* Diluted earnings per share from continuing operations increased 27.0 percent to a record $2.21 * Record free cash flow of $75.5 million, or $3.65 per diluted share * Record revenues of $1,088 million, an increase of 4.3 percent * Board authorizes additional $50 million for share repurchases * Fiscal 2009 free cash flow guidance increased; revenue and EPS guidance confirmed
GREENVILLE, Wis., June 12, 2008 (PRIME NEWSWIRE) -- School Specialty (Nasdaq:SCHS), a leading education company providing supplemental learning products to the preK-12 market, today reported record fiscal year-end financial results. Fiscal 2008 revenue was $1,088 million, 4.3 percent above the prior-year's record revenue of $1,043 million. Earnings from continuing operations also were an all-time high at $45.8 million, 16.8 percent above the $39.2 million reported in fiscal 2007. Diluted earnings per share from continuing operations rose 27.0 percent to $2.21 compared with the prior year's $1.74.
Free cash flow for the year increased 17.9 percent compared to fiscal 2007, reaching $75.5 million, or $3.65 per share, based on the weighted average diluted shares outstanding for fiscal 2008.
"Fiscal 2008 was an extremely busy and gratifying year," said Chief Executive Officer David Vander Zanden. "We saw broad acceptance of our core science curriculum offerings, and our associates made significant progress on initiatives that we believe are positioning us for continued and sustainable organic growth. We're aligning our business units to serve our customers in a more coordinated and effective manner, improving our ability to analyze and respond to customer needs, advancing our supplemental and curriculum-based product development efforts, and driving efficiencies through lean process improvement. Many of these efforts helped us achieve revenue growth in our Essentials segment during the second half of fiscal 2008 and continuing this growth will remain our focus in this important segment."
"I'm also very pleased with our continuing ability to deliver strong free cash flow and our progress in reducing working capital requirements," noted Vander Zanden. "We expect another record year of free cash flow in fiscal 2009, with additional reductions in working capital through a combination of enhanced systems capabilities, supply chain efficiencies, and improved discipline around product selection and stocking models. In addition it appears at this early stage that the fiscal 2009 funding is unfolding as expected."
Fourth Quarter Financial Results
Revenue for the fourth quarter of fiscal 2008 was $173.6 million compared with $166.0 million in fiscal 2007. Essentials segment revenue grew 6.0 percent, or $4.0 million, from $67.5 million in the fourth quarter of fiscal 2007 to $71.6 million in the fourth quarter of fiscal 2008. Specialty segment revenue increased 2.0 percent, or $2.1 million, from $104.2 million in last year's fourth quarter to $106.3 million in this year's fourth quarter.
Gross margin decreased in the quarter from 43.4 percent to 39.5 percent. In the fourth quarter of fiscal 2008, Essentials revenue grew to 41.2 percent of the company's total revenue. Gross margin in the Essentials segment decreased 160 basis points from 33.8 percent in the fourth quarter of fiscal 2007 to 32.2 percent in the fourth quarter of fiscal 2008. This Essentials decrease was primarily related to the higher revenue mix of furniture versus consumables. Revenue attributable to furniture generates a lower gross margin than the consumable revenue as most furniture is shipped directly to our customers from our vendors. The Specialty segment gross margin decreased in the quarter to 44.1 percent from 48.1 percent last year. Approximately 200 basis points of this decrease was attributable to a $2.1 million inventory charge related to the charitable donation of inventory of a terminated product line. The donation generated a $1.6 million tax benefit for the quarter. Of this, $0.8 million was incremental due to the favorable tax treatment of certain inventory donations thereby reducing the company's effective income tax rate for the quarter. The remaining decrease in the Specialty segment gross margin is primarily related to the product mix within the segment. Approximately 20 basis points of the gross margin decline related to the revenue mix shift between the Essentials and Specialty segments. In fiscal 2007's fourth quarter, Essentials revenue, which generates lower gross margins than Specialty, was 40.7 percent of the company's total revenue.
Operating loss for the quarter was $16.7 million compared with an operating loss of $11.5 million in the fourth quarter of fiscal 2007. Selling, general and administrative (SG&A) expense as a percent of revenue decreased to 49.1 percent in the current quarter compared with 50.3 percent in fiscal 2007's fourth quarter. SG&A expense increased $1.8 million in the current quarter from $83.5 million to $85.3 million. The increase is primarily related to additional investments in the company's direct marketing and product management initiatives, incremental variable compensation costs related to performance-based compensation plans, and incremental variable costs attributable to the revenue increase. These incremental costs were partially offset by continued efficiencies in supply chain operations, specifically in warehousing and transportation.
The loss from continuing operations was $12.7 million in the fourth quarter of fiscal 2008 as compared to a loss from continuing operations of $11.3 million in last year's fourth quarter. The per share loss from continuing operations was $0.66 for the fourth quarter of fiscal 2008 versus $0.53 in fiscal 2007. Approximately $0.06 of this decrease is related to the decreased share count in the fourth quarter of fiscal 2008 as compared with the fourth quarter of fiscal 2007 due to share repurchases.
Net loss for the fourth quarter of fiscal 2008 was $15.5 million, which included a net of tax loss of $2.8 million from the discontinued School Specialty Media (SSM) business, which was sold during the quarter, compared with a net loss of $29.2 million in the fourth quarter of fiscal 2007, which included a $17.9 million net of tax loss for SSM. The net loss per share in the fourth quarter of fiscal 2008 was $0.81 compared to $1.38 in last year's fourth quarter.
During the fourth quarter of fiscal 2008, the company repurchased $34.6 million of its outstanding common stock substantially completing all repurchases under previously authorized share repurchase programs. On June 11, 2008, the company's Board of Directors approved a new share repurchase program, granting authority to purchase up to $50 million of its issued and outstanding common stock. Purchases under this program may be made from time to time in the open market or in privately negotiated transactions based on ongoing assessments of capital needs of the business, the market price of its stock, general market conditions and other factors. Common stock acquired through the repurchase program will be available for general corporate purposes.
2008 Fiscal Year-End Financial Results
Revenue for fiscal 2008 was a record $1,087.9 million, up $44.8 million or 4.3 percent from $1,043.2 million in fiscal 2007. Specialty segment revenue increased $59.8 million, or 10.1 percent, in fiscal 2008 to $651.7 million from $591.9 million in fiscal 2007. The Specialty segment revenue growth in the fiscal year was led by science curriculum sales involving state adoptions, which increased approximately $48 million over the prior year, which was partially offset by a decline in mass-merchant retail sales of approximately $11 million. The remaining Specialty segment units, excluding the mass-merchant retail business, had revenue growth in the fiscal year of 4.3 percent. The Essentials segment revenue for fiscal 2008 was down 3.3 percent to $455.4 million from $471.1 million in fiscal 2007. This decline was attributable to a reduction in school rebuilding activity in Louisiana, the elimination of an unproductive catalog, and the decision to not pursue low-margin bid business, all of which occurred in the first two quarters of the fiscal year.
Gross margin declined 30 basis points in fiscal 2008 from 42.7 percent to 42.4 percent. The decreased gross margin was due to an inventory charge of approximately $3 million related to the company's decision to terminate certain Specialty segment product lines. These associated inventory items have been disposed through a charitable donation. The donation generated a $2.4 million tax benefit for the fiscal year. Of this, $1.2 million was incremental due to the favorable tax treatment of certain inventory donations, thereby reducing the company's effective income tax rate for the year. The revenue mix both between segments and within the segments also had an impact on gross margins for the year. Revenue from the Specialty segment, net of intercompany eliminations, increased to approximately 58 percent of total revenue in fiscal 2008 as compared with approximately 55 percent in fiscal 2007. While the shift in revenue mix toward the Specialty segment, which historically has higher gross margins than the Essentials segment, contributed to increased gross margins, these increases were primarily offset by a gross margin decline in the Essentials segment of 60 basis points. This decline was attributable to a combination of the product mix within the segment, as well as reduction in volume-based vendor rebates related to the decline in purchases associated with both the revenue decline and inventory reduction.
SG&A expense as a percent of revenue decreased from 33.7 percent in fiscal 2007 to 33.3 percent in fiscal 2008. SG&A expense increased $9.9 million from $351.8 million in fiscal 2007 to $361.7 million this year. The increase in SG&A is attributable to the additional variable selling and distribution expenses associated with the revenue growth, incremental costs to support the business system conversion, additional investments in the company's direct marketing and product management initiatives, and increased variable performance-based compensation costs. Partially offsetting these increases were efficiencies realized in our supply chain and other cost-reduction efforts. Operating income in fiscal 2008 was 9.1 percent of revenue as compared with 9.0 percent of revenue in fiscal 2007. Earnings from continuing operations increased 16.8 percent from $39.2 million in fiscal 2007 to $45.8 million in fiscal 2008.
Diluted earnings per share from continuing operations increased 27.0 percent from $1.74 in fiscal 2007 to $2.21 in fiscal 2008. Approximately $0.18 of this increase is related to the decreased share count. The reduction in the share count is due to share repurchases, partially offset by shares issued pursuant to stock option exercises. The diluted earnings per share increase from the reduced share count was partially offset by an $0.08 decrease attributable to the additional interest expense related to using free cash flow to fund the share repurchases versus reducing debt. Thus, the incremental net earnings per share impact in fiscal 2008 associated with repurchases was $0.10 per share.
Diluted earnings per share, which includes the discontinued SSM business, increased to $1.99 per share in fiscal 2008 from $0.80 in fiscal 2007. Net income increased to $41.1 million in fiscal 2008, which includes a net of tax loss of $4.7 million from SSM, compared with the prior year's $18.0 million, which includes a net of tax loss of $21.2 million from SSM.
During fiscal 2008, the company repurchased $94.9 million of its outstanding common stock. Since the beginning of fiscal 2007, the company has repurchased $171.4 million of its outstanding common stock.
Sale of Discontinued Operation
During the fourth quarter of fiscal 2008, the company completed the sale of SSM for proceeds of $8.6 million, of which $1.4 million was received in cash prior to the end of fiscal 2008. For the year, SSM reported a net of tax loss of $4.7 million, or a $0.22 loss per diluted share. The net of tax loss from operations was $3.2 million, or a $0.15 loss per diluted share. In addition, a $1.5 million net of tax loss on disposal was reported in fiscal 2008, or a $0.07 loss per diluted share. This incremental loss on disposal was primarily related to approximately $0.5 million net of tax loss on assets sold in the disposal transaction, and approximately $1.0 million net of tax loss related to severance, retention bonuses, and lease termination costs.
Outlook
For fiscal 2009, the company is updating its free cash flow guidance to be in the range of $80 million to $90 million. This estimate excludes approximately $11 million of free cash flow expected to be recognized in fiscal 2009 related to the tax savings on the SSM disposal. The company's previous free cash flow guidance was a range of $75 million to $85 million, excluding the free cash flow from the tax savings on the SSM disposal. The company also is confirming its most recent fiscal 2009 revenue guidance for growth of between 3 percent and 5 percent, excluding the impact of state adoption revenues attributable to the company's science curriculum. State adoption revenue is expected to decline by approximately $32 million in fiscal 2009. Thus total revenue guidance for fiscal 2009 compared to fiscal 2008, including adoption revenues, is expected to be between a 1 percent decline to a 2 percent increase, or a range of $1,077 million to $1,110 million. The company also is confirming that it expects an increase in fiscal 2009 diluted earnings per share of 3 percent to 10 percent, or a range of $2.27 to $2.43.
Conference Call
School Specialty will host a conference call to discuss its fiscal 2008 fourth quarter and year-end results. The conference call begins today, June 12, at 10:00 a.m. Central (11:00 a.m. Eastern). The call will be simultaneously broadcast in the Investor Information 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 any guidance put forth in the "Outlook" section 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 28, 2007, 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 Fiscal Year Ended
---------------------- ----------------------
April 26, April 27, April 26, April 27,
2008 2007 2008 2007
---------- ---------- ---------- ----------
Revenues $ 173,632 $ 166,040 $1,087,903 $1,043,152
Cost of revenues 104,987 93,991 626,661 597,515
---------- ---------- ---------- ----------
Gross profit 68,645 72,049 461,242 445,637
Selling, general and
administrative
expenses 85,339 83,529 361,754 351,839
---------- ---------- ---------- ----------
Operating income
(loss) (16,694) (11,480) 99,488 93,798
Other (income) expense:
Interest expense 5,046 5,403 19,857 22,203
Interest income (5) (45) (28) (117)
Other 373 771 5,718 6,019
---------- ---------- ---------- ----------
Income (loss) before
provision for income
taxes (22,108) (17,609) 73,941 65,693
Provision for (benefit
from) income taxes (9,426) (6,351) 28,129 26,468
---------- ---------- ---------- ----------
Earnings (loss) from
continuing operations (12,682) (11,258) 45,812 39,225
Loss from discontinued
School Specialty
Media business unit,
net of income taxes (2,810) (17,942) (4,691) (21,179)
---------- ---------- ---------- ----------
Net income (loss) $ (15,492) $ (29,200) $ 41,121 $ 18,046
========== ========== ========== ==========
Weighted average shares
outstanding:
Basic 19,205 21,177 20,196 21,873
Diluted 19,205 21,177 20,708 22,545
Basic earnings (loss)
per share of common
stock:
Earnings (loss) from
continuing
operations $ (0.66) $ (0.53) $ 2.27 $ 1.79
Loss from discontinued
operations (0.15) (0.85) (0.23) (0.96)
---------- ---------- ---------- ----------
Total $ (0.81) $ (1.38) $ 2.04 $ 0.83
========== ========== ========== ==========
Diluted earnings (loss)
per share of common
stock:
Earnings (loss) from
continuing
operations $ (0.66) $ (0.53) $ 2.21 $ 1.74
Loss from discontinued
operations (0.15) (0.85) (0.22) (0.94)
---------- ---------- ---------- ----------
Total $ (0.81) $ (1.38) $ 1.99 $ 0.80
========== ========== ========== ==========
SCHOOL SPECIALTY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
April 26, April 28,
2008 2007
---------- ----------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 4,034 $ 2,386
Accounts receivable 77,591 65,900
Inventories 149,548 177,319
Deferred catalog costs 14,845 14,848
Refundable income taxes 9,288 1,850
Prepaid expenses and other current assets 18,857 16,548
Deferred taxes 15,726 10,201
---------- ----------
Total current assets 289,889 289,052
Property, plant and equipment, net 77,311 77,345
Goodwill 543,630 534,488
Intangible assets, net 176,771 183,660
Other 29,726 26,334
---------- ----------
Total assets $1,117,327 $1,110,879
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities - long-term debt $ 133,628 $ 133,590
Accounts payable 64,340 77,794
Accrued compensation 19,476 14,709
Deferred revenue 6,641 5,464
Other accrued liabilities 30,593 23,392
---------- ----------
Total current liabilities 254,678 254,949
Long-term debt - less current maturities 312,210 293,139
Deferred taxes and other 71,751 50,246
---------- ----------
Total liabilities 638,639 598,334
---------- ----------
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 23,631,135 and
23,310,461 shares issued, respectively 24 23
Capital paid-in excess of par value 380,073 367,068
Treasury stock, at cost - 4,922,610 and
2,126,121 shares, respectively (171,387) (76,508)
Accumulated other comprehensive income 25,158 17,763
Retained earnings 244,820 204,199
---------- ----------
Total shareholders' equity 478,688 512,545
---------- ----------
Total liabilities and shareholders' equity $1,117,327 $1,110,879
========== ==========
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Unaudited
Fiscal Year Ended
----------------------
April 26, April 27,
2008 2007
---------- ----------
Cash flows from operating activities:
Net income $ 41,121 $ 18,046
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and intangible asset
amortization expense 25,348 25,843
Amortization of development costs 8,963 6,237
Amortization of debt fees and other 1,959 1,361
Loss on disposal of School Specialty Media
business unit 1,519 --
Impairment charge -- 29,000
Share-based compensation expense 5,490 4,507
Deferred taxes 14,924 (1,630)
Loss on disposal of property, equipment and
other 263 292
Changes in current assets and liabilities
(net of assets acquired and liabilities
assumed in business combinations):
Accounts receivable (12,688) (5,995)
Inventories 23,234 (19,503)
Deferred catalog costs (2,294) 6,291
Prepaid expenses and other current assets (4,134) 14,124
Accounts payable (13,702) 2,874
Accrued liabilities 13,703 9,413
---------- ----------
Net cash provided by operating activities 103,706 90,860
---------- ----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash
acquired (5,828) --
Additions to property, plant and equipment (17,723) (18,169)
Investment in intangible and other assets -- (202)
Investment in product development costs (10,849) (9,684)
Proceeds from disposal of School Specialty
Media business unit 1,350 --
Proceeds from disposal of property, plant and
equipment 375 1,013
---------- ----------
Net cash used in investing activities (32,675) (27,042)
---------- ----------
Cash flows from financing activities:
Proceeds from convertible debt offering -- 200,000
Proceeds from bank borrowings 691,200 704,400
Repayment of debt and capital leases (672,091) (894,878)
Purchase of treasury stock (94,879) (76,508)
Proceeds from exercise of stock options 5,559 7,798
Excess income tax benefit from exercise of
stock options 828 576
Payment of debt fees and other -- (5,223)
---------- ----------
Net cash used in financing activities (69,383) (63,835)
---------- ----------
Net increase in cash and cash equivalents 1,648 (17)
Cash and cash equivalents, beginning of period 2,386 2,403
---------- ----------
Cash and cash equivalents, end of period $ 4,034 $ 2,386
========== ==========
Free cash flow reconciliation:
Net cash used in operating activities $ 103,706 $ 90,860
Additions to property and equipment (17,723) (18,169)
Investment in development costs (10,849) (9,684)
Proceeds from disposal of property and
equipment 375 1,013
---------- ----------
Free cash flow $ 75,509 $ 64,020
========== ==========
School Specialty, Inc.
Segment Analysis - Revenues and Gross Profit/Margin Analysis
4th Quarter, Fiscal 2008
(In thousands)
Unaudited
Segment Revenues and Gross Profit/Margin Analysis-QTD
-----------------------------------------------------
% of Revenues
Change Change ------------------
4Q08-QTD 4Q07-QTD $ % 4Q08-QTD 4Q07-QTD
-------- -------- ------- ------- -------- --------
Revenues
Specialty $106,315 $104,249 $ 2,066 2.0% 61.2% 62.8%
Essentials 71,585 67,539 4,046 6.0% 41.2% 40.7%
Corporate and
Interco
Elims (4,268) (5,748) 1,480 -2.4% -3.5%
-------- -------- ------- -------- --------
Total
Revenues $173,632 $166,040 $ 7,592 4.6% 100.0% 100.0%
======== ======== ======= ======== ========
% of Gross Profit
Change Change ------------------
4Q08-QTD 4Q07-QTD $ % 4Q08-QTD 4Q07-QTD
-------- -------- ------- ------- -------- --------
Gross Profit
Specialty $ 46,907 $ 50,149 $(3,242) -6.5% 68.3% 69.6%
Essentials 23,017 22,800 217 1.0% 33.5% 31.6%
Corporate and
Interco
Elims (1,279) (900) (379) -1.8% -1.2%
-------- -------- ------- -------- --------
Total Gross
Profit $ 68,645 $ 72,049 $(3,404) -4.7% 100.0% 100.0%
======== ======== ======= ======== ========
Segment Gross Margin Summary-QTD
--------------------------------
Gross Margin 4Q08-QTD 4Q07-QTD
-------- --------
Specialty 44.1% 48.1%
Essentials 32.2% 33.8%
Total Gross Margin 39.5% 43.4%
Segment Revenues and Gross Profit/Margin Analysis-YTD
-----------------------------------------------------
% of Revenue
Change Change ------------------
4Q08-YTD 4Q07-YTD $ % 4Q08-YTD 4Q07-YTD
-------- -------- -------- ------- -------- --------
Revenues
Specialty $ 651,731 $ 591,866 $ 59,865 10.1% 59.9% 56.7%
Essentials 455,385 471,141 (15,756) -3.3% 41.9% 45.2%
Corporate
and
Interco
Elims (19,213) (19,855) 642 -1.8% -1.9%
---------- ---------- -------- -------- --------
Total
Revenues $1,087,903 $1,043,152 $ 44,751 4.3% 100.0% 100.0%
========== ========== ========= ======== ========
% of Gross Profit
Change Change ------------------
4Q08-YTD 4Q07-YTD $ % 4Q08-YTD 4Q07-YTD
-------- -------- -------- ------- -------- --------
Gross Profit
Specialty $ 320,372 $ 295,196 $ 25,176 8.5% 69.5% 66.2%
Essentials 144,280 151,956 (7,676) -5.1% 31.3% 34.1%
Corporate
and
Interco
Elims (3,410) (1,515) (1,895) -0.8% -0.3%
---------- ---------- -------- -------- --------
Total
Gross
Profit $ 461,242 $ 445,637 $ 15,605 3.5% 100.0% 100.0%
========== ========== ========= ======== ========
Segment Gross Margin Summary-YTD
--------------------------------
Gross Margin 4Q08-YTD 4Q07-YTD
-------- --------
Specialty 49.2% 49.9%
Essentials 31.7% 32.3%
Total Gross Margin 42.4% 42.7%