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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 25, 2016

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                      TO                     

Commission File Number: 000-24385

 

 

SCHOOL SPECIALTY, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   39-0971239

(State or Other Jurisdiction

of Incorporation)

 

(IRS Employer

Identification No.)

W6316 Design Drive

Greenville, Wisconsin 54942

(Address of Principal Executive Offices) (Zip Code)

(920) 734-5712

(Registrant’s Telephone Number, including Area Code)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  x    No  ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

  

Outstanding at
August 2, 2016

Common Stock, $0.001 par value    1,000,004

 

 

 


Table of Contents

SCHOOL SPECIALTY, INC.

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 25, 2016

 

          Page
Number
 
PART I - FINANCIAL INFORMATION   

ITEM 1.

  

CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

  
  

Condensed Consolidated Balance Sheets at June 25, 2016, December 26, 2015 and June 27, 2015

     1   
  

Condensed Consolidated Statements of Operations for the Three Months and Six Month Periods Ended June 25, 2016 and June 27, 2015

     2   
  

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Month Periods Ended June 25, 2016 and June 27, 2015

     3   
  

Condensed Consolidated Statements of Cash Flows for the Three and Six Month Periods Ended June 25, 2016 and June 27, 2015

     4   
  

Notes to Condensed Consolidated Financial Statements

     5   

ITEM 2.

  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

     20   

ITEM 3.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     27   

ITEM 4.

  

CONTROLS AND PROCEDURES

     27   

PART II - OTHER INFORMATION

  

ITEM 6.

  

EXHIBITS

     28   

 

-Index-


Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Unaudited Financial Statements

SCHOOL SPECIALTY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In Thousands)

 

     June 25, 2016     December 26, 2015     June 27, 2015  

ASSETS

      

Current assets:

      

Cash and cash equivalents

   $ 8,570      $ 12,865      $ 9,157   

Accounts receivable, less allowance for doubtful accounts of $1,073, $1,077, and $989, respectively

     78,736        58,370        75,457   

Inventories, net

     128,673        76,199        130,984   

Deferred catalog costs

     6,455        6,527        4,527   

Prepaid expenses and other current assets

     13,472        13,111        13,877   

Refundable income taxes

     5,080        9        1,662   
  

 

 

   

 

 

   

 

 

 

Total current assets

     240,986        167,081        235,664   

Property, plant and equipment, net

     28,497        27,127        30,841   

Goodwill

     21,588        21,588        21,588   

Intangible assets, net

     36,849        38,652        40,455   

Development costs and other

     17,269        19,321        22,005   

Deferred taxes long-term

     5        5        —     

Investment in unconsolidated affiliate

     715        715        715   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 345,909      $ 274,489      $ 351,268   
  

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

      

Current liabilities:

      

Current maturities - long-term debt

   $ 46,400      $ 1,821      $ 62,444   

Accounts payable

     61,985        20,076        47,286   

Accrued compensation

     7,736        10,488        6,630   

Deferred revenue

     2,971        2,705        2,630   

Other accrued liabilities

     14,320        14,794        13,884   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     133,412        49,884        132,874   

Long-term debt - less current maturities

     143,948        142,438        151,665   

Other liabilities

     179        561        1,205   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     277,538        192,883        285,744   
  

 

 

   

 

 

   

 

 

 

Commitments and contingencies - Note 17

      

Stockholders’ equity:

      

Preferred stock, $0.001 par value per share, 500,000 shares authorized; none outstanding

     —          —          —     

Common stock, $0.001 par value per share, 2,000,000 shares authorized; 1,000,004 shares outstanding

     1        1        1   

Capital in excess of par value

     119,955        119,240        118,716   

Accumulated other comprehensive loss

     (1,580     (1,919     (1,233

Retained earnings (accumulated deficit)

     (50,005     (35,716     (51,960
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     68,371        81,606        65,524   
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 345,909      $ 274,489      $ 351,268   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

SCHOOL SPECIALTY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In Thousands, Except Per Share Amounts)

 

     For the Three Months Ended     For the Six Months Ended  
     June 25, 2016     June 27, 2015     June 25, 2016     June 27, 2015  

Revenues

   $ 145,858      $ 140,970      $ 239,583      $ 232,552   

Cost of revenues

     90,259        90,897        148,519        148,147   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     55,599        50,073        91,064        84,405   

Selling, general and administrative expenses

     53,212        54,652        100,523        105,304   

Facility exit costs and restructuring

     383        —          549        2,288   

Impairment charge

     —          2,713        —          2,713   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     2,004        (7,292     (10,008     (25,900

Other expense (income):

        

Interest expense

     4,455        4,977        8,845        9,302   

Change in fair value of interest rate swap

     (91     (43     (176     9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for (benefit from) income taxes

     (2,360     (12,226     (18,677     (35,211

Provision for (benefit from) income taxes

     (374     168        (4,388     598   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (1,986   $ (12,394   $ (14,289   $ (35,809
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding:

        

Basic

     1,000        1,000        1,000        1,000   

Diluted

     1,000        1,000        1,000        1,000   

Net Loss per Share:

        

Basic

   $ (1.99   $ (12.39   $ (14.29   $ (35.81

Diluted

   $ (1.99   $ (12.39   $ (14.29   $ (35.81

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

SCHOOL SPECIALTY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In Thousands)

 

     For the Three Months Ended     For the Six Months Ended  
     June 25, 2016     June 27, 2015     June 25, 2016     June 27, 2015  

Net loss

   $ (1,986   $ (12,394   $ (14,289   $ (35,809

Other comprehensive income (loss), net of tax:

        

Foreign currency translation adjustments

     124        84        339        (414
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive loss

   $ (1,862   $ (12,310   $ (13,950   $ (36,223
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

SCHOOL SPECIALTY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In Thousands)

 

     For the Six Months Ended  
     June 25, 2016     June 27, 2015  

Cash flows from operating activities:

    

Net loss

   $ (14,289   $ (35,809

Adjustments to reconcile net income to net cash used in operating activities:

    

Depreciation and intangible asset amortization expense

     7,923        9,766   

Amortization of development costs

     3,075        7,624   

Loss on disposal of property, equipment, other

     —          774   

Amortization of debt fees and other

     1,027        793   

Change in fair value of interest rate swap

     (176     9   

Impairment charges

     —          2,713   

Unrealized foreign exchange (gain) loss

     (904     509   

Share-based compensation expense

     715        611   

Deferred taxes

     1        22   

Non-cash interest expense

     923        732   

Changes in current assets and liabilities:

    

Accounts receivable

     (20,239     (14,619

Inventories

     (52,469     (53,950

Deferred catalog costs

     72        2,811   

Prepaid expenses and other current assets

     (5,425     (7

Accounts payable

     42,122        26,468   

Accrued liabilities

     (3,334     2,705   
  

 

 

   

 

 

 

Net cash used in by operating activities

     (40,978     (48,848
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Additions to property, plant and equipment

     (7,490     (5,757

Investment in product development costs

     (1,309     (3,047

Proceeds from disposal of property, plant and equipment

     —          1,610   
  

 

 

   

 

 

 

Net cash provided by investing activities

     (8,799     (7,194
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from bank borrowings

     146,404        150,099   

Repayment of bank borrowings

     (101,825     (96,230

Refund of debt fees and other

     —          49   
  

 

 

   

 

 

 

Net cash provided by financing activities

     44,579        53,918   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     903        (684
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (4,295     (2,808
  

 

 

   

 

 

 

Cash and cash equivalents, beginning of period

     12,865        11,965   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 8,570      $ 9,157   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Interest paid

   $ 6,895      $ 7,777   

Income taxes paid, net

   $ 1,112      $ 1,353   

Change in accounts payable for additions to property and equipment

   $ —        $ (2,808

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (which are normal and recurring in nature unless otherwise noted) considered necessary for a fair presentation have been included. The balance sheet at December 26, 2015 has been derived from School Specialty, Inc.’s (“School Specialty” or the “Company”) audited financial statements for the transition period ended December 26, 2015. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Transition Report on Form 10-K for the thirty-five weeks ended December 26, 2015.

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 court jurisdiction (see Note 3). As discussed in Note 5 – Fresh Start Accounting, as of June 11, 2013 (the “Effective Date”), 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.

The Company changed its fiscal year end from the last Saturday in April to the last Saturday in December. The Company has reported its financial results for the period of April 26, 2015 to December 26, 2015 (the “short year 2015”) on a Transition Report on Form 10-K. As used in these consolidated financial statements and related notes to consolidated financial statements, “fiscal 2015” and “fiscal 2014” refer to the Company’s twelve-months ended April 25, 2015 and April 26, 2014, respectively. The December 28, 2014 to March 28, 2015 period will be referred to as “first quarter 2015” and the March 29, 2015 to June 27, 2015 period will be referred to as “second quarter 2015” in these consolidated financial statements and related notes to the consolidated financial statements.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases.” ASU No. 2016-02 requires lessees to recognize the assets and liabilities arising from leases on the balance sheet. The new guidance requires that all leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements. This guidance will be effective for periods beginning on January 1, 2019. The Company is currently in the process of evaluating the impact of adoption of this ASU on the Company’s consolidated financial statements

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes - Balance Sheet Classification of Deferred Taxes.” ASU No. 2015-17 simplifies the presentation of deferred taxes. The new guidance requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet, as opposed to being presented as current or non-current. This guidance will be effective for annual periods beginning after December 15, 2016. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU No. 2014-09 provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. This guidance will be effective for the Company in the first quarter of its fiscal year ending December 29, 2018. The Company is currently in the process of evaluating the impact of adoption of this ASU on the Company’s consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern.” ASU 2014-15 defines management’s responsibility to evaluate whether there is substantial doubt about an organization’s

 

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Table of Contents

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective in the annual period ending after December 15, 2016. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.

NOTE 3 – CHANGE IN ACCOUNTING PRINCIPLE

In the first quarter of 2016, the Company adopted ASU No. 2015-03, “Interest – Imputation of Interest.” ASU No. 2015-03 requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. As a result of the adoption of this new accounting standard, Company has reclassified its unamortized debt issuance costs related to its Term Loan (see Note 14 – Debt) as a direct deduction to the carrying value of its debt. The impact of this accounting principle change on the previously issued financial statements is as follows:

 

     Reported as of
December 26, 2015
     Debt Issuance
Costs
     As Adjusted
December 26, 2015
 

ASSETS

        

Development costs and other

   $ 23,911       $ (4,590    $ 19,321   
  

 

 

    

 

 

    

 

 

 

Total assets

     279,079         (4,590      274,489   

LIABILITIES

        

Long-term debt - less current maturities

   $ 147,028       $ (4,590    $ 142,438   
  

 

 

    

 

 

    

 

 

 

Total liabilities

     197,473         (4,590      192,883   

Total liabilities and stockholders’ equity

   $ 279,079       $ (4,590    $ 274,489   

Pursuant to ASU No. 2015-15 “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,” debt issuance costs associated with revolving credit facilities are not affected by ASU No. 2015-03. As such, debt issuance costs related to the Company’s ABL facility are classified as long-term assets within the “Development cost and other” line of the Condensed Balance Sheet, which is consistent with prior period reporting.

The change in accounting principle had no impact on the Company’s Consolidated Statements of Operations, Consolidated Statements of Comprehensive Income or Consolidated Statements of Cash Flows.

NOTE 4 – BANKRUPTCY PROCEEDINGS

On January 28, 2013 (the “Petition Date”), School Specialty and certain of its subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief under Chapter 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”).

On May 23, 2013, the Bankruptcy Court entered an order confirming the Debtors’ Second Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (the “Reorganization Plan”), and a corrected copy of such order was entered by the Bankruptcy Court on June 3, 2013. The Reorganization Plan became effective on June 11, 2013. Pursuant to the Reorganization Plan, on the Effective Date, the Company’s existing credit agreements, outstanding convertible subordinated debentures, equity plans and certain other agreements were cancelled. In addition, all outstanding equity interests of the Company that were issued and outstanding prior to the Effective Date were cancelled on the Effective Date. Also on the Effective Date, in accordance with and as authorized by the Reorganization Plan, the Company reincorporated in Delaware and issued a total of 1,000,004 shares of Common Stock of the reorganized Company to holders of certain allowed claims against the Debtors in exchange for such claims.

 

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Table of Contents

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

For further details on the bankruptcy proceedings, see Note 3 of the Transition Report on Form 10-K for the thirty-five weeks ended December 26, 2015.

NOTE 5 – FRESH START ACCOUNTING

On the Effective Date, the Company adopted fresh start accounting and reporting in accordance with FASB ASC 852. The adoption of fresh start accounting resulted in the Company becoming a new entity for financial reporting purposes. Fresh start reporting generally requires resetting the historical net book value of assets and liabilities to fair value as of the Effective Date by allocating the entity’s enterprise value as set forth in the Reorganization Plan to its assets and liabilities pursuant to accounting guidance related to business combinations. Accordingly, the financial statements on or prior to the Effective Date are not comparable with the financial statements for periods after such date. Any references to “Successor” or “Successor Company” show the financial position and results of operations of the reorganized Company subsequent to the 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 the bankruptcy emergence.

For further details on fresh start accounting, see Note 4 of the Transition Report on Form 10-K for the thirty-five weeks ended December 26, 2015.

NOTE 6 – INCOME TAXES

The Company files income tax returns with the U.S., various U.S. states, and foreign jurisdictions. The most significant tax return the Company files is with the U.S. The Company’s tax returns are no longer subject to examination by the U.S. for fiscal years before 2014. The Company has various state tax audits and appeals in process at any given time. It is not anticipated that any adjustments resulting from tax examinations or appeals would result in a material change to the Company’s financial position or results of operations.

In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that either all, or some portion, of the deferred tax assets will not be realized. The realization is dependent upon the future generation of taxable income, reversal of deferred tax liabilities, tax planning strategies, and expiration of tax attribute carryovers. As a result, the Company had concluded that the realization of a majority of the deferred tax assets did not meet the more likely than not threshold, and recorded a tax valuation allowance. As of December 26, 2015, the Company continued to maintain a valuation allowance against substantially all of its net deferred tax assets as it has not generated taxable income during a twelve-month tax year since the emergence from bankruptcy. In short year 2015, the Company decreased its tax valuation allowance to $26,363 from $41,705 at the end of fiscal 2015. This decrease related primarily to the utilization of tax net operating losses and adjustments to the deferred tax asset associated with the Company’s goodwill balances. As of June 25, 2016, there remained a valuation allowance against substantially all of the Company’s deferred tax assets. As of June 25, 2016, the Company had an immaterial amount of unremitted earnings from foreign investments.

For interim quarterly reporting purposes, the Company records income tax expense or benefit based on its forecasted annual effective tax rate. As the company typically reports losses in the first half of the fiscal year, the Company will record tax benefit and refundable income tax for those periods. During the second half of the fiscal year, the Company typically generates income and, accordingly, expects to record a tax provision for such period which may offset some or all of the tax benefit and refundable income tax recorded in the first half of the year.

The balance of the Company’s liability for unrecognized income tax benefits, net of federal tax benefits, at June 25, 2016, December 26, 2015 and June 27, 2015, was $94, $482, and $510, respectively, all of which would have an impact on the effective tax rate if recognized. The Company does not expect any material changes in the amount of unrecognized tax benefits within the next twelve months. The Company classifies accrued interest and penalties related to unrecognized tax benefits as income tax expense in its consolidated statements of operations. The amounts of accrued interest and penalties included in the liability for uncertain tax positions are not material.

 

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Table of Contents

SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

NOTE 7 – STOCKHOLDERS’ EQUITY

Changes in condensed consolidated stockholders’ equity during the six month periods ended June 25, 2016 and June 27, 2015, were as follows:

 

(in thousands)

   Common
Stock
     Capital in Excess
of Par Value
    Retained Earnings
(Accumulated
Deficit)
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Stockholders’
Equity
 

Balance, December 26, 2015

   $ 1       $ 119,240      $ (35,716   $ (1,919   $ 81,606   

Net loss

     —           —          (14,289     —          (14,289

Share-based compensation expense

     —           715        —          —          715   

Foreign currency translation adjustment

     —           —          —          339        339   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 25, 2016

   $ 1       $ 119,955      $ (50,005   $ (1,580   $ 68,371   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 27, 2014

   $ 1       $ 119,532      $ (16,151   $ (819   $ 102,563   

Net loss

     —           —          (35,809     —          (35,809

Share-based compensation expense

     —           611        —          —          611   

Foreign currency translation adjustment

     —           —          —          (414     (414

Change in Fresh Start estimate

     —           (1,427     —          —          (1,427
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 27, 2015

   $ 1       $ 118,716      $ (51,960   $ (1,233   $ 65,524   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

In June 2014, the Company revised its fresh-start estimate for the amount of deferred cash payment obligations (see Note 14 – Debt). The change in estimate is related to an increased number of unsecured trade creditors which elected to provide the Company customary trade terms which entitled those creditors to a 45% recovery of their unsecured claim rather than a 20% recovery. This change in estimate resulted in a decrease of $2,992 to the Successor Company’s equity and a corresponding increase in long-term debt. This change was incorrectly recorded in the financial statements as $1,565 in June 2014. In January 2015, the recorded amount was corrected to $2,992. Management has concluded that the misstatements of interim financial statements in the first half of 2015 were not material.

NOTE 8 – EARNINGS PER SHARE

Earnings Per Share

The following information presents the Company’s computations of basic earnings per share (“basic EPS”) and diluted earnings per share (“diluted EPS”) for the periods presented in the condensed consolidated statements of operations:

 

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

     Income (loss)
(Numerator)
    Weighted
Average
Shares
(Denominator)
     Per Share
Amount
 

Three months ended June 25, 2016:

       

Basic EPS

   $ (1,986     1,000       $ (1.99
       

 

 

 

Effect of dilutive stock options and RSUs

     —          —        
  

 

 

   

 

 

    

Basic and diluted EPS

   $ (1,986     1,000       $ (1.99
  

 

 

   

 

 

    

 

 

 

Three months ended June 27, 2015:

       

Basic EPS

   $ (12,394     1,000       $ (12.39
       

 

 

 

Effect of dilutive stock options and RSUs

     —          —        
  

 

 

   

 

 

    

Basic and diluted EPS

   $ (12,394     1,000       $ (12.39
  

 

 

   

 

 

    

 

 

 
     Income (loss)
(Numerator)
    Weighted
Average
Shares
(Denominator)
     Per Share
Amount
 

Six months ended June 25, 2016:

       

Basic EPS

   $ (14,289     1,000       $ (14.29
       

 

 

 

Effect of dilutive stock options and RSUs

     —          —        
  

 

 

   

 

 

    

Basic and diluted EPS

   $ (14,289     1,000       $ (14.29
  

 

 

   

 

 

    

 

 

 

Six months ended June 27, 2015:

       

Basic EPS

   $ (35,809     1,000       $ (35.81
       

 

 

 

Effect of dilutive stock options and RSUs

     —          —        
  

 

 

   

 

 

    

Basic and diluted EPS

   $ (35,809     1,000       $ (35.81
  

 

 

   

 

 

    

 

 

 

The Company had 71 and 72 stock options outstanding for the three and six month periods ended June 25, 2016 and June 27, 2015, respectively, which were not included in the computation of diluted EPS because they were anti-dilutive. The Company had 28 and 14 restricted stock units for the three and six month periods ended June 25, 2016, respectively, and zero for the three and six month periods ended June 27, 2015, which were not included in the computation of diluted EPS because they were anti-dilutive.

NOTE 9 – SHARE-BASED COMPENSATION EXPENSE

Employee Stock Plans

As of June 25, 2016, the Company had one share-based employee compensation plan: the School Specialty, Inc. 2014 Incentive Plan (the “2014 Plan”). The 2014 Plan was adopted by the Board of Directors on April 24, 2014 and approved on September 4, 2014 by the Company’s stockholders. On April 24, 2014, School Specialty, Inc.’s CEO was awarded 33 stock options under the 2014 Plan. Other members of management were awarded 65 stock options during fiscal 2015, 25 of which were cancelled in fiscal 2015 subsequent to the award due to terminations of employment. September 4, 2014, the date on which the stockholders approved the 2014 Plan, was considered the grant date, or measurement date, for those awards issued prior to this date. As such, those awards made prior to September 4, 2014 were not considered outstanding and no expense associated with those awards was recognized prior to that date. There were 68 stock options awarded prior to the measurement date.

The 33 stock options that were awarded to the Company’s CEO will vest as to one-fourth of the options on the first four anniversaries of the date of the award. The options that were awarded to other members of management will vest as to one-half of the options on the second anniversary of the date of the award and as to one-fourth of the options on each of the third and fourth anniversaries of the award date.

 

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

A summary of option transactions for the six months ended June 25, 2016 and June 27, 2015 is as follows:

 

     Options Outstanding      Options Exercisable  
     Options      Weighted-
Average
Exercise Price
     Options      Weighted-
Average
Exercise Price
 

Balance at December 26, 2015

     73       $ 130.00         8       $ 130.00   

Granted

     —              

Exercised

     —              

Canceled

     (2    $ 130.00         
  

 

 

          

Balance at June 25, 2016

     71       $ 130.00         21       $ 130.00   
  

 

 

          

Balance at December 27, 2014

     66       $ 130.00         —         $ —     

Granted

     7       $ 130.00         

Exercised

     —              

Canceled

     —              
  

 

 

          

Balance at June 27, 2015

     73       $ 130.00         8       $ 130.00   
  

 

 

          

On March 23, 2016, the Compensation Committee of the Board of Directors of the Company granted an aggregate of 28 Restricted Stock Units (“RSUs”) under the Company’s 2014 Plan to members of the Company’s senior management. The restricted stock units are performance-based. A certain percentage of the RSUs will vest on the third anniversary of the date of grant, with such percentage based on the 15 day Volume Weighted Average Price (“VWAP”) of the Company’s common stock prior to the vesting date. The percentage of RSUs that will vest shall be determined as follows:

 

Vesting %

  

15 Day VWAP

0%

   VWAP less than $108.00

20%

   VWAP greater than or equal to $108.00, but less than $118.00

40%

   VWAP greater than or equal to $118.00, but less than $128.00

60%

   VWAP greater than or equal to $128.00, but less than $138.00

80%

   VWAP greater than or equal to $138.00, but less than $148.00

100%

   VWAP greater than or equal to $148.00

Any RSUs that vest will be settled in shares of Company common stock.

The following table presents the share-based compensation expense recognized for the three and six month periods ended June 25, 2016 and June 27, 2015:

 

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

     For the Three Months Ended  
     June 25, 2016      June 27, 2015  
     Gross      Net of Tax      Gross      Net of Tax  

Stock Options

   $ 261       $ 202       $ 434       $ 434   

Restricted Stock Units

     194         148         —           —     
  

 

 

       

 

 

    

Total stock-based compensation expense

   $ 455          $ 434      
  

 

 

       

 

 

    
     For the Six Months Ended  
     June 25, 2016      June 27, 2015  
     Gross      Net of Tax      Gross      Net of Tax  

Stock Options

   $ 521       $ 399       $ 613       $ 613   

Restricted Stock Units

     194         148         —           —     
  

 

 

       

 

 

    

Total stock-based compensation expense

   $ 715          $ 613      
  

 

 

       

 

 

    

The stock-based compensation expense is reflected in selling, general and administrative (“SG&A”) expenses in the accompanying consolidated statements of operations.

The total unrecognized share-based compensation expense as of June 25, 2016 and June 27, 2015 was as follows:

 

     June 25,
2016
     June 27,
2015
 

Stock Options, net of estimated forfeitures

   $ 2,204       $ 3,247   

Restricted Stock Units

   $ 2,074       $ —     

On May 28, 2014, the Board granted 6 stock appreciation rights (“SARs”) to each of the non-employee members of the Board under the 2014 Plan. On July 31, 2015, the Board granted 6 SARs to each of the two new non-employee members of the Board. Each SAR has a grant date value of $130 and will be settled in cash upon exercise. As such, the SARs are accounted for as liability awards. Since the Company’s stock trading price was less than each SAR’s exercise price as of the three and six month periods ended June 25, 2016, no expense was recorded for the SARs. The SARs will vest as to one-half of the SARs on the second anniversary of the date of grant and as to one-fourth of the SARs on each of the third and fourth anniversaries of the date of grant. Total SARs that remain outstanding as of June 25, 2016 are 22 as 6 SARs have been canceled due to the death of a non-employee Board member.

NOTE 10 – GOODWILL AND OTHER INTANGIBLE ASSETS

The following tables present details of the Company’s intangible assets, including the estimated useful lives, excluding goodwill:

 

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

     Gross Value      Accumulated
Amortization
     Net Book
Value
 

June 25, 2016

        

Amortizable intangible assets:

        

Customer relationships (13 years)

   $ 11,300       $ (2,681    $ 8,619   

Publishing rights (20 years)

     4,000         (617      3,383   

Trademarks (20 years)

     22,700         (3,501      19,199   

Developed technology (7 years)

     6,600         (2,908      3,692   

Content (5 years)

     4,400         (4,400      —     

Perpetual license agreements (5 years)

     1,200         (740      460   

Favorable leasehold interests (10 years)

     2,160         (664      1,496   
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 52,360       $ (15,511    $ 36,849   
  

 

 

    

 

 

    

 

 

 
     Gross Value      Accumulated
Amortization
     Net Book
Value
 

December 26, 2015

        

Amortizable intangible assets:

        

Customer relationships (13 years)

   $ 11,300       $ (2,246    $ 9,054   

Publishing rights (20 years)

     4,000         (517      3,483   

Trademarks (20 years)

     22,700         (2,932      19,768   

Developed technology (7 years)

     6,600         (2,436      4,164   

Content (5 years)

     4,400         (4,400      —     

Perpetual license agreements (5 years)

     1,200         (620      580   

Favorable leasehold interests (10 years)

     2,160         (557      1,603   
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 52,360       $ (13,708    $ 38,652   
  

 

 

    

 

 

    

 

 

 
     Gross Value      Accumulated
Amortization
     Net Book
Value
 

June 27, 2015

        

Amortizable intangible assets:

        

Customer relationships (13 years)

   $ 11,300       $ (1,811    $ 9,489   

Publishing rights (20 years)

     4,000         (417      3,583   

Trademarks (20 years)

     22,700         (2,363      20,337   

Developed technology (7 years)

     6,600         (1,964      4,636   

Content (5 years)

     4,400         (4,400      —     

Perpetual license agreements (5 years)

     1,200         (500      700   

Favorable leasehold interests (10 years)

     2,160         (450      1,710   
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 52,360       $ (11,905    $ 40,455   
  

 

 

    

 

 

    

 

 

 

The gross values were determined by the valuation which was performed as part of the fresh start accounting. In addition to the intangible assets above, the Company recorded $21,588 of goodwill. In second quarter 2015, the Company recorded an impairment charge of $2,713 related to the Content intangible asset, which reduced the net book value of the intangible asset to zero as of the end of second quarter 2015. This impairment was related to the Company’s decision to reduce future investments in digital content and digital delivery for its Agenda product category. No impairment was recorded for the six months ended June 25, 2016.

Intangible asset amortization expenses were included in SG&A expense. Intangible asset amortization expense for the three months ended June 25, 2016 and June 27, 2015, was $901 and $973, respectively. Intangible asset amortization expense for the six months ended June 25, 2016 and June 27, 2015, was $1,803 and $2,094, respectively.

Intangible asset amortization expense for each of the five succeeding fiscal years is estimated to be:

 

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

Fiscal 2016 (6 months remaining)

   $ 1,801   

Fiscal 2017

     3,603   

Fiscal 2018

     3,463   

Fiscal 2019

     3,363   

Fiscal 2020

     2,813   

Fiscal 2021

     2,420   

The table below shows the allocation to the segments of the recorded goodwill as of June 25, 2016.

 

     Distribution
Segment
     Curriculum
Segment
     Total  

Fresh Start Valuation:

        

Goodwill

   $ 14,666       $ 6,922       $ 21,588   
  

 

 

    

 

 

    

 

 

 

Balance at June 25, 2016

   $ 14,666       $ 6,922       $ 21,588   
  

 

 

    

 

 

    

 

 

 

NOTE 11 – INVESTMENT IN UNCONSOLIDATED AFFILIATE

As of June 25, 2016, the Company held a 35% interest in Carson-Dellosa Publishing, which was accounted for under the cost method as the Company did not have significant influence over the investee.

The investment in unconsolidated affiliate consisted of the following:

 

     Percent
Owned
    June 25, 2016      December 26, 2015      June 27, 2015  

Carson- Dellosa Publishing, LLC

     35   $ 715       $ 715       $ 715   

See Note 18 – Subsequent Events

NOTE 12 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

 

     June 25, 2016      December 26, 2015      June 27, 2015  

Projects in progress

   $ 9,462       $ 3,981         6,507   

Buildings and leasehold improvements

     3,318         3,312         3,300   

Furniture, fixtures and other

     41,812         40,120         36,550   

Machinery and warehouse equipment

     11,664         11,501         11,412   
  

 

 

    

 

 

    

 

 

 

Total property, plant and equipment

     66,256         58,914         57,769   

Less: Accumulated depreciation

     (37,759      (31,787      (26,928
  

 

 

    

 

 

    

 

 

 

Net property, plant and equipment

   $ 28,497       $ 27,127       $ 30,841   
  

 

 

    

 

 

    

 

 

 

Depreciation expense for the three months ended June 25, 2016 and June 27, 2015, was $2,835 and $3,980 respectively. Depreciation expense for the six months ended June 25, 2016 and June 27, 2015, was $6,122 and $7,673 respectively

 

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

NOTE 13 – DEBT

Long-term debt consisted of the following:

 

     June 25, 2016      December 26, 2015      June 27, 2015  

ABL Facility, maturing in 2019

   $ 46,400       $ —         $ 61,000   

Term Loan, maturing in 2019

     130,279         132,100         142,463   

Term Loan Original Issue Discount

     (1,624      (1,859      (2,087

Unamortized Term Loan Debt Issuance Costs

     (4,052      (4,590      (5,177

Deferred Cash Payment Obligations, maturing in 2019

     19,345         18,608         17,910   
  

 

 

    

 

 

    

 

 

 

Total debt

     190,348         144,259         214,109   

Less: Current maturities

     (46,400      (1,821      (62,444
  

 

 

    

 

 

    

 

 

 

Total long-term debt

   $ 143,948       $ 142,438       $ 151,665   
  

 

 

    

 

 

    

 

 

 

ABL Facility

On June 11, 2013, the Company entered into a Loan Agreement (the “Asset-Based Credit Agreement”) by and among the Company, Bank of America, N.A., as Agent, SunTrust Bank, as Syndication Agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated and SunTrust Robinson Humphrey, Inc., as Joint Lead Arrangers and Bookrunners, and the Lenders that are party to the Asset-Based Credit Agreement (the “Asset-Based Lenders”).

Under the Asset-Based Credit Agreement, the Asset-Based Lenders agreed to provide a revolving senior secured asset-based credit facility (the “ABL Facility”) in an aggregate principal amount of $175,000. As of August 7, 2015, the aggregate commitments were permanently reduced, at the election of the Company, by $50,000, from $175,000 to $125,000.

Outstanding amounts under the ABL Facility will bear interest at a rate per annum equal to, at the Company’s election: (1) a base rate (equal to the greatest of (a) the prime lending rate, (b) the federal funds rate plus 0.50%, and (c) the 30-day LIBOR rate plus 1.00% per annum) (the “Base Rate”) plus an applicable margin (equal to a specified margin based on the interest rate elected by the Company, the fixed charge coverage ratio under the ABL Facility and the applicable point in the life of the ABL Facility) (the “Applicable Margin”), or (2) a LIBOR rate plus the Applicable Margin (the “LIBOR Rate”). Interest on loans under the ABL Facility bearing interest based upon the Base Rate will be due monthly in arrears, and interest on loans bearing interest based upon the LIBOR Rate will be due on the last day of each relevant interest period or, if sooner, on the respective dates that fall every three months after the beginning of such interest period.

In November 2014, the Company amended the ABL Facility. The main purpose for the amendment was to provide the Company additional flexibility in its execution of certain restructuring actions by increasing the cap on the amount that may be added back under the definition of earnings before interest, taxes, depreciation, and amortization (“EBITDA”) for non-recurring, unusual or extraordinary charges, business optimization expenses or other restructuring charges or reserves and cash expenses relating to earn outs or similar obligations.

In September 2015, the Company amended the ABL Facility. The main purposes for the amendment were to reduce the Applicable Margin for base rate and LIBOR loans, reduce the unused line fee rate and extend the scheduled maturity date. As amended, the maturity date is extended to September 16, 2020, which shall automatically become March 12, 2019 unless the Company’s term loan facility has been repaid, refinanced, redeemed, exchanged or amended prior to such date, in the case of any refinancing or amendment, to a date that is at least 90 days after the scheduled maturity date. In addition, the amendment provided for the withdrawal of Sun Trust Bank as a lender and the assumption of its commitments by the remaining lenders. As a result of this amendment, the Company recorded a loss on the early extinguishment of debt of $877, which represented the non-cash charge associated with the acceleration of a portion of the remaining unamortized debt issuance costs.

 

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

The effective interest rate under the ABL Facility for the three months ended June 25, 2016 was 5.66%, which includes interest on borrowings of $167, amortization of loan origination fees of $195 and commitment fees on unborrowed funds of $87. As of June 25, 2016, the outstanding balance on the ABL Facility was $46,400.

The Company may prepay advances under the ABL Facility in whole or in part at any time without penalty or premium. The Company will be required to make specified prepayments upon the occurrence of certain events, including: (1) the amount outstanding on the ABL Facility exceeding the Borrowing Base (as determined in accordance with the terms of the ABL Facility), and (2) the Company’s receipt of net cash proceeds of any sale or disposition of assets that are first priority collateral for the ABL Facility.

Pursuant to a Guaranty and Collateral Agreement dated as of June 11, 2013 (the “ABL Security Agreement”), the ABL Facility is secured by a first priority security interest in substantially all assets of the Company and the guarantor subsidiaries. Under an intercreditor agreement between the Asset-Based Lenders and the Term Loan Lenders, as defined and described below, the Asset-Based Lenders have a first priority security interest in substantially all working capital assets of the Company and the guarantor subsidiaries, and a second priority security interest in all other assets, subordinate only to the first priority security interest of the Term Loan Lenders in such other assets.

The Asset-Based Credit Agreement contains customary events of default and financial, affirmative and negative covenants, including but not limited to a springing financial covenant relating to the Company’s fixed charge coverage ratio and restrictions on indebtedness, liens, investments, asset dispositions and dividends and other restricted payments.

Term Loan

Also on June 11, 2013, the Company entered into a Credit Agreement (the “Term Loan Credit Agreement”) among the Company, Credit Suisse AG, as Administrative Agent and Collateral Agent, and the Lenders defined in the Term Loan Credit Agreement (the “Term Loan Lenders”). In November, 2014, the Company amended the Term Loan Credit Agreement. The main purpose for the amendment was to provide the Company additional flexibility in its execution of certain restructuring actions by increasing the cap on the amount that may be added back under the definition of consolidated EBITDA for non-recurring, unusual or extraordinary charges, business optimization expenses or other restructuring charges or reserves and cash expenses relating to earn outs or similar obligations.

Under the Term Loan Credit Agreement, the Term Loan Lenders agreed to make a term loan (the “Term Loan”) to the Company in aggregate principal amount of $145,000, including an original issue discount of $2,900. The outstanding principal amount of the Term Loan will bear interest at a rate per annum equal to the applicable LIBOR rate (with a 1% floor) plus 8.50%, or the base rate plus a margin of 7.50%. Interest on loans under the Term Loan Credit Agreement bearing interest based upon the base rate will be due quarterly in arrears, and interest on loans bearing interest based upon the LIBOR Rate will be due on the last day of each relevant interest period or, if sooner, on the respective dates that fall every three months after the beginning of such interest period.

The effective interest rate under the term loan credit facility for the three months ended June 25, 2016 was 10.84%, which includes interest on borrowings of $3,129, amortization of loan origination fees of $322 and original issue discount amortization of $119. On September 21, 2015, the Company elected to make a $10,000 prepayment on the Term Loan. As a result of the prepayment, the Company incurred a $200 early prepayment fee. As of June 25, 2016, the outstanding balance on the Term Loan Credit Agreement was $128,655, net of the remaining unamortized original issue discount of $1,624. The original issue discount is being amortized as additional interest expense on a straight-line basis over the life of the Term Loan.

The Term Loan matures on June 11, 2019. The Term Loan Credit Agreement requires prepayments at specified levels upon the Company’s receipt of net proceeds from certain events, including: (1) certain dispositions of property, divisions, business units or business lines; and (2) other issuances of debt other than Permitted Debt (as defined in the Term Loan Credit Agreement). The Term Loan Credit Agreement also requires prepayments at

 

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

specified levels from the Company’s excess cash flow. The Company is also permitted to voluntarily prepay the Term Loan in whole or in part. Any prepayments are to be made at par, plus an early payment fee calculated in accordance with the terms of the Term Loan Credit Agreement, as amended, if prepaid prior to October 31, 2016. See Note 18 – Subsequent Events

Pursuant to a Guarantee and Collateral Agreement dated as of June 11, 2013 (the “Term Loan Security Agreement”), the Term Loan is secured by a first priority security interest in substantially all assets of the Company and the guarantor subsidiaries. Under an intercreditor agreement between the Asset-Based Lenders and the Term Loan Lenders, the Term Loan Lenders have a second priority security interest in substantially all working capital assets of the Company and the subsidiary guarantors, subordinate only to the first priority security interest of the Asset-Based Lenders in such assets, and a first priority security interest in all other assets.

The Term Loan Credit Agreement contains customary events of default and financial, affirmative and negative covenants, including but not limited to quarterly financial covenants, relating to the Company’s (1) minimum interest coverage ratio and (2) maximum net total leverage ratio and restrictions on indebtedness, liens, investments, asset dispositions and dividends and other restricted payments.

The Term Loan required the Company to enter into an interest rate hedge, within 90 days of the Effective Date, in an amount equal to at least 50% of the aggregate principal amount outstanding under the Term Loan. The purpose of the interest rate hedge is to effectively subject a portion of the Term Loan to a fixed or maximum interest rate. As such, the Company entered into an interest rate swap agreement on August 27, 2013 that effectively fixes the interest payments on a portion of the Company’s variable-rate debt. The swap, which has a termination date of September 11, 2016, effectively fixes the LIBOR-based interest rate on the debt in the amount of the notional amount of the swap at 9.985%. The notional amount of the swap at June 25, 2016 was $72,500. During the three months ended June 25, 2016, the fair value of the derivative increased by $91 and a gain of $91 was recognized. During the three months ended June 27, 2015, the fair value of the derivative increased by $43 and a gain of $43 was recognized. During the six months ended June 25, 2016, the fair value of the derivative increased by $176 and a gain of $176 was recognized. During the six months ended June 27, 2015, the fair value of the derivative decreased by $9 and a loss of $9 was recognized. The gain or loss related to the derivative was recorded in “Change in fair value of interest rate swap” on the consolidated statement of operations.

Under this swap agreement, the Company will pay the counterparty interest on the notional amount at a fixed rate per annum of 1.485% and the counterparty will pay the Company interest on the notional amount at a variable rate per annum equal to the greater of 1-month LIBOR or 1.0%. The 1-month LIBOR rate applicable to this agreement was 0.449% at June 25, 2016. The notional amounts do not represent amounts exchanged by the parties, and thus are not a measure of exposure of the Company. The amounts exchanged are normally based on the notional amounts and other terms of the swaps. The variable rates are subject to change over time as 1-month LIBOR fluctuates.

The Company has estimated that the fair value of its Term Loan (valued under Level 3) as of June 25, 2016 approximated the carrying value of $130,279.

Deferred Cash Payment Obligations

In connection with the Reorganization Plan, general unsecured creditors are entitled to receive a deferred cash payment obligation of 20% of the allowed claim in full settlement of the allowed unsecured claims. Such payment accrues quarterly paid-in-kind interest of 5% per annum beginning on the Effective Date. Trade unsecured creditors had the ability to make a trade election to provide agreed upon customary trade terms. If the election was made, those unsecured trade creditors received a deferred cash payment obligation of 45% of the allowed claim in full settlement of those claims. As of the Effective Date, the deferred payment obligations under the trade elections began to accrue quarterly paid-in-kind interest of 10% per annum. All deferred cash payment obligations, along with interest paid-in-kind, are payable in December 2019.

 

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

The Company’s reconciliation of general unsecured claims was completed in fiscal 2015. As of June 25, 2016, the Company’s deferred payment obligations were $19,345, of which $3,086 represents a 20% recovery for the general unsecured creditors and $12,099 represents a 45% recovery for those creditors who elected to provide the Company standard trade terms with the remaining $4,160 related to accrued paid-in-kind interest.

NOTE 14 – CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Changes in accumulated other comprehensive income (loss) during the three and six month periods June 25, 2016 and June 27, 2015 were as follows:

 

     Foreign
Currency
Translation
 

Accumulated Other Comprehensive Income (Loss) at December 26, 2015

   $ (1,919

Other comprehensive income before reclassifications

     215   

Amounts reclassified from other comprehensive income

     —     
  

 

 

 

Accumulated Other Comprehensive Income (Loss) at March 26, 2016

   $ (1,704
  

 

 

 

Other comprehensive income before reclassifications

     124   

Amounts reclassified from other comprehensive income

     —     
  

 

 

 

Accumulated Other Comprehensive Income (Loss) at June 25, 2016

   $ (1,580
  

 

 

 
     Foreign
Currency
Translation
 

Accumulated Other Comprehensive Income (Loss) at December 27, 2014

   $ (819

Other comprehensive loss before reclassifications

     (498

Amounts reclassified from other comprehensive income

     —     
  

 

 

 

Accumulated Other Comprehensive Income (Loss) at March 28, 2015

   $ (1,317
  

 

 

 

Other comprehensive income before reclassifications

     84   

Amounts reclassified from other comprehensive income

     —     
  

 

 

 

Accumulated Other Comprehensive Income (Loss) at June 27, 2015

   $ (1,233
  

 

 

 

NOTE 15 – RESTRUCTURING

In the three and six months ended June 25, 2016 and June 27, 2015, the Company recorded restructuring costs associated with the closure or disposal of distribution centers, lease termination costs and severance related to headcount reductions. The following is a reconciliation of accrued restructuring costs for the three and six months ended June 25, 2016 and June 27, 2015:

 

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

     Distribution      Curriculum      Corporate      Total  

Accrued Restructuring Costs at December 26, 2015

   $ —         $ —         $ 375       $ 375   

Amounts charged to expense

     —           —           166         166   

Payments

     —           —           (288      (288
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued Restructuring Costs at March 26, 2016

   $ —         $ —         $ 253       $ 253   
  

 

 

    

 

 

    

 

 

    

 

 

 

Amounts charged to expense

     —           —           383         383   

Payments

     —           —           (460      (460
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued Restructuring Costs at June 25, 2016

   $ —         $ —         $ 176       $ 176   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Distribution      Curriculum      Corporate      Total  

Accrued Restructuring Costs at December 27, 2014

   $ —         $ —         $ 1,618       $ 1,618   

Amounts charged to expense

     —           —           1,982         1,982   

Payments

     —           —           (1,787      (1,787
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued Restructuring Costs at March 28, 2015

   $ —         $ —         $ 1,813       $ 1,813   
  

 

 

    

 

 

    

 

 

    

 

 

 

Amounts charged to expense

     —           —           —           —     

Payments

     —           —           (924      (924
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued Restructuring Costs at June 27, 2015

   $ —         $ —         $ 889       $ 889   
  

 

 

    

 

 

    

 

 

    

 

 

 

The $383 and $0 charged for the three months ended June 25, 2016 and June 27, 2015 and the $549 and $1,982 for the six months ended June 25, 2016 and June 27, 2015, were included in facility exit costs and restructuring in the Condensed Consolidated Statements of Operations.

NOTE 16 – SEGMENT INFORMATION

The Company determines its operating segments based on the information utilized by the chief operating decision maker, the Company’s Chief Executive Officer, to allocate resources and assess performance. Based on this information, the Company has determined that it operates in two operating segments, Distribution and Curriculum, which also constitute its reportable segments. The Company operates principally in the United States, with limited operations in Canada. The Distribution segment offers products primarily to the pre-kindergarten through twelfth grade (“preK-12”) education market that include basic classroom supplies and office products, instructional teaching materials, indoor and outdoor furniture and equipment, physical education equipment, classroom technology, and planning and organizational products. The Curriculum segment is a publisher of proprietary and non-proprietary core, supplemental and intervention curriculum in the categories of science, math, reading and intervention in the preK-12 education market. The accounting policies of the segments are the same as those described in Summary of Significant Accounting Policies as included in the Company’s Transition Report on Form 10-K for the short year ended December 26, 2015.

The Company measures profitability of its operating segments at a gross profit level. This measure of profitability for the segments is a change from prior periods which reported operating income or loss at the segment level. Since the majority of SG&A costs are managed centrally and allocation methodologies of these costs to the operating segments is arbitrary, the Company’s chief operating decision maker does not review segment profitability using operating profit, only gross profit. Accordingly, the segment information reports gross profit at the segment level. All prior periods were recast to conform to this new measure.

 

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SCHOOL SPECIALTY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

 

     Three Months Ended
June 25, 2016
    Three Months Ended
June 27, 2015
    Six Months Ended
June 25, 2016
    Six Months Ended
June 27, 2015
 

Revenues:

        

Distribution

   $ 119,173      $ 116,210      $ 196,981      $ 194,767   

Curriculum

     26,685        24,760        42,602        37,785   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 145,858      $ 140,970      $ 239,583      $ 232,552   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit:

        

Distribution

   $ 41,761      $ 40,973      $ 69,254      $ 69,439   

Curriculum

     13,838        9,100        21,810        14,966   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 55,599      $ 50,073      $ 91,064      $ 84,405   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     2,004        (7,292     (10,008     (25,900

Interest expense, net

     4,364        4,934        8,669        9,311   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

   $ (2,360   $ (12,226   $ (18,677   $ (35,211
  

 

 

   

 

 

   

 

 

   

 

 

 
     June 25, 2016     December 26, 2015     June 27, 2015        

Identifiable assets:

        

Distribution

   $ 235,888      $ 173,838      $ 240,009     

Curriculum

     95,408        88,796        96,475     

Corporate assets

     14,613        11,855        14,784     
  

 

 

   

 

 

   

 

 

   

Total

   $ 345,909      $ 274,489      $ 351,268     
  

 

 

   

 

 

   

 

 

   
     Three Months Ended
June 25, 2016
    Three Months Ended
June 27, 2015
    Six Months Ended
June 25, 2016
    Six Months Ended
June 27, 2015
 

Depreciation and amortization of intangible assets and development costs:

        

Distribution

   $ 3,035      $ 5,340      $ 6,513      $ 9,468   

Curriculum

     2,393        5,505        4,485        7,922   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 5,428      $ 10,845      $ 10,998      $ 17,390   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenditures for property, plant and equipment, intangible and other assets and development costs:

        

Distribution

   $ 5,033      $ 1,320      $ 6,486      $ 5,089   

Curriculum

     1,300        1,660        2,313        3,715   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 6,333      $ 2,980      $ 8,799      $ 8,804   
  

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 17 – COMMITMENTS AND CONTINGENCIES

Various claims and proceedings arising in the normal course of business are pending against the Company. The results of these matters are not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

NOTE 18 – SUBSEQUENT EVENTS

On July 26, 2016, the Company sold its 35% interest in Carson Dellosa Publishing LLC (Note 11 – Investment in Unconsolidated Affiliate) for approximately $10,000. In the third quarter of fiscal 2016, the Company will record a non-operating gain on disposal of approximately $9,300. In accordance with the Term Loan Agreement, the company expects approximately $8,200 of the net cash proceeds from this sale to be used to pay down the Term Loan and any remaining net cash proceeds used to pay down the ABL.

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

Quarterly Overview

School Specialty is a leading distributor of supplies, furniture, technology products, supplemental learning products (“instructional solutions”) and curriculum solutions, primarily to the education marketplace. The Company provides educators with its own innovative and proprietary products and services, from basic school supplies to 21st century classroom designs to Science, Reading, Language and Math teaching materials, as well as planning and development tools. Through its nationwide distribution network, School Specialty also provides its customers with access to a broad spectrum of trusted, third-party brands across its business segments. This assortment strategy enables the Company to offer a broad range of products primarily serving the preK-12 education market at the state, district and school levels. The Company is expanding its presence outside the education market into channels such as partnerships with e-tailers, retailers and healthcare facilities.

The Company changed its fiscal year end from the last Saturday in April to the last Saturday in December. The Company has reported its financial results for the period of April 26, 2015 to December 26, 2015 (the “short year 2015”) on a Transition Report on Form 10-K. As used in this Quarterly Report on Form 10-Q, “fiscal 2015” and “fiscal 2014” refer to the Company’s twelve-months ended April 25, 2015 and April 26, 2014, respectively. The December 28, 2014 to March 28, 2015 period will be referred to as “first quarter 2015” and the period from March 29, 2015 to June 27, 2015 will be referred to as “second quarter 2015” in this Quarterly Report on Form 10-Q. Collectively, the first quarter 2015 and second quarter 2015 will be referred to as the “first half 2015”.

Our goal is to grow profitably as a leading provider of supplies, products, services and curriculum to the education market. After five consecutive years of revenue declines, due primarily to macroeconomic conditions that had a negative impact on school spending, our revenues grew 2.4% in calendar 2015 versus calendar 2014. Revenue growth continued in the first half of fiscal 2016 with revenues increasing 3.0% compared to the prior-year first six months ended in June 2015. We believe we can continue to drive revenue growth in future years and balanced revenue growth across all product categories is a core objective for the Company. We expect to achieve this goal over the long-term through an organic growth strategy based on leveraging our strong brand names and distribution capabilities and transforming the Company’s sales and marketing to better leverage our deep category and market expertise. Our growth strategy focuses on both new customer acquisition and the retention and further penetration of existing customers while exploring new markets or revenue streams.

In addition to driving profitable growth, our organization is focused on improving the efficiency and effectiveness of our operating infrastructure and distribution network. Initiatives over the past several quarters have resulted in a lower cost structure while also improving service levels to customers. As a result, our SG&A expenses declined in both dollars and as a percent of revenue in short year 2015. This trend continued in the first six months of fiscal 2016 (down $4.8 million, or 335 basis points). Our operating loss margins improved from 11.1% of revenue for the six months ended June 27, 2015 to 4.2% for the six months ended June 25, 2016. The cost efficiencies realized have allowed us to continue to invest in areas that will drive revenue growth or improve the effectiveness of our operations.

Our business and consequently our working capital needs are highly seasonal, with peak sales levels occurring from June through September. During this period, we receive, ship and bill the majority of our business so that schools and teachers receive their products by the start of each school year. Our inventory levels increase in April through June in anticipation of the peak shipping season. The majority of shipments are made between June and September and the majority of cash receipts are collected from September through December. With the change in our fiscal year end from the last Saturday in April to the last Saturday in December, we expect to ship more than 50% of our revenue and earn more than 100% of our annual net income from June through September of our fiscal year and operate at a net loss from October through May.

 

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Results of Operations

Three Months Ended June 25, 2016 Compared to Three Months Ended June 27, 2015

Revenues

Revenue of $145.9 million for the three months ended June 25, 2016 increased by $4.9 million, or 3.5%, as compared to the three months ended June 27, 2015.

Distribution segment revenues of $119.2 million for the three months ended June 25, 2016 increased by 2.5%, or $3.0 million compared to the three months ended June 27, 2015. Revenues for Projects and Loose Furniture, increased by $1.6 million and $4.0 million, respectively, which were partially offset by declines of $0.7 million and $1.4 million in our AV Tech and Agendas categories, respectively. The increased revenues in our Furniture category was related to increased spending in new school construction, strong growth in our private label furniture lines, the introduction of new products and more effective sales and marketing efforts. Strong year-over-year order trends in the Furniture category contributed to the revenue increases, and these strong order trends have continued into the first part of the third quarter. Revenues in the AV Tech category are down due to a decrease in demand for the Company’s listening devices. Revenues in the Agenda category have continued to decline as we believe schools have de-emphasized paper-based planners and shifted remaining purchases to those with less content.

Curriculum segment revenues of $26.7 million for the three months ended June 25, 2016 increased by 7.8%, or $1.9 million, from the three months ended June 27, 2015. This increase was primarily related to the Science category as widespread acceptance of FOSS products, which are aligned with Next Generation Science Standards, continued in the second quarter of fiscal 2016. The Reading category experienced growth in the second quarter of 2.2% as the combination of product enhancements and an improved sales structure had a positive impact.

Gross Profit

Gross profit for the three months ended June 25, 2016 was $55.6 million, as compared to $50.1 million for the three months ended June 27, 2015. Gross margin for the three months ended June 25, 2016 was 38.1%, as compared to 35.5% for the three months ended June 27, 2015. Lower product development amortization expense, combined with product development impairment charges taken in the prior year contributed to the increased gross margin year-over-year.

Distribution segment gross margin was 35.0% for the three months ended June 25, 2016, as compared to 35.2% for the three months ended June 27, 2015. A change in mix within the segment reduced gross margin by approximately 100 basis points. Increased direct-ship freight costs resulted in approximately 30 basis points of gross margin decline. Partially offsetting these declines was lower product development amortization, in the current year’s quarter, which contributed 110 basis points of gross margin improvement. The segment recorded $1.3 million of accelerated product development amortization in the second quarter of 2015.

Curriculum segment gross margin was 51.9% for the three months ended June 25, 2016, as compared to 36.8% for the three months ended June 27, 2015. Decreased product development amortization year-over-year, resulted in 1,240 basis points of improvement in gross margin. In the second quarter of 2015, the segment recorded $2.5 million of accelerated product development amortization. Favorable product mix driven by a higher margin in Science content-related products, particularly FOSS, contributed to the remaining gross margin favorability in the Curriculum segment.

Selling, General and Administrative Expenses

SG&A includes selling expenses, the most significant of which are wages and commissions; operations expenses, which includes customer service, warehouse and out-bound freight costs; catalog costs; general administrative overhead, which includes information systems, accounting, legal and human resources; and depreciation and intangible asset amortization expense.

SG&A decreased $1.5 million from $54.7 million for the three months ended June 27, 2015 to $53.2 million for the three months ended June 25, 2016. As a percent of revenue, SG&A decreased from 38.8% for the three months ended June 27, 2015 to 36.5% for the three months ended June 25, 2016.    

Depreciation and amortization expense in SG&A was down approximately $1.1 million in the second quarter of 2016, as compared to the second quarter of 2015 due partially to the prior year write-off of the intangible asset associated with Agenda content. Catalog expense was down $0.4 million during the first half of 2016 compared to

 

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the first half of 2015. This decrease is associated with the Company’s continued strategy of increasing customer interactions through digital marketing campaigns and more efficient use of print catalogs. These reductions to SG&A were partially offset by $0.5 million of additional performance-based incentive compensation expense in the current year’s second quarter as compared to the second quarter of 2015. Compensation and benefit costs, excluding performance-based compensation, were relatively flat in the second quarter of 2016 as compared to the second quarter of 2015.

Facility exit costs and restructuring

During the three month period ended June 25, 2016, the Company recorded $0.4 million, of facility exit costs and restructuring charges, all of which related to severance.

Impairment Charges

The Company recorded an impairment charge of $2.7 million in the second quarter of 2015 related to the amortizable asset associated with the agenda product category’s digital content and digital delivery development efforts. The Company is focused on the print-based agenda products and does not currently plan to continue to invest in the digital agenda product offerings.

Interest Expense

Interest expense decreased from $5.0 million for the three months ended June 27, 2015 to $4.5 million for the three months ended June 25, 2016. This decrease was related to the reduction in cash interest of $0.5 million due primarily to a $19.5 million lower average outstanding debt balance in the second quarter of 2016 as compared to the second quarter of 2015. Approximately $12.2 million of the reduction in the average outstanding debt balance was related to the Company’s term loan debt. A $0.1 million reduction in unused ABL line fees also contributed to the decrease in cash interest expense. Non cash interest and amortization of debt fees was flat at $1.0 million for the three months ended June 25, 2016 and June 27, 2015.

Change in Fair Value of Interest Rate Swap

The Company has an interest rate swap agreement that effectively fixes the interest payments on a portion of the Company’s variable-rate debt. The swap, which has a termination date of September 11, 2016, effectively fixes the LIBOR-based interest rate on the portion of the debt equivalent to the notional amount of the swap at 9.985%. The notional amount of the swap at June 25, 2016 was $72.5 million. As of June 25, 2016, the fair value of the derivative increased by $0.1 million and, accordingly, a non-cash gain of $0.1 million was recorded.

Provision for (Benefit from) Income Taxes

The benefit from income taxes was $0.4 million for the three months ended June 25, 2016, as compared to a provision for income taxes of $0.2 million for the three months ended June 27, 2015. The tax benefit recorded in the three months ended June 25, 2016 is expected to be entirely offset by tax provisions recognized against the net income expected to be generated over the remainder of 2016.

Six Months Ended June 25, 2016 Compared to Six Months Ended June 27, 2015

Revenues

Revenue of $239.6 million for the six months ended June 25, 2016 increased by $7.0 million, or 3.0%, as compared to the six months ended June 27, 2015.

Distribution segment revenues of $197.0 million for the six months ended June 25, 2016 increased by 1.1%, or $2.2 million, from the six months ended June 27, 2015. Revenues from our two largest product categories, Supplies and Loose Furniture, increased by $1.3 million and $6.8 million, respectively, partially offsetting declines of $1.4 million and $3.8 million in our Agendas and AV Tech categories, respectively. The increased revenues in our Furniture category was related to increased spending in new school construction, strong growth in our private label furniture lines, the introduction of new products and more effective sales and marketing efforts. Strong year-over-year

 

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order trends in the Supplies and Loose Furniture categories contributed to the revenue increases. Entering the second half of the year, Loose Furniture order trends have continued to show growth while Supplies category order trends have been consistent with prior year. Revenues in the AV Tech category are down due to a decrease in demand for the Company’s listening devices; in the prior year, the product category benefited from several large orders driven by common core assessments. The Agendas category has continued to decline as we believe schools have de-emphasized paper-based planners and shifted remaining purchases to those with less content. We expect the rate of decline for Agenda products to lessen, though, and current year order trends have been consistent with our internal expectations.

Curriculum segment revenues of $42.6 million for the six months ended June 25, 2016 increased by 12.8%, or $4.8 million, from the six months ended June 27, 2015. This increase was related to the Science category as revenue for the Reading category was relatively flat year-over-year. Strong acceptance of the Science unit’s FOSS products, which are aligned with Next Generation Science Standards, continued in the first half of fiscal 2016 and contributed to the increase. Product enhancements in the Reading category, combined with structural changes to our Reading sales organization, are helping to stabilize the year-over-year revenue performance as the category generated modest growth in the first half of 2016.

Gross Profit

Gross profit for the six months ended June 25, 2016 was $91.1 million, as compared to $84.4 million for the six months ended June 27, 2015. In the six months ended July 25, 2016, increased revenues contributed $2.8 million of additional gross profit and lower product development amortization expense contributed $4.5 million of the increase. Gross margin for the six months ended June 25, 2016 was 38.0%, as compared to 36.3% for the six months ended June 27, 2015.

Distribution segment gross margin was 35.2% for the six months ended June 25, 2016, as compared to 35.6% for the six months ended June 27, 2015. Reduced product development amortization in six months ended June 25, 2016 as compared to the six months ended June 27, 2015 provided 60 basis points of gross margin improvement. A change in product mix within the segment, combined with a shift in mix towards vendor-direct shipments versus stock shipment, reduced gross margin in the segment by approximately 70 basis points. The remaining decrease in gross margin was related to a combination of increased direct-ship freight costs and lower Project Furniture margins in the first half of 2016 as compared to the first half of 2015 as the prior year benefited from a higher level of favorable cost variances recognized in the period.

Curriculum segment gross margin was 51.2% for the six months ended June 25, 2016, as compared to 39.6% for the six months ended June 27, 2015. Approximately 950 basis points of this increase is primarily related to a decrease in product development amortization of $3.3 million in the first half of 2016 compared to the first half of 2015. Favorable product mix driven by a higher margin in Science content-related products, particularly FOSS, contributed to the remaining gross margin favorability in the Curriculum segment.

Selling, General and Administrative Expenses

SG&A decreased $4.8 million from $105.3 million for the six months ended June 27, 2015 to $100.5 million for the six months ended June 25, 2016. As a percent of revenue, SG&A decreased from 45.3% for the six months ended June 27, 2015 to 42.0% for the six months ended June 25, 2016.

The Company incurred $4.5 million of transition expenses associated with process improvement initiatives in the six months ended June 27, 2015, as compared to $1.5 million in the six months ended June 25, 2016. Compensation and benefit costs, excluding performance-based compensation, decreased $1.0 million due to a lower average headcount in the first half of 2016 as compared to the first half of 2015. As planned, the savings associated with the reduction in the number of associates was offset by incremental expense related to transferring certain fulfillment activities for customers in the western United States to a third-party logistics provider to better service those customers. The resulting shorter lead times for our west coast customers is expected to enable revenue growth. Performance-based incentive compensation expense was approximately $1.6 million in the first half of 2016 as compared to $0.5 million in the first half of 2015. We recognized a net foreign currency gain in the first half of 2016 of $0.7 million due to the Canadian dollar strengthening versus the U.S. dollar in the period; this compares to a net foreign currency loss of $0.4 million in the six months ended June 27, 2015.

 

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Depreciation and amortization expense in SG&A was down approximately $1.7 million in the first half of 2016, as compared to the first half of 2015 due partially to the prior year write-off of the intangible asset associated with Agenda content.

Facility exit costs and restructuring

During the six month period ended June 25, 2016, the Company recorded $0.5 million of facility exit costs and restructuring charges, which were all related to severance. During the six months ended June 27, 2015, the Company recorded $2.3 million of facility exit costs and restructuring charges, of which $2.0 million related to severance.

Impairment Charges

The Company recorded an impairment charge of $2.7 million in the first half of 2015 related to the amortizable asset associated with the agenda product category’s digital content and digital delivery development efforts. The Company is focused on the print-based agenda products and does not currently plan to continue to invest in the digital agenda product offerings.

Interest Expense

Interest expense decreased from $9.3 million for the six months ended June 27, 2015 to $8.8 million for the six months ended June 25, 2016. The decrease in interest expense was related to reduced cash interest expense of $0.9 million associated primarily with a $17.1 million lower average outstanding debt balances in the first six months of the current year. Approximately $12.2 million of the reduction in the average outstanding debt balance was related to the Company’s term loan debt. A $0.2 million reduction in unused ABL line fees also contributed to the decrease in cash interest expense. This decrease was partially offset by $0.4 million of additional non cash interest and amortization of debt fees during the six months ended June 25, 2016 as compared to the six months ended June 27, 2015.

Change in Fair Value of Interest Rate Swap

As of June 25, 2016, the fair value of the interest rate swap increased by $0.2 million and, accordingly, a non-cash gain of $0.2 million was recorded. For the six months ended June 27, 2015, there was no change in the fair value of the swap.

Provision for (Benefit from) Income Taxes

The benefit from income taxes was $4.4 million for the six months ended June 25, 2016, as compared to a provision for income taxes of $0.6 million for the six months ended June 27, 2015.

The effective tax rate for the six months ended June 25, 2016 and the six months ended June 27, 2015 was 23.5% and -2.5%, respectively. The effective tax rate for the six months ended June 25, 2016 represents the Company’s current estimate of the fiscal 2016 full year effective tax rate. The tax benefit recorded in the six months ended June 25, 2016, along with the associated refundable income taxes reflected in the current assets of the Consolidated Balance Sheets, are expected to be entirely offset by tax provisions recognized against the net income expected to be generated over the remainder of 2016. The tax expense for the six months ended June 27, 2015 primarily related to foreign taxes and alternative minimum tax.

Liquidity and Capital Resources

At June 25, 2016, the Company had net working capital of $107.6 million, an increase of $4.8 million as compared to the six months ended June 27, 2015. The Company’s capitalization at June 25, 2016 was $258.7 million and consisted of total debt of $190.3 million and stockholders’ equity of $68.4 million.

 

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Net cash used by operating activities was $41.0 million and $48.8 million for the six months ended June 25, 2016 and June 27, 2015, respectively. The decrease in cash used by operating activities was related to a year-over-year reduction in the net loss for the quarter, partially offset by an increase in net working capital growth in the first half of 2016 versus the first half of 2015. Net loss decreased by $21.5 million in the six months ended June 25, 2016, as compared to the six months ended June 27, 2015, although $10.9 million of the decreased net loss was attributable to a reduction in non-cash items, most notably depreciation, amortization and impairment. Two of the larger variances within net working capital were a $3.4 million increase in refundable income taxes associated with the tax benefit recognized in the first half of 2016 and the first quarter payment of prior year performance-based compensation for which payment in the prior year was zero. A year-over-year working capital improvement in accounts payable is primarily related to timing and a portion of the accounts payable improvement was offset by a year-over-year reduction in accounts receivable collections in the first half of 2016 due to the strong year end collections in December 2015.

Net cash used in investing activities was $8.8 million and $7.2 million for the six months ended June 25, 2016 and June 27, 2015, respectively. For full year fiscal 2016, the Company expects cash used in investing activities to be between $16.0 million and $17.0 million as compared to $14.1 million in calendar 2015. The anticipated full year increase is related to the implementation of a new phone system, which will provide necessary functionality and feature enhancements to our call centers and other key business application tools to improve operating effectiveness and lower costs. The implementation of the new phone system began during the six months ended June 25, 2016, and the expenditures for the phone system are contributing to the year-over-year increase in net cash used in investing activities.

Net cash provided from financing activities was $44.6 million and $53.9 million for the six months ended June 25, 2016 and June 27, 2015, respectively. In both periods, the net cash provided from financing activities represents combined net borrowings from the ABL Facility, partially offset by paydowns of our Term Loan facilities. These net borrowings were used to fund the Company’s cash used in operations and investing activities. Outstanding borrowings on the ABL Facility were $46.4 million as of June 25, 2016, while the excess availability on that date for the ABL Facility was $59.4 million. We expect the outstanding ABL borrowings of $46.4 million to be repaid with positive operating cash flows over the remainder of 2016. The Company’s remaining gross Term Loan balance as of June 25, 2016 was $130.3 million.

The Company’s ABL Facility and Term Loan contain customary events of default and financial, affirmative and negative covenants. The Company was in compliance with all such covenants during the three and six month periods ended June 25, 2016. Based on current projections, the Company believes it will maintain compliance with these covenants throughout the next twelve months.

We believe that our cash flow from operations, borrowings available from our existing credit facility and other sources of capital will be sufficient to meet our liquidity requirements for operations, including anticipated capital expenditures and our contractual obligations for the next twelve months.

Fluctuations in Quarterly Results of Operations

Our business is subject to seasonal influences. Our historical revenues and profitability have been dramatically higher in the periods from June through September, primarily due to increased shipments to customers coinciding with the start of each school year. Quarterly results also may be materially affected by variations in our costs for the products sold, the mix of products sold and general economic conditions. Therefore, results for any quarter are not indicative of the results that we may achieve for any subsequent fiscal quarter or for a full fiscal year.

Inflation

Inflation, particularly in energy costs, has had and is expected to have an effect on our results of operations and our internal and external sources of liquidity.

Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q that are not historical are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include: (1)

 

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statements made under Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, including, without limitation, statements with respect to our internal growth plans, projected revenues and revenue growth, margin improvement, capital expenditures, adequacy of capital resources and ability to comply with financial covenants; and (2) statements included or incorporated by reference in our future filings with the Securities and Exchange Commission. Forward-looking statements also include statements regarding the intent, belief or current expectation of School Specialty or its officers. Forward-looking statements include statements preceded by, followed by or that include forward-looking terminology such as “may,” “should,” “believes,” “expects,” “anticipates,” “estimates,” “continues,” “projects” or similar expressions.

All forward-looking statements included in this Quarterly Report are based on information available to us as of the date hereof. We do not undertake to update any forward-looking statements that may be made by us or on our behalf, in this Quarterly Report on Form 10-Q or otherwise. Our actual results may differ materially from those contained in the forward-looking statements identified above. Factors which may cause such a difference to occur include, but are not limited to, the risk factors set forth in Item 1A, “Risk Factors” of our Transition Report on Form 10-K for the thirty-five weeks ended December 26, 2015.

 

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in qualitative and quantitative disclosures about market risk from what was reported in our Transition Report on Form 10-K for the thirty-five weeks ended December 26, 2015.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on an evaluation as of the end of the period covered by this quarterly report, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) were effective for the purposes set forth in the definition of the Exchange Act rules.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter ended June 25, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

ITEM 6. Exhibits

See the Exhibit Index, which is incorporated herein by reference.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

SCHOOL SPECIALTY, INC.

(Registrant)

                August 2, 2016    

/s/ Ryan M. Bohr

                Date     Ryan M. Bohr
    Executive Vice President and Chief Financial Officer
    (Principal Financial Officer)
                August 2, 2016    

/s/ Kevin L. Baehler

                Date     Kevin L. Baehler
    Senior Vice President and Chief Accounting Officer
    (Principal Accounting Officer)

 

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EXHIBIT INDEX

 

Exhibit No.

  

Description

  31.1    Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002, by Chief Executive Officer.
  31.2    Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002, by Chief Financial Officer.
  32.1    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002, by Chief Executive Officer.
  32.2    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002, by Chief Financial Officer.
101    The following materials from School Specialty, Inc.’s. Quarterly Report on Form 10-Q for the quarter ended March 26, 2016 are filed herewith, formatted in XBRL (Extensive Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statement of Operations, (iii) the Condensed Consolidated Statement of Comprehensive Income, (iv) the Condensed Consolidated Statement of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.

 

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