* Operating margin improves 130 basis points in the second quarter * Free cash flow improves $24 million in first six months of fiscal 2010 * Revenue, EPS and free cash flow guidance confirmed
GREENVILLE, Wis., Nov. 19, 2009 (GLOBE NEWSWIRE) -- School Specialty (Nasdaq:SCHS) today reported fiscal 2010 second quarter and year-to-date financial results that demonstrate solid progress in reducing costs, and continuing strong free cash flow. Revenue for the second quarter of fiscal 2010 declined to $346.1 million, down 11.3 percent from $390.3 million in the prior year's second quarter. Excluding the expected decline in science curriculum adoption revenue of $10 million, quarterly revenue declined 9.0 percent. Second quarter net income was $29.6 million as compared to $30.4 million last year. Second quarter diluted earnings per share declined to $1.57, or 2.5 percent, as compared to $1.61 in last year's second quarter.
Despite the volume decline, the company's successful restructuring and fixed-cost reductions resulted in a 130 basis-point operating margin increase in the second quarter, and a 50 basis-point improvement year to date. Free cash flow improved by $24.3 million, or over 200 percent, for the first six months of the year. Low capital spending requirements, inventory controls, and improved days sales outstanding for accounts receivable all contributed to the strong cash flow performance. The company used much of the cash to strengthen its balance sheet, reducing total debt by $115 million over the past 12 months, which includes the pay-off of an accounts receivable securitization facility in last year's fourth quarter.
"The busy season results came in as we expected," said Chief Executive Officer David J. Vander Zanden. "Our previously announced $20 million cost-reduction program has grown to $25 million, and that additional success at controlling costs was seen in our operating margin improvement. Schools continue to struggle with their budget challenges. While volume in consumable and curriculum products, excluding adoptions, has been only modestly below the prior year, sales of furniture and equipment have been significantly lower because those purchases are more easily delayed. In this challenging environment, our associates have worked extremely hard over the past year at expense control, and completing our business and functional consolidations within Educational Resources. We believe those structural changes and fixed-cost reductions have also prepared us for future growth as the economy recovers and education spending returns to more normal levels."
School Specialty also announced today that it has completed the previously announced divestiture of its retail trade book business, School Specialty Publishing, to Carson-Dellosa Publishing, LLC, a newly-formed business entity. Under the agreement, School Specialty combined its publishing unit assets with those of Cookie Jar Education, Inc. and received a minority equity interest in Carson-Dellosa Publishing. Future results from the business combination will be reported as an investment under the equity method of accounting, beginning in the third quarter of fiscal 2010.
Second Quarter Financial Results
* Revenue for the second quarter was $346.1 million, compared with $390.3 million in fiscal 2009's second quarter. The decrease was primarily due to reductions in spending by many school districts, and an expected $10 million decline in science adoption revenue compared to the same period last year. The furniture and equipment category incurred the largest revenue reduction, while curriculum-based and consumable products saw more modest mid-single-digit declines. * Gross profit was $143.1 million compared with $159.1 million in last year's second quarter. Consolidated gross margin improved 50 basis points to 41.3 percent, despite an unfavorable product mix this year. The improvement was primarily due to product pricing and costing initiatives. * Selling, general and administrative (SG&A) expenses declined $13.7 million to $86.4 million compared with the prior year's $100.1 million. Cost reductions resulting from operational consolidations, improved supply chain management and various expense controls reduced SG&A as a percent of revenue in the second quarter to 25.0 percent, compared with the prior year's 25.6 percent. * Operating income for the second quarter was $56.7 million compared with $59.0 million for the same period last year. The company's gross margin improvement and cost-reduction efforts helped drive a 130 basis-point improvement in operating margin, reaching 16.4 percent. * Second quarter net interest expense and other declined $1.2 million to $7.7 million from $8.9 million in last year's second quarter. This decline was attributable to a reduction in debt balances of over $115 million, inclusive of the elimination of an accounts receivable securitization program in fiscal 2009. Both periods included non-cash interest expense of $3.2 million and $3.0 million, respectively, as a result of the company's adoption of FASB ASC Topic 470-20 regarding new accounting rules for convertible debt. * Net income in the second quarter of the current year was $29.6 million ($1.57 per diluted share) compared with last year's second quarter net income of $30.4 million ($1.61 per diluted share). Both periods included non-cash charges related to convertible debt accounting, which reduced second quarter diluted EPS by $0.10 in both fiscal 2010 and fiscal 2009.
Six-Month Financial Results
* Revenue for the first half of fiscal 2010 was $676.5 million compared with $769.1 million in the first half of last year. The reduction is primarily due to spending reductions by schools, and an expected $21 million decline in state science adoption revenue. * Gross profit for the first six months of the fiscal year was $285.9 million compared with $323.1 million in the first six months of last year. Gross margin improved 30 basis points to 42.3 percent, despite this year's lower-margin product mix. The improvement was due to product pricing and successful vendor costing initiatives. * SG&A expenses declined $26.4 million in the first six months of this year to $174.7 million compared with $201.1 million in the first six months of fiscal 2009. As a percent of sales, year-to-date SG&A declined 30 basis points to 25.8 percent. * Operating income for the first half of fiscal 2010 was $111.2 million, compared with operating income of $122.0 million in the same period last year. Operating margin increased 50 basis points to 16.4 percent. * Year-to-date net interest expense and other declined $1.9 million to $15.3 million from $17.2 million in the first six months of fiscal 2009. This decline was attributable to a reduction in debt balances of approximately $115 million, inclusive of the elimination of an accounts receivable securitization program in fiscal 2009. Both periods included non-cash interest expense of $6.4 million and $5.9 million, respectively, as a result of the company's adoption of the new accounting rules for convertible debt. * Net income for the first six months of fiscal 2010 was $58.0 million ($3.07 per diluted share) compared with $63.8 million ($3.36 per diluted share) for the first six months of fiscal 2009. Both periods included non-cash charges related to convertible debt accounting, which reduced six-month diluted EPS by $0.20 this year and $0.19 in fiscal 2009.
Outlook
School Specialty is maintaining its fiscal 2010 guidance for revenue, earnings per share and free cash flow. The company expects revenue to range from $915 million to $940 million which includes a projected $22 million decline in curriculum adoption revenue and an approximately $8 million decline due to the net effect of the divestiture of School Specialty Publishing and the acquisition of AutoSkill International, Inc. The free cash flow range of $70 million to $80 million ($3.71 to $4.24 per diluted share) excludes the $11.7 million purchase price of the AutoSkill acquisition announced last quarter. In addition, the company has updated the following modeling expectations:
* Gross margin is now expected to grow 100 to 130 basis points over fiscal 2009 versus prior guidance of plus 60 to 70 basis points. * SG&A is expected to be 33.4 to 33.8 percent of revenue. * One-time integration costs from acquisition and divestiture activity are projected at $.06 to $.08 per fully diluted share.
Finally, the projected diluted earnings per share range of $1.40 to $1.60 is unchanged. These figures include a $0.42 non-cash charge for adoption of the new convertible debt accounting rules, and one-time integration costs mentioned above. Excluding the impact of the convertible debt accounting change and the transaction integration costs, the diluted earnings per share range is $1.88 to $2.10. Had the new convertible debt accounting rules been in effect last year, fiscal 2009's diluted earnings per share would have been $1.44, compared with the reported $1.83.
Conference Call
School Specialty will host a conference call to discuss its fiscal 2010 second quarter financial results. The conference call begins today, November 19, 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 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 Six Months Ended
------------------ ------------------
(As (As
Adjusted)* Adjusted)*
Oct. 24, Oct. 25, Oct. 24, Oct. 25,
2009 2008 2009 2008
-------- -------- -------- --------
Revenues $346,146 $390,306 $676,513 $769,100
Cost of revenues 203,041 231,189 390,617 445,981
-------- -------- -------- --------
Gross profit 143,105 159,117 285,896 323,119
Selling, general and
administrative expenses 86,445 100,089 174,697 201,106
-------- -------- -------- --------
Operating income 56,660 59,028 111,199 122,013
Other (income) expense:
Interest expense 7,739 7,546 15,298 15,355
Interest income -- (141) (10) (220)
Other -- 1,534 -- 2,089
-------- -------- -------- --------
Income before provision for
income taxes 48,921 50,089 95,911 104,789
Provision for income taxes 19,324 19,664 37,885 41,014
-------- -------- -------- --------
Net income $ 29,597 $ 30,425 $ 58,026 $ 63,775
======== ======== ======== ========
Weighted average shares
outstanding:
Basic 18,837 18,785 18,833 18,813
Diluted 18,911 18,900 18,892 19,002
Net Income Per Share:
Basic $ 1.57 $ 1.62 $ 3.08 $ 3.39
Diluted $ 1.57 $ 1.61 $ 3.07 $ 3.36
*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 (As
Statements)* Adjusted)*
Oct. 24, April 25, Oct. 25,
2009 2009 2008
---------- ---------- ----------
ASSETS (Unaudited) (Unaudited)
Current assets:
Cash and cash equivalents $ 8,836 $ 1,871 $ 9,683
Accounts receivable 192,633 103,683 192,809
Inventories 109,784 127,108 129,474
Deferred catalog costs 5,843 15,537 11,006
Prepaid expenses and other
current assets 11,497 17,347 21,143
Refundable income taxes -- 1,566 --
Deferred taxes 9,805 9,805 16,275
---------- ---------- ----------
Total current assets 338,398 276,917 380,390
Property, plant and equipment, net 68,331 70,183 71,841
Goodwill 545,222 532,318 530,300
Intangible assets, net 170,154 168,082 172,208
Other 28,760 27,551 28,160
---------- ---------- ----------
Total assets $1,150,865 $1,075,051 $1,182,899
========== ========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Current maturities - long-term
debt $ 129,663 $ 127,071 $ 124,576
Accounts payable 40,315 56,786 48,389
Accrued compensation 12,953 12,821 16,354
Deferred revenue 4,579 4,254 4,679
Accrued income taxes 21,380 -- 22,021
Other accrued liabilities 32,634 28,231 37,127
---------- ---------- ----------
Total current liabilities 241,524 229,163 253,146
Long-term debt - less current
maturities 230,658 244,586 289,359
Deferred taxes 93,896 86,109 93,855
Other liabilities 913 913 794
---------- ---------- ----------
Total liabilities 566,991 560,771 637,154
---------- ---------- ----------
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 24,265,678;
24,243,438 and 24,206,938
shares issued, respectively 24 24 24
Capital paid-in excess of par
value 436,923 435,150 432,657
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 20,599 10,804 8,116
Retained earnings 312,965 254,939 291,585
---------- ---------- ----------
Total shareholders' equity 583,874 514,280 545,745
---------- ---------- ----------
Total liabilities and
shareholders' equity $1,150,865 $1,075,051 $1,182,899
========== ========== ==========
*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
Six Months Ended
-------------------------
(As Adjusted)*
October 24, October 25,
2009 2008
----------- -----------
Cash flows from operating activities:
Net income $ 58,026 $ 63,775
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and intangible asset
amortization expense 13,196 12,043
Amortization of development costs 3,514 3,502
Amortization of debt fees and other 1,055 1,019
Share-based compensation expense 2,159 2,389
Deferred taxes 7,452 7,160
Loss (gain) on disposal of property,
equipment and other 275 677
Non-cash convertible debt deferred
financing costs 6,398 5,893
Changes in current assets and
liabilities (net of assets acquired
and liabilities assumed in business
combinations):
Change in amounts sold under
receivables securitization, net -- --
Accounts receivable (86,610) (117,308)
Inventories 17,653 19,938
Deferred catalog costs 9,694 3,839
Prepaid expenses and other current
assets 3,967 7,675
Accounts payable (17,190) (17,322)
Accrued liabilities 25,189 27,626
----------- -----------
Net cash provided by operating
activities 44,778 20,906
----------- -----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash
acquired (11,700) --
Additions to property, plant and
equipment (6,364) (5,115)
Proceeds from disposal of discontinued
operations 500 2,235
Investment in product development costs (4,436) (4,055)
Proceeds from disposal of property,
plant and equipment 2,083 109
----------- -----------
Net cash used in investing
activities (19,917) (6,826)
----------- -----------
Cash flows from financing activities:
Proceeds from bank borrowings 283,700 441,600
Repayment of debt and capital leases (301,433) (439,109)
Purchase of treasury stock -- (15,250)
Payment of debt and other (238) --
Proceeds from exercise of stock options 75 2,647
Excess income tax benefit from exercise
of stock options -- 1,681
----------- -----------
Net cash used in financing activities (17,896) (8,431)
----------- -----------
Net increase in cash and cash equivalents 6,965 5,649
Cash and cash equivalents, beginning of
period 1,871 4,034
----------- -----------
Cash and cash equivalents, end of period $ 8,836 $ 9,683
=========== ===========
Free cash flow reconciliation:
Net cash used in operating activities $ 44,778 $ 20,906
Additions to property and equipment (6,364) (5,115)
Investment in development costs (4,436) (4,055)
Proceeds from disposal of property and
equipment 2,083 109
----------- -----------
Free cash flow $ 36,061 $ 11,845
=========== ===========
*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
2nd Quarter, Fiscal 2010
(In thousands)
Unaudited
Segment Revenues and Gross
Profit/Margin Analysis-QTD
--------------------------
% of Revenues
-------------
2Q10 2Q09 Change Change 2Q10 2Q09
-QTD -QTD $ % -QTD -QTD
-------- -------- -------- ----- ----- -----
Revenues
Educational
Resources $239,864 $266,286 $(26,422) -9.9% 69.3% 68.2%
Publishing 106,610 124,089 (17,479) -14.1% 30.8% 31.8%
Corporate and
Interco Elims (328) (69) (259) -0.1% 0.0%
-------- -------- -------- ------ ------
Total
Revenues $346,146 $390,306 $(44,160) -11.3% 100.0% 100.0%
======== ======== ======== ====== ======
% of Gross
Profit
-------------
2Q10 2Q09 Change Change 2Q10 2Q09
-QTD -QTD $ % -QTD -QTD
-------- -------- ------- ----- ----- -----
Gross Profit
Educational
Resources $ 82,776 $ 88,172 $ (5,396) -6.1% 57.8% 55.4%
Publishing 59,693 70,068 (10,375) -14.8% 41.7% 44.0%
Corporate and
Interco Elims 636 877 (241) 0.5% 0.6%
-------- -------- -------- ------ ------
Total Gross
Profit $143,105 $159,117 $(16,012) -10.1% 100.0% 100.0%
======== ======== ======== ====== ======
Segment Gross Margin Summary-QTD
--------------------------------
2Q10 2Q09
Gross Margin -QTD -QTD
-------- --------
Educational
Resources 34.5% 33.1%
Publishing 56.0% 56.5%
Total Gross
Margin 41.3% 40.8%
---------------------------------------------------------------------
Segment Revenues and
Gross Profit/Margin
Analysis-YTD
--------------------
% of Revenue
-------------
2Q10 2Q09 Change Change 2Q10 2Q09
-YTD -YTD $ % -YTD -YTD
-------- -------- -------- ----- ----- -----
Revenues
Educational
Resources $464,807 $518,536 $(53,729) -10.4% 68.7% 67.4%
Publishing 212,956 250,916 (37,960) -15.1% 31.5% 32.6%
Corporate and
Interco Elims (1,250) (352) (898) -0.2% 0.0%
-------- -------- -------- ------ ------
Total
Revenues $676,513 $769,100 $(92,587) -12.0% 100.0% 100.0%
======== ======== ======== ====== ======
% of Gross
Profit
-------------
2Q10 2Q09 Change Change 2Q10 2Q09
-YTD -YTD $ % -YTD -YTD
-------- -------- ------- ----- ----- -----
Gross Profit
Educational
Resources $165,492 $177,265 $(11,773) -6.6% 57.9% 54.9%
Publishing 119,208 144,089 (24,881) -17.3% 41.7% 44.6%
Corporate and
Interco Elims 1,196 1,765 (569) 0.4% 0.5%
-------- -------- -------- ------ ------
Total Gross
Profit $285,896 $323,119 $(37,223) -11.5% 100.0% 100.0%
======== ======== ======== ====== ======
Segment Gross Margin
Summary-YTD
--------------------
2Q10 2Q09
Gross Margin -YTD -YTD
-------- --------
Educational
Resources 35.6% 34.2%
Publishing 56.0% 57.4%
Total Gross
Margin 42.3% 42.0%