Investor News

Printer Friendly Version View printer-friendly version
<< Back
School Specialty Reports Fiscal 2011 First Quarter Results
  --  Revenue and earnings decline; guidance updated
  --  Free cash flow and working capital management remain strong
  --  Convertible subordinated notes of $133 million retired
  --  Company to record goodwill impairment charge based on macro-economic
      factors


GREENVILLE, Wis., Aug. 19, 2010 (GLOBE NEWSWIRE) -- School Specialty (Nasdaq:SCHS) today reported fiscal 2011 first quarter financial results. Revenue for the first quarter was $253.0 million compared with $330.4 million in the first quarter of the prior fiscal year, a decline of 23 percent. The decline is higher than the estimated range of 17 percent to 20 percent previously discussed by management, and is primarily due to continued delays in school purchases, increasing price competition in the furniture markets, and the continued impact of execution issues created earlier in the year. Excluding revenue from divestitures of $10.7 million in fiscal 2010, comparable revenue declined 21 percent.

During the first quarter, the company performed its annual goodwill impairment testing. The continuation of state budget challenges and school spending cuts, and the resulting effects on the company's operating results, has created a shortfall in the fair value estimation for goodwill below the current book value. Based upon preliminary estimates, the company expects to record a pre-tax non-cash impairment charge in the range of $390 million to $440 million. This impairment is a non-cash expense that will not affect the company's debt position, cash flow, liquidity or financial ratios under its revolving credit facility.

Net income, excluding the estimated goodwill impairment charge, was $13.3 million compared with $28.4 million in last year's first quarter. Diluted earnings per share were $0.70 compared with $1.51 last year. Including the estimated goodwill impairment charge, the net loss reported is expected to be approximately $315 million to $353 million ($16.70 to $18.71 per share).

Free cash flow improved in the first quarter of fiscal 2011 by $15.2 million, or 55 percent, over fiscal 2010's first quarter. Free cash flow benefited from continuing improvements in working capital management and an improved cash conversion cycle. Total debt declined $68.9 million, or 17 percent, compared to the same period last year. In addition, following the quarter end the company successfully completed a debt refinancing through the retirement of $132.9 million in convertible subordinated notes, which was completed August 2, 2010, and funded by the company's new bank credit facility.

Chief Executive Officer David J. Vander Zanden said it is more appropriate to combine the results of the first two quarters to gauge performance of the business, adding that the delays in school ordering experienced in the first quarter will be apparent in the second quarter when the company expects to see revenue growth in the Accelerated Learning segment. The company expects that Accelerated Learning's second quarter growth will reduce the segment's revenue decline for the first half of the year to the mid-single-digits, excluding divestitures.

"There was spending reluctance on the part of schools during the first quarter, however with most school budgets now set, we are seeing an increase in order activity," said Vander Zanden. "As was the case in our last fiscal year, our largest revenue decrease is in furniture due to a continued reduction in school construction. First quarter furniture revenue was off 31 percent, and we see no near-term improvement in school construction activity. However, we launched a new line of furniture in August that we expect will make us more price competitive. In addition, we expect pricing pressures for both furniture and consumable products to negatively affect gross margins in coming quarters," added Vander Zanden. "Accelerated Learning products are not as price sensitive and their gross margins are expected to show modest improvement."

He added that management is encouraged by several new revenue initiatives, including opportunities involving the U.S. Communities purchasing cooperative, new product offerings in Accelerated Learning, and the Amazon.com purchasing portal. "Across School Specialty, our associates are working very hard to increase revenue, enhance customer service and improve efficiencies within a very difficult business environment," said Vander Zanden. "Their efforts will be the key to our future success as we emerge from this challenging period in our history."

First Quarter Financial Results

  --  Revenue for fiscal 2011's first quarter was $253.0 million, compared
      with $330.4 million in fiscal 2010's first quarter. The decrease was
      primarily due to reductions, or delays, in spending by many school
      districts, a significant decline in school construction activity
      impacting furniture sales, and certain execution issues in the
      Educational Resources segment. Approximately $10.7 million of the
      decline, or 2 percent, was related to the fiscal 2010 divestiture of
      School Specialty Publishing.

  --  Gross profit was $108.1 million compared with $142.8 million in last
      year's first quarter.  Consolidated gross margin declined 50 basis
      points to 42.7 percent, compared with the prior year's 43.2 percent. The
      decline in gross margin was related primarily to higher customer
      discounts within the Educational Resources segment, partially offset by
      a favorable product mix.

  --  Selling, general and administrative (SG&A) expenses declined $10.4
      million to $77.8 million compared with the prior year's $88.3 million.
      The decrease is primarily attributable to lower volume and the ongoing
      favorable impact of last year's cost reduction, integration and
      divestiture activities.

  --  Interest expense in the first quarter was $8.1 million compared with
      last year's $7.6 million. First quarter fiscal 2011 interest expense
      includes $3.4 million of non-cash interest expense related to the
      company's convertible debt, compared to $3.1 million of non-cash
      interest expense in last year's first quarter.

  --  Net income, excluding the goodwill impairment charge, was $13.3 million
      compared with last year's $28.4 million. Diluted earnings per share were
      $0.70 compared with $1.51 last year. Including the impairment charge
      discussed previously, the net loss reported will be approximately $315
      million to $353 million ($16.70 to $18.71 per share).


Convertible Debt Retirement

On August 2, 2010, subsequent to quarter end, the company redeemed $132.9 million of its convertible debt using borrowings on its $350.0 million revolving credit facility. At the end of the first quarter of fiscal 2011, the company had zero borrowings on this revolving credit facility.

Outlook

School Specialty has updated its full-year fiscal 2011 guidance for revenue, earnings and free cash flow. The company now expects revenue to range from $735 million to $770 million, compared with the prior guidance of $790 million to $825 million. Diluted earnings per share for fiscal 2011, excluding the non-cash impairment charge, is now expected to range from $0.15 to $0.45, reflecting lower revenue and gross margins, compared with the prior guidance of $1.00 to $1.30. This range includes a non-cash charge related to the convertible debt of $0.32. Excluding both charges, diluted earnings per share will be $0.37 to $0.72. Fiscal 2011 free cash flow guidance is now $40 million to $50 million, or $2.12 to $2.65 per diluted share, compared with the prior range of $60 million to $70 million. Both the revised and prior ranges include a $16 million cash tax payment obligation associated with the company's retirement of $132.9 million in convertible notes.

Conference Call

School Specialty will host a conference call to discuss its fiscal 2011 first quarter financial results. The conference call begins today, August 19, at 10:00 a.m. Central (11:00 a.m. Eastern). The call will be simultaneously broadcast in the Investors section of the School Specialty web site at www.schoolspecialty.com, and a replay of the call will be available.

About School Specialty, Inc.

School Specialty is a leading education company that provides innovative and proprietary products, programs and services to help educators engage and inspire students of all ages and abilities to learn. The company designs, develops, and provides preK-12 educators with the latest and very best curriculum, supplemental learning resources, and school supplies. Working in collaboration with educators, School Specialty reaches beyond the scope of textbooks to help teachers, guidance counselors and school administrators ensure that every student reaches his or her full potential.

For more information about School Specialty, visit www.schoolspecialty.com.

Cautionary Statement Concerning Forward-Looking Information

Any statements made in this press release about future results of operations, expectations, plans, prospects, or asset values, including but not limited to statements included under the heading "Outlook," constitute forward-looking statements. Forward-looking statements also include those preceded or followed by the words "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "should," "plans," "targets" and/or similar expressions. These forward-looking statements are based on School Specialty's current estimates and assumptions and, as such, involve uncertainty and risk. Forward-looking statements are not guarantees of future performance, and actual results may differ materially from those contemplated by the forward-looking statements because of a number of factors, including the factors described in Item 1A of School Specialty's Annual Report on Form 10-K for the fiscal year ended April 24, 2010, which factors are incorporated herein by reference. Except to the extent required under the federal securities laws, School Specialty does not intend to update or revise the forward-looking statements.

                        -Financial Tables Follow-


                SCHOOL SPECIALTY, INC.
         CONSOLIDATED STATEMENTS OF OPERATIONS
       (In Thousands, Except Per Share Amounts)
                       Unaudited

                                Three Months Ended
                              ----------------------

                               July 24,    July 25,
                                 2010        2009
                              ----------  ----------

  Revenues                     $ 252,984   $ 330,367

  Cost of revenues               144,912     187,576
                              ----------  ----------
   Gross profit                  108,072     142,791
  Selling, general and
   administrative expenses        77,848      88,252
                              ----------  ----------
   Operating income               30,224      54,539

  Other (income) expense:
   Interest expense                8,130       7,560

   Interest income                    --        (10)
                              ----------  ----------
  Income before provision
   for income taxes               22,094      46,989
  Provision for income taxes       8,791      18,560
   Income before from
    investment in
    unconsolidated affiliate    $ 13,303    $ 28,429
                              ----------  ----------
  Equity in (losses)
   earnings of
   unconsolidated affiliate,
   net of tax                         --          --
                              ----------  ----------

   Net income                   $ 13,303    $ 28,429
                              ==========  ==========

  Weighted average shares
   outstanding:
   Basic                          18,864      18,829
   Diluted                        18,891      18,876

  Net Income per Share:
   Basic                          $ 0.71      $ 1.51
   Diluted                        $ 0.70      $ 1.51



                         SCHOOL SPECIALTY, INC.
                  CONSOLIDATED CONDENSED BALANCE SHEETS
                             (In Thousands)

                                 July 24,     April 24,      July 25,
                                   2010          2010          2009
                               ------------  ------------  ------------
  ASSETS                        (Unaudited)                 (Unaudited)
  Current assets:
   Cash and cash equivalents        $ 8,586      $ 21,035       $ 3,867
   Accounts receivable              177,888        72,734       237,942
   Inventories                      126,828        99,910       167,921
   Deferred catalog costs            10,268        13,593         9,816
   Prepaid expenses and other
    current assets                   16,115        14,318        17,191
   Refundable income taxes               --         1,539            --

   Deferred taxes                     9,866         9,867         9,805
                               ------------  ------------  ------------
     Total current assets           349,551       232,996       446,542
  Property, plant and
   equipment, net                    64,672        66,607        69,060
  Goodwill                          537,976       540,248       539,109
  Intangible assets, net            163,741       166,552       165,505
  Other                              33,125        33,118        27,632
  Investment in
   unconsolidated affiliate          28,308        28,299            --
                               ------------  ------------  ------------

     Total assets               $ 1,177,373   $ 1,067,820   $ 1,247,848
                               ============  ============  ============

  LIABILITIES AND
   SHAREHOLDERS' EQUITY
  Current liabilities:
   Current maturities -
    long-term debt                $ 133,809     $ 132,397     $ 128,354
   Accounts payable                 126,169        47,954       131,280
   Accrued compensation              10,764         7,501        12,871
   Deferred revenue                   5,466         4,312         5,777
   Accrued income taxes               4,264            --        12,502

   Other accrued liabilities         37,458        30,905        43,440
                               ------------  ------------  ------------
     Total current
      liabilities                   317,930       223,069       334,224
  Long-term debt - less
   current maturities               201,587       199,742       275,902
  Deferred taxes                     94,327        92,398        63,982

  Other liabilities                   1,423         1,423           913
                               ------------  ------------  ------------

     Total liabilities              615,267       516,632       675,021
                               ------------  ------------  ------------

  Commitments and
   contingencies
  Shareholders' equity:
   Preferred stock, $0.001
    par value per share,
    1,000,000 shares
    authorized; none
    outstanding                          --            --            --
   Common stock, $0.001 par
    value per share,
    150,000,000 authorized
    and 24,290,345;
    24,280,097 and 24,255,767
    shares issued,
    respectively                         24            24            24
   Capital paid-in excess of
    par value                       437,513       436,959       462,287
   Treasury stock, at cost -
    5,420,210; 5,420,210 and
    5,420,210 shares,
    respectively                  (186,637)     (186,637)     (186,637)
   Accumulated other
    comprehensive income             21,113        24,052        17,785

   Retained earnings                290,093       276,790       279,368
                               ------------  ------------  ------------
     Total shareholders'
      equity                        562,106       551,188       572,827
                               ------------  ------------  ------------
     Total liabilities and
      shareholders' equity      $ 1,177,373   $ 1,067,820   $ 1,247,848
                               ============  ============  ============



                         SCHOOL SPECIALTY, INC.
                 CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (In Thousands)
                               Unaudited

                                                Three Months Ended
                                             ------------------------

                                              July 24,     July 25,
                                                2010         2009
                                             -----------  -----------
  Cash flows from operating activities:
   Net income                                   $ 13,303     $ 28,429
   Adjustments to reconcile net income to
    net cash provided by operating
    activities:
    Depreciation and intangible asset
     amortization expense                          6,988        6,762
    Amortization of development costs              1,537        1,831
    Amortization of debt fees and other              625          520
    Share-based compensation expense                 827        1,273
    Deferred taxes                                 1,748        3,661
    Investment in unconsolidated affiliate            --           --
    Non cash convertible debt deferred
     financing costs                               3,436        3,166
    Changes in current assets and liabilities (net of
     assets acquired and liabilities
    assumed in business combinations):
     Accounts receivable                       (105,190)    (134,156)
     Inventories                                (26,921)     (40,582)
     Deferred catalog costs                        3,325        5,721
     Prepaid expenses and other current
      assets                                       (259)        3,802
     Accounts payable                             77,721       74,259

     Accrued liabilities                          15,181       22,978
                                             -----------  -----------
       Net cash used in operating
        activities                               (7,679)     (22,336)
                                             -----------  -----------

  Cash flows from investing activities:
   Additions to property, plant and
    equipment                                    (2,410)      (2,946)
   Proceeds from business dispositions                --          200

   Investment in product development costs       (2,181)      (2,194)
                                             -----------  -----------
       Net cash used in investing
        activities                               (4,591)      (4,940)
                                             -----------  -----------

  Cash flows from financing activities:
   Proceeds from bank borrowings                  35,400      109,800
   Repayment of debt and capital leases         (35,579)     (80,365)
   Payment of debt fees and other                     --        (238)

   Proceeds from exercise of stock options            --           75
                                             -----------  -----------
       Net cash (used in)/provided by
        financing activities                       (179)       29,272
                                             -----------  -----------

  Net decrease in cash and cash equivalents     (12,449)        1,996
  Cash and cash equivalents, beginning of
   period                                         21,035        1,871
                                             -----------  -----------

  Cash and cash equivalents, end of period       $ 8,586      $ 3,867
                                             ===========  ===========

  Free cash flow reconciliation:
   Net cash used in operating activities       $ (7,679)   $ (22,336)
   Additions to property and equipment           (2,410)      (2,946)

   Investment in development costs               (2,181)      (2,194)
                                             -----------  -----------

   Free cash flow                             $ (12,270)   $ (27,476)
                                             ===========  ===========



                                     School Specialty, Inc.
                 Segment Analysis - Revenues and Gross Profit/Margin Analysis
                                   1st Quarter, Fiscal 2011
                                         (In thousands)
                                           Unaudited


  Segment Revenues and Gross Profit/Margin
   Analysis-QTD
  --------------------------------------------------

                                                                              % of Revenues
                                                                           ------------------

                                                                   Change
                               1Q11-QTD    1Q10-QTD    Change $       %    1Q11-QTD  1Q10-QTD
                              ----------  ----------  -----------  ------  --------  --------
  Revenues
   Educational Resources       $ 175,418   $ 224,943   $ (49,525)  -22.0%     69.3%     68.1%
   Accelerated Learning (1)       77,399     106,345     (28,946)  -27.2%     30.6%     32.2%
   Corporate and Interco
    Elims                            167       (921)        1,088              0.1%     -0.3%
                              ----------  ----------  -----------          --------  --------

     Total Revenues            $ 252,984   $ 330,367   $ (77,383)            100.0%    100.0%
                              ==========  ==========  ===========  -23.4%  ========  ========


                                                                              % of Revenues
                                                                           ------------------

                                                                   Change
                               1Q11-QTD    1Q10-QTD    Change $       %    1Q11-QTD  1Q10-QTD
                              ----------  ----------  -----------  ------  --------  --------
  Gross Profit
   Educational Resources        $ 62,110    $ 82,715   $ (20,605)  -24.9%     57.5%     57.9%
   Accelerated Learning           45,315      59,515     (14,200)  -23.9%     41.9%     41.7%

   Intercompany Eliminations         647         561           86              0.6%      0.4%
                              ----------  ----------  -----------          --------  --------

     Total Gross Profit        $ 108,072   $ 142,791   $ (34,719)            100.0%    100.0%
                              ==========  ==========  ===========  -24.3%  ========  ========


  Segment Gross Margin Summary-QTD
  --------------------------------------  ----------


  Gross Margin                 1Q11-QTD    1Q10-QTD
                              ----------  ----------
   Educational Resources           35.4%       36.8%
   Accelerated Learning            58.5%       56.0%
     Total Gross Margin            42.7%       43.2%

  (1) Q1 fiscal 2010 revenue includes $10,746 related to the School Specialty
   Publishing business unit,
  which was divested in third quarter of fiscal 2010.

This news release was distributed by GlobeNewswire, www.globenewswire.com

SOURCE: School Specialty, Inc.

CONTACT:  School Specialty, Inc.
David Vander Ploeg, Executive VP and CFO
920-882-5854
Mark Fleming, Communications & Investor Relations
920-882-5646