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School Specialty Inc. Reports Operating Results (10-Q)

February 22, 2011 | About:
10qk

10qk

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School Specialty Inc. (SCHS) filed Quarterly Report for the period ended 2011-01-22.

School Specialty Inc. has a market cap of $305.69 million; its shares were traded at around $16.2 with and P/S ratio of 0.34. 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.Hedge Fund Gurus that owns SCHS: Michael Dell of MSD Capital, Jim Simons of Renaissance Technologies LLC. Mutual Fund and Other Gurus that owns SCHS: Chris Davis of Davis Selected Advisers.

Highlight of Business Operations:

As a percent of revenue, SG&A increased from 63.0% for the three months ended January 23, 2010 to 65.8% for the three months ended January 22, 2011. SG&A decreased $5.8 million from $65.0 million in the third quarter of fiscal 2010 to $59.2 million in the third quarter of fiscal 2011. Approximately $1.8 million of the SG&A savings in the third quarter of fiscal 2011 is related to compensation related decisions during the quarter. SG&A attributable to the Educational Resources and Accelerated Learning segments decreased a combined $6.2 million and Corporate SG&A increased $0.4 million in the third quarter as compared to last years third quarter. The increase in Corporate SG&A is a result of an increase in business technology spending to support the Companys business systems and eCommerce platform, which was offset by approximately $0.5 million related to the above mentioned compensation related decisions.

Accelerated Learning segment SG&A decreased $1.6 million, or 7.3%, from $22.2 million for the three months ended January 23, 2010 to $20.5 million for the three months ended January 22, 2011. The divestiture of the SSP business in the third quarter of fiscal 2010 led to a $0.6 million decrease in SG&A. The segments portion of the consolidated quarterly savings related to the above-mentioned compensation related decisions was approximately $0.6 million. In addition, the segment had a decrease of $1.5 million in its administrative costs as a result of the conversion of one of the operating units onto the Companys enterprise resource planning (ERP) system. Partially offsetting this decrease was an increase of $0.8 million attributable primarily to an increase in its variable costs such

As a percent of revenue, SG&A increased from 30.7% for the nine months ended January 23, 2010 to 98.9% for the nine months ended January 22, 2011. SG&A increased $388.0 million from $239.7 million for the nine months ended January 23, 2010 to $627.7 million for the nine months ended January 22, 2011. The primary increase in SG&A is attributable to the non-cash impairment charge of $411.4 million the Company recorded in the first quarter of fiscal 2011. Due to the significance of the impairment charge in the current year, the Company believes it is more meaningful to compare SG&A excluding the impairment charge to last years SG&A in the comparable period. Excluding the impact of the impairment charge taken by the Company in the first quarter of fiscal 2011, SG&A decreased $23.4 million from $239.7 million in the first nine months of fiscal 2010 to $216.3 million in the first nine months of fiscal 2011. Approximately $2.1 million of the SG&A savings for the nine months ended January 22, 2011 is related to compensation related decisions made by management. On the same basis, SG&A attributable to the Educational Resources and Accelerated Learning segments decreased a combined $25.7 million and Corporate SG&A increased $2.3 million in the first nine months of fiscal 2011 as compared to last years first nine months. The increase in Corporate SG&A was related primarily to increases in business technology spending to support the Companys business systems and eCommerce platform and incremental depreciation related to the Companys ERP system, which was offset by approximately $0.6 million related to the above mentioned compensation related decisions. Excluding the impact of the impairment charge taken by the Company in the first quarter of fiscal 2011, SG&A as a percent of revenue increased from 30.7% for the nine months ended January 23, 2010 to 34.1% for the nine months ended January 22, 2011, as cost cutting actions did not keep pace with the decline in revenues.

Educational Resources segment SG&A decreased $20.9 million, or 15.4%, from $135.4 million for the nine months ended January 23, 2010 to $114.5 million for the nine months ended January 22, 2011. The segment experienced a decrease of approximately $11 million in its variable SG&A costs such as transportation, warehousing, and selling expenses associated with decreased revenues. In addition, the segment had a decline of approximately $4 million in its marketing costs primarily associated with a reduction in catalog amortization through reduced circulation of supplemental catalogs. The segments portion of the consolidated quarterly savings related to the above-mentioned compensation related decisions was approximately $0.8 million. Educational Resources segment SG&A increased as a percent of revenues from 24.8% for the nine months ended January 23, 2010 to 26.5% for the nine months ended January 22, 2011.

Accelerated Learning segment SG&A decreased $4.8 million, or 6.2%, from $77.1 million for the nine months ended January 23, 2010 to $72.3 million for the nine months ended January 22, 2011. The divestiture of the SSP business led to a $7.4 million decrease in SG&A. Reduced volume led to approximately $2.2 million of a decrease in the segments variable costs such as transportation, warehousing, and selling expenses. In addition, the segment had a decrease of $1.7 million in its administrative as a result of the conversion of one of the operating units onto the Companys ERP system. The segments portion of the consolidated quarterly savings related to the above-mentioned compensation related decisions was approximately $0.8 million. Partially offsetting these decreased expenses was an increase of $2.5 million in selling expenses as a result of the expansion of the reading intervention and health sales forces. Accelerated Learning segment SG&A increased as a percent of revenues from 33.0% for the nine months ended January 23, 2010 to 35.9% for the nine months ended January 22, 2011.

The benefit for income taxes was $57.8 million for the first nine months 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 acquisitions for which a tax benefit was not recorded. The remaining impairment of $173.4 million generated the $66.5 million of tax benefit. The effective tax rate in the first nine months of fiscal 2011 was 14.8%. Due to the significance that the impairment charge has on the effective tax rate, the Company believes the tax provision (benefit) and the effective tax rate excluding the impairment charge are more meaningful comparisons to last years comparable period. Excluding impairment, the tax provision for the first nine months of fiscal 2011 was $8.6 million as compared to $26.0 million in the first nine months of fiscal 2010. The decline is related to the decrease in earnings before tax. Excluding impairment, the effective tax rate was 41.1% in the first nine months of fiscal 2011 as compared to 39.5% in the first nine months of fiscal 2010. The increase in the effective tax rate is related primarily to the tax benefit recorded for the Companys share of the loss from its unconsolidated affiliate and the impact of the permanent items on a lower tax base.

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