School Specialty Inc. (SCHS), a leading education company, recently posted financial results for fourth-quarter 2010.
Greenville, Wisconsin-based company’s net loss increased by 3 cents to 73 cents a share from the year ago quarter. The Zacks Consensus Estimate for the quarter was pegged at a loss of 62 cents a share. The fiscal 2010 earnings decreased by 7 cents year over year to $1.37 a share; and missed the Zacks Consensus Estimate by 10 cents. Earnings, as guided by the company, falls in the range of $1.00-$1.30 for fiscal 2011, or $1.32 to $1.62, excluding the impact of the convertible debt accounting.
Total revenues for the quarter and the year under review slipped 25% and 14% year over year to $117 million and $896.7 million respectively, mainly due to soft furniture sales and the divestiture of the School Specialty Publishing business. Furthermore, the general economic conditions continued to affect school spending levels, along with business integration-related decisions.
However, revenues coming from the AutoSkill International acquisition partially set off the negative growth in revenues. In addition, fiscal 2010 revenue growth was affected due to a decline in school construction and renovations, and a decrease in state science adoption revenues.
Management forecasts fiscal 2011 revenues of $790 million – $825 million, representing 6% – 10% year-over-year growth, excluding divestitures. Due to continued anticipated softness in the furniture market, the company’s volume is expected to decline 70% year over year in fiscal 2011.
Nevertheless, gross margin for the quarter and year expanded 360 and 140 basis points (bps) year-over-year to 43.4% and 42.3%, respectively. The quarter benefited from a product mix within both the Accelerated Learning and Educational Resources segments. The fiscal 2010 gross margin expanded due to product pricing, cost reduction programs, and a positive product mix in the Accelerated Learning segment.
On the other hand, the operating loss for the quarter was $13.9 million, compared to an operating loss of $14.3 million in the prior year quarter. Operating profit for the year came in as $74.7 million compared to $77.7 million in fiscal 2009. However, operating margin increased 90 bps annually to 8.3% in fiscal 2010 due to gross margin expansion.
Exiting the year, the educational provider had free cash flow of $90.2 million, reflecting a working capital improvement. Free cash flow was utilized to reduce debt by $52.6 million, fund the acquisition of AutoSkill International and purchase the Think Math! (TM) curriculum. In addition, the company’s year-end cash position was boosted by $19.2 million, thereby strengthening its balance sheet. Free cash flow is expected to be approximately $60 million – $70 million, including $16 million cash tax payment associated with the expected repurchase obligation under the $133 million convertible notes.
To enhance its top-line growth and margin expansion, School Specialty plans to enter into contract with U.S. Communities, a non-profit government purchasing cooperative, and introduce private label furniture product line. The company also signed a new consumer-focused contract with Amazon.com, which will generate revenue in the second half of fiscal 2011. The company exited the year with an impression that it will continue to generate strong free cash flow and as well as sustained its cost containment effort to counter the depressed school funding environment.
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