GREENVILLE, Wis., Feb. 13 /PRNewswire-FirstCall/ — School Specialty (NASDAQ:SCHS) , a leading education company providing supplemental learning products to the preK-12 market, today reported third quarter and nine months fiscal 2007 financial results. Revenues for the “seasonally-low” third quarter were $132.1 million as compared to $132.5 million for last year’s third quarter. The loss per share improved from ($0.98) in the third quarter of fiscal 2006 to ($0.88) this year. Revenues for the first nine months of fiscal 2007 were a record $896.1 million, a 7.3 percent increase over the same period last year. Diluted earnings per share grew 51.1 percent to $2.07 per share from $1.37 per share last year.
“We established a good base line of performance with modest revenue growth and good cost control through our third quarter this year. We are now entering our new selling season having just introduced hundreds of new products, and we look forward to an improved funding environment next summer. We are therefore optimistic about improved organic growth opportunities in fiscal 2008,” said David J. Vander Zanden, President and Chief Executive Officer of School Specialty, Inc.
Third Quarter Financial Results
Revenues for the third quarter were $132.1 million versus $132.5 million in fiscal 2006. Fiscal 2006 revenues included the results of the Audio Graphics division which was sold in the fourth quarter of fiscal 2006. The Company’s organic revenue growth for the quarter was 1.0 percent. Gross margin was 39.4 percent in the third quarter compared with 40.1 percent last year, down 70 basis points due primarily to a shift in revenue mix from higher margin businesses to lower margin businesses within the Specialty segment.
Operating loss for the quarter improved to $23.8 million as compared to a loss of $29.8 million in the third quarter of fiscal 2006. Selling, general and administrative expenses (“SG&A”) decreased $7.0 million. The improvement in SG&A was primarily due to supply chain efficiencies, catalog optimization, headcount reductions and non-recurring expenses that were realized in last year’s third quarter. Stock-based compensation expense, which was adopted at the beginning of fiscal 2007 was $0.9 million pre-tax, or $0.03 per share in the third quarter.
Net loss was $18.8 million for the quarter as compared to a net loss of $22.5 million in the third quarter of fiscal 2006, with loss per share of ($0.88) for the quarter, including stock-based compensation, as compared to a loss per share of ($0.98) in the third quarter of fiscal 2006. The current year loss per share is impacted by the Company’s share repurchase program and convertible debt offering which has reduced the number of outstanding shares and impacted interest expense. The combined impact of the share repurchase program and convertible debt offering increased the loss per share by ($0.08). Excluding stock based compensation and the impact of the buyback, the loss per share would have been ($0.77) versus ($0.98) in the third quarter of fiscal 2006.
During the third quarter of fiscal 2007, the Company repurchased 1.1 million shares of its common stock for an aggregate net purchase price of $40.0 million.
Nine Months Financial Results
Revenues for the first nine months of fiscal 2007 grew 7.3 percent to a record $896.1 million from $834.9 million. Revenue growth in the Essentials segment was 2.2 percent. Specialty revenues grew 12.0 percent, primarily driven by the acquisition of Delta Education, which was acquired in August 2005. Organic revenue growth for the combined segments for the first nine months of fiscal 2007 was 2.0 percent. Gross profit grew 7.8 percent to $384.3 million compared to $356.6 million for the first nine months of fiscal 2006, driven primarily by increased revenues and a 20 basis point expansion in gross margin from 42.7 percent last year to 42.9 percent. The margin expansion was driven by a shift in the revenue mix from the Essentials segment to the more profitable Specialty segment. Revenue from the Specialty segment increased to 56.6 percent of total revenues in fiscal 2007 from 54.2 percent in fiscal 2006 primarily related to the acquisition of Delta.
Operating income was $100.0 million for the first nine months of fiscal 2007 compared to $69.5 million for the first nine months of fiscal 2006. SG&A, which excludes terminated merger costs of $5.2 million in fiscal 2006, increased $2.3 million from $282.0 million to $284.3 million. The increase in SG&A was due to variable costs associated with increased revenues of $61.2 million, the inclusion of Delta and stock based compensation expense, offset by cost reduction initiatives including off-season integration activities, supply chain enhancements and headcount reductions. SG&A as a percent of revenue decreased 210 basis points from 33.8 percent to 31.7 percent. Stock based compensation expense, which was adopted at the beginning of fiscal 2007, was $3.3 million pre-tax, or $0.11 per diluted share for the first nine months.
Net income for the first nine months of fiscal 2007 increased $14.6 million, or 44.8 percent to $47.2 million. Diluted earnings per share increased 51.1 percent from $1.37 last year to $2.07 this year including stock-based compensation expense. The current year diluted earnings per share is impacted by the Company’s share repurchase program and convertible debt offering which has reduced the number of outstanding shares and impacted interest expense. The combined impact of the share repurchase program and convertible debt offering resulted in an incremental $0.05 of diluted earnings per share.
During the first nine months of fiscal 2007, the Company repurchased 2.1 million shares of its common stock for an aggregate net purchase price of $76.5 million.
Outlook
School Specialty is revising the fiscal 2007 revenue guidance from $1.06 – $1.10 billion to $1.07 – $1.09 billion. In addition, the Company is revising the diluted earnings per share guidance for fiscal 2007 to $2.00 to $2.05 per diluted share. This excludes the impact of estimated stock based compensation expense of approximately $0.15 per diluted share for the 2007 fiscal year and is consistent with the previous guidance of $2.00 to $2.20 per diluted share. Including the $0.15 of estimated expense for stock based compensation, the revised fiscal 2007 diluted earnings per share guidance is $1.85 to $1.90 per diluted share.
For fiscal 2008, the Company is expecting revenue growth of 4 percent to 6 percent and an increase in diluted earnings per share of 12 to 20 percent, including stock based compensation expense.
Internet Conference Call
Investors have the opportunity to listen to School Specialty’s fiscal 2007 third 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 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.
School Specialty 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 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.
-Financial Tables Follow-School Specialty, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)
UnauditedThree Months Ended Nine Months Ended
January January January January
27, 28, 27, 28,
2007 2006 2007 2006Revenues $132,072 $132,476 $896,143 $834,878
Cost of revenues 80,018 79,409 511,840 478,236
Gross profit 52,054 53,067 384,303 356,642
Selling, general and
administrative expenses 75,895 82,878 284,288 281,979
Terminated merger costs – – – 5,202Operating income (loss) (23,841) (29,811) 100,015 69,461
Interest expense and other 6,698 6,814 21,976 16,388
Income (loss) before provision
for income taxes (30,539) (36,625) 78,039 53,073Provision for (benefit from)
income taxes (11,716) (14,101) 30,793 20,433Net income (loss) $(18,823) $(22,524) $47,246 $32,640
Weighted average shares
outstanding:
Basic 21,274 22,902 22,105 22,880
Diluted 21,274 22,902 22,787 23,893Per share amounts:
Basic $(0.88) $(0.98) $2.14 $1.43
Diluted $(0.88) $(0.98) $2.07 $1.37Earnings before interest and
other, taxes, depreciation,
intangible asset and product
development amortization costs
(EBITDA) reconciliation:
Net income $(18,823) $(22,524) $47,246 $32,640
Provision for income taxes (11,716) (14,101) 30,793 20,433
Net interest expense and other 6,698 6,814 21,976 16,388
Depreciation and intangible
asset amortization expense 6,402 6,184 19,262 17,211
Amortization of product
development costs 1,497 845 5,192 3,115
EBITDA $(15,942) $(22,782) $124,469 $89,787Other expense primarily represents the discount and loss related to
securitized accounts receivable. For the three months ended January 27,
2007 and January 28, 2006 the discount and loss was $1,688 and $1,212,
respectively. For the nine months ended January 27, 2007 and January 28,
2006, the discount and loss was $5,257 and $2,962, respectively.School Specialty, Inc.
Consolidated Condensed Balance Sheets
(In thousands)January 27, April 29, January 28,
2007 2006 2006
(Unaudited) (Unaudited)
Assets
Cash and cash equivalents $1,541 $2,403 $1,518
Accounts receivable 74,356 60,553 58,053
Inventories 137,137 158,892 123,028
Prepaid expenses and other current
assets 38,670 49,818 46,315
Deferred taxes 7,126 7,097 8,911
Total current assets 258,830 278,763 237,825
Property and equipment, net 78,774 76,774 75,103
Goodwill and other intangible assets,
net 741,784 747,241 774,853
Other 33,628 27,597 24,866
Total assets $1,113,016 $1,130,375 $1,112,647Liabilities and Shareholders’ Equity
Current maturities – long-term debt $133,579 $133,578 $231,760
Accounts payable 53,611 74,919 45,406
Other current liabilities 54,267 35,499 40,988
Total current liabilities 241,457 243,996 318,154
Long-term debt 279,590 283,629 149,389
Deferred taxes and other 56,549 49,017 60,654
Total liabilities 577,596 576,642 528,197
Shareholders’ equity 535,420 553,733 584,450
Total liabilities & shareholders’
equity $1,113,016 $1,130,375 $1,112,647School Specialty, Inc.
Consolidated Statements of Cash Flows
(In thousands)
UnauditedNine Months Ended
January 27, January 28,
2007 2006Cash flows from operating activities:
Net income $47,246 $32,640
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and intangible
asset amortization expense 19,262 17,211
Amortization of product
development costs 5,192 3,115
Amortization of debt fees and
other 928 1,048
Share-based compensation expense 3,259 –
Deferred taxes 7,748 4,604
Loss (gain) on disposal or
impairment of property and
equipment 290 (57)
Proceeds from amounts sold under
receivables securitization, net – 2,800
Change in current assets and
liabilities (net of assets acquired
and liabilities assumed in business
combinations):
(Increase) decrease in accounts
receivable (13,941) 24,802
(Increase) decrease in
inventories 19,689 35,856
(Increase) decrease in deferred
catalog costs 6,980 1,532
(Increase) decrease in prepaid
expenses and other current
assets 3,291 (4,190)
Increase (decrease) in accounts
payable (20,828) (17,910)
Increase (decrease) in accrued
liabilities 19,473 (1,159)
Net cash provided by
operating activities 98,589 100,292Cash flows from investing activities:
Cash paid in acquisitions, net of
cash acquired – (271,437)
Additions to property and equipment (14,788) (9,789)
Investment in intangible and other
assets (202) (1,376)
Investment in product development
costs (7,167) (8,016)
Proceeds from disposal of property
and equipment 1,011 227
Net cash used in investing
activities (21,146) (290,391)Cash flows from financing activities:
Proceeds from bank borrowings 1,164,900 1,417,100
Repayment of debt and capital
leases (1,168,938) (1,231,732)
Purchase of treasury stock (76,508) –
Payment of debt fees and other (5,266) (244)
Proceeds from exercise of stock
options 6,502 2,300
Excess income tax benefit from
exercise of stock options 1,005 –
Net cash (used in) provided
by financing activities (78,305) 187,424Net decrease in cash and cash
equivalents (862) (2,675)
Cash and cash equivalents, beginning
of period 2,403 4,193
Cash and cash equivalents, end of
period $1,541 $1,518Free cash flow reconciliation:
Net cash provided by
operating activities $98,589 $100,292
Additions to property and
equipment (14,788) (9,789)
Investment in product
development costs (7,167) (8,016)
Proceeds from disposal of
property and equipment 1,011 227
Net borrowings under accounts
receivable securitization
facility – (2,800)
Free cash flow $77,645 $79,914School Specialty, Inc.
Segment Analysis – Revenues and Gross Profit/Margin Analysis
3rd Quarter, Fiscal 2007
(In thousands)
UnauditedSegment Revenues and Gross Profit/Margin Analysis-QTD
% of Revenues
3Q07-QTD 3Q06-QTD Change $ Change % 3Q07-QTD 3Q06-QTD
Revenues
Specialty $78,194 $74,747 $3,447 4.6% 59.2% 56.4%
Essentials 56,679 60,065 (3,386) -5.6% 43.0% 45.4%
Corporate 184 179 5 2.8% 0.1% 0.1%
Intercompany
Eliminations (2,985) (2,515) (470) 18.7% -2.3% -1.9%
Total
Revenues $132,072 $132,476 $(404) -0.3% 100.0% 100.0%% of Gross
Profit
3Q07-QTD 3Q06-QTD Change $ Change % 3Q07-QTD 3Q06-QTD
Gross Profit
Specialty $35,166 $35,812 $(646) -1.8% 67.6% 67.5%
Essentials 17,115 17,249 (134) -0.8% 32.8% 32.5%
Corporate 133 179 (46) -25.7% 0.3% 0.3%
Intercompany
Eliminations (360) (173) (187) 108.1% -0.7% -0.3%
Total Gross
Profit $52,054 $53,067 $(1,013) -1.9% 100.0% 100.0%Segment Gross Margin
Summary-QTDGross Margin 3Q07-QTD 3Q06-QTD
Specialty 45.0% 47.9%
Essentials 30.2% 28.7%
Corporate 72.3% 100.0%
Intercompany
Eliminations 12.1% 6.9%
Total Gross
Margin 39.4% 40.1%Segment Revenues and
Gross Profit/Margin
Analysis-YTD
% of Revenue
3Q07-YTD 3Q06-YTD Change $ Change % 3Q07-YTD 3Q06-YTD
Revenues
Specialty $506,648 $452,269 $54,379 12.0% 56.6% 54.2%
Essentials 403,602 394,926 8,676 2.2% 45.0% 47.3%
Corporate 540 511 29 5.7% 0.1% 0.0%
Intercompany
Eliminations (14,647) (12,828) (1,819) 14.2% -1.7% -1.5%
Total
Revenues $896,143 $834,878 $61,265 7.3% 100.0% 100.0%% of Gross
Profit
3Q07-YTD 3Q06-YTD Change $ Change % 3Q07-YTD 3Q06-YTD
Gross Profit
Specialty $255,761 $228,875 $26,886 11.7% 66.6% 64.2%
Essentials 129,157 127,697 1,460 1.1% 33.6% 35.8%
Corporate 490 511 (21) -4.1% 0.1% 0.1%
Intercompany
Eliminations (1,105) (441) (664) 150.6% -0.3% -0.1%
Total Gross
Profit $384,303 $356,642 $27,661 7.8% 100.0% 100.0%Segment Gross Margin
Summary-YTDGross Margin 3Q07-YTD 3Q06-YTD
Specialty 50.5% 50.6%
Essentials 32.0% 32.3%
Corporate 90.7% 100.0%
Intercompany
Eliminations 7.5% 3.4%
Total Gross
Margin 42.9% 42.7%
First Call Analyst:
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Source: School Specialty, Inc.
