- Third quarter earnings per share (EPS) improves 22% or $0.27 over the prior year
- Gross profit margin improves 550 basis points; SG&A declines $8.3 million
- Debt reduced by $60 million; cash position increased $22 million
- Revenue and EPS guidance updated; free cash flow guidance confirmed
GREENVILLE, Wis., Feb. 18, 2010 (GLOBE NEWSWIRE) -- School Specialty (Nasdaq:SCHS) today reported fiscal 2010 third quarter and year-to-date financial results. While revenue for the third quarter of fiscal 2010 declined to $103.1 million, compared with $121.7 million in the prior year's third quarter, continued gross margin improvements, operational efficiencies, cost reductions and lower interest expense led to a $4.9 million improvement in the company's third quarter net loss compared to the same period last year. Net loss in the seasonally slow third quarter this year was $18.5 million compared to last year's net loss of $23.4 million. The quarter's loss per share improved to $0.98, as compared to $1.25 per share loss in fiscal 2009.
Free cash flow was $87.2 million for the nine-month period, reflecting tighter inventory controls, improved accounts receivable collections and low capital spending. The company also continued to strengthen its balance sheet, reducing total debt by approximately $60 million over the past 12 months, and increasing its quarter-end cash balance by more than $22 million.
"We achieved improved year-over-year earnings per share in excess of 20 percent in the third quarter due to the exceptional efforts of our associates in driving efficiencies, controlling costs and strengthening our balance sheet," said Chief Executive Officer David J. Vander Zanden. "The reduction in our third quarter revenue reflects a continuing difficult school spending environment, particularly in furniture. However, I'm very encouraged by the progress in our Intervention category, where the acquisition of AutoSkill has brought us a major new business win in Texas, as well as other promising growth opportunities for its reading and math software programs. While sales in our supplies and supplemental categories have been modestly lower due to school budget issues, the furniture and school construction sector continued to be the most impacted by budget cuts and major project delays. We expect that the recovery in furniture will be slow, especially for the portion of the business tied to projects. In spite of these challenges, our associates continue to make important progress in consolidating functions, and streamlining how we reach and serve our customers. In addition to creating customer benefits, we are achieving permanent cost reductions that are supporting our current profitability, while preparing us for future growth."
Third Quarter Financial Results
- Revenue for the third quarter was $103.1 million, compared with $121.7 million in last year's third quarter. The decrease was primarily related to the Educational Resources segment, which experienced a $14.7 million revenue decline. The general economic conditions have continued to affect school spending levels, particularly in the furniture product lines. Additional revenue in the quarter that related to the acquisition of AutoSkill International was offset by the revenue decline attributable to the divestiture of School Specialty Publishing.
- Gross profit was $42.4 million compared with $43.3 million in last year's third quarter. Consolidated gross margin improved 550 basis points to 41.1 percent. The improvement was primarily due to favorable product mix, particularly within the Publishing segment, and continued margin expansion within the Educational Resources segment related to product pricing and costing initiatives begun last year. The absence of promotions within the Science unit that reduced gross margin in the prior year's third quarter also contributed to the increase.
- Selling, general and administrative (SG&A) expenses declined $8.3 million to $65.0 million compared with the prior year's $73.3 million. A majority of the decline is related to the company's cost-reduction efforts over the past 12 months. SG&A as a percent of revenue in the third quarter was 63.1 percent, compared with the prior year's 60.2 percent.
- Operating loss for the third quarter improved to $22.6 million compared with a loss of $30.0 million for the same period last year.
- Third quarter net interest expense and other expense declined $0.5 million to $7.5 million from $8.0 million in last year's third quarter. This decline was attributable to a reduction in average quarterly debt balances of approximately $90 million, which includes the elimination of an accounts receivable securitization program in fiscal 2009. The current quarter included non-cash interest expense of $3.3 million as compared to $3.0 million in last year's third quarter, as a result of the company adopting FASB ASC Topic 470-20 regarding new accounting rules for convertible debt.
- Net loss in the third quarter of fiscal 2010 was $18.5 million ($0.98 per share) compared with last year's third quarter net loss of $23.4 million ($1.25 per share). Both periods included non-cash charges related to convertible debt accounting, which increased the third quarter loss per share by $0.11 in fiscal 2010 and $0.10 in fiscal 2009. Fiscal 2010 diluted EPS has been reduced by $0.01 for the company's share of the net loss from its minority interest in Carson-Dellosa Publishing, LLC, which was formed during the third quarter. The company's minority interest was obtained through a contribution of publishing unit assets, including cash.
Nine-Month Financial Results
- Revenue for the first nine months fiscal 2010 was $779.6 million compared with $890.8 million in the same period last year. The reduction is primarily due to spending reductions by schools, and the expected $21 million decline in state science adoption revenue.
- Year-to-date gross profit was $328.3 million compared with $366.4 million in the first nine months of last year. Gross margin improved 100 basis points to 42.1 percent. The improvement was due primarily to product pricing and successful vendor costing initiatives.
- SG&A expenses declined $34.7 million in the first nine months of the year to $239.7 million compared with $274.4 million in the first nine months of fiscal 2009. As a percent of sales, year-to-date SG&A declined 10 basis points to 30.7 percent. Cost reductions resulting from operational consolidations, improved supply chain management and various expense controls all contributed to the year-over-year decline.
- Year-to-date operating income was $88.6 million, compared with operating income of $92.0 million in the same period last year. Improved gross margin and SG&A leverage resulted in a 110 basis point improvement in operating margin to 11.4 percent for the first nine months of fiscal 2010, compared to 10.3 percent for the same period last year.
- Net interest expense and other expense for fiscal 2010's first nine months declined $2.4 million to $22.8 million from $25.2 million in the same period last year. This decline was attributable to a reduction in average debt balances of approximately $100 million, which includes the elimination of an accounts receivable securitization program in fiscal 2009. The current year included non-cash interest expense of $9.7 million compared to $8.9 million last year, as a result of the company's adoption of the new accounting rules for convertible debt.
- Net income for the first nine months of fiscal 2010 was $39.6 million ($2.09 per diluted share) compared with $40.3 million ($2.13 per diluted share) for the first nine months of fiscal 2009. Both periods included non-cash charges related to convertible debt accounting, which reduced nine-month diluted EPS by $0.31 this year and $0.29 in fiscal 2009. Fiscal 2010 diluted EPS has been reduced by $0.01 for the company's share of the net loss from its minority interest in Carson-Dellosa Publishing, LLC.
Outlook
School Specialty is updating its fiscal 2010 guidance for revenue and earnings per share, and confirming its previously issued guidance for free cash flow. The company is reducing its revenue guidance from $915 million to $940 million to a range of $895 million to $910 million. This revenue range includes a projected $22 million decline in curriculum adoption revenue and an approximate $8 million decline due to the net effect of the divestiture of School Specialty Publishing and the acquisition of AutoSkill International, Inc. The projected diluted earnings per share range has been narrowed to $1.40 to $1.54 from the previous range of $1.40 to $1.60 per diluted share. As with the previous guidance, these figures include a $0.42 non-cash charge for adoption of the new convertible debt accounting rules, and one-time integration costs of $0.06 to $0.08 per diluted share from acquisition and divestiture activity. The company is confirming the free cash flow range of $70 million to $80 million ($3.71 to $4.24 per diluted share), which excludes the $11.7 million purchase price of the AutoSkill acquisition announced in the second quarter.
Conference Call
School Specialty will host a conference call to discuss its fiscal 2010 third quarter financial results. The conference call begins today, February 18, 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 or prospects, 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 25, 2009, 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 | |||
| (As Adjusted)* | (As Adjusted)* | |||
| January 23, 2010 | January 24, 2009 | January 23, 2010 | January 24, 2009 | |
| Revenues | $ 103,126 | $ 121,710 | $ 779,639 | $ 890,810 |
| Cost of revenues | 60,708 | 78,411 | 451,325 | 524,392 |
| Gross profit | 42,418 | 43,299 | 328,314 | 366,418 |
| Selling, general and administrative expenses | 65,009 | 73,283 | 239,706 | 274,389 |
| Operating income | (22,591) | (29,984) | 88,608 | 92,029 |
| Other (income) expense: | ||||
| Interest expense | 7,527 | 7,343 | 22,827 | 22,698 |
| Interest income | (22) | (102) | (33) | (322) |
| Other | -- | 714 | -- | 2,803 |
| Income before provision for income taxes | (30,096) | (37,939) | 65,814 | 66,850 |
| Provision for income taxes | (11,886) | (14,498) | 25,998 | 26,516 |
| Income (loss) from continuing operations before income taxes and income (loss) from investment in unconsolidated affiliate | $ (18,210) | $ (23,441) | $ 39,816 | $ 40,334 |
| Equity in (losses) earnings of unconsolidated affiliate, net of tax | (241) | -- | (241) | -- |
| Net income | $ (18,451) | $ (23,441) | $ 39,575 | $ 40,334 |
| . | ||||
| Weighted average shares outstanding: | ||||
| Basic | 18,849 | 18,788 | 18,838 | 18,804 |
| Diluted | 18,849 | 18,788 | 18,901 | 18,927 |
| Net Income Per Share: | ||||
| Basic | $ (0.98) | $ (1.25) | $ 2.10 | $ 2.14 |
| Diluted | $ (0.98) | $ (1.25) | $ 2.09 | $ 2.13 |
| *The Company adopted at the beginning of Fiscal 2010 Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 470-20, "Debt with Conversion and Other" ("FASB ASC Topic 470-20"). The adoption of FASB ASC Topic 470-20 required an adjustment of previously reported amounts assigned to debt, deferred taxes, equity and interest expense. | ||||
| SCHOOL SPECIALTY, INC. | |||
| CONSOLIDATED CONDENSED BALANCE SHEETS | |||
| (In Thousands) | |||
| (As Adjusted from Audited Statements)* | (As Adjusted)* | ||
| January 23, 2010 |
April 25, 2009 |
January 24, 2009 | |
| ASSETS | (Unaudited) | (Unaudited) | |
| Current assets: | |||
| Cash and cash equivalents | $ 23,459 | $ 1,871 | $ 1,258 |
| Accounts receivable | 92,894 | 103,683 | 65,220 |
| Inventories | 89,844 | 127,108 | 132,615 |
| Deferred catalog costs | 10,619 | 15,537 | 19,435 |
| Prepaid expenses and other current assets | 9,113 | 17,347 | 17,911 |
| Refundable income taxes | -- | 1,566 | -- |
| Deferred taxes | 9,805 | 9,805 | 16,232 |
| Total current assets | 235,734 | 276,917 | 252,671 |
| Property, plant and equipment, net | 65,332 | 70,183 | 70,379 |
| Goodwill | 536,975 | 532,318 | 530,960 |
| Intangible assets, net | 167,449 | 168,082 | 170,134 |
| Other | 28,019 | 27,551 | 28,056 |
| Investment in unconsolidated affiliate | 29,046 | -- | -- |
| Total assets | $ 1,062,555 | $ 1,075,051 | $ 1,052,200 |
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||
| Current liabilities: | |||
| Current maturities - long-term debt | $ 131,013 | $ 127,071 | $ 125,807 |
| Accounts payable | 25,145 | 56,786 | 47,295 |
| Accrued compensation | 9,915 | 12,821 | 14,223 |
| Deferred revenue | 5,141 | 4,254 | 3,645 |
| Accrued income taxes | 7,837 | -- | 7,043 |
| Other accrued liabilities | 26,718 | 28,231 | 32,008 |
| Total current liabilities | 205,769 | 229,163 | 230,021 |
| Long-term debt - less current maturities | 197,935 | 244,586 | 204,008 |
| Deferred taxes | 92,427 | 86,109 | 93,513 |
| Other liabilities | 913 | 913 | 785 |
| Total liabilities | 497,044 | 560,771 | 528,327 |
| 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 24,277,777; 24,243,438 and 24,209,938 shares issued, respectively | 24 | 24 | 24 |
| Capital paid-in excess of par value | 437,811 | 435,150 | 433,377 |
| 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 | 19,799 | 10,804 | 8,965 |
| Retained earnings | 294,514 | 254,939 | 268,144 |
| Total shareholders' equity | 565,511 | 514,280 | 523,873 |
| Total liabilities and shareholders' equity | $ 1,062,555 | $ 1,075,051 | $ 1,052,200 |
| *The Company adopted at the beginning of Fiscal 2010 Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 470-20, "Debt with Conversion and Other" ("FASB ASC Topic 470-20"). The adoption of FASB ASC Topic 470-20 required an adjustment of previously reported amounts assigned to debt, deferred taxes, equity and interest expense. | |||
| SCHOOL SPECIALTY, INC. | ||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | ||
| (In Thousands) | ||
| Unaudited | ||
| Nine Months Ended | ||
| (As Adjusted)* | ||
|
January 23, 2010 |
January 24, 2009 |
|
| Cash flows from operating activities: | ||
| Net income | $ 39,575 | $ 40,334 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
||
| Depreciation and intangible asset amortization expense | 19,882 | 18,196 |
| Amortization of development costs | 4,191 | 4,593 |
| Loss from unconsolidated affiliate | 241 | -- |
| Amortization of debt fees and other | 1,642 | 1,529 |
| Share-based compensation expense | 3,033 | 3,192 |
| Deferred taxes | 6,071 | 6,860 |
| Loss (gain) on disposal of property, equipment and other | 275 | 484 |
| Non-cash convertible debt deferred financing costs | 9,696 | 8,932 |
|
Changes in current assets and liabilities (net of assets acquired and liabilities assumed in business combinations): |
||
| Change in amounts sold under receivables securitization, net | -- | (3,000) |
| Accounts receivable | 8,773 | 13,318 |
| Inventories | 23,277 | 16,800 |
| Deferred catalog costs | 4,918 | (4,590) |
| Prepaid expenses and other current assets | 5,903 | 11,259 |
| Accounts payable | (32,400) | (18,260) |
| Accrued liabilities | 5,248 | 4,488 |
| Net cash provided by operating activities | 100,325 | 104,135 |
| Cash flows from investing activities: | ||
| Cash paid in acquisitions, net of cash acquired | (11,700) | -- |
| Additions to property, plant and equipment | (8,494) | (7,730) |
| Proceeds from disposal of discontinued operations | 800 | 2,485 |
| Investment in product development costs | (6,679) | (6,152) |
| Proceeds from disposal of property, plant and equipment | 2,083 | 192 |
| Investment in non-controlling interest | (2,226) | -- |
| Net cash used in investing activities | (26,216) | (11,205) |
| Cash flows from financing activities: | ||
| Proceeds from bank borrowings | 304,400 | 533,800 |
| Repayment of debt and capital leases | (356,803) | (618,467) |
| Purchase of treasury stock | -- | (15,250) |
| Payment of debt fees and other | (238) | -- |
| Proceeds from exercise of stock options | 120 | 2,692 |
| Excess income tax benefit from exercise of stock options | -- | 1,519 |
| Net cash used in financing activities | (52,521) | (95,706) |
| Net increase in cash and cash equivalents | 21,588 | (2,776) |
| Cash and cash equivalents, beginning of period | 1,871 | 4,034 |
| Cash and cash equivalents, end of period | $ 23,459 | $ 1,258 |
| Free cash flow reconciliation: | ||
| Net cash used in operating activities | $ 100,325 | $ 104,135 |
| Additions to property and equipment | (8,494) | (7,730) |
| Investment in development costs | (6,679) | (6,152) |
| Proceeds from disposal of property and equipment | 2,083 | 192 |
| Net accounts receivable securitization facility activity | -- | 3,000 |
| Free cash flow | $ 87,235 | $ 93,445 |
| *The Company adopted at the beginning of Fiscal 2010 Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 470-20, "Debt with Conversion and Other" ("FASB ASC Topic 470-20"). The adoption of FASB ASC Topic 470-20 required an adjustment of previously reported amounts assigned to debt, deferred taxes, equity and interest expense. | ||
| School Specialty, Inc. | ||||||
| Segment Analysis - Revenues and Gross Profit/Margin Analysis | ||||||
| 3rd Quarter, Fiscal 2010 | ||||||
| (In thousands) | ||||||
| Unaudited | ||||||
| Segment Revenues and Gross Profit/Margin Analysis-QTD | ||||||
| % of Revenues | ||||||
| 3Q10-QTD | 3Q09-QTD | Change $ | Change % | 3Q10-QTD | 3Q09-QTD | |
| Revenues | ||||||
| Educational Resources | $ 81,984 | $ 96,698 | $ (14,714) | -15.2% | 79.5% | 79.4% |
| Publishing | 21,007 | 24,948 | (3,941) | -15.8% | 20.4% | 20.5% |
| Corporate and Interco Elims | 135 | 64 | 71 | 0.1% | 0.1% | |
| Total Revenues | $ 103,126 | $ 121,710 | $ (18,584) | -15.3% | 100.0% | 100.0% |
| % of Gross Profit | ||||||
| 3Q10-QTD | 3Q09-QTD | Change $ | Change % | 3Q10-QTD | 3Q09-QTD | |
| Gross Profit | ||||||
| Educational Resources | $ 30,044 | $ 33,133 | $ (3,089) | -9.3% | 70.8% | 76.5% |
| Publishing | 11,884 | 9,561 | 2,323 | 24.3% | 28.0% | 22.1% |
| Corporate and Interco Elims | 490 | 605 | (115) | 1.2% | 1.4% | |
| Total Gross Profit | $ 42,418 | $ 43,299 | $ (881) | -2.0% | 100.0% | 100.0% |
| Segment Gross Margin Summary-QTD | ||||||
| Gross Margin | 3Q10-QTD | 3Q09-QTD | ||||
| Educational Resources | 36.6% | 34.3% | ||||
| Publishing | 56.6% | 38.3% | ||||
| Total Gross Margin | 41.1% | 35.6% | ||||
| Segment Revenues and Gross Profit/Margin Analysis-YTD | ||||||
| % of Revenue | ||||||
| 3Q10-YTD | 3Q09-YTD | Change $ | Change % | 3Q10-YTD | 3Q09-YTD | |
| Revenues | ||||||
| Educational Resources | $ 546,791 | $ 615,234 | $ (68,443) | -11.1% | 70.1% | 69.1% |
| Publishing | 233,573 | 275,865 | (42,292) | -15.3% | 30.0% | 31.0% |
| Corporate and Interco Elims | (725) | (289) | (436) | -0.1% | -0.1% | |
| Total Revenues | $ 779,639 | $ 890,810 | $ (111,171) | -12.5% | 100.0% | 100.0% |
| % of Gross Profit | ||||||
| 3Q10-YTD | 3Q09-YTD | Change $ | Change % | 3Q10-YTD | 3Q09-YTD | |
| Gross Profit | ||||||
| Educational Resources | $ 195,536 | $ 210,398 | $ (14,862) | -7.1% | 59.6% | 57.4% |
| Publishing | 130,944 | 153,650 | (22,706) | -14.8% | 39.9% | 41.9% |
| Corporate and Interco Elims | 1,834 | 2,370 | (536) | 0.5% | 0.7% | |
| Total Gross Profit | $ 328,314 | $ 366,418 | $ (38,104) | -10.4% | 100.0% | 100.0% |
| Segment Gross Margin Summary-YTD | ||||||
| Gross Margin | 3Q10-YTD | 3Q09-YTD | ||||
| Educational Resources | 35.8% | 34.2% | ||||
| Publishing | 56.1% | 55.7% | ||||
| Total Gross Margin | 42.1% | 41.1% | ||||