OMX Officemax Incorporated

ITASCA, Ill., Aug. 3 /PRNewswire-FirstCall/ -- OfficeMax(R) Incorporated (NYSE:OMX) today reported results for the second quarter ended July 1, 2006. For the second quarter, the company reported net income of $27.4 million, or $.35 per diluted share, compared with a net loss of $21.5 million, or $.28 per diluted share, in the second quarter of 2005. Results for the second quarter of 2006 include various items which are not expected to be ongoing, including credits from adjustments to the store closing and additional consideration reserves, partially offset by charges related to our previously announced headquarters consolidation. A full description of these special items and a reconciliation to the company's reported GAAP financial results are included in this press release. For the second quarter of 2006, net income before special items was $23.0 million, or $.29 per diluted share, compared with a net loss before special items of $10.2 million, or $.14 per diluted share, in the second quarter of 2005. "We are pleased with our second quarter operating performance and the resulting increase in our financial outlook for full year 2006," said Sam Duncan, Chairman and Chief Executive Officer of OfficeMax. "In our Contract segment, through a continued focus on profitable sales and cost efficiencies, we achieved significant operating income growth. In our Retail segment, significantly lower inventory clearance activity, reduced shrinkage, and cost controls provided strong operating income improvement." Contract Segment OfficeMax Contract segment sales increased 0.8% in the second quarter of 2006 compared to the second quarter of 2005 reflecting flat sales growth in our U.S. Contract operations and increased sales from our international operations. Contract segment operating income increased to $44.4 million in the second quarter of 2006 compared to $23.7 million in the second quarter of 2005. Contract segment gross margin increased to 22.1% in the second quarter of 2006 from 21.9% in the second quarter of 2005, primarily as a result of several margin enhancement initiatives, partially offset by higher delivery costs due to increased energy prices. Contract segment operating income benefited from targeted cost reduction programs, including the impact of our distribution center consolidation and lower promotional and marketing costs, as well as significant improvement in our Canadian operations. Retail Segment OfficeMax Retail segment sales decreased 6.2% in the second quarter of 2006 compared to the second quarter of 2005 due primarily to the 109 strategic store closings completed in the first quarter of 2006. Same-store sales for the second quarter of 2006 decreased approximately 1%. Retail operating income for the second quarter of 2006 included a $9.0 million pre-tax benefit resulting from an adjustment to the reserve for retail store closures. Excluding this special item, operating income increased to $18.2 million in the second quarter of 2006 compared to an operating loss of $15.5 million in the second quarter of 2005. Retail segment gross margin increased to 29.7% in the second quarter of 2006 compared with 25.6% in the second quarter of 2005, due to significantly lower inventory clearance activity, reduced shrinkage, and a more effective promotional strategy. Retail segment operating income in the second quarter of 2006 also benefited from targeted cost reduction programs including reduced store labor expense, offset by higher allocated general and administrative expense as well as store incentive compensation expense. During the second quarter of 2006, OfficeMax opened 9 new retail stores and closed 2 stores, ending the quarter with 874 retail stores compared with 946 stores at the end of the second quarter of 2005. Corporate and Other Segment The OfficeMax Corporate and Other segment includes support staff services and certain other expenses that are not fully allocated to the Retail and Contract segments. Corporate and Other segment results in the second quarter of 2006 included expenses of $10.9 million related to the previously announced headquarters consolidation. Corporate and Other segment results for the second quarter of 2005 included a charge of $9.4 million for one-time severance payments and other expenses, primarily professional service fees, not expected to be ongoing. Excluding these special items, Corporate and Other segment operating expense decreased by $4.5 million to $14.1 million in the second quarter of 2006 from $18.6 million in the second quarter of 2005, due primarily to reduced legacy company costs, partially offset by increased incentive compensation expense. During the second quarter of 2006, OfficeMax recognized a $9.2 million pre-tax benefit from an adjustment to the reserve for the additional consideration agreement that was entered into in connection with the October 2004 sale of our paper, forest products, and timberland assets. This adjustment is included in Other, net Income (non-operating) in our Consolidated Statements of Income. During the second quarter of 2006, OfficeMax generated $79.0 million in cash from operations and used $23.7 million for capital expenditures. For the first six months of 2006, OfficeMax generated $151.0 million in cash from operations and used $47.0 million for capital expenditures. At June 30, 2006, OfficeMax reported $213.9 million of net debt, or total debt excluding the timber securitization notes less cash and restricted investments. Financial Outlook As reported today, OfficeMax generated operating income as a percent of sales, or operating income margin, of 2.4% in the second quarter of 2006 and 3.5% in the first six months of 2006, excluding special items. OfficeMax is in the initial stages of a turnaround plan but expects to exceed its previously announced goal for 2006 operating income margin of 2.0% to 2.25%, excluding special items. The company now expects 2006 operating income margin to be in the range of 3.0% to 3.5%, excluding special items. This revised outlook reflects the company's strong performance for the second quarter of 2006 and its expectations for the third and fourth quarters of 2006. Special items, including charges for retail store closures and our headquarters consolidation, are expected to reduce our operating income margin by approximately 1.5% for the full year 2006. Conference Call Information OfficeMax will host a conference call with investors and analysts to discuss the second quarter 2006 results on Thursday, August 3, 2006, at 9:00 a.m. Eastern Time (8:00 a.m. Central Time). An audio webcast of the conference call can be accessed via the Internet by visiting the Investors section of the OfficeMax website at http://investor.officemax.com/. To participate in the conference call, dial (800) 374-0165; international callers should dial (706) 634-0995. The webcast will be archived and available online for one year following the call and will be posted on the "Presentations" page located within the Investors section of the OfficeMax website. About OfficeMax OfficeMax(R) Incorporated is a leader in both business-to-business and retail office products distribution. OfficeMax delivers an unparalleled customer experience -- in service, in product, in time savings, and in value -- through a relentless focus on its customers. The company provides office supplies and paper, print and document services, technology products and solutions, and furniture to large, medium and small businesses and consumers. OfficeMax customers are served by more than 35,000 associates through direct sales, catalogs, the Internet and approximately 870 superstores. OfficeMax trades on the New York Stock Exchange under the symbol OMX. To find the nearest OfficeMax, call 1-877-OFFICEMAX. For more information, visit http://www.officemax.com/. Forward-Looking Statements Some statements made in this press release and other written or oral statements made by or on behalf of the company constitute "forward-looking statements" within the meaning of the federal securities laws, including statements regarding future events and developments and the company's future performance, as well as management's expectations, beliefs, intentions, plans, estimates or projections relating to the future. Management believes that these forward-looking statements are reasonable. However, the company cannot guarantee that its actual results will be consistent with such statements and you should not place undue reliance on them. These statements are based on current expectations and speak only as of the date they are made. The company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of future events, new information or otherwise. Important factors regarding the company which may cause results to differ from expectations are included in the company's Annual Report on Form 10-K for the year ended December 31, 2005, including under the caption "Cautionary and Forward-Looking Statements," in Item 1A of that form, and in other filings with the SEC. Media Contact Investor Contact Bill Bonner John Jennings 630 864 6066 630 864 6820 OFFICEMAX INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) (thousands) July 1, December 31, 2006 2005 ASSETS Current assets: Cash and cash equivalents $173,956 $72,198 Receivables, net 526,282 600,244 Merchandise inventories 969,849 1,114,570 Other current assets 154,943 155,037 Total current assets 1,825,030 1,942,049 Property and equipment: Property and equipment 1,104,828 1,083,563 Accumulated depreciation (585,901) (548,118) Property and equipment, net 518,927 535,445 Goodwill and intangible assets, net 1,403,540 1,423,432 Timber notes receivable 1,635,000 1,635,000 Other long-term assets 717,095 736,216 Total assets $6,099,592 $6,272,142 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings $- 18,666 Current portion of long-term debt 25,772 68,648 Accounts payable 841,468 991,453 Accrued liabilities and other 487,908 509,559 Total current liabilities 1,355,148 1,588,326 Long-term debt: Long-term debt, less current portion 384,378 407,242 Timber securitization notes 1,470,000 1,470,000 Total long-term debt 1,854,378 1,877,242 Other long-term liabilities: Compensation and benefits 536,462 538,830 Other long-term liabilities 508,067 504,610 Total other long-term liabilities 1,044,529 1,043,440 Minority interest 25,478 27,455 Shareholders' equity: Preferred stock 54,735 54,735 Common stock 185,108 176,977 Additional paid-in capital 855,574 747,805 Retained earnings 877,109 898,283 Accumulated other comprehensive loss (152,467) (142,121) Total shareholders' equity 1,820,059 1,735,679 Total liabilities and shareholders' equity $6,099,592 $6,272,142 OFFICEMAX INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (LOSS) (unaudited) (thousands, except per-share amounts) For the Quarter Ended July 1, June 25, 2006 2005 Sales $2,040,951 $2,091,804 Cost of goods sold and occupancy costs 1,521,954 1,598,906 Gross profit 518,997 492,898 Operating expenses: Operating and selling 385,299 416,652 General and administrative expenses 86,671 95,789 Other expense, net 456 282 Operating income (loss) 46,571 (19,825) Other income (expense): Debt retirement expense - (2,237) Interest expense (30,214) (33,481) Interest income 22,103 23,484 Other, net 6,727 (12) (1,384) (12,246) Income (loss) from continuing operations before income taxes and minority interest 45,187 (32,071) Income taxes (17,284) 15,266 Income (loss) from continuing operations before minority interest 27,903 (16,805) Minority interest, net of income taxes (508) (454) Income (loss) from continuing operations 27,395 (17,259) Discontinued operations Operating loss - (7,003) Income tax benefit - 2,724 Loss from discontinued operations - (4,279) Net income (loss) 27,395 (21,538) Preferred dividends (1,009) (1,155) Net income (loss) applicable to common shareholders $26,386 $(22,693) Basic income (loss) per common share Continuing operations $0.36 $(0.23) Discontinued operations - (0.05) Basic income (loss) per common share $0.36 $(0.28) Diluted income (loss) per common share Continuing operations $0.35 $(0.23) Discontinued operations - (0.05) Diluted income (loss) per common share $0.35 $(0.28) Weighted Average Shares Basic 72,877 81,726 Diluted 74,924 81,726 OFFICEMAX INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited) (thousands, except per-share amounts) Six Months Ended July 1, June 25, 2006 2005 Sales $4,464,488 $4,414,604 Cost of goods sold and occupancy costs 3,318,737 3,354,422 Gross profit 1,145,751 1,060,182 Operating and other expenses: Operating and selling 818,344 866,954 General and administrative expenses 175,904 188,253 Other expense, net 113,296 10,668 Operating income (loss) 38,207 (5,693) Other income (expense): Debt retirement expense - (14,392) Interest expense (61,717) (64,672) Interest income 43,217 55,353 Other, net 4,561 758 (13,939) (22,953) Income (loss) from continuing operations before income taxes and minority interest 24,268 (28,646) Income taxes (9,290) 11,750 Income (loss) from continuing operations before minority interest 14,978 (16,896) Minority interest, net of income taxes (1,689) (1,363) Income (loss) from continuing operations 13,289 (18,259) Discontinued operations Operating loss (17,972) (14,028) Income tax benefit 6,991 5,457 Loss from discontinued operations (10,981) (8,571) Net income (loss) 2,308 (26,830) Preferred dividends (2,018) (2,261) Net income (loss) applicable to common shareholders $290 $(29,091) Basic income (loss) per common share Continuing operations $0.15 $(0.23) Discontinued operations (0.15) (0.10) Basic income (loss) per common share $(0.00) $(0.33) Diluted income (loss) per common share Continuing operations $0.15 $(0.23) Discontinued operations (0.15) (0.10) Diluted income (loss) per common share $0.00 $(0.33) Weighted Average Shares Basic 71,855 87,281 Diluted 73,510 87,281 OFFICEMAX INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (thousands) For the Six Months Ended July 1, June 25, 2006 2005 Cash provided by (used for) operations: Net income (loss) $2,308 $(26,830) Items in net income (loss) not using (providing) cash Depreciation and amortization of intangibles 60,316 73,233 Other 30,980 25,283 Changes other than from acquisitions of business Receivables and inventory 217,532 201,878 Accounts payable and accrued liabilities (180,825) (288,411) Income taxes and other 20,669 (204,372) Cash provided by (used for) for operations 150,980 (219,219) Cash provided by (used for) investment: Expenditures for property and equipment (46,996) (59,103) Proceeds from sale of assets - 90,522 Acquisition of businesses - (33,028) Other 596 (1,709) Cash provided by (used for) investment (46,400) (3,318) Cash provided by (used for) financing: Cash dividends paid (23,268) (28,009) Changes in debt, net (84,144) (176,441) Purchase of common stock (33) (780,351) Proceeds from exercise of stock options 104,623 22,009 Other - 126 Cash provided by (used for) financing (2,822) (962,666) Increase (decrease) in cash and cash equivalents 101,758 (1,185,203) Cash and equivalents at beginning of period 72,198 1,242,542 Cash and equivalents at end of period $173,956 $57,339 OFFICEMAX INCORPORATED AND SUBSIDIARIES SUPPLEMENTAL SEGMENT INFORMATION (unaudited) (millions, except per-share data) For the Quarter Ended July 1, 2006 June 25, 2005 Before Before As Special Special As Special Special Reported Items(a) Items(c) Reported Items(b) Items(c) Segment Sales OfficeMax, Contract $1,146.7 $1,146.7 $1,138.2 $1,138.2 OfficeMax, Retail 894.2 894.2 953.6 953.6 2,040.9 2,040.9 2,091.8 2,091.8 Segment income (loss) OfficeMax, Contract $44.4 $- $44.4 $23.7 $- $23.7 OfficeMax, Retail 27.2 (9.0) 18.2 (15.5) - (15.5) Corporate and Other (25.0) 10.9 (14.1) (28.0) 9.4 (18.6) Operating income (loss) 46.6 1.9 48.5 (19.8) 9.4 (10.4) Operating income margin 2.3% 2.4% -0.9% -0.5% Debt retirement expenses - - - (2.2) 2.2 - Interest expense (30.2) - (30.2) (33.5) - (33.5) Interest income and other 28.8 (9.2) 19.6 23.5 - 23.5 Income (loss) from continuing operations before income taxes and minority interest 45.2 (7.3) 37.9 (32.0) 11.6 (20.4) Income taxes (17.3) 2.9 (14.4) 15.3 (4.6) 10.7 Income (loss) from continuing operations before minority interest 27.9 (4.4) 23.5 (16.7) 7.0 (9.7) Minority interest, net of income tax (0.5) - (0.5) (0.5) - (0.5) Income (loss) from continuing operations 27.4 (4.4) 23.0 (17.2) 7.0 (10.2) Discontinued operations Operating loss - - - (7.0) 7.0 - Income tax benefit - - - 2.7 (2.7) - Loss from discontinued operations - - - (4.3) 4.3 - Net income (loss) $27.4 $(4.4) $23.0 $(21.5) $11.3 $(10.2) Diluted income (loss) per common share Continuing operations $0.35 $(0.06) $0.29 $(0.23) $0.09 $(0.14) Discontinued operations - - - (0.05) 0.05 - Diluted income (loss) per common share $0.35 $(0.06) $0.29 $(0.28) $0.14 $(0.14) (a) See Note 4 for a discussion of these special items. (b) See Notes 3 and 5 for a discussion of these special items. (c) For the purpose of evaluating our results, net of taxes, we have presented the results before special items using an estimated annual tax rate. For the purpose of presenting diluted income (loss) per common share before special items, we calculated diluted income (loss) per common share before special items without making any adjustments to the number of shares used in the calculation of diluted income (loss) per common share as reported. OFFICEMAX INCORPORATED AND SUBSIDIARIES SEGMENT INFORMATION (unaudited) (millions, except per-share data) Six Months Ended July 1, 2006 June 25, 2005 Before Before As Special Special As Special Special Reported Items(a) Items(c) Reported Items(b) Items(c) Segment Sales OfficeMax, Contract $2,377.5 $2,377.5 $2,262.6 $2,262.6 OfficeMax, Retail 2,087.0 2,087.0 2,152.0 2,152.0 4,464.5 4,464.5 4,414.6 4,414.6 Segment income (loss) OfficeMax, Contract $111.5 $- $111.5 $42.1 $9.8 $51.9 OfficeMax, Retail (10.8) 89.5 78.7 7.3 - 7.3 Corporate and Other (62.5) 26.6 (35.8) (55.1) 20.8 (34.4) Operating income (loss) 38.2 116.2 154.4 (5.7) 30.6 24.9 Operating income margin 0.9% 3.5% -0.1% 0.6% Debt retirement expenses - - - (14.4) 14.4 - Interest expense (61.7) - (61.7) (64.7) - (64.7) Interest income and other 47.8 (9.2) 38.5 56.1 (2.6) 53.5 Income (loss) from continuing operations before income taxes and minority interest 24.3 106.9 131.2 (28.6) 42.3 13.7 Income taxes (9.3) (41.6) (50.9) 11.8 (16.5) (4.7) Income (loss) from continuing operations before minority interest 15.0 65.3 80.3 (16.9) 25.9 9.0 Minority interest, net of income tax (1.7) - (1.7) (1.4) - (1.4) Income (loss) from continuing operations 13.3 65.3 78.6 (18.3) 25.9 7.6 Discontinued operations Operating loss (18.0) 18.0 - (14.0) 14.0 - Income tax benefit 7.0 (7.0) - 5.5 (5.5) - Loss from discontinued operations (11.0) 11.0 - (8.6) 8.6 - Net income (loss) $2.3 $76.3 $78.6 $(26.8) $34.4 $7.6 Diluted income (loss) per common share Continuing operations $0.15 $0.89 $1.04 $(0.23) $0.29 $0.06 Discontinued operations (0.15) 0.15 - (0.10) 0.10 - Diluted income (loss) per common share $0.00 $1.04 $1.04 $(0.33) $0.39 $0.06 Totals may not foot due to rounding. (a) See Notes 4 and 5 for a discussion of these special items. (b) See Notes 3 and 5 for a discussion of these special items. (c) For the purpose of evaluating our results, net of taxes, we have presented the results before special items using an estimated annual tax rate. For the purpose of presenting diluted income (loss) per common share before special items, we calculated diluted income (loss) per common share before special items without making any adjustments to the number of shares used in the calculation of diluted income (loss) per common share as reported. If adjustments for potential dilution are included, outstanding shares would have increased by approximately 2.4 million shares for 2005. (1) Financial Information The quarterly consolidated financial statements included in this release are unaudited, and should be read in conjunction with the audited financial statements in our 2005 Annual Report on Form 10-K. In all periods presented, the measurement of net income (loss) involved estimates and accruals. (2) Reconciliation of non-GAAP Measures to GAAP Measures We evaluate our results of operations both before and after special gains and losses. We believe our presentation of non-GAAP measures and financial measures before special items enhances our investors' overall understanding of our recurring operational performance. Specifically, we believe presenting results before special items provides useful information to both investors and management by excluding gains, losses and expenses that are not indicative of our core operating activities. In the preceding tables, we reconcile our financial measures before special items to our reported financial results for the second quarter and first six months of 2006 and 2005, respectively. Financial Outlook We announced on January 24, 2006 our expectations for full year 2006 EBIT margin of 2.0% to 2.25%, excluding special items. In January 2006, we used EBIT margin as a measure of our operating performance. In this release, we have renamed this measure operating income margin, to make it clear that it can be calculated by dividing operating income before special items by sales. The two measures are identical. The January operating income margin expectation assumed special items for retail store closures and our headquarters consolidation. Our revised expectation for full year 2006 operating income margin is 3.0 to 3.5%, excluding special items. We expect special items for retail store closures and our headquarters consolidation to reduce our operating income margin by approximately 1.5% for full year 2006. (3) 2005 Special Items First Quarter 2005 During the first quarter of 2005, we recorded expenses of $11.3 million in our Corporate and Other segment primarily for severance. We also recorded a $9.8 million charge in our Contract segment related to a legal settlement with the Department of Justice. During the first quarter of 2005, we also incurred costs related to the early retirement of debt of $12.2 million and realized a $2.6 million settlement gain from a previous asset sale. Second Quarter 2005 During the second quarter of 2005, we incurred $9.4 million of expenses in the Corporate and Other segment for severance and other expenses, primarily related to professional service fees, which are not expected to be ongoing. During the second quarter ended of 2005, we also incurred costs related to the early retirement of debt of $2.2 million. (4) 2006 Special Items First Quarter 2006 During the first quarter of 2006, we closed 109 underperforming domestic retail stores and recorded a charge of $98.6 million in our Retail segment, primarily related to remaining lease obligations. Also during the first quarter of 2006, we incurred $15.7 million of expenses in our Corporate and Other segment related to our headquarters consolidation, primarily for employee severance and retention. Second Quarter 2006 During the second quarter of 2006, we recorded a $9.0 million pre-tax benefit in our Retail segment from an adjustment to the reserve for closed retail stores. During the second quarter of 2006, we incurred $10.9 million of expenses in our Corporate and Other segment related to our headquarters consolidation, primarily for employee severance and retention. Also during the second quarter of 2006, we recognized a $9.2 million credit from an adjustment to the reserve for the additional consideration agreement that was entered into in connection with the October 2004 sale of our paper, forest products and timberland assets. This adjustment is included in Other, net Income (non-operating) in our Consolidated Statements of Income. (5) Discontinued Operations In the first quarter of 2006, we ceased operations at the Company's wood- polymer building materials facility near Elma, Washington. As a result, we recorded expenses of $18.0 million in the first quarter of 2006 primarily related to lease and contract termination costs and other closure and exit costs, including severance. The costs and expenses related to this business in 2006 and 2005 are reflected as discontinued operations in our Consolidated Statements of Income (Loss) and are included as special items in our Segment Information tables. DATASOURCE: OfficeMax Incorporated CONTACT: Media: Bill Bonner, +1-630-864-6066, or Investors: John Jennings, +1-630-864-6820, both for OfficeMax Incorporated Web site: http://www.officemax.com/

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