Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Nature of Operations
OfficeMax Incorporated ("OfficeMax," the "Company" or "we") is a leader in both business-to-business and retail office products
distribution. The Company provides office supplies and paper, print and document services, technology products and solutions and furniture to large, medium and small businesses, government offices,
and consumers. OfficeMax customers are serviced by approximately 36,000 associates through direct sales, catalogs, the Internet and a network of retail stores located throughout the United States,
Canada, Australia, New Zealand and Mexico. The Company's common stock is traded on the New York Stock Exchange under the ticker symbol OMX. The Company's corporate headquarters is located in
Naperville, Illinois, and the OfficeMax website address is www.officemax.com.
The
Company manages its business using three reportable segments: OfficeMax, Contract; OfficeMax, Retail; and Corporate and Other. OfficeMax, Contract markets and sells office supplies
and paper, technology products and solutions and office furniture directly to large corporate and government offices, as well as to small and medium-sized offices through field salespeople, outbound
telesales, catalogs, the Internet and, primarily in foreign markets, through office products stores. OfficeMax, Retail markets and sells office supplies and paper, print and document services,
technology products and solutions and office furniture to small and medium-sized businesses and consumers through a network of retail stores.
Consolidation
The consolidated financial statements include the accounts of OfficeMax and all majority owned subsidiaries as well as those of variable interest entities in
which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation.
Change in Fiscal Year
Effective March 11, 2005, the Company amended its bylaws to make its fiscal year-end the last Saturday in December. Prior to this change, all
of the Company's businesses except for its U.S. retail operations had a December 31 fiscal year-end. The U.S. retail operations maintained a fiscal year that ended on the last
Saturday in December. Due primarily to statutory requirements, the Company's international businesses have maintained their December 31 year-ends. Fiscal year 2005 ended on
December 31, 2005 for all reportable segments and businesses, and included 53 weeks for the Retail segment. Fiscal year 2006 ended on December 30, 2006 and included
52 weeks for all reportable segments and businesses. Fiscal year 2007 ended on December 29, 2007 and also included 52 weeks for all reportable segments and businesses.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures about contingent assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results are likely to differ from those estimates, but management does not believe such differences will materially affect the
Company's financial position, results of operations or cash flows. Significant items subject to such estimates and assumptions include the recognition of vendor rebates and allowances; the carrying
amount of intangibles and goodwill; valuation allowances for receivables, inventories and deferred income tax
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assets;
facility closure reserves and environmental liabilities; and assets and obligations related to employee benefits.
Foreign Currency Translation
Local currencies are considered the functional currencies for the Company's operations outside the United States. Assets and liabilities of foreign operations are
translated into U.S. dollars at the rate of exchange in effect at the balance sheet date with the related translation adjustments reported in stockholders' equity as a component of accumulated other
comprehensive income (loss). Revenues and expenses are translated into U.S. dollars at average monthly exchange rates prevailing during the year. Foreign currency transaction gains and losses related
to assets and liabilities that are denominated in a currency other than the functional currency are reported in the Consolidated Statements of Income (Loss) in the period they occur.
Revenue Recognition
Revenue from the sale of products is recognized at the time both title and the risk of ownership are transferred to the customer, which generally occurs upon
delivery to the customer or third-party delivery service for contract, catalog and Internet sales, and at the point of sale for retail transactions. Service revenue is recognized as the services are
rendered. Revenue is reported less an appropriate provision for returns and net of coupons, rebates and other sales incentives.
Revenue
from transactions in which the Company acts as an agent or broker is reported on a commission basis. Revenue from the sale of extended warranty contracts is reported on a
commission basis at the time of sale, except in a limited number of states where state law specifies the Company as the legal obligor. In such states, the revenue from the sale of extended warranty
contracts is recorded at the gross amount and recognized ratably over the contract period. The performance obligations and risk of loss associated with extended warranty contracts sold by the Company
are assumed by an unrelated third party. Costs associated with these contracts are recognized in the same period as the related revenue.
Fees
for shipping and handling charged to customers in connection with sale transactions are included in sales. Costs related to shipping and handling are included in cost of goods sold
and occupancy costs. Taxes collected from customers are accounted for on a net basis and are excluded from sales.
Cash and Cash Equivalents
Cash equivalents includes short-term debt instruments that have an original maturity of three months or less at the date of purchase. The Company's
banking arrangements allow the Company to fund outstanding checks when presented to the financial institution for payment. This cash management practice frequently results in a net cash overdraft
position for accounting purposes, which occurs when total issued checks exceed available cash balances at a single financial institution. The Company records its outstanding checks in accounts
payabletrade in the Consolidated Balance Sheets, and the net change in overdrafts in the accounts payabletrade line item within the cash flows from operating activities
section of the Consolidated Statements of Cash Flows.
Accounts Receivable
Accounts receivable relate primarily to amounts owed by customers for trade sales of products and services and amounts due from vendors under volume purchase
rebate, cooperative advertising and various other marketing programs. An allowance for doubtful accounts is recorded to provide for estimated losses resulting from uncollectible accounts, and is the
Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable.
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Management
believes that the Company's exposure to credit risk associated with accounts receivable is limited due to the size and diversity of its customer and vendor base, which extends across many
different industries and geographic regions.
The
Company has an agreement with a third-party service provider that manages the Company's private label credit card program and directly extends credit to customers.
Prior
to July 2007, the Company sold fractional ownership interests in a defined pool of accounts receivable and retained a subordinated interest and servicing rights to those
receivables. The sale of the receivables under this program was accounted for under Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." Sold accounts receivable were excluded from receivables in the Company's Consolidated Balance Sheet. The portion of the fractional ownership in
the transferred receivables that the Company retained is included in Receivables in the Consolidated Balance Sheet. See Note 8, Sales of Accounts Receivable, for additional information related
to this terminated program.
At
December 29, 2007 and December 30, 2006, the Company had allowances for doubtful accounts of $14.5 million and $15.1 million, respectively.
Vendor Rebates and Allowances
The Company participates in various cooperative advertising and other marketing programs with its vendors. The Company also participates in volume purchase rebate
programs, some of which provide for tiered rebates based on defined levels of purchase volume. These arrangements enable the Company to receive reimbursement for costs incurred to promote the sale of
vendor products, or to earn rebates that reduce the cost of merchandise purchased. Vendor rebates and allowances are accrued as earned. Rebates and allowances received as a result of attaining defined
purchase levels are accrued over the incentive period based on the terms of the vendor arrangement and estimates of qualifying purchases during the rebate program period. These estimates are reviewed
on a quarterly basis and adjusted for changes in anticipated product sales and expected purchase levels. Volume-based rebates and allowances earned are initially recorded as a reduction in the cost of
merchandise inventories and are included in operations (as a reduction in cost of goods sold) in the period the related product is sold. Amounts received under other promotional programs are generally
event-based and are recognized at the time of the event as a reduction of cost of goods sold or inventory, as appropriate, based on the nature of the promotion and the terms of the vendor agreement.
Advertising and other allowances that represent reimbursements of specific, incremental and identifiable costs incurred to promote vendors' products are recorded as a reduction of operating and
selling expenses in the period the expense is incurred.
Merchandise Inventories
Inventories consist of office products merchandise and are stated at the lower of weighted average cost or net realizable value. The Company estimates the
realizable value of inventory using assumptions about future demand, market conditions and product obsolescence. If the estimated realizable value is less than cost, the inventory value is reduced to
its estimated realizable value.
Throughout
the year, the Company performs physical inventory counts at all locations. For periods subsequent to each location's last physical inventory count, an allowance for estimated
shrinkage is provided based on historical shrink results and current business trends.
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Property and Equipment
Property and equipment are recorded at cost. The Company calculates depreciation using the straight-line method over the estimated useful lives of the
assets or the terms of the related leases. The estimated useful lives of depreciable assets are generally as follows: building and improvements, 5 to 40 years; furniture and equipment, 1.5 to
5 years; and machinery, equipment and delivery trucks, 5 to 10 years. Leasehold improvements are amortized over the lesser of the term of the lease, including any option periods that
management believes are probable of exercise, or the estimated lives of the improvements, which generally range from 5 to 15 years.
Long-Lived Asset Impairment
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," long-lived assets, such as
property, plant, and equipment, capitalized software costs and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized equal to the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in the Consolidated Balance Sheets and reported at the lower of the carrying amount
or fair value less costs to sell, and are no longer depreciated.
Goodwill and Intangible Assets
The Company accounts for goodwill and other indefinite life intangible assets in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets."
Goodwill represents the excess of purchase price and related direct costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Goodwill and intangible
assets with indefinite lives are not amortized, but are tested for impairment at least annually, or more frequently if events and circumstances indicate that the asset might be impaired, using a
fair-value-based approach. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. This determination is made at the reporting unit level
and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair
value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is
determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation in accordance with SFAS No. 141, "Business Combinations." The residual fair
value after this allocation is the implied fair value of the reporting unit goodwill. The Company completed its annual assessment in
accordance with the provisions of SFAS No. 142 in the first quarters of 2007 and 2006, and concluded there was no impairment.
Intangible
assets represent the values assigned to trade names, customer lists and relationships, noncompete agreements and exclusive distribution rights of businesses acquired. Trade
name assets have an indefinite life and are not amortized. All other intangible assets are amortized on a straight-line basis over their expected useful lives, which range from three to
20 years. (See Note 10, Goodwill and Intangible Assets, for additional information related to goodwill and intangible assets.)
Investments in Affiliates
Investments in affiliated companies are accounted for under the cost method if the Company does not exercise significant influence over the affiliated company. At
December 29, 2007 and
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December 30,
2006, the Company held an investment in Boise Cascade, L.L.C., which is accounted for under the cost method. Investments that enable the Company to exercise significant influence
over an affiliated company, but do not represent a controlling interest, are accounted for under the equity method; such investments are carried at cost and are adjusted to reflect the Company's
proportionate share of income or loss, less dividends received. The Company periodically reviews the recoverability of investments in affiliates. The Company would recognize a loss on these
investments if there is a loss in value of an investment which is other than a temporary decline. (See Note 9, Investments in Affiliates, for additional information related to the Company's
investments in affiliates.)
Capitalized Software Costs
The Company capitalizes certain costs related to the acquisition and development of internal use software that is expected to benefit future periods in accordance
with American Institute of Certified Public Accountants' Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." These
costs are amortized using the straight-line method over the expected life of the software, which is typically three to five years. Deferred charges in the Consolidated Balance Sheets
include unamortized capitalized software costs of $45.6 million and $25.7 million at December 29, 2007 and December 30, 2006, respectively. Amortization of capitalized
software costs totaled $15.2 million, $17.7 million and $25.6 million in 2007, 2006 and 2005, respectively.
Software
development costs that do not meet the criteria for capitalization are expensed as incurred.
Pension and Post Retirement Benefits
The Company sponsors noncontributory defined benefit pension plans covering certain terminated employees, vested employees, retirees, and some active OfficeMax,
Contract employees. The Company also sponsors various retiree medical benefit plans. The type of retiree medical benefits and the extent of coverage vary based on employee classification, date of
retirement, location, and other factors. The Company explicitly reserves the right to amend or terminate its retiree medical plans at any time, subject only to constraints, if any, imposed by the
terms of collective bargaining agreements. Amendment or termination may significantly affect the amount of expense incurred.
As
of December 30, 2006, the Company adopted SFAS 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB
Statements No. 87, 88, 106, and 132(R)." SFAS 158 requires employers to fully recognize the funded status of single-employer defined benefit pension, retiree healthcare and other
postretirement plans in the Consolidated Balance Sheets, with changes in the funded status recognized through other comprehensive income, net of tax, in the year in which the changes occur.
Actuarially-determined liabilities related to pension and postretirement benefits are recorded based on estimates and assumptions. Key factors used in developing estimates of these liabilities include
assumptions related to discount rates, rates of return on investments, future compensation costs, healthcare cost trends, benefit payment patterns and other factors.
The
Company measures changes in the funded status of its plans using actuarial models in accordance with SFAS 87, "Employers' Accounting for Pension Plans," and SFAS 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." These models use an attribution approach that generally spreads recognition of the effects of individual events over the
estimated service lives of the employees in the plan. The attribution approach assumes that employees render service over their service lives on a relatively smooth basis and as such, presumes that
the income statement effects of pension or postretirement benefit plans should follow the same pattern. Net
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pension
and postretirement benefit income or expense is also determined using assumptions which include expected long-term rates of return on plan assets and discount rates. The Company
bases the discount rate assumption on the rates of return on high-quality bonds currently available and expected to be available during the period to maturity of the pension benefits. The
long-term asset return assumption is based on the average rate of earnings expected on invested funds, and considers several factors including actual historical rates, expected rates and
external data.
The
Company's policy is to fund its pension plans based upon actuarial recommendations and in accordance with applicable laws and income tax regulations. Pension benefits are primarily
paid through trusts funded by the Company. All of the Company's postretirement medical plans are unfunded. The Company pays postretirement benefits directly to the participants.
Facility Closure Reserves
The Company conducts regular reviews of its real estate portfolio to identify underperforming facilities, and closes those facilities that are no longer
strategically or economically viable. The Company accounts for facility closure costs that are not related to a purchase business combination in accordance with SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." In accordance with SFAS No. 146, the Company records a liability for the cost associated with a facility closure at its fair value in the
period in which the liability is incurred, which is either the date the lease termination is communicated to the lessor or the location's cease-use date. Upon closure, unrecoverable costs
are included in facility closure reserves on the Consolidated Balance Sheets and include provisions for the present value of future lease obligations, less contractual or estimated sublease income.
Accretion expense is recognized over the life of the payments.
The
closure of certain facilities acquired in the OfficeMax, Inc. acquisition was accounted for in accordance with Emerging Issues Task Force ("EITF") Issue
No. 95-3, "Recognition of Liabilities in Connection With a Purchase Business Combination." The estimated costs to be incurred in closing these facilities were accrued in connection
with the acquisition, and did not result in a charge to income in the Company's Consolidated Statements of Income (Loss).
Environmental Matters
The Company has adopted the provisions of SFAS No. 143, "Accounting for Asset Retirement Obligations," in accounting for landfill closure costs related to
the sold paper, forest products and timberland assets. This statement requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at
the time the obligations are incurred. Upon initial recognition of a liability, that cost is capitalized as part of the related long-lived asset and depreciated on a
straight-line basis over the remaining estimated useful life of the asset. The asset retirement obligation for estimated closure and closed-site monitoring costs recorded on
the Company's Consolidated Balance Sheet was $4.2 million at December 29, 2007 and December 30, 2006. These obligations are related to assets held for sale.
Environmental
liabilities that relate to the operation of the sold paper, forest products and timberland assets prior to the closing of the Sale transaction were retained by the Company.
These
environmental obligations are not within the scope of SFAS No. 143, and the Company accrues for losses associated with these types of environmental remediation obligations when such losses are
probable and reasonably estimable according to the guidance in SOP 96-1, "Environmental Remediation Liabilities." The liabilities for environmental obligations are not discounted to
their present value. (See Note 18, Legal Proceedings and Contingencies, for additional information.)
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Self-insurance
The Company is self-insured for certain losses related to workers' compensation and medical claims as well as general and auto liability. The expected
ultimate cost for claims incurred is recognized as a liability in the Consolidated Balance Sheets. The expected ultimate cost of claims incurred is estimated based principally on analysis of
historical claims data and actuarial estimates of claims incurred but not reported. Losses are accrued and charged to operations when it is probable that a loss has been incurred and the amount can be
reasonably estimated.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The
Company is subject to tax audits in numerous jurisdictions in the U.S. and around the world. Tax audits by their very nature are often complex and can require several years to
complete. In the normal course of business, the Company is subject to challenges from the IRS and other tax authorities regarding amounts of taxes due. These challenges may alter the timing or amount
of taxable income or deductions, or the allocation of income among tax jurisdictions. Prior to fiscal 2007, the Company recognized income tax accruals with respect to uncertain tax positions based
upon SFAS No. 5, "Accounting for Contingencies." In fiscal 2007, the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 48, "Accounting for Uncertainty
in Income Taxes." Under FIN 48, the benefits of tax positions that are more likely than not of being sustained upon audit based on the technical merits of the tax position are recognized in the
consolidated financial statements; positions that do not meet this threshold are not recognized. For tax positions that are at least more likely than not of being sustained upon audit, the largest
amount of the benefit that is more likely than not of being sustained is recognized in the consolidated financial statements. (See Note 6, Income Taxes, for a discussion of the adoption impact
of FIN 48.)
Accruals
for income tax exposures, including penalties and interest, expected to be settled within the next year are included in accrued expenses and other current liabilities with the
remainder included in other long-term obligations in the Consolidated Balance Sheets. Interest and penalties related to income tax exposures are recognized as incurred and included in
income tax expense in the Consolidated Statements of Income (Loss).
Advertising and Catalog Costs
Advertising costs are either expensed the first time the advertising takes place or, in the case of direct-response advertising, capitalized and charged to
expense in the periods in which the related sales occur. Advertising expense was $242.6 million in 2007, $240.4 million in 2006 and $276.2 million in 2005, and is recorded in
operating and selling expenses in the Consolidated Statements of Income (Loss). Capitalized catalog costs, which are included in other current assets in the Consolidated Balance Sheets, totaled
$7.6 million at December 29, 2007, and $9.3 million at December 30, 2006.
Pre-Opening Expenses
The Company incurs certain non-capital expenses prior to the opening of a store. These pre-opening expenses consist primarily of
straight-line rent from the date of possession, store payroll, and supplies and are expensed as incurred and reflected in operating and selling
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expenses.
In 2007, 2006 and 2005, the Company recorded approximately $10.2 million, $5.6 million and $4.5 million in pre-opening costs, respectively.
Leasing Arrangements
The Company conducts a substantial portion of its business in leased properties. Some of the Company's leases contain escalation clauses and renewal options. In
accordance with SFAS No. 13, "Accounting for Leases," as amended by SFAS No. 29, "Determining Contingent Rentals," and FASB Technical Bulletin 85-3, "Accounting
for Operating Leases with Scheduled Rent Increases," the Company recognizes rental expense for leases that contain predetermined fixed escalation clauses on a straight-line basis over the
expected term of the lease. The difference between the amounts charged to expense and the contractual minimum lease payment is recorded in other long-term liabilities in the Consolidated
Balance Sheets. At December 29, 2007 and December 30, 2006, other long-term liabilities included approximately $73.7 million and $51.3 million, respectively,
related to these future escalation clauses.
The
expected term of a lease is calculated from the date the Company first takes possession of the facility, including any periods of free rent and any option or renewal periods
management believes are probable of exercise. This expected term is used in the determination of whether a lease is capital or operating and in the calculation of straight-line rent
expense. Rent abatements and escalations are considered in the calculation of minimum lease payments in the Company's capital lease tests and in determining straight-line rent expense for
operating leases. Straight-line rent expense is also adjusted to reflect any allowances or reimbursements provided by the lessor.
Derivative Instruments and Hedging Activities
The Company accounts for derivatives and hedging activities in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Certain Hedging
Activities," as amended, which requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivative instruments are recorded in current
earnings or deferred in accumulated other comprehensive income (loss), depending on whether a derivative is designated as, and is effective as, a hedge and on the type of hedging transaction. Changes
in fair value of derivatives that are designated as cash flow hedges are deferred in accumulated other comprehensive income (loss) until the underlying hedged transactions are recognized in earnings,
at which time any deferred hedging gains or losses are also recorded in earnings. If a derivative instrument is designated as a fair value hedge, changes in the fair value of the instrument are
reported in current earnings and offset the change in fair value of the hedged assets, liabilities or firm commitments. The ineffective portion of an instrument's change in fair value is immediately
recognized in earnings. Instruments that do not meet the criteria for hedge accounting or contracts for which the Company has not elected hedge accounting, are marked to fair value with unrealized,
gains or losses reported in earnings.
Recently Issued or Newly Adopted Accounting Standards
Following are summaries of recently issued accounting pronouncements that have either been recently adopted or that may become applicable to the preparation of
the Company's consolidated financial statements in the future.
During
2006, the Company adopted SFAS No. 158, "Employer's Accounting for Defined Pension and Other Postretirement Plansan amendment of FASB Statements No. 87,
88, 106 and 132(R)." This Standard requires that employers recognize, on a prospective basis, the funded status of their defined benefit pension and postretirement benefit plans in the statement of
financial position, and that changes in the funded status be recognized as a component of other comprehensive income, net of tax. SFAS No. 158 also requires the funded status of a plan to be
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measured
as of the date of the year-end statement of financial position, and requires additional note disclosures. The Company adopted the recognition provisions of SFAS No. 158 and
initially applied them to the funded status of its defined benefit pension and other postretirement benefit plans as of December 30, 2006. The initial recognition of the funded status of our
defined benefit pension and other postretirement plans resulted in an increase in Shareholders' Equity of $11.9 million, which was net of income taxes of $7.6 million. We currently
measure the funded status of our defined benefit plans as of the date of our fiscal year-end statement of financial position, and therefore, the adoption of the measurement provisions of
SFAS No. 158 had no impact on our financial statements.
In
June 2006, the FASB issued Interpretation ("FIN") No. 48, "Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109."
This Interpretation clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109, "Accounting for Income Taxes." The Interpretation prescribes a
recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Interpretation was effective for fiscal years beginning after December 15,
2006. The Company adopted FIN 48 effective at the beginning of fiscal year 2007. (See Note 6, Income Taxes, for a discussion of the adoption impact of FIN 48.)
In
2006, the EITF reached a consensus on Issue No. 06-03, "How Sales Tax Collected from Customers and Remitted to Governmental Authorities Should be Presented in the
Income Statement (That is, Gross versus Net Presentation)". This EITF Issue clarifies that the presentation of taxes collected from customers and remitted to governmental authorities on a gross
(included in revenues and costs) or net (excluded from revenues) basis is an accounting policy decision that should be disclosed pursuant to Accounting Principles Board (APB) Opinion No. 22,
"Disclosure of Accounting Policies." The EITF Issue was effective for the Company beginning in fiscal year 2007. We collect such taxes from customers and account for them on a net (excluded from
revenues)
basis. The adoption of EITF Issue No. 06-03 did not impact the consolidated financial statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("FAS 157"). This Standard defines fair value,
establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FAS 157 is effective for fiscal years
beginning after November 15, 2007 for financial assets and liabilities, as well as for any other assets and liabilities that are carried at fair value on a recurring basis in financial
statements. In November 2007, the FASB provided a one year deferral for the implementation of FAS 157 for other nonfinancial assets and liabilities. The adoption of FAS 157 is not
expected to have a material impact on the Company's financial position, results of operations or cash flows.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilitiesincluding an amendment of
SFAS 115," ("SFAS 159"). SFAS 159 allows entities to choose, at specific election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise
required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item's fair value in subsequent reporting periods must be recognized in current
earnings. SFAS 159 is effective beginning January 1, 2008. The Company is currently evaluating the impact of the provisions of SFAS 159.
In
December 2007, the FASB issued SFAS No. 141R, "Business Combinations." This statement amends SFAS No. 141 and provides revised guidance for recognizing and
measuring assets acquired and liabilities assumed in a business combination. This statement also requires that transaction costs in a business combination be expensed as incurred. SFAS No. 141R
applies prospectively to business combinations for which the acquisition date is on or after the beginning of
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the
first annual reporting period beginning on or after December 15, 2008. SFAS No. 141R will impact the accounting for business combinations completed beginning January 1, 2009.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements." SFAS 160 requires noncontrolling interests
(previously referred to as minority interests) to be treated as a separate component of equity, not as a liability or other item outside of permanent equity. SFAS 160 applies to the accounting
for noncontrolling interests and transactions with noncontrolling interest holders in consolidated financial statements and is effective for periods beginning on or after December 15, 2008.
Earlier application is prohibited. SFAS No. 160 will be applied prospectively to all noncontrolling interests, including those that arose before the effective date, except that comparative
prior period information must be recast to classify noncontrolling interests in equity and provide other disclosures required by SFAS No. 160. The Company is currently evaluating the impact of
the provisions of SFAS 160.
Prior Period Revisions
Certain amounts included in the prior years' financial statements have been revised to conform with the current year's presentation. In the current year, the
Company separately presented the effect of exchange rate changes on cash in the consolidated Statements of Cash Flows. In prior periods, these amounts were included in other operating activities. The
effect of this revision on the amounts reported for 2006 and 2005 was not material.
2. Discontinued Operations
In December 2004, the Company's board of directors authorized management to pursue the divestiture of a facility near Elma, Washington that manufactured
integrated wood-polymer building materials. The board of directors and management concluded that the operations of the facility were no longer consistent with the Company's strategic
direction. As a result of that decision, the Company recorded the facility's assets as held for sale on the Consolidated Balance Sheets and reported the results of its operations as discontinued
operations.
During
2005, the Company experienced unexpected difficulties in achieving anticipated levels of production at the facility. These issues delayed the process of identifying and qualifying
a buyer for the business. While management made substantial progress in addressing the manufacturing issues that caused production to fall below plan, during the fourth quarter of 2005, the Company
concluded that it was unable to attract a buyer in the near term and elected to cease operations at the facility during the first quarter of 2006. As of December 29, 2007, the Company has not
identified a buyer for the facility.
In
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the Company recorded pre-tax charges, including
$28.2 million recorded in the fourth quarter of 2005, to reduce the carrying value of the long-lived assets of the Elma, Washington facility to their estimated fair value. During
the first quarter of 2006, the Company ceased operations at the facility and recorded pre-tax expenses of $18.0 million for contract termination and other closure costs. These
charges and expenses were reflected within discontinued operations in the Consolidated Statements of Income (Loss).
The
liabilities of the wood-polymer building materials facility near Elma, Washington, are included in current liabilities ($15.4 million at December 29, 2007
and $15.5 million at December 30, 2006, respectively) in the Consolidated Balance Sheets. There were no assets related to this facility included in the Consolidated Balance Sheets at
December 29, 2007 or December 30, 2006.
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3. Integration Activities and Facility Closures
During 2003, the Company acquired OfficeMax, Inc. for $1.3 billion (the "Acquisition"). Increased scale as a result of the Acquisition allowed
management to evaluate the Company's combined office products business and to identify opportunities for consolidating operations. Costs associated with the planned closure and consolidation of
acquired OfficeMax, Inc. facilities were accounted for under EITF Issue No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination," and
recognized as liabilities in connection with the acquisition and charged to goodwill. Costs incurred in connection with all other business integration activities have been recognized in the
Consolidated Statement of Income (Loss).
In
September 2005, the board of directors approved a plan to relocate and consolidate the Company's retail headquarters in Shaker Heights, Ohio and its existing corporate headquarters in
Itasca, Illinois into a new facility in Naperville, Illinois. The Company began the consolidation and relocation process in the latter half of 2005. The Company has incurred and expensed approximately
$70.9 million of costs related to the headquarters consolidation, including $45.9 million recognized during 2006 and $25.0 million recognized during the second half of 2005, all
of which were reflected in the Corporate and Other segment. The consolidation and relocation process was completed during the second half of 2006.
Also
in 2005, the Company recorded charges to income of $23.2 million for the write-down of impaired assets related to underperforming retail stores and the
restructuring of its Canadian operations.
During
2006, the Company announced a reorganization of the Contract segment, and recorded a pre-tax charge of $7.3 million for employee severance related to the
reorganization. The Contract segment also recorded an additional $3.0 million of costs during 2006 primarily related to a facility closure and employee severance.
During
2006, the Company closed 109 underperforming domestic retail stores and recorded a pre-tax charge of $89.5 million, comprised of $11.3 million for
employee severance, asset write-off and impairment and other closure costs and $78.2 million of estimated future lease obligations.
59
The
Company conducts regular reviews of its real estate portfolio to identify underperforming facilities, and closes those facilities that are no longer strategically or economically
viable. The Company records a liability for the cost associated with a facility closure at its fair value in the period in which the liability is incurred, which is either the date the lease
termination is communicated to the lessor or the location's cease-use date. Upon closure, unrecoverable costs are included in facility closure reserves on the Consolidated Balance Sheets
and include provisions for the present value of future lease obligations, less contractual or estimated sublease income. Accretion expense is recognized over the life of the payments. Integration and
facility closure reserve account activity during 2007, 2006 and 2005, including activity related to the reorganization of the Contract segment, retail store closures and headquarters consolidation,
was as follows:
|
|
Lease
Contract
Terminations
|
|
Severance
Retention
|
|
Asset
Write-off &
Impairment
|
|
Other
|
|
Total
|
|
|
|
(thousands)
|
|
Balance at December 31, 2004
|
|
$
|
116,390
|
|
$
|
6,642
|
|
$
|
|
|
$
|
409
|
|
$
|
123,441
|
|
Charges to income
|
|
|
547
|
|
|
21,214
|
|
|
23,062
|
|
|
3,565
|
|
|
48,388
|
|
Change in goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes to estimated costs included in income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments
|
|
|
(28,872
|
)
|
|
(6,354
|
)
|
|
|
|
|
(3,235
|
)
|
|
(38,461
|
)
|
Non-cash charges
|
|
|
|
|
|
|
|
|
(23,062
|
)
|
|
|
|
|
(23,062
|
)
|
Accretion
|
|
|
3,390
|
|
|
|
|
|
|
|
|
|
|
|
3,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
$
|
91,455
|
|
$
|
21,502
|
|
$
|
|
|
$
|
739
|
|
$
|
113,696
|
|
Charges to income
|
|
|
89,934
|
|
|
19,407
|
|
|
9,543
|
|
|
27,332
|
|
|
146,216
|
|
Change in goodwill
|
|
|
(11,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(11,000
|
)
|
Changes to estimated costs included in income
|
|
|
|
|
|
(1,080
|
)
|
|
|
|
|
|
|
|
(1,080
|
)
|
Cash payments
|
|
|
(68,596
|
)
|
|
(28,991
|
)
|
|
|
|
|
(18,951
|
)
|
|
(116,538
|
)
|
Non-cash charges
|
|
|
|
|
|
|
|
|
(9,543
|
)
|
|
(5,978
|
)
|
|
(15,521
|
)
|
Accretion
|
|
|
6,031
|
|
|
|
|
|
|
|
|
|
|
|
6,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 30, 2006
|
|
$
|
107,824
|
|
$
|
10,838
|
|
$
|
|
|
$
|
3,142
|
|
$
|
121,804
|
|
Charges to income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes to estimated costs included in income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments
|
|
|
(38,196
|
)
|
|
(8,424
|
)
|
|
|
|
|
(1,725
|
)
|
|
(48,345
|
)
|
Non-cash charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
|
|
|
3,603
|
|
|
|
|
|
|
|
|
|
|
|
3,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 29, 2007
|
|
$
|
73,231
|
|
$
|
2,414
|
|
$
|
|
|
$
|
1,417
|
|
$
|
77,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 29, 2007, approximately $22.2 million of the reserve liability was included in accrued liabilities, other, and
$54.9 million was included in other long-term liabilities. At December 30, 2006, approximately $44.7 million of the reserve liability was included in accrued
liabilities, other, and $77.1 million was included in other long-term liabilities. At December 29, 2007, the integration activities and facility closures reserve included
approximately $73 million for estimated future lease obligations, which represents the estimated fair value of the lease obligations and is net of anticipated sublease income of approximately
$77 million.
60
4. Net Income (Loss) Per Common Share
Basic net income (loss) per share is calculated using net earnings available to common stockholders divided by the weighted-average number of shares of common
stock outstanding during the year. Diluted net income (loss) per share is similar to basic net income (loss) per share except that the weighted-average number of shares of common stock outstanding is
increased to include the number of additional shares of common stock that would have been outstanding assuming the issuance of all potentially dilutive shares, such as common stock to be issued upon
exercise of options and non-vested restricted shares, and, if dilutive, the conversion of outstanding preferred stock. Net income (loss) per common share was determined by dividing net
income (loss), as adjusted, by weighted average shares outstanding as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(thousands, except per-share amounts)
|
|
Basic income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
207,373
|
|
$
|
99,054
|
|
$
|
(41,212
|
)
|
Preferred dividends
|
|
|
(3,961
|
)
|
|
(4,037
|
)
|
|
(4,378
|
)
|
|
|
|
|
|
|
|
|
Basic income (loss) from continuing operations
|
|
|
203,412
|
|
|
95,017
|
|
|
(45,590
|
)
|
Loss from discontinued operations
|
|
|
|
|
|
(7,333
|
)
|
|
(32,550
|
)
|
|
|
|
|
|
|
|
|
Basic income (loss)
|
|
$
|
203,412
|
|
$
|
87,684
|
|
$
|
(78,140
|
)
|
|
|
|
|
|
|
|
|
Average sharesbasic
|
|
|
75,274
|
|
|
73,142
|
|
|
78,745
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
2.70
|
|
$
|
1.30
|
|
$
|
(0.58
|
)
|
|
Discontinued operations
|
|
|
|
|
|
(0.10
|
)
|
|
(0.41
|
)
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share
|
|
$
|
2.70
|
|
$
|
1.20
|
|
$
|
(0.99
|
)
|
|
|
|
|
|
|
|
|
Diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) from continuing operations
|
|
$
|
203,412
|
|
$
|
95,017
|
|
$
|
(45,590
|
)
|
Preferred dividends eliminated(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) from continuing operations
|
|
|
203,412
|
|
|
95,017
|
|
|
(45,590
|
)
|
Loss from discontinued operations
|
|
|
|
|
|
(7,333
|
)
|
|
(32,550
|
)
|
|
|
|
|
|
|
|
|
Diluted income (loss)
|
|
$
|
203,412
|
|
$
|
87,684
|
|
$
|
(78,140
|
)
|
|
|
|
|
|
|
|
|
Average sharesbasic
|
|
|
75,274
|
|
|
73,142
|
|
|
78,745
|
|
Restricted stock, stock options and other
|
|
|
1,100
|
|
|
571
|
|
|
|
|
Series D Convertible Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average sharesdiluted(a)(b)(c)
|
|
|
76,374
|
|
|
73,713
|
|
|
78,745
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
2.66
|
|
$
|
1.29
|
|
$
|
(0.58
|
)
|
|
Discontinued operations
|
|
|
|
|
|
(.10
|
)
|
|
(0.41
|
)
|
|
|
|
|
|
|
|
|
Diluted income (loss) per common share
|
|
$
|
2.66
|
|
$
|
1.19
|
|
$
|
(0.99
|
)
|
|
|
|
|
|
|
|
|
-
(a)
-
The
assumed conversion of outstanding preferred stock was anti-dilutive in all periods presented, and therefore no adjustment was required to determine diluted income
(loss) from continuing operations or average shares-diluted.
-
(b)
-
Options
to purchase 0.4 million shares of common stock were outstanding during 2007, but were not included in the computation of diluted income (loss) per common share because
the impact would have been anti-dilutive as the option price is higher than the average market price during the year.
-
(c)
-
Options
to purchase 3.8 million shares of common stock were outstanding during 2005, but were not included in the computation of diluted income (loss) per common share because
the impact would have been anti-dilutive due to the net loss recognized in the period.
61
5. Other Operating, Net
The components of other operating, net in the Consolidated Statements of Income (Loss) are as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(thousands)
|
|
Integration activities and facility closure costs (Note 3)
|
|
$
|
|
|
$
|
146,216
|
|
$
|
48,178
|
|
Legal settlement(a)
|
|
|
|
|
|
|
|
|
9,800
|
|
Other, net
|
|
|
|
|
|
|
|
|
1,527
|
|
Earnings from affiliates
|
|
|
(6,065
|
)
|
|
(5,873
|
)
|
|
(5,460
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
(6,065
|
)
|
$
|
140,343
|
|
$
|
54,045
|
|
|
|
|
|
|
|
|
|
-
(a)
-
Legal
settlement with the Department of Justice.
6. Income Taxes
The income tax (provision) benefit attributable to income (loss) from continuing operations as shown in the Consolidated Statements of Income (Loss) includes the
following components:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(thousands)
|
|
Current income tax (provision) benefit
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(25,710
|
)
|
$
|
(10,014
|
)
|
$
|
28,908
|
|
|
State
|
|
|
(11,380
|
)
|
|
(4,079
|
)
|
|
(14,629
|
)
|
|
Foreign
|
|
|
(24,582
|
)
|
|
(17,816
|
)
|
|
(20,512
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(61,672
|
)
|
|
(31,909
|
)
|
|
(6,233
|
)
|
Deferred income tax (provision) benefit
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(61,882
|
)
|
|
(31,521
|
)
|
|
22,646
|
|
|
State
|
|
|
(4,785
|
)
|
|
(6,428
|
)
|
|
(23,331
|
)
|
|
Foreign
|
|
|
3,057
|
|
|
1,117
|
|
|
5,692
|
|
|
|
|
|
|
|
|
|
|
|
|
(63,610
|
)
|
|
(36,832
|
)
|
|
5,007
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(125,282
|
)
|
$
|
(68,741
|
)
|
$
|
(1,226
|
)
|
|
|
|
|
|
|
|
|
Income tax benefit attributable to loss from discontinued operations was $10.6 million and $20.1 million for 2006 and 2005,
respectively. There was no impact due to discontinued operations during 2007.
During
2007, 2006 and 2005, the Company made cash payments for income taxes, net of refunds received, of $89.5 million, $0.6 million and $134.1 million,
respectively.
62
The income tax provision attributable to income (loss) from continuing operations for the years ended December 29, 2007, December 30, 2006 and December 31, 2005
differed from the amounts computed by applying the statutory U.S. Federal income tax rate of 35% to pre-tax income (loss) from continuing operations as a result of the following:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(thousands)
|
|
Tax (provision) benefit at statutory rate
|
|
$
|
(118,184
|
)
|
$
|
(60,157
|
)
|
$
|
13,166
|
|
State taxes, net of federal effect
|
|
|
(11,030
|
)
|
|
(5,907
|
)
|
|
(5,532
|
)
|
Foreign tax provision differential
|
|
|
106
|
|
|
(5,262
|
)
|
|
(2,883
|
)
|
Basis difference in investments disposed of
|
|
|
|
|
|
|
|
|
14,867
|
|
Nondeductible compensation
|
|
|
|
|
|
(473
|
)
|
|
(4,268
|
)
|
NOL valuation allowance
|
|
|
434
|
|
|
(6,498
|
)
|
|
(21,533
|
)
|
Change in contingency liability
|
|
|
755
|
|
|
1,925
|
|
|
(4,607
|
)
|
Tax settlement, net of other charges
|
|
|
1,582
|
|
|
5,240
|
|
|
12,462
|
|
ESOP dividend deduction
|
|
|
1,317
|
|
|
1,413
|
|
|
1,489
|
|
Other, net
|
|
|
(262
|
)
|
|
978
|
|
|
(4,387
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
(125,282
|
)
|
$
|
(68,741
|
)
|
$
|
(1,226
|
)
|
|
|
|
|
|
|
|
|
63
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at
year-end are presented below.
|
|
2007
|
|
2006
|
|
|
|
(thousands)
|
|
Current deferred tax assets (liabilities) attributable to
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
38,096
|
|
$
|
40,231
|
|
Net operating loss carryforwards
|
|
|
7,213
|
|
|
43,489
|
|
Allowances for receivables and rebates
|
|
|
29,605
|
|
|
17,998
|
|
Compensation and benefits
|
|
|
23,397
|
|
|
11,657
|
|
Inventory
|
|
|
3,780
|
|
|
(6,047
|
)
|
Property and equipment
|
|
|
16,754
|
|
|
|
|
Alternative minimum tax and other credit carryforwards
|
|
|
53,919
|
|
|
|
|
Other temporary differences
|
|
|
357
|
|
|
17,124
|
|
Contingency reserves
|
|
|
11,949
|
|
|
5,044
|
|
|
|
|
|
|
|
Total current net deferred tax assets
|
|
$
|
185,070
|
|
$
|
129,496
|
|
|
|
|
|
|
|
Noncurrent deferred tax assets (liabilities) attributable to
|
|
|
|
|
|
|
|
Deferred gain(a)
|
|
|
(473,838
|
)
|
|
(473,838
|
)
|
Alternative minimum tax and other credit carryforwards
|
|
|
188,033
|
|
|
214,590
|
|
Compensation and benefits
|
|
|
103,065
|
|
|
152,221
|
|
Net operating loss carryforwards
|
|
|
40,381
|
|
|
66,849
|
|
Reserves
|
|
|
24,864
|
|
|
44,445
|
|
Investments
|
|
|
6,399
|
|
|
10,046
|
|
Goodwill
|
|
|
(30,802
|
)
|
|
(33,110
|
)
|
Other non-current liabilities
|
|
|
5,179
|
|
|
3,010
|
|
Undistributed earnings
|
|
|
(4,955
|
)
|
|
(4,776
|
)
|
Deferred charges
|
|
|
2,086
|
|
|
2,692
|
|
Property and equipment
|
|
|
15,505
|
|
|
14,300
|
|
Other temporary differences
|
|
|
21
|
|
|
(4,430
|
)
|
|
|
|
|
|
|
|
|
|
(124,062
|
)
|
|
(8,001
|
)
|
Less: Valuation allowance
|
|
|
(30,300
|
)
|
|
(30,734
|
)
|
|
|
|
|
|
|
Total noncurrent net deferred tax assets (liabilities)
|
|
$
|
(154,362
|
)
|
$
|
(38,735
|
)
|
|
|
|
|
|
|
-
(a)
-
Includes
$543.8 million related to the gain on the sale of the Company's timberlands to affiliates of Boise Cascade, L.L.C. that was deferred until 2019 for tax purposes.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
Management believes it is more likely than not that the Company will realize the benefits of these deductible differences, except for certain state net operating losses as noted below. The amount of
the deferred tax assets considered realizable, however, could be reduced if estimates of future taxable income during the carryforward period are reduced.
The
Company has established a valuation allowance related to net operating loss carryforwards in jurisdictions where the Company has substantially reduced operations because management
believes it is more likely than not that these items will expire before the Company is able to realize their benefits. Periodically, the valuation allowance is reviewed and adjusted based on
64
management's
assessments of realizable deferred tax assets. The valuation allowance was $30.3 million and $30.7 million at December 29, 2007 and December 30, 2006, respectively.
The
Company had a deferred tax asset related to net operating loss carryforwards for Federal income tax purposes of $68.2 million at December 30, 2006. These net operating
loss carryforwards were utilized to offset Federal taxable income in 2007. As of December 29, 2007, the Company has alternative minimum tax credit carryforwards of approximately
$224.8 million, which are available to reduce future regular Federal income taxes, if any, over an indefinite period, and foreign tax credit
carryforwards of $10.7 million with an expiration date of 2016. The Company also has deferred tax assets related to various state net operating losses of $17.2 million, net of the
valuation allowance, that expire between 2008 and 2025.
Pre-tax
income (loss) related to continuing operations from domestic and foreign sources is as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(thousands)
|
|
Domestic
|
|
$
|
272,169
|
|
$
|
124,643
|
|
$
|
(65,073
|
)
|
Foreign
|
|
|
65,358
|
|
|
47,235
|
|
|
27,457
|
|
|
|
|
|
|
|
|
|
Total pre-tax income (loss)
|
|
$
|
337,527
|
|
$
|
171,878
|
|
$
|
(37,616
|
)
|
|
|
|
|
|
|
|
|
As of December 29, 2007, the Company had undistributed earnings and profits of foreign operations of approximately $360 million. The
Company has not provided any U.S. income tax related to jurisdictions for which it has determined that it has permanently reinvested its earnings. The Company has provided for $4.9 million in
Federal income taxes related to the anticipated repatriation of earnings from its investment in a Mexican joint venture, net of foreign tax credit.
Through
December 30, 2006, the Company had established estimated contingent tax liabilities to provide for the possibility of unfavorable outcomes in tax matters. Contingent tax
liabilities totaled $66.6 million as of December 30, 2006, and are included in other noncurrent liabilities in the Consolidated Balance Sheets. These liabilities were accrued when
considered probable and estimable, consistent with the requirements of SFAS No. 5, "Accounting for Contingencies."
The
Company adopted FASB Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" at the
beginning of 2007. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109, "Accounting for Income Taxes." The Interpretation
prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the implementation, the Company recognized a
$4.0 million increase to reserves for uncertain tax positions. This increase was accounted for as an adjustment to the beginning balance of retained earnings on the Consolidated Balance Sheet.
Including the cumulative effect of this increase, at the beginning of 2007, the Company had $70.6 million of total gross unrecognized tax benefits. As of December 29, 2007, the Company
had $33.1 million of total gross unrecognized tax
65
benefits.
The reconciliation of the beginning and ending gross unrecognized tax benefits is as follows:
Balance at December 30, 2006
|
|
$
|
70,567
|
|
Increase related to prior year tax positions
|
|
|
4,513
|
|
Decrease related to prior year tax positions
|
|
|
(33,717
|
)
|
Increase related to current year positions
|
|
|
1,915
|
|
Settlements
|
|
|
(10,150
|
)
|
Lapse of Statute
|
|
|
|
|
|
|
|
|
Balance at December 29, 2007
|
|
|
33,128
|
|
|
|
|
|
Of the total gross unrecognized tax benefits, approximately $20 million (net of the federal benefit on state issues) represents the amount
of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods. The remaining balance of approximately $13 million, if recognized,
would be recorded as an adjustment to goodwill and would not affect the effective tax rate. It is possible that the Company's liability for uncertain tax positions will be reduced by as much as
$15.9 million by the end of 2008. Approximately $6.8 million of this amount would impact the Company's effective tax rate, and the remaining $9.1 million would affect
goodwill. Such reductions would result from the effective settlement of tax positions with various tax authorities.
The
Company or its subsidiaries file income tax returns in the U.S. Federal jurisdiction, and multiple state and foreign jurisdictions. The Company has substantially concluded all U.S.
Federal income tax matters for 2002 and prior years. Years prior to 2003 are no longer subject to U.S. Federal income tax examination. The Company is no longer subject to state income tax examinations
by tax authorities in its major state jurisdictions for years before 2002.
The
Company recognizes accrued interest and penalties associated with uncertain tax positions as part of income tax expense. As of December 29, 2007, the Company had
$5.5 million of accrued interest and penalties associated with uncertain tax positions. Income tax expense for 2007 includes a benefit of $0.4 million related to interest and penalties,
reflecting interest accrued less the effect of adjustments on settlement.
7. Leases
The Company leases its retail stores as well as certain other property and equipment under operating leases. These leases are noncancelable and generally contain
multiple renewal options for periods ranging from three to five years, and require the Company to pay all executory costs such as maintenance and insurance. Rental payments include minimum rentals
plus, in some cases, contingent rentals based on a percentage of sales above specified minimums. Rental expense for operating leases included the following components:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(thousands)
|
|
Minimum rentals
|
|
$
|
341,067
|
|
$
|
343,203
|
|
$
|
365,880
|
|
Contingent rentals
|
|
|
908
|
|
|
763
|
|
|
752
|
|
Sublease rentals
|
|
|
(1,258
|
)
|
|
(1,660
|
)
|
|
(2,021
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
340,717
|
|
$
|
342,306
|
|
$
|
364,611
|
|
|
|
|
|
|
|
|
|
For operating leases with remaining terms of more than one year, the minimum lease payment requirements are: $371.8 million for 2008,
$338.6 million for 2009, $301.2 million for 2010, $256.7 million for 2011, $211.5 million for 2012 and $583.3 million thereafter. These minimum lease
66
payments
do not include contingent rental payments that may be due based on a percentage of sales in excess of stipulated amounts. These future minimum lease payment requirements have not been reduced
by $62.3 million of minimum sublease rentals due in the future under noncancelable subleases. These sublease rentals include amounts related to closed stores and other facilities that are
accounted for in the integration activities and facility closures reserve. See Note 3, Integration Activities and Facility Closures.
The
Company capitalizes lease obligations for which it assumes substantially all property rights and risks of ownership. The Company did not have any material capital leases during any
of the periods presented.
8. Sales of Accounts Receivable
Prior to July 2007, the Company sold, on a revolving basis, an undivided interest in a defined pool of receivables while retaining a subordinated interest
in a portion of the receivables. The Company continued servicing the sold receivables and charged the third party conduits a monthly servicing fee at market rates. The program qualified for sale
treatment under SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." At December 30, 2006, $180.0 million of sold accounts
receivable were excluded from receivables in the accompanying Consolidated Balance Sheets. The Company's subordinated retained interest in the transferred receivables was $111.2 million at
December 30, 2006 and was included in receivables, net in the Consolidated Balance Sheet. Expenses associated with the securitization program totaled $5.6 million, $10.6 million
and $5.5 million in 2007, 2006 and 2005, respectively. These expenses relate primarily to the loss on sale of receivables and discount on retained interests, facility fees and professional fees
associated with the program, and were included in the Consolidated Statements of Income (Loss).
On
July 12, 2007, the Company entered into a new loan agreement that amended the Company's existing revolving credit facility and replaced the Company's accounts receivable
securitization program. The transferred accounts receivable under the accounts receivable securitization program at that date were refinanced with borrowings under the new loan agreement and excess
cash. The Company no longer sells any of its accounts receivable. For additional information on the new loan agreement see Note 12, Debt.
9. Investments in Affiliates
In connection with the sale of the paper, forest products and timberland assets in 2004 (the "Sale"), the Company invested $175 million in the equity units
of affiliates of the buyer, Boise Cascade, L.L.C. A portion (approximately $66 million) of the equity units received in exchange for the Company's investment carries no voting rights. This
investment is accounted for under the cost method as Boise Cascade, L.L.C. does not maintain separate ownership accounts for its members, and the Company does not have the ability to significantly
influence its operating and financial policies. This investment is included in investment in affiliates in the Consolidated Balance Sheets. The Company has determined that it is not practicable to
estimate the fair value of this investment. However, the Company did not observe any events or changes in circumstances that would have had a significant adverse effect on the fair value of the
investment.
The
Boise Cascade, L.L.C. non-voting equity units accrue dividends daily at the rate of 8% per annum on the liquidation value plus accumulated dividends. Dividends accumulate
semiannually to the extent not paid in cash on the last day of any June and December. The Company recognized dividend income on this investment of $6.1 million in 2007, $5.9 million in
2006 and $5.5 million in 2005.
67
10. Goodwill and Intangible Assets
Goodwill
Changes in the carrying amount of goodwill by segment are as follows:
|
|
OfficeMax,
Contract
|
|
OfficeMax,
Retail
|
|
Total
|
|
Balance at December 31, 2005
|
|
$
|
523,537
|
|
$
|
694,663
|
|
$
|
1,218,200
|
|
Effect of foreign currency translation
|
|
|
6,423
|
|
|
|
|
|
6,423
|
|
Businesses acquired
|
|
|
1,114
|
|
|
|
|
|
1,114
|
|
Purchase accounting adjustments
|
|
|
(2,984
|
)
|
|
(6,721
|
)
|
|
(9,705
|
)
|
|
|
|
|
|
|
|
|
Balance at December 30, 2006
|
|
|
528,090
|
|
|
687,942
|
|
|
1,216,032
|
|
Effect of foreign currency translation
|
|
|
28,032
|
|
|
|
|
|
28,032
|
|
Businesses acquired
|
|
|
763
|
|
|
|
|
|
763
|
|
Purchase accounting adjustments
|
|
|
|
|
|
(28,023
|
)
|
|
(28,023
|
)
|
|
|
|
|
|
|
|
|
Balance at December 29, 2007
|
|
$
|
556,885
|
|
$
|
659,919
|
|
$
|
1,216,804
|
|
|
|
|
|
|
|
|
|
During 2007, adjustments were necessary to reflect the reversal of income tax reserves that were recorded in purchase accounting. For additional
information on the tax reserve adjustment see Note 6, Income Taxes. During 2006, adjustments were necessary to reflect the recognition of certain identifiable assets acquired in a 2005
transaction in the contract segment and the reversal of a portion of the EITF 95-3 liability recorded in purchase accounting related to the retail segment.
Acquired Intangible Assets
Intangible assets represent the values assigned to trade names, customer lists and relationships, noncompete agreements and exclusive distribution rights of
businesses acquired. The trade name assets have an indefinite life and are not amortized. All other intangible assets are amortized on a straight-line basis over their expected useful
lives. Customer lists and relationships are amortized over three to 20 years, noncompete agreements over their terms, which are generally three to five years, and exclusive distribution rights
over ten years. Intangible assets consisted of the following at year end:
|
|
2007
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
|
(thousands)
|
Trade names
|
|
$
|
173,150
|
|
$
|
|
|
$
|
173,150
|
Customer lists and relationships
|
|
|
43,381
|
|
|
(23,072
|
)
|
|
20,309
|
Noncompete agreements
|
|
|
12,884
|
|
|
(10,842
|
)
|
|
2,042
|
Exclusive distribution rights
|
|
|
6,977
|
|
|
(2,758
|
)
|
|
4,219
|
|
|
|
|
|
|
|
|
|
$
|
236,392
|
|
$
|
(36,672
|
)
|
$
|
199,720
|
|
|
|
|
|
|
|
68
|
|
2006
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
|
(thousands)
|
Trade names
|
|
$
|
173,150
|
|
$
|
|
|
$
|
173,150
|
Customer lists and relationships
|
|
|
39,681
|
|
|
(17,678
|
)
|
|
22,003
|
Noncompete agreements
|
|
|
12,853
|
|
|
(8,213
|
)
|
|
4,640
|
Exclusive distribution rights
|
|
|
3,616
|
|
|
(2,105
|
)
|
|
1,511
|
|
|
|
|
|
|
|
|
|
$
|
229,300
|
|
$
|
(27,996
|
)
|
$
|
201,304
|
|
|
|
|
|
|
|
Intangible asset amortization expense totaled $7.0 million in 2007, $7.3 million in 2006 and $6.8 million in 2005. The
estimated amortization expense is $5.5 million, $2.2 million, $2.0 million, $1.6 million, $1.6 million and $1.6 million in 2008, 2009, 2010, 2011, 2012 and
2013, respectively.
During
the first quarter of both 2007 and 2006, the Company evaluated the remaining useful lives of finite-lived purchased intangible assets to determine if any adjustments to the useful
lives were necessary. Based on this review, management determined that no adjustments to the useful lives of finite-lived purchased intangible assets were necessary.
11. Timber Notes Receivable
In October 2004, OfficeMax sold its timberlands as part of the Sale. In exchange for the timberlands, the Company received timber installment notes
receivable in the amount of $1,635 million, which were credit enhanced with guarantees. The guarantees were issued by highly-rated financial institutions and were secured by the pledge of
underlying collateral notes issued by the credit enhancement banks. The timber installment notes receivable are 15-year non-amortizing. There are two notes that total
$817.5 million bearing interest at 4.982% and a third note in the amount of $817.5 million bearing interest at 5.112%. Interest earned on all of the notes is received semiannually. See
the sub-caption "Timber Notes" in Note 12, Debt, for additional information concerning a securitization transaction involving the timber installment notes receivable.
69
12. Debt
Long-Term Debt
Long-term debt, almost all of which is unsecured, consists of the following at year end:
|
|
2007
|
|
2006
|
|
|
(thousands)
|
7.50% notes, due in 2008
|
|
$
|
29,656
|
|
$
|
29,656
|
9.45% debentures, due in 2009
|
|
|
35,707
|
|
|
35,707
|
6.50% notes, due in 2010
|
|
|
13,680
|
|
|
13,680
|
7.00% notes, due in 2013
|
|
|
19,100
|
|
|
19,100
|
7.35% debentures, due in 2016
|
|
|
17,967
|
|
|
17,967
|
Medium-term notes, Series A, with interest rates averaging 7.8% and 7.7%, due in varying amounts annually through 2013
|
|
|
56,900
|
|
|
82,300
|
Revenue bonds, with interest rates averaging 6.4% and 6.4%, due in varying amounts annually through 2029
|
|
|
189,930
|
|
|
189,930
|
American & Foreign Power Company Inc. 5% debentures, due in 2030
|
|
|
18,526
|
|
|
18,526
|
Other indebtedness, with interest rates averaging 7.1% and 5.5%, due in varying amounts annually through 2017
|
|
|
3,412
|
|
|
3,687
|
|
|
|
|
|
|
|
|
384,878
|
|
|
410,553
|
Less unamortized discount
|
|
|
630
|
|
|
673
|
Less current portion
|
|
|
34,827
|
|
|
25,634
|
|
|
|
|
|
|
|
|
349,421
|
|
|
384,246
|
5.42% securitized timber notes, due in 2019
|
|
|
735,000
|
|
|
735,000
|
5.54% securitized timber notes, due in 2019
|
|
|
735,000
|
|
|
735,000
|
|
|
|
|
|
|
|
$
|
1,819,421
|
|
$
|
1,854,246
|
|
|
|
|
|
Scheduled Debt Maturities
The scheduled payments of long-term debt, excluding timber notes due in 2019, are $34.8 million in 2008, $50.9 million in 2009,
$15.9 million in 2010, $0.5 million in 2011, $35.1 million in 2012 and $247.0 million thereafter.
Credit Agreements
On July 12, 2007, the Company entered into an Amended and Restated Loan and Security Agreement (the "Loan Agreement") with a group of banks. The Loan
Agreement amended the Company's existing revolving credit facility and replaced the Company's accounts receivable securitization program. The new Loan Agreement permits the Company to borrow up to a
maximum of $700 million subject to a borrowing base calculation that limits availability to a percentage of eligible accounts receivable plus a percentage of the value of eligible inventory
less certain reserves. The revolving credit facility may be increased (up to a maximum of $800 million) at the Company's request or reduced from time to time, in each case according to terms
detailed in the Loan Agreement. There were no borrowings outstanding under the Company's revolving credit facilities as of December 29, 2007 or December 30, 2006. The maximum amount
outstanding under the revolving credit facility was $103.0 million and $122.0 million during 2007 and 2006, respectively. The average amount outstanding under the revolving credit
facility was $6.8 million during 2007 and $20.6 million during 2006. Letters of credit, which may be issued under the revolving credit facility up to a maximum of $250 million,
reduce available borrowing capacity under the revolving credit facility. Letters of credit issued under the revolving credit facility totaled
70
$85.5 million
as of December 29, 2007 and $75.5 million as of December 30, 2006. As of December 29, 2007, the maximum aggregate borrowing amount available under the
revolving credit facility was $700.0 million and excess availability under the revolving credit facility totaled $614.5 million. At December 29, 2007, the Company was in
compliance with all covenants under the Agreement. The Loan Agreement allows the payment of dividends subject to availability restrictions and so long as no default has occured. The Loan Agreement
expires on July 12, 2012.
Borrowings
under the revolving credit facility bear interest at rates based on either the prime rate or the London Interbank Offered Rate ("LIBOR"). Margins are applied to the applicable
borrowing rates and letter of credit fees under the revolving credit facility depending on the level of average excess availability. Fees on letters of credit issued under the revolving credit
facility were charged at a weighted average rate of 0.875% during the year-ended December 29, 2007. The Company is also charged an unused line fee of 0.25% on the amount by which
the maximum available credit exceeds the average daily outstanding borrowings and letters of credit.
As
of December 29, 2007, Grupo OfficeMax, our 51%-owned joint venture in Mexico, had short term borrowings of $14.2 million. The short-term borrowings consist
of three loans with balances of $4.6 million, $4.6 million and $5.0 million respectively. Two of these loans are promissory notes to be repaid in the first quarter of 2008. The
third loan is a simple revolving loan. The financing for Grupo OfficeMax is unsecured with no recourse against the Company.
Timber Notes
In October 2004, the Company sold its timberlands as part of the Sale and received credit-enhanced timber installment notes receivable in the amount of
$1,635 million. In December 2004, the Company completed a securitization transaction in which its interests in the timber installment notes receivable and related guarantees were transferred to
wholly-owned bankruptcy remote subsidiaries that were designated to be qualifying special purpose entities (the "OMXQ's"). The OMXQ's pledged the timber installment notes receivable and related
guarantees and issued securitization notes in the amount of $1,470 million. Recourse on the securitization notes is limited to the pledged timber installment notes receivable. The
securitization notes are 15-year non-amortizing, and were issued in two equal $735 million tranches paying interest of 5.42% and 5.54%, respectively.
As
a result of these transactions, OfficeMax received $1,470 million in cash from the OMXQ's, and over 15 years will earn approximately $82.5 million per year in
interest income on the timber installment notes receivable and incur annual interest expense of approximately $80.5 million on the securitization notes. The pledged timber installment notes
receivable and nonrecourse securitization notes will mature in 2020 and 2019, respectively. The securitization notes have an initial term that is approximately three months shorter than the
installment notes. The Company expects to refinance its ownership of the installment notes in 2019 with a short-term secured borrowing to bridge the period from initial maturity of the
securitization notes to the maturity of the installment notes.
The
original entities issuing the credit enhanced timber installment notes are variable-interest entities (the "VIE's") under FASB Interpretation 46R, "Consolidation of Variable Interest
Entities". The OMXQ's are considered to be the primary beneficiary, and therefore, the VIE's are required to be consolidated with the OMXQ's, which are also the issuers of the securitization notes. As
a result, the accounts of the OMXQ's have been consolidated into those of their ultimate parent, OfficeMax. The effect of the Company's consolidation of the OMXQ's is that the securitization
transaction is treated as a financing, and both the timber notes receivable and the securitization notes payable are reflected in the Consolidated Balance Sheets.
71
Note Agreements
In October 2003, the Company issued 6.50% senior notes due in 2010 and 7.00% senior notes due in 2013. At the time of issuance, the senior note indentures
contained a number of restrictive
covenants, substantially all of which have since been eliminated through the execution of supplemental indentures as described below. On November 5, 2004, the Company repurchased substantially
all of the outstanding 6.50% senior notes and received the requisite consents to adopt amendments to the indenture pursuant to a tender offer for these securities. As a result, the Company and the
trustee executed a supplemental indenture that eliminated substantially all of the restrictive covenants, certain events of default and related provisions, and replaced them with the covenants
contained in the Company's other public debt. Those covenants include a limitation on mergers and similar transactions, a restriction on secured transactions involving Principal Properties, as
defined, and a restriction on sale and leaseback transactions involving Principal Properties.
In
December 2004, both Moody's Investors Service, Inc., and Standard & Poor's Rating Services upgraded the credit rating on the Company's 7.00% senior notes to investment
grade as a result of actions the Company took to collateralize the notes by granting the note holders a security interest in certain investments maturing in 2008 (the "Pledged Instruments"). These
Pledged Instruments are reflected as restricted investments in the Consolidated Balance Sheets. As a result of these ratings upgrades, the original 7.00% senior note covenants have been replaced with
the covenants found in the Company's other public debt. The remaining Pledged Instruments continue to be subject to the security interest, and are reflected as restricted investments in the
Consolidated Balance Sheets. Upon the maturity of the Pledged Instruments in 2008, the Company intends to reinvest the proceeds for a five year term.
Other
The Company had leased certain equipment at its integrated wood-polymer building materials facility near Elma, Washington under a capital lease. The
lease agreement had a base term of seven years and an interest rate of 4.67%. During the first quarter of 2006, the Company paid $29.1 million to terminate the lease agreement.
Cash Paid for Interest
Cash payments for interest, net of interest capitalized and including interest payments related to the timber securitization notes, were $116.6 million in
2007, $124.1 million in 2006 and $122.6 million in 2005.
13. Financial Instruments, Derivatives and Hedging Activities
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade accounts receivable, other assets (nonderivatives), short-term borrowings, trade accounts
payable, and due to related party, approximate fair value because of the short maturity of these instruments. The following table presents the carrying amounts and estimated fair values of the
Company's other financial instruments at December 29, 2007 and December 30, 2006. The fair value of a financial instrument
72
is
the amount at which the instrument could be exchanged in a current transaction between willing parties.
|
|
2007
|
|
2006
|
|
|
Carrying amount
|
|
Fair value
|
|
Carrying amount
|
|
Fair value
|
|
|
(thousands)
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timber notes receivable
|
|
$
|
1,635.0
|
|
$
|
1,763.5
|
|
$
|
1,635.0
|
|
$
|
1,669.3
|
|
Restricted investments
|
|
|
22.4
|
|
|
21.8
|
|
|
22.3
|
|
|
21.6
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
384.2
|
|
$
|
382.4
|
|
$
|
409.9
|
|
$
|
412.0
|
|
Securitization notes payable
|
|
|
1,470.0
|
|
|
1,581.7
|
|
|
1,470.0
|
|
|
1,440.7
|
The carrying amounts shown in the table are included in the Consolidated Balance Sheets under the indicated captions. The following methods and assumptions were
used to estimate the fair value of each class of financial instruments:
-
-
Timber
notes receivable: The fair value is determined as the present value of expected future cash flows discounted at the current interest rate for loans of similar terms
with comparable credit risk.
-
-
Restricted
investments: The fair values of debt securities are based on quoted market prices at the reporting date for those or similar investments.
-
-
Long-term
debt: The fair value of the Company's long-term debt is estimated based on quoted market prices when available or by discounting the future
cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable maturities.
-
-
Securitization
notes payable: The fair value of the Company's securitization notes is estimated by discounting the future cash flows of each instrument at rates currently
available to the Company for similar instruments of comparable maturities.
Derivatives and Hedging Activities
Except as described under the sub-heading "Additional Consideration Agreement," the Company was not a party to any significant derivative instruments
at December 29, 2007 or December 30, 2006.
Changes
in interest rates and currency exchange rates expose the Company to financial market risk. Management occasionally uses derivative financial instruments, such as interest rate
swaps, forward purchase contracts and forward exchange contracts, to manage the Company's exposure to changes in interest rates on outstanding debt instruments and to manage the Company's exposure to
changes in currency exchange rates. The Company generally does not enter into derivative instruments for any purpose other than hedging the cash flows associated with future interest payments on
variable rate debt and hedging the exposure related to changes in the fair value of certain outstanding fixed rate debt instruments due to changes in interest rates. The Company occasionally hedges
interest rate risk associated with anticipated financing transactions, as well as commercial transactions and certain liabilities that are denominated in a currency other than the currency of the
operating unit entering into the underlying transaction. The Company does not speculate using derivative instruments.
The
Company uses a combination of fixed and variable rate debt to finance its operations. The debt obligations with fixed cash flows expose the Company to variability in the fair value
of
73
outstanding
debt instruments due to changes in interest rates. The Company has from time to time entered into interest rate swap agreements that effectively convert the interest rate on certain
fixed-rate debt to a variable rate. The Company has designated these interest rate swap agreements as hedges of the changes in fair value of the underlying debt obligation attributable to
changes in interest rates and accounted for them as fair value hedges. Changes in the fair value of interest rate swaps designated as hedging instruments that effectively offset the variability in the
fair value of outstanding debt obligations are reported in operations. These amounts offset the gain or loss (that is, the change in fair value) of the hedged debt instrument that is attributable to
changes in interest rates (that is, the hedged risk) which is also recognized currently in operations. The Company has also from time to time entered into interest rate swap agreements that
effectively convert floating rate debt to a fixed rate obligation. These swaps have been designated as hedges of floating interest rate payments attributable to changes in interest rates and accounted
for as cash flow hedges, with changes in the fair value of the swap recorded to accumulated other comprehensive income (loss) until the hedged transaction occurs, at which time it is reclassified to
operations.
Additional Consideration Agreement
Pursuant to an Additional Consideration Agreement between OfficeMax and Boise Cascade, L.L.C., the Company may have been required to make substantial cash
payments to, or receive substantial cash payments from, Boise Cascade, L.L.C. As described below, the Additional Consideration Agreement terminated in the first quarter of 2008. Under the Additional
Consideration Agreement, the Sale proceeds were adjusted upward or downward based on paper prices following the Sale, subject to annual and aggregate caps. Specifically, the Company agreed to pay
Boise Cascade, L.L.C. $710,000 for each dollar by which the average market price per ton of a specified benchmark grade of cut-size office paper during any 12-month period
ending on September 30 was less than $800. Boise Cascade, L.L.C. agreed to pay us $710,000 for each dollar by which the average market price per ton exceeded $920. Under the terms of the
agreement, neither party was obligated to make a payment in excess of $45 million in any one year. Payments by either party were also subject to an aggregate cap of $125 million that
declined to $115 million in the fifth year and $105 million in the sixth year.
In
connection with recording the Sale in 2004, the Company recognized a $42 million projected future obligation related to the Additional Consideration Agreement based on internal
estimates and published industry paper price projections. The Company recognized accretion expense totaling approximately $6.0 million in the Consolidated Statements of Income (Loss) in 2006
and 2005.
The
Company recorded changes in the fair value of the Additional Consideration Agreement in net income (loss) in the period they occur; however, any potential payments from Boise
Cascade, L.L.C. to us were not recorded in net income (loss) until all contingencies had been satisfied, which was generally at the end of a 12-month measurement period ending on
September 30. Due to increases in actual and projected paper prices, the change in fair value of this obligation resulted in the recognition of non-operating income in our
Consolidated Statement of Income (Loss) of $48.0 million in 2006 and $32.5 million in 2007. Based upon actual and projected paper prices at December 29, 2007 and
December 30, 2006, we did not recognize an asset or liability in our Consolidated Balance Sheet related to the Additional Consideration Agreement.
In
February 2008, Boise Cascade, L.L.C. sold a majority interest in its paper and packaging and newsprint businesses to Aldabra 2 Acquisition Corp. As a result of this transaction, the
Additional Consideration Agreement terminated and no further payments will be required of either party.
74
14. Retirement and Benefit Plans
Pension and Other Postretirement Benefit Plans
The Company sponsors noncontributory defined benefit pension plans covering certain terminated employees, vested employees, retirees, and some active OfficeMax,
Contract employees. The Company's salaried pension plan was closed to new entrants on November 1, 2003, and on December 31, 2003, the benefits of eligible OfficeMax, Contract
participants were frozen.
Under
the terms of the Company's plans, the pension benefit for salaried employees was based primarily on the employees' years of service and highest five-year average
compensation. The pension benefit for hourly employees was generally based on a fixed amount per year of service. The Company's general funding policy is to make contributions to the plans in amounts
that are within the limits of deductibility under current tax regulations, and not less than the minimum contribution required by law. The Company uses a measurement date consistent with its year end
for its pension plans.
The
Company also sponsors various retiree medical benefit plans. The type of retiree medical benefits and the extent of coverage vary based on employee classification, date of
retirement, location, and other factors. All of the Company's postretirement medical plans are unfunded. The Company explicitly reserves the right to amend or terminate its retiree medical plans at
any time, subject only to constraints, if any, imposed by the terms of collective bargaining agreements. Amendment or termination may significantly affect the amount of expense incurred.
During
the third quarter of 2005, the Company made changes to its retiree medical benefit plans that had the net effect of reducing the medical insurance subsidy provided to retirees,
including eliminating the subsidy for certain retirees. As a result of these plan changes, the accumulated post-retirement benefit obligation was reduced by approximately
$44 million. The plan changes were considered to be a negative plan amendment, as defined in SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions."
Accordingly, there was no gain related to the plan changes recognized in the Consolidated Statement of Income (Loss) for 2005. The reduction in the accumulated post-retirement benefit
obligation will be recognized ratably over the remaining life expectancy of the participants in the plans, which is currently estimated to be approximately 12 years.
During
the first quarter of 2007, the Company made changes to its Canadian retiree medical benefit plan that eliminated benefits for certain active employees. As a result of these plan
changes, the
accumulated post-retirement benefit obligation was reduced by approximately $6.2 million. The plan changes were considered to be curtailment, as defined in SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions." The reduction in the accumulated post-retirement benefit obligation did not exceed the transition obligation included in accumulated other
comprehensive income (loss). Accordingly, there was no gain related to the plan changes recognized in the Consolidated Statement of Income (Loss) for 2007.
75
Obligations and Funded Status
The changes in pension and other postretirement benefit obligations and plan assets during 2007 and 2006, as well as the funded status of the Company's plans at
December 29, 2007 and December 30, 2006, were as follows:
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(thousands)
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
1,381,555
|
|
$
|
1,382,760
|
|
$
|
31,789
|
|
$
|
31,523
|
|
Service cost
|
|
|
1,676
|
|
|
1,600
|
|
|
341
|
|
|
870
|
|
Interest cost
|
|
|
77,084
|
|
|
74,679
|
|
|
1,353
|
|
|
1,583
|
|
Amendments
|
|
|
|
|
|
|
|
|
(6,191
|
)
|
|
|
|
Actuarial (gain) loss
|
|
|
(67,511
|
)
|
|
20,007
|
|
|
(4,717
|
)
|
|
(180
|
)
|
Changes due to exchange rates
|
|
|
|
|
|
|
|
|
3,390
|
|
|
35
|
|
Transfers and immediate recognition
|
|
|
|
|
|
6,158
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(100,781
|
)
|
|
(103,649
|
)
|
|
(1,684
|
)
|
|
(2,042
|
)
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
1,292,023
|
|
$
|
1,381,555
|
|
$
|
24,281
|
|
$
|
31,789
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
1,183,275
|
|
$
|
1,146,596
|
|
$
|
|
|
$
|
|
|
Actual return on plan assets
|
|
|
82,816
|
|
|
130,690
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
19,137
|
|
|
9,638
|
|
|
1,684
|
|
|
2,042
|
|
Benefits paid
|
|
|
(100,781
|
)
|
|
(103,649
|
)
|
|
(1,684
|
)
|
|
(2,042
|
)
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
1,184,447
|
|
$
|
1,183,275
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(107,576
|
)
|
$
|
(198,280
|
)
|
$
|
(24,281
|
)
|
$
|
(31,789
|
)
|
Unrecognized actuarial loss
|
|
|
253,923
|
|
|
335,444
|
|
|
5,584
|
|
|
10,220
|
|
Unrecognized transition obligation
|
|
|
|
|
|
|
|
|
|
|
|
4,947
|
|
Unrecognized prior service cost (benefit)
|
|
|
|
|
|
|
|
|
(38,176
|
)
|
|
(41,845
|
)
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
146,347
|
|
$
|
137,164
|
|
$
|
(56,873
|
)
|
$
|
(58,467
|
)
|
|
|
|
|
|
|
|
|
|
|
76
The following table shows the amounts recognized in the Consolidated Balance Sheets related to the Company's defined benefit pension and other postretirement benefit plans at year end:
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(thousands)
|
|
Prepaid benefit cost
|
|
$
|
10,069
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Deferred income tax assets
|
|
|
98,777
|
|
|
130,488
|
|
|
(12,658
|
)
|
|
(10,690
|
)
|
Accrued benefit liabilitycurrent
|
|
|
(5,628
|
)
|
|
(11,100
|
)
|
|
(2,039
|
)
|
|
(2,100
|
)
|
Accrued benefit liabilitynon-current
|
|
|
(112,017
|
)
|
|
(187,180
|
)
|
|
(22,242
|
)
|
|
(29,689
|
)
|
Accumulated other comprehensive income (loss)
|
|
|
155,146
|
|
|
204,956
|
|
|
(19,934
|
)
|
|
(15,988
|
)
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
146,347
|
|
$
|
137,164
|
|
$
|
(56,873
|
)
|
$
|
(58,467
|
)
|
|
|
|
|
|
|
|
|
|
|
The Company adopted the recognition provisions of SFAS No. 158, "Employer's Accounting for Defined Benefit Pension and Other Postretirement
Plansan amendment of FASB Statements No. 87, 88, 106 and 132(R)," as of December 30, 2006, which requires the recognition of the funded status of all defined benefit plans
in the statement of financial position, and that changes in the funded status be recognized through other comprehensive income, net of tax, in the year in which the changes occur. The initial
recognition of the funded status of the Company's pension and other postretirement plans resulted in an increase in shareholders' equity of $11.9 million, which was net of income taxes of
$7.6 million.
Components of Net Periodic Benefit Cost (Income)
The components of net periodic benefit cost (income) are as follows:
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(thousands)
|
|
Service cost
|
|
$
|
1,676
|
|
$
|
1,600
|
|
$
|
959
|
|
$
|
341
|
|
$
|
870
|
|
$
|
643
|
|
Interest cost
|
|
|
77,084
|
|
|
74,679
|
|
|
75,266
|
|
|
1,353
|
|
|
1,583
|
|
|
3,668
|
|
Expected return on plan assets
|
|
|
(89,018
|
)
|
|
(87,353
|
)
|
|
(84,135
|
)
|
|
|
|
|
|
|
|
|
|
Recognized actuarial loss
|
|
|
20,220
|
|
|
23,159
|
|
|
29,628
|
|
|
512
|
|
|
692
|
|
|
675
|
|
Plan settlement/curtailment/closures expense
|
|
|
|
|
|
1,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service costs and other
|
|
|
|
|
|
|
|
|
|
|
|
(4,009
|
)
|
|
(3,571
|
)
|
|
(826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-sponsored plans
|
|
|
9,962
|
|
|
13,665
|
|
|
21,718
|
|
|
(1,803
|
)
|
|
(426
|
)
|
|
4,160
|
|
Multiemployer pension plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost (income)
|
|
$
|
9,962
|
|
$
|
13,665
|
|
$
|
21,718
|
|
$
|
(1,803
|
)
|
$
|
(426
|
)
|
$
|
4,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated net actuarial loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net
periodic benefit cost over the next fiscal year is $11.8 million. The estimated net actuarial loss and prior service benefit for the retiree medical plans that will be amortized from
accumulated other comprehensive loss into net periodic benefit cost (income) over the next fiscal year are $0.3 million and ($4.0) million, respectively.
77
Assumptions
The assumptions used in accounting for the Company's plans are estimates of factors including, among other things, the amount and timing of future benefit
payments. The following table presents the key assumptions used in the measurement of the Company's benefit obligations:
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
|
|
|
|
|
|
United States
|
|
Canada
|
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
Weighted average assumptions as of year end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
6.30%
|
|
5.80%
|
|
5.60%
|
|
5.90%
|
|
5.60%
|
|
5.20%
|
|
5.50%
|
|
5.00%
|
|
5.10%
|
Rate of compensation increase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the assumptions used in the measurement of net periodic benefit cost:
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
|
|
|
|
|
|
|
United States
|
|
Canada
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
Weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
5.80
|
%
|
5.60
|
%
|
5.60
|
%
|
5.60
|
%
|
5.20
|
%
|
5.48
|
%
|
5.00
|
%
|
5.10
|
%
|
6.00
|
%
|
Expected return on plan assets
|
|
8.00
|
%
|
8.00
|
%
|
8.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company bases its discount rate assumption on the rates of return available on high-quality bonds with maturities approximating
the expected period over which the pension benefits will be paid.
The
expected long-term rate of return on plan assets assumption is based on the weighted average of expected returns for the major asset classes in which the plans' assets
are held. Asset-class expected returns are based on long-term historical returns, inflation expectations, forecasted gross domestic product and earnings growth, as well as other economic
factors. The weights assigned to each asset class are based on the Company's investment strategy. The weighted-average expected return on plan assets used in the calculation of net periodic pension
benefit cost for 2007 is 8.00%.
The
following table presents the assumed healthcare cost trend rates used in measuring the Company's postretirement benefit obligations at December 29, 2007 and
December 30, 2006:
|
|
United States
|
|
Canada
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Weighted average assumptions as of year-end:
|
|
|
|
|
|
|
|
|
Healthcare cost trend rate assumed for next year
|
|
|
|
|
|
9.00%
|
|
9.50%
|
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
|
|
|
|
|
|
5.00%
|
|
5.00%
|
Year that the rate reaches the ultimate trend rate
|
|
|
|
|
|
2015
|
|
2015
|
78
The assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A
one-percentage-point change in the assumed healthcare cost trend rates would have the following effects:
|
|
One-Percentage-Point
Increase
|
|
One-Percentage-Point
Decrease
|
|
|
|
(thousands)
|
|
Effect on total of service and interest cost
|
|
$
|
209
|
|
$
|
(166
|
)
|
Effect on postretirement benefit obligation
|
|
$
|
2,360
|
|
$
|
(1,922
|
)
|
Effective October 1, 2005, the healthcare cost trend rate assumptions for the U.S. plan were reduced to zero following the adoption of plan
changes that reduced the medical insurance subsidy to retirees as discussed previously. As a result, the above amounts reflect the impact of changes in trend rates for the Canadian plan only.
Plan Assets
The allocation of pension plan assets by category at December 29, 2007 and December 30, 2006 is as follows:
Asset Category
|
|
2007
|
|
2006
|
|
U.S. equity securities
|
|
44.5
|
%
|
45.1
|
%
|
International equity securities
|
|
23.0
|
%
|
23.4
|
%
|
Fixed-income securities
|
|
32.5
|
%
|
31.5
|
%
|
|
|
|
|
|
|
|
|
100
|
%
|
100
|
%
|
|
|
|
|
|
|
The Company's Retirement Funds Investment Committee is responsible for establishing and overseeing the implementation of the investment policy for
the Company's pension plans. The investment policy is structured to optimize growth of the pension plan trust assets, while minimizing the risk of significant losses, in order to enable the plans to
satisfy their benefit payment obligations over time. Plan assets are invested primarily in U.S. equities, international equities and fixed-income securities. The Company uses benefit payments and
Company contributions as its primary rebalancing mechanisms to maintain the asset class exposures within the guideline ranges established under the investment policy.
The
current asset allocation guidelines set forth a U.S. equity range of 40% to 50%, an international equity range of 20% to 26% and a fixed-income range of 27% to 37%. Asset-class
positions within the ranges are continually evaluated and adjusted based on expectations for future returns, the funded position of the plans and market risks. Occasionally, the Company may utilize
futures or other financial instruments to alter the pension trust's exposure to various asset classes in a lower-cost manner than trading securities in the underlying portfolios. At
December 29, 2007 and December 30, 2006, the pension trust did not have any equity investments in the Company's common stock.
Cash Flows
Pension plan contributions include required statutory minimums and, in some years, additional discretionary amounts. During 2007, 2006 and 2005, the Company made
cash contributions to its pension plans totaling $19.1 million, $9.6 million and $2.8 million, respectively. Minimum contribution requirements for 2008 are approximately
$9.4 million. However, the Company may elect to make additional voluntary contributions.
79
Qualified
pension benefit payments are paid from the assets held in the plan trust, while nonqualified pension and other benefit payments are paid by the Company. Future benefit payments
by year are estimated to be as follows:
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
|
(thousands)
|
2008
|
|
$
|
104,020
|
|
$
|
2,039
|
2009
|
|
|
102,756
|
|
|
1,893
|
2010
|
|
|
101,587
|
|
|
1,790
|
2011
|
|
|
100,467
|
|
|
1,707
|
2012
|
|
|
99,657
|
|
|
1,626
|
Years 2013-2017
|
|
|
480,609
|
|
|
7,584
|
Defined Contribution Plans
The Company also sponsors defined contribution plans for most of its employees. Through 2004, the Company sponsored four contributory defined contribution savings
plans for most of its salaried and hourly employees: a plan for OfficeMax, Retail employees, a plan for non-Retail salaried employees, a plan for union hourly employees, and a plan for
non-Retail, nonunion hourly employees. Effective October 29, 2004, the defined contribution plan account balances for active paper and forest products employees were transferred to
plans established by Boise Cascade, L.L.C. The plan for non-Retail salaried employees includes an employee stock ownership plan ("ESOP") component through which the Company matches
contributions of eligible employees. Under that plan, the Company's Series D ESOP convertible preferred stock is allocated to eligible participants, as principal and interest payments are made
on the ESOP debt by the plan. The ESOP debt was guaranteed by the Company. (See Note 15, Shareholders' Equity for additional information related to the ESOP.) The final principal and interest
payments on the ESOP debt were made on June 30, 2004. All remaining shares were allocated to the ESOP participants as matching contributions in 2005. As a result, Company matching contributions
for ESOP participants are now made in cash. In January 2005, all of the remaining savings plans were merged into a single plan. Total Company contributions to the defined contribution savings plans
were $8.1 million in 2007, $7.8 million in 2006 and $9.9 million in 2005.
15. Shareholders' Equity
Preferred Stock
At December 29, 2007, 1,110,867 shares of 7.375% Series D ESOP convertible preferred stock were outstanding, compared with 1,216,335 shares
outstanding at December 30, 2006 and December 31, 2005. The Series D ESOP convertible preferred stock is shown in the Consolidated Balance Sheets at its liquidation preference of
$45 per share. This preferred stock was originally issued to the trustee of the Company's ESOP for salaried employees in 1989, and was allocated to eligible participants through 2005. All shares
outstanding have been allocated to participants in the plan. Each ESOP preferred share is entitled to one vote, bears an annual cumulative dividend of
$3.31875 and is convertible at any time by the trustee to 0.80357 share of common stock. The ESOP preferred shares may not be redeemed for less than the liquidation preference.
80
Common Stock
The Company is authorized to issue 200,000,000 shares of common stock, of which 75,397,094 shares were issued and outstanding at December 29, 2007. Of the
unissued shares, 7,393,647 shares were reserved for the following purposes:
Conversion or redemption of Series D ESOP preferred stock
|
|
892,659
|
Issuance under OfficeMax Incentive and Performance Plan
|
|
5,193,025
|
Issuance under Key Executive Stock Option Plan
|
|
1,214,924
|
Issuance under Director Stock Compensation Plan
|
|
7,475
|
Issuance under Director Stock Option Plan
|
|
19,000
|
Issuance under Key Executive Deferred Compensation Plan
|
|
9,377
|
Issuance under 2003 Director Stock Compensation Plan
|
|
57,187
|
The Company has a shareholder rights plan that was adopted in December 1988. The current rights plan, as amended and restated, took effect in
December 1998 and expires in December 2008. On January 18, 2006, the Company announced that the Company's Board of Directors voted not to seek an extension of the shareholder rights plan when
it expires in 2008.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) includes the following:
|
|
Minimum
Pension
Liability
Adjustment
|
|
Foreign
Currency
Translation
Adjustment
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Balance at December 31, 2005, net of taxes
|
|
$
|
(227,508
|
)
|
$
|
85,387
|
|
$
|
(142,121
|
)
|
Current-period changes, before taxes
|
|
|
29,999
|
|
|
11,581
|
|
|
41,580
|
|
Income taxes
|
|
|
(3,365
|
)
|
|
|
|
|
(3,365
|
)
|
Adjustment from initial adoption of SFAS No. 158, net of tax
|
|
|
11,911
|
|
|
|
|
|
11,911
|
|
|
|
|
|
|
|
|
|
Balance at December 30, 2006, net of taxes
|
|
|
(188,963
|
)
|
|
96,968
|
|
|
(91,995
|
)
|
Current-period changes, before taxes
|
|
|
87,435
|
|
|
59,977
|
|
|
147,412
|
|
Income taxes
|
|
|
(33,679
|
)
|
|
|
|
|
(33,679
|
)
|
|
|
|
|
|
|
|
|
Balance at December 29, 2007, net of taxes
|
|
$
|
(135,207
|
)
|
$
|
156,945
|
|
$
|
21,738
|
|
|
|
|
|
|
|
|
|
Share-Based Payments
In December 2004, the FASB issued SFAS No. 123R, "Share Based Payment." SFAS 123R is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation," and supersedes Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and its related implementation guidance. SFAS 123R focuses
primarily on accounting for transactions in which an entity obtains employee services in exchange for share-based payments. SFAS 123R requires entities to recognize compensation expense from
all share-based payment transactions in the financial statements. SFAS 123R establishes fair value as the measurement objective in accounting for share-based payment transactions and requires
all companies to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees.
Effective
January 1, 2006, the Company adopted SFAS 123R using the modified prospective transition method. Accordingly, the financial statements for periods prior to
January 1, 2006 have
81
not
been restated to reflect the adoption of SFAS 123R. Under the modified prospective transition method, the Company must record compensation expense for all awards granted after the adoption
date and for the unvested portion of previously granted awards that remain outstanding at the adoption date, under the fair value method. Previously, the Company recognized compensation expense for
share-based awards to employees using the fair-value-based guidance in SFAS 123. Due to the fact that the Company had previously accounted for share-based awards using
SFAS 123, the adoption of SFAS 123R did not have a material impact on the Company's financial position, results of operations or cash flows.
The
Company sponsors several share-based compensation plans, which are described below. Compensation costs related to the Company's share-based plans were $26.9 million,
$24.7 million and $10.0 million for 2007, 2006 and 2005, respectively. Compensation expense is generally recognized on a straight-line basis over the vesting period of
grants. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $10.5 million, $9.6 million and $3.9 million for 2007, 2006
and 2005, respectively.
2003 Director Stock Compensation Plan and OfficeMax Incentive and Performance Plan
In February 2003, the Company's Board of Directors adopted the 2003 Director Stock Compensation Plan (the "2003 DSCP") and the 2003 OfficeMax Incentive and
Performance Plan (the "2003 Plan"), formerly named the 2003 Boise Incentive and Performance Plan, which were approved by shareholders in April 2003.
A
total of 57,187 shares of common stock are reserved for issuance under the 2003 DSCP. Prior to December 8, 2005, the 2003 DSCP permitted non-employee directors to
elect to receive some or all of their annual retainer and meeting fees in the form of options to purchase shares of the Company's common stock. Non-employee directors who elected to
receive a portion of their compensation in the form of stock options did not receive cash for that portion of their compensation. The difference between the $2.50-per-share
exercise price of the options and the market value of the common stock on the date of grant was equal to the cash compensation that participating directors elected to forego and was recognized as
compensation expense in the Consolidated Statements of Income (Loss). On December 8, 2005, the Board of Directors amended the 2003 DSCP to eliminate the choice to receive discounted stock
options. All options granted under the 2003 DSCP expire three years after the holder ceases to be a director.
The
2003 Plan was effective January 1, 2003, and replaced the Key Executive Performance Plan for Executive Officers, Key Executive Performance Plan for Key Executives/Key
Managers, 1984 Key Executive Stock Option Plan ("KESOP"), Key Executive Performance Unit Plan ("KEPUP") and Director Stock Option Plan ("DSOP"). No further grants or awards have been made under the
Key Executive Performance Plans, KESOP, KEPUP, or DSOP since 2003. A total of 5,193,025 shares of common stock is reserved for issuance under the 2003 Plan. The Company's executive officers, key
employees and nonemployee directors are eligible to receive awards under the 2003 Plan at the discretion of the Executive Compensation Committee of the Board of Directors. Eight types of awards may be
granted under the 2003 Plan, including stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares, annual incentive awards and stock
bonus awards.
Restricted Stock and Restricted Stock Units
In 2007, the Company granted to employees and nonemployee directors 767,626 restricted stock units ("RSUs"). The weighted-average grant-date fair
value of the RSUs was $50.81. As of December 29, 2007, 676,038 of these RSUs were unvested, and vest after defined service periods as follows: 23,778 units in 2008, 326,130 in 2009 and 326,130
in 2010. The remaining
82
compensation
expense to be recognized related to this grant, net of estimated forfeitures, is approximately $14 million.
In
2006, the Company granted to employees and nonemployee directors 1,157,479 restricted stock units ("RSUs"). The weighted-average grant-date fair value of the RSUs was
$28.79. As of December 29, 2007, 927,474 of these RSUs were unvested, and vest after defined service periods as follows: 463,737 in 2008 and 463,737 in 2009. The remaining compensation expense
to be recognized related to this grant, net of estimated forfeitures, is approximately $7 million.
In
2005, the Company granted to employees and nonemployee directors 728,123 RSUs. The weighted-average grant-date fair value of the RSUs was $33.15. As of December 29,
2007, 51,900 of these RSUs were unvested, and vest after defined service periods as follows: 45,900 units in 2008 and 3,000 units in both 2009 and 2010. The remaining compensation expense to be
recognized related to this grant, net of estimated forfeitures, is approximately $0.2 million.
Restricted
stock shares are restricted until they vest and cannot be sold by the recipient until the restriction has lapsed. RSUs are restricted until they vest and are convertible into
one common share after the restriction has lapsed. No entries are made in the financial statements on the grant date of restricted stock and RSU awards. The Company recognizes compensation expense
related to these awards over the vesting periods based on the closing prices of the Company's common stock on the grant dates. If these awards contain performance criteria, management periodically
reviews actual performance against the criteria and adjusts compensation expense accordingly. In 2007, 2006 and 2005, the Company recognized $26.4 million, $24.1 million and
$9.2 million, respectively, of pre-tax compensation expense and additional paid-in capital related to restricted stock and RSU awards.
Restricted
shares and RSUs are not included as shares outstanding in the calculation of basic earnings per share, but are included in the number of shares used to calculate diluted
earnings per share as long as all applicable performance criteria are met, and their effect is dilutive. When the restriction lapses on restricted stock, the par value of the stock is reclassified
from additional paid-in-capital to common stock. When the restriction lapses on RSUs, the units are converted to unrestricted common shares and the par value of the stock is
reclassified from additional paid-in-capital to common stock. Unrestricted shares
are included in shares outstanding for purposes of calculating both basic and diluted earnings per share. Depending on the terms of the applicable grant agreement, restricted stock and RSUs may be
eligible to receive all dividends declared on the Company's common shares during the vesting period; however, such dividends are not paid until the restrictions lapse.
Stock Units
The Company has a shareholder approved deferred compensation program for certain of its executive officers that allows them to defer a portion of their cash
compensation. Previously, these officers could allocate their deferrals to a stock unit account. Each stock unit is equal in value to one share of the Company's common stock. The Company matched
deferrals used to purchase stock units with a 25% Company allocation of stock units. The value of deferred stock unit accounts is paid in shares of the Company's common stock when an officer retires
or terminates employment. There were 9,377 and 13,464 stock units allocated to the accounts of these executive officers at December 29, 2007 and December 30, 2006, respectively. As a
result of an amendment to the plan, no additional deferrals can be allocated to the stock unit accounts.
Stock Options
In addition to the 2003 DSCP and the 2003 Plan discussed above, the Company has the following shareholder-approved stock option plans: the Key Executive Stock
Option Plan
83
("KESOP"),
the Director Stock Option Plan ("DSOP") and the Director Stock Compensation Plan ("DSCP"). No further grants will be made under the KESOP, DSOP and DSCP.
The
KESOP provided for the grant of options to purchase shares of common stock to key employees of the Company. The exercise price of awards under the KESOP was equal to the fair market
value of the Company's common stock on the date the options were granted. Options granted under the KESOP expire, at the latest, ten years and one day following the grant date.
The
DSOP, which was available only to nonemployee directors, provided for annual grants of options. The exercise price of awards under the DSOP was equal to the fair market value of the
Company's common stock on the date the options were granted. The options granted under the DSOP expire upon the earlier of three years after the director ceases to be a director or ten years after the
grant date.
The
DSCP permitted nonemployee directors to elect to receive grants of options to purchase shares of the Company's common stock in lieu of cash compensation. The difference between the
$2.50-per-share exercise price of DSCP options and the market value of the common stock subject to the options was intended to offset the cash compensation that participating
directors elected not to receive. Options granted under the DSCP expire three years after the holder ceases to be a director.
Under
the KESOP and DSOP, options may not, except under unusual circumstances, be exercised until one year following the grant date. Under the DSCP, options may be exercised six months
after the grant date.
A
summary of stock option activity for the years ended December 29, 2007, December 30, 2006 and December 31, 2005 is presented in the table below:
|
|
2007
|
|
2006
|
|
2005
|
|
|
Shares
|
|
Wtd. Avg.
Ex. Price
|
|
Shares
|
|
Wtd. Avg.
Ex. Price
|
|
Shares
|
|
Wtd. Avg.
Ex. Price
|
Balance at beginning of year
|
|
|
1,753,188
|
|
$
|
31.81
|
|
5,759,545
|
|
$
|
32.39
|
|
|
6,963,462
|
|
$
|
32.62
|
Options granted
|
|
|
35,000
|
|
|
31.39
|
|
|
|
|
|
|
|
310,200
|
|
|
32.38
|
Options exercised
|
|
|
(187,843
|
)
|
|
31.49
|
|
(3,993,857
|
)
|
|
32.62
|
|
|
(883,817
|
)
|
|
28.00
|
Options forfeited and expired
|
|
|
(4,050
|
)
|
|
32.88
|
|
(12,500
|
)
|
|
37.57
|
|
|
(630,300
|
)
|
|
41.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
1,596,295
|
|
$
|
31.84
|
|
1,753,188
|
|
$
|
31.81
|
|
|
5,759,545
|
|
$
|
32.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
1,409,896
|
|
|
|
|
1,522,390
|
|
|
|
|
|
5,449,345
|
|
|
|
Weighted average fair value of options granted (Black-Scholes)
|
|
$
|
7.95
|
|
|
|
|
|
|
|
|
|
$
|
7.21
|
|
|
|
The following table provides summarized information about stock options outstanding at December 29, 2007:
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of Exercise Prices
|
|
Options
Outstanding
|
|
Weighted
Average
Contractual
Life (Years)
|
|
Weighted
Average
Exercise
Price
|
|
Options
Exercisable
|
|
Weighted
Average
Exercise
Price
|
$2.50
|
|
11,171
|
|
|
|
$
|
2.50
|
|
11,171
|
|
$
|
2.50
|
$18.00 $28.00
|
|
569,664
|
|
2.6
|
|
|
27.65
|
|
569,664
|
|
|
27.65
|
$28.01 $39.00
|
|
1,015,460
|
|
4.1
|
|
|
34.50
|
|
829,061
|
|
|
35.01
|
84
The remaining compensation expense to be recognized related to outstanding stock options, net of estimated forfeitures, is approximately $0.6 million. At December 29, 2007,
the aggregate intrinsic value was $0.2 million for outstanding stock options and exercisable stock options. The aggregate intrinsic value represents the total pre-tax intrinsic
value (i.e. the difference between the Company's closing stock price on the last trading day of the fourth quarter of 2007 and the exercise price, multiplied by the number of
in-the-money options at the end of the quarter).
The
Company did not grant any stock options during 2006. To calculate stock-based employee compensation expense under the fair value method as outlined in SFAS 123(R) for 2007
grants and SFAS 123 for 2005 grants, the Company estimated the fair value of each option award on the date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rates of 4.5% in 2007 and 4.3% in 2005 (based on the applicable Treasury bill rate); expected dividends of 60 cents per share in both years
(based on actual cash dividends expected to be paid); expected life of 3.0 years in 2007 and 3.4 years in 2005 (based on the time period options are expected to be outstanding based on
historical experience); and expected stock price volatility of 35.5% in 2007 and 28% in 2005 (based on the historical volatility of the Company's common stock).
Other
In May 2005, the Company repurchased 23.5 million shares of its common stock and the associated common stock purchase rights through a modified Dutch
auction tender offer at a purchase price of $775.5 million, or $33.00 per share, plus transaction costs.
In
September 1995, the Company's Board of Directors authorized the purchase of up to 4.3 million shares of the Company's common stock. As part of this authorization, the Company
repurchased odd-lot shares (fewer than 100 shares) from shareholders wishing to exit their holdings in the Company's common stock. Shares repurchased under this program are retired. Since
1995, the Company has repurchased 50,577 shares of common stock under this authorization, including 907 shares in 2006 and 2,190 shares in 2005. The Company's Board of Directors terminated the share
repurchase authorization in December 2006.
16. Segment Information
The Company manages its business using three reportable segments: OfficeMax, Contract; OfficeMax, Retail; and Corporate and Other. Management reviews the
performance of the Company based on these segments.
OfficeMax,
Contract distributes a broad line of items for the office, including office supplies and paper, technology products and solutions and office furniture. OfficeMax, Contract
sells directly to large corporate and government offices, as well as small and medium-sized offices in the United States, Canada, Australia and New Zealand. This segment markets and sells through
field salespeople, outbound telesales, catalogs, the Internet and in some markets, including Canada, Hawaii, Australia and New Zealand, through office products stores. Substantially all products sold
by OfficeMax, Contract are purchased from third-party manufacturers or industry wholesalers, except office papers. OfficeMax, Contract purchases office papers primarily from the paper operations of
Boise Cascade, L.L.C., under a 12-year paper supply contract. (See Note 17, Commitments and Guarantees, for additional information related to the paper supply contract.)
OfficeMax,
Retail is a retail distributor of office supplies and paper, print and document services, technology products and solutions and office furniture. OfficeMax, Retail has
operations in the United States, Puerto Rico and the U.S. Virgin Islands. OfficeMax, Retail office supply stores feature OfficeMax ImPress, an in-store module devoted to
print-for-pay and related services. The retail segment also operates office supply stores in Mexico through a 51%-owned joint venture.
85
Substantially
all products sold by OfficeMax, Retail are purchased from third-party manufacturers or industry wholesalers, except office papers. OfficeMax, Retail purchases office papers primarily
from the paper operations of Boise Cascade, L.L.C., under the paper supply contract described above. (See Note 17, Commitments and Guarantees, for additional information related to the
paper supply contract.)
Corporate
and Other includes corporate support staff services and related assets and liabilities.
Management
evaluates the segments based on operating profits before interest expense, income taxes, minority interest, extraordinary items and cumulative effect of accounting changes.
The income and expense related to certain assets and liabilities that are reported in the Corporate and Other segment have been allocated to the Contract and Retail segments. Certain expenses that
management considers unusual or non-recurring are not allocated to the segments.
The
segments follow the accounting principles described in Note 1, Summary of Significant Accounting Policies. Prior periods have been revised to adjust the geographic
classification and allocation of segment assets. The effect of these changes was not material to the financial statements.
No
single customer accounts for 10% or more of consolidated trade sales.
OfficeMax,
Contract has foreign operations in Canada, Australia and New Zealand. OfficeMax, Retail has foreign operations in Mexico through a 51%-owned joint venture.
The
following table summarizes by geography, net sales for fiscal years 2007, 2006 and 2005, and long-lived assets at each year end:
|
|
2007
|
|
2006
|
|
2005
|
|
|
(millions)
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
7,548.9
|
|
$
|
7,617.2
|
|
$
|
7,878.6
|
|
Foreign
|
|
|
1,533.1
|
|
|
1,348.5
|
|
|
1,279.1
|
|
|
|
|
|
|
|
|
|
$
|
9,082.0
|
|
$
|
8,965.7
|
|
$
|
9,157.7
|
|
|
|
|
|
|
|
Long-lived assets
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
3,662.8
|
|
$
|
3,755.9
|
|
$
|
3,976.8
|
|
Foreign
|
|
|
416.3
|
|
|
363.3
|
|
|
353.3
|
|
|
|
|
|
|
|
|
|
$
|
4,079.1
|
|
$
|
4,119.2
|
|
$
|
4,330.1
|
|
|
|
|
|
|
|
86
Segment sales to external customers by product line are as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
|
(millions)
|
OfficeMax, Contract
|
|
|
|
|
|
|
|
|
|
|
Office supplies and paper
|
|
$
|
2,696.3
|
|
$
|
2,568.9
|
|
$
|
2,598.1
|
|
Technology products
|
|
|
1,535.1
|
|
|
1,551.9
|
|
|
1,469.2
|
|
Office furniture
|
|
|
584.7
|
|
|
593.7
|
|
|
561.3
|
|
|
|
|
|
|
|
|
|
|
4,816.1
|
|
|
4,714.5
|
|
|
4,628.6
|
|
|
|
|
|
|
|
OfficeMax, Retail
|
|
|
|
|
|
|
|
|
|
|
Office supplies and paper
|
|
|
1,640.4
|
|
|
1,627.5
|
|
|
1,639.6
|
|
Technology products
|
|
|
2,241.8
|
|
|
2,212.5
|
|
|
2,363.5
|
|
Office furniture
|
|
|
383.7
|
|
|
411.2
|
|
|
526.0
|
|
|
|
|
|
|
|
|
|
|
4,265.9
|
|
|
4,251.2
|
|
|
4,529.1
|
|
|
|
|
|
|
|
Total OfficeMax
|
|
|
|
|
|
|
|
|
|
|
Office supplies and paper
|
|
|
4,336.7
|
|
|
4,196.4
|
|
|
4,237.7
|
|
Technology products
|
|
|
3,776.9
|
|
|
3,764.4
|
|
|
3,832.7
|
|
Office furniture
|
|
|
968.4
|
|
|
1,004.9
|
|
|
1,087.3
|
|
|
|
|
|
|
|
|
|
$
|
9,082.0
|
|
$
|
8,965.7
|
|
$
|
9,157.7
|
|
|
|
|
|
|
|
87
An analysis of the Company's operations by segment is as follows:
|
|
|
|
|
|
|
|
Selected Components of Income (Loss)
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Taxes
and Minority Interest
|
|
Earnings from Affiliates
|
|
Depreciation and Amortization
|
|
Capital Expendi-
tures
|
|
|
|
Invest-
ments
In Affiliates
|
|
|
Trade
|
|
Total
|
|
Assets
|
|
|
(millions)
|
Year Ended December 29, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OfficeMax, Contract
|
|
$
|
4,816.1
|
|
$
|
4,816.1
|
|
$
|
207.9
|
|
$
|
|
|
$
|
66.6
|
|
$
|
43.8
|
|
$
|
1,778.2
|
|
|
|
OfficeMax, Retail
|
|
|
4,265.9
|
|
|
4,265.9
|
|
|
173.7
|
|
|
|
|
|
64.9
|
|
|
98.3
|
|
|
2,238.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,082.0
|
|
|
9,082.0
|
|
|
381.6
|
|
|
|
|
|
131.5
|
|
|
142.1
|
|
|
4,016.7
|
|
|
|
Corporate and Other
|
|
|
|
|
|
|
|
|
(37.4
|
)
|
|
6.1
|
|
|
0.1
|
|
|
|
|
|
2,267.1
|
|
|
175.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,082.0
|
|
$
|
9,082.0
|
|
$
|
344.2
|
|
|
6.1
|
|
|
131.6
|
|
|
142.1
|
|
|
6,283.8
|
|
|
175.0
|
Interest expense
|
|
|
|
|
|
|
|
|
(121.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income and other
|
|
|
|
|
|
|
|
|
114.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,082.0
|
|
$
|
9,082.0
|
|
$
|
337.5
|
|
$
|
6.1
|
|
$
|
131.6
|
|
$
|
142.1
|
|
$
|
6,283.8
|
|
$
|
175.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OfficeMax, Contract
|
|
$
|
4,714.5
|
|
$
|
4,714.5
|
|
$
|
197.7
|
|
$
|
|
|
$
|
60.6
|
|
$
|
82.7
|
|
$
|
1,649.8
|
|
$
|
|
OfficeMax, Retail
|
|
|
4,251.2
|
|
|
4,251.2
|
|
|
86.3
|
|
|
|
|
|
67.1
|
|
|
93.6
|
|
|
2,406.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,965.7
|
|
|
8,965.7
|
|
|
284.0
|
|
|
|
|
|
127.7
|
|
|
176.3
|
|
|
4,056.4
|
|
|
|
Corporate and Other
|
|
|
|
|
|
|
|
|
(118.0
|
)
|
|
5.9
|
|
|
0.1
|
|
|
|
|
|
2,159.6
|
|
|
175.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,965.7
|
|
$
|
8,965.7
|
|
$
|
166.0
|
|
|
5.9
|
|
|
127.8
|
|
|
176.3
|
|
|
6,216.0
|
|
|
175.0
|
Interest expense
|
|
|
|
|
|
|
|
|
(123.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income and other
|
|
|
|
|
|
|
|
|
129.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,965.7
|
|
$
|
8,965.7
|
|
$
|
172.0
|
|
$
|
5.9
|
|
$
|
127.8
|
|
$
|
176.3
|
|
$
|
6,216.0
|
|
$
|
175.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OfficeMax, Contract
|
|
$
|
4,628.6
|
|
$
|
4,628.6
|
|
$
|
100.3
|
|
$
|
|
|
$
|
66.3
|
|
$
|
121.0
|
|
$
|
1,588.4
|
|
$
|
|
OfficeMax, Retail
|
|
|
4,529.1
|
|
|
4,529.1
|
|
|
27.9
|
|
|
|
|
|
84.7
|
|
|
65.9
|
|
|
2,484.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,157.7
|
|
|
9,157.7
|
|
|
128.2
|
|
|
|
|
|
151.0
|
|
|
186.9
|
|
|
4,073.3
|
|
|
|
Corporate and Other
|
|
|
|
|
|
|
|
|
(118.5
|
)
|
|
5.5
|
|
|
0.2
|
|
|
0.4
|
|
|
2,198.5
|
|
|
175.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,157.7
|
|
$
|
9,157.7
|
|
$
|
9.7
|
|
|
5.5
|
|
|
151.2
|
|
|
187.3
|
|
|
6,271.8
|
|
|
175.0
|
Assets held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
(128.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income and other
|
|
|
|
|
|
|
|
|
95.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt retirement expense
|
|
|
|
|
|
|
|
|
(14.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,157.7
|
|
$
|
9,157.7
|
|
$
|
(37.6
|
)
|
$
|
5.5
|
|
$
|
151.2
|
|
$
|
187.3
|
|
$
|
6,272.1
|
|
$
|
175.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17. Commitments and Guarantees
Commitments
The Company has commitments for minimum lease payments due under noncancelable leases and for the repayment of outstanding long-term debt. In
addition, the Company has purchase obligations for goods and services and capital expenditures that were entered into in the normal course of business.
Pursuant
to an Additional Consideration Agreement between OfficeMax and Boise Cascade, L.L.C. related to the Sale, the Company may have been required to make substantial cash
payments to, or receive substantial cash payments from, Boise Cascade, L.L.C. The Additional Consideration Agreement terminated in the first quarter of 2008. Under the Additional Consideration
Agreement, the Sale proceeds were adjusted upward or downward based on paper prices following the Sale, subject to annual and aggregate caps. Specifically, we agreed to pay Boise
Cascade, L.L.C. $710,000 for each dollar by which the average market price per ton of a specified grade of cut-size office paper during any 12-month period ending on
September 30 was less than
88
$800.
Boise Cascade, L.L.C. agreed to pay us $710,000 for each dollar by which the average market price per ton exceeded $920. Under the terms of the agreement, neither party was obligated to make a
payment in excess of $45 million in any one year. Payments by either party were also subject to an aggregate cap of $125 million that declined to $115 million in the fifth year
and $105 million in the sixth year. (See Note 13, Financial Instruments, Derivatives and Hedging Activities, for more information related to the Additional Consideration Agreement).
In
connection with the Sale, the Company entered into a paper supply contract with affiliates of Boise Cascade, L.L.C. under which we are obligated to purchase our North American
requirements for cut-size office paper, to the extent Boise Cascade, L.L.C. produces such paper, until December 2012, at prices approximating market levels. The Company's purchase
obligations under the agreement will phase-out over a four-year period beginning one year after the delivery of notice of termination, but not prior to December 31,
2012.
In
accordance with the terms of a joint-venture agreement between the Company and the minority owner of the Company's subsidiary in Mexico (Grupo OfficeMax), the Company can be required
to purchase the minority owner's 49% interest in the subsidiary if certain earnings targets are achieved. At December 29, 2007 and throughout 2007, Grupo OfficeMax had met these earnings
targets. The earnings targets are calculated quarterly on a rolling four-quarter basis. Accordingly, the targets can be achieved in one quarter but not in the next. If the earnings targets
are achieved and the minority owner elects to put its ownership interest to the Company, the purchase price would be equal to fair value, calculated based on the subsidiary's earnings before interest,
taxes and depreciation and amortization for the last four quarters, and the current market multiples for similar companies. The fair value purchase price at December 29, 2007 is estimated to be
$65 million to $70 million.
Guarantees
The Company provides guarantees, indemnifications and assurances to others, which constitute guarantees as defined under FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others."
Indemnification
obligations may arise from the Asset Purchase Agreement between OfficeMax Incorporated, OfficeMax Southern Company, Minidoka Paper Company, Forest Products
Holdings, L.L.C. and Boise Land & Timber Corp. The terms of this agreement include purchase price adjustments, which could require the Company to make additional payments in the future.
Additionally, the Company has agreed to provide indemnification with respect to a variety of obligations. These indemnification obligations are subject, in some cases, to survival periods, deductibles
and caps. At December 29, 2007, the Company is not aware of any material liabilities arising from these indemnifications.
There
are eleven operating leases that have been assigned to other parties but for which the Company remains contingently liable in the event of nonpayment by the other parties. The
lease terms vary and, assuming exercise of renewal options, extend through 2019. Annual rental payments under these leases are approximately $4.8 million.
The
Company and its affiliates enter into a wide range of indemnification arrangements in the ordinary course of business. These include tort indemnifications, tax indemnifications,
officer and director indemnifications against third-party claims arising out of arrangements to provide services to the Company and indemnifications in merger and acquisition agreements. It is
impossible to quantify the maximum potential liability under these indemnifications. At December 29, 2007, the Company is not aware of any material liabilities arising from these
indemnifications.
89
18. Legal Proceedings and Contingencies
OfficeMax Incorporated and certain of its subsidiaries are named as defendants in a number of lawsuits, claims and proceedings arising out of the operation of the
paper and forest products assets prior to the closing of the Sale, for which OfficeMax agreed to retain responsibility. Also, as part of the Sale, we agreed to retain responsibility for all pending or
threatened proceedings and future proceedings alleging asbestos-related injuries arising out of the operation of the paper and forest products assets prior to the closing of the Sale. We do not
believe any of these retained proceedings are material to our business.
We
have been notified that we are a "potentially responsible party" under the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA") or similar federal and state
laws, or have received a claim from a private party, with respect to certain sites where hazardous substances or other contaminants are or may be located. All of these sites relate to operations
either no longer owned by the Company or unrelated to its ongoing operations. In most cases, we
are one of many potentially responsible parties, and our alleged contribution to these sites is relatively minor. For sites where a range of potential liability can be determined, we have established
appropriate reserves. We believe we have minimal or no responsibility with regard to several other sites. We cannot predict with certainty the total response and remedial costs, our share of the total
costs, the extent to which contributions will be available from other parties or the amount of time necessary to complete the cleanups. Based on our investigations; our experience with respect to
cleanup of hazardous substances; the fact that expenditures will, in many cases, be incurred over extended periods of time; and the number of solvent potentially responsible parties, we do not believe
that the known actual and potential response costs will, in the aggregate, materially affect our financial position, results of operations or cash flows.
Over
the past several years and continuing in 2008, we have been named a defendant in a number of cases where the plaintiffs allege asbestos-related injuries from exposure to asbestos
products or exposure to asbestos while working at job sites. The claims vary widely and often are not specific about the plaintiffs' contacts with the Company. None of the claimants seeks damages from
us individually, and we are generally one of numerous defendants. Many of the cases filed against us have been voluntarily dismissed, although we have settled some cases. The settlements we have paid
have been covered mostly by insurance, and we believe any future settlements or judgments in these cases would be similarly covered. To date, no asbestos case against us has gone to trial, and the
nature of these cases makes any prediction as to the outcome of pending litigation inherently subjective. At this time, however, we believe our involvement in asbestos litigation is not material to
either our financial position or our results of operations.
In
June 2005, the Company announced that the SEC issued a formal order of investigation arising from the Company's previously announced internal investigation into its accounting for
vendor income. The Company launched its internal investigation in December 2004 when the Company received claims by a vendor to its retail business that certain employees acted inappropriately in
requesting promotional payments and in falsifying supporting documentation. The internal investigation was conducted under the direction of the Company's audit committee and was completed in March
2005. The Company cooperated fully with the SEC. In a letter dated October 23, 2007, the Company received notification from the SEC that it had completed its investigation against the Company
and was not recommending any enforcement action.
On
April 25, 2005, a putative derivative action, Homstrom v. Harad, et al., was filed in the Circuit Court of Cook County, Illinois. The Homstrom complaint names as defendants the
following current and former officers and directors of OfficeMax Incorporated: George J. Harad, Christopher C. Milliken, Theodore Crumley, Gary J. Peterson, Brian P. Anderson, Warren F. Bryant, Claire
S. Farley, Rakesh Gangwal, Edward E. Hagenlocker, Gary G. Michael, A. William Reynolds, Francesca
90
Ruiz
De Luzuriaga, Jane E. Shaw, Carolyn M. Ticknor, Ward W. Woods, Brian C. Cornell, David M. Szymanski, Richard R. Goodmanson, Donald N. MacDonald, and Frank A. Schrontz. The complaint also names
the following former directors of OfficeMax, Inc. as defendants: Michael Feuer, Lee Fisher, Edwin J. Holman, Jerry Sue Thornton, Burnett W. Donoho, Michael F. Killeen, Ivan J. Winfield, and
Jacqueline Woods. OfficeMax Incorporated is named as a nominal defendant. The complaint purports to assert, among other things, various common law derivative claims against the individual defendants
including breach of fiduciary duty and unjust enrichment. The complaint seeks an award in favor of OfficeMax and against the individual defendants of an unspecified amount of damages, disgorgement of
benefits and compensation, equitable or injunctive relief, costs, including attorneys' fees, and such other relief as the court deems just and proper. Pursuant to provisions of company's bylaws, fees
and other expenses incurred in connection with the foregoing derivative action are being advanced on behalf of those present and former officers and directors by the company.
The
Company is also involved in other litigation and administrative proceedings arising in the normal course of business. In the opinion of management, the Company's recovery, if any, or
liability, if any, under such pending litigation or administrative proceedings would not materially affect the Company's financial position, results of operations or cash flows.
19. Quarterly Results of Operations (unaudited)
Summarized quarterly financial data is as follows:
|
|
2007
|
|
2006
|
|
|
First(a)
|
|
Second
|
|
Third
|
|
Fourth(b)
|
|
First(c)
|
|
Second(d)
|
|
Third(e)
|
|
Fourth(f)
|
|
|
(millions, except per-share and stock price information)
|
Sales
|
|
$
|
2,436
|
|
$
|
2,132
|
|
$
|
2,315
|
|
$
|
2,199
|
|
$
|
2,424
|
|
$
|
2,041
|
|
$
|
2,244
|
|
$
|
2,257
|
Income (loss) from continuing operations
|
|
|
59
|
|
|
27
|
|
|
50
|
|
|
71
|
|
|
(14
|
)
|
|
27
|
|
|
31
|
|
|
55
|
Income (loss) from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
4
|
Net income (loss)
|
|
|
59
|
|
|
27
|
|
|
50
|
|
|
71
|
|
|
(25
|
)
|
|
27
|
|
|
31
|
|
|
59
|
Net income (loss) per common share from continuing operations(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
.77
|
|
|
.35
|
|
|
.65
|
|
|
.93
|
|
|
(.21
|
)
|
|
.36
|
|
|
.41
|
|
|
.72
|
|
Diluted
|
|
|
.76
|
|
|
.35
|
|
|
.64
|
|
|
.92
|
|
|
(.21
|
)
|
|
.35
|
|
|
.41
|
|
|
.71
|
Net income (loss) per common share(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
.77
|
|
|
.35
|
|
|
.65
|
|
|
.93
|
|
|
(.37
|
)
|
|
.36
|
|
|
.41
|
|
|
.76
|
|
Diluted
|
|
|
.76
|
|
|
.35
|
|
|
.64
|
|
|
.92
|
|
|
(.37
|
)
|
|
.35
|
|
|
.41
|
|
|
.76
|
Common stock dividends paid per share
|
|
|
.15
|
|
|
.15
|
|
|
.15
|
|
|
.15
|
|
|
.15
|
|
|
.15
|
|
|
.15
|
|
|
.15
|
Common stock prices(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
55.40
|
|
|
54.38
|
|
|
40.16
|
|
|
34.89
|
|
|
31.73
|
|
|
44.73
|
|
|
45.38
|
|
|
51.80
|
|
Low
|
|
|
47.87
|
|
|
38.64
|
|
|
30.96
|
|
|
20.38
|
|
|
24.72
|
|
|
30.42
|
|
|
38.78
|
|
|
40.26
|
-
(a)
-
Includes
$1.1 million of charges from the sale of OfficeMax Contract's operations in Mexico to Grupo OfficeMax, our 51% owned joint venture. This was recorded as an increase in
minority interest, net of income tax.
-
(b)
-
Includes
$32.5 million of income from adjustments to the estimated fair value of the Additional Consideration Agreement we entered into in connection with the sale of our
paper, forest products and timberland assets in 2004.
-
(c)
-
Includes
$98.5 million of store closing and impairment charges, $15.7 million of charges related to headquarters consolidation and $11.0 million of charges for
the write-down of impaired assets at the Company's Elma, Washington manufacturing facility that is accounted for as a discontinued operation.
91
-
(d)
-
Includes
$10.9 million of charges related to headquarters consolidation, $9.0 million of income related to favorable adjustments to facility closure reserves and
$9.2 million of income from adjustments to the estimated fair value of the Additional Consideration Agreement we entered into in connection with the sale of our paper, forest products and
timberland assets in 2004.
-
(e)
-
Includes
$11.4 million of charges related to headquarters consolidation, and $7.9 million of charges related to the reorganization in our Contract segment.
-
(f)
-
Includes
$7.9 million of charges related to headquarters consolidation, $2.4 million of charges related to the reorganization in our Contract segment, including
international restructuring and asset write-offs, $38.8 million of income from adjustments to the estimated fair value of the Additional Consideration Agreement we entered into in
connection with the sale of our paper, forest products and timberland assets in 2004, and $3.7 million of income tax benefits related to the Company's Elma, Washington manufacturing facility
that is accounted for as a discontinued operation.
-
(g)
-
Quarters
added together may not equal full year amount because each quarter is calculated on a stand-alone basis.
-
(h)
-
The
Company's common stock (symbol OMX) is traded on the New York Stock Exchange.
92