School Specialty Inc. has a market cap of $253.5 million; its shares were traded at around $13.35 with a P/E ratio of 23.8 and P/S ratio of 0.3. School Specialty Inc. had an annual average earning growth of 3.7% over the past 10 years. GuruFocus rated School Specialty Inc. the business predictability rank of 2.5-star.SCHS is in the portfolios of Chris Davis of Davis Selected Advisers.
Highlight of Business Operations:Accelerated Learning segment revenues decreased 27.2% from $106.3 million for the three months ended July 25, 2009 (which includes $1.1 million of intersegment revenues) to $77.4 million for the three months ended July 24, 2010 (which is comprised solely of sales to external parties). The divestiture of the School Specialty Publishing business unit in last years second quarter accounted for $10.7 million of the decline. AutoSkill International, Inc. (AutoSkill), acquired in last years second quarter, added $1.8 million in revenue in the first quarter of fiscal 2011. The balance of the decline was related to spending reductions across all education categories due to education spending cuts by states, as well as the timing of orders that shifted from the Companys first quarter to its second quarter in fiscal 2011. The Company believes that approximately $10 million of the first quarter revenue decline was related to this shift in timing of orders.
Educational Resources segment gross profit decreased $20.6 million from $82.7 million for the three months ended July 25, 2009 to $62.1 million for the three months ended July 24, 2010. The decrease in segment revenue resulted in an $18.2 million decline in gross profit had segment gross margin remained constant. The decrease in gross margin of 140 basis points from 36.8% in the first quarter of fiscal 2010 to 35.4% in the first quarter of fiscal 2011 decreased gross profit by $2.4 million. Approximately 230 basis points of the decrease in gross margin is related to higher price discounting in the furniture and high-volume commodity supply categories. In this period of cuts in education funding, educators have become more sensitive to price. As such, the Company determined that additional discounting was necessary to compete. The decline was partially offset by an increase of approximately 90 basis points in gross margin related to a product mix shift towards more profitable products within the Educational Resources segment.
Accelerated Learning segment SG&A decreased $2.9 million, or 10.4%, from $27.6 million for the three months ended July 25, 2009 to $24.7 million for the three months ended July 24, 2010. The divestiture of the SSP business led to a $3.5 million decrease in SG&A. The segment also experienced a decrease of approximately $1.1 million in its variable SG&A costs such as transportation, warehousing, and selling expenses associated with decreased revenues. The segments selling expense increased by $1.1 million related to the expansion of its reading intervention and health sales forces. Accelerated Learning segment SG&A increased as a percent of revenues from 26.0% for the three months ended July 25, 2009 to 31.9% for the three months ended July 24, 2010. The increase in SG&A as a percentage of revenue is due to the base non-variable costs in comparison to decreased revenues.
The Company recorded $411.4 million of impairment charges in the first quarter of fiscal 2011 pursuant to its goodwill assessment. The goodwill impairment charge was $411.2 million, which consisted of $249.7, $55.4 and $106.1 for the Education Resources, Science and Planning and Student Development reporting units, respectively. An impairment of $0.2 million was related to an indefinite-lived tradename intangible.
The benefit for income taxes was $57.7 million for the first quarter of fiscal 2011. The current year income tax benefit includes $66.5 million of income tax benefit related to the $411.4 million goodwill and non-amortizable asset impairment. Approximately $237.8 million of the goodwill impairment was related to non-deductible goodwill associated with past stock acquisition for which a tax benefit was not recorded. The remaining impairment of $173.4 million generated the $66.5 million of tax benefit. Excluding the impairment impact, the tax provision in the first quarter of fiscal 2011 was $8.8 million as compared with $18.6 million in the first quarter of fiscal 2010. The decline is related to the decrease in earnings before tax. The effective tax rate in the first quarter of fiscal 2011 was 14.8%, which was impacted by the non-deductible portion of the goodwill charge. Excluding impairment, the effective tax rate was 39.8% in the first quarter of fiscal 2011 as compared with 39.5% in last years first quarter.
Net cash used in investing activities decreased by $0.3 million to $4.6 million in the first quarter of fiscal 2011 as compared to $4.9 million for the first quarter of fiscal 2010. Additions to property, plant and equipment decreased $0.5 million from the first quarter of fiscal 2010 to $2.4 million in the first quarter of fiscal 2011, primarily as a result of decreased spending related to the implementation of our ERP system. Product development spending remained flat in the first quarter of fiscal 2011 as compared to the first quarter of fiscal 2010, at $2.2 million. The Company is committed to the ongoing investment in the development of curriculum-based products.
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