• Revenue and earnings decline; guidance updated
  • Free cash flow and working capital management remain strong
  • Convertible subordinated notes of $133 million retired
  • Company to record goodwill impairment charge based on macro-economic factors

GREENVILLE, Wis., Aug. 19, 2010 (GLOBE NEWSWIRE) -- School Specialty (Nasdaq:SCHS) today reported fiscal 2011 first quarter financial results. Revenue for the first quarter was $253.0 million compared with $330.4 million in the first quarter of the prior fiscal year, a decline of 23 percent. The decline is higher than the estimated range of 17 percent to 20 percent previously discussed by management, and is primarily due to continued delays in school purchases, increasing price competition in the furniture markets, and the continued impact of execution issues created earlier in the year. Excluding revenue from divestitures of $10.7 million in fiscal 2010, comparable revenue declined 21 percent.

During the first quarter, the company performed its annual goodwill impairment testing. The continuation of state budget challenges and school spending cuts, and the resulting effects on the company's operating results, has created a shortfall in the fair value estimation for goodwill below the current book value. Based upon preliminary estimates, the company expects to record a pre-tax non-cash impairment charge in the range of $390 million to $440 million. This impairment is a non-cash expense that will not affect the company's debt position, cash flow, liquidity or financial ratios under its revolving credit facility.

Net income, excluding the estimated goodwill impairment charge, was $13.3 million compared with $28.4 million in last year's first quarter. Diluted earnings per share were $0.70 compared with $1.51 last year. Including the estimated goodwill impairment charge, the net loss reported is expected to be approximately $315 million to $353 million ($16.70 to $18.71 per share).

Free cash flow improved in the first quarter of fiscal 2011 by $15.2 million, or 55 percent, over fiscal 2010's first quarter. Free cash flow benefited from continuing improvements in working capital management and an improved cash conversion cycle. Total debt declined $68.9 million, or 17 percent, compared to the same period last year. In addition, following the quarter end the company successfully completed a debt refinancing through the retirement of $132.9 million in convertible subordinated notes, which was completed August 2, 2010, and funded by the company's new bank credit facility.  

Chief Executive Officer David J. Vander Zanden said it is more appropriate to combine the results of the first two quarters to gauge performance of the business, adding that the delays in school ordering experienced in the first quarter will be apparent in the second quarter when the company expects to see revenue growth in the Accelerated Learning segment. The company expects that Accelerated Learning's second quarter growth will reduce the segment's revenue decline for the first half of the year to the mid-single-digits, excluding divestitures.

"There was spending reluctance on the part of schools during the first quarter, however with most school budgets now set, we are seeing an increase in order activity," said Vander Zanden. "As was the case in our last fiscal year, our largest revenue decrease is in furniture due to a continued reduction in school construction. First quarter furniture revenue was off 31 percent, and we see no near-term improvement in school construction activity. However, we launched a new line of furniture in August that we expect will make us more price competitive. In addition, we expect pricing pressures for both furniture and consumable products to negatively affect gross margins in coming quarters," added Vander Zanden. "Accelerated Learning products are not as price sensitive and their gross margins are expected to show modest improvement."

He added that management is encouraged by several new revenue initiatives, including opportunities involving the U.S. Communities purchasing cooperative, new product offerings in Accelerated Learning, and the Amazon.com purchasing portal. "Across School Specialty, our associates are working very hard to increase revenue, enhance customer service and improve efficiencies within a very difficult business environment," said Vander Zanden. "Their efforts will be the key to our future success as we emerge from this challenging period in our history."

 First Quarter Financial Results
  • Revenue for fiscal 2011's first quarter was $253.0 million, compared with $330.4 million in fiscal 2010's first quarter. The decrease was primarily due to reductions, or delays, in spending by many school districts, a significant decline in school construction activity impacting furniture sales, and certain execution issues in the Educational Resources segment. Approximately $10.7 million of the decline, or 2 percent, was related to the fiscal 2010 divestiture of School Specialty Publishing.  
  • Gross profit was $108.1 million compared with $142.8 million in last year's first quarter.  Consolidated gross margin declined 50 basis points to 42.7 percent, compared with the prior year's 43.2 percent. The decline in gross margin was related primarily to higher customer discounts within the Educational Resources segment, partially offset by a favorable product mix.  
  • Selling, general and administrative (SG&A) expenses declined $10.4 million to $77.8 million compared with the prior year's $88.3 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 quarter was $8.1 million compared with last year's $7.6 million. First quarter fiscal 2011 interest expense includes $3.4 million of non-cash interest expense related to the company's convertible debt, compared to $3.1 million of non-cash interest expense in last year's first quarter.   
  • Net income, excluding the goodwill impairment charge, was $13.3 million compared with last year's $28.4 million. Diluted earnings per share were $0.70 compared with $1.51 last year. Including the impairment charge discussed previously, the net loss reported will be approximately $315 million to $353 million ($16.70 to $18.71 per share).

Convertible Debt Retirement

On August 2, 2010, subsequent to quarter end, the company redeemed $132.9 million of its convertible debt using borrowings on its $350.0 million revolving credit facility. At the end of the first quarter of fiscal 2011, the company had zero borrowings on this revolving credit facility.


School Specialty has updated its full-year fiscal 2011 guidance for revenue, earnings and free cash flow. The company now expects revenue to range from $735 million to $770 million, compared with the prior guidance of $790 million to $825 million. Diluted earnings per share for fiscal 2011, excluding the non-cash impairment charge, is now expected to range from $0.15 to $0.45, reflecting lower revenue and gross margins, compared with the prior guidance of $1.00 to $1.30. This range includes a non-cash charge related to the convertible debt of $0.32. Excluding both charges, diluted earnings per share will be $0.37 to $0.72. Fiscal 2011 free cash flow guidance is now $40 million to $50 million, or $2.12 to $2.65 per diluted share, compared with the prior range of $60 million to $70 million. Both the revised and prior ranges include a $16 million cash tax payment obligation associated with the company's retirement of $132.9 million in convertible notes.

Conference Call

School Specialty will host a conference call to discuss its fiscal 2011 first quarter financial results. The conference call begins today, August 19, 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, prospects, or asset values, 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 24, 2010, 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.

-Financial Tables Follow-
(In Thousands, Except Per Share Amounts)
  Three Months Ended
  July 24, 2010 July 25, 2009
Revenues  $ 252,984  $ 330,367
Cost of revenues  144,912  187,576
Gross profit  108,072  142,791
Selling, general and administrative expenses  77,848  88,252
Operating income  30,224  54,539
Other (income) expense:    
Interest expense  8,130  7,560
Interest income  --  (10)
Income before provision for income taxes  22,094  46,989
Provision for income taxes  8,791  18,560
Income before from investment in unconsolidated affiliate  $ 13,303  $ 28,429
Equity in (losses) earnings of unconsolidated affiliate, net of tax  --  --
Net income  $ 13,303  $ 28,429
Weighted average shares outstanding:    
Basic  18,864  18,829
Diluted  18,891  18,876
Net Income per Share:    
Basic  $ 0.71  $ 1.51
Diluted  $ 0.70  $ 1.51
(In Thousands)
  July 24, 2010 April 24, 2010 July 25, 2009
ASSETS (Unaudited)   (Unaudited)
Current assets:      
Cash and cash equivalents  $ 8,586  $ 21,035  $ 3,867
Accounts receivable  177,888  72,734  237,942
Inventories  126,828  99,910  167,921
Deferred catalog costs  10,268  13,593  9,816
Prepaid expenses and other current assets  16,115  14,318  17,191
Refundable income taxes  --  1,539  --
Deferred taxes   9,866  9,867  9,805
Total current assets   349,551  232,996  446,542
Property, plant and equipment, net  64,672  66,607  69,060
Goodwill  537,976  540,248  539,109
Intangible assets, net  163,741  166,552  165,505
Other   33,125  33,118  27,632
Investment in unconsolidated affiliate  28,308  28,299  --
Total assets  $ 1,177,373  $ 1,067,820  $ 1,247,848
Current liabilities:      
Current maturities - long-term debt  $ 133,809  $ 132,397  $ 128,354
Accounts payable  126,169  47,954  131,280
Accrued compensation  10,764  7,501  12,871
Deferred revenue  5,466  4,312  5,777
Accrued income taxes  4,264  --  12,502
Other accrued liabilities  37,458  30,905  43,440
Total current liabilities  317,930  223,069  334,224
Long-term debt - less current maturities  201,587  199,742  275,902
Deferred taxes  94,327  92,398  63,982
Other liabilities  1,423  1,423  913
Total liabilities  615,267  516,632  675,021
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 24,290,345; 24,280,097 and 24,255,767 shares issued, respectively  24  24  24
Capital paid-in excess of par value  437,513  436,959  462,287
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  21,113  24,052  17,785
Retained earnings  290,093  276,790  279,368
Total shareholders' equity  562,106  551,188  572,827
Total liabilities and shareholders' equity  $ 1,177,373  $ 1,067,820  $ 1,247,848
(In Thousands)
  Three Months Ended
  July 24, 2010 July 25, 2009
Cash flows from operating activities:    
Net income  $ 13,303  $ 28,429
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and intangible asset amortization expense  6,988  6,762
Amortization of development costs  1,537  1,831
Amortization of debt fees and other  625  520
Share-based compensation expense  827  1,273
Deferred taxes  1,748  3,661
Investment in unconsolidated affiliate  --  --
Non cash convertible debt deferred financing costs  3,436  3,166
Changes in current assets and liabilities (net of assets acquired and liabilities assumed in business combinations):  
Accounts receivable  (105,190)  (134,156)
Inventories  (26,921)  (40,582)
Deferred catalog costs  3,325  5,721
Prepaid expenses and other current assets  (259)  3,802
Accounts payable  77,721  74,259
Accrued liabilities  15,181  22,978
Net cash used in operating activities  (7,679)  (22,336)
Cash flows from investing activities:    
Additions to property, plant and equipment  (2,410)  (2,946)
Proceeds from business dispositions  --  200
Investment in product development costs  (2,181)  (2,194)
Net cash used in investing activities  (4,591)  (4,940)
Cash flows from financing activities:    
Proceeds from bank borrowings  35,400  109,800
Repayment of debt and capital leases  (35,579)  (80,365)
Payment of debt fees and other  --  (238)
Proceeds from exercise of stock options  --  75
Net cash (used in)/provided by financing activities  (179)  29,272
Net decrease in cash and cash equivalents  (12,449)  1,996
Cash and cash equivalents, beginning of period  21,035  1,871
Cash and cash equivalents, end of period  $ 8,586  $ 3,867
Free cash flow reconciliation:    
Net cash used in operating activities  $ (7,679)  $ (22,336)
Additions to property and equipment  (2,410)  (2,946)
Investment in development costs  (2,181)  (2,194)
Free cash flow  $ (12,270)  $ (27,476)
School Specialty, Inc.
Segment Analysis - Revenues and Gross Profit/Margin Analysis
1st Quarter, Fiscal 2011
(In thousands)
Segment Revenues and Gross Profit/Margin Analysis-QTD        
          % of Revenues
  1Q11-QTD 1Q10-QTD Change $ Change % 1Q11-QTD 1Q10-QTD
Educational Resources  $ 175,418  $ 224,943  $ (49,525) -22.0% 69.3% 68.1%
Accelerated Learning ( 1)    77,399  106,345  (28,946) -27.2% 30.6% 32.2%
Corporate and Interco Elims  167  (921)  1,088   0.1% -0.3%
Total Revenues  $ 252,984  $ 330,367  $ (77,383) -23.4% 100.0% 100.0%
          % of Revenues
  1Q11-QTD 1Q10-QTD Change $ Change % 1Q11-QTD 1Q10-QTD
Gross Profit            
Educational Resources  $ 62,110  $ 82,715  $ (20,605) -24.9% 57.5% 57.9%
Accelerated Learning  45,315  59,515  (14,200) -23.9% 41.9% 41.7%
Intercompany Eliminations  647  561  86   0.6% 0.4%
Total Gross Profit  $ 108,072  $ 142,791  $ (34,719) -24.3% 100.0% 100.0%
Segment Gross Margin Summary-QTD          
Gross Margin 1Q11-QTD 1Q10-QTD        
Educational Resources 35.4% 36.8%        
Accelerated Learning  58.5% 56.0%        
Total Gross Margin 42.7% 43.2%        
(1) Q1 fiscal 2010 revenue includes $10,746 related to the School Specialty Publishing business unit, which was divested in third quarter of fiscal 2010.
CONTACT:  School Specialty, Inc.          David Vander Ploeg, Executive VP and CFO            920-882-5854          Mark Fleming, Communications & Investor Relations            920-882-5646

School Specialty, Inc.