GREENVILLE, Wis., Nov. 14 /PRNewswire-FirstCall/ — School Specialty, Inc. (NASDAQ:SCHS) the leading education company providing supplemental learning products to the preK-12 market, today reported record second quarter fiscal 2007 financial results. Revenues for the second quarter grew 10.0 percent from $344.4 million to $378.7 million and diluted earnings per share grew 50.6 percent from $0.85 per share to $1.28 per share. For the first six months, which represents the back-to-school season, revenues were a record $764.1 million, representing 8.8 percent growth over the same period last year. Diluted earnings per share grew 24.5 percent to $2.85 per share from $2.29 per share last year.
“We are pleased to have completed a successful back-to-school season with solid revenue growth and strong earnings enhanced by improvements in operations and cost containment,” said David J. Vander Zanden, President and Chief Executive Officer of School Specialty, Inc.
Second Quarter Financial Results
Revenues for the second quarter of fiscal 2007 rose 10.0 percent from $344.4 million to $378.7 million, driven by approximately 6 percent organic growth and an additional month of acquired Delta revenues in fiscal 2007 compared to fiscal 2006. Gross margin was 42.1 percent as compared with 42.5 percent last year, due primarily to a shift in revenue mix from higher margin business to lower margin business within both the Essentials and Specialty segments.
Operating income for the quarter grew $16.5 million or 41.5 percent from $39.7 million to $56.2 million. Selling, general and administrative expenses (“SG&A”), excluding terminated merger expenses of $2.5 million, decreased $1.1 million to $103.1 million, on a revenue increase of $34.3 million. The improvement in SG&A was primarily due to supply chain efficiencies, cost control and non-recurring expenses that were realized in last year’s second quarter. Stock based compensation expense, which was adopted at the beginning of fiscal 2007, was $1.1 million pre-tax, or $0.04 per diluted share in the second quarter.
Net income grew 42.0 percent from $20.6 million to $29.2 million and diluted earnings per share grew 50.6 percent from $0.85 per share to $1.28 per share including stock based compensation.
During fiscal 2007’s second quarter the Company repurchased 828,921 shares of common stock for a net aggregate purchase price of $29.0 million.
Six Months Financial Results
Revenues for the first six months of fiscal 2007 grew 8.8 percent to a record $764.1 million from $702.4 million. Revenue growth in the Essentials segment was 3.6 percent. Specialty revenues grew 13.5 percent, primarily driven by the acquisition of Delta, which was acquired in August 2005. Organic revenue growth for the combined segments for the first six months of fiscal 2007 exceeded 2 percent. Gross profit grew 9.4% to $332.2 million, driven by increased revenues and gross margin expansion of 30 basis points from 43.2 percent last year to 43.5 percent for the first six months of fiscal 2007. Gross margin expansion was driven by an increase in the revenue mix from Essentials to the more profitable Specialty segment. Revenue from the Specialty business expanded from 53.7 percent of total revenue to 56.1 percent due primarily to the acquisition of Delta.
Operating income grew $24.6 million, or 24.8 percent from $99.3 million to $123.9 million for the first six months of fiscal 2007. SG&A, excluding terminated merger costs of $5.2 million in fiscal 2006, increased $9.3 million from $199.1 million to $208.4 million. The increase in SG&A was due to variable costs associated with increased revenues of $61.7 million, the inclusion of Delta and stock based compensation expense, partially offset by reduced costs associated with off-season integration activities, cost containment initiatives and supply chain enhancements. Excluding prior year terminated merger costs of $5.2 million, SG&A as a percent of revenues decreased 100 basis points from 28.3 percent to 27.3 percent. Stock based compensation expense, which was adopted at the beginning of fiscal 2007, was $2.4 million pre-tax, or $0.08 per diluted share for the first six months.
Net income for the first six months grew $10.9 million or 19.8% to $66.1 million and diluted earnings per share expanded 24.5% from $2.29 last year to $2.85 including stock based compensation.
During fiscal 2007, the Company repurchased 1.1 million shares of its common stock for an aggregate net purchase price of $36.5 million.
California Adopts School Specialty Inquiry-Based Science Programs
On November 9, 2006, the California State Board of Education approved the adoption of our hands-on science curricula products, FOSS from Delta Education for grades K-5 and Focus on Earth, Life and Physical Science for grades 6-8 from CPO Science. The programs were developed specifically for California and are aligned with California state science standards. This approval allows School Specialty to compete in California school districts for state allocated instructional material funds totaling approximately $200 million for the current science adoption cycle.
Outlook
“With the busy season behind us, we are confirming our fiscal 2007 revenue guidance of $1.06 billion to $1.10 billion, representing organic revenue growth of zero to four percent and confirming our guidance for diluted earnings per share of $2.00 to $2.20, excluding stock based compensation expense, with stock option expense ranging from $0.03 to $0.05 per diluted share per quarter,” said Vander Zanden.
Internet Conference Call
Investors have the opportunity to listen to School Specialty’s fiscal 2007 second quarter conference call live over the Internet through Vcall at http://www.vcall.com/ . The conference call begins today at 10:00 am Central Time. To listen, go to the Vcall website at least 15 minutes before the start of the call to register, download and install any necessary audio software. A replay will be available shortly after the call is completed and for the week that follows. A transcript will be available within two days of the call. The conference call will also be accessible through the General Investor Information Overview and Press Release pages of the School Specialty corporate web site at http://www.schoolspecialty.com/ .
About School Specialty, Inc.
School Specialty is an education company that provides innovative and proprietary products, programs, and services to help educators engage and inspire students of all ages and abilities.
Through leading brands, School Specialty designs, develops, and provides PreK-12 educators with the latest and very best curriculum, supplemental learning resources, and classroom basics.
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 http://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 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 29, 2006, 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)
UnauditedThree Months Ended Six Months Ended
October October October October
28, 29, 28, 29,
2006 2005 2006 2005Revenues $378,672 $344,365 $764,071 $702,402
Cost of revenues 219,348 197,974 431,822 398,827
Gross profit 159,324 146,391 332,249 303,575
Selling, general and
administrative expenses 103,112 104,206 208,393 199,101
Terminated merger related expenses – 2,466 – 5,202Operating income 56,212 39,719 123,856 99,272
Interest expense and other 8,119 6,275 15,278 9,574
Income before provision for
income taxes 48,093 33,444 108,578 89,698Provision for income taxes 18,891 12,876 42,509 34,534
Net income $29,202 $20,568 $66,069 $55,164
Weighted average shares
outstanding:
Basic 22,212 22,881 22,548 22,869
Diluted 22,898 24,175 23,213 24,135Per share amounts:
Basic $1.31 $0.90 $2.93 $2.41
Diluted $1.28 $0.85 $2.85 $2.29Earnings before interest and
other, taxes, depreciation,
intangible asset and product
development amortization costs
(EBITDA) reconciliation:
Net income $29,202 $20,568 $66,069 $55,164
Provision for income taxes 18,891 12,876 42,509 34,534
Net interest expense and other 8,119 6,275 15,278 9,574
Depreciation and intangible
asset amortization expense 6,542 5,826 12,860 11,027
Amortization of product
development costs 1,829 1,113 3,695 2,270
EBITDA $64,583 $46,658 $140,411 $112,569Other expense primarily represents the discount and loss related to
securitized accounts receivable. For the three months ended October 28,
2006 and October 29, 2005 the discount and loss was $2,519 and $1,072,
respectively. For the six months ended October 28, 2006 and October 29,
2005 the discount and loss was $3,569 and $1,749, respectively.School Specialty, Inc.
Consolidated Condensed Balance Sheets
(In thousands)October 28, April 29, October 29,
2006 2006 2005
(Unaudited) (Unaudited)
Assets
Cash and cash equivalents $9,077 $2,403 $7,684
Accounts receivable 168,063 60,553 163,883
Inventories 123,281 158,892 116,577
Prepaid expenses and other current
assets 31,782 49,818 34,179
Deferred taxes 6,260 7,097 9,890
Total current assets 338,463 278,763 332,213
Property and equipment, net 79,381 76,774 75,383
Goodwill and other intangible assets,
net 747,866 747,241 775,357
Other 27,977 27,597 21,938
Total assets $1,193,687 $1,130,375 $1,204,891Liabilities and Shareholders’ Equity
Current maturities – long-term debt $133,571 $133,578 $275,066
Accounts payable 55,427 74,919 50,787
Other current liabilities 72,003 35,499 66,485
Total current liabilities 261,001 243,996 392,338
Long-term debt 288,937 283,629 149,528
Deferred taxes and other 52,134 49,017 58,600
Total liabilities 602,072 576,642 600,466
Shareholders’ equity 591,615 553,733 604,425
Total liabilities & shareholders’
equity $1,193,687 $1,130,375 $1,204,891School Specialty, Inc.
Consolidated Statements of Cash Flows
(In thousands)
UnauditedSix Months Ended
October 28, October 29,
2006 2005Cash flows from operating activities:
Net income $66,069 $55,164
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and intangible amortization
expense 12,860 11,027
Amortization of product development
costs 3,695 2,270
Amortization of debt fees and other 495 661
Share based compensation expense 2,355 –
Deferred taxes 4,199 1,571
Loss (Gain) on disposal of property and
equipment 274 (66)
Net borrowings under accounts receivable
securitization facility – 2,800
Change in current assets and liabilities
(net of assets acquired and liabilities
assumed in business combinations):
Accounts receivable (107,518) (81,139)
Inventories 33,578 42,109
Deferred catalog costs 8,503 7,393
Prepaid expenses and other current
assets 8,547 1,978
Accounts payable (19,412) (12,736)
Accrued liabilities 36,781 24,155
Net cash provided by operating
activities 50,426 55,187Cash flows from investing activities:
Cash paid in acquisitions, net of cash
acquired – (270,325)
Additions to property and equipment (11,123) (5,960)
Investment in intangible and other
assets (102) (1,275)
Investment in product development costs (4,739) (3,775)
Proceeds from disposal of property and
equipment 932 81
Net cash used in investing activities (15,032) (281,254)Cash flows from financing activities:
Proceeds from bank borrowings 679,400 977,800
Repayment of debt and capital leases (674,099) (748,987)
Purchase of treasury shares (36,526) –
Payment of debt fees and other (20) (226)
Proceeds from exercise of stock options 2,525 971
Net cash (used in) provided by
financing activities (28,720) 229,558Net increase in cash and cash equivalents 6,674 3,491
Cash and cash equivalents, beginning of
period 2,403 4,193
Cash and cash equivalents, end of period $9,077 $7,684Free cash flow reconciliation:
Net cash provided by operating
activities $50,426 $55,187
Additions to property and equipment (11,123) (5,960)
Investment in product development
costs (4,739) (3,775)
Proceeds from disposal of property and
equipment 932 81
Net borrowings under accounts
receivable securitization facility – (2,800)
Free cash flow $35,496 $42,733School Specialty, Inc.
Segment Analysis – Revenues and Gross Profit/Margin Analysis
2nd Quarter, Fiscal 2007
(In thousands)
UnauditedSegment Revenues
and Gross
Profit/Margin
Analysis-QTD
Change Change % of Revenues
2Q07-QTD 2Q06-QTD $ % 2Q07-QTD 2Q06-QTD
Revenues
Specialty $210,658 $187,780 $22,878 12.2% 55.6% 54.5%
Essentials 172,072 160,318 11,754 7.3% 45.4% 46.5%
Corporate 182 173 9 5.2% 0.0% 0.1%
Intercompany
Eliminations (4,240) (3,906) (334) 8.6% -1.0% -1.1%
Total Revenues $378,672 $344,365 $34,307 10.0% 100.0% 100.0%% of Gross
Change Change Profit
2Q07-QTD 2Q06-QTD $ % 2Q07-QTD 2Q06-QTD
Gross Profit
Specialty $105,999 $96,164 $9,835 10.2% 66.5% 65.7%
Essentials 53,118 49,876 3,242 6.5% 33.3% 34.1%
Corporate 177 173 4 2.3% 0.1% 0.1%
Intercompany
Eliminations 30 178 (148) -83.1% 0.1% 0.1%
Total Gross
Profit $159,324 $146,391 $12,933 8.8% 100.0% 100.0%Segment Gross Margin
Summary-QTDGross Margin 2Q07-QTD 2Q06-QTD
Specialty 50.3% 51.2%
Essentials 30.9% 31.1%
Corporate 97.3% 100.0%
Intercompany
Eliminations -0.7% -4.6%
Total Gross
Margin 42.1% 42.5%Segment Revenues and
Gross Profit/Margin
Analysis-YTD
Change Change % of Revenue
2Q07-YTD 2Q06-YTD $ % 2Q07-YTD 2Q06-YTD
Revenues
Specialty $428,454 $377,523 $50,931 13.5% 56.1% 53.7%
Essentials 346,923 334,860 12,063 3.6% 45.4% 47.7%
Corporate 357 332 25 7.5% 0.1% 0.1%
Intercompany
Eliminations (11,663) (10,313) (1,350) 13.1% -1.6% -1.5%
Total Revenues $764,071 $702,402 $61,669 8.8% 100.0% 100.0%% of Gross
Change Change Profit
2Q07-YTD 2Q06-YTD $ % 2Q07-YTD 2Q06-YTD
Gross Profit
Specialty $220,596 $193,102 $27,494 14.2% 66.4% 63.6%
Essentials 112,041 110,409 1,632 1.5% 33.7% 36.4%
Corporate 357 332 25 7.5% 0.1% 0.1%
Intercompany
Eliminations (745) (268) (477) 178.0% -0.2% -0.1%
Total Gross
Profit $332,249 $303,575 $28,674 9.4% 100.0% 100.0%Segment Gross Margin
Summary-YTDGross Margin 2Q07-YTD 2Q06-YTD
Specialty 51.5% 51.1%
Essentials 32.3% 33.0%
Corporate 100.0% 100.0%
Intercompany
Eliminations 6.4% 2.6%
Total Gross
Margin 43.5% 43.2%
