—  Supplies order trends improve following new catalog mailings
— Cost reductions result in additional SG&A savings
— Guidance confirmed
— Revolving credit facility amended


GREENVILLE, Wis., Feb. 17, 2011 (GLOBE NEWSWIRE) — School Specialty (Nasdaq:SCHS) today reported fiscal 2011 third quarter and year-to-date financial results. Revenue for the quarter was $89.9 million, a decline of 12.9 percent compared with revenue of $103.1 million in last year’s third quarter. Net loss in the seasonally slow third quarter was $20.2 million, a 9.2 percent increase compared with a loss of $18.5 million in the same period last year. The quarter’s loss per share was $1.07 compared with a loss of $0.98 in fiscal 2010.


The company generated an additional $9.3 million in free cash flow in the third quarter, contributing to a year-to-date debt reduction of over $78 million.


“We’re encouraged by our third quarter results as revenue trends improved over our first and second quarters,” said President and Chief Executive Officer David Vander Zanden. “I’m particularly pleased with the early results of our latest catalog mailings and marketing efforts in Educational Resources. During January we saw a noticeable increase in supplies orders as a result of these catalog drops, and that’s very positive since supplies represent about 45 percent of our total revenue. In addition to the enhanced catalogs and circulation, our associates improved our pricing programs, product offerings, e-commerce systems, and sales outreach efforts. We expect sales momentum in consumables to remain positive in the fourth quarter, and help generate improved financial results during the upcoming back-to-school season. Although our furniture business will continue to negatively impact overall group results, we are seeing our large-project revenues stabilize.


“Third quarter revenue for the Accelerated Learning group was modestly below the same period last year due to softness in larger purchases of our reading products and the timing of orders, which we anticipate will benefit our fourth quarter,” said Vander Zanden, noting the company’s science business had a strong finish to the quarter. “The business remains well positioned for the coming year with a growing lineup of effective education solutions across our categories of reading, science, math, health and student development.”


Third Quarter Financial Results

  —  Revenue for the third quarter of fiscal 2011 was $89.9 million, or down
12.9 percent, compared with $103.1 million in the prior year’s third
quarter. While continued pressure in school funding and budgets is
contributing to these reductions, the rate of decline has improved from
the first six months of the fiscal year, as the company expected.

— Gross profit was $32.9 million compared with $42.4 million in last
year’s third quarter. Consolidated gross margin declined 440 basis
points to 36.7 percent, reflecting the continuation of price discounting
in the Educational Resources segment in response to competitive
pressures in a depressed school spending environment. In addition,
product mix, both within and between segments contributed to the
decline.

— Selling, general and administrative expenses declined to $59.2 million
from the prior year’s $65.0 million. The expense decrease is primarily
attributable to cost reduction efforts, as well as lower volume.

— Third quarter net interest expense and other declined $1.1 million to
$6.4 million from $7.5 million in last year’s third quarter. This
decline was attributable to a reduction in non-cash interest expense
related to the company’s convertible debt. Non-cash interest expense
declined from $3.3 million in last year’s third quarter to $2.1 million
in this year’s third quarter. The non-cash interest expense reduction
was due to the retirement of a $133.0 million convertible bond earlier
this year.

— Net loss in the third quarter was $20.2 million ($1.07 per share)
compared to a loss of $18.5 million ($0.98 per share) in the same period
last year.


Nine-Month Financial Results

  —  Revenue for the first nine months of fiscal 2011 was $634.7 million
compared with $779.6 million in the same period last year, a decline of
18.6 percent. Excluding the $17.5 million of revenue in fiscal 2010’s
first nine months from last year’s sale of School Specialty Publishing,
consolidated revenue declined 16.7 percent. Negatively affecting revenue
this year were general spending reductions by schools, including a
significant decline in furniture sales due to a lack of school
construction projects across the U.S., and various execution issues in
the Educational Resources segment.

— Year-to-date gross profit was $258.5 million compared with $328.3
million last year. Gross margin declined 140 basis points to 40.7
percent versus last year’s 41.1 percent. Most of the decline was due to
competitive pricing pressures within the Educational Resources segment,
somewhat offset by a favorable product mix.

— Selling, general and administrative expenses declined to $216.3 million
(34.1 percent of revenue), from the prior year’s $239.7 million (30.7
percent of revenue). The expense decrease is primarily attributable to
lower volume, and the past year’s cost-reductions, operational
consolidation and divesture.

— Nine-month net interest expense and other declined $1.6 million to $21.2
million from last year’s $22.8 million. Included in this year’s total
was $7.7 million of non-cash interest expense related to the company’s
convertible debt, compared with $9.7 million of non-cash interest
expense last year. Partially offsetting the decrease in non-cash
interest expense was approximately $0.6 million of incremental loan
commitment fees on unborrowed funds related to the company’s revolving
credit facility.

— A non-cash impairment charge of $411.3 million, or $344.9 million net of
tax, was recorded in the first nine months of the fiscal year associated
with the annual assessment of goodwill and other indefinite-lived
intangible assets. The tax benefit associated with the impairment was
negatively impacted by the portion of the goodwill which is
non-deductible for tax purposes.

— Year-to-date net loss was $333.7 million ($17.68 per share) compared to
net income of $39.6 million ($2.09 per share) in the same period last
year. Excluding the net of tax impact of an impairment charge recorded
in this year’s first quarter, net income was $11.3 million ($0.60 per
share).


Credit Facility Amendment


The company also announced it has amended its revolving credit facility. The amendment, among other things, reduces the overall credit facility capacity from $350 million to $300 million, with up to $125 million of the available capacity structured as a Delayed Draw Term Loan to be used to refinance the company’s convertible notes. Covenant modifications include increases in both the total and senior leverage ratios, while the facility’s interest rate will generally increase 75 basis points on borrowings.


Further details concerning the amendment will be contained in a Form 8-K to be filed by the company within the next few days with the Securities and Exchange Commission.


Outlook


School Specialty is maintaining its prior guidance for fiscal 2011:

  —  Revenue of $735 million to $770 million,
— Loss per share of $0.30 to $0.60; which includes the non-cash charge of
$0.32 related to convertible debt, but excludes the non-cash impairment
of $18.28 per share, and
— Free cash flow of $50 million to $60 million.


Conference Call


School Specialty will host a conference call to discuss its fiscal 2011 third quarter financial results. The conference call begins today, February 17, 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 24, 2010, 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.


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

Three Months Ended Nine Months Ended
———————— ————————

January
January 22, January 23, January 22, 23,
2011 2010 2011 2010
———– ———– ———— ———-

Revenues $ 89,859 $ 103,126 $ 634,723 $ 779,639

Cost of revenues 56,910 60,708 376,179 451,325
———– ———– ———— ———-
Gross profit 32,949 42,418 258,544 328,314
Selling, general and
administrative expenses 59,169 65,009 216,335 239,706

Impairment Charge — — 411,390 —
———– ———– ———— ———-
Operating income/(loss) (26,220) (22,591) (369,181) 88,608

Other (income) expense:
Interest expense 6,365 7,527 21,241 22,827

Interest income — (22) — (33)
———– ———– ———— ———-
Income/(Loss) before
provision for income
taxes (32,585) (30,096) (390,422) 65,814
Provision for (benefit
from) income taxes (13,385) (11,886) (57,832) 25,998
———– ———– ———— ———-
Income/(loss) before
investment in
unconsolidated affiliate $ (19,200) $ (18,210) $ (332,590) $ 39,816
———– ———– ———— ———-
Equity in (losses) of
unconsolidated affiliate (950) (241) (1,085) (241)
———– ———– ———— ———-

Net income/(loss) $ (20,150) $ (18,451) $ (333,675) $ 39,575
=========== =========== ============ ==========

Weighted average shares
outstanding:
Basic 18,870 18,849 18,868 18,838
Diluted 18,870 18,849 18,868 18,901

Net Income Per Share:
Basic $ (1.07) $ (0.98) $ (17.68) $ 2.10
Diluted $ (1.07) $ (0.98) $ (17.68) $ 2.09

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

January April 24, January 23,
22, 2011 2010 2010
———- ———— ————
ASSETS
Current assets:
Cash and cash equivalents $ 1,667 $ 21,035 $ 23,459
Accounts receivable 70,767 72,734 92,894
Inventories 80,747 99,910 89,844
Deferred catalog costs 16,597 13,593 10,619
Prepaid expenses and other
current assets 13,329 14,318 11,267
Refundable income taxes — 1,539 —

Deferred taxes 9,867 9,867 9,805
———- ———— ————
Total current assets 192,974 232,996 237,888
Property, plant and
equipment, net 64,383 66,607 65,332
Goodwill 127,694 540,248 536,975
Intangible assets, net 158,205 166,552 167,449
Development costs and other 34,352 33,118 28,019
Investment in unconsolidated
affiliate 27,215 28,299 29,046
———- ———— ————

Total assets $ 604,823 $ 1,067,820 $ 1,064,709
========== ============ ============

LIABILITIES AND
SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities –
long-term debt $ 193,375 $ 132,397 $ 131,013
Accounts payable 64,045 47,954 25,145
Accrued compensation 6,949 7,501 9,915
Deferred revenue 4,112 4,312 5,141
Accrued income taxes 19,204 — 7,837

Other accrued liabilities 26,266 30,905 32,872
———- ———— ————
Total current liabilities 313,951 223,069 211,923
Long-term debt – less
current maturities 60,395 199,742 197,935
Deferred taxes 10,751 92,398 92,427

Other liabilities 1,423 1,423 913
———- ———— ————

Total liabilities 386,520 516,632 503,198
———- ———— ————

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
24,290,345; 24,280,097 and
24,277,777 shares issued,
respectively 24 24 24
Capital paid-in excess of
par value 438,818 436,959 437,811
Treasury stock, at cost
5,420,210; 5,420,210 and
5,420,210 shares,
respectively (186,637) (186,637) (186,637)
Accumulated other
comprehensive income 22,984 24,052 19,799
(Accumulated
deficit)/Retained earnings (56,886) 276,790 290,514
———- ———— ————
Total shareholders’
equity 218,303 551,188 561,511
———- ———— ————
Total liabilities and
shareholders’ equity $ 604,823 $ 1,067,820 $ 1,064,709
========== ============ ============

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

Nine Months Ended
————————

January
January 22, 23,
2011 2010
———— ———-
Cash flows from operating activities:
Net income $ (333,676) $ 39,575
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and intangible asset
amortization expense 20,742 19,882
Amortization of development costs 3,838 4,191
Amortization of debt fees and other 1,602 1,642
Share-based compensation expense 2,304 3,033
Impairment charge 411,390 —
Investment in unconsolidated affiliate 1,085 241
Deferred taxes (82,094) 6,071
Loss (gain) on disposal of property,
equipment and other — 275
Non-cash convertible debt deferred
financing costs 7,691 9,696
Changes in current assets and
liabilities (net of assets acquired and
liabilities assumed in business
combinations):
Accounts receivable 2,332 8,773
Inventories 19,162 23,277
Deferred catalog costs (3,004) 4,918
Prepaid expenses and other current
assets 2,528 5,903
Accounts payable 15,883 (32,400)

Accrued liabilities 13,784 5,248
———— ———-
Net cash provided by operating
activities 83,567 100,325
———— ———-

Cash flows from investing activities:
Cash paid in acquisitions, net of cash
acquired — (11,700)
Additions to property, plant and
equipment (10,220) (8,494)
Proceeds from disposal of discontinued
operations — 800
Investment in product development costs (6,655) (6,679)
Proceeds from disposal of property, plant
and equipment — 2,083

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

Net cash used in investing activities (16,875) (26,216)
———— ———-

Cash flows from financing activities:
Proceeds from bank borrowings 632,600 304,400
Repayment of debt and capital leases (585,660) (356,803)
Redemption of convertible debt (133,000) —
Payment of debt and other — (238)

Proceeds from exercise of stock options — 120
———— ———-

Net cash used in financing activities (86,060) (52,521)
———— ———-

Net (decrease)/increase in cash and cash
equivalents (19,368) 21,588
Cash and cash equivalents, beginning of
period 21,035 1,871
———— ———-

Cash and cash equivalents, end of period $ 1,667 $ 23,459
============ ==========

Free cash flow reconciliation:
Net cash used in operating activities $ 83,567 $ 100,325
Additions to property and equipment (10,220) (8,494)
Investment in development costs (6,655) (6,679)
Proceeds from disposal of property and
equipment — 2,083
———— ———-

Free cash flow $ 66,692 $ 87,235
============ ==========

School Specialty, Inc.
Segment Analysis – Revenues and Gross Profit/Margin Analysis
3rd Quarter, Fiscal 2011
(In thousands)
Unaudited

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

% of Revenues
——————

Change
3Q11-QTD 3Q10-QTD Change $ % 3Q11-QTD 3Q10-QTD
———- ———- ———— —— ——– ——–
Revenues
Educational Resources $ 69,785 $ 81,984 $ (12,199) -14.9% 77.7% 79.5%
Accelerated Learning 19,907 21,007 (1,100) -5.2% 22.2% 20.4%
Corporate and Interco
Elims 167 135 32 0.1% 0.1%
———- ———- ———— ——– ——–

Total Revenues $ 89,859 $ 103,126 $ (13,267) 100.0% 100.0%
========== ========== ============ -12.9% ======== ========

% of Gross Profit
——————

Change
3Q11-QTD 3Q10-QTD Change $ % 3Q11-QTD 3Q10-QTD
———- ———- ———— —— ——– ——–
Gross Profit
Educational Resources $ 22,196 $ 30,044 $ (7,848) -26.1% 67.4% 70.8%
Accelerated Learning 10,267 11,884 (1,617) -13.6% 31.2% 28.0%
Corporate and Interco
Elims 486 490 (4) 1.4% 1.2%
———- ———- ———— ——– ——–

Total Gross Profit $ 32,949 $ 42,418 $ (9,469) 100.0% 100.0%
========== ========== ============ -22.3% ======== ========

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

Gross Margin 3Q11-QTD 3Q10-QTD
———- ———-
Educational Resources 31.8% 36.6%
Accelerated Learning 51.6% 56.6%
Total Gross Margin 36.7% 41.1%

——————————————————————————————-

——————————————————————————————-

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

% of Revenue
——————

Change
3Q11-YTD 3Q10-YTD Change $ % 3Q11-YTD 3Q10-YTD
———- ———- ———— —— ——– ——–
Revenues
Educational Resources $ 432,897 $ 546,791 $ (113,894) -20.8% 68.2% 70.1%
Accelerated Learning 201,325 233,573 (32,248) -13.8% 31.7% 30.0%
Corporate and Interco
Elims 501 (725) 1,226 0.1% -0.1%
———- ———- ———— ——– ——–

Total Revenues $ 634,723 $ 779,639 $ (144,916) 100.0% 100.0%
========== ========== ============ -18.6% ======== ========

% of Gross Profit
——————

Change
3Q11-YTD 3Q10-YTD Change $ % 3Q11-YTD 3Q10-YTD
———- ———- ———— —— ——– ——–
Gross Profit
Educational Resources $ 143,046 $ 195,536 $ (52,490) -26.8% 55.3% 59.6%
Accelerated Learning 113,485 130,944 (17,459) -13.3% 43.9% 39.9%
Corporate and Interco
Elims 2,013 1,834 179 0.8% 0.5%
———- ———- ———— ——– ——–

Total Gross Profit $ 258,544 $ 328,314 $ (69,770) 100.0% 100.0%
========== ========== ============ -21.3% ======== ========

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

Gross Margin 3Q11-YTD 3Q10-YTD
———- ———-
Educational Resources 33.0% 35.8%
Accelerated Learning 56.4% 56.1%
Total Gross Margin 40.7% 42.1%


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


SOURCE: School Specialty, Inc.

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