GREENVILLE, Wis., Feb. 19, 2009 (GLOBE NEWSWIRE) -- School Specialty (Nasdaq:SCHS), a leading education company providing supplemental learning products to the preK-12 market, today reported fiscal 2009 third quarter and year-to-date financial results. The company reported revenue for the third quarter of fiscal 2009 of $121.7 million, a 9.7 percent decline from the prior year's third quarter. Loss per share from continuing operations in the current year's third quarter was $1.15 per share, reflecting the seasonally low period for educational product sales, as compared to a $0.95 loss per share in last year's third quarter. Restructuring charges and the impact of share repurchases have contributed $0.04 and $0.10 per share, respectively, to the decline from the prior year.
The company generated $93.4 million of free cash flow in the first nine months of fiscal 2009 as compared to $70.3 million in the comparable period of fiscal 2008, an increase of $23.1 million. The company has utilized its free cash flow to reduce its outstanding debt by approximately $85 million during fiscal 2009.
Chief Executive Officer David J. Vander Zanden said he's optimistic that the federal economic stimulus aid for education will work to loosen education spending. "Schools have been very cautious in their spending, preserving their remaining budgets as they await decisions on next year's state education funding," noted Vander Zanden. "The states now have certainty as to the benefits of President Obama's economic stimulus package, and the governors' proposed budgets will be released over the next few weeks. We expect state education funding to improve significantly in these proposed budgets as compared to the states' previously released budget estimates. The stimulus funds should result in higher levels of school spending beginning in our first quarter. Our previously announced $20 million cost saving program is exceeding target and our associates are making great progress in driving cost savings, pursuing revenue growth opportunities, and generating strong cash flow."
Third Quarter Financial Results
Revenue in the third quarter of fiscal 2009 was $121.7 million, a 9.7 percent decrease from fiscal 2008's third quarter revenue of $134.8 million. Specialty segment revenue was down $8.3 million, or 10.6 percent, from $78.3 million in the third quarter of fiscal 2008 to $70.0 million in the third quarter of fiscal 2009. Essentials segment revenue was down 9.2 percent from $57.5 million in last year's third quarter to $52.2 million in the third quarter of fiscal 2009. The decreases in both segments were attributable to a combination of reductions and delays in spending by school districts as state budgetary concerns and the ongoing global economic slowdown have resulted in uncertainty as to the education funding levels in the upcoming state budget cycles.
Gross profit was $43.3 million in the third quarter of fiscal 2009 compared with $51.7 million in last year's third quarter. Gross margin declined 270 basis points from 38.3 percent in the third quarter of fiscal 2008 to 35.6 percent in the third quarter of fiscal 2009. Specialty segment gross margin in this year's third quarter declined 430 basis points from the third quarter of last year. Approximately 160 basis points of the decline was due to product mix within the segment, particularly related to the reduction in higher margin curriculum-based revenue. The remaining decline is due primarily to a combination of Science product promotions impacting the third quarter and underabsorption of overhead costs due to lower volume. Essentials segment gross margin declined 50 basis points from the third quarter of last year. The decline in the Essentials gross margin was due to a higher mix of furniture, which historically has carried lower gross margins as the product is shipped direct from vendors.
As of the close of third quarter, the company has completed its pricing adjustments and cost negotiations with vendors that should result in future quarterly gross margin improvements, when compared with the prior year's comparable quarters.
Selling, general and administrative (SG&A) expenses decreased $3.3 million from $76.6 million, or 56.8 percent of revenue, in the third quarter of fiscal 2008 to $73.3 million, or 60.2 percent of revenue, in the third quarter of fiscal 2009. SG&A in the current year's third quarter included a $1.3 million restructuring charge, or $0.04 per share, associated with the cost reduction efforts. The restructuring charge has been more than offset by both volume-related cost savings and operational efficiencies in transportation and warehousing costs, savings from cost reductions, and a reduction in performance-based compensation costs.
The operating loss for the quarter was $30.0 million, including the restructuring charge of $1.3 million, compared to an operating loss of $24.9 million in the third quarter of fiscal 2008. The loss from continuing operations was $21.6 million in the third quarter of fiscal 2009, including the $1.3 million restructuring charge, as compared to a loss of $19.0 million in the third quarter of fiscal 2008.
Net loss was $21.6 million in the third quarter of fiscal 2009, compared to a net loss of $20.3 million in fiscal 2008, which also included a net of tax loss of $1.2 million, or $0.06 loss per diluted share, for the discontinued School Specialty Media business sold during fiscal 2008. The company's stock repurchases over the past year have increased fiscal 2009's third quarter loss per share by approximately $0.10.
Nine Month Financial Results
Revenue for the first nine months of fiscal 2009 was $890.8 million, down $23.5 million, or 2.6 percent, from $914.3 million in the first nine months of fiscal 2008. This reduction was attributable to an expected $25 million decline in state adoptions of the company's curriculum-based products during the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008. Excluding state adoption revenue, revenue in the first nine months of fiscal 2009 was flat as compared to the first nine months of fiscal 2008. Specialty segment revenue declined $28.9 million in the first nine months of fiscal 2009 from $535.3 million in fiscal 2008's first nine months to $506.4 million in the comparable period of fiscal 2009. Excluding state adoption revenue, Specialty revenue declined 0.8 percent in the first nine months of this year. The company believes the comparison is meaningful because state adoption revenue will have significant variability between years due to the cyclical nature of curriculum adoptions, which are based on schedules established by individual states. The Essentials segment revenue for the first nine months of fiscal 2009 grew 1.0 percent from $383.8 million to $387.7 million. This increase was attributable primarily to increased furniture orders associated with school construction projects.
Gross margin declined by 180 basis points in the first nine months of fiscal 2009 as compared to the first nine months of fiscal 2008, from 42.9 percent to 41.1 percent. Approximately 40 basis points of the decline in gross margin was related to a higher mix of revenue from Essentials. Specialty segment gross margin declined 110 basis points from the first nine months of fiscal 2008 to the first nine months of fiscal 2009. Approximately 50 basis points of the decrease in Specialty segment gross margin is related to changes in product mix due primarily to the reduction in higher-margin curriculum adoption revenue. Essentials gross margin declined 190 basis points for the first nine months of fiscal 2009 as compared to the first nine months of fiscal 2008. Of the decrease, 60 basis points is attributable to a change in product mix due to increased furniture sales, with the remainder due to commodity cost increases and transportation cost increases.
SG&A expenses decreased $2.0 million during the first nine months of fiscal 2009 to $274.4 million, or 30.8 percent of revenue, from $276.4 million, or 30.2 percent of revenue, in the first nine months of fiscal 2008. SG&A expenses in fiscal 2009 included a $3.0 million restructuring charge related to the Lyons, NY distribution center closing as well as other one-time cost reduction efforts. Higher average transportation costs in fiscal 2009's first nine months have been offset by reductions in variable selling costs associated with state adoption revenue, as well as reduced performance-based variable compensation costs.
Operating income in the first nine months of fiscal 2009 was 10.3 percent of revenue as compared to 12.7 percent of revenue in the first nine months of fiscal 2008. Earnings from continuing operations decreased 21.6 percent to $45.8 million, including the $3.0 million restructuring charge, in the first nine months of fiscal 2009 from $58.5 million in the comparable period of fiscal 2008.
Diluted earnings per share from continuing operations decreased 12.9 percent from $2.78 in fiscal 2008 to $2.42 in fiscal 2009, which included $0.10 per diluted share in restructuring charges. The percentage decline in diluted earnings per share was less than the percentage decline in income from continuing operations due to the reduction in the shares outstanding associated with share repurchases over the past year. The incremental diluted earnings per share in the first nine months of fiscal 2009 as compared to the first nine months of fiscal 2008 due to the share repurchases was approximately $0.15 per share.
During the first quarter of fiscal 2009 the company repurchased 497,600 shares for a net purchase price of $15.3 million. The company did not purchase any shares during the second and third quarters. As of the end of the third quarter of fiscal 2009, the company has remaining authority to purchase $34.7 million of outstanding common stock.
Outlook
School Specialty is maintaining its fiscal 2009 free cash flow guidance of $70 million to $80 million. This range excludes approximately $11 million of additional free cash flow expected to be received in fiscal 2009 related to cash tax savings from the sale of School Specialty Media in late fiscal 2008. The company is reducing its prior revenue guidance to a range of $1,040 million to $1,055 million from a range of $1,065 million to $1,080 million, and expects total year state adoption revenue to decline by $27 million compared to fiscal 2008. Previous guidance for diluted earnings per share from continuing operations of $2.04 to $2.24 per share, which excluded an estimated restructuring charge of $0.14 per share, is being lowered to a range of $1.80 to $1.95, which excludes a restructuring charge of approximately $0.14 per share for the year.
Conference Call
School Specialty will host a conference call to discuss its fiscal 2009 third quarter financial results. The conference call begins today, February 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 26, 2008, 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
------------------ ------------------
Jan. 24, Jan. 26, Jan. 24, Jan. 26,
2009 2008 2009 2008
-------- -------- -------- --------
Revenue $121,710 $134,839 $890,810 $914,271
Cost of revenue 78,411 83,151 524,392 521,674
-------- -------- -------- --------
Gross profit 43,299 51,688 366,418 392,597
Selling, general and
administrative expenses 73,283 76,559 274,389 276,415
-------- -------- -------- --------
Operating income (loss) (29,984) (24,871) 92,029 116,182
Other (income) expense:
Interest expense 4,304 4,524 13,766 14,811
Interest income (102) (9) (322) (23)
Other 714 1,629 2,803 5,345
-------- -------- -------- --------
Income (loss) before provision
for income taxes (34,900) (31,015) 75,782 96,049
Provision for (benefit from)
income taxes (13,330) (11,973) 29,947 37,555
-------- -------- -------- --------
Earnings (loss) from
continuing operations (21,570) (19,042) 45,835 58,494
Loss from operations of
discontinued
School Specialty Media
business unit, net of income
taxes -- (1,220) -- (1,881)
-------- -------- -------- --------
Net income (loss) $(21,570) $(20,262) $ 45,835 $ 56,613
======== ======== ======== ========
Weighted average shares
outstanding:
Basic 18,788 20,010 18,804 20,526
Diluted 18,788 20,010 18,927 21,055
Basic earnings (loss) per share
of common stock:
Earnings (loss) from
continuing operations $ (1.15) $ (0.95) $ 2.44 $ 2.85
Loss from discontinued
operations -- (0.06) -- (0.09)
-------- -------- -------- --------
Total $ (1.15) $ (1.01) $ 2.44 $ 2.76
======== ======== ======== ========
Diluted earnings (loss) per
share of common stock:
Earnings (loss) from
continuing operations $ (1.15) $ (0.95) $ 2.42 $ 2.78
Loss from discontinued
operations -- (0.06) -- (0.09)
-------- -------- -------- --------
Total $ (1.15) $ (1.01) $ 2.42 $ 2.69
======== ======== ======== ========
SCHOOL SPECIALTY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
January 24, April 26, January 26,
2009 2008 2008
----------- ----------- -----------
ASSETS (Unaudited) (Unaudited)
Current assets:
Cash and cash equivalents $ 1,258 $ 4,034 $ 1,684
Accounts receivable 65,220 77,591 93,770
Inventories 132,615 149,548 146,500
Deferred catalog costs 19,435 14,845 17,745
Prepaid expenses and other
current assets 17,911 18,857 20,907
Refundable income taxes -- 9,288 --
Deferred taxes 16,232 15,726 10,457
----------- ----------- -----------
Total current assets 252,671 289,889 291,063
Property, plant and equipment,
net 70,379 77,311 76,517
Goodwill 530,960 543,630 544,552
Intangible assets, net 170,134 176,771 179,001
Other 28,056 29,726 26,512
----------- ----------- -----------
Total assets $ 1,052,200 $ 1,117,327 $ 1,117,645
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Current maturities - long-term
debt $ 133,664 $ 133,628 $ 133,622
Accounts payable 47,295 64,340 47,920
Accrued compensation 14,223 19,476 17,288
Deferred revenue 3,645 6,641 5,774
Accrued income taxes 7,043 -- 11,539
Other accrued liabilities 32,008 30,593 31,670
----------- ----------- -----------
Total current liabilities 237,878 254,678 247,813
Long-term debt - less current
maturities 227,507 312,210 281,767
Deferred taxes 81,468 70,671 58,505
Other liabilities 785 1,080 850
----------- ----------- -----------
Total liabilities 547,638 638,639 588,935
----------- ----------- -----------
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 24,209,938;
23,631,135 and 23,629,635
shares issued, respectively 24 24 24
Capital paid-in excess of par
value 391,555 380,073 378,794
Treasury stock, at cost -
5,420,210; 4,922,610 and
3,814,902 shares,
respectively (186,637) (171,387) (136,761)
Accumulated other
comprehensive income 8,965 25,158 26,341
Retained earnings 290,655 244,820 260,312
----------- ----------- -----------
Total shareholders' equity 504,562 478,688 528,710
----------- ----------- -----------
Total liabilities and
shareholders' equity $ 1,052,200 $ 1,117,327 $ 1,117,645
=========== =========== ===========
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Unaudited
Nine Months Ended
------------------------
January 24, January 26,
2009 2008
----------- -----------
Cash flows from operating activities:
Net income $ 45,835 $ 56,613
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and intangible asset
amortization expense 18,196 18,892
Amortization of development costs 4,593 7,217
Amortization of debt fees and other 1,529 1,521
Share-based compensation expense 3,192 4,230
Deferred taxes 10,291 8,148
Loss on disposal of property, equipment
and other 484 31
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 13,318 (26,712)
Inventories 16,800 31,271
Deferred catalog costs (4,590) (2,897)
Prepaid expenses and other current assets 11,259 (2,454)
Accounts payable (18,260) (29,975)
Accrued liabilities 4,488 24,186
----------- -----------
Net cash provided by operating activities 104,135 90,071
----------- -----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash
acquired -- (5,753)
Additions to property, plant and equipment (7,730) (12,218)
Proceeds from disposal of discontinued
operations 2,485 --
Investment in product development costs (6,152) (7,955)
Proceeds from disposal of property, plant
and equipment 192 375
----------- -----------
Net cash used in investing activities (11,205) (25,551)
----------- -----------
Cash flows from financing activities:
Proceeds from bank borrowings 533,800 533,000
Repayment of debt and capital leases (618,467) (544,340)
Purchase of treasury stock (15,250) (60,253)
Proceeds from exercise of stock options 2,692 5,519
Excess income tax benefit from exercise of
stock options 1,519 852
----------- -----------
Net cash used in financing activities (95,706) (65,222)
----------- -----------
Net decrease in cash and cash equivalents (2,776) (702)
Cash and cash equivalents, beginning of
period 4,034 2,386
----------- -----------
Cash and cash equivalents, end of period $ 1,258 $ 1,684
=========== ===========
Free cash flow reconciliation:
Net cash provided by operating activities $ 104,135 $ 90,071
Additions to property and equipment (7,730) (12,218)
Investment in development costs (6,152) (7,955)
Proceeds from disposal of property and
equipment 192 375
Change in amounts sold under receivables
securitization, net 3,000 --
----------- -----------
Free cash flow $ 93,445 $ 70,273
=========== ===========
School Specialty, Inc.
Segment Analysis - Revenue and Gross Profit/Margin Analysis
3rd Quarter, Fiscal 2009
(In thousands)
Unaudited
Segment Revenue and Gross Profit/Margin Analysis-QTD
----------------------------------------------------
% of Revenue
--------------
Change 3Q09 3Q08
3Q09-QTD 3Q08-QTD Change $ % -QTD -QTD
-------- -------- -------- -------- ------ ------
Revenue
Specialty $ 69,967 $ 78,254 $ (8,287) -10.6% 57.5% 58.0%
Essentials 52,218 57,540 (5,322) -9.2% 42.9% 42.7%
Corporate and
Interco Elims (475) (955) 480 -0.4% -0.7%
-------- -------- -------- ------ ------
Total Revenue $121,710 $134,839 $(13,129) -9.7% 100.0% 100.0%
======== ======== ======== ====== ======
% of Gross
Profit
--------------
Change 3Q09 3Q08
3Q09-QTD 3Q08-QTD Change $ % -QTD -QTD
-------- -------- -------- -------- ------ ------
Gross Profit
Specialty $ 28,208 $ 34,868 $ (6,660) -19.1% 65.1% 67.5%
Essentials 14,713 16,495 (1,782) -10.8% 34.0% 31.9%
Corporate and
Interco Elims 378 325 53 0.9% 0.6%
-------- -------- -------- ------ ------
Total Gross
Profit $ 43,299 $ 51,688 $ (8,389) -16.2% 100.0% 100.0%
======== ======== ======== ====== ======
Segment Gross Margin Summary-QTD
--------------------------------
Gross Margin 3Q09-QTD 3Q08-QTD
-------- --------
Specialty 40.3% 44.6%
Essentials 28.2% 28.7%
Total Gross
Margin 35.6% 38.3%
Segment Revenue and Gross Profit/Margin Analysis-YTD
----------------------------------------------------
% of Revenue
--------------
Change 3Q09 3Q08
3Q09-YTD 3Q08-YTD Change $ % -YTD -YTD
-------- -------- -------- ------ ------ ------
Revenue
Specialty $506,426 $535,315 $(28,889) -5.4% 56.9% 58.6%
Essentials 387,713 383,800 3,913 1.0% 43.5% 42.0%
Corporate and
Interco Elims (3,329) (4,844) 1,515 -0.4% -0.6%
-------- -------- -------- ------ ------
Total Revenue $890,810 $914,271 $(23,461) -2.6% 100.0% 100.0%
======== ======== ======== ====== ======
% of Gross
Profit
--------------
Change 3Q09 3Q08
3Q09-YTD 3Q08-YTD Change $ % -YTD -YTD
-------- -------- -------- ------ ------ ------
Gross Profit
Specialty $250,247 $270,425 $(20,178) -7.5% 68.3% 68.9%
Essentials 115,049 121,263 (6,214) -5.1% 31.4% 30.9%
Corporate and
Interco Elims 1,122 909 213 0.3% 0.2%
-------- -------- -------- ------ ------
Total Gross
Profit $366,418 $392,597 $(26,179) -6.7% 100.0% 100.0%
======== ======== ======== ====== ======
Segment Gross Margin Summary-YTD
--------------------------------
Gross Margin 3Q09-YTD 3Q08-YTD
-------- --------
Specialty 49.4% 50.5%
Essentials 29.7% 31.6%
Total Gross
Margin 41.1% 42.9%