—  Third quarter earnings per share (EPS) improves 22% or $0.27 over the
prior year
— Gross profit margin improves 550 basis points; SG&A declines $8.3
million
— Debt reduced by $60 million; cash position increased $22 million
— Revenue and EPS guidance updated; free cash flow guidance confirmed


GREENVILLE, Wis., Feb. 18, 2010 (GLOBE NEWSWIRE) — School Specialty (Nasdaq:SCHS) today reported fiscal 2010 third quarter and year-to-date financial results. While revenue for the third quarter of fiscal 2010 declined to $103.1 million, compared with $121.7 million in the prior year’s third quarter, continued gross margin improvements, operational efficiencies, cost reductions and lower interest expense led to a $4.9 million improvement in the company’s third quarter net loss compared to the same period last year. Net loss in the seasonally slow third quarter this year was $18.5 million compared to last year’s net loss of $23.4 million. The quarter’s loss per share improved to $0.98, as compared to $1.25 per share loss in fiscal 2009.


Free cash flow was $87.2 million for the nine-month period, reflecting tighter inventory controls, improved accounts receivable collections and low capital spending. The company also continued to strengthen its balance sheet, reducing total debt by approximately $60 million over the past 12 months, and increasing its quarter-end cash balance by more than $22 million.


“We achieved improved year-over-year earnings per share in excess of 20 percent in the third quarter due to the exceptional efforts of our associates in driving efficiencies, controlling costs and strengthening our balance sheet,” said Chief Executive Officer David J. Vander Zanden. “The reduction in our third quarter revenue reflects a continuing difficult school spending environment, particularly in furniture. However, I’m very encouraged by the progress in our Intervention category, where the acquisition of AutoSkill has brought us a major new business win in Texas, as well as other promising growth opportunities for its reading and math software programs. While sales in our supplies and supplemental categories have been modestly lower due to school budget issues, the furniture and school construction sector continued to be the most impacted by budget cuts and major project delays. We expect that the recovery in furniture will be slow, especially for the portion of the business tied to projects. In spite of these challenges, our associates continue to make important progress in consolidating functions, and streamlining how we reach and serve our customers. In addition to creating customer benefits, we are achieving permanent cost reductions that are supporting our current profitability, while preparing us for future growth.”


Third Quarter Financial Results

  —  Revenue for the third quarter was $103.1 million, compared with $121.7
million in last year’s third quarter. The decrease was primarily
related to the Educational Resources segment, which experienced a $14.7
million revenue decline. The general economic conditions have continued
to affect school spending levels, particularly in the furniture product
lines. Additional revenue in the quarter that related to the acquisition
of AutoSkill International was offset by the revenue decline
attributable to the divestiture of School Specialty Publishing.
— Gross profit was $42.4 million compared with $43.3 million in last
year’s third quarter. Consolidated gross margin improved 550 basis
points to 41.1 percent. The improvement was primarily due to favorable
product mix, particularly within the Publishing segment, and continued
margin expansion within the Educational Resources segment related to
product pricing and costing initiatives begun last year. The absence of
promotions within the Science unit that reduced gross margin in the
prior year’s third quarter also contributed to the increase.
— Selling, general and administrative (SG&A) expenses declined $8.3
million to $65.0 million compared with the prior year’s $73.3 million. A
majority of the decline is related to the company’s cost-reduction
efforts over the past 12 months. SG&A as a percent of revenue in the
third quarter was 63.1 percent, compared with the prior year’s 60.2
percent.
— Operating loss for the third quarter improved to $22.6 million compared
with a loss of $30.0 million for the same period last year.
— Third quarter net interest expense and other expense declined $0.5
million to $7.5 million from $8.0 million in last year’s third quarter.
This decline was attributable to a reduction in average quarterly debt
balances of approximately $90 million, which includes the elimination of
an accounts receivable securitization program in fiscal 2009. The
current quarter included non-cash interest expense of $3.3 million as
compared to $3.0 million in last year’s third quarter, as a result of
the company adopting FASB ASC Topic 470-20 regarding new accounting
rules for convertible debt.
— Net loss in the third quarter of fiscal 2010 was $18.5 million ($0.98
per share) compared with last year’s third quarter net loss of $23.4
million ($1.25 per share). Both periods included non-cash charges
related to convertible debt accounting, which increased the third
quarter loss per share by $0.11 in fiscal 2010 and $0.10 in fiscal 2009.
Fiscal 2010 diluted EPS has been reduced by $0.01 for the company’s
share of the net loss from its minority interest in Carson-Dellosa
Publishing, LLC, which was formed during the third quarter. The
company’s minority interest was obtained through a contribution of
publishing unit assets, including cash.


Nine-Month Financial Results

  —  Revenue for the first nine months fiscal 2010 was $779.6 million
compared with $890.8 million in the same period last year. The reduction
is primarily due to spending reductions by schools, and the expected $21
million decline in state science adoption revenue.
— Year-to-date gross profit was $328.3 million compared with $366.4
million in the first nine months of last year. Gross margin improved
100 basis points to 42.1 percent. The improvement was due primarily to
product pricing and successful vendor costing initiatives.
— SG&A expenses declined $34.7 million in the first nine months of the
year to $239.7 million compared with $274.4 million in the first nine
months of fiscal 2009. As a percent of sales, year-to-date SG&A declined
10 basis points to 30.7 percent. Cost reductions resulting from
operational consolidations, improved supply chain management and various
expense controls all contributed to the year-over-year decline.
— Year-to-date operating income was $88.6 million, compared with operating
income of $92.0 million in the same period last year. Improved gross
margin and SG&A leverage resulted in a 110 basis point improvement in
operating margin to 11.4 percent for the first nine months of fiscal
2010, compared to 10.3 percent for the same period last year.
— Net interest expense and other expense for fiscal 2010’s first nine
months declined $2.4 million to $22.8 million from $25.2 million in the
same period last year. This decline was attributable to a reduction in
average debt balances of approximately $100 million, which includes the
elimination of an accounts receivable securitization program in fiscal
2009. The current year included non-cash interest expense of $9.7
million compared to $8.9 million last year, as a result of the company’s
adoption of the new accounting rules for convertible debt.
— Net income for the first nine months of fiscal 2010 was $39.6 million
($2.09 per diluted share) compared with $40.3 million ($2.13 per diluted
share) for the first nine months of fiscal 2009. Both periods included
non-cash charges related to convertible debt accounting, which reduced
nine-month diluted EPS by $0.31 this year and $0.29 in fiscal 2009.
Fiscal 2010 diluted EPS has been reduced by $0.01 for the company’s
share of the net loss from its minority interest in Carson-Dellosa
Publishing, LLC.


Outlook


School Specialty is updating its fiscal 2010 guidance for revenue and earnings per share, and confirming its previously issued guidance for free cash flow. The company is reducing its revenue guidance from $915 million to $940 million to a range of $895 million to $910 million. This revenue range includes a projected $22 million decline in curriculum adoption revenue and an approximate $8 million decline due to the net effect of the divestiture of School Specialty Publishing and the acquisition of AutoSkill International, Inc. The projected diluted earnings per share range has been narrowed to $1.40 to $1.54 from the previous range of $1.40 to $1.60 per diluted share. As with the previous guidance, these figures include a $0.42 non-cash charge for adoption of the new convertible debt accounting rules, and one-time integration costs of $0.06 to $0.08 per diluted share from acquisition and divestiture activity. The company is confirming the free cash flow range of $70 million to $80 million ($3.71 to $4.24 per diluted share), which excludes the $11.7 million purchase price of the AutoSkill acquisition announced in the second quarter.


Conference Call


School Specialty will host a conference call to discuss its fiscal 2010 third quarter financial results. The conference call begins today, February 18, 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.

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

Three Months Ended Nine Months Ended
———————— ———————-
(As (As
Adjusted)* Adjusted)*

January 23, January 24, January January
2010 2009 23, 2010 24, 2009
———– ———– ———- ———-

Revenues $ 103,126 $ 121,710 $ 779,639 $ 890,810

Cost of revenues 60,708 78,411 451,325 524,392
———– ———– ———- ———-
Gross profit 42,418 43,299 328,314 366,418
Selling, general and
administrative expenses 65,009 73,283 239,706 274,389
———– ———– ———- ———-
Operating income (22,591) (29,984) 88,608 92,029

Other (income) expense:
Interest expense 7,527 7,343 22,827 22,698
Interest income (22) (102) (33) (322)

Other — 714 — 2,803
———– ———– ———- ———-
Income before provision
for income taxes (30,096) (37,939) 65,814 66,850

Provision for income taxes (11,886) (14,498) 25,998 26,516
———– ———– ———- ———-
Income (loss) from
continuing operations
before income taxes and
income (loss) from
investment in
unconsolidated affiliate $ (18,210) $ (23,441) $ 39,816 $ 40,334
———– ———– ———- ———-
Equity in (losses)
earnings of
unconsolidated affiliate,
net of tax (241) — (241) —
———– ———– ———- ———-

Net income $ (18,451) $ (23,441) $ 39,575 $ 40,334
=========== =========== ========== ==========
.
Weighted average shares
outstanding:
Basic 18,849 18,788 18,838 18,804
Diluted 18,849 18,788 18,901 18,927

Net Income Per Share:
Basic $ (0.98) $ (1.25) $ 2.10 $ 2.14
Diluted $ (0.98) $ (1.25) $ 2.09 $ 2.13

*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” (“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 (As
Statements)* Adjusted)*

January 23, April 25, January 24,
2010 2009 2009
———— ———— ————
ASSETS (Unaudited) (Unaudited)
Current assets:
Cash and cash equivalents $ 23,459 $ 1,871 $ 1,258
Accounts receivable 92,894 103,683 65,220
Inventories 89,844 127,108 132,615
Deferred catalog costs 10,619 15,537 19,435
Prepaid expenses and other
current assets 9,113 17,347 17,911
Refundable income taxes — 1,566 —

Deferred taxes 9,805 9,805 16,232
———— ———— ————
Total current assets 235,734 276,917 252,671
Property, plant and
equipment, net 65,332 70,183 70,379
Goodwill 536,975 532,318 530,960
Intangible assets, net 167,449 168,082 170,134
Other 28,019 27,551 28,056
Investment in unconsolidated
affiliate 29,046 — —
———— ———— ————

Total assets $ 1,062,555 $ 1,075,051 $ 1,052,200
============ ============ ============

LIABILITIES AND
SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities –
long-term debt $ 131,013 $ 127,071 $ 125,807
Accounts payable 25,145 56,786 47,295
Accrued compensation 9,915 12,821 14,223
Deferred revenue 5,141 4,254 3,645
Accrued income taxes 7,837 — 7,043

Other accrued liabilities 26,718 28,231 32,008
———— ———— ————
Total current liabilities 205,769 229,163 230,021
Long-term debt – less
current maturities 197,935 244,586 204,008
Deferred taxes 92,427 86,109 93,513

Other liabilities 913 913 785
———— ———— ————

Total liabilities 497,044 560,771 528,327
———— ———— ————

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
24,277,777; 24,243,438 and
24,209,938 shares issued,
respectively 24 24 24
Capital paid-in excess of
par value 437,811 435,150 433,377
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 19,799 10,804 8,965

Retained earnings 294,514 254,939 268,144
———— ———— ————

Total shareholders’ equity 565,511 514,280 523,873
———— ———— ————
Total liabilities and
shareholders’ equity $ 1,062,555 $ 1,075,051 $ 1,052,200
============ ============ ============

*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” (“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

Nine Months Ended
———————-
(As
Adjusted)*

January January
23, 24,
2010 2009
———- ———-
Cash flows from operating activities:
Net income $ 39,575 $ 40,334
Adjustments to reconcile net income to
net cash provided
by operating activities:
Depreciation and intangible asset
amortization expense 19,882 18,196
Amortization of development costs 4,191 4,593
Loss from unconsolidated affiliate 241 —
Amortization of debt fees and other 1,642 1,529
Share-based compensation expense 3,033 3,192
Deferred taxes 6,071 6,860
Loss (gain) on disposal of property,
equipment and other 275 484
Non-cash convertible debt deferred
financing costs 9,696 8,932
Changes in current assets and
liabilities (net of assets
acquired and liabilities assumed in
business combinations):
Change in amounts sold under
receivables securitization, net — (3,000)
Accounts receivable 8,773 13,318
Inventories 23,277 16,800
Deferred catalog costs 4,918 (4,590)
Prepaid expenses and other current
assets 5,903 11,259
Accounts payable (32,400) (18,260)

Accrued liabilities 5,248 4,488
———- ———-
Net cash provided by operating
activities 100,325 104,135
———- ———-

Cash flows from investing activities:
Cash paid in acquisitions, net of cash
acquired (11,700) —
Additions to property, plant and
equipment (8,494) (7,730)
Proceeds from disposal of discontinued
operations 800 2,485
Investment in product development costs (6,679) (6,152)
Proceeds from disposal of property, plant
and equipment 2,083 192

Investment in non-controlling interest (2,226) —
———- ———-

Net cash used in investing activities (26,216) (11,205)
———- ———-

Cash flows from financing activities:
Proceeds from bank borrowings 304,400 533,800
Repayment of debt and capital leases (356,803) (618,467)
Purchase of treasury stock — (15,250)
Payment of debt fees and other (238) —
Proceeds from exercise of stock options 120 2,692
Excess income tax benefit from exercise
of stock options — 1,519
———- ———-

Net cash used in financing activities (52,521) (95,706)
———- ———-

Net increase in cash and cash equivalents 21,588 (2,776)
Cash and cash equivalents, beginning of
period 1,871 4,034
———- ———-

Cash and cash equivalents, end of period $ 23,459 $ 1,258
========== ==========

Free cash flow reconciliation:
Net cash used in operating activities $ 100,325 $ 104,135
Additions to property and equipment (8,494) (7,730)
Investment in development costs (6,679) (6,152)
Proceeds from disposal of property and
equipment 2,083 192
Net accounts receivable securitization
facility activity — 3,000
———- ———-

Free cash flow $ 87,235 $ 93,445
========== ==========

*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” (“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
3rd Quarter, Fiscal 2010
(In thousands)
Unaudited

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

% of Revenues
——————

Change
3Q10-QTD 3Q09-QTD Change $ % 3Q10-QTD 3Q09-QTD
———- ———- ———— —— ——– ——–
Revenues
Educational Resources $ 81,984 $ 96,698 $ (14,714) -15.2% 79.5% 79.4%
Publishing 21,007 24,948 (3,941) -15.8% 20.4% 20.5%
Corporate and Interco
Elims 135 64 71 0.1% 0.1%
———- ———- ———— ——– ——–

Total Revenues $ 103,126 $ 121,710 $ (18,584) 100.0% 100.0%
========== ========== ============ -15.3% ======== ========

% of Gross Profit
——————

Change
3Q10-QTD 3Q09-QTD Change $ % 3Q10-QTD 3Q09-QTD
———- ———- ———— —— ——– ——–
Gross Profit
Educational Resources $ 30,044 $ 33,133 $ (3,089) -9.3% 70.8% 76.5%
Publishing 11,884 9,561 2,323 24.3% 28.0% 22.1%
Corporate and Interco
Elims 490 605 (115) 1.2% 1.4%
———- ———- ———— ——– ——–

Total Gross Profit $ 42,418 $ 43,299 $ (881) 100.0% 100.0%
========== ========== ============ -2.0% ======== ========

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

Gross Margin 3Q10-QTD 3Q09-QTD
———- ———-
Educational Resources 36.6% 34.3%
Publishing 56.6% 38.3%
Total Gross Margin 41.1% 35.6%

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

% of Revenue
——————

Change
3Q10-YTD 3Q09-YTD Change $ % 3Q10-YTD 3Q09-YTD
———- ———- ———— —— ——– ——–
Revenues
Educational Resources $ 546,791 $ 615,234 $ (68,443) -11.1% 70.1% 69.1%
Publishing 233,573 275,865 (42,292) -15.3% 30.0% 31.0%
Corporate and Interco
Elims (725) (289) (436) -0.1% -0.1%
———- ———- ———— ——– ——–

Total Revenues $ 779,639 $ 890,810 $ (111,171) 100.0% 100.0%
========== ========== ============ -12.5% ======== ========

% of Gross Profit
——————

Change
3Q10-YTD 3Q09-YTD Change $ % 3Q10-YTD 3Q09-YTD
———- ———- ———— —— ——– ——–
Gross Profit
Educational Resources $ 195,536 $ 210,398 $ (14,862) -7.1% 59.6% 57.4%
Publishing 130,944 153,650 (22,706) -14.8% 39.9% 41.9%
Corporate and Interco
Elims 1,834 2,370 (536) 0.5% 0.7%
———- ———- ———— ——– ——–

Total Gross Profit $ 328,314 $ 366,418 $ (38,104) 100.0% 100.0%
========== ========== ============ -10.4% ======== ========

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

Gross Margin 3Q10-YTD 3Q09-YTD
———- ———-
Educational Resources 35.8% 34.2%
Publishing 56.1% 55.7%
Total Gross Margin 42.1% 41.1%


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


SOURCE: School Specialty, Inc.

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