School Specialty (SCOO) 8-K Results of Operations and Financial Condition

Exhibit 99.1

    FOR IMMEDIATE RELEASE THURSDAY, FEBRUARY 18, 2010 Contact: David Vander Ploeg Executive VP and CFO 920-882-5854         Mark Fleming Communications & Investor Relations 920-882-5646

W6316 Design Drive, Greenville, WI 54942

P.O. Box 1579, Appleton, WI 54912-1579

SCHOOL SPECIALTY REPORTS THIRD QUARTER AND NINE-MONTH RESULTS

o Third quarter earnings per share (EPS) improves 22% or $0.27 over the prior year

o Gross profit margin improves 550 basis points; SG&A declines $8.3 million

o Debt reduced by $60 million; cash position increased $22 million

o Revenue and EPS guidance updated; free cash flow guidance confirmed

Greenville, WI, February 18, 2010—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.”

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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.

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• 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 atwww.schoolspecialty.com, and a replay of the call will be available.

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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.

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SCHOOL SPECIALTY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Amounts)

Unaudited

	Three Months Ended						Nine Months Ended
	January 23, 2010			(As Adjusted)* January 24, 2009			January 23, 2010			(As Adjusted)* January 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.

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SCHOOL SPECIALTY, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(In Thousands)

	January 23, 2010			(As Adjusted from Audited Statements)* April 25, 2009			(As Adjusted)* January 24, 2009
	(Unaudited)						(Unaudited)
ASSETS
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.

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SCHOOL SPECIALTY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

Unaudited

	Nine Months Ended
	January 23, 2010			(As Adjusted)* January 24, 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.

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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
	3Q10-QTD			3Q09-QTD			Change $			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	)	-15.3	%	100.0	%	100.0	%
												% of Gross Profit
	3Q10-QTD			3Q09-QTD			Change $			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	)	-2.0	%	100.0	%	100.0	%
Segment Gross Margin Summary-QTD
	3Q10-QTD			3Q09-QTD
Gross Margin
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
	3Q10-YTD			3Q09-YTD			Change $			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	)	-12.5	%	100.0	%	100.0	%
												% of Gross Profit
	3Q10-YTD			3Q09-YTD			Change $			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	)	-10.4	%	100.0	%	100.0	%
Segment Gross Margin Summary-YTD
	3Q10-YTD			3Q09-YTD
Gross Margin
Educational Resources		35.8	%		34.2	%
Publishing		56.1	%		55.7	%
Total Gross Margin		42.1	%		41.1	%

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