School Specialty Announces Fiscal 2013 Second Quarter Results

-  Reports Revenue of $236.9 Million and Net Income of $14.1 Million
-  Operating Income Increases 17 Percent to $25.3 Million
-  Gross Margin Improves in Quarter and Six Months Results

GREENVILLE, Wis., Nov. 20, 2012 (GLOBE NEWSWIRE) -- School Specialty SCHS, a leading K-12 education company with the broadest array of products in the market, today reported second quarter and six months results for the period ending October 27, 2012. Revenue for the second quarter of fiscal 2013 was $236.9 million, compared with $251.4 million in the prior year, a decline of 5.8 percent. Net income for the second quarter of fiscal 2013 was $14.1 million or $0.75 per diluted earnings per share compared with $8.9 million or $0.47 per diluted share last year.

Revenue for the six months of fiscal 2013 was $489.0 million compared with $527.5 million last year, a decline of 7.3 percent. Net income for the six months increased to $32.5 million or $1.72 per diluted share, versus $22.4 million or $1.18 per diluted share in the comparable period last year.

"Despite the challenging marketplace, we continued to make progress on our turnaround strategy and mid and long term initiatives while staying focused on managing costs," said Michael P. Lavelle, President and Chief Executive Officer. "Revenue declines in the second quarter were reduced from earlier this year with continued improvement in our operating performance. Our immediate priorities remain improving EBITDA and working capital while we focus our marketing and sales strategies to support our revenue goals," he added. 

Second Quarter Financial Results

• Revenue for fiscal 2013 second quarter was $236.9 million, compared with $251.4 million in fiscal 2012, a decline of 5.8 percent. The decline in sales reflects the continued impact of industry-wide soft educational spending on curriculum products.
   
• Educational Resources revenue was $171.1 million in the quarter compared with $173.2 million in the prior year and Accelerated Learning revenue declined 15.9 percent to $65.6 million from $78.0 million last year.
   
• Gross profit was $92.7 million compared with $95.1 million last year, a decline of 2.5 percent. Consolidated gross margin improved to 39.1 percent, an increase of 130 basis points, primarily due to margin improvement in both Educational Resources and Accelerated Learning.
   
• Selling, general and administrative (SG&A) expenses were $67.4 million compared with $73.4 million in the prior year's second quarter, a decline of 8.2 percent, reflecting strong cost controls. Lower overall sales levels also reduced the variable cost component which reduced expenses.
   
• During the second quarter, the company also recorded a $1.4 million impairment charge related to the receipt of $3 million in settlement of a note issued to the company with the divestiture of a business in 2008. 
   
• Interest expense for the second quarter was $9.3 million compared with $6.9 million in the previous year. This increase is largely driven by higher interest rates on our term loan and a prepayment charge on a term loan principal payment.
   
• The provision for income taxes in the second quarter of fiscal 2013 was $0.3 million compared with $6.0 million in the previous year. The decline in taxes was related to projected annual tax losses for fiscal 2013.
   
• Earnings before interest, taxes, depreciation, amortization and impairment charges (EBITDA) improved 9.3 percent to $34.2 million compared with $31.3 million in the previous year.
   
• Net income was $14.1 million compared with $8.9 million last year. Diluted earnings per share increased 59.7 percent in this year's second quarter to $0.75 from $0.47 in the comparable period last year.
   
• The second quarter of fiscal 2013 included the previously mentioned impairment charge of $1.4 million or $0.07 per diluted share. The prior year included restructuring charges of $0.9 million or $0.05 per diluted share. Excluding these charges, adjusted net income for this year's second quarter was $15.5 million or $0.82 per diluted share compared with $9.7 million or $0.51 per diluted share in the prior year's second quarter.

Six Months Results

• Revenue for the first six months of fiscal 2013 was $489.0 million, compared with $527.5 million in the same period of the prior year, a decline of 7.3 percent. 
   
• Educational Resources revenue in the first six months of fiscal 2013 declined 4.0 percent to $344.8 million compared with $359.3 million in fiscal 2012. Accelerated Learning revenue declined 14.3 percent to $143.9 million in the first six months of fiscal 2013 compared with $167.8 million in the prior year.
   
• Gross profit for the first six months of the fiscal year was $196.3 million compared with $206.3 million last year.  The consolidated gross margin increased 100 basis points to 40.1 percent from 39.1 percent in the comparable six month period of fiscal 2012. 
   
• SG&A expenses declined 7.0 percent to $142.5 million compared with the prior year's $153.2 million. The decline is due to a combination of decreased variable costs associated with the revenue decline and lower compensation costs.  
   
• Interest expense in the six months of the current fiscal year was $19.3 million compared with last year's $14.8 million. Fiscal 2013 interest expense was higher due to costs related to the debt refinancing, higher interest rates on our term loan and a prepayment charge on term loan principal.   
   
• During the first half of fiscal 2012, $57.5 million of outstanding 3.75% convertible subordinated debentures were exchanged and refinanced with new debentures. Expenses of $1.1 million associated with this convertible debt exchange were recognized in last year's first six months.
   
• EBITDA for the six months was $71.8 million compared with $71.7 million in the previous year's six month period.
   
• Net income was $32.5 million or $1.72 per diluted share in the first half of fiscal 2013, compared with net income of $22.4 million or $1.18 per diluted share last year.  
   
• For the first six months of fiscal 2013, one-time costs included the previously mentioned $1.4 million or $0.07 per diluted share impairment charge, $2.5 million or $0.13 per diluted share related to debt refinancing expenses, and $1.1 million or $0.06 per diluted share in restructuring charges. For the six month comparable period last year, results included a $0.7 million or $0.04 per diluted share expense associated with the exchange of convertible debt and $0.9 million or $0.05 per diluted share from restructuring charges. On an adjusted basis for the six months, fiscal 2013 adjusted net income would have been $37.5 million or $1.98 per diluted share compared with $23.9 million or $1.26 per diluted share in fiscal 2012.
   
• Free cash flow in the first half of fiscal 2013 increased $28.1 million to $13.9 million compared to negative free cash flow of $14.2 million in fiscal 2012's first half. 

Financial Outlook

"We believe that given the challenging market this school season, fiscal year 2013 revenues are likely to decline in the mid-single digit range compared with fiscal 2012. Although revenue is softer than our previously anticipated performance levels for fiscal 2013, given our margin and cost reduction actions, we continue to believe that fiscal 2013 will look similar to fiscal 2012 actual results in terms of EBITDA," said Lavelle.

Conference Call

The second quarter earnings conference call is scheduled for today at 11 a.m. ET/10 a.m. CT. The live audio webcast will include accompanying slides and is available on the Investors section of School Specialty's web site at www.schoolspecialty.com under Presentations.  The presentation will be archived on the company's website and available later in the day.  

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. 

Accelerated Learning's major products include: Wordly Wise 3000^®, Premier^™ Agenda, Delta Education^™, FOSS^®, CPO Science ^™, Frey Scientific ^®, Educator's Publishing Service, Academy of Reading^®, Think Math!^™, MCI^®, S.P.I.R.E.^® and SPARK^™. Educational Resources proprietary brands include: Education Essentials^®, Sportime^®, Childcraft^®, Sax^® Arts & Crafts, Califone^®, abc^®, Abilitations^®, School Smart^®, Classroom Select^™ and Projects by Design^®.

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, or prospects, including but not limited to statements included under the heading "Financial 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 28, 2012, 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.