Combined First Quarter Revenues of $202.2 Million, But $22.0 Million
of Orders Shifted Into Second Quarter- Combined Gross Margins Improve
to 41.2 Percent in Quarter and SG&A Expenses Decline 15.7 Percent vs.
Last Year’s First Quarter- Combined FY14 Revenues Expected to be
$620-$630 Million; Adjusted EBITDA Expected to be $40-$44 Million-
Process Improvement Programs Underway to Generate $12-$15 Million of
Annualized Savings
GREENVILLE, Wis., Sept. 16, 2013 (GLOBE NEWSWIRE) — School Specialty
Inc. (“SSI” or “the Company”), a leading distributor of supplies,
furniture and both supplemental and curriculum products to the
education marketplace, today announced its fiscal 2014 first quarter
results for the period ended July 27, 2013.
During the period January 28, 2013 through June 11, 2013, School
Specialty, Inc. and certain of its subsidiaries operated as
debtors-in-possession under bankruptcy jurisdiction. In accordance with
Financial Standards Board Accounting Standards Codification (“ASC”)
852, for periods including and subsequent to the filing of the Chapter
11 petition through the bankruptcy emergence date of June 11, 2013, all
expenses, gains and losses that result from the reorganization were
reported separately as reorganization items in the Consolidated
Statements of Operations. Net cash used for reorganization items was
disclosed separately in the Consolidated Statement of Cash Flows, and
liabilities subject to compromise were reported separately in the
Consolidated Balance Sheets.
As of June 11, 2013, the Company adopted fresh-start accounting in
accordance with ASC 852. The adoption of fresh-start accounting
resulted in the Company becoming a new entity for financial reporting
purposes. Accordingly, the financial statements on or prior to June 11,
2013 are not comparable with the financial statements for periods after
June 11, 2013. The consolidated financial statements as of July 27,
2013 and for the seven weeks then ended and any references to
“Successor” or “Successor Company” show the financial position and
results of operations of the reorganized Company subsequent to
bankruptcy emergence on June 11, 2013. References to “Predecessor” or
“Predecessor Company” refer to the financial position and results of
operations of the Company prior to bankruptcy emergence.
Management believes that the presentation of Non-GAAP Financial
Information, referred to as the Combined Adjusted Results, are
reconciled to the most comparable GAAP measures and offer the best
comparisons for the comparable fiscal first quarter periods. For
further information on the Company’s Results of Operations and related
Balance Sheet and Cash Flow items, please refer to the Company’s Form
10-Q for the period ending July 27, 2013 on file with the Securities
and Exchange Commission. Additionally, given the significant
seasonality inherent in SSI’s business, as well as order timing
considerations between quarters, management believes that first half
fiscal 2014 results are most useful to determine operating trends and
financial performance.
First Quarter Financial Results
Combined adjusted revenues for the three months ended July 27, 2013
were $202.2 million, compared with $252.1 million in the comparable
prior year period, a decline of 19.8%. The decline in revenue was in
both the Educational Resources and Accelerated Learning business
segments, and was primarily due to the uncertainty caused by the
Company’s Chapter 11 reorganization and that approximately $22.0
million of first quarter orders were processed later and shifted into
the second quarter. Additionally, approximately $5.0 million of the
decline was related to large curriculum orders in the prior year’s
first quarter, which were not expected to recur in the current year.
Adjusting for both events, revenues for the comparable periods were
down 9.1%. Bookings since the end of the first quarter have been
tracking higher, and the Company expects revenues in the second quarter
to be generally in line with last year.
Combined adjusted gross profit margin for the three months ended July
27, 2013 was 41.2% as compared with 41.1% for the Predecessor Company’s
three months ended July 28, 2012. This improvement was primarily driven
by higher gross margins in the Educational Resources segment, due to
the favorable mix between product lines, partially offset by lower
margins in the Accelerated Learning segment due to higher product
development costs and product mix. The Company remains focused on
enhancing its margin structure and believes this can be achieved
through continued product innovation and better supply chain
efficiencies. As a result of improvements year-to-date and with the
expected product mix on a go-forward basis this fiscal year, the
Company expects gross margins will trend generally in line with recent
years.
Combined adjusted selling, general and administrative (SG&A) expenses
for the three months ended July 27, 2013 were $63.3 million as compared
to $75.1 million for the comparable year-ago period, a decline of $11.8
million or 15.7%. This decline was primarily a result of cost control
measures instituted by the Company as it continues to right-size the
organization to lower costs and improve productivity and efficiencies,
as well as variable selling costs associated with decreased revenues.
As a percent of revenue, SG&A increased from 29.8% for the three months
ended July 28, 2012 to 31.3% for the three months ended July 27, 2013.
Net interest expense for the fiscal 2014 first quarter was $6.1 million
compared to $10.0 million in the comparable prior year period, a
decrease of $3.9 million. The decrease in net interest expense was due
primarily to prior year interest associated with the Company’s
convertible notes, which were subsequently discharged when the Company
emerged from Chapter 11 reorganization.
The Company recorded a $104.9 million net restructuring gain for the
three months ended July 27, 2013. This consists of $161.9 million of
cancellation of indebtedness income, offset by $16.1 million of
professional, financing and other fees, and $40.9 million of
fresh-start and other reorganization fees.
The provision for income taxes in the first quarter of fiscal 2014 was
$1.9 million compared to $0.3 million in the comparable prior year
period.
Adjusted earnings before income taxes, depreciation and amortization
(EBITDA) was $28.2 million in the fiscal 2014 first quarter as compared
to $37.7 million in the comparable fiscal 2013 period, a decline of
$9.5 million. This decline was primarily related to the volume declines
discussed previously, partially offset by savings realized in the SG&A
categories as a result of a smaller workforce and the corresponding
labor savings, as well as reductions in catalog expenditures. Due to
the timing of order fulfillment discussed previously and booking trends
observed since the end of the first quarter, we anticipate a large
percentage of this net decline being recovered in the second quarter.
Net income for the first quarter of fiscal 2014 was $114.4 million
compared with $18.4 million in the comparable period last year. Current
period results include $102.3 million of net benefits from the
composite of all reorganization and post-bankruptcy-related items
flowing through the income statement during the Predecessor and
Successor periods of the fiscal first quarter.
“Our first quarter reflected the challenges resulting from our
emergence from Chapter 11 reorganization as we only officially emerged
halfway through the quarter. On the positive side, our bookings have
shown significant improvement since the end of the first quarter, and
we recaptured some of those lost sales opportunities in the second
quarter,” stated Jim Henderson, Chairman of the Board and Interim
President and CEO. “While we’re not in a robust educational spending
environment today, signs do point to increased funding and the uptick
in our order flow is a positive sign that our business has stabilized
consistent with our projections. Our balance sheet has also
significantly improved with our total debt cut in half post-emergence
and we are focusing on our working capital management to further
improve cash generation. Additionally, our process improvement
initiatives should strengthen our capital structure further, while
freeing up resources to invest in our business and our supply chain.”
Henderson continued, “My focus as Chairman and as a senior leader of
this company is three-fold: to stabilize our business, improve our
infrastructure and return School Specialty to sustainable growth, with
better and consistent bottom-line performance.”
Fiscal 2014 First Quarter Corporate Developments and Subsequent Events
— Emergence from Chapter 11 Reorganization: On June 11, 2013, School
Specialty completed its financial restructuring and officially emerged
from its Chapter 11 reorganization.
— New Financing Facilities: On June 11, 2013, School Specialty disclosed
its new capital financing, securing a fully committed $175 million
asset-based revolving credit facility led by Bank of America, N.A. and
SunTrust Bank, along with a $145 million term loan facility led by
Credit Suisse Securities (USA) LLC.
— Changes in Senior Leadership: On July 22, 2013, School Specialty
announced that Michael P. Lavelle would resign as President and CEO,
which took effect on August 9, 2013 and that James R. Henderson,
Chairman, would assume the role as Interim President and CEO, a position
he currently holds while a search for a permanent replacement is
underway. Additionally, David Vander Ploeg, the Company’s CFO, announced
that he would be retiring at calendar year end.
— Organizational Alignment: Over the past few weeks, the Company has
instituted various changes, which include the consolidation of its
Distribution Center network, the exiting of Commercial Printing plant
operations, and further alignment in its Supplies and Furniture
distribution operations. While there will be cost savings as a result of
these events, changes were not solely driven by cost reductions, but
rather, the early stages of a Process Improvement Program to generate
customer, supply chain and operational efficiencies.
— Process Improvement Program: With full Board of Directors support,
School Specialty has kicked-off a Process Improvement Program designed
to better align the Company’s operating groups, enhance systems and
processes and drive efficiency throughout the organization — all done
in an effort to improve the customer experience. Moving into fiscal year
2015, the Company anticipates significant operational improvements, cost
savings and innovation enhancements as a result. The majority of
initiatives will be gradual and done after the heavy school selling
season has ended and will always be done with 100% customer satisfaction
in mind. In addition, management has identified further operational
initiatives that will be pursued in multiple phased efforts once the
initial Process Improvement Program has been completed.
Mr. Henderson added, “Over the coming year, we’ll be realigning our
operations focused on one thing — becoming better. We have strong
talent throughout SSI and our brands remain strong. Our nationwide
distribution and partner network is perhaps our biggest strength and
this is something we will grow and capitalize on. There will be some
organizational enhancements, which will encompass more LEAN principles
but the most important element of this change will be better customer
support. With one of the largest assortment of products servicing the
educational markets, and the distribution network to reach every school
across the country, opportunities are there for the taking. We’ll be
more focused on delivering our customers the products they need with an
unparalleled customer experience. All of us at School Specialty remain
focused on increasing stakeholder value.”
Market Outlook
During the Company’s Chapter 11 reorganization, filings were made with
the U.S. Bankruptcy Court with respect to the Company’s fiscal year
2014 financial outlook. The Company had projected revenues of $645
million and Adjusted EBITDA of $44 million in those filings. Based on
year-to-date performance and the market outlook for the remainder of
the year, the Company believes that revenues will be approximately
$620-$630 million, which implies growth over the budget after the 2014
fiscal first quarter decline. Additionally, adjusting for public
company expenses of approximately $2 million, which were not part of
the reorganization plan, the Company is projecting Adjusted EBITDA of
$40-$44 million.
The cumulative effect of the initial process improvement program
initiatives are expected to generate annualized cost savings of $12-$15
million, with one-time cash generation in excess of $20 million.
Restructuring charges in fiscal 2014 are expected to be in the range of
$12-$14 million and capital expenditures, originally budgeted at $19
million, are expected to be approximately $16-$17 million.
School Specialty intends to publish a letter to shareholders with an
accompanying presentation on its financial results later this week. The
Company will not be hosting a teleconference, but management will be
available to address questions after the filing of this supplemental
information. This information will also be available on our website,
www.schoolspecialty.com in the Investor Relations section.
