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School Specialty Announces Fiscal 2014 First Quarter Results

School Specialty, Inc.

- 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.

About School Specialty, Inc.

School Specialty is a leading distributor of innovative and proprietary products, programs and services to the education marketplace. The Company designs, develops, and provides educators with the latest and very best school supplies, furniture and both curriculum and supplemental learning resources. 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.

Statement Concerning Forward-Looking Information

Any statements made in this press release about future financial conditions, results of operations, expectations, plans, or prospects, including the information in the heading "Market 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 27, 2013, 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 COMBINED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
Unaudited / Non-GAAP
Successor
Company
Predecessor
Company
Non-GAAP Combined Predecessor
Company
Seven Weeks Ended
July 27, 2013
Six Weeks Ended
June 11, 2013
Three Months Ended
July 27, 2013
Three Months
Ended
July 28, 2012
Revenues $ 143,499 $ 58,697 $ 202,196 $ 252,139
Cost of revenues 83,741 35,079 118,820 148,542
Gross profit 59,758 23,618 83,376 103,597
Selling, general and administrative expenses 35,867 27,473 63,340 75,116
Bankruptcy related restructuring charges 2,595 -- 2,595 --
Operating income 21,296 (3,855) 17,441 28,481
Other expense:
Interest expense 2,821 3,235 6,056 9,966
Reorganization items, net 1,280 (106,174) (104,894) --
Income before provision for income taxes 17,195 99,084 116,279 18,515
Provision for income taxes 252 1,641 1,893 259
Income before income of unconsolidated affiliate 16,943 97,443 114,386 18,256
Income of unconsolidated affiliate -- -- -- 119
Net income $ 16,943 $ 97,443 $ 114,386 $ 18,375
Adjusted Earnings before interest, taxes, depreciation, amortization, bankruptcy-related restructuring and impairment charges (EBITDA) reconciliation:
Net income $ 114,386 $ 18,375
Equity in (income)/losses of unconsolidated affiliate -- (119)
Provision for income taxes 1,893 259
Reorganization items, net (104,894) --
Bankruptcy related restructuring costs 2,595 --
Share-based compensation expense -- 119
Depreciation and amortization expense 5,849 7,016
Amortization of development costs 2,396 2,068
Net interest expense 6,056 9,966
Adjusted EBITDA $ 28,281 $ 37,684
SCHOOL SPECIALTY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands, Except Share Data)
Successor Company Predecessor
Company
July 27,
2013
April 27, 2013 July 28, 2012
ASSETS
Current assets:
Cash and cash equivalents $ 9,787 $ 20,769 $ 5,542
Restricted cash 25,820 26,302 2,708
Accounts receivable, less allowance for doubtful accounts of $2,176, $926 and $2,597, respectively 138,879 58,942 178,293
Inventories 104,868 92,582 112,467
Deferred catalog costs 5,793 8,924 7,773
Prepaid expenses and other current assets 26,667 29,901 11,050
Refundable income taxes 5,334 9,793 3,580
Deferred taxes -- -- 4,797
Total current assets 317,148 247,213 326,210
Property, plant and equipment, net 46,309 39,209 54,238
Goodwill 23,661 -- 41,010
Intangible assets, net 47,427 110,306 121,627
Development costs and other 38,042 30,079 40,274
Deferred taxes long-term 51 51 390
Investment in unconsolidated affiliate 715 715 10,019
Total assets $ 473,353 $ 427,573 $ 593,768
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities - long-term debt $ 62,229 $ 198,302 $ 79,444
Accounts payable 49,124 22,897 103,099
Accrued compensation 7,597 7,197 10,723
Deferred revenue 2,605 2,237 3,354
Accrued fee for early termination of long-term debt 25,582 25,000 --
Other accrued liabilities 34,467 21,905 26,027
Total current liabilities 181,604 277,538 222,647
Long-term debt - less current maturities 152,932 -- 285,508
Other liabilities 925 925 587
Liabilities subject to compromise -- 228,302 --
Total liabilities 335,461 506,765 508,742
Commitments and contingencies
Stockholders' equity (deficit):
Predecessor preferred stock, $0.001 par value per share, 1,000,000 shares authorized; none outstanding -- -- --
Predecessor common stock, $0.001 par value per share, 150,000,000 shares authorized; 24,599,159 and 24,597,856 shares issued, respectively -- 24 24
Predecessor capital in excess of par value 446,232 444,456
Predecessor treasury stock, at cost, 5,420,210 and 5,420,210 shares, respectively -- (186,637) (186,637)
Successor preferred stock, $0.001 par value per share, 500,000 shares authorized; none outstanding -- -- --
Successor common stock, $0.001 par value per share, 2,000,000 shares authorized; 1,000,004 shares outstanding 1 -- --
Successor capital in excess of par value 120,955 -- --
Accumulated other comprehensive income (loss) (7) 22,381 22,308
Retained earnings (accumulated deficit) 16,943 (361,192) (195,125)
Total stockholders' equity (deficit) 137,892 (79,192) 85,026
Total liabilities and stockholders' equity (deficit) $ 473,353 $ 427,573 $ 593,768

CONTACT: Glenn Wiener IR@SchoolSpecialty.com Tel: 212-786-6011

Source:School Specialty, Inc.