School Specialty Reports Second Quarter And Year-to-Date Results
"School budget pressures reduced revenue slightly from our expectations in Accelerated Learning," noted Vander Zanden. "We are seeing some states perform better as state and local revenue collections improve, and continue to believe that this school year represents the bottom of the cycle. We are increasing our marketing expenditures in Educational Resources as we go through the next several quarters, and expect to see improvements in consumables revenue in the fourth quarter of this year.
"I am especially pleased with our associates' success in generating free cash flow by bringing a new level of sophistication and discipline to our inventory management practices, improving accounts receivable collections and controlling capital spending. As a result of their efforts, we were able to achieve strong growth in free cash flow during the first half of the year, allowing us to reduce our total debt by $70 million in the second quarter," said Vander Zanden. "Their efforts enabled us to continue investing in our businesses to ensure we're prepared to capitalize on growth opportunities as the spending environment improves."
Second Quarter Financial Results
- Revenue for the second quarter was $291.9 million, compared with $346.1 million for the same period last year. The decrease was primarily related to the Educational Resources segment as both the supplies and furniture categories experienced continued reductions associated with ongoing school funding concerns and reduced school construction. Accelerated Learning had revenue growth of 4.3 percent, excluding last year's divestiture of School Specialty Publishing.
- Gross profit was $117.5 million compared with $143.1 million in last year's second quarter. Consolidated gross margin declined 100 basis points to 40.3 percent. The decline in gross margin was primarily due to price discounting in response to competitive pressures in the Educational Resources segment.
- Selling, general and administrative (SG&A) expenses declined $7.1 million to $79.3 million compared with the prior year's $86.4 million. The decline was related to the variable cost reduction associated with the volume decline.
- Second quarter net interest expense declined $1.0 million to $6.7 million from last year's $7.7 million. This decline was attributable to a reduction in non-cash interest expense related to the company's convertible debt and lower debt levels. Non-cash interest expense declined from $3.2 million in last year's second quarter to $2.1 million in this year's second quarter. This reduction in non-cash interest expense was related to the retirement of the company's $133.0 million convertible bond issuance during the quarter.
- Net income in this year's second quarter was $18.1 million, or $0.96 per diluted share, compared with last year's second quarter net income of $29.6 million, or $1.57 per diluted share.
Six-Month Financial Results
- Revenue for the first half of fiscal 2011 was $544.9 million, compared with $676.5 million in the first half of last year, a decline of 19.5 percent. Excluding $17.5 million of revenue in fiscal 2010 from the divestiture of School Specialty Publishing, consolidated revenue declined 17.3 percent. Revenue for the six-month period for Educational Resources declined 21.9 percent. Accelerated Learning revenue declined 14.8 percent, or 7.2 percent excluding revenue in the prior period from divestitures. The decreases were primarily due to spending reductions by many school districts, a significant decline in school construction activity impacting furniture sales, and certain execution issues in the Educational Resources segment.
- Gross profit in the first half of the fiscal year was $225.6 million compared with $285.9 million in the same period last year. Consolidated gross margin declined 90 basis points to 41.4 percent, compared with the prior year's 42.3 percent. The decline in gross margin was primarily related to higher customer discounts within the Educational Resources segment, partially offset by a favorable product mix.
- SG&A expenses declined $17.5 million to $157.2 million compared with the prior year's $174.7 million. The decrease is primarily attributable to lower volume and the ongoing favorable impact of last year's cost reduction, integration and divestiture activities.
- Interest expense in the first half of the fiscal year was $14.9 million compared with last year's $15.3 million. Fiscal 2011 interest expense for the first six months included $5.5 million of non-cash interest expense related to the company's convertible debt, compared to $6.4 million of non-cash interest expense in last year's first half. The decrease in non-cash interest expense has been partially offset by approximately $0.4 million of incremental loan commitment fees associated with the company's revolving credit facility.
- A non-cash impairment charge of $411.3 million, or $344.9 million net of tax, was recorded in the first half of the current fiscal year associated with the annual assessment of goodwill and other indefinite-lived intangible assets. The tax benefit associated with the impairment was negatively impacted by the portion of the goodwill which is non-deductible for tax purposes.
- Net loss was $313.5 million, or a loss of $16.62 per share, in the first half of fiscal 2011 compared with net income of $58.0 million, or $3.07 per diluted share, in last year's first half. Excluding the net of tax impact of the impairment charge, net income was $31.4 million, or $1.66 per diluted share, in the current year's first half.
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