SCHOOL SPECIALTY INC - FORM 8-K - EX-99.1 - PRESS RELEASE

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8-K - FORM 8-K - SCHOOL SPECIALTY INC	d8k.htm

Exhibit 99.1

LOGO

FOR IMMEDIATE RELEASE

THURSDAY, JUNE 10, 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 FOURTH QUARTER AND FISCAL 2010 RESULTS

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

Greenville, WI, June 10, 2010—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.

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•

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!™ 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.

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“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.

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SCHOOL SPECIALTY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Amounts)

Unaudited


	Three Months Ended						Fiscal Year Ended
	April 24, 2010			(As Adjusted)* April 25, 2009			April 24, 2010			(As Adjusted)* April 25, 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.

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SCHOOL SPECIALTY, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(In Thousands)


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

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SCHOOL SPECIALTY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

Unaudited


	Fiscal Year Ended
	April 24, 2010			(As Adjusted)* April 25, 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

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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
	4Q10-QTD			4Q09-QTD			Change $			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	)	-25.1	%	100.0	%	100.0	%


												% of Gross Profit
	4Q10-QTD			4Q09-QTD			Change $			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	)	-18.3	%	100.0	%	100.0	%


*Segment Gross Margin Summary-QTD*
	4Q10-QTD			4Q09-QTD
*Gross Margin*
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
	4Q10-YTD			4Q09-YTD			Change $			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	)	-14.4	%	100.0	%	100.0	%


												% of Gross Profit
	4Q10-YTD			4Q09-YTD			Change $			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	)	-11.5	%	100.0	%	100.0	%


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

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