and 2018, respectively.
Stock-based compensation
The Company recognizes the cost of services received in exchange for any stock-based awards. The Company recognizes the cost on a straight-line basis over an award’s requisite service period, which is generally the vesting period, except for the grants to retirement-eligible employees, based on the award’s fair value at the date of grant.
The fair values of stock options granted by the Company are estimated at the date of grant using the Black-Scholes option-pricing model. The Company’s determination of the fair value of stock-based payment awards using this option-pricing model is affected by the price of the Common Stock as well as by assumptions regarding highly complex and subjective variables, including, but not limited to, the expected price volatility of the Common Stock over the terms of the awards, the risk-free interest rate, and actual and projected employee stock option exercise behaviors. Estimates of fair value are not intended to predict actual future events or the value that may ultimately be realized by those who receive these awards.
Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates, in order to derive the Company’s best estimate of awards ultimately expected to vest. In determining the estimated forfeiture rates for stock-based awards, the Company annually conducts an assessment of the actual number of equity awards that have been forfeited previously. When estimating expected forfeitures, the Company considers factors such as the type of award, the employee class and historical experience. The estimate of stock-based awards that will ultimately be forfeited requires significant judgment and, to the extent that actual results or updated estimates differ from current estimates, such amounts will be recognized as a cumulative adjustment in the period such estimates are revised.
The table set forth below provides the estimated fair value of options granted by the Company during fiscal years 2020, 2019 and 2018 and the significant weighted average assumptions used in determining such fair value under the Black-Scholes option-pricing model. The average expected life represents an estimate of the period of time stock options are expected to remain outstanding based on the historical exercise behavior of the option grantees. The risk-free interest rate was based on the U.S. Treasury yield curve corresponding to the expected life in effect at the time of the grant. The volatility was estimated based on historical volatility corresponding to the expected life.
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2020
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2019
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2018
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Estimated fair value of stock options granted
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$
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6.99
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$
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11.97
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$
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10.45
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Assumptions:
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Expected dividend yield
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1.9
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%
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1.4
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%
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1.5
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%
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Expected stock price volatility
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27.4
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%
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28.4
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%
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29.8
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%
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Risk-free interest rate
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1.3
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%
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3.0
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%
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2.1
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%
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Average expected life of options
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5 years
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6 years
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6 years
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New Accounting Pronouncements
Current Fiscal Year Adoptions:
ASU No. 2016-02, ASU No. 2018-10, ASU No. 2018-11 and ASU No. 2019-01
In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), which supersedes existing guidance on accounting for leases in ASC Topic 840, Leases. The amendments in this ASU require lessees to account for leases as either finance leases or operating leases and generally require all leases to be recorded on the balance sheet, through the recognition of right-of-use (ROU) assets and corresponding lease liabilities. The lease liability should be measured at the present value of the lease payments over the lease term. The ROU asset should be measured at the lease liability amount, adjusted for lease prepayments, lease incentives received and the lessee's initial direct costs (e.g., commissions). The guidance also requires specific qualitative and quantitative disclosures about leasing activities. In addition, in July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which provide an additional (and optional) transition method whereby the new lease standard is applied at the adoption date and recognized as an adjustment to retained earnings.
The Company adopted ASU No. 2016-02 as of the beginning of the first quarter of fiscal 2020 using the modified retrospective approach with no restatement of prior year amounts. In connection with the adoption of this standard, the Company applied the package of practical expedients intended to ease transition for existing
leases by not requiring the Company to reassess: 1) its initial lease classification conclusions for existing or expired leases; 2) whether an existing or expired contract is a lease or contains an embedded lease; 3) the capitalization of initial direct costs for existing or expired leases. Upon adoption of ASU No. 2016-02, the Company recognized initial ROU assets and lease liabilities consistent with the range previously disclosed in the Company's Annual Report on Form 10-K for the year ended May 31, 2019 with no adjustment to retained earnings. Refer to the above section "Summary of Significant Accounting Policies" and Note 9, Leases, for further discussion of the Company's lease accounting policy and related disclosures.
ASU No. 2018-15
In August 2018, the FASB issued ASU No. 2018-15, Intangibles— Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which reduces the complexity in accounting for costs of implementing a cloud computing service arrangement. This standard aligns the accounting for implementation costs of hosting arrangements, regardless of whether it conveys a license of the hosted software. ASU No. 2018-15 aligns the following requirements for capitalizing implementation costs: (1) those incurred in a hosting arrangement that is a service contract and (2) those incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).
The Company adopted ASU No. 2018-15 as of the beginning of the first quarter of fiscal 2020 using the prospective approach. In fiscal year 2020, the Company capitalized approximately $11.9 of cloud computing costs which have not yet been placed into service. This amount is included within Other assets and deferred charges on the Company's Consolidated Balance Sheets and within the operating section of the Company's Consolidated Statements of Cash Flows.
ASU No. 2018-02
In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220)—Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The amendments in this update affect any entity that is required to apply the provisions of Topic 220, Income Statement-Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by U.S. GAAP. The Company adopted ASU No. 2018-02 as of the beginning of the first quarter of fiscal 2020, which resulted in no impact on the Company's Consolidated Financial Statements.
Forthcoming Adoptions:
ASU No. 2016-13
In June 2016, the FASB issued ASU No. 2016-13, "Measurement of Credit Losses on Financial Instruments" (ASU 2016-13). ASU 2016-13, which was further updated and clarified by the FASB through the issuance of additional related ASUs, amends the guidance surrounding measurement and recognition of credit losses on financial assets measured at amortized cost, including trade receivables and debt securities, by requiring recognition of an allowance for credit losses expected to be incurred over an asset's lifetime based on relevant information about past events, current conditions, and supportable forecasts impacting its ultimate collectability. This "expected loss" model may result in earlier recognition of credit losses than the current "as incurred" model, under which losses are recognized only upon an occurrence of an event that gives rise to the incurrence of a probable loss.
The ASU will be effective for the Company in the first quarter of fiscal 2021, with early adoption permitted. The adoption of ASU 2016-13 is not expected to have a material impact on the Company’s Consolidated Financial Statements.
ASU No. 2017-04
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which removes step two from the goodwill impairment test (comparison of implied fair value of goodwill with the carrying amount of that goodwill for a reporting unit). Instead, an entity should measure its goodwill impairment by the amount the carrying value exceeds the fair value of a reporting unit.
The ASU will be effective for the Company in the first quarter of fiscal 2021. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact that ASU 2017-04 will have on its consolidated financial position, results of operations and cash flows.
ASU No. 2019-12
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes. The updates in this guidance remove the following exceptions: 1. Exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income); 2. Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; 3. Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; 4. Exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The guidance also simplifies the accounting for income taxes by: 1. Requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax; 2. Requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction; 3. Specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements; 4. Requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The guidance further provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax and provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination or a separate transaction.
The ASU will be effective for the Company in the first quarter of fiscal 2022. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. An entity that elects to early adopt in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period and an entity that elects early adoption must adopt all the amendments in the same period. The Company is evaluating the impact of this ASU on its consolidated financial position, results of operations and cash flows.
2. REVENUES
Disaggregated Revenue Data
The following table presents the Company’s revenues disaggregated by region and channel during the year ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Book Clubs
|
$
|
156.8
|
|
|
$
|
212.4
|
|
|
$
|
224.3
|
|
|
Book Fairs
|
|
383.8
|
|
|
|
499.6
|
|
|
|
513.6
|
|
|
Trade
|
|
306.8
|
|
|
|
275.4
|
|
|
|
232.3
|
|
|
Total Children's Book Publishing & Distribution
|
$
|
847.4
|
|
|
$
|
987.4
|
|
|
$
|
970.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Education
|
$
|
287.1
|
|
|
$
|
297.3
|
|
|
$
|
288.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Major Markets(1)
|
|
256.6
|
|
|
|
257.9
|
|
|
|
258.3
|
|
|
Other Markets(2)
|
|
96.0
|
|
|
|
111.3
|
|
|
|
111.3
|
|
|
Total International
|
$
|
352.6
|
|
|
$
|
369.2
|
|
|
$
|
369.6
|
|
|
Total Revenues
|
$
|
1,487.1
|
|
|
$
|
1,653.9
|
|
|
$
|
1,628.4
|
|
(1) - Includes Canada, UK, Australia and New Zealand.
(2) - Primarily includes markets in Asia.
Estimated Returns
A liability for expected returns of $43.5 and $34.5 was recorded within Other accrued expenses on the Company's Consolidated Balance Sheets as of May 31, 2020 and 2019, respectively. In addition, a return asset of $2.7 and $1.6 was recorded within Prepaid expenses and other current assets as of May 31, 2020 and 2019, respectively, for the recoverable cost of product estimated to be returned by customers.
Deferred Revenue
The Company's contract liabilities consist of advance billings and payments received from customers in excess of revenue recognized and revenue allocated to outstanding book fairs incentive credits. These liabilities are recorded within Deferred revenue on the Company's Consolidated Balance Sheets and are classified as short term, as substantially all of the associated performance obligations are expected to be satisfied, and related revenue recognized, within one year. The amount of revenue recognized during the years ended May 31, 2020 and 2019 included within the opening Deferred revenue balance was $121.8 and $107.2, respectively.
3. SEGMENT INFORMATION
The Company categorizes its businesses into three reportable segments: Children’s Book Publishing and Distribution and Education, which comprise the Company's domestic operations, and International.
|
|
|
|
•
|
Children’s Book Publishing and Distribution operates as an integrated business which includes the publication and distribution of children’s books, ebooks, media and interactive products in the United States through its book clubs and book fairs in its school channels and through the trade channel. This segment is comprised of three operating segments.
|
|
|
|
|
•
|
Education includes the publication and distribution to schools and libraries of children’s books, classroom magazines, supplemental and core classroom materials and programs and related support services, and print and on-line reference and non-fiction products for grades pre-kindergarten to 12 in the United States. This segment is comprised of three operating segments.
|
|
|
|
|
•
|
International includes the publication and distribution of products and services outside the United States by the Company’s international operations, and its export and foreign rights businesses. This segment is comprised of three operating segments.
|
The following table sets forth information for the Company’s segments for the three fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Children's
Book
Publishing &
Distribution
|
|
Education
|
|
Overhead (1)
|
|
Total
Domestic
|
|
International
|
|
Total
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
875.4
|
|
|
$
|
287.3
|
|
|
$
|
—
|
|
|
$
|
1,162.7
|
|
|
$
|
324.4
|
|
|
$
|
1,487.1
|
|
|
Bad debts
|
|
5.8
|
|
|
|
2.5
|
|
|
|
—
|
|
|
|
8.3
|
|
|
|
7.3
|
|
|
|
15.6
|
|
|
Depreciation and amortization(2)
|
|
26.5
|
|
|
|
13.0
|
|
|
|
43.4
|
|
|
|
82.9
|
|
|
|
7.3
|
|
|
|
90.2
|
|
|
Asset impairments and write downs
|
|
—
|
|
|
|
—
|
|
|
|
40.0
|
|
|
|
40.0
|
|
|
|
0.6
|
|
|
|
40.6
|
|
|
Segment operating income (loss)
|
|
23.6
|
|
|
|
29.9
|
|
|
|
(135.5
|
)
|
|
|
(82.0
|
)
|
|
|
(6.5
|
)
|
|
|
(88.5
|
)
|
|
Segment assets at May 31, 2020
|
|
523.7
|
|
|
|
223.4
|
|
|
|
1,012.7
|
|
|
|
1,759.8
|
|
|
|
273.8
|
|
|
|
2,033.6
|
|
|
Goodwill at May 31, 2020
|
|
46.9
|
|
|
|
68.1
|
|
|
|
—
|
|
|
|
115.0
|
|
|
|
9.9
|
|
|
|
124.9
|
|
|
Expenditures for other non-current assets(3)
|
|
49.5
|
|
|
|
20.1
|
|
|
|
49.0
|
|
|
|
118.6
|
|
|
|
22.0
|
|
|
|
140.6
|
|
|
Other non-current assets at May 31, 2020(3)
|
|
169.6
|
|
|
|
123.8
|
|
|
|
499.8
|
|
|
|
793.2
|
|
|
|
74.6
|
|
|
|
867.8
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
990.3
|
|
|
$
|
297.4
|
|
|
$
|
—
|
|
|
$
|
1,287.7
|
|
|
$
|
366.2
|
|
|
$
|
1,653.9
|
|
|
Bad debts
|
|
3.8
|
|
|
|
1.4
|
|
|
|
—
|
|
|
|
5.2
|
|
|
|
1.8
|
|
|
|
7.0
|
|
|
Depreciation and amortization(2)
|
|
23.7
|
|
|
|
9.5
|
|
|
|
41.7
|
|
|
|
74.9
|
|
|
|
6.8
|
|
|
|
81.7
|
|
|
Asset impairments and write downs
|
|
—
|
|
|
|
—
|
|
|
|
0.9
|
|
|
|
0.9
|
|
|
|
—
|
|
|
|
0.9
|
|
|
Segment operating income (loss)
|
|
82.9
|
|
|
|
30.6
|
|
|
|
(102.3
|
)
|
|
|
11.2
|
|
|
|
13.8
|
|
|
|
25.0
|
|
|
Segment assets at May 31, 2019
|
|
523.4
|
|
|
|
214.7
|
|
|
|
887.6
|
|
|
|
1,625.7
|
|
|
|
252.8
|
|
|
|
1,878.5
|
|
|
Goodwill at May 31, 2019
|
|
47.0
|
|
|
|
68.2
|
|
|
|
—
|
|
|
|
115.2
|
|
|
|
10.0
|
|
|
|
125.2
|
|
|
Expenditures for other non-current assets(3)
|
|
71.4
|
|
|
|
22.6
|
|
|
|
77.6
|
|
|
|
171.6
|
|
|
|
13.5
|
|
|
|
185.1
|
|
|
Other non-current assets at May 31, 2019(3)
|
|
175.0
|
|
|
|
116.3
|
|
|
|
507.7
|
|
|
|
799.0
|
|
|
|
65.3
|
|
|
|
864.3
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
970.2
|
|
|
$
|
288.6
|
|
|
$
|
—
|
|
|
$
|
1,258.8
|
|
|
$
|
369.6
|
|
|
$
|
1,628.4
|
|
|
Bad debts
|
|
4.4
|
|
|
|
1.4
|
|
|
|
—
|
|
|
|
5.8
|
|
|
|
3.7
|
|
|
|
9.5
|
|
|
Depreciation and amortization(2)
|
|
23.3
|
|
|
|
7.4
|
|
|
|
29.1
|
|
|
|
59.8
|
|
|
|
6.2
|
|
|
|
66.0
|
|
|
Asset impairments and write downs
|
|
0.2
|
|
|
|
—
|
|
|
|
11.0
|
|
|
|
11.2
|
|
|
|
—
|
|
|
|
11.2
|
|
|
Segment operating income (loss)
|
|
105.8
|
|
|
|
33.9
|
|
|
|
(101.8
|
)
|
|
|
37.9
|
|
|
|
17.7
|
|
|
|
55.6
|
|
|
Segment assets at May 31, 2018
|
|
434.8
|
|
|
|
202.4
|
|
|
|
927.9
|
|
|
|
1,565.1
|
|
|
|
260.3
|
|
|
|
1,825.4
|
|
|
Goodwill at May 31, 2018
|
|
40.9
|
|
|
|
68.3
|
|
|
|
—
|
|
|
|
109.2
|
|
|
|
10.0
|
|
|
|
119.2
|
|
|
Expenditures for other non-current assets(3)
|
|
58.6
|
|
|
|
19.2
|
|
|
|
104.5
|
|
|
|
182.3
|
|
|
|
15.3
|
|
|
|
197.6
|
|
|
Other non-current assets at May 31, 2018(3)
|
|
151.2
|
|
|
|
101.8
|
|
|
|
492.7
|
|
|
|
745.7
|
|
|
|
74.3
|
|
|
|
820.0
|
|
|
|
|
|
(1)
|
Overhead includes all domestic corporate amounts not allocated to segments, including expenses and costs related to the management of corporate assets. Unallocated assets are principally comprised of deferred income taxes and property, plant and equipment related to the Company’s headquarters in the metropolitan New York area, its fulfillment and distribution facilities located in Missouri and its facility located in Connecticut.
|
|
|
|
|
(2)
|
Includes depreciation of property, plant and equipment and amortization of intangible assets and prepublication and production costs.
|
|
|
|
|
(3)
|
Other non-current assets include property, plant and equipment, prepublication assets, production assets, cloud computing costs, royalty advances, goodwill, intangible assets and investments. Expenditures for other non-current assets for the International reportable segment include expenditures for long-lived assets of $17.3, $8.2 and $10.0 for the fiscal years ended May 31, 2020, 2019 and 2018, respectively. Other non-current assets for the International reportable segment include long-lived assets of $43.8, $35.9 and $36.8 at May 31, 2020, 2019 and 2018, respectively.
|
4. ASSET WRITE DOWN
During the third quarter, the Company implemented new systems, processes and a centralized management structure to better coordinate demand planning and procurement activity across North America, and to optimize inventory utilization and management. As a result of the foregoing, the Company determined that substantial quantities of inventory will not be required to meet future profitable demand, and will be donated, liquidated or disposed. Accordingly, a $40.0 non cash write down was recognized in the third quarter of fiscal 2020 for this excess inventory and associated costs. The inventory cost, net of reserves, was $37.6. In addition, $1.6 and $0.8 of author advances and prepublication costs, respectively, were written down as they were directly related to the inventory. The related impact was a loss per basic and diluted share of Class A and Common Stock of $0.84 in the twelve months ended May 31, 2020.
5. DEBT
The following table summarizes the Company's debt as of May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
|
|
|
2020
|
|
|
2019
|
|
Loan Agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Loan
|
$
|
200.0
|
|
|
$
|
200.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Unsecured Lines of Credit (weighted average interest rates of 4.6% and 4.1%, respectively)
|
|
7.9
|
|
|
|
7.9
|
|
|
|
7.3
|
|
|
|
7.3
|
|
|
UK long-term debt
|
|
10.6
|
|
|
|
10.6
|
|
|
|
—
|
|
|
|
—
|
|
|
Total debt
|
$
|
218.5
|
|
|
$
|
218.5
|
|
|
$
|
7.3
|
|
|
$
|
7.3
|
|
|
Less: lines of credit and current portion of long-term debt
|
|
(7.9
|
)
|
|
|
(7.9
|
)
|
|
|
(7.3
|
)
|
|
|
(7.3
|
)
|
|
Total long-term debt
|
$
|
210.6
|
|
|
$
|
210.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The fair value of the Company's debt approximates the carrying value for all periods presented.
The following table sets forth the maturities of the carrying values of the Company’s debt obligations as of May 31, 2020 for the fiscal years ended May 31:
|
|
|
|
|
|
|
|
2021
|
$
|
7.9
|
|
|
2022
|
|
210.6
|
|
|
2023
|
|
—
|
|
|
2024
|
|
—
|
|
|
2025
|
|
—
|
|
|
Thereafter
|
|
—
|
|
|
Total debt
|
$
|
218.5
|
|
US Loan Agreement
On January 5, 2017, Scholastic Corporation and Scholastic Inc. (each, a “Borrower” and together, the “Borrowers”) entered into a 5-year credit facility with certain banks (the “Loan Agreement”). The Loan Agreement replaced the Company's then existing loan agreement and has substantially similar terms, except that:
|
|
|
|
•
|
the borrowing limit was reduced to $375.0 from $425.0;
|
•the “starter” basket for permitted payments of dividends and other payments in respect of capital stock was
increased to $275.0 from $75.0; and
•the maturity date was extended to January 5, 2022.
The prior loan agreement, which was originally entered into in 2007 and had a maturity date of December 5, 2017, was terminated on January 5, 2017 in connection with the entry into the new Loan Agreement and was treated as a debt modification.
The Loan Agreement allows the Company to borrow, repay or prepay and reborrow at any time prior to the January 5, 2022 maturity date. Under the Loan Agreement, interest on amounts borrowed thereunder is due and payable in arrears on the last day of the interest period (defined as the period commencing on the date of the advance and ending on the last day of the period selected by the Borrower at the time each advance is made). The interest pricing under the Loan Agreement is dependent upon the Borrower’s election of a rate that is either:
|
|
|
|
•
|
A Base Rate equal to the higher of (i) the prime rate, (ii) the prevailing Federal Funds rate plus 0.50% or (iii) the Eurodollar Rate for a one month interest period plus 1.00%, as well as, in each case, an applicable spread ranging from 0.175% to 0.60%, as determined by the Company’s prevailing consolidated debt to total capital ratio.
|
- or -
|
|
|
|
•
|
A Eurodollar Rate equal to the London interbank offered rate (LIBOR) plus an applicable spread ranging from 1.175% to 1.60%, as determined by the Company’s prevailing consolidated debt to total capital ratio.
|
As of May 31, 2020, the indicated spread on Base Rate Advances was 0.175% and the indicated spread on Eurodollar Advances was 1.175%, both based on the Company’s prevailing consolidated debt to total capital ratio.
The Loan Agreement also provides for the payment of a facility fee in respect of the aggregate amount of revolving credit commitments ranging from 0.20% to 0.40% per annum based upon the Company’s prevailing consolidated debt to total capital ratio. At May 31, 2020, the facility fee rate was 0.20%.
A portion of the revolving credit facility up to a maximum of $50.0 is available for the issuance of letters of credit. In addition, a portion of the revolving credit facility up to a maximum of $15.0 is available for swingline loans. The Loan Agreement has an accordion feature which permits the Company, provided certain conditions are satisfied, to increase the facility by up to an additional $150.0.
As of May 31, 2020, the Company had outstanding borrowings of $200.0 under the Loan Agreement. The Company incurred this obligation in the fourth quarter of fiscal 2020 as a precautionary measure due to the uncertainty resulting from the COVID-19 pandemic. While this obligation is not due until the January 5, 2022 maturity date, the Company may, from time to time, make payments to reduce this obligation when cash from operations becomes available for this purpose. No borrowings were outstanding under the Loan Agreement as of May 31, 2019.
At May 31, 2020, the Company had open standby letters of credit totaling $4.3 issued under certain credit lines, including $0.4 under the Loan Agreement and $3.9 under the domestic credit lines discussed below. 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 May 31, 2020, the Company was in compliance with these covenants.
UK Loan Agreements
On September 23, 2019, Scholastic Limited UK entered into a term loan agreement to borrow £2.0 to fund a land purchase in connection with the construction of a new UK facility. The loan has a maturity date of July 31, 2021. Under the agreement, the principal balance is due in full in a single payment on the last day of the term and interest on the amount borrowed is due and payable quarterly. The interest is charged at 1.77% per annum over the Base Rate. The Base Rate is currently equal to 0.10% per annum and is subject to change. As of May 31, 2020, the Company had $2.5 outstanding on the loan.
On January 24, 2020, Scholastic Limited UK entered into a term loan facility with a borrowing limit of £6.6 to fund the construction of the new UK facility. The loan has a maturity date of July 31, 2021. Under the agreement, the principal balance is due in full in a single payment on the last day of the term and interest on the amount borrowed is due and payable quarterly. The interest is charged at 1.77% per annum over the Base Rate. The Base Rate is currently equal to 0.10% per annum and is subject to change. As of May 31, 2020, the Company had $8.1 outstanding on the loan and no remaining available credit under this facility.
Lines of Credit
As of May 31, 2020, the Company’s domestic credit lines available under unsecured money market bid rate credit lines totaled $25.0. There were no outstanding borrowings under these credit lines as of May 31, 2020 and May 31, 2019. As of May 31, 2020, availability under these unsecured money market bid rate credit lines totaled $21.1. All loans made under these credit lines are at the sole discretion of the lender and at an interest rate and term agreed to at the time each loan is made, but not to exceed 365 days. These credit lines may be renewed, if requested by the Company, at the option of the lender.
As of May 31, 2020, the Company had various local currency credit lines, totaling $25.4, underwritten by banks primarily in the United States, Canada and the United Kingdom. Outstanding borrowings under these facilities were $7.9 at May 31, 2020 at a weighted average interest rate of 4.6%, compared to outstanding borrowings of $7.3 at May 31, 2019 at a weighted average interest rate of 4.1%. As of May 31, 2020, amounts available under these facilities totaled $17.5. These credit lines are typically available for overdraft borrowings or loans up to 364 days and may be renewed, if requested by the Company, at the sole option of the lender.
6. COMMITMENTS AND CONTINGENCIES
Contractual Commitments
The following table sets forth the aggregate minimum future contractual commitments at May 31, 2020 relating to royalty advances and minimum print quantities for the fiscal years ending May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty Advances
|
|
Minimum Print Quantities
|
|
2021
|
$
|
16.2
|
|
|
$
|
40.9
|
|
|
2022
|
|
5.3
|
|
|
|
1.7
|
|
|
2023
|
|
0.6
|
|
|
|
1.4
|
|
|
2024
|
|
0.0
|
|
|
|
—
|
|
|
2025
|
|
0.0
|
|
|
|
—
|
|
|
2026 and thereafter
|
|
0.1
|
|
|
|
—
|
|
|
Total commitments
|
$
|
22.2
|
|
|
$
|
44.0
|
|
The Company may be subject to penalties if it fails to meet these minimum print quantities due to changes in the marketplace as a result of COVID-19.
The Company had open standby letters of credit of $4.3 and $5.3 issued under certain credit lines as of May 31, 2020 and 2019, respectively, in support of its insurance programs. These letters of credit are scheduled to expire within one year; however, the Company expects that substantially all of these letters of credit will be renewed, at similar terms, prior to their expiration.
Contingencies
COVID-19
The COVID-19 pandemic and actions taken, or which may be taken in the future following any easing of current restrictions based on the future course of the pandemic, by governments, businesses and individuals to limit the spread of the virus may continue to have an adverse effect on the Company’s results of operations and financial condition. Refer to Item 1A, Risk Factors, for a detailed discussion regarding the ways that the virus and steps taken to curtail it have impacted or may in the future impact the Company’s businesses and operations.
The Company is not currently aware of any loss contingencies related to the foregoing that would require recognition in the current fiscal year ended May 31, 2020.
Legal Matters
Various claims and lawsuits arising in the normal course of business are pending against the Company. The Company accrues a liability for such matters when it is probable that a liability has occurred and the amount of such liability can be reasonably estimated. When only a range can be estimated, the most probable amount in the range is accrued unless no amount within the range is a better estimate than any other amount, in which case the minimum amount in the range is accrued. Legal costs associated with litigation are expensed in the period in which they are incurred. The Company does not expect, in the case of those various claims and lawsuits arising in the normal course of business where a loss is considered probable or reasonably possible, that the reasonably possible losses from such claims and lawsuits (either individually or in the aggregate) would have a material adverse effect on the Company’s consolidated financial position or results of operations.
In fiscal 2020, the Company entered into a settlement agreement, without admission of liability, related to an alleged patent infringement claim and recognized an expense of $1.5. In addition, the Company entered into settlement agreements related to photo copyright infringement cases, recognizing $2.4 in total in fiscal 2020.
Sales Tax Matters
On June 21, 2018, the U.S. Supreme Court issued its opinion in South Dakota v. Wayfair, Inc. et. al., reversing prior precedent, in particular Quill Corp. v. North Dakota (1992), which held that states could not constitutionally require retailers to collect and remit sales or use taxes in respect to mail order or internet sales made to residents of a state in the absence of the retailer having a physical presence in the taxing state. As a result, the Company now has an obligation, at least on a go forward basis, based on each state's enforcement date, to collect and remit sales and use taxes, primarily in respect to sales made through its school book club channel, as well as certain sales made through its ecommerce internet sites, to residents in states that the Company had not previously remitted sales or use taxes based on having no physical presence in such states.
The Company continues to monitor its compliance based on anticipated enforcement dates and an assumption as to each state's likely interpretation and application of the Court's decision. As the Company continues to monitor each state, the staggered enforcement dates, and the progress towards compliance, expenses will be incurred by the Company. The Company remits sales tax to all required states. Any on-going or future litigation with states relating to sales and use taxes could be impacted favorably or unfavorably by the Court’s decision in future fiscal periods.
In fiscal 2019, the Company entered into a settlement with the State of Wisconsin in order to resolve legacy sales and use tax assessments for fiscal years 2003 through 2014. The Company recorded $8.1 of expense in the Overhead segment.
7. INVESTMENTS
Investments are included in Other assets and deferred charges on the Consolidated Balance Sheets. The following table summarizes the Company’s investments for the fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Segment
|
|
Equity method investments
|
$
|
25.0
|
|
|
$
|
23.4
|
|
|
International
|
|
Other equity investments
|
|
6.0
|
|
|
|
6.0
|
|
|
Children's Book Publishing & Distribution
|
|
Total investments
|
$
|
31.0
|
|
|
$
|
29.4
|
|
|
|
The Company’s 26.2% equity interest in a children’s book publishing business located in the UK is accounted for using the equity method of accounting. Equity method income from this investment is reported in the International segment.
In April 2019, the Company acquired an equity investment for $6.0, which provided a 4.6% ownership interest in a financing and production company that makes film, television, and digital programming designed for the youth market. This equity investment does not have a readily determinable fair value and the Company has elected to apply the measurement alternative, and report this investment at cost, less impairment, on the Company's Consolidated Balance Sheets. There have been no impairments or adjustments to the carrying value of this investment.
The Company has other equity investments with a net carrying value of less than $0.1 at May 31, 2020 and May 31, 2019, respectively.
Income from equity investments reported in Selling, general and administrative expenses in the Consolidated Statements of Operations totaled $3.2 for the year ended May 31, 2020, $5.9 for the year ended May 31, 2019 and $4.8 for the year ended May 31, 2018.
8. PROPERTY, PLANT AND EQUIPMENT
The following table summarizes the major classes of assets at cost and accumulated depreciation for the fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Land
|
$
|
82.5
|
|
|
$
|
79.1
|
|
|
Buildings
|
|
246.7
|
|
|
|
239.1
|
|
|
Capitalized software
|
|
189.5
|
|
|
|
158.9
|
|
|
Furniture, fixtures and equipment
|
|
217.0
|
|
|
|
213.4
|
|
|
Building and leasehold improvements
|
|
212.2
|
|
|
|
211.0
|
|
|
Construction in progress
|
|
49.0
|
|
|
|
46.8
|
|
|
Total at cost
|
$
|
996.9
|
|
|
$
|
948.3
|
|
|
Less: Accumulated depreciation and amortization
|
|
(420.0
|
)
|
|
|
(370.6
|
)
|
|
Property, plant and equipment, net
|
$
|
576.9
|
|
|
$
|
577.7
|
|
Depreciation and amortization expense related to property, plant, and equipment was $60.5, $56.2 and $41.8 for the fiscal years ended May 31, 2020, 2019 and 2018, respectively.
In fiscal 2020, the Company recognized a pretax impairment charge of $0.6 related to an outdated technology platform in Canada. In fiscal 2019, the Company recognized pretax impairment charges of $0.9 related to the abandonment of legacy building improvements. In fiscal 2018 the Company recognized pretax impairment charges of $11.0 related to the abandonment of legacy building improvements and an impairment of $0.2 related to book fairs trucks.
Assets Held For Sale
The Company committed to a plan to sell the company-owned facility located in Danbury, Connecticut to relocate the book fairs warehousing and distribution operations conducted in Danbury to a warehouse in Allentown, Pennsylvania. This asset is included in the Overhead segment. The Company also committed to a plan to sell the UK distribution centers located in Witney and Southam to consolidate the operations into a new facility in Warwickshire which is currently under construction. These assets are included in the International segment. The Company expects the sale of these facilities to be completed within one year and to recognize a gain on sale. The long-lived assets which consist of land, building, and building improvements are classified as held for sale. These assets are carried at the lower of carrying value or fair value less costs to sell and no additional depreciation is being recognized. As of May 31, 2020, the carrying amounts totaled $8.8.
9. LEASES
The following table summarizes right-of-use assets and lease liabilities recorded on the Company's Consolidated Balance Sheet for the fiscal year ended May 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
May 31, 2020
|
|
Location within Consolidated Balance Sheet
|
|
Operating leases
|
$
|
95.3
|
|
|
Operating lease right-of-use assets, net
|
|
Finance leases
|
|
10.9
|
|
|
Property, plant and equipment, net
|
|
Total lease assets
|
$
|
106.2
|
|
|
|
|
|
|
|
|
|
|
Operating leases :
|
|
|
|
|
|
Current portion
|
$
|
22.8
|
|
|
Current portion of operating lease liabilities
|
|
Non-current portion
|
|
75.7
|
|
|
Long-term operating lease liabilities
|
|
Total operating lease liabilities
|
$
|
98.5
|
|
|
|
|
|
|
|
|
|
|
Finance leases :
|
|
|
|
|
|
Current portion
|
$
|
2.1
|
|
|
Other accrued expenses
|
|
Non-current portion
|
|
9.5
|
|
|
Other noncurrent liabilities
|
|
Total finance lease liabilities
|
$
|
11.6
|
|
|
|
|
Total lease liabilities
|
$
|
110.1
|
|
|
|
The following table summarizes the activity for the fiscal year ended May 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended May 31, 2020
|
|
Location within Consolidated Statements of Operations
|
|
|
|
|
Operating lease expense (1)
|
$
|
28.6
|
|
|
Selling, general and administrative expenses
|
|
Finance lease costs :
|
|
|
|
|
|
Depreciation of leased assets
|
|
2.1
|
|
|
Depreciation and amortization
|
|
Accretion of lease liabilities
|
|
0.4
|
|
|
Interest expense
|
|
Total lease expense
|
$
|
31.1
|
|
|
|
(1) The Company elected to account for rent concessions negotiated in connection with COVID-19 as if they were contemplated as part of the existing contract. Under this accounting model, the Company continued to recognize lease expense as the lessee and rental income as the lessor. There is an immaterial impact from these concessions for the fiscal year ended May 31, 2020. COVID-19 may cause changes in the market that could impact future lease payments.
The following table summarizes certain cash flows information related to the Company's leases for the fiscal year ended May 31, 2020:
|
|
|
|
|
|
|
|
|
Fiscal Year Ended May 31, 2020
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows from operating leases
|
$
|
3.2
|
|
|
Operating cash flows from finance leases
|
|
0.4
|
|
|
Financing cash flows from finance leases
|
|
2.0
|
The following table provides a maturity analysis summary of the Company's lease liabilities recorded on the Company's Consolidated Balance Sheet for the fiscal year ended May 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
|
Fiscal 2021
|
$
|
26.8
|
|
|
$
|
2.5
|
|
|
Fiscal 2022
|
|
25.3
|
|
|
|
2.4
|
|
|
Fiscal 2023
|
|
19.4
|
|
|
|
2.3
|
|
|
Fiscal 2024
|
|
11.8
|
|
|
|
2.1
|
|
|
Fiscal 2025
|
|
7.6
|
|
|
|
1.3
|
|
|
Fiscal 2026 and thereafter
|
|
24.8
|
|
|
|
2.4
|
|
|
Total lease payments
|
$
|
115.7
|
|
|
$
|
13.0
|
|
|
Less: interest
|
|
(17.2
|
)
|
|
|
(1.4
|
)
|
|
Total lease liabilities
|
$
|
98.5
|
|
|
$
|
11.6
|
|
The following table summarizes the weighted-average remaining lease terms and weighted-average discount rates related to the Company's leases recorded on the Company's Consolidated Balance Sheet for the fiscal year ended May 31, 2020:
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
|
Weighted-average remaining lease term (years)
|
5.8
|
|
5.9
|
|
Weighted-average discount rate
|
4.7%
|
|
3.8%
|
10. GOODWILL AND OTHER INTANGIBLES
The following table summarizes the activity in Goodwill for the fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Gross beginning balance
|
$
|
164.8
|
|
|
$
|
158.8
|
|
|
Accumulated impairment
|
|
(39.6
|
)
|
|
|
(39.6
|
)
|
|
Beginning balance
|
$
|
125.2
|
|
|
$
|
119.2
|
|
|
Additions
|
|
—
|
|
|
|
6.3
|
|
|
Foreign currency translation
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
|
Other
|
|
—
|
|
|
|
—
|
|
|
Ending balance
|
$
|
124.9
|
|
|
$
|
125.2
|
|
There were no impairment charges related to Goodwill in any of the periods presented. As of May 31, 2020, $66.7 of Goodwill is attributable to a reporting unit whose fair value reasonably exceeds carrying value. This reporting unit is associated with the Education segment. If there is a continued adverse impact on the school-based market related to the COVID-19 pandemic, the Company will need to reassess the Goodwill related to this reporting unit for impairment, as well as other related assets including prepublication costs.
In fiscal 2019, the Company completed the purchase of a majority-ownership position in MBI, a UK-based children's book publishing business, resulting in the recognition of $6.3 of Goodwill. See Note 11, "Acquisitions," for more information.
The following table summarizes Other intangibles for the fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Other intangibles subject to amortization - beginning balance
|
$
|
12.2
|
|
|
$
|
10.1
|
|
|
Additions
|
|
1.6
|
|
|
|
4.5
|
|
|
Other
|
|
—
|
|
|
|
0.6
|
|
|
Amortization expense
|
|
(3.2
|
)
|
|
|
(2.8
|
)
|
|
Foreign currency translation
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
|
Total other intangibles subject to amortization, net of accumulated amortization of $30.1 and $26.9, respectively
|
$
|
10.5
|
|
|
$
|
12.2
|
|
|
|
|
|
|
|
|
|
Total other intangibles not subject to amortization
|
|
2.1
|
|
|
|
2.1
|
|
|
Total other intangibles
|
$
|
12.6
|
|
|
$
|
14.3
|
|
In fiscal 2020, the Company purchased a U.S.-based book fair business resulting in $1.6 of amortizable intangible assets. In fiscal 2019, the Company completed the purchase of a majority interest in a UK-based children's book publishing business, which resulted in $3.9 of amortizable intangible assets. In fiscal 2019, the Company also purchased a U.S.-based book fair business resulting in $0.3 of amortizable intangible assets and a UK-based book clubs business resulting in $0.3 of amortizable intangible assets.
Amortization expense for Other intangibles totaled $3.2, $2.8 and $2.1 for the fiscal years ended May 31, 2020, 2019 and 2018, respectively.
The following table reflects the estimated amortization expense for intangibles for future fiscal years ending May 31:
|
|
|
|
|
|
|
|
2021
|
$
|
2.2
|
|
|
2022
|
|
2.1
|
|
|
2023
|
|
1.9
|
|
|
2024
|
|
1.6
|
|
|
2025
|
|
1.3
|
|
|
Thereafter
|
|
1.4
|
|
Intangible assets with indefinite lives consist principally of trademark and tradename rights. Intangible assets with definite lives consist principally of customer lists, intellectual property, tradenames and other agreements. Intangible assets with definite lives are amortized over their estimated useful lives. The weighted-average remaining useful lives of all amortizable intangible assets is approximately 5.7 years.
11. ACQUISITIONS
Fiscal 2020
In fiscal 2020, the Company acquired a U.S.-based book fair business resulting in the recognition of $1.6 of amortizable intangible assets. The results of operations of this business subsequent to the acquisition are included in the Children's Book Publishing and Distribution segment.
Fiscal 2019
Make Believe Ideas Limited Acquisition
On March 27, 2019, the Company completed the acquisition of a majority ownership interest in Make Believe Ideas Limited, a UK-based children's book publishing company, by acquiring an additional 46.5% of equity interest in MBI to bring the Company's total ownership interest to 95.0%. Prior to March 27, 2019, the Company accounted for its 48.5% equity interest under the equity method of accounting. In connection with the acquisition, the carrying value of the pre-existing equity-method investment was remeasured to a fair value of $12.1, resulting in the recognition of a gain of $0.1. The fair value was estimated using future operating cash flow projections that were discounted at a rate of 17.0%, which accounted for the relative risks of the estimated future cash flows. The Company classified this as a Level 3 fair value measurement due to the use of these significant unobservable inputs. Additionally, a loss of $1.0 was
recorded related to the recognition of accumulated foreign currency translation adjustments previously recorded within accumulated other comprehensive income (loss).
The founder and chief executive officer of MBI retains a 5.0% noncontrolling ownership interest in MBI. The Company fully consolidated MBI as of the acquisition date, and the 5.0% noncontrolling interest is classified within stockholder's equity. The results of operations subsequent to the acquisition date are included in the Children's Book Publishing and Distribution segment.
The Company accounted for the acquisition of the additional ownership interest as a business combination under the acquisition method of accounting. The acquisition date fair value of the consideration for the additional 46.5% interest was $4.6, consisting of $7.6 net cash paid and the elimination of a $3.0 pre-acquisition payable owed to MBI by the Company. As part of the business combination, the Company determined that the fair value of 100% of MBI was $22.3. Estimated fair values were assigned to the assets and liabilities acquired, including inventory, receivables, payables and a trade name. The Company utilized internally-developed discounted cash flow forecasts to determine the estimated fair value of the trade name of $3.9 and has therefore classified this as a Level 3 fair value measurement. As a result of this acquisition, $6.3 of goodwill was assigned to the Company’s Children's Book Publishing and Distribution segment, which is not deductible for tax purposes.
Other Acquisitions
In fiscal 2019, the Company purchased a U.S.-based book fair business and a UK-based book clubs business resulting in $0.6 of amortizable intangible assets. The results of operations of these businesses subsequent to the acquisitions were included in the Children's Book Publishing and Distribution and International segments, respectively.
The transactions in fiscal 2020 and 2019 were not determined to be material individually, or in the aggregate, to the Company's results and, therefore, pro forma financial information is not presented.
12. TAXES
The components of Earnings (loss) before income taxes for the fiscal years ended May 31 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
United States
|
$
|
(92.5
|
)
|
|
$
|
8.7
|
|
|
$
|
(18.4
|
)
|
|
Non-United States
|
|
2.8
|
|
|
|
17.3
|
|
|
|
16.9
|
|
|
Total
|
$
|
(89.7
|
)
|
|
$
|
26.0
|
|
|
$
|
(1.5
|
)
|
The provision for income taxes for the fiscal years ended May 31 consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
$
|
(72.2
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(3.6
|
)
|
|
State and local
|
|
(1.2
|
)
|
|
|
4.8
|
|
|
|
0.7
|
|
|
Non-United States
|
|
2.1
|
|
|
|
2.8
|
|
|
|
4.9
|
|
|
Total Current
|
$
|
(71.3
|
)
|
|
$
|
7.4
|
|
|
$
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
$
|
27.3
|
|
|
$
|
1.1
|
|
|
$
|
5.0
|
|
|
State and local
|
|
(0.9
|
)
|
|
|
3.1
|
|
|
|
(3.5
|
)
|
|
Non-United States
|
|
(1.1
|
)
|
|
|
(1.2
|
)
|
|
|
—
|
|
|
Total Deferred
|
$
|
25.3
|
|
|
$
|
3.0
|
|
|
$
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current and Deferred
|
$
|
(46.0
|
)
|
|
$
|
10.4
|
|
|
$
|
3.5
|
|
Effective Tax Rate Reconciliation
A reconciliation of the significant differences between the effective income tax rate and the federal statutory rate on Earnings (loss) before income taxes for the fiscal years ended May 31 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Computed federal statutory provision
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
|
29.2
|
%
|
|
State income tax provision, net of federal income tax benefit
|
|
2.0
|
|
|
|
25.7
|
|
|
|
37.1
|
|
|
Difference in effective tax rates on earnings of foreign subsidiaries
|
|
1.8
|
|
|
|
2.3
|
|
|
|
(1.3
|
)
|
|
Rate differential on net operating loss carrybacks
|
|
34.2
|
|
|
|
—
|
|
|
|
—
|
|
|
GILTI inclusion
|
|
(2.4
|
)
|
|
|
3.4
|
|
|
|
—
|
|
|
Charitable contributions
|
|
0.1
|
|
|
|
(0.6
|
)
|
|
|
28.6
|
|
|
Tax credits
|
|
0.8
|
|
|
|
(3.1
|
)
|
|
|
42.8
|
|
|
Valuation allowances
|
|
(1.1
|
)
|
|
|
2.3
|
|
|
|
68.1
|
|
|
Uncertain positions
|
|
(2.3
|
)
|
|
|
(6.3
|
)
|
|
|
110.3
|
|
|
Remeasurement of deferred tax balances
|
|
—
|
|
|
|
—
|
|
|
|
(371.3
|
)
|
|
Permanent differences
|
|
(1.1
|
)
|
|
|
0.1
|
|
|
|
(177.6
|
)
|
|
Other
|
|
(1.7
|
)
|
|
|
(4.8
|
)
|
|
|
0.8
|
|
|
Effective tax rates
|
|
51.3
|
%
|
|
|
40.0
|
%
|
|
|
(233.3
|
)%
|
|
Total provision (benefit) for income taxes
|
$
|
(46.0
|
)
|
|
$
|
10.4
|
|
|
$
|
3.5
|
|
Tax Legislation Updates
In response to the COVID-19 pandemic, many governments have enacted or are contemplating measures to provide aid and economic stimulus. These measures may include deferring the due dates of tax payments or other changes to their income and non-income-based tax laws as well as providing direct government assistance through grants and forgivable loans. On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer-side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property.
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. The Tax Cuts and Jobs Act, among other things, reduced the U.S. federal corporate tax rate from 35% to 21% and imposed a new minimum tax on Global Intangible Low-Taxed Income ("GILTI") earned by foreign subsidiaries.
Effective Tax Rate
The effective tax rate for the fiscal year ended May 31, 2020 was impacted by the loss before income taxes of $89.7, which reflected lower operating results as a result of the COVID-19 pandemic. In addition, the Company expects to carry back net operating losses generated in the U.S. to previous periods which were taxed at the higher 35% federal corporate tax rate.
The effective tax rate for the fiscal year ended May 31, 2019 was impacted by a reduction in the federal statutory rate under the Tax Cuts and Jobs Act, as the new rate was applicable to the entire current fiscal year period. The Company's income tax expense for the fiscal period included $0.9 of expense related to GILTI, partially offset by applicable deductions and foreign tax credits. The Company's state income tax expense was primarily impacted by variations in state earnings and corresponding state net operating carryforwards.
The effective tax rate for the fiscal year ended May 31, 2018 was impacted by the loss before income taxes of $1.5, which included a pre-tax change of $57.3 related to the settlement of the Company's domestic defined benefit pension plan. The effective tax rate was also impacted by a reduction in the federal statutory rate under the Tax Cuts and Jobs Act, for a portion of the prior fiscal year period, and the re-measurement of the Company's U.S. deferred tax balances, resulting in $5.7 of additional tax provision.
Unremitted Earnings
The Company assesses foreign investment levels periodically to determine if all or a portion of the Company’s investments in foreign subsidiaries are indefinitely invested. The Company is permanently reinvested in certain foreign subsidiaries representing a portion of the Company's investments in foreign subsidiaries. Any required adjustment to the income tax provision would be reflected in the period that the Company changes this assessment. As of May 31, 2020, there have been no adjustments to the income tax provision related to unremitted earnings.
Deferred Taxes
The significant components for deferred income taxes for the fiscal years ended May 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Tax uniform capitalization
|
$
|
10.4
|
|
|
$
|
12.8
|
|
|
Prepublication expenses
|
|
0.8
|
|
|
|
1.2
|
|
|
Inventory reserves
|
|
10.3
|
|
|
|
15.1
|
|
|
Allowance for doubtful accounts
|
|
2.9
|
|
|
|
1.9
|
|
|
Deferred revenue
|
|
—
|
|
|
|
23.5
|
|
|
Other reserves
|
|
18.0
|
|
|
|
17.2
|
|
|
Postretirement, post employment and pension obligations
|
|
5.3
|
|
|
|
6.0
|
|
|
Tax carryforwards
|
|
51.1
|
|
|
|
31.8
|
|
|
Lease Liabilities
|
|
25.2
|
|
|
|
—
|
|
|
Other
|
|
11.9
|
|
|
|
13.7
|
|
|
Gross deferred tax assets
|
$
|
135.9
|
|
|
$
|
123.2
|
|
|
Valuation allowance
|
|
(31.3
|
)
|
|
|
(25.7
|
)
|
|
Total deferred tax assets
|
$
|
104.6
|
|
|
$
|
97.5
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
(65.8
|
)
|
|
|
(60.3
|
)
|
|
Lease Right of Use Assets
|
|
(24.4
|
)
|
|
|
—
|
|
|
Prepaid expenses
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
Other
|
|
(1.9
|
)
|
|
|
—
|
|
|
Total deferred tax liability
|
$
|
(92.3
|
)
|
|
$
|
(60.5
|
)
|
|
Total net deferred tax assets
|
$
|
12.3
|
|
|
$
|
37.0
|
|
The total net deferred tax assets include deferred tax liabilities of $6.3 which are included in Other noncurrent liabilities on the Company's Consolidated Balance Sheet and deferred tax assets of $18.6 as of May 31, 2020.
The Company regularly assesses the realizability of deferred tax assets considering all available evidence including, to the extent applicable, the nature, frequency and severity of prior cumulative losses, forecasts of future taxable income, tax filing status, duration of statutory carryforward periods, tax planning strategies and historical experience. For the fiscal year ended May 31, 2020, the valuation allowance increased by $5.6 and there were no valuation allowance releases. For the fiscal year ended May 31, 2019, the valuation allowance increased by $0.6, driven by increases to the valuation allowance of $3.9, partially offset by $3.3 of valuation allowance releases and other items. For the fiscal year ended May 31, 2020, the Company has tax effected state and foreign net operating loss carryforwards of $15.4 and $28.1, respectively. Certain state net operating loss carryforwards, if not utilized, expire at various times, primarily between fiscal year 2021 and fiscal year 2040. Certain foreign net operating loss carryforwards, if not utilized, also expire at various times. Approximately half of the foreign net operating loss carryforwards expire between fiscal year 2021 and fiscal year 2040 and the remaining carryforwards do not have an expiration date.
Unrecognized tax benefits
The benefits of uncertain tax positions are recorded in the financial statements only after determining a more likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from taxing authorities, in which case such benefits are included in long-term income taxes payable and reduced by the associated federal deduction for state taxes and non-U.S. tax credits. The interest and penalties related to these uncertain tax positions are recorded
as part of the Company’s income tax expense and constitute part of Other noncurrent liabilities on the Company’s Consolidated Balance Sheets.
The total amount of unrecognized tax benefits at May 31, 2020, 2019, and 2018 were $10.2, excluding $2.2 accrued for interest and penalties, $9.0, excluding $1.4 accrued for interest and penalties, and $10.1, excluding $1.8 accrued for interest and penalties, respectively. Of the total amount of unrecognized tax benefits at May 31, 2020, 2019, and 2018, $10.2, $9.0 and $10.1, respectively, would impact the Company’s effective tax rate.
During the years presented, the Company recognized interest and penalties related to unrecognized tax benefits in the provision for taxes in the Consolidated Financial Statements. The Company recognized an expense of $0.8, a benefit of $0.4, and an expense of $0.1 for the years ended May 31, 2020, 2019, and 2018, respectively.
The table below presents a reconciliation of the unrecognized tax benefits for the fiscal years indicated:
|
|
|
|
|
|
|
|
Gross unrecognized benefits at May 31, 2017
|
$
|
14.1
|
|
|
Decreases related to prior year tax positions
|
|
(2.6
|
)
|
|
Increase related to prior year tax positions
|
|
0.4
|
|
|
Increases related to current year tax positions
|
|
0.5
|
|
|
Settlements during the period
|
|
(1.9
|
)
|
|
Lapse of statute of limitation
|
|
(0.4
|
)
|
|
Gross unrecognized benefits at May 31, 2018
|
$
|
10.1
|
|
|
Decreases related to prior year tax positions
|
|
(1.1
|
)
|
|
Increase related to prior year tax positions
|
|
0.2
|
|
|
Increases related to current year tax positions
|
|
0.7
|
|
|
Settlements during the period
|
|
(0.2
|
)
|
|
Lapse of statute of limitation
|
|
(0.7
|
)
|
|
Gross unrecognized benefits at May 31, 2019
|
$
|
9.0
|
|
|
Decreases related to prior year tax positions
|
|
(0.2
|
)
|
|
Increase related to prior year tax positions
|
|
1.8
|
|
|
Increases related to current year tax positions
|
|
0.1
|
|
|
Settlements during the period
|
|
(0.2
|
)
|
|
Lapse of statute of limitation
|
|
(0.3
|
)
|
|
Gross unrecognized benefits at May 31, 2020
|
$
|
10.2
|
|
Unrecognized tax benefits for the Company increased by $1.2 for the year ended May 31, 2020 and decreased by $1.1 for the year ended May 31, 2019. Although the timing of the resolution and/or closure of audits is uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next twelve months. However, given the number of years remaining subject to examination and the number of matters being examined, the Company is unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.
Income Tax Returns
The Company, including its domestic subsidiaries, files a consolidated U.S. income tax return, and also files tax returns in various states and other local jurisdictions. Also, certain subsidiaries of the Company file income tax returns in foreign jurisdictions. The Company is routinely audited by various tax authorities and the fiscal 2015 through fiscal 2019 tax years remain open. The Company has been notified by the IRS that there will be an examination of the income tax return for fiscal 2015, however the audit has not yet started as of May 31, 2020. In fiscal 2020, there were settlements of audits with taxing authorities, none of which were considered material to the provision for income taxes.
Non-income Taxes
The Company is subject to tax examinations for sales-based taxes. A number of these examinations are ongoing and, in certain cases, have resulted in assessments from taxing authorities. The Company assesses sales tax contingencies for each jurisdiction in which it operates, considering all relevant facts including statutes, regulations, case law and
experience. Where a sales tax liability in respect to a jurisdiction is probable and can be reliably estimated for such jurisdiction, the Company has made accruals for these matters which are reflected in the Company’s Consolidated Financial Statements. These amounts are included in the Consolidated Financial Statements in Selling, general and administrative expenses. Future developments relating to the foregoing could result in adjustments being made to these accruals.
13. CAPITAL STOCK AND STOCK-BASED AWARDS
Class A Stock and Common Stock
Capital stock consisted of the following as of May 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Stock
|
|
Common Stock
|
|
Preferred Stock
|
|
Authorized
|
4,000,000
|
|
|
70,000,000
|
|
|
2,000,000
|
|
|
Reserved for Issuance
|
—
|
|
|
8,409,143
|
|
|
—
|
|
|
Outstanding
|
1,656,200
|
|
|
32,529,874
|
|
|
—
|
|
The only voting rights vested in the holders of Common Stock, except as required by law, are the election of such number of directors as shall equal at least one-fifth of the members of the Board. The Class A Stockholders are entitled to elect all other directors and to vote on all other matters. The Class A Stockholders and the holders of Common Stock are entitled to one vote per share on matters on which they are entitled to vote. The Class A Stockholders have the right, at their option, to convert shares of Class A Stock into shares of Common Stock on a share-for-share basis. With the exception of voting rights and conversion rights, and as to any rights of holders of Preferred Stock if issued, the Class A Stock and the Common Stock are equal in rank and are entitled on the same basis to dividends and distributions when or if declared by the Board.
The Company issues shares of Common Stock from its Treasury stock to meet its share-based payment requirements, net of shares required to be withheld to cover the recipient's tax obligations.
Preferred Stock
The Company's Preferred Stock may be issued in one or more series, with the rights of each series, including voting rights, to be determined by the Board before each issuance. To date, no shares of Preferred Stock have been issued.
Stock-based awards
At May 31, 2020, the Company maintained four stockholder-approved stock-based compensation plans with regard to the Common Stock:
|
|
|
|
•
|
Scholastic Corporation 2001 Stock Incentive Plan (the “2001 Plan”), under which no further awards can be made;
|
|
|
|
|
•
|
Scholastic Corporation 2011 Stock Incentive Plan (the “2011 Plan”);
|
|
|
|
|
•
|
Scholastic Corporation 2007 Outside Directors Stock Incentive Plan (the “2007 Directors Plan”), under which no further grants can be made; and
|
|
|
|
|
•
|
Scholastic Corporation 2017 Outside Directors Stock Incentive Plan (the “2017 Directors Plan”)
|
The 2011 Plan was approved by the Class A Stockholders in September 2011 and provides for the issuance of certain equity awards, including non-qualified stock options, time-vested restricted stock units, performance-based restricted stock units, all of which have been issued by the Company to date, and incentive stock options and other equity awards. In September 2014, the Class A Stockholders approved the second amendment to the 2011 Plan increasing the shares available for issuance pursuant to awards granted under the 2011 Plan by 2,475,000 shares. In September 2018, the Class A Stockholders approved the third amendment to the 2011 Plan increasing the shares available for issuance pursuant to awards granted under the 2011 Plan by 2,540,000 shares, for a total of 7,115,000 shares available for issuance under the 2011 Plan.
The Company’s stock-based awards vest over periods not to exceed four years and the Company's equity plans permit the acceleration of vesting upon retirement for certain eligible employees, as well as for certain other events.
At May 31, 2020, non-qualified stock options to purchase 99,212 shares and 2,749,287 shares of Common Stock were outstanding under the 2001 Plan and the 2011 Plan, respectively. During fiscal 2020, 101,266 options were granted under the 2011 Plan at a weighted average exercise price of $30.38.
At May 31, 2020, 2,803,519 shares of Common Stock were available for issuance under the 2011 Plan.
In September 2007, the Class A Stockholders approved the 2007 Outside Directors Plan. From September 2007 through September 2011, the 2007 Directors Plan provided for the automatic grant to each non-employee director, on the date of each annual meeting of stockholders, of non-qualified stock options to purchase 3,000 shares of Common Stock at a purchase price per share equal to the fair market value of a share of Common Stock on the date of grant and 1,200 restricted stock units. In September 2012, the Class A Stockholders approved an amendment and restatement to the 2007 Outside Directors Stock Incentive Plan (the “Amended 2007 Directors Plan”), which provided for the automatic grant to each non-employee director, on the date of each annual meeting of stockholders, of stock options and restricted stock units with a value equal to a fixed dollar amount. The total amount, as well as the relative percentage of stock options and restricted stock units, were to be determined annually by the Board (or committee designated by the Board) in advance of the grant date. The value of the stock option was determined based on the Black-Scholes option pricing method, with the exercise price being the fair market value of the Common Stock on the grant date, and the value of the restricted stock unit portion is the fair market value of the Common Stock on the grant date. In December 2015, the Board approved amendment number 2 to the Amended 2007 Directors Plan to provide that a non-employee director elected between annual meetings of stockholders would receive a grant at the time of such election equal to a pro rata portion of the most recent annual grant of stock options and restricted stock units, based on the number of regular Board meetings remaining to be held for the annual period during which such election occurred.
In September 2017, the Class A Stockholders approved the 2017 Directors Plan which has 400,000 shares of Common Stock reserved for issuance and provides for the automatic grant to each non-employee director, on the date of each annual meeting of stockholders, of stock options and restricted stock units with a value equal to a fixed dollar amount. The total dollar amount, as well as the relative percentage of stock options and restricted stock units, is determined annually by the Board (or Committee designated by the Board) in advance of the grant date. In July 2019, the Board approved the fiscal 2020 grant to each non-employee director, on the date of the 2019 annual meeting of stockholders, of stock options and restricted stock units having a combined value, as determined by the Board, of ninety thousand dollars ($90,000), (based on the fair market value on the date of grant), with 60% of such award to be awarded as restricted stock units and 40% of such award to be awarded as stock options, such grant to vest in its entirety on the earlier of the first anniversary of the date of grant or the date of the next annual meeting of stockholders following the date of grant.
On September 18, 2019, an aggregate of 24,297 options at an exercise price of $39.33 per share and 9,604 restricted stock units were granted to the non-employee directors under the 2017 Directors Plan, such grant to vest in its entirety on the earlier of the first anniversary of the date of grant or the date of the next annual meeting of Stockholders following the date of grant. As of May 31, 2020, non-qualified stock options to purchase 92,394 shares and 62,088 shares were outstanding under the 2007 Plan and the 2017 Plan, respectively.
Stock Options - Generally, stock options granted under the Company's equity plans may not be exercised for a minimum of one year after the date of grant and expire ten years after the date of grant. The intrinsic value of certain stock options is tax deductible by the Company upon exercise, if compliant with current tax law. The Company amortizes the fair value of stock options as stock-based compensation expense over the requisite service period on a straight-line basis, or sooner if the employee effectively vests upon termination of employment for certain retirement-eligible employees, as well as in certain other events.
The following table sets forth the intrinsic value of stock options exercised, pretax stock-based compensation cost and related tax benefits for the Company's equity plans for the fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Total intrinsic value of stock options exercised
|
$
|
0.2
|
|
|
$
|
2.1
|
|
|
$
|
5.0
|
|
|
Total stock-based compensation cost (pretax)
|
|
3.8
|
|
|
|
8.3
|
|
|
|
10.7
|
|
|
Tax benefits (shortfalls) related to stock-based compensation cost
|
|
(0.5
|
)
|
|
|
0.5
|
|
|
|
(0.2
|
)
|
|
Weighted average grant date fair value per option
|
$
|
6.99
|
|
|
$
|
11.97
|
|
|
$
|
10.45
|
|
Pretax stock-based compensation cost is recognized in Selling, general and administrative expenses. As of May 31, 2020, the total pretax compensation cost not yet recognized by the Company with regard to outstanding unvested stock options was $1.5. The weighted average period over which this compensation cost is expected to be recognized is 2.1 years.
The following table sets forth the stock option activity under the Company's equity plans for the fiscal year ended May 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted
Average
Exercise Price
|
|
Average Remaining
Contractual
Term (in years)
|
|
Aggregate
Intrinsic Value (in millions)
|
|
Outstanding at May 31, 2019
|
|
2,942,129
|
|
|
$
|
36.62
|
|
|
|
|
|
|
|
|
|
Additional grants (1)
|
|
2,306
|
|
|
|
42.96
|
|
|
|
|
|
|
|
|
Granted
|
|
125,563
|
|
|
|
32.12
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(26,326
|
)
|
|
|
30.56
|
|
|
|
|
|
|
|
|
|
Expired, canceled and forfeited
|
|
(40,691
|
)
|
|
|
40.72
|
|
|
|
|
|
|
|
|
|
Outstanding at May 31, 2020
|
|
3,002,981
|
|
|
$
|
36.43
|
|
|
|
5.5
|
|
$
|
1.2
|
|
|
Exercisable at May 31, 2020
|
|
2,215,823
|
|
|
$
|
35.46
|
|
|
|
4.6
|
|
$
|
1.1
|
|
(1) Reflects an adjustment made to the September 2018 grants.
Restricted Stock Units – In addition to stock options, the Company has issued restricted stock units to certain officers and senior management under the 2011 Plan. The restricted stock units convert to shares of Common Stock on a one-for-one basis upon vesting, which for time-vested restricted stock units is typically in four equal annual installments beginning with the first anniversary of the date of grant, with the exception of 11,316 restricted stock units granted in fiscal 2020 that vest over a three year period. Additionally, the Company has accrued for the issuance of performance-based restricted stock units to two members of senior management under discrete incentive plans. There were 43,248 shares of Common Stock issued upon the vesting of restricted stock units during fiscal 2020. The Company measures the value of restricted stock units at fair value based on the number of units granted and the price of the underlying Common Stock on the grant date. The Company amortizes the fair value of outstanding restricted stock units as stock-based compensation expense over the requisite service period on a straight-line basis, or sooner if the employee effectively vests upon termination of employment under certain circumstances.
The following table sets forth the restricted stock unit award activity for the fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Granted
|
|
34,632
|
|
|
|
82,044
|
|
|
|
68,089
|
|
|
Weighted average grant date price per unit
|
$
|
32.56
|
|
|
$
|
42.86
|
|
|
$
|
38.97
|
|
As of May 31, 2020, the total pretax compensation cost not yet recognized by the Company with regard to unvested restricted stock units was $1.5. The weighted average period over which this compensation cost is expected to be recognized is 2.4 years.
Management Stock Purchase Plan - The Company maintains the Scholastic Corporation Management Stock Purchase Plan (the “MSPP”), which permits certain members of senior management to defer up to 100% of his or her annual cash bonus payments in the form of restricted stock units (the "MSPP RSUs”) which are purchased by the employee at a 25% discount from the lowest closing price of the Common Stock on NASDAQ on any day during the fiscal quarter in which such bonuses are awarded. The MSPP RSUs are converted into shares of Common Stock on a one-for-one basis at the end of the applicable deferral period, which must be a minimum of three years. The Company measures the value of MSPP RSUs based on the number of awards granted and the price of the underlying Common Stock on the grant date, giving effect to the 25% discount. The Company amortizes this discount as stock-based compensation expense over the vesting term on a straight-line basis, or sooner if the employee effectively vests upon termination of employment under certain circumstances.
The following table sets forth the MSPP RSUs activity for the fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
MSPP RSUs allocated
|
|
3,843
|
|
|
|
17,239
|
|
|
|
73,965
|
|
|
Purchase price per unit
|
$
|
24.36
|
|
|
$
|
30.48
|
|
|
$
|
28.76
|
|
At May 31, 2020, there were 283,017 shares of Common Stock remaining authorized for issuance under the MSPP.
As of May 31, 2020, the total pretax compensation cost not yet recognized by the Company with regard to unvested MSPP RSUs was $0.0.
The following table sets forth the restricted stock unit and MSPP RSUs activity for the year ended May 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units and MSPP RSUs
|
|
|
|
Weighted
Average grant
date fair value
|
|
Nonvested as of May 31, 2019
|
287,564
|
|
|
|
$
|
25.61
|
|
|
Granted
|
38,475
|
|
|
|
|
30.21
|
|
|
Vested
|
(98,942
|
)
|
|
|
|
28.36
|
|
|
Forfeited
|
(664
|
)
|
|
|
|
34.04
|
|
|
Nonvested as of May 31, 2020
|
226,433
|
|
|
|
$
|
25.11
|
|
The total fair value of shares vested during the fiscal years ended May 31, 2020, 2019 and 2018 was $2.8, $2.7 and $3.6, respectively.
Employee Stock Purchase Plan - The Company maintains the Scholastic Corporation Employee Stock Purchase Plan (the “ESPP”), which is offered to eligible United States employees. The ESPP permits participating employees to purchase Common Stock, with after-tax payroll deductions, on a quarterly basis at a 15% discount from the closing price of the Common Stock on NASDAQ on the last business day of the calendar quarter. The Company recognizes the discount on the Common Stock issued under the ESPP as stock-based compensation expense in the quarter in which the employees began participating in the ESPP.
The following table sets forth the ESPP share activity for the fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Shares issued
|
|
65,714
|
|
|
|
48,000
|
|
|
|
50,516
|
|
|
Weighted average purchase price per share
|
$
|
27.84
|
|
|
$
|
36.25
|
|
|
$
|
33.74
|
|
At May 31, 2020, there were 356,239 shares of Common Stock remaining authorized for issuance under the ESPP.
14. TREASURY STOCK
The Company has authorizations from the Board of Directors to repurchase Common Stock, from time to time as conditions allow, on the open market or through negotiated private transactions, as summarized in the table below:
|
|
|
|
|
|
|
|
|
Authorizations
|
Amount
|
|
|
July 2015
|
$
|
50.0
|
|
|
|
March 2018
|
|
50.0
|
|
|
|
March 2020
|
|
50.0
|
|
|
|
Total current Board authorizations
|
$
|
150.0
|
|
|
|
Less repurchases made under the authorizations as of May 31, 2020
|
$
|
(82.7
|
)
|
|
|
Remaining Board authorization at May 31, 2020
|
$
|
67.3
|
|
|
Remaining Board authorization at May 31, 2020 represents the amount remaining under the Board authorization for Common share repurchases on March 21, 2018 and the current $50.0 Board authorization for Common share
repurchases announced on March 18, 2020, which is available for further repurchases, from time to time as conditions allow, on the open market or through negotiated private transactions. During the twelve months ended May 31, 2020, the Company repurchased approximately 1.0 million shares on the open market for approximately $35.5 at an average cost of $34.23 per share. The Company’s repurchase program may be suspended at any time without prior notice.
15. EMPLOYEE BENEFIT PLANS
Pension Plans
The Company has a defined benefit pension plan (the “UK Pension Plan”) that covers certain employees located in the United Kingdom who meet various eligibility requirements. Benefits are based on years of service and on a percentage of compensation near retirement. The UK Pension Plan is funded by contributions from the Company. The Company’s UK Pension Plan has a measurement date of May 31.
The Company previously had a cash balance retirement plan (the "U.S. Pension Plan") which was terminated in fiscal 2018.
Postretirement Benefits
The Company provides postretirement benefits to eligible retired United States-based employees (the “Postretirement Benefits”) consisting of certain healthcare and life insurance benefits. Employees became eligible for these benefits after completing certain minimum age and service requirements. Effective June 1, 2009, the Company modified the terms of the Postretirement Benefits, effectively excluding a large percentage of employees from the plan. The Company’s postretirement benefit plan has a measurement date of May 31.
In the second quarter of fiscal 2019, the Company made a change in benefits for certain postretirement benefit plan participants. Beginning January 1, 2019, the plan established Health Reimbursement Accounts (HRAs) to provide certain participants with additional flexibility to choose healthcare options based on individual needs. As a result of this change, the Company remeasured its Postretirement Benefit obligation as of November 30, 2018 and recognized a reduction of $2.7 to its benefit obligation and a reduction to its accumulated comprehensive loss of $2.7 in the second quarter of fiscal 2019. The related prior service credit will be amortized as a Component of net periodic benefit (cost) over the average remaining life expectancy of plan participants of approximately 13 years.
The Medicare Prescription Drug, Improvement and Modernization Act (the “Medicare Act”) introduced a prescription drug benefit under Medicare (“Medicare Part D”) as well as a Federal subsidy of 28% to sponsors of retiree health care
benefit plans providing a benefit that is at least actuarially equivalent to Medicare Part D. The Company has determined that the Postretirement Benefits provided to its retiree population are in aggregate the actuarial equivalent of the benefits under Medicare Part D. As a result, in fiscal 2020, 2019 and 2018, the Company recognized a cumulative reduction of its accumulated postretirement benefit obligation of $1.2, $1.5 and $2.3, respectively, due to the Federal subsidy under the Medicare Act.
The following table sets forth the weighted average actuarial assumptions utilized to determine the benefit obligations for the U.S. Pension Plan and the UK Pension Plan (collectively the “Pension Plans”), including the Postretirement Benefits, at May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plan
|
|
UK Pension Plan
|
|
Postretirement Benefits
|
|
|
2020 *
|
|
2019 *
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
Weighted average assumptions used to determine benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
*
|
|
*
|
|
—
|
%
|
|
1.7
|
%
|
|
2.3
|
%
|
|
2.6
|
%
|
|
2.7
|
%
|
|
3.6
|
%
|
|
4.0
|
%
|
|
Rate of compensation increase
|
*
|
|
*
|
|
—
|
|
|
3.6
|
%
|
|
4.1
|
%
|
|
3.9
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Weighted average assumptions used to determine net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate (1)
|
*
|
|
*
|
|
2.3
|
%
|
|
2.4
|
%
|
|
2.4
|
%
|
|
2.5
|
%
|
|
3.2
|
%
|
|
3.7
|
%
|
|
3.7
|
%
|
|
Expected short-term return on plan assets (2)
|
*
|
|
*
|
|
4.8
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Expected long-term return on plan assets
|
*
|
|
*
|
|
—
|
|
|
3.1
|
%
|
|
3.4
|
%
|
|
3.4
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Rate of compensation increase
|
*
|
|
*
|
|
—
|
|
|
4.1
|
%
|
|
3.9
|
%
|
|
4.1
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
* The U.S. Pension Plan was terminated in fiscal 2018.
(1) The fiscal 2018 U.S. Pension Plan discount rate is for the period of June 1, 2017 through the plan settlement date.
(2) The fiscal 2018 U.S. Pension Plan expected short-term return on plan assets is for the period of June 1, 2017 through the plan settlement date.
To develop the expected long-term rate of return on plan assets assumption for the UK Pension Plan, the Company considers historical returns and future expectations. Considering this information and the potential for lower future returns due to a generally lower interest rate environment, the Company selected an assumed weighted average long-term rate of return on plan assets of 3.1% for the UK Pension Plan. In fiscal 2018, the U.S. Pension Plan utilized a short-term rate of return assumption of 4.8% due to the U.S. Pension Plan termination for the period June 1, 2017 through the plan settlement date.
The following table sets forth the change in benefit obligation for the UK Pension Plan and Postretirement Benefits at May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UK Pension Plan
|
|
Postretirement Benefits
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
40.9
|
|
|
$
|
40.0
|
|
|
$
|
23.4
|
|
|
$
|
26.8
|
|
|
Service cost
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.0
|
|
|
Interest cost
|
|
0.9
|
|
|
|
0.9
|
|
|
|
0.6
|
|
|
|
0.8
|
|
|
Plan participants’ contributions
|
|
—
|
|
|
|
—
|
|
|
|
0.2
|
|
|
|
0.4
|
|
|
Actuarial losses (gains)
|
|
2.4
|
|
|
|
3.1
|
|
|
|
(1.3
|
)
|
|
|
0.1
|
|
|
Foreign currency translation
|
|
(1.1
|
)
|
|
|
(2.0
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Plan amendments
|
|
—
|
|
|
|
0.1
|
|
|
|
—
|
|
|
|
(2.7
|
)
|
|
Benefits paid, including expenses
|
|
(1.4
|
)
|
|
|
(1.2
|
)
|
|
|
(2.1
|
)
|
|
|
(2.0
|
)
|
|
Benefit obligation at end of year
|
$
|
41.7
|
|
|
$
|
40.9
|
|
|
$
|
20.8
|
|
|
$
|
23.4
|
|
The following table sets forth the change in plan assets for the UK Pension Plan at May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
UK Pension Plan
|
|
|
2020
|
|
2019
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
31.8
|
|
|
$
|
30.8
|
|
|
Actual return on plan assets
|
|
6.0
|
|
|
|
2.8
|
|
|
Employer contributions
|
|
1.1
|
|
|
|
1.0
|
|
|
Benefits paid, including expenses
|
|
(1.4
|
)
|
|
|
(1.2
|
)
|
|
Foreign currency translation
|
|
(0.9
|
)
|
|
|
(1.6
|
)
|
|
Fair value of plan assets at end of year
|
$
|
36.6
|
|
|
$
|
31.8
|
|
The following table sets forth the net funded status of the UK Pension Plan and Postretirement Benefits and the related amounts recognized on the Company’s Consolidated Balance Sheets at May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UK Pension Plan
|
|
Postretirement Benefits
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Current liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1.5
|
)
|
|
$
|
(1.8
|
)
|
|
Non-current liabilities
|
|
(5.1
|
)
|
|
|
(9.1
|
)
|
|
|
(19.3
|
)
|
|
|
(21.6
|
)
|
|
Net funded balance
|
$
|
(5.1
|
)
|
|
$
|
(9.1
|
)
|
|
$
|
(20.8
|
)
|
|
$
|
(23.4
|
)
|
The following amounts were recognized in Accumulated other comprehensive income (loss) for the UK Pension Plan and Postretirement Benefits on the Company’s Consolidated Balance Sheets at May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
UK Pension
Plan
|
|
Post -
Retirement
Benefits
|
|
Total
|
|
UK Pension
Plan
|
|
Post -
Retirement
Benefits
|
|
Total
|
|
Net actuarial gain (loss)
|
$
|
(9.6
|
)
|
|
$
|
1.3
|
|
|
$
|
(8.3
|
)
|
|
$
|
(13.0
|
)
|
|
$
|
0.5
|
|
|
$
|
(12.5
|
)
|
|
Amount recognized in
Accumulated comprehensive
income (loss) before tax
|
|
(9.6
|
)
|
|
|
1.2
|
|
|
|
(8.4
|
)
|
|
|
(13.0
|
)
|
|
|
0.0
|
|
|
|
(13.0
|
)
|
The estimated net loss for the UK Pension Plan that will be amortized from Accumulated other comprehensive loss into net periodic benefit (cost) over the fiscal year ending May 31, 2021 is $0.5.
The Company estimates there will be no net gain or loss for the Postretirement Benefits amortized from Accumulated other comprehensive loss into net periodic benefit (cost) for the fiscal year ending May 31, 2021.
Income tax benefit of $0.4, income tax benefit of $0.5 and income tax expense of $20.9 were recognized in Accumulated other comprehensive loss at May 31, 2020, 2019 and 2018, respectively.
The following table sets forth the projected benefit obligations, accumulated benefit obligations and the fair value of plan assets with respect to the UK Pension Plan as of May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
UK Pension Plan
|
|
|
2020
|
|
2019
|
|
Projected benefit obligations
|
$
|
41.7
|
|
|
$
|
40.9
|
|
|
Accumulated benefit obligations
|
|
41.4
|
|
|
|
40.2
|
|
|
Fair value of plan assets
|
|
36.6
|
|
|
|
31.8
|
|
The following table sets forth the net periodic benefit (cost) for the Pension Plans and Postretirement Benefits for the fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plan
|
|
UK Pension Plan
|
|
Postretirement Benefits
|
|
|
2020 *
|
|
2019 *
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
Components of net (benefit)
cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
*
|
|
|
*
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.0
|
|
|
$
|
0.0
|
|
|
$
|
0.0
|
|
|
Interest cost
|
*
|
|
|
*
|
|
|
|
1.9
|
|
|
|
0.9
|
|
|
|
0.9
|
|
|
|
1.1
|
|
|
|
0.6
|
|
|
|
0.8
|
|
|
|
0.8
|
|
|
Expected return on assets
|
*
|
|
|
*
|
|
|
|
(4.1
|
)
|
|
|
(1.0
|
)
|
|
|
(1.0
|
)
|
|
|
(1.0
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Settlement charge
|
*
|
|
|
*
|
|
|
|
57.3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Amortization of net actuarial (gain) loss
|
*
|
|
|
*
|
|
|
|
0.9
|
|
|
|
1.0
|
|
|
|
0.8
|
|
|
|
1.2
|
|
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
|
|
0.1
|
|
|
Net periodic (benefit) cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
56.0
|
|
|
$
|
0.9
|
|
|
$
|
0.7
|
|
|
$
|
1.3
|
|
|
$
|
0.4
|
|
|
$
|
0.7
|
|
|
$
|
0.9
|
|
* The U.S. Pension Plan was terminated in fiscal 2018.
Plan Assets
The Company’s investment policy with regard to the assets in the UK Pension Plan is to actively manage, within acceptable risk parameters, certain asset classes where the potential exists to outperform the broader market.
The following table sets forth the total weighted average asset allocations for the UK Pension Plans by asset category at May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
UK Pension Plan
|
|
|
|
2020
|
|
2019
|
|
Equity securities
|
|
28.6
|
%
|
|
35.0
|
%
|
|
Cash and cash equivalents
|
|
2.2
|
%
|
|
3.0
|
%
|
|
Liability-driven instruments
|
|
48.0
|
%
|
|
38.0
|
%
|
|
Real estate
|
|
6.1
|
%
|
|
7.0
|
%
|
|
Other
|
|
15.1
|
%
|
|
17.0
|
%
|
|
|
|
100.0
|
%
|
|
100.0
|
%
|
The following table sets forth the targeted weighted average asset allocations for the UK Pension Plan included in the Company’s investment policy:
|
|
|
|
|
|
|
|
|
|
UK
Pension
Plan
|
|
Equity securities
|
|
29
|
%
|
|
Cash and cash equivalents
|
|
2
|
%
|
|
Liability-driven instruments and other
|
|
63
|
%
|
|
Real estate
|
|
6
|
%
|
|
Total
|
|
100
|
%
|
The fair values of the Company’s Pension Plan assets are measured using Level 1, Level 2 and Level 3 fair value measurements.
The following table sets forth the measurement of the Company’s Pension Plan assets at fair value by asset category at the respective dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value as of May 31, 2020
|
|
|
UK Pension Plan
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Cash and cash equivalents
|
$
|
0.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.8
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. (1)
|
|
3.7
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3.7
|
|
|
International (2)
|
|
6.8
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6.8
|
|
|
Pooled, Common and Collective Funds (3) (4)
|
|
—
|
|
|
|
17.5
|
|
|
|
—
|
|
|
|
17.5
|
|
|
Annuities
|
|
—
|
|
|
|
—
|
|
|
|
5.6
|
|
|
|
5.6
|
|
|
Real estate (5)
|
|
2.2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2.2
|
|
|
Total
|
$
|
13.5
|
|
|
$
|
17.5
|
|
|
$
|
5.6
|
|
|
$
|
36.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value as of May 31, 2019
|
|
|
UK Pension Plan
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Cash and cash equivalents
|
$
|
0.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.9
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. (1)
|
|
1.1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.1
|
|
|
International (2)
|
|
10.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10.0
|
|
|
Pooled, Common and
Collective Funds (3) (4)
|
|
—
|
|
|
|
12.0
|
|
|
|
—
|
|
|
|
12.0
|
|
|
Annuities
|
|
—
|
|
|
|
—
|
|
|
|
5.5
|
|
|
|
5.5
|
|
|
Real estate (5)
|
|
2.3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2.3
|
|
|
Total
|
$
|
14.3
|
|
|
$
|
12.0
|
|
|
$
|
5.5
|
|
|
$
|
31.8
|
|
(1) Funds which invest in a diversified portfolio of publicly traded U.S. common stocks of large-cap, medium-cap and small-cap
companies. There are no restrictions on these investments.
(2) Funds which invest in a diversified portfolio of publicly traded common stocks of non-U.S. companies, primarily in Europe and
Asia. There are no restrictions on these investments.
(3) Funds which invest in UK government bonds and bond index-linked investments and interest rate and inflation swaps. There are
no restrictions on these investments.
(4) Funds which invest in bond index funds available to certain qualified retirement plans but not traded openly on any
public exchanges. There are no restrictions on these investments.
(5) Represents assets of a non-U.S. entity plan invested in a fund whose underlying investments are comprised of properties. The
fund has publicly available quoted market prices and there are no restrictions on these investments.
The Company has purchased annuities to service fixed payments to certain retired plan participants in the UK. These annuities are purchased from investment grade counterparties. These annuities are not traded on open markets and are therefore valued based upon the actuarial determined valuation, and related assumptions, of the underlying projected benefit obligation, a Level 3 valuation technique. The fair value of these assets was $5.6 and $5.5 at May 31, 2020 and May 31, 2019, respectively.
The following table summarizes the changes in fair value of these Level 3 assets for the fiscal years ended May 31, 2020 and 2019:
|
|
|
|
|
|
|
|
Balance at May 31, 2018
|
$
|
5.7
|
|
|
Actual Return on Plan Assets:
|
|
|
|
|
Relating to assets still held at May 31, 2019
|
|
0.1
|
|
|
Relating to assets sold during the year
|
|
—
|
|
|
Purchases, sales and settlements, net
|
|
—
|
|
|
Transfers in and/or out of Level 3
|
|
—
|
|
|
Foreign currency translation
|
|
(0.3
|
)
|
|
Balance at May 31, 2019
|
$
|
5.5
|
|
|
Actual Return on Plan Assets:
|
|
|
|
|
Relating to assets still held at May 31, 2020
|
|
0.2
|
|
|
Relating to assets sold during the year
|
|
—
|
|
|
Purchases, sales and settlements, net
|
|
—
|
|
|
Transfers in and/or out of Level 3
|
|
—
|
|
|
Foreign currency translation
|
|
(0.1
|
)
|
|
Balance at May 31, 2020
|
$
|
5.6
|
|
Contributions
In fiscal 2021, the Company expects to make contributions of $1.0 to the UK Pension Plan.
Estimated future benefit payments
The following table sets forth the expected future benefit payments under the UK Pension Plan and the Postretirement Benefits by fiscal year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UK Pension Plan
|
|
Postretirement
|
|
|
Pension benefits
|
|
Benefit
payments
|
|
Medicare
subsidy
receipts
|
|
2021
|
$
|
0.9
|
|
|
$
|
1.7
|
|
|
$
|
0.1
|
|
|
2022
|
|
1.1
|
|
|
|
1.6
|
|
|
|
0.1
|
|
|
2023
|
|
0.9
|
|
|
|
1.6
|
|
|
|
0.1
|
|
|
2024
|
|
1.3
|
|
|
|
1.6
|
|
|
|
0.1
|
|
|
2025
|
|
1.5
|
|
|
|
1.6
|
|
|
|
0.2
|
|
|
2026 and thereafter
|
|
7.4
|
|
|
|
7.0
|
|
|
|
0.6
|
|
Assumed health care cost trend rates at May 31:
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Health care cost trend rate assumed for the next fiscal year
|
6.3
|
%
|
|
6.5
|
%
|
|
Rate to which the cost trend is assumed to decline (the ultimate trend rate)
|
5.0
|
%
|
|
5.0
|
%
|
|
Year that the rate reaches the ultimate trend rate
|
2026
|
|
|
2026
|
|
Assumed health care cost trend rates could have a significant effect on the amounts reported for the postretirement health care plan. A one percentage point change in assumed health care cost trend rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Total service and interest cost - 1% increase
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
Total service and interest cost - 1% decrease
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
Postretirement benefit obligation - 1% increase
|
|
1.9
|
|
|
|
2.1
|
|
|
Postretirement benefit obligation - 1% decrease
|
|
(1.7
|
)
|
|
|
(1.9
|
)
|
Defined contribution plans
The Company also provides defined contribution plans for certain eligible employees. In the United States, the Company sponsors a 401(k) retirement plan and has contributed $6.7, $7.6 and $7.2 for fiscal years 2020, 2019 and 2018, respectively.
16. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the impact on earnings of reclassifications out of Accumulated other comprehensive income (loss) for the fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
Pension
Plans
|
|
Post -
Retirement
Benefits
|
|
Pension
Plans
|
|
Post -
Retirement
Benefits
|
|
Pension
Plans
|
|
Post -
Retirement
Benefits
|
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.0
|
|
|
Net amortization and deferrals
|
|
—
|
|
|
|
(0.2
|
)
|
|
|
—
|
|
|
|
(0.1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Lump sum settlement charge
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
55.0
|
|
|
|
—
|
|
|
Amortization of net actuarial losses (gains)
|
|
1.0
|
|
|
|
—
|
|
|
|
0.8
|
|
|
|
—
|
|
|
|
2.1
|
|
|
|
0.1
|
|
|
Tax (benefit) expense
|
|
—
|
|
|
|
0.0
|
|
|
|
—
|
|
|
|
0.0
|
|
|
|
(22.3
|
)
|
|
|
0.0
|
|
|
Amounts reclassified from Accumulated other comprehensive income (loss)
|
$
|
1.0
|
|
|
$
|
(0.2
|
)
|
|
$
|
0.8
|
|
|
$
|
(0.1
|
)
|
|
$
|
34.8
|
|
|
$
|
0.1
|
|
The amounts reclassified out of Accumulated other comprehensive income (loss) were recognized in Other components of net periodic benefit (cost) for all periods presented.
For the fiscal year ended May 31, 2018, the Company recognized pretax settlement charges of $57.3 in Other components of net periodic benefit (cost), related to the settlement of the U.S Pension Plan and the related purchase of insurance company group annuity contracts.
The following tables summarize the activity in Accumulated other comprehensive income (loss), net of tax, by component for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
Pension
Plans
|
|
Post -
Retirement
Benefits
|
|
Total
|
|
Balance at May 31, 2018 (1)
|
$
|
(41.9
|
)
|
|
$
|
(12.5
|
)
|
|
$
|
(1.3
|
)
|
|
$
|
(55.7
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
$
|
(5.2
|
)
|
|
$
|
(1.4
|
)
|
|
$
|
1.9
|
|
|
$
|
(4.7
|
)
|
|
Less: amount reclassified from Accumulated other comprehensive income (loss) (net of taxes)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss
|
$
|
—
|
|
|
$
|
0.8
|
|
|
$
|
(0.1
|
)
|
|
$
|
0.7
|
|
|
Other comprehensive income (loss)
|
|
(5.2
|
)
|
|
|
(0.6
|
)
|
|
|
1.8
|
|
|
|
(4.0
|
)
|
|
Balance at May 31, 2019 (1)
|
$
|
(47.1
|
)
|
|
$
|
(13.1
|
)
|
|
$
|
0.5
|
|
|
$
|
(59.7
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
$
|
(2.9
|
)
|
|
$
|
2.5
|
|
|
$
|
1.0
|
|
|
$
|
0.6
|
|
|
Less: amount reclassified from Accumulated other comprehensive income (loss) (net of taxes)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss
|
$
|
—
|
|
|
$
|
1.0
|
|
|
$
|
(0.2
|
)
|
|
$
|
0.8
|
|
|
Other comprehensive income (loss)
|
|
(2.9
|
)
|
|
|
3.5
|
|
|
|
0.8
|
|
|
|
1.4
|
|
|
Balance at May 31, 2020 (1)
|
$
|
(50.0
|
)
|
|
$
|
(9.6
|
)
|
|
$
|
1.3
|
|
|
$
|
(58.3
|
)
|
(1) Accumulated other comprehensive income (loss) related to Pension Plans and Postretirement Benefits are reported net of taxes of $0.4, $0.5 and $1.1 at May 31, 2020, 2019, and 2018, respectively.
17. 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 fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Class A and Common Shares
|
$
|
(43.8
|
)
|
|
$
|
15.5
|
|
|
$
|
(5.0
|
)
|
|
Weighted average Shares of Class A Stock and Common Stock
outstanding for basic earnings (loss) per share (in millions)
|
|
34.6
|
|
|
|
35.2
|
|
|
|
35.0
|
|
|
Dilutive effect of Class A Stock and Common Stock potentially issuable pursuant to stock-based compensation plans (in millions)
|
|
—
|
|
|
|
0.6
|
|
|
|
—
|
|
|
Adjusted weighted average Shares of Class A Stock and Common Stock outstanding for diluted earnings (loss) per share (in millions)
|
|
34.6
|
|
|
|
35.8
|
|
|
|
35.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share of Class A Stock and Common Stock
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
$
|
(1.27
|
)
|
|
$
|
0.44
|
|
|
$
|
(0.14
|
)
|
|
Diluted earnings (loss) per share
|
$
|
(1.27
|
)
|
|
$
|
0.43
|
|
|
$
|
(0.14
|
)
|
Net income (loss) attributable to Class A and Common Shares excludes earnings of $0.1 for the fiscal year ended May 31, 2019, for earnings attributable to participating restricted stock units. The Company experienced a loss for the fiscal years ended May 31, 2020 and May 31, 2018 and therefore did not allocate any loss to the participating restricted stock units.
There were 2.5 million of potentially anti-dilutive shares outstanding pursuant to compensation plans as of May 31, 2020.
A portion of the Company’s restricted stock units which are granted to employees participate in earnings through cumulative dividends which are payable and non-forfeitable to the employees upon vesting of the restricted stock units. Accordingly, the Company measures earnings per share based upon the lower of the Two-class method or the Treasury Stock method.
The following table sets forth Options outstanding pursuant to stock-based compensation plans for the fiscal years ended May 31:
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Options outstanding pursuant to stock-based compensation plans (in millions)
|
3.0
|
|
2.9
|
As of May 31, 2020, $67.3 remains available for future purchases of common shares under the current repurchase authorization of the Board of Directors.
See Note 14, “Treasury Stock,” for a more complete description of the Company’s share buy-back program.
18. OTHER ACCRUED EXPENSES
Other accrued expenses consisted of the following at May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Accrued payroll, payroll taxes and benefits
|
$
|
38.8
|
|
|
$
|
41.2
|
|
|
Accrued bonus and commissions
|
|
12.1
|
|
|
|
13.7
|
|
|
Accrued other taxes
|
|
22.9
|
|
|
|
29.3
|
|
|
Returns liability
|
|
43.5
|
|
|
|
34.5
|
|
|
Accrued advertising and promotions
|
|
9.9
|
|
|
|
9.6
|
|
|
Other accrued expenses
|
|
34.3
|
|
|
|
36.5
|
|
|
Total accrued expenses
|
$
|
161.5
|
|
|
$
|
164.8
|
|
The table below provides information regarding Accrued severance which is included in Accrued payroll, payroll taxes and benefits on the Company’s Consolidated Balance Sheets at May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
Beginning balance
|
$
|
5.5
|
|
|
$
|
4.2
|
|
|
Accruals
|
|
17.2
|
|
|
|
10.6
|
|
|
Payments
|
|
(17.0
|
)
|
|
|
(9.3
|
)
|
|
Ending balance
|
$
|
5.7
|
|
|
$
|
5.5
|
|
The Company implemented cost reduction programs in fiscal 2020 and 2019, recognizing severance expense of $13.1 and $6.5, respectively.
19. DERIVATIVES AND HEDGING
The Company enters into foreign currency derivative contracts to economically hedge the exposure to foreign currency fluctuations associated with the forecasted purchase of inventory, the foreign exchange risk associated with certain receivables denominated in foreign currencies and certain future commitments for foreign expenditures. These derivative contracts are economic hedges and are not designated as cash flow hedges. The Company marks-to-market these instruments and records the changes in the fair value of these items in Selling, general and administrative expenses, and it recognizes the unrealized gain or loss in other current assets or other current liabilities. The notional values of the contracts as of May 31, 2020 and 2019 were $23.5 and $30.0, respectively. Net unrealized gains of $0.6 and $0.8 were recognized at May 31, 2020 and May 31, 2019, respectively.
20. FAIR VALUE MEASUREMENTS
The Company determines the appropriate level in the fair value hierarchy for each fair value measurement of assets and liabilities carried at fair value on a recurring basis in the Company’s financial statements. The fair value hierarchy prioritizes the inputs, which refer to assumptions that market participants would use in pricing an asset or liability, based upon the highest and best use, into three levels as follows:
|
|
|
|
•
|
Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.
|
|
|
|
|
•
|
Level 2 Observable inputs other than unadjusted quoted prices in active markets for identical assets or liabilities such as:
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◦
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Quoted prices for similar assets or liabilities in active markets
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◦
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Quoted prices for identical or similar assets or liabilities in inactive markets
|
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|
|
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◦
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Inputs other than quoted prices that are observable for the asset or liability
|
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|
|
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◦
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Inputs that are derived principally from or corroborated by observable market data by correlation or other means
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|
|
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•
|
Level 3 Unobservable inputs in which there is little or no market data available, which are significant to the fair value measurement and require the Company to develop its own assumptions.
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The Company’s financial assets and liabilities measured at fair value consisted of cash and cash equivalents, debt and foreign currency forward contracts. Cash and cash equivalents are comprised of bank deposits and short-term investments, such as money market funds, the fair value of which is based on quoted market prices, a Level 1 fair value measure. The Company employs Level 2 fair value measurements for the disclosure of the fair value of its various lines of credit. The fair value of the Company's debt approximates the carrying value for all periods presented. For a more complete description of fair value measurements employed, see Note 5, “Debt.” 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 19, “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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•
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Assets acquired in a business combination
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|
•
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Impairment assessment of goodwill and intangible assets
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|
|
|
•
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Long-lived assets held for sale
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Level 2 and Level 3 inputs are employed by the Company in the fair value measurement of these assets and liabilities. For the fair value measurements employed by the Company for goodwill, see Note 10, “Goodwill and Other Intangibles." For the fair value measurements employed by the Company for acquisitions see Note 11, “Acquisitions." The Company employs fair value measurements for certain property, plant and equipment, production assets, investments and prepublication assets and the Company assessed future expected cash flows attributable to these assets.
The following tables present non-financial assets that were measured and recognized at fair value on a non-recurring basis and the total impairment losses and additions recognized on those assets:
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|
|
|
|
|
|
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Net carrying
value as of
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Fair value measured and recognized using
|
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Impairment losses
for fiscal year ended
|
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Additions due to acquisitions
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|
May 31, 2020
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Level 1
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Level 2
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Level 3
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|
May 31, 2020
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Author advances
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$
|
—
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|
|
$
|
—
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|
|
$
|
—
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|
|
$
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1.6
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|
$
|
1.6
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|
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$
|
—
|
|
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Prepublication costs
|
|
—
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|
|
|
—
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|
|
|
—
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|
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0.8
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|
|
|
0.8
|
|
|
|
—
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Property, plant and equipment, net
|
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—
|
|
|
|
—
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|
|
|
—
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|
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0.6
|
|
|
|
0.6
|
|
|
|
—
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|
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Intangible assets
|
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1.5
|
|
|
|
—
|
|
|
|
—
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|
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1.6
|
|
|
|
—
|
|
|
|
1.6
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying
value as of
|
|
Fair value measured and recognized using
|
|
Impairment losses
for fiscal year ended
|
|
Additions due to acquisitions
|
|
|
May 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
May 31, 2019
|
|
|
Property, plant and equipment, net
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.9
|
|
|
$
|
—
|
|
|
Investment acquired
|
|
6.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6.0
|
|
|
|
—
|
|
|
|
6.0
|
|
|
Intangible assets
|
|
4.9
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5.1
|
|
|
|
—
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying
value as of
|
|
Fair value measured and
recognized using
|
|
Impairment losses
for fiscal year ended
|
|
Additions due to other investments and acquisitions
|
|
|
May 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
May 31, 2018
|
|
|
Property, plant and equipment, net
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11.2
|
|
|
$
|
—
|
|
|
Intangible assets
|
|
3.1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3.3
|
|
|
|
—
|
|
|
|
3.3
|
|
21. SUBSEQUENT EVENTS
On July 22, 2020, the Board of Directors declared a regular cash dividend of $0.15 per Class A and Common share in respect of the first quarter of fiscal 2021. The dividend is payable on September 15, 2020 to shareholders of record on August 31, 2020.