—  Continued strong free cash flow – $90.2 million for fiscal 2010, or
$4.78 per diluted share
— Strengthening balance sheet as evidenced by $52.6 million in debt
reduction and $19.2 million of increased cash
— Continued soft furniture sales and business unit divestiture drove $39.1
million decrease in Q4 revenues
— Ongoing cost-reduction efforts lead to $46.5 million reduction in SG&A
expenses


School Specialty (Nasdaq:SCHS) today reported fiscal fourth quarter and year-end results that reflect continuing strong free cash flow and solid progress in containing costs to counter a depressed school funding environment. While revenue for both the fourth quarter and fiscal 2010 were well below the prior-year’s results due to an unprecedented slow-down in school spending, operational discipline and business consolidations enabled a 140-basis-point improvement in gross margin and a 90-basis-point rise in operating margin for the year, resulting in a slight decline in earnings per share.


Chief Executive Officer David J. Vander Zanden said School Specialty made significant progress during an extremely difficult year for education budgets and school spending. “I am very proud of our associates. They pulled together to successfully complete a number of important initiatives across the corporation that were focused both on executing planned business realignments and on softening the impact of a severe reduction in education spending,” said Vander Zanden. “While revenue declined more than 14 percent, our operating income was down only 4 percent. Free cash flow was exceptional, thanks in large part to new processes and systems that allow our associates to create permanent efficiencies in working capital management. During the year we completed a major restructuring of our Educational Resources group, gained new curriculum and educational technology offerings to support our growth strategy, and negotiated a more flexible credit agreement to fund our future capital needs.”


Continued working capital improvements helped drive fiscal 2010 free cash flow to $90.2 million, or $4.78 per diluted share. Much of the available cash was used to reduce total debt, which declined $52.6 million over the 12-month period. In addition, the company’s year-end cash balance increased $19.2 million compared to the prior year.


Fourth Quarter Financial Results

  —  Revenue for the fourth quarter of fiscal 2010 was $117.0 million,
compared with $156.2 million in the prior year’s final quarter. The
decrease was due primarily to a combination of decreased furniture
revenue of $14.1 million plus the impact related to the divestiture of
School Specialty Publishing, which generated $9.3 million of the revenue
in last year’s fourth quarter. The impact of continued difficult general
economic conditions on school spending, along with business
integration-related decisions, comprised the balance of the decline.
Partially offsetting the decline was $1.3 million of incremental revenue
associated with the acquisition of AutoSkill International.

— Gross profit was $50.8 million compared with $62.2 million in last
year’s fourth quarter. Consolidated gross margin improved 360 basis
points to 43.4 percent from the prior year’s 39.8 percent, reflecting a
more favorable product mix within both the Accelerated Learning
(formerly named the Publishing segment) and Educational Resources
segments.

— Selling, general and administrative expenses declined $11.8 million to
$64.7 million (55.3 percent of revenue) from the prior year’s $76.5
million (49.0 percent of revenue). The decrease is attributable to the
company’s cost-reduction efforts over the past 12 months, supply chain
efficiencies and lower volume.

— The operating loss for the fourth quarter was $13.9 million, compared to
an operating loss of $14.3 million last year.

— Net interest expense and other expense in the fourth quarter of fiscal
2010 increased $0.3 million to $7.7 million, compared to the same period
last year. The increase was attributable to non-cash interest expense of
$3.4 million as compared to $3.1 million in last year’s fourth quarter,
as a result of the company adopting FASB ASC Topic 470-20 regarding new
accounting rules for convertible debt. Interest expense savings related
to decreased overall debt balances were offset by accelerated
amortization of debt issuance costs related to the retired revolving
credit facility of $0.4 million, or $0.01 per share.

— Net loss in the fourth quarter was $13.7 million ($0.73 per share)
compared to a net loss of $13.2 million ($0.70 per share) in the
comparable quarter last year. Both periods included non-cash charges
related to convertible debt accounting, which increased the fourth
quarter loss by $0.11 per share in fiscal 2010 and $0.10 per share in
fiscal 2009. Earnings per share in fiscal 2010 was reduced by $0.02 for
the company’s share of the net loss from its minority interest in
Carson-Dellosa Publishing, LLC, which was formed during fiscal 2010’s
second quarter in connection with the School Specialty Publishing
divestiture.


Fiscal 2010 Financial Results

  —  Consolidated revenue for fiscal 2010 was $896.7 million compared with
$1,047.0 million last year. The two primary drivers of this reduction
were lower levels of school construction and renovations, which resulted
in a $55.9 million decline in furniture revenue, and an expected $21
million decline in state science adoption revenue. In addition, the
divestiture of School Specialty Publishing resulted in $12.9 million of
the revenue decline, which was partially offset by $5.9 million of
incremental revenue associated with the acquisition of AutoSkill
International. The remaining decline was related to the impact of
general economic conditions on school spending.

— Gross profit for the year was $379.1 million compared with $428.6
million last year. Gross margin increased 140 basis points to 42.3
percent versus last year’s 40.9 percent. The improvement was primarily
due to product pricing and successful vendor costing initiatives.
Favorable product mix, particularly in the Accelerated Learning segment,
also contributed to the increased gross margin.

— Selling, general and administrative expenses declined $46.5 million to
$304.4 million (34.0 percent of revenue), from the prior year’s $350.9
million (33.5 percent of revenue). Contributing to the decline were
cost reductions from operational consolidations, efficiencies in supply
chain operations and multiple expense control efforts companywide.

— Operating income for fiscal 2010 was $74.7 million compared to $77.7
million in fiscal 2009. Improved gross margin contributed to a
90-basis-point increase in operating margin from 7.4 percent in fiscal
2009 to 8.3 percent in fiscal 2010.

— Interest expense and other expense for fiscal 2010 declined $2.1 million
to $30.5 million from the prior year’s $32.6 million, the result of a
decline in average debt balances of approximately $90 million. The
reduction includes the elimination of an accounts receivable
securitization program in fiscal 2009. These totals also include
non-cash interest expense related to new accounting rules for
convertible debt of $13.1 million in fiscal 2010 and $12.0 million in
fiscal 2009.

— Net income for fiscal 2010 was $25.9 million ($1.37 per diluted share)
compared with $27.1 million ($1.44 per diluted share). Both periods
included non-cash charges related to convertible debt accounting, which
reduced diluted earnings per share by $0.42 in fiscal 2010 and $0.39 in
fiscal 2009. Fiscal 2010 diluted earnings per share has been reduced by
$0.04 for the company’s share of the net loss from its minority interest
in Carson-Dellosa Publishing, LLC. Diluted earnings per share for fiscal
2010 and fiscal 2009, excluding the impact of the accounting change for
convertible debt, were $1.78 and 1.83, respectively.

— The company’s fiscal 2010 free cash flow totaled $90.2 million. The
company used its free cash flow to pay down debt, fund its acquisition
of AutoSkill International and purchase the Think Math!(TM) curriculum.
In addition, the company increased its end-of-year cash balance by $19.2
million.


Outlook


School Specialty is expecting fiscal 2011 revenue to be in a range of $790 million to $825 million. Excluding revenue from divestitures, this is a decline of approximately 6 percent to 10 percent from fiscal 2010 levels. The continued expected softness in the furniture market represents approximately 70 percent of the volume decline. Diluted earnings per share is expected to be in the range of $1.00 to $1.30 in fiscal 2011, or $1.32 to $1.62 excluding the impact of the convertible debt accounting. Fiscal 2011 free cash flow is expected to be in a range of $60 million to $70 million, which includes an approximate $16 million cash tax payment associated with the expected repurchase obligation under the $133 million convertible notes.


“The funding environment will continue to challenge our revenue and margins in fiscal 2011, especially for our supplies and furniture businesses where price is becoming more important. The back-to-school season is expected to be very difficult for most districts across America. Looking beyond the summer, we have several new initiatives, including a contract with U.S. Communities, a non-profit government purchasing cooperative, and the introduction of a new private label furniture line that we expect to help maintain revenue and margins in the second half of the year. We have also just signed a new consumer-focused contract with Amazon.com that we anticipate will generate new revenue in the second half of the year. We are cautiously optimistic in our belief that fiscal 2011 will reflect the bottom of the funding decline and that states will begin to experience revenue growth over the coming months,” said Vander Zanden.


Conference Call


School Specialty will host a conference call to discuss its fiscal 2010 financial results. The conference call begins today, June 10, at 10:00 a.m. Central (11:00 a.m. Eastern). The call will be simultaneously broadcast in the Investors section of the School Specialty web site at www.schoolspecialty.com, and a replay of the call will be available.


About School Specialty, Inc.


School Specialty is a leading education company that provides innovative and proprietary products, programs and services to help educators engage and inspire students of all ages and abilities to learn. The company designs, develops, and provides preK-12 educators with the latest and very best curriculum, supplemental learning resources, and school supplies. Working in collaboration with educators, School Specialty reaches beyond the scope of textbooks to help teachers, guidance counselors and school administrators ensure that every student reaches his or her full potential.


For more information about School Specialty, visit www.schoolspecialty.com.


Cautionary Statement Concerning Forward-Looking Information


Any statements made in this press release about future results of operations, expectations, plans or prospects, including but not limited to statements included under the heading “Outlook,” constitute forward-looking statements. Forward-looking statements also include those preceded or followed by the words “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “should,” “plans,” “targets” and/or similar expressions. These forward-looking statements are based on School Specialty’s current estimates and assumptions and, as such, involve uncertainty and risk. Forward-looking statements are not guarantees of future performance, and actual results may differ materially from those contemplated by the forward-looking statements because of a number of factors, including the factors described in Item 1A of School Specialty’s Annual Report on Form 10-K for the fiscal year ended April 25, 2009, which factors are incorporated herein by reference. Except to the extent required under the federal securities laws, School Specialty does not intend to update or revise the forward-looking statements.

                        -Financial Tables Follow-

                               SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
Unaudited

Three Months Ended Fiscal Year Ended
———————— ————————

(As (As
Adjusted)* Adjusted)*
April 24, April 25, April 24, April 25,
2010 2009 2010 2009
———– ———– ———- ————

Revenues $ 117,039 $ 156,170 $ 896,678 $ 1,046,980

Cost of revenues 66,205 93,985 517,530 618,377
———– ———– ———- ————
Gross profit 50,834 62,185 379,148 428,603
Selling, general and
administrative expenses 64,745 76,530 304,451 350,919
———– ———– ———- ————
Operating income (loss (13,911) (14,345) 74,697 77,684

Other (income) expense:
Interest expense 7,705 7,540 30,532 30,238
Interest income (33) (11) (66) (333)

Other — (124) — 2,679
———– ———– ———- ————
Income (loss) before
provision for income taxes (21,583) (21,750) 44,231 45,100
Provision for (benefit
from) income taxes (8,320) (8,544) 17,678 17,972
———– ———– ———- ————
Income (loss) before from
investment in
unconsolidated affiliate $ (13,263) $ (13,206) $ 26,553 $ 27,128
———– ———– ———- ————
Equity in (losses) earnings
of unconsolidated
affiliate, net of tax (460) — (701) —
———– ———– ———- ————

Net income (loss) $ (13,723) $ (13,206) $ 25,852 $ 27,128
=========== =========== ========== ============

Weighted average shares
outstanding:
Basic 18,859 18,795 18,843 18,802
Diluted 18,859 18,795 18,874 18,895

Net Income Per Share:
Basic $ (0.73) $ (0.70) $ 1.37 $ 1.44
Diluted $ (0.73) $ (0.70) $ 1.37 $ 1.44

*The Company adopted at the beginning of Fiscal 2010 Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic
470-20, “Debt with Conversion and Other Options” (“FASB ASC Topic 470-20”).
The adoption of FASB ASC Topic 470-20 required an adjustment of previously
reported amounts assigned to debt, deferred taxes, equity and interest
expense.

                   SCHOOL SPECIALTY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)

(As Adjusted
from
Audited
Statements)*
April 24, April 25,
2010 2009
———— ————
ASSETS (Unaudited) (Unaudited)
Current assets:
Cash and cash equivalents $ 21,035 $ 1,871
Accounts receivable 72,734 103,683
Inventories 99,910 127,108
Deferred catalog costs 13,593 15,537
Prepaid expenses and other
current assets 12,164 17,347
Refundable income taxes 1,539 1,566

Deferred taxes 9,867 9,805
———— ————
Total current assets 230,842 276,917
Property, plant and
equipment, net 66,607 70,183
Goodwill 540,248 532,318
Intangible assets, net 166,552 168,082
Other 33,118 27,551
Investment in unconsolidated
affiliate 28,299 —
———— ————

Total assets $ 1,065,666 $ 1,075,051
============ ============

LIABILITIES AND
SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities –
long-term debt $ 132,397 $ 127,071
Accounts payable 47,954 56,786
Accrued compensation 7,501 12,821
Deferred revenue 4,312 4,254

Other accrued liabilities 24,750 28,231
———— ————
Total current liabilities 216,914 229,163
Long-term debt – less
current maturities 199,742 244,586
Deferred taxes and other 92,398 86,109

Other liabilities 1,423 913
———— ————

Total liabilities 510,477 560,771
———— ————

Commitments and
contingencies
Shareholders’ equity:
Preferred stock, $0.001 par
value per share, 1,000,000
shares authorized; none
outstanding — —
Common stock, $0.001 par
value per share,
150,000,000 authorized and
24,280,097 and 24,243,438
shares issued,
respectively 24 24
Capital paid-in excess of
par value 436,959 435,150
Treasury stock, at cost –
5,420,210 and 5,420,210
shares, respectively (186,637) (186,637)
Accumulated other
comprehensive income 24,052 10,804

Retained earnings 280,791 254,939
———— ————

Total shareholders’ equity 555,189 514,280
———— ————
Total liabilities and
shareholders’ equity $ 1,065,666 $ 1,075,051
============ ============

*The Company adopted at the beginning of Fiscal 2010
Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic 470-20,
“Debt with Conversion and Other Options” (“FASB ASC
Topic 470-20”). The adoption of FASB ASC Topic 470-20
required an adjustment of previously reported amounts
assigned to debt, deferred taxes, equity and interest
expense.

                        SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Unaudited

Fiscal Year Ended
———————-

(As
Adjusted)*

April 24, April 25,
2010 2009
———- ———-
Cash flows from operating activities:
Net income $ 25,852 $ 27,128
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and intangible asset
amortization expense 26,847 24,315
Amortization of development costs 5,067 6,401
Investment in unconsolidated affiliate 701 —
Amortization of debt fees and other 2,420 1,394
Share-based compensation expense 2,448 4,488
Deferred taxes 5,981 6,011
Loss on disposal of property, equipment
and other 652 490
Non-cash convertible debt deferred
financing costs 13,062 12,033
Changes in current assets and liabilities (net of
assets acquired and liabilities assumed in business
combinations):
Change in amounts sold under
receivables securitization, net — (50,000)
Accounts receivable 29,008 21,867
Inventories 13,586 22,313
Deferred catalog costs 1,944 (692)
Prepaid expenses and other current
assets 1,317 10,860
Accounts payable (9,267) (8,484)

Accrued liabilities (7,659) (6,910)
———- ———-
Net cash provided by operating
activities 111,959 71,214
———- ———-

Cash flows from investing activities:
Cash paid in acquisitions, net of cash
acquired (11,700) —
Additions to property, plant and
equipment (13,832) (11,622)
Acquisition of intangible and other
assets (1,800) —
Proceeds from disposal of discontinued
operations 800 2,485
Investment in product development costs (10,035) (8,523)
Proceeds from disposal of property, plant
and equipment 2,083 186

Investment in Noncontrolling Interest (2,226) —
———- ———-

Net cash used in investing activities (36,710) (17,474)
———- ———-

Cash flows from financing activities:
Proceeds from bank borrowings 304,400 680,000
Repayment of debt and capital leases (356,979) (725,890)
Purchase of treasury stock — (15,250)
Proceeds from exercise of stock options 117 3,195
Excess income tax benefit from exercise
of stock options — 1,439

Payment of debt fees and other (3,623) 603
———- ———-

Net cash used in financing activities (56,085) (55,903)
———- ———-

Net increase in cash and cash equivalents 19,164 (2,163)
Cash and cash equivalents, beginning of
period 1,871 4,034
———- ———-

Cash and cash equivalents, end of period $ 21,035 $ 1,871
========== ==========

Free cash flow reconciliation:
Net cash provided by operating activities $ 111,959 $ 71,214
Additions to property and equipment (13,832) (11,622)
Investment in development costs (10,035) (8,523)
Proceeds from disposal of property and
equipment 2,083 186
Net accounts receivable securitization
facility — 50,000
———- ———-

Free cash flow $ 90,175 $ 101,255
========== ==========

*The Company adopted at the beginning of Fiscal 2010 Financial
Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic 470-20, “Debt with Conversion and
Other Options” (“FASB ASC Topic 470-20”). The adoption of FASB
ASC Topic 470-20 required an adjustment of previously reported
amounts assigned to debt, deferred taxes, equity and interest
expense.

                                      School Specialty, Inc.
Segment Analysis – Revenues and Gross Profit/Margin Analysis
4th Quarter, Fiscal 2010
(In thousands)
Unaudited

Segment Revenues and Gross Profit/Margin
Analysis-QTD
—————————————————-

% of Revenues
——————

Change
4Q10-QTD 4Q09-QTD Change $ % 4Q10-QTD 4Q09-QTD
———- ———— ———— —— ——– ——–
Revenues
Educational Resources $ 94,258 $ 121,834 $ (27,576) -22.6% 80.5% 78.0%
Accelerated Learning
Group 22,584 34,338 (11,754) -34.2% 19.3% 22.0%
Corporate and Interco
Elims 197 (2) 199 0.2% 0.0%
———- ———— ———— ——– ——–

Total Revenues $ 117,039 $ 156,170 $ (39,131) 100.0% 100.0%
========== ============ ============ -25.1% ======== ========

% of Gross Profit
——————

Change
4Q10-QTD 4Q09-QTD Change $ % 4Q10-QTD 4Q09-QTD
———- ———— ———— —— ——– ——–
Gross Profit
Educational Resources $ 37,476 $ 46,243 $ (8,767) -19.0% 73.7% 74.4%
Accelerated Learning
Group 12,498 15,264 (2,766) -18.1% 24.6% 24.5%
Corporate and Interco
Elims 860 678 182 1.7% 1.1%
———- ———— ———— ——– ——–

Total Gross Profit $ 50,834 $ 62,185 $ (11,351) 100.0% 100.0%
========== ============ ============ -18.3% ======== ========

Segment Gross Margin Summary-QTD
————————————–

Gross Margin 4Q10-QTD 4Q09-QTD
———- ————
Educational Resources 39.8% 38.0%
Accelerated Learning
Group 55.3% 44.5%
Total Gross Margin 43.4% 39.8%

———————————————————————————————-

Segment Revenues and Gross Profit/Margin
Analysis-YTD
—————————————————-

% of Revenue
——————

Change
4Q10-YTD 4Q09-YTD Change $ % 4Q10-YTD 4Q09-YTD
———- ———— ———— —— ——– ——–
Revenues
Educational Resources $ 641,048 $ 737,068 $ (96,020) -13.0% 71.5% 70.4%
Accelerated Learning
Group 256,157 310,203 (54,046) -17.4% 28.6% 29.6%
Corporate and Interco
Elims (527) (291) (236) -0.1% 0.0%
———- ———— ———— ——– ——–

Total Revenues $ 896,678 $ 1,046,980 $ (150,302) 100.0% 100.0%
========== ============ ============ -14.4% ======== ========

% of Gross Profit
——————

Change
4Q10-YTD 4Q09-YTD Change $ % 4Q10-YTD 4Q09-YTD
———- ———— ———— —— ——– ——–
Gross Profit
Educational Resources $ 233,011 $ 256,641 $ (23,630) -9.2% 61.6% 59.9%
Accelerated Learning
Group 143,442 168,914 (25,472) -15.1% 37.8% 39.4%
Corporate and Interco
Elims 2,695 3,048 (353) 0.6% 0.7%
———- ———— ———— ——– ——–

Total Gross Profit $ 379,148 $ 428,603 $ (49,455) 100.0% 100.0%
========== ============ ============ -11.5% ======== ========

Segment Gross Margin Summary-YTD
————————————–

Gross Margin 4Q10-YTD 4Q09-YTD
———- ————
Educational Resources 36.3% 34.8%
Accelerated Learning
Group 56.0% 54.5%
Total Gross Margin 42.3% 40.9%


This news release was distributed by GlobeNewswire, www.globenewswire.com


SOURCE: School Specialty, Inc.

CONTACT: School Specialty, Inc.
David Vander Ploeg, Executive VP and CFO
920-882-5854
Communications & Investor Relations
Mark Fleming
920-882-5646