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School Specialty Reports Fiscal 2012 Third Quarter and Year-to-Date Results
  • Year-to-Date Revenues of $612.7 Million and Adjusted Net Income of $6.1 Million or $0.32 Per Share
  • Educational Resources Improves Revenue and Gross Margin in Quarter
  • Total Debt Declines $44.3 Million From Second Quarter
  • Strategic Review of Business Segments Underway by New CEO  
    • GREENVILLE, Wis., Feb. 23, 2012 (GLOBE NEWSWIRE) -- School Specialty (Nasdaq:SCHS) today reported fiscal 2012 third quarter and year-to-date financial results. Revenue for the third quarter of fiscal 2012 was $85.3 million, compared with $89.9 million in the prior year, a decline of 5.1 percent. The company reported a GAAP net loss for the quarter of $104.6 million, or $5.54 per share.  During the third quarter, the company sold the assets of its Seeds of Science/Roots of Reading program  for $6.7 million in cash and recognized a pre-tax gain of $4.4 million.  The company continues to be compliant with all required bank covenants.

      During the quarter, the company recorded a pre-tax non-cash impairment charge of $107.5 million for goodwill and non-amortizable intangible assets.  This impairment charge 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. The company's benefit from income taxes was also reduced by $2.9 million for a valuation allowance related to deferred tax assets not expected to be realized.  Adjusting for these items, the company's third quarter adjusted net loss1 was $16.3 million, or $0.86 per share in 2012 versus a net loss of $20.2 million, or $1.07 per share in the prior year's third quarter.

      For the first nine months of fiscal 2012, total revenues were $612.7 million compared with $634.7 million in the prior year. The company reported a GAAP net loss of $82.2 million or $4.35 per share for the year to date, compared with a net loss in last year's comparable period of $333.7 million, or $17.68 per share, including a net of tax impairment charge of $344.9 million or $18.28 per share. Adjusted net income was $6.1 million or $0.32 per diluted share for the nine months of fiscal 2012, compared to adjusted net income of $11.3 million, or $0.60 per diluted share in the prior year. 

      "As the new CEO of School Specialty, I am in the process of reviewing all of our business segments and assets and I see opportunities amidst the challenging preK-12 market," said President and CEO Michael P. Lavelle. "Educational Resources results have been improving throughout the fiscal year, and gross profit margins improved both sequentially and as compared to last year's third quarter.   However, postponed state adoptions and uncertainty in the marketplace related to school budgets and changes in core standards continued to affect Accelerated Learning revenues in the third quarter. "

      1 The term "adjusted" is explained and referenced at the end of this release in "Reconciliation of GAAP Net Loss and Net Loss per share to adjusted Net Income (Loss) and Net Earnings (Loss) per Share."

      Lavelle continued, "School Specialty's well-respected family of brands and outstanding distribution network offer new growth opportunities for the company. We intend to broaden our multi-channel, multi-market approach this selling season to enhance sales. Our web-based initiatives are an important part of the future and contributed to the gain in Educational Resources sales in the quarter. Our long term strategy will focus on the strengths of our brands and the breadth of our product line to improve revenue and profitability." 

      Third Quarter Financial Results

      • Revenue for the third quarter was $85.3 million, compared with $89.9 million for the same period last year. Educational Resources revenue increased slightly to $70.4 million in the third quarter, compared with $69.8 million in the prior year, as online initiatives began to generate new sales. Third quarter revenue for the Accelerated Learning segment declined to $14.3 million compared with $19.9 million in the same period last year, primarily due to lower curriculum sales in Science and Reading.
         
      • Gross profit was $30.6 million compared with $32.9 million in last year's third quarter, a decline of 7.0 percent. Consolidated gross margin declined to 35.9 percent compared with 36.7 percent in the prior year. The decline in gross margin was primarily due to the change in the mix of sales by business segments, reflecting lower comparable sales within the Accelerated Learning segment.
         
      • Selling, general and administrative (SG&A) expenses declined $9.5 million to $49.7 million from the prior year's $59.2 million. The decline was primarily related to a $4.4 million gain on the sale of Seeds of Science/Roots of Reading assets and $4.3 million lower compensation and benefit costs related to headcount reductions and mandated furloughs taken during the quarter.
         
      • A non-cash impairment charge of $107.5 million, or $85.5 million net of tax, was recorded in the current year's third quarter. The tax benefit associated with the impairment was negatively impacted by the portion of the goodwill which is non-deductible for tax purposes.
         
      • The tax benefit in the current year's quarter was reduced by a $2.9 million valuation allowance for deferred tax assets that are not expected to be realized.
         
      • The adjusted net loss for this year's third quarter was $16.3 million or $0.86 per share, compared with last year's third quarter adjusted net loss of $20.2 million or $1.07 per share.

      Nine-Month Financial Results

      • Revenue for the first nine months of fiscal 2012 was $612.7 million, compared with $634.7 million in the same period of the prior year, a decline of 3.5 percent. Revenue for the nine-month period of fiscal 2012 for Educational Resources was $429.7 million compared with $432.9 million in fiscal 2011. Accelerated Learning revenue declined 9.5 percent to $182.2 million in the first nine months of fiscal 2012 compared with $201.3 million in the prior year, primarily as a result of lower student agenda sales and lower curriculum sales in Science and Reading.
         
      • Year-to-date gross profit for fiscal 2012 was $237.0 million compared with $258.5 million in the same period last year. The consolidated gross margin for the first nine months of fiscal 2012 declined to 38.7 percent from 40.7 percent in the comparable fiscal 2011 period. Lower revenues from Accelerated Learning and Educational Resources price discounting were the major contributors to the gross margin decline.
         
      • SG&A expenses declined 6.2 percent to $202.9 million compared with the prior year's $216.3 million. This decline is due primarily to a combination of decreased variable costs associated with the revenue decline and lower compensation costs and the previously mentioned gain related to the disposal of Seeds of Science/Roots of Reading assets.
         
      • In fiscal 2012, $57.5 million of outstanding 3.75% convertible subordinated debentures were exchanged and refinanced with new debentures. Expenses of $1.1 million associated with this convertible debt exchange were recognized in the current year.
         
      • During the third quarter of fiscal 2012, the company retired the remaining $42.5 million of the original convertible subordinated notes due 2026, utilizing a portion of the term loan feature of the company's existing credit facility.
         
      • Earnings before interest, taxes, depreciation, amortization and impairment charges (adjusted EBITDA) totaled $61.4 million, compared with $66.8 million in the previous year.
         
      • Adjusted net income was $6.1 million or $0.32 per diluted share in the nine months of fiscal 2012, compared with adjusted net income of $11.3 million or $0.60 per diluted share in the prior year, excluding impairment charges and tax valuation allowances.
         
      • Free cash flow declined in the nine months of fiscal 2012 by $38.2 million compared to the same period in fiscal 2011. This decline was a result of planned early inventory purchases made during the company's fourth quarter of fiscal 2011 and the timing of tax payments in the current fiscal year. 

      Outlook

      School Specialty confirmed its guidance, excluding the impairment charge of $107.5 million for the full fiscal year 2012 as follows:

      Revenue $730 million to $740 million
      EBITDA $48 million to $52 million
      Loss per share ($0.65) to ($0.50)
      Free cash flow2 $0 million to $10 million
         
      2 Including non-recurring deferred tax payments of approximately $30 million

      Conference Call

      School Specialty will host a conference call to discuss its fiscal 2012 third quarter financial results. The conference call begins today, February 23, 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 http://www.globenewswire.com/newsroom/ctr?d=246891&l=12&a=www.schoolspecialty.com&u=http%3A%2F%2Fwww.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. 

      Accelerated Learning's major products include: World Wise 3000®, PremierAgenda, Delta Education, FOSS®, CPO Science, Frey Scientific®, Educator's Publishing Service, Academy of Reading®, Think Math!, MCI®, S.P.I.R.E.® and SPARK.   Educational Resources proprietary brands include: Education Essentials®, Sportime®, Childcraft®, Sax® Arts & Crafts, Califone®, abc®, Abilitations®, School Smart®, Classroom Select and Projects by Design®.

      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 30, 2011, 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.

      SCHOOL SPECIALTY, INC.
      CONSOLIDATED STATEMENTS OF OPERATIONS
      (In Thousands, Except Per Share Amounts)
      Unaudited
               
       
      Three Months Ended
      Nine Months Ended
       
      January 28, 2012
      January 22, 2011
      January 28, 2012
      January 22, 2011
               
      Revenue  
      $ 85,258
       
      $ 89,859
       
      $ 612,717
       
      $ 634,723
      Cost of revenue  
      54,630
       
      56,910
       
      375,753
       
      376,179
      Gross profit  
      30,628
       
      32,949
       
      236,964
       
      258,544
      Selling, general and administrative expenses  
      49,672
       
      59,169
       
      202,853
       
      216,335
      Impairment charge  
      107,501
       
      --
       
      107,501
       
      411,390
      Operating loss  
      (126,545)
       
      (26,220)
       
      (73,390)
       
      (369,181)
               
      Other expense:        
      Interest expense  
      6,293
       
      6,365
       
      21,072
       
      21,241
      Expense associated with convertible debt exchange  
      --
       
      --
       
      1,090
       
      --
      Loss before provision for income taxes  
      (132,838)
       
      (32,585)
       
      (95,552)
       
      (390,422)
      Benefit from income taxes  
      (29,832)
       
      (13,385)
       
      (14,860)
       
      (57,832)
      Loss before investment in  
       
       
       
       unconsolidated affiliate  
      $(103,006)
       
      $ (19,200)
       
      $ (80,692)
       
      $ (332,590)
      Losses of unconsolidated affiliate  
      (1,608)
       
      (950)
       
      (1,493)
       
      (1,085)
      Net loss  
      $(104,614)
       
      $ (20,150)
       
      $ (82,185)
       
      $ (333,675)
               
      Weighted average shares outstanding:        
      Basic and Diluted  
      18,880
       
      18,870
       
      18,878
       
      18,868
         
       
       
       
      Net Loss Per Share:  
       
       
       
      Basic and Diluted  
      $ (5.54)
       
      $ (1.07)
       
      $ (4.35)
       
      $ (17.68)
               
      Earnings before interest, taxes, depreciation,         
       amortization and impairment        
       charges (EBITDA) reconciliation:        
       Net loss  
      $(104,614)
       
      $ (20,150)
       
      $ (82,185)
       
      $ (333,675)
       Losses of unconsolidated affiliate  
      1,608
       
      950
       
      1,493
       
      1,085
       Benefit from income taxes  
      (29,832)
       
      (13,385)
       
      (14,860)
       
      (57,832)
       Expense associated with convertible debt exchange  
      -- 
       
      -- 
       
      1,090
       
      -- 
       Depreciation and amortization expense  
      7,813
       
      6,873
       
      22,351
       
      20,742
       Amortization of development costs  
      993
       
      906
       
      4,950
       
      3,838
       Interest expense  
      6,293
       
      6,365
       
      21,072
       
      21,241
       EBITDA  
      $(117,739)
       
      $ (18,441)
       
      $ (46,089)
       
      $ (344,601)
       Impairment charge  
      107,501
       
      -- 
       
      107,501
       
      411,390
       Adjusted EBITDA  
      $ (10,238)
       
      $ (18,441)
       
      $ 61,412
       
      $ 66,789
               
      See accompanying notes to condensed consolidated financial statements.
       
      SCHOOL SPECIALTY, INC.
      CONSOLIDATED CONDENSED BALANCE SHEETS
      (In Thousands)
      Unaudited
       
      January 28, 2012
      April 30, 2011
      January 22, 2011
      ASSETS      
      Current assets:      
      Cash and cash equivalents  
      $ 975
       
      $ 9,821
       
      $ 1,667
      Accounts receivable  
      64,290
       
      67,442
       
      70,767
      Inventories   
      79,715
       
      111,266
       
      80,747
      Deferred catalog costs   
      15,412
       
      16,639
       
      16,597
      Prepaid expenses and other current assets  
      12,873
       
      14,516
       
      13,329
      Deferred taxes  
      5,737
       
      --
       
      9,867
      Total current assets  
      179,002
       
      219,684
       
      192,974
      Property, plant and equipment, net   
      57,754
       
      65,571
       
      64,383
      Goodwill  
      41,049
       
      129,390
       
      127,694
      Intangible assets, net  
      126,860
       
      155,889
       
      158,205
      Development costs and other  
      33,847
       
      36,383
       
      34,352
      Deferred taxes long-term  
      26,459
       
      10,227
       
      --
      Investment in unconsolidated affiliate  
      18,907
       
      20,400
       
      27,215
      Total assets  
      $ 483,878
       
      $ 637,544
       
      $ 604,823
             
      LIABILITIES AND SHAREHOLDERS' EQUITY      
      Current liabilities:      
      Current maturities - long-term debt  
      $ 957
       
      $ 98,243
       
      $ 193,375
      Accounts payable  
      65,302
       
      85,639
       
      64,045
      Accrued compensation  
      4,234
       
      7,972
       
      6,949
      Deferred revenue  
      3,576
       
      3,600
       
      4,112
      Deferred taxes  
      --
       
      4,454
       
      --
      Accrued income taxes  
      8,476
       
      11,855
       
      19,204
      Other accrued liabilities  
      17,019
       
      25,428
       
      26,266
      Total current liabilities  
      99,564
       
      237,191
       
      313,951
      Long-term debt - less current maturities  
      265,112
       
      198,036
       
      60,395
      Deferred taxes  
      --
       
      --
       
      10,751
      Other liabilities  
      688
       
      688
       
      1,423
      Total liabilities  
      365,364
       
      435,915
       
      386,520
             
      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      
      24,300,545; 24,290,345 and 24,290,345 shares issued, respectively  
      24
       
      24
       
      24
      Capital paid-in excess of par value  
      443,897
       
      441,335
       
      438,818
      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  
      22,898
       
      26,390
       
      22,984
      (Accumulated deficit)  
      (161,668)
       
      (79,483)
       
      (56,886)
      Total shareholders' equity  
      118,514
       
      201,629
       
      218,303
      Total liabilities and shareholders' equity  
      $ 483,878
       
      $ 637,544
       
      $ 604,823
       
      SCHOOL SPECIALTY, INC.
      CONSOLIDATED STATEMENTS OF CASH FLOWS
      (In Thousands)
      Unaudited
           
       
      Nine Months Ended
       
      January 28, 2012
      January 22, 2011
      Cash flows from operating activities:    
      Net loss  
      $ (82,185)
       
      $ (333,675)
      Adjustments to reconcile net income to net cash provided  
       
      by operating activities:  
       
      Depreciation and intangible asset amortization expense  
      22,351
       
      20,742
      Amortization of development costs  
      4,950
       
      3,838
      Amortization of debt fees and other  
      2,157
       
      1,602
      Share-based compensation expense  
      1,867
       
      2,304
      Impairment charge  
      107,501
       
      411,390
      Expense associated with convertible debt exchange  
      1,090
       
      --
      Losses of investment in unconsolidated affiliate  
      1,493
       
      1,085
      Deferred taxes  
      (27,607)
       
      (82,095)
      (Gain) on sale of assets  
      (4,376)
       
      --
      Non-cash convertible debt deferred financing costs  
      7,290
       
      7,691
      Changes in current assets and liabilities   
       
      Accounts receivable  
      2,101
       
      2,332
      Inventories  
      30,815
       
      19,162
      Deferred catalog costs  
      1,227
       
      (3,004)
      Prepaid expenses and other current assets  
      1,638
       
      2,528
      Accounts payable  
      (20,693)
       
      15,883
      Accrued liabilities  
      (15,588)
       
      13,784
      Net cash provided by operating activities  
      34,031
       
      83,567
         
       
      Cash flows from investing activities:  
       
      Additions to property, plant and equipment  
      (6,616)
       
      (10,220)
      Investment in product development costs  
      (5,560)
       
      (6,655)
      Proceeds from sale of assets  
      6,650
       
      --
      Net cash used in investing activities  
      (5,526)
       
      (16,875)
         
       
      Cash flows from financing activities:  
       
      Proceeds from bank borrowings  
      500,300
       
      632,600
      Repayment of debt and capital leases  
      (493,488)
       
      (585,660)
      Redemption of convertible debt  
      (42,500)
       
      (133,000)
      Payment of debt and other  
      (1,663)
       
      --
      Net cash used in financing activities  
      (37,351)
       
      (86,060)
         
       
      Net decrease in cash and cash equivalents  
      (8,846)
       
      (19,368)
      Cash and cash equivalents, beginning of period  
      9,821
       
      21,035
      Cash and cash equivalents, end of period  
      $ 975
       
      $ 1,667
         
       
      Free cash flow reconciliation:  
       
      Net cash provided by operating activities  
      $ 34,031
       
      $ 83,567
      Additions to property and equipment  
      (6,616)
       
      (10,220)
      Investment in development costs  
      (5,560)
       
      (6,655)
      Proceeds from sale of assets  
      6,650
       
      -- 
      Free cash flow  
      $ 28,505
       
      $ 66,692
       
      School Specialty, Inc.
      Segment Analysis - Revenues and Gross Profit/Margin Analysis
      (In Thousands)
      Unaudited
                   
      Segment Revenues and Gross Profit/Margin Analysis-QTD        
               
      % of Revenues
       
      3Q12-QTD
      3Q11-QTD
      Change $
      Change %
      3Q12-QTD
      3Q11-QTD
      Revenues            
       Educational Resources  
      $ 70,428
       
      $ 69,785
       
      $ 643
      0.9%
      82.6%
      77.7%
       Accelerated Learning  
      14,313
       
      19,907
       
      (5,594)
      -28.1%
      16.8%
      22.2%
       Corporate and Interco Elims  
      517
       
      167
       
      350
       
      0.6%
      0.1%
       Total Revenues  
      $ 85,258
       
      $ 89,859
       
      $ (4,601)
      -5.1%
      100.0%
      100.0%
                   
               
      % of Gross Profit
       
      3Q12-QTD
      3Q11-QTD
      Change $
      Change %
      3Q12-QTD
      3Q11-QTD
      Gross Profit            
       Educational Resources  
      $ 23,723
       
      $ 22,196
       
      $ 1,527
      6.9%
      77.5%
      67.4%
       Accelerated Learning  
      6,388
       
      10,267
       
      (3,879)
      -37.8%
      20.9%
      31.2%
       Corporate and Interco Elims  
      517
       
      486
       
      31
       
      1.6%
      1.4%
       Total Gross Profit  
      $ 30,628
       
      $ 32,949
       
      $ (2,321)
      -7.0%
      100.0%
      100.0%
                   
      Segment Gross Margin Summary-QTD          
                   
      Gross Margin
      3Q12-QTD
      3Q11-QTD
             
       Educational Resources
      33.7%
      31.8%
             
       Accelerated Learning
      44.6%
      51.6%
             
       Total Gross Margin
      35.9%
      36.7%
             
       
       
                   
      Segment Revenues and Gross Profit/Margin Analysis-YTD        
               
      % of Revenue
       
      3Q12-YTD
      3Q11-YTD
      Change $
      Change %
      3Q12-YTD
      3Q11-YTD
      Revenues            
       Educational Resources  
      $ 429,713
       
      $ 432,897
       
      $ (3,184)
      -0.7%
      70.1%
      68.2%
       Accelerated Learning  
      182,153
       
      201,325
       
      (19,172)
      -9.5%
      29.8%
      31.7%
       Corporate and Interco Elims  
      851
       
      501
       
      350
       
      0.1%
      0.1%
       Total Revenues  
      $ 612,717
       
      $ 634,723
       
      $ (22,006)
      -3.5%
      100.0%
      100.0%
                   
               
      % of Gross Profit
       
      3Q12-YTD
      3Q11-YTD
      Change $
      Change %
      3Q12-YTD
      3Q11-YTD
      Gross Profit            
       Educational Resources  
      $ 138,444
       
      $ 143,046
       
      $ (4,602)
      -3.2%
      58.4%
      55.3%
       Accelerated Learning  
      97,669
       
      113,485
       
      (15,816)
      -13.9%
      41.2%
      43.9%
       Corporate and Interco Elims  
      851
       
      2,013
       
      (1,162)
       
      0.4%
      0.8%
       Total Gross Profit  
      $ 236,964
       
      $ 258,544
       
      $ (21,580)
      -8.3%
      100.0%
      100.0%
                   
      Segment Gross Margin Summary-YTD          
                   
      Gross Margin
      3Q12-YTD
      3Q11-YTD
             
       Educational Resources
      32.2%
      33.0%
             
       Accelerated Learning
      53.6%
      56.4%
             
       Total Gross Margin
      38.7%
      40.7%
             
       
      School Specialty, Inc.
      Reconciliation of GAAP Net Loss and Net Loss per Share to Adjusted Net Income (Loss) and Net Earnings (Loss) per Share
      (In Thousands, Except Per Share Amounts)
      Unaudited
               
       
      3 Months Ended
      9 Months Ended
       
      January 28, 2012
      January 22, 2011
      January 28, 2012
      January 22, 2011
               
      GAAP Net Loss  
      $ (104,614)
       
      $ (20,150)
       
      $ (82,185)
       
      $ (333,675)
       Impairment Charges, net of tax  
      (85,470)
       
      -- 
       
      (85,470)
       
      (344,930)
       Deferred tax valuation allowance  
      (2,860)
       
      -- 
       
      (2,860)
       
      -- 
      Adjusted Net Income (Loss)  
      $ (16,284)
       
      $ (20,150)
       
      $ 6,145
       
      $ 11,255
               
       
      3 Months Ended
      9 Months Ended
       
      January 28, 2012
      January 22, 2011
      January 28, 2012
      January 22, 2011
               
      GAAP Net Loss per Share  
      $ (5.54)
       
      $ (1.07)
       
      $ (4.35)
       
      $ (17.68)
       Impairment Charges, net of tax  
      (4.53)
       
      -- 
       
      (4.53)
       
      (18.28)
       Deferred tax valuation allowance  
      (0.15)
       
      -- 
       
      (0.15)
       
      --
      Adjusted (Loss) Earnings per share  
      $ (0.86)
       
      $ (1.07)
       
      $ 0.32
       
      $ 0.60
               
      Note: Totals may not foot due to rounding differences.

      School Specialty's financial results for the third quarter and nine months of fiscal 2012 and 2011 included certain items that management believes are not representative of its operating performance. These items include non-cash impairment charges for goodwill and other non-amortizable assets and the impact of recording valuation allowances on deferred tax balances associated with certain tax benefit carryforwards that are not expected to be realized in future periods. This additional information and reconciliation is not meant to be considered in isolation or as a substitute for the company's results of operations as prepared and presented in accordance with GAAP.

      CONTACT: David Vander Ploeg
      Executive VP and CFO
      920-882-5854

      Elizabeth M. Higashi, CFA
      Investor Relations
      920-243-5392