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School Specialty Reports Second Quarter and First Half Results


 * Operating margin improves 130 basis points in the second quarter
 * Free cash flow improves $24 million in first six months of fiscal
   2010
 * Revenue, EPS and free cash flow guidance confirmed

GREENVILLE, Wis., Nov. 19, 2009 (GLOBE NEWSWIRE) -- School Specialty (Nasdaq:SCHS) today reported fiscal 2010 second quarter and year-to-date financial results that demonstrate solid progress in reducing costs, and continuing strong free cash flow. Revenue for the second quarter of fiscal 2010 declined to $346.1 million, down 11.3 percent from $390.3 million in the prior year's second quarter. Excluding the expected decline in science curriculum adoption revenue of $10 million, quarterly revenue declined 9.0 percent. Second quarter net income was $29.6 million as compared to $30.4 million last year. Second quarter diluted earnings per share declined to $1.57, or 2.5 percent, as compared to $1.61 in last year's second quarter.

Despite the volume decline, the company's successful restructuring and fixed-cost reductions resulted in a 130 basis-point operating margin increase in the second quarter, and a 50 basis-point improvement year to date. Free cash flow improved by $24.3 million, or over 200 percent, for the first six months of the year. Low capital spending requirements, inventory controls, and improved days sales outstanding for accounts receivable all contributed to the strong cash flow performance. The company used much of the cash to strengthen its balance sheet, reducing total debt by $115 million over the past 12 months, which includes the pay-off of an accounts receivable securitization facility in last year's fourth quarter.

"The busy season results came in as we expected," said Chief Executive Officer David J. Vander Zanden. "Our previously announced $20 million cost-reduction program has grown to $25 million, and that additional success at controlling costs was seen in our operating margin improvement. Schools continue to struggle with their budget challenges. While volume in consumable and curriculum products, excluding adoptions, has been only modestly below the prior year, sales of furniture and equipment have been significantly lower because those purchases are more easily delayed. In this challenging environment, our associates have worked extremely hard over the past year at expense control, and completing our business and functional consolidations within Educational Resources. We believe those structural changes and fixed-cost reductions have also prepared us for future growth as the economy recovers and education spending returns to more normal levels."

School Specialty also announced today that it has completed the previously announced divestiture of its retail trade book business, School Specialty Publishing, to Carson-Dellosa Publishing, LLC, a newly-formed business entity. Under the agreement, School Specialty combined its publishing unit assets with those of Cookie Jar Education, Inc. and received a minority equity interest in Carson-Dellosa Publishing. Future results from the business combination will be reported as an investment under the equity method of accounting, beginning in the third quarter of fiscal 2010.

Second Quarter Financial Results



 * Revenue for the second quarter was $346.1 million, compared with
   $390.3 million in fiscal 2009's second quarter.  The decrease was
   primarily due to reductions in spending by many school districts,
   and an expected $10 million decline in science adoption revenue
   compared to the same period last year.  The furniture and
   equipment category incurred the largest revenue reduction, while
   curriculum-based and consumable products saw more modest
   mid-single-digit declines.

 * Gross profit was $143.1 million compared with $159.1 million in
   last year's second quarter.   Consolidated gross margin improved
   50 basis points to 41.3 percent, despite an unfavorable product mix
   this year.  The improvement was primarily due to product pricing
   and costing initiatives.

 * Selling, general and administrative (SG&A) expenses declined
   $13.7 million to $86.4 million compared with the prior year's
   $100.1 million.  Cost reductions resulting from operational
   consolidations, improved supply chain management and various
   expense controls reduced SG&A as a percent of revenue in the
   second quarter to 25.0 percent, compared with the prior year's
   25.6 percent.

 * Operating income for the second quarter was $56.7 million
   compared with $59.0 million for the same period last year.
   The company's gross margin improvement and cost-reduction
   efforts helped drive a 130 basis-point improvement in operating
   margin, reaching 16.4 percent.

 * Second quarter net interest expense and other declined $1.2
   million to $7.7 million from $8.9 million in last year's
   second quarter.  This decline was attributable to a reduction
   in debt balances of over $115 million, inclusive of the
   elimination of an accounts receivable securitization program in
   fiscal 2009.  Both periods included non-cash interest expense of
   $3.2 million and $3.0 million, respectively, as a result of the
   company's adoption of FASB ASC Topic 470-20 regarding new
   accounting rules for convertible debt.

 * Net income in the second quarter of the current year was $29.6
   million ($1.57 per diluted share) compared with last year's
   second quarter net income of $30.4 million ($1.61 per diluted
   share).  Both periods included non-cash charges related to
   convertible debt accounting, which reduced second quarter diluted
   EPS by $0.10 in both fiscal 2010 and fiscal 2009.

Six-Month Financial Results



 * Revenue for the first half of fiscal 2010 was $676.5 million
   compared with $769.1 million in the first half of last year.
   The reduction is primarily due to spending reductions by schools,
   and an expected $21 million decline in state science adoption
   revenue.

 * Gross profit for the first six months of the fiscal year was
   $285.9 million compared with $323.1 million in the first six
   months of last year.   Gross margin improved 30 basis points to
   42.3 percent, despite this year's lower-margin product mix.  The
   improvement was due to product pricing and successful vendor
   costing initiatives.

 * SG&A expenses declined $26.4 million in the first six months of
   this year to $174.7 million compared with $201.1 million in the
   first six months of fiscal 2009.  As a percent of sales,
   year-to-date SG&A declined 30 basis points to 25.8 percent.

 * Operating income for the first half of fiscal 2010 was $111.2
   million, compared with operating income of $122.0 million in the
   same period last year.  Operating margin increased 50 basis
   points to 16.4 percent.

 * Year-to-date net interest expense and other declined $1.9 million
   to $15.3 million from $17.2 million in the first six months of
   fiscal 2009.  This decline was attributable to a reduction in
   debt balances of approximately $115 million, inclusive of the
   elimination of an accounts receivable securitization program in
   fiscal 2009.  Both periods included non-cash interest expense of
   $6.4 million and $5.9 million, respectively, as a result of the
   company's adoption of the new accounting rules for convertible
   debt.

 * Net income for the first six months of fiscal 2010 was $58.0
   million ($3.07 per diluted share) compared with $63.8 million
   ($3.36  per diluted share) for the first six months of fiscal
   2009.  Both periods included non-cash charges related to
   convertible debt accounting, which reduced six-month diluted EPS
   by $0.20 this year and $0.19 in fiscal 2009.

Outlook

School Specialty is maintaining its fiscal 2010 guidance for revenue, earnings per share and free cash flow. The company expects revenue to range from $915 million to $940 million which includes a projected $22 million decline in curriculum adoption revenue and an approximately $8 million decline due to the net effect of the divestiture of School Specialty Publishing and the acquisition of AutoSkill International, Inc. The free cash flow range of $70 million to $80 million ($3.71 to $4.24 per diluted share) excludes the $11.7 million purchase price of the AutoSkill acquisition announced last quarter. In addition, the company has updated the following modeling expectations:



 * Gross margin is now expected to grow 100 to 130 basis points
   over fiscal 2009 versus prior guidance of plus 60 to 70 basis
   points.
 * SG&A is expected to be 33.4 to 33.8 percent of revenue.
 * One-time integration costs from acquisition and divestiture
   activity are projected at $.06 to $.08 per fully diluted share.

Finally, the projected diluted earnings per share range of $1.40 to $1.60 is unchanged. These figures include a $0.42 non-cash charge for adoption of the new convertible debt accounting rules, and one-time integration costs mentioned above. Excluding the impact of the convertible debt accounting change and the transaction integration costs, the diluted earnings per share range is $1.88 to $2.10. Had the new convertible debt accounting rules been in effect last year, fiscal 2009's diluted earnings per share would have been $1.44, compared with the reported $1.83.

Conference Call

School Specialty will host a conference call to discuss its fiscal 2010 second quarter financial results. The conference call begins today, November 19, at 10:00 a.m. Central (11:00 a.m. Eastern). The call will be simultaneously broadcast in the Investor Information 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   Six Months Ended
                                ------------------  ------------------
                                            (As                 (As
                                         Adjusted)*          Adjusted)*
                                Oct. 24,  Oct. 25,  Oct. 24,  Oct. 25,
                                  2009      2008      2009      2008
                                --------  --------  --------  --------

 Revenues                       $346,146  $390,306  $676,513  $769,100
 Cost of revenues                203,041   231,189   390,617   445,981
                                --------  --------  --------  --------
  Gross profit                   143,105   159,117   285,896   323,119
 Selling, general and
  administrative expenses         86,445   100,089   174,697   201,106
                                --------  --------  --------  --------
  Operating income                56,660    59,028   111,199   122,013

 Other (income) expense:
  Interest expense                 7,739     7,546    15,298    15,355
  Interest income                     --      (141)      (10)     (220)
  Other                               --     1,534        --     2,089
                                --------  --------  --------  --------
 Income before provision for
  income taxes                    48,921    50,089    95,911   104,789
 Provision for income taxes       19,324    19,664    37,885    41,014
                                --------  --------  --------  --------
  Net income                    $ 29,597  $ 30,425  $ 58,026  $ 63,775
                                ========  ========  ========  ========
 Weighted average shares
  outstanding:
  Basic                           18,837    18,785    18,833    18,813
  Diluted                         18,911    18,900    18,892    19,002

 Net Income Per Share:
  Basic                         $   1.57  $   1.62  $   3.08  $   3.39
  Diluted                       $   1.57  $   1.61  $   3.07  $   3.36

 *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)*
                                     Oct. 24,    April 25,   Oct. 25,
                                       2009        2009        2008
                                    ----------  ----------  ----------
 ASSETS                             (Unaudited)             (Unaudited)
 Current assets:
  Cash and cash equivalents         $    8,836  $    1,871  $    9,683
  Accounts receivable                  192,633     103,683     192,809
  Inventories                          109,784     127,108     129,474
  Deferred catalog costs                 5,843      15,537      11,006
  Prepaid expenses and other
   current assets                       11,497      17,347      21,143
  Refundable income taxes                   --       1,566          --
  Deferred taxes                         9,805       9,805      16,275
                                    ----------  ----------  ----------
   Total current assets                338,398     276,917     380,390
 Property, plant and equipment, net     68,331      70,183      71,841
 Goodwill                              545,222     532,318     530,300
 Intangible assets, net                170,154     168,082     172,208
 Other                                  28,760      27,551      28,160
                                    ----------  ----------  ----------
   Total assets                     $1,150,865  $1,075,051  $1,182,899
                                    ==========  ==========  ==========

 LIABILITIES AND SHAREHOLDERS'
  EQUITY
 Current liabilities:
  Current maturities - long-term
   debt                             $  129,663  $  127,071  $  124,576
  Accounts payable                      40,315      56,786      48,389
  Accrued compensation                  12,953      12,821      16,354
  Deferred revenue                       4,579       4,254       4,679
  Accrued income taxes                  21,380          --      22,021
  Other accrued liabilities             32,634      28,231      37,127
                                    ----------  ----------  ----------
   Total current liabilities           241,524     229,163     253,146
 Long-term debt - less current
   maturities                          230,658     244,586     289,359
 Deferred taxes                         93,896      86,109      93,855
 Other liabilities                         913         913         794
                                    ----------  ----------  ----------
   Total liabilities                   566,991     560,771     637,154
                                    ----------  ----------  ----------
 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 24,265,678;
   24,243,438 and 24,206,938
   shares issued, respectively              24          24          24
  Capital paid-in excess of par
   value                               436,923     435,150     432,657
  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                               20,599      10,804       8,116
  Retained earnings                    312,965     254,939     291,585
                                    ----------  ----------  ----------
   Total shareholders' equity          583,874     514,280     545,745
                                    ----------  ----------  ----------
   Total liabilities and
    shareholders' equity            $1,150,865  $1,075,051  $1,182,899
                                    ==========  ==========  ==========

 *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
                                                  Six Months Ended
                                             -------------------------
                                                         (As Adjusted)*
                                             October 24,   October 25,
                                                 2009          2008
                                             -----------   -----------

 Cash flows from operating activities:
  Net income                                 $    58,026   $    63,775
  Adjustments to reconcile net income to
   net cash provided by operating
   activities:
   Depreciation and intangible asset
    amortization expense                          13,196        12,043
   Amortization of development costs               3,514         3,502
   Amortization of debt fees and other             1,055         1,019
   Share-based compensation expense                2,159         2,389
   Deferred taxes                                  7,452         7,160
   Loss (gain) on disposal of property,
    equipment and other                              275           677
   Non-cash convertible debt deferred
    financing costs                                6,398         5,893
   Changes in current assets and
    liabilities (net of assets acquired
    and liabilities assumed in business
    combinations):
    Change in amounts sold under
     receivables securitization, net                  --            --
    Accounts receivable                          (86,610)     (117,308)
    Inventories                                   17,653        19,938
    Deferred catalog costs                         9,694         3,839
    Prepaid expenses and other current
     assets                                        3,967         7,675
    Accounts payable                             (17,190)      (17,322)
    Accrued liabilities                           25,189        27,626
                                             -----------   -----------
     Net cash provided by operating
      activities                                  44,778        20,906
                                             -----------   -----------

 Cash flows from investing activities:
  Cash paid in acquisitions, net of cash
   acquired                                      (11,700)           --
  Additions to property, plant and
   equipment                                      (6,364)       (5,115)
  Proceeds from disposal of discontinued
   operations                                        500         2,235
  Investment in product development costs         (4,436)       (4,055)
  Proceeds from disposal of property,
   plant and equipment                             2,083           109
                                             -----------   -----------
     Net cash used in investing
      activities                                 (19,917)       (6,826)
                                             -----------   -----------

 Cash flows from financing activities:
  Proceeds from bank borrowings                  283,700       441,600
  Repayment of debt and capital leases          (301,433)     (439,109)
  Purchase of treasury stock                          --       (15,250)
  Payment of debt and other                         (238)           --
  Proceeds from exercise of stock options             75         2,647
  Excess income tax benefit from exercise
   of stock options                                   --         1,681
                                             -----------   -----------
     Net cash used in financing activities       (17,896)       (8,431)
                                             -----------   -----------

 Net increase in cash and cash equivalents         6,965         5,649
 Cash and cash equivalents, beginning of
  period                                           1,871         4,034
                                             -----------   -----------
 Cash and cash equivalents, end of period    $     8,836   $     9,683
                                             ===========   ===========

 Free cash flow reconciliation:
  Net cash used in operating activities      $    44,778   $    20,906
  Additions to property and equipment             (6,364)       (5,115)
  Investment in development costs                 (4,436)       (4,055)
  Proceeds from disposal of property and
   equipment                                       2,083           109
                                             -----------   -----------
  Free cash flow                             $    36,061   $    11,845
                                             ===========   ===========

 *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
                       2nd Quarter, Fiscal 2010
                            (In thousands)
                               Unaudited

 Segment Revenues and Gross
 Profit/Margin Analysis-QTD
 --------------------------
                                                         % of Revenues
                                                         -------------
                    2Q10      2Q09     Change    Change   2Q10    2Q09
                    -QTD      -QTD        $        %      -QTD    -QTD
                  --------  --------  --------   -----   -----   -----

 Revenues
  Educational
   Resources      $239,864  $266,286  $(26,422)   -9.9%   69.3%   68.2%
  Publishing       106,610   124,089   (17,479)  -14.1%   30.8%   31.8%
  Corporate and
   Interco Elims      (328)      (69)     (259)           -0.1%    0.0%
                  --------  --------  --------          ------  ------
   Total
    Revenues      $346,146  $390,306  $(44,160)  -11.3%  100.0%  100.0%
                  ========  ========  ========          ======  ======


                                                          % of Gross
                                                            Profit
                                                         -------------
                    2Q10      2Q09     Change    Change   2Q10    2Q09
                    -QTD      -QTD        $        %      -QTD    -QTD
                  --------  --------  -------    -----   -----   -----

 Gross Profit
  Educational
   Resources      $ 82,776  $ 88,172  $ (5,396)   -6.1%   57.8%   55.4%
  Publishing        59,693    70,068   (10,375)  -14.8%   41.7%   44.0%
  Corporate and
   Interco Elims       636       877      (241)            0.5%    0.6%
                  --------  --------  --------          ------  ------
   Total Gross
    Profit        $143,105  $159,117  $(16,012)  -10.1%  100.0%  100.0%
                  ========  ========  ========          ======  ======


 Segment Gross Margin Summary-QTD
 --------------------------------
                    2Q10      2Q09
 Gross Margin       -QTD      -QTD
                  --------  --------
  Educational
   Resources          34.5%     33.1%
  Publishing          56.0%     56.5%
   Total Gross
    Margin            41.3%     40.8%

 ---------------------------------------------------------------------

 Segment Revenues and
 Gross Profit/Margin
 Analysis-YTD
 --------------------
                                                          % of Revenue
                                                         -------------
                    2Q10      2Q09     Change    Change   2Q10    2Q09
                    -YTD      -YTD        $        %      -YTD    -YTD
                  --------  --------  --------   -----   -----   -----

 Revenues
  Educational
   Resources      $464,807  $518,536  $(53,729)  -10.4%   68.7%   67.4%
  Publishing       212,956   250,916   (37,960)  -15.1%   31.5%   32.6%
  Corporate and
   Interco Elims    (1,250)     (352)     (898)           -0.2%    0.0%
                  --------  --------  --------          ------  ------
   Total
    Revenues      $676,513  $769,100  $(92,587)  -12.0%  100.0%  100.0%
                  ========  ========  ========          ======  ======

                                                         % of Gross
                                                            Profit
                                                         -------------
                    2Q10      2Q09     Change    Change   2Q10    2Q09
                    -YTD      -YTD        $        %      -YTD    -YTD
                  --------  --------  -------    -----   -----   -----
 Gross Profit
  Educational
   Resources      $165,492  $177,265  $(11,773)   -6.6%   57.9%   54.9%
  Publishing       119,208   144,089   (24,881)  -17.3%   41.7%   44.6%
  Corporate and
   Interco Elims     1,196     1,765      (569)            0.4%    0.5%
                  --------  --------  --------          ------  ------
   Total Gross
    Profit        $285,896  $323,119  $(37,223)  -11.5%  100.0%  100.0%
                  ========  ========  ========          ======  ======

 Segment Gross Margin
 Summary-YTD
 --------------------
                    2Q10      2Q09
 Gross Margin       -YTD      -YTD
                  --------  --------
  Educational
   Resources          35.6%     34.2%
  Publishing          56.0%     57.4%
   Total Gross
    Margin            42.3%     42.0%
CONTACT:  School Specialty
          David Vander Ploeg, Executive VP and CFO
            920-882-5854
          Mark Fleming, Communications & Investor Relations
            920-882-5646