• Third quarter revenue of $278.5 million
  • Third quarter operating income of $22.5 million
  • Third quarter Adjusted EBITDA of $37.5 million
  • Updating 2019 revenue guidance to be slightly below our previously disclosed guidance of $640 million to $650 million

GREENVILLE, Wis., Nov. 12, 2019 (GLOBE NEWSWIRE) — School Specialty, Inc. (OTCQB: SCOO) (“School Specialty”, “SSI” or “the Company”), a leading provider of innovative products and solutions that support integrated learning environments for improved student social, emotional, mental and physical well-being, today provided results for its fiscal third quarter ended September 28, 2019.

Michael Buenzow, Interim Chief Executive Officer, stated, “The past several months have been transformative for our Company. We have improved our sales organization through the implementation of the Team Sell model, refined our approach to customer segmentation, and continued to improve pricing. Our gross margin trends within key product areas continue to improve and we achieved key objectives relating to core fulfillment center performance and more efficient management of our transportation requirements. We continue to streamline our organization and align around our core competencies and as a result have decided to move the custom portion of the Agenda business to Discontinued Operations as of the fourth quarter. A tighter focus on our core business will enable us to improve profitability and free cash flow going forward. During the quarter, our Supplies product line increased 2.2% year over year, driven by solid growth with our Large District accounts. As we progress through the fourth quarter, support for a strong Science Curriculum recovery in 2020; the Science Curriculum segment has been a significant area of under-performance in 2019, but the tide is beginning to turn in our favor.”

Ryan M. Bohr, Executive Vice President and Chief Operating Officer, stated, “The improving trend in gross margin is attributable to ongoing initiatives to optimize pricing and take a more strategic approach to margin management. The improvements made are just beginning to materially impact our results; we have yet to realize the full benefits of these actions and expect continued gross margin improvement in 2020. Our operations team and their ability to service our customers throughout this peak season was exemplary, leading to improved order momentum as we exit the peak season. In addition, we are investing in our product line to ensure that we are bringing industry-leading solutions to our customers. This includes launching in 2020 our greatest number of new, innovative furniture items in many years.”

Michael Buenzow added, “As we enter the final quarter of the year, we are now tracking slightly below the lower end of our previously disclosed revenue guidance as a result of a delayed recovery within Science Curriculum and modestly lower outlook for our Instruction and Invention product portfolio. Despite the lower revenue outlook, we are encouraged by the trend in 2019 gross margin. We are guiding adjusted EBITDA to a range of $28 million to $30 million, down from $42 million previously; the revised outlook is almost entirely driven by Science Curriculum segment and challenges within the custom Agenda business. However, we are confident adjusted EBITDA will improve in 2020 as our new product introductions drive organic revenue growth, process improvement initiatives continue to drive down costs and we realize the benefit of our strategic decision to exit the custom Agenda business.  Our team is dedicated to these objectives and will continue to work across the business to maximize shareholder value.”

Strategic Alternatives Progress

As previously announced, School Specialty, Inc. is continuing to work with its Board of Directors, in conjunction with its legal and financial advisors, to carry out a formal process to explore and evaluate potential strategic alternatives focused on maximizing shareholder value.  The Company has previously disclosed that it has been working with a financial advisor to address its capital structure and has expanded these efforts to include the review of a full range of strategic and financing alternatives, which may include a sale of the Company or other business combination.  The Board has formed a special committee which will carefully evaluate and consider all potential options. Our entire team remains committed to serving our customers throughout this process. 

The Company is currently in active discussions with multiple parties across a range of alternatives, including sale transactions and junior capital investments.  Proposals have been requested to be submitted in November.  In addition, the Company recently reached agreement in principle on non-binding terms with its senior secured lenders fora forbearance related to third quarter noncompliance and amendments to the terms of its debt facilities.  Finally, the Company is in discussions to obtain an extension of the December 12, 2019 maturity date of the deferred cash payment obligations.   

Third Quarter of Fiscal 2019 Results

  • Revenue was $278.5 million for the quarter ended September 28, 2019, as compared to $290.3 million in the third quarter of fiscal 2018, representing a decrease of 4.1%. This decrease included declines of 2.1% in the Distribution segment and 32.1% in the Science Curriculum segment.
     
    • The Agenda category, which was negatively impacted by weaker demand and ongoing operational challenges, contributed $4.4 million of the Distribution revenue decline.
    • Strong late peak season orders, particularly in large districts, coupled with a strong fulfillment season has provided revenue growth for Supplies and booking trends suggesting continued strength in the category heading into Q4.
    • Overall Furniture revenue was down 1.7% in the quarter. While demand was strong in transactional furniture (+3.5%), it was offset by lower learning environment project sales driven by a strategic decision to focus resources on higher margin opportunities.
    • Instruction & Intervention revenue was down 9.3% in the quarter reflecting continued soft demand for Triumph Learning (Coach) product line.  However, with the launch of Success Coach in Q3 and a strong pipeline of opportunities for SPIRE and Wordly Wise, we are experiencing year-over-year growth in the fourth quarter through early November.
    • Science Curriculum for 2019 reflects a continued soft market and lower overall win-rates; however, based on product enhancements, changes to our sales and marketing approach, and materially stronger opportunity pipeline, confidence is building that Science Curriculum revenues will recover in 2020.
       
  • The Company reported a gross profit margin for the quarter ended September 28, 2019 of 33.2%, as compared to 33.6% reported in the third quarter of fiscal 2018.  The year-over-year spread in gross margin narrowed significantly from the 190 basis point decline from Q2 2019.
    • Distribution segment gross margin increased 20 basis points year-over-year in Q3 2019, as compared to margin contraction spread of 110 basis points at the end of Q2 2019.  Pricing actions and the improved approach to bids and contracts have continued to positively impact gross margin.
    • Curriculum segment gross margin was down 30 basis points in Q3 2019. While product pricing and costs are generally consistent year-over-year, minor gross margin variances occur based on volume fluctuations and the impact of certain semi-fixed costs recognized in cost of goods sold.
       
  • Selling, general and administrative (“SG&A”) expenses were $64.4 million for the quarter ended September 28, 2019, an 8.1% increase year-over-year, driven primarily by increases in seasonal labor spend and incentive compensation expense recognized in the quarter (timing-related) and an increase in costs associated with the custom-planner business.
     
  • The Company reported adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) of $37.5 million for the quarter ended September 28, 2019, compared to $44 million in the quarter ended September 28, 2018. The Adjusted EBITDA contribution of the custom planner business, which the Company announced in the fourth quarter that it will be discontinued, drove $6.3 million of the $6.6 million decline.            

Fiscal 2019 Outlook Update

  • Total revenue is expected to be approximately $638 million, a 5.3% decrease year-over-year. The updated outlook is driven primarily by aa delayed recovery in the Science Curriculum segment and a modestly lower outlook for Instruction & Intervention based on the Q3 performance in that product area.
  • Gross margin is forecasted to be 33.2%, a year-over-year decrease of 70 basis points driven primarily by Agendas and a shift in product mix related to lower Science revenues; margins in the Supplies and Furniture product areas continue to strengthen.
  • Full year SG&A expense, excluding restructuring related costs, is forecasted to decline approximately 5.8% year-over-year, or approximately $205.0 million, as SG&A continues to be managed aggressively.
  • Full year 2019 Adjusted EBITDA is forecasted to be between $28 million to $30 million, down $6.1 million year over year at the midpoint.  The reduction from prior guidance is primarily related to lower Science revenues and weaker Agendas gross margin associated with credits and costs incurred to resolve customer order issues.
     
  • Free cash flow is anticipated to be in the range of $0 million to $5 million, down from the most recent guidance of $15 million to $20 million. This decline is driven by greater losses than previously expected in our Agenda business, lower than anticipated Science Curriculum revenue, and increased restructuring costs primarily related to the pursuit of strategic alternatives. We expect capital expenditures to be consistent with previous guidance of $10 million and product development investments to be modestly lower than prior guidance of $4 million.

School Specialty will be hosting a teleconference and webcast on Wednesday, November 13, 2019 at 9:00 a.m. ET to discuss its results and outlook. Speaking from management will be Michael C. Buenzow, Interim President and Chief Executive Officer; Ryan M. Bohr, Executive Vice President and Chief Operating Officer; and Kevin L. Baehler, Executive Vice President and Chief Financial Officer.

Conference Call Information:

  • Toll-free number: 844-882-7832 / International number: 574-990-9706 / Conference ID: 7399069
  • Replay number: 855-859-2056 / International replay number: 404-537-3406 / Conference ID: 7399069

Interested parties can also participate on the webcast by visiting the Investor Relations section of School Specialty’s website at http://investors.schoolspecialty.com. For those who are unable to participate on the live conference call and webcast, a replay will be available approximately one hour after the completion of the call.

About School Specialty, Inc.
School Specialty designs, develops and delivers the broadest assortment of innovative and proprietary products, programs and services to the education marketplace, including essential classroom supplies, furniture, educational technology, supplemental learning resources, science-based curriculum, and other unique products and services that enable educators across North America to transform more than classrooms. The Company applies its unmatched team of subject-matter experts and customized planning, development and project management tools to deliver its unique value proposition, which supports the social, emotional, mental, and physical safety of students – improving both their learning outcomes and school district performance.

School Specialty serves the U.S. and Canada with a multi-channel approach. For more information, visit https://corporate.schoolspecialty.com/ or connect with us on Facebook, Twitter, Instagram, and Pinterest. Find ideas, resources and inspiration by visiting our blog: https://blog.schoolspecialty.com/.

Statement Concerning Forward-Looking Information
Any statements made in this press release about School Specialty’s expected financial results, future financial condition, results of operations, expectations, plans, or prospects, including but not limited to those statements relating to its expected results for 2019 under the heading “Fiscal 2019 Outlook Update” and elsewhere in this press release, constitute forward-looking statements. Forward-looking statements also include those preceded or followed by the words “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “should,” “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 risk factors described in Item 1A of School Specialty’s Form 10-K for the fiscal year ended December 29, 2018, which risk factors are incorporated herein by reference. Any forward-looking statement in this release speaks only as of the date on which it is made. Except to the extent required under the federal securities laws, School Specialty does not intend to update or revise the forward-looking statements.

Non-GAAP Financial Information
This press release includes references to Adjusted EBITDA, a non-GAAP financial measure. Adjusted EBITDA represents net income (loss) adjusted for: provision for (benefit from) income taxes; purchase accounting deferred revenue adjustments; restructuring costs; restructuring-related costs included in SG&A; impairment charges; depreciation and amortization expense; amortization of development costs; net interest expense; and stock-based compensation. Free Cash Flow represents Adjusted EBITDA adjusted for: capital expenditures; product development expenditures; proceeds from asset sales; unrealized foreign exchange gains and losses; other; changes in working capital; Cash Interest and Cash Taxes.

The Company considers Adjusted EBITDA a relevant supplemental measure of its financial performance and Free Cash Flow a relevant supplemental measure of liquidity. The Company believes these non-GAAP financial measures provide useful supplemental information for investors regarding trends and performance of our ongoing operations and is useful for year-over-year comparisons of such results. We also use these non-GAAP financial measures in making operational and financial decisions and in establishing operational goals.

In summary, we believe that providing these non-GAAP financial measures to investors, as a supplement to GAAP financial measures, helps investors to (i) evaluate our operating and financial performance and future prospects, (ii) compare financial results across accounting periods, (iii) better understand the long-term performance of our core business, (iv) evaluate trends in our business, (v) evaluate our ability to generate cash and improve liquidity, and (vi) assess the Company’s ability to fund both its operating activities and reinvestments into the business, as well as service its debt, including debt repayments, all consistent with how management evaluates such performance and trends.

Adjusted EBITDA and Free Cash Flow do not represent, and should not be considered, an alternative to net income or operating income, or an alternative to cashflow from operations, as determined by GAAP, and our calculation may not be comparable to similarly titled measures reported by other companies.

Company Contacts                                                         
Ryan Bohr, EVP and Chief Operating Officer                        Kevin Baehler, EVP and Chief Financial Officer   
Ryan.bohr@schoolspecialty.com                                           Kevin.baehler@schoolspecialty.com      
Tel: 920-882-5868                                                                  Tel: 920-882-5882

Investor and Media Relations Contact
Mark Barbalato – FTI Consulting
Mark.Barbalato@fticonsulting.com
Tel: 212-850-5707

Tables to Follow


SCHOOL SPECIALTY, INC.  
CONSOLIDATED STATEMENTS OF OPERATIONS  
(In Thousands, Except Per Share Amounts)  
                                 
          For the Three Months Ended     For the Nine Months Ended
   
          September 28, 2019     September 29, 2018     September 28, 2019     September 29, 2018    
                                 
Revenues   $   278,512     $   290,280     $   535,053     $   558,839    
Cost of revenues   185,945     192,776     357,005     366,470    
  Gross profit   92,567     97,504     178,048     192,369    
Selling, general and administrative expenses   64,436     59,607     167,416     170,553    
Impairment charge   4,580       –      4,863       –     
Facility exit costs and restructuring   1,080       667       2,290       1,149    
  Operating income (loss)   22,471     37,230     3,479     20,667    
Other expense:                          
  Interest expense     5,341       4,157       14,927       11,351    
  Change in fair value of derivatives     238       –        1,320       –     
Income (loss) before benefit from income taxes   16,892     33,073       (12,768)     9,316    
Provision for (benefit from) income taxes   (972)     14,517     199     9,420    
  Net income (loss)   $   17,864     $   18,556     $   (12,967)     $   (104)    
                                 
Weighted average shares outstanding:                          
  Basic     7,025       7,000       7,013       7,000    
  Diluted     8,282       7,063       7,013       7,000    
                                 
Net Loss per Share:                          
  Basic   $   2.54     $   2.65     $   (1.85)     $   (0.01)    
  Diluted   $   2.16     $   2.63     $   (1.85)     $   (0.01)    
                                 
          September 28, 2019     September 29, 2018     September 28, 2019     September 29, 2018    
      Adjusted Earnings before interest, taxes, depreciation,                           
        amortization, change in value of derivatives,  restructuring                          
        and impairment charges (EBITDA) reconciliation:                          
        Net income (loss)   $   17,864     $   18,556     $   (12,967)     $   (104)    
        Provision for (benefit from) income taxes     (972)       14,517       199       9,420    
      Purchase accounting deferred revenue adjustment     –        77       –        715    
        Impairment charge      4,580       –        4,863       –     
        Restructuring costs      1,080       667       2,290       1,149    
        Restructuring-related costs incl in SG&A      3,450       313       7,383       2,002    
        Change in fair value of derivatives     238       –        1,320       –     
        Depreciation and amortization expense     4,605       4,214       13,118       13,607    
        Amortization of development costs     1,171       1,503       3,471       4,190    
        Net interest expense     5,341       4,157       14,927       11,351    
        Stock-based compensation     118       (19)       (771)       1,178    
        Adjusted EBITDA   $   37,475     $   43,985     $   33,833     $   43,508    

              September 28, 2019     September 29, 2018
ASSETS            
Current assets:          
  Cash and cash equivalents   $   5,862     $   7,922
  Accounts receivable, less allowance for doubtful accounts          
    of $1,721 and $1,310, respectively     162,127       175,111
  Inventories, net     81,974       96,024
  Prepaid expenses and other current assets      18,802       17,731
  Refundable income taxes      397       – 
    Total current assets   $   269,162     $   296,788
                     
                     
                     
                     
                     
                     
Property, plant and equipment, net      29,497       31,732
Operating lease right-of-use asset   11,275       – 
Goodwill     –        26,842
Intangible assets, net     30,215       34,245
Development costs and other    13,818       15,407
Deferred taxes long-term   282       2,002
Investment in unconsolidated affiliate    –        – 
    Total assets   $   354,249     $   407,016

              September 28, 2019     September 29, 2018
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:           
  Current maturities – long-term debt   $   199,068     $   90,450
  Current operating lease liability   5,039       – 
  Accounts Payable   49,341     43,219
  Accrued compensation   7,156     5,211
  Contract liabilities   7,589     7,232
  Accrued royalties 1,542       2,105
  Other accrued liabilities   20,829     23,885
    Total current liabilities   290,564     172,102
Long-term debt – less current maturities   0     128,830
Operating lease liability 6,337       – 
Other liabilities   3,580     569
    Total liabilities   300,481     301,501
Stockholders’ equity:           
  Common stock, $0.001 par value per share, 50,000,000 shares authorized;          
    7,025,219; 7,000,000 and 7,000,000 shares issued and outstanding, respectively   7     7
  Treasury stock, at cost 5,145; 5,145 shares authorized and outstanding   (34)       – 
  Capital in excess of par value   124,301     124,228
  Accumulated other comprehensive loss   (1,902)     (1,720)
  Retained earnings (accumulated deficit)   (68,604)     (17,000)
    Total stockholders’ equity   53,768     105,515
    Total liabilities and stockholders’ equity   $   354,249     $   407,016

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Source: School Specialty, Inc