UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended September 25, 2010
or
¨
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from to
Commission File Number: 1-5057
OFFICEMAX INCORPORATED
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
82-0100960
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S Employer
Identification No.)
|
|
|
263 Shuman Boulevard
Naperville, Illinois
|
|
60563
|
(Address of principal executive offices)
|
|
(Zip Code)
|
(630) 438-7800
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes
x
No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and
post such files). Yes
¨
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
|
|
|
|
|
|
|
Large accelerated filer
|
|
¨
|
|
Accelerated filer
|
|
x
|
|
|
|
|
Non-accelerated filer
|
|
¨
(Do not check if a smaller reporting company)
|
|
Smaller reporting company
|
|
¨
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
¨
No
x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
|
|
|
Class
|
|
Shares Outstanding as of October 26, 2010
|
Common Stock, $2.50 par value
|
|
85,027,278
|
TABLE OF CONTENTS
2
PART
IFINANCIAL INFORMATION
ITEM 1.
|
FINANCIAL STATEMENTS
|
OfficeMax Incorporated and Subsidiaries
Consolidated Statements of Operations
(thousands, except per-share
amounts)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 25,
2010
|
|
|
September 26,
2009
|
|
|
|
(unaudited)
|
|
Sales
|
|
$
|
1,813,366
|
|
|
$
|
1,831,947
|
|
Cost of goods sold and occupancy costs
|
|
|
1,342,944
|
|
|
|
1,397,215
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
470,422
|
|
|
|
434,732
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Operating and selling
|
|
|
341,748
|
|
|
|
339,043
|
|
General and administrative
|
|
|
87,750
|
|
|
|
69,019
|
|
Other operating expenses
|
|
|
|
|
|
|
1,473
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
429,498
|
|
|
|
409,535
|
|
Operating income
|
|
|
40,924
|
|
|
|
25,197
|
|
Interest expense
|
|
|
(18,444
|
)
|
|
|
(19,289
|
)
|
Interest income
|
|
|
10,646
|
|
|
|
10,873
|
|
Other expense, net
|
|
|
(23
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
Pre-tax income
|
|
|
33,103
|
|
|
|
16,778
|
|
Income tax expense
|
|
|
(11,678
|
)
|
|
|
(9,942
|
)
|
|
|
|
|
|
|
|
|
|
Net income attributable to OfficeMax and noncontrolling interest
|
|
|
21,425
|
|
|
|
6,836
|
|
Joint venture results attributable to noncontrolling interest
|
|
|
(886
|
)
|
|
|
(558
|
)
|
|
|
|
|
|
|
|
|
|
Net income attributable to OfficeMax
|
|
|
20,539
|
|
|
|
6,278
|
|
Preferred dividends
|
|
|
(573
|
)
|
|
|
(622
|
)
|
|
|
|
|
|
|
|
|
|
Net income available to OfficeMax common shareholders
|
|
$
|
19,966
|
|
|
$
|
5,656
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.23
|
|
|
$
|
0.07
|
|
Diluted
|
|
$
|
0.23
|
|
|
$
|
0.07
|
|
See accompanying
notes to quarterly consolidated financial statements
3
OfficeMax
Incorporated and Subsidiaries
Consolidated Statements of Operations
(thousands, except per-share amounts)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 25,
2010
|
|
|
September 26,
2009
|
|
|
|
(unaudited)
|
|
Sales
|
|
$
|
5,383,794
|
|
|
$
|
5,401,549
|
|
Cost of goods sold and occupancy costs
|
|
|
3,980,171
|
|
|
|
4,106,346
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,403,623
|
|
|
|
1,295,203
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Operating and selling
|
|
|
1,026,667
|
|
|
|
1,021,343
|
|
General and administrative
|
|
|
247,219
|
|
|
|
208,917
|
|
Other operating expenses
|
|
|
11,348
|
|
|
|
39,710
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,285,234
|
|
|
|
1,269,970
|
|
Operating income
|
|
|
118,389
|
|
|
|
25,233
|
|
Interest expense
|
|
|
(55,132
|
)
|
|
|
(57,956
|
)
|
Interest income
|
|
|
31,850
|
|
|
|
36,449
|
|
Other income (expense), net
|
|
|
(57
|
)
|
|
|
2,837
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income
|
|
|
95,050
|
|
|
|
6,563
|
|
Income tax expense
|
|
|
(34,374
|
)
|
|
|
(4,425
|
)
|
|
|
|
|
|
|
|
|
|
Net income attributable to OfficeMax and noncontrolling interest
|
|
|
60,676
|
|
|
|
2,138
|
|
Joint venture results attributable to noncontrolling interest
|
|
|
(2,249
|
)
|
|
|
1,111
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to OfficeMax
|
|
|
58,427
|
|
|
|
3,249
|
|
Preferred dividends
|
|
|
(1,921
|
)
|
|
|
(2,159
|
)
|
|
|
|
|
|
|
|
|
|
Net income available to OfficeMax common shareholders
|
|
$
|
56,506
|
|
|
$
|
1,090
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.67
|
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
0.65
|
|
|
$
|
0.01
|
|
See accompanying
notes to quarterly consolidated financial statements
4
OfficeMax
Incorporated and Subsidiaries
Consolidated Balance Sheets
(thousands, except share and per-share amounts)
|
|
|
|
|
|
|
|
|
|
|
September 25,
2010
|
|
|
December 26,
2009
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
587,936
|
|
|
$
|
486,570
|
|
Receivables, net
|
|
|
540,842
|
|
|
|
539,350
|
|
Inventories
|
|
|
764,047
|
|
|
|
805,646
|
|
Deferred income taxes and tax receivables
|
|
|
106,299
|
|
|
|
133,836
|
|
Other current assets
|
|
|
55,459
|
|
|
|
55,934
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,054,583
|
|
|
|
2,021,336
|
|
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
|
41,302
|
|
|
|
41,072
|
|
Buildings and improvements
|
|
|
487,694
|
|
|
|
483,133
|
|
Machinery and equipment
|
|
|
801,280
|
|
|
|
792,650
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
1,330,276
|
|
|
|
1,316,855
|
|
Accumulated depreciation
|
|
|
(934,586
|
)
|
|
|
(894,707
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
|
395,690
|
|
|
|
422,148
|
|
|
|
|
Intangible assets, net
|
|
|
82,942
|
|
|
|
83,806
|
|
Investment in affiliates
|
|
|
175,000
|
|
|
|
175,000
|
|
Timber notes receivable
|
|
|
899,250
|
|
|
|
899,250
|
|
Deferred income taxes
|
|
|
299,374
|
|
|
|
300,900
|
|
Other non-current assets
|
|
|
172,469
|
|
|
|
167,091
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,079,308
|
|
|
$
|
4,069,531
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to quarterly consolidated financial statements
5
OfficeMax
Incorporated and Subsidiaries
Consolidated Balance Sheets
(thousands, except share and per-share amounts)
|
|
|
|
|
|
|
|
|
|
|
September 25,
2010
|
|
|
December 26,
2009
|
|
|
|
(unaudited)
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of debt
|
|
$
|
22,638
|
|
|
$
|
22,430
|
|
Accounts payable
|
|
|
639,479
|
|
|
|
687,340
|
|
Income tax payable
|
|
|
6,094
|
|
|
|
3,389
|
|
Accrued expenses and other current liabilities:
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
151,456
|
|
|
|
153,408
|
|
Other
|
|
|
236,470
|
|
|
|
225,125
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,056,137
|
|
|
|
1,091,692
|
|
|
|
|
Long-term debt, less current portion
|
|
|
271,337
|
|
|
|
274,622
|
|
Non-recourse debt
|
|
|
1,470,000
|
|
|
|
1,470,000
|
|
|
|
|
Other long-term obligations:
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
267,074
|
|
|
|
277,247
|
|
Deferred gain on sale of assets
|
|
|
179,757
|
|
|
|
179,757
|
|
Other long-term obligations
|
|
|
224,476
|
|
|
|
244,958
|
|
|
|
|
|
|
|
|
|
|
Total other long-term obligations
|
|
|
671,307
|
|
|
|
701,962
|
|
|
|
|
Noncontrolling interest in joint venture
|
|
|
38,075
|
|
|
|
28,059
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stockno par value; 10,000,000 shares authorized; Series D ESOP: $.01 stated value; 724,779 and 810,654
shares outstanding
|
|
|
32,615
|
|
|
|
36,479
|
|
Common stock$2.50 par value; 200,000,000 shares authorized; 85,026,130 and 84,624,726 shares
outstanding
|
|
|
212,565
|
|
|
|
211,562
|
|
Additional paid-in capital
|
|
|
992,024
|
|
|
|
989,912
|
|
Accumulated deficit
|
|
|
(546,286
|
)
|
|
|
(602,242
|
)
|
Accumulated other comprehensive loss
|
|
|
(118,466
|
)
|
|
|
(132,515
|
)
|
|
|
|
|
|
|
|
|
|
Total OfficeMax shareholders equity
|
|
|
572,452
|
|
|
|
503,196
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
4,079,308
|
|
|
$
|
4,069,531
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to quarterly consolidated financial statements
6
OfficeMax
Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
(thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 25,
2010
|
|
|
September 26,
2009
|
|
|
|
(unaudited)
|
|
Cash provided by operations:
|
|
|
|
|
|
|
|
|
Net income attributable to OfficeMax and noncontrolling interest
|
|
$
|
60,676
|
|
|
$
|
2,138
|
|
Non-cash items in net income :
|
|
|
|
|
|
|
|
|
Earnings from affiliates
|
|
|
(5,391
|
)
|
|
|
(4,984
|
)
|
Depreciation and amortization
|
|
|
76,586
|
|
|
|
88,693
|
|
Pension and other postretirement expense
|
|
|
3,688
|
|
|
|
9,391
|
|
Other
|
|
|
8,747
|
|
|
|
5,595
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
4,002
|
|
|
|
30,926
|
|
Inventories
|
|
|
48,227
|
|
|
|
224,294
|
|
Accounts payable and accrued liabilities
|
|
|
(50,850
|
)
|
|
|
(94,038
|
)
|
Current and deferred income taxes
|
|
|
28,433
|
|
|
|
59,077
|
|
Other
|
|
|
(18,140
|
)
|
|
|
48,044
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operations
|
|
|
155,978
|
|
|
|
369,136
|
|
Cash provided by (used for) investment:
|
|
|
|
|
|
|
|
|
Expenditures for property and equipment
|
|
|
(50,153
|
)
|
|
|
(23,946
|
)
|
Distribution from escrow account
|
|
|
|
|
|
|
25,142
|
|
Withdrawal from insurance policies
|
|
|
|
|
|
|
14,977
|
|
Proceeds from sale of assets
|
|
|
1,607
|
|
|
|
697
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used for) investment
|
|
|
(48,546
|
)
|
|
|
16,870
|
|
Cash used for financing:
|
|
|
|
|
|
|
|
|
Cash dividends paidpreferred stock
|
|
|
(2,575
|
)
|
|
|
(3,052
|
)
|
Payments of short-term debt, net
|
|
|
(626
|
)
|
|
|
(11,480
|
)
|
Payments of long-term debt
|
|
|
(2,715
|
)
|
|
|
(10,330
|
)
|
Purchase of Series D preferred stock
|
|
|
(3,595
|
)
|
|
|
(4,877
|
)
|
Other
|
|
|
1,839
|
|
|
|
6,330
|
|
|
|
|
|
|
|
|
|
|
Cash used for financing
|
|
|
(7,672
|
)
|
|
|
(23,409
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
1,606
|
|
|
|
13,570
|
|
Increase in cash and cash equivalents
|
|
|
101,366
|
|
|
|
376,167
|
|
Cash and cash equivalents at beginning of period
|
|
|
486,570
|
|
|
|
170,779
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
587,936
|
|
|
$
|
546,946
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to quarterly consolidated financial statements
7
Notes to Quarterly
Consolidated Financial Statements (unaudited)
1. Basis of Presentation
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 office furniture to large, medium and small businesses, government offices and consumers.
OfficeMax customers are serviced by over 30,000 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 accompanying quarterly consolidated financial statements include the accounts of OfficeMax and all majority-owned subsidiaries,
except our 88%-owned subsidiary that formerly owned assets in Cuba that were confiscated by the Cuban government in the 1960s, which is accounted for as an investment due to various asset restrictions. We also consolidate the variable interest
entities in which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation. These financial statements are for the thirteen-week and thirty-nine-week periods ended on
September 25, 2010 (also referred to as the third quarter of 2010 or the three months ended September 25, 2010 and the first nine months of 2010 or the the nine months ended September 25,
2010, respectively) and the thirteen-week and thirty-nine-week periods ended on September 26, 2009 (also referred to as the third quarter of 2009 or the three months ended September 26, 2009 and first
nine months of 2009 or the the nine months ended September 26, 2009, respectively). The Companys fiscal year ends on the last Saturday in December. Due primarily to statutory reporting requirements, the Companys
international businesses maintain December 31 year-ends and end their quarters on the last calendar day of the month, with our majority-owned joint venture in Mexico reporting one month in arrears.
The Company manages its business using three reportable segments: OfficeMax, Contract (Contract segment or
Contract); OfficeMax, Retail (Retail segment or Retail); and Corporate and Other. Management reviews the performance of the Company based on these segments. We present information pertaining to our segments in
Note 10. Segment Information.
The Company has prepared the quarterly consolidated financial statements included herein
pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Some information and note disclosures, which would normally be included in comprehensive annual financial statements prepared in accordance with
accounting principles generally accepted in the United States, have been condensed or omitted pursuant to those rules and regulations. These quarterly consolidated financial statements should be read together with the consolidated financial
statements and the accompanying notes included in the Companys Annual Report on Form 10-K for the year ended December 26, 2009.
The quarterly consolidated financial statements included herein have not been audited by an independent registered public accounting firm, but in the opinion of management, include all adjustments
necessary to present fairly the results for the periods indicated. Except as disclosed within these Notes to Quarterly Consolidated Financial Statements (unaudited), the adjustments made were of a normal, recurring nature. Quarterly
results are not necessarily indicative of results which may be expected for a full year.
2. 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 viable or economically beneficial. 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, primarily the locations
cease-use date. Upon closure, unrecoverable costs are included in facility closure reserves 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 required payments.
8
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
During the first
nine months of 2010, the Company recorded charges of $14.4 million in its Retail segment related to facility closures, of which $13.0 million was related to the lease liability and other costs associated with closing eight domestic stores prior
to the end of their lease terms and $1.4 million was related to asset impairments and other items. None of these charges were recorded in the third quarter of 2010.
During the first nine months of 2009, the Company recorded charges of $31.2 million (all in the first six months) related to the closing of 21 stores prior to the end of their lease terms, of which
17 were in the U.S. and four were in Mexico. These charges were included in other operating expenses in the Consolidated Statements of Operations.
Facility closure reserve account activity during the first nine months of 2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended 2010
|
|
|
|
LeaseContract
Terminations
|
|
|
Other
|
|
|
Total
|
|
|
|
(thousands)
|
|
Balance at December 26, 2009
|
|
$
|
61,559
|
|
|
$
|
13
|
|
|
$
|
61,572
|
|
Charges related to stores closed in 2010
|
|
|
12,947
|
|
|
|
122
|
|
|
|
13,069
|
|
Transfer of deferred rent and other balances
|
|
|
6,659
|
|
|
|
|
|
|
|
6,659
|
|
Cash payments
|
|
|
(16,237
|
)
|
|
|
(135
|
)
|
|
|
(16,372
|
)
|
Accretion
|
|
|
2,696
|
|
|
|
|
|
|
|
2,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 25, 2010
|
|
$
|
67,624
|
|
|
$
|
|
|
|
$
|
67,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 25, 2010, the lease termination component of the facilities closure reserve consisted of
the following:
|
|
|
|
|
|
|
September 25,
2010
|
|
|
|
(thousands)
|
|
Estimated future lease obligations
|
|
$
|
138,109
|
|
Less: anticipated sublease income
|
|
|
(70,485
|
)
|
|
|
|
|
|
Total
|
|
$
|
67,624
|
|
|
|
|
|
|
In addition, we were the lessee of a legacy, building materials manufacturing facility near Elma,
Washington. During 2006, we ceased operations at the facility, fully impaired the assets and recorded a reserve, which is separate from the facility closure reserve above, for the related lease payments and other contract termination and closure
costs. During the second quarter of 2010, we signed an agreement with the lessor to terminate the lease and recorded income of $3.9 million to adjust the associated reserve. This income is reported in other operating (income) expense in our
Consolidated Statements of Operations. Also during the second quarter of 2010, we contracted with a third party for the sale of the equipment, subject to a financing contingency. Subsequent to the third quarter, we closed on the sale of the
equipment to the third party and completed the lease termination. As a result of the equipment sale and lease termination, we will record income of approximately $5.5 million in the fourth quarter to adjust the associated reserve.
3. Severance and Other Charges
The first nine months of 2010 included a charge recorded in our Contract segment of $0.8 million (all in the first six months) for severance related to a reorganization of our U.S. Contract customer
service centers. During the first nine months of 2009, we recorded $8.4 million of severance and other charges in the Contract segment,
9
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
$1.5 million of which was recorded in the third quarter related to the reorganization of our customer service centers and $6.9 million of which was recorded in the second quarter,
principally related to U.S. and Canadian sales force reorganizations. These charges are included in other operating expenses in the Consolidated Statements of Operations.
As of September 25, 2010, $1.0 million of severance charges recorded in 2010 and 2009 remain to be paid and are included in accrued expenses and other current liabilities in the Consolidated
Balance Sheets.
4. Timber Notes Receivable/Non-Recourse Debt
In October 2004, we sold our timberland assets in exchange for $15 million in cash plus credit-enhanced timber installment notes in the amount of $1,635 million (the Installment
Notes). The Installment Notes were issued by single-member limited liability companies formed by affiliates of Boise Cascade, L.L.C. (the Note Issuers). The Installment Notes are 15-year non-amortizing obligations and were issued
in two equal $817.5 million tranches bearing interest at 5.11% and 4.98%, respectively. In order to support the issuance of the Installment Notes, the Note Issuers transferred a total of $1,635 million in cash to Lehman Brothers
Holdings Inc. (Lehman) and Wachovia Corporation (Wachovia) (which was later purchased by Wells Fargo & Company). Lehman and Wachovia each received $817.5 million. Lehman and Wachovia issued collateral notes (the
Collateral Notes) to the Note Issuers. Concurrently with the issuance of the Installment and Collateral Notes, Lehman and Wachovia guaranteed the respective Installment Notes and the Note Issuers pledged the Collateral Notes as security
for the performance of the Installment Note obligations. The Installment Notes are reported in our Consolidated Balance Sheets as Timber notes receivable.
In December 2004, we completed a securitization transaction in which the Companys interests in the Installment Notes and related guarantees were transferred to wholly-owned bankruptcy remote
subsidiaries. The subsidiaries pledged the Installment Notes and related guarantees and issued securitized notes (the Securitization Notes) in the amount of $1,470 million ($735 million through the structure supported by the
Lehman guaranty and $735 million through the structure supported by the Wachovia guaranty). As a result of these transactions, we received $1,470 million in cash. Recourse on the Securitization Notes is limited to the proceeds of the
applicable pledged Installment Notes and underlying Lehman or Wachovia guaranty, and therefore there is no recourse against OfficeMax. The Securitization Notes are reported in our Consolidated Balance Sheets as Non-recourse debt.
On September 15, 2008, Lehman, the guarantor of half of the Installment Notes and the Securitization Notes, filed a petition in the
United States Bankruptcy Court for the Southern District of New York seeking relief under chapter 11 of the United States Bankruptcy Code. Lehmans bankruptcy filing constituted an event of default under the $817.5 million Installment
Note guaranteed by Lehman (the Lehman Guaranteed Installment Note). We evaluated the carrying value of the Lehman Guaranteed Installment Note and reduced it to the estimated amount we expect to collect, $81.8 million. On
April 14, 2010, Lehman filed its Debtors Disclosure Statement with the United States Bankruptcy Court for the Southern District of New York. The Disclosure Statement indicated a range of estimated recoveries for general unsecured creditors of
Lehman. As our estimate is similar to the estimate included in the Disclosure Statement, we have not adjusted our estimated carrying value for the Lehman Guaranteed Installment Note.
Since recourse on the Securitization Notes is limited to the proceeds from the applicable pledged Installment Notes and underlying Lehman
or Wachovia guaranty, the Lehman Guaranteed Installment Note and the underlying Lehman guaranty will be transferred to the holders of the Securitization Notes guaranteed by Lehman in order to settle and extinguish that liability. However, under
current generally accepted accounting principles, we are required to continue to recognize the liability related to the Securitization Notes guaranteed by Lehman until such time as the liability has been extinguished. This will occur when the Lehman
Guaranteed Installment
10
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
Note and the guaranty are transferred to and accepted by the Securitization Note holders. We expect that this will occur no later than the date when the assets of Lehman are distributed and the
bankruptcy is finalized. Accordingly, we expect to recognize a non-cash gain equal to the difference between the carrying amount of the Securitization Notes guaranteed by Lehman and the carrying value of the Lehman Guaranteed Installment Note in a
later period when the liability is legally extinguished. The actual gain to be recognized in the future will be measured based on the carrying amounts of the Lehman Guaranteed Installment Note and the Securitization Notes guaranteed by Lehman at the
date of settlement.
5. Debt
Credit Agreements
On July 12, 2007, the Company entered into
an Amended and Restated Loan and Security Agreement (the U.S. Credit Agreement) with a group of banks. The U.S. Credit 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. Letters of credit, which may be issued under the U.S. Credit Agreement up to a maximum of
$250 million, reduce available borrowing capacity. At the end of the third quarter of 2010, the Company was in compliance with all covenants under the U.S. Credit Agreement. The U.S. Credit Agreement expires on July 12, 2012.
On September 30, 2009, Grand & Toy Limited, the Companys wholly-owned subsidiary in Canada, entered into a Loan and
Security Agreement (the Canadian Credit Agreement) with a group of banks. The Canadian Credit Agreement permits Grand & Toy Limited to borrow up to a maximum of C$60 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. Letters of credit, which may be issued under the Canadian Credit Agreement up to a maximum of
C$10 million, reduce available borrowing capacity. Grand & Toy Limited was in compliance with all covenants under the Canadian Credit Agreement at the end of the third quarter of 2010. The Canadian Credit Agreement expires on
July 12, 2012.
On March 15, 2010, the Companys five wholly-owned subsidiaries based in Australia and New
Zealand (the Australasian subsidiaries) entered into a Facility Agreement (the Australasian Credit Agreement) with a financial institution based in those countries. The Australasian Credit Agreement permits the Australasian
subsidiaries to borrow up to a maximum of A$80 million subject to a borrowing base calculation that limits availability to a percentage of eligible accounts receivable plus a percentage of the value of certain owned properties, less certain
reserves. At the end of the third quarter of 2010, the Australasian subsidiaries were in compliance with all covenants under the Australasian Credit Agreement. The Australasian Credit Agreement expires on March 15, 2013.
Borrowings and availability under the Companys credit agreements at the end of the third quarter of 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Credit
Agreement
|
|
|
Canadian
Credit
Agreement
|
|
|
Australasian
Credit
Agreement
|
|
|
Total
|
|
|
|
(millions of U.S. dollars)
|
|
|
|
|
Maximum aggregate available borrowing amount
|
|
$
|
516.2
|
|
|
$
|
46.4
|
|
|
$
|
63.9
|
|
|
$
|
626.5
|
|
Less: Stand-by letters of credit
|
|
|
(56.5
|
)
|
|
|
|
|
|
|
|
|
|
|
(56.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount available for borrowing at the end of the third quarter of 2010
|
|
$
|
459.7
|
|
|
$
|
46.4
|
|
|
$
|
63.9
|
|
|
$
|
570.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum borrowings outstanding during first nine months of 2010
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
Cash Paid
for Interest
Cash payments for interest, excluding payments related to the timber notes, were $20.3 million and $21.6
million for the first nine months of 2010 and 2009, respectively. Cash interest payments made on the Securitization Notes are completely offset by interest payments received on the Installment Notes.
6. Investments in Affiliates
In connection with the sale of the paper, forest products and timberland assets in 2004, the Company invested $175 million in the securities of affiliates of Boise Cascade, L.L.C. Due to the
restructuring conducted by those affiliates, the investment is currently in Boise Cascade Holdings, L.L.C. (the Boise Investment). A portion of the securities received in exchange for the Companys investment carry no voting rights.
This investment is accounted for under the cost method as 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.
Through its investment in Boise Inc., Boise Cascade Holdings, L.L.C. indirectly owned an interest in Boise White
Paper, L.L.C. OfficeMax is obligated by contract to purchase its North American requirements for cut-size office paper from Boise White Paper, L.L.C. During the first quarter of 2010, Boise Cascade Holdings, L.L.C. sold its remaining investment in
Boise Inc. As a result of the sale, the Company estimated the fair value of its investment in Boise Cascade Holdings, L.L.C. and concluded that there was no impairment to the carrying value of the investment. The Company continues to monitor and
assess this investment and industry. Also as a result of the sale, Boise White Paper, L.L.C. is no longer a related party to the Company, and as such, amounts previously presented as related party receivables of $6.5 million and related party
payables of $37.1 million at December 26, 2009 have been reclassified to Receivables, net and Accounts Payable, respectively.
The Boise Investment represented a continuing involvement in the operations of the business we sold in 2004. Therefore, approximately $180 million of gain realized from the sale in 2004 was deferred.
This gain is expected to be recognized in earnings as the Companys investment is reduced.
The non-voting securities of
Boise Cascade Holdings, L.L.C. 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 June and December. The
Company recognized dividend income on this investment of $1.9 million and $1.7 million in the third quarter of 2010 and 2009, respectively, and $5.4 million and $5.0 million in the first nine months of 2010 and 2009, respectively.
The Company receives distributions on the Boise Investment for the income tax liability associated with its share of allocated earnings.
The Company did not receive any tax-related distributions in the first nine months of 2010 and received $2.6 million in the first nine months of 2009.
12
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
7. Financial Instruments
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade accounts receivable, other assets (non-derivatives), short-term borrowings and trade accounts payable approximate fair value because of the short
maturity of these instruments. The following table presents the carrying amounts and estimated fair values of the Companys other financial instruments at September 25, 2010 and December 26, 2009. The fair value of a financial
instrument is the estimated amount at which the instrument could be exchanged in a current transaction between willing parties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25, 2010
|
|
|
December 26, 2009
|
|
|
|
Carrying
Amount
|
|
|
Fair
value
|
|
|
Carrying
Amount
|
|
|
Fair
value
|
|
|
|
(millions)
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate debt
|
|
$
|
280.1
|
|
|
$
|
268.4
|
|
|
$
|
280.9
|
|
|
$
|
190.8
|
|
Variable-rate debt
|
|
|
13.9
|
|
|
|
13.6
|
|
|
|
16.7
|
|
|
|
16.4
|
|
Non-recourse debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wachovia
|
|
$
|
735.0
|
|
|
$
|
837.8
|
|
|
$
|
735.0
|
|
|
$
|
754.8
|
|
Lehman
|
|
|
735.0
|
|
|
|
81.8
|
|
|
|
735.0
|
|
|
|
81.8
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timber notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wachovia
|
|
$
|
817.5
|
|
|
$
|
917.7
|
|
|
$
|
817.5
|
|
|
$
|
823.6
|
|
Lehman
|
|
|
81.8
|
|
|
|
81.8
|
|
|
|
81.8
|
|
|
|
81.8
|
|
In establishing a
fair value, there is a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The basis of the fair value measurement is categorized in three levels, in order of priority, as described below:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or
liabilities.
Level 2: Quoted prices in markets that are not active, or financial instruments for which all significant
inputs are observable; either directly or indirectly.
Level 3: Prices or valuation techniques that require inputs that
are both significant to the fair value measurement and unobservable; thus, reflecting assumptions about the market participants.
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 of the Installment Notes guaranteed by Wachovia 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 (Level 2 inputs). The fair value of the Lehman Guaranteed Installment Note reflects the estimated future cash flows of the note
considering the estimated effects of the Lehman bankruptcy (Level 3 inputs).
|
|
|
|
Fixed-rate and variable debt
: The fair value of the Companys debt is estimated based on recent 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 (Level 2 inputs).
|
13
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
|
|
|
Non-recourse debt:
The fair value of the Securitization Notes supported by Wachovia is estimated by discounting the future cash flows of the
instruments at rates currently available to the Company for similar instruments of comparable maturities (Level 2 inputs). The fair value of the Securitization Notes supported by Lehman is estimated based on the future cash flows of the
instruments in a bankruptcy proceeding (Level 3 inputs).
|
For the nine months ended September 25,
2010, there was no change in assets and liabilities measured at estimated fair value using Level 3 inputs.
8. Income Taxes
The Company or its subsidiaries file income tax returns in the U.S. Federal jurisdiction, and multiple state and foreign
jurisdictions. Years prior to 2006 are no longer subject to U.S. Federal income tax examination, and the Company is no longer subject to income tax examinations in its major state jurisdictions for years before 2003.
At the time of the sale of the timberlands in 2004, we generated a tax gain and recognized the related deferred tax liability. The timber
installment note structure allowed the Company to defer the resulting tax liability of $543 million until 2020, the maturity date for the Installment Notes. Due to the Lehman bankruptcy and note defaults, the Lehman portion of the gain will be
triggered when the Lehman Guaranteed Installment Note is transferred to the Securitization Note holders as payment and/or when the Lehman bankruptcy is resolved. At that time, we expect to reduce the estimated cash payment due by utilizing our
available alternative minimum tax credits.
As of September 25, 2010, the Company had $20.7 million of total gross
unrecognized tax benefits. During the first nine months of 2010, the Company increased the unrecognized tax benefit as we derecognized amounts for positions relating to temporary differences. Of the total gross unrecognized benefits, approximately
$6.5 million represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the Companys effective income tax rate in future periods. The Company does not anticipate any income tax settlements to occur within
the next twelve months.
A reconciliation of the beginning and ending gross unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
Amount
|
|
|
|
(thousands)
|
|
Balance at December 26, 2009
|
|
$
|
8,247
|
|
Increase related to prior year tax positions
|
|
|
12,793
|
|
Settlement
|
|
|
(329
|
)
|
|
|
|
|
|
Balance at September 25, 2010
|
|
$
|
20,711
|
|
|
|
|
|
|
During the first nine months of 2010 and 2009, the Company made cash payments for income taxes, net of
refunds received, as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(millions)
|
|
Cash tax payments (refunds), net
|
|
$
|
5.9
|
|
|
$
|
(62.3
|
)
|
14
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
9. Postretirement Benefit Plans
The following represents the components of net periodic pension and other postretirement benefit costs (income) which are
recorded in general and administrative expense in the Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
September 25,
2010
|
|
|
September 26,
2009
|
|
|
September 25,
2010
|
|
|
September 26,
2009
|
|
|
|
(thousands)
|
|
Service cost
|
|
$
|
691
|
|
|
$
|
1,126
|
|
|
$
|
65
|
|
|
$
|
47
|
|
Interest cost
|
|
|
18,553
|
|
|
|
18,965
|
|
|
|
301
|
|
|
|
288
|
|
Expected return on plan assets
|
|
|
(20,873
|
)
|
|
|
(18,943
|
)
|
|
|
|
|
|
|
|
|
Recognized actuarial loss
|
|
|
3,310
|
|
|
|
1,646
|
|
|
|
56
|
|
|
|
13
|
|
Amortization of prior service costs and other
|
|
|
|
|
|
|
|
|
|
|
(1,001
|
)
|
|
|
(1,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost (income)
|
|
$
|
1,681
|
|
|
$
|
2,794
|
|
|
$
|
(579
|
)
|
|
$
|
(655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 25,
2010
|
|
|
September 26,
2009
|
|
|
September 25,
2010
|
|
|
September 26,
2009
|
|
|
|
(thousands)
|
|
Service cost
|
|
$
|
2,074
|
|
|
$
|
3,379
|
|
|
$
|
196
|
|
|
$
|
141
|
|
Interest cost
|
|
|
55,660
|
|
|
|
56,893
|
|
|
|
906
|
|
|
|
864
|
|
Expected return on plan assets
|
|
|
(62,620
|
)
|
|
|
(57,680
|
)
|
|
|
|
|
|
|
|
|
Recognized actuarial loss
|
|
|
9,929
|
|
|
|
8,684
|
|
|
|
168
|
|
|
|
109
|
|
Amortization of prior service costs and other
|
|
|
379
|
|
|
|
|
|
|
|
(3,004
|
)
|
|
|
(2,999
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost (income)
|
|
$
|
5,422
|
|
|
$
|
11,276
|
|
|
$
|
(1,734
|
)
|
|
$
|
(1,885
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company expects to fund the minimum pension contribution requirement for 2010 of approximately
$3.8 million, with cash. As of September 25, 2010, $2.6 million in cash has been contributed.
10. Segment Information
The Company manages its business using three reportable segments: Contract, Retail and Corporate and Other. Management
reviews the performance of the Company based on these segments.
Contract distributes a broad line of items for the office,
including office supplies and paper, technology products and solutions, print and document services and office furniture. Contract sells directly to large corporate and government offices, as well as to 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, Australia and New Zealand, through office products stores. All
products sold by Contract are purchased from third-party manufacturers or industry wholesalers. Contract purchases office papers primarily from Boise White Paper, L.L.C., under a paper supply contract with an initial term that expires in 2016.
Retail is a retail distributor of office supplies and paper, print and document services, technology products and solutions
and office furniture. In addition, this segment contracts with large national retail chains to supply
15
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
office and school supplies to be sold in their stores. Retail office products stores feature OfficeMax ImPress, an in-store module devoted to print-for-pay and related services. Retail has
operations in the United States, Puerto Rico and the U.S. Virgin Islands. The Retail segment also operates office products stores in Mexico through a 51%-owned joint venture. All products sold by Retail are purchased from third-party manufacturers
or industry wholesalers. Retail purchases office papers primarily from Boise White Paper, L.L.C., under the paper supply contract described above.
Corporate and Other includes corporate support staff services and certain other legacy expenses as well as the related assets and liabilities. 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.
Management evaluates the segments performances based on segment income which represents operating income excluding the
effect of certain operating matters such as severance, facility closures (including adjustments to legacy closures), and asset impairments, that are not indicative of our core operations. There were no such matters in the third quarter of 2010.
An analysis of our operations by segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
Segment
income
(loss)
|
|
|
Other
operating
expense,
net
|
|
|
Operating
income (loss)
|
|
|
Interest
and
other,
net
|
|
|
Pre-tax
income
|
|
|
|
(millions)
|
|
Three months ended September 25, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
$
|
877.3
|
|
|
$
|
19.5
|
|
|
$
|
|
|
|
$
|
19.5
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
936.1
|
|
|
|
32.4
|
|
|
|
|
|
|
|
32.4
|
|
|
|
|
|
|
|
|
|
Corporate and Other
|
|
|
|
|
|
|
(11.0
|
)
|
|
|
|
|
|
|
(11.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,813.4
|
|
|
$
|
40.9
|
|
|
$
|
|
|
|
$
|
40.9
|
|
|
$
|
(7.8
|
)
|
|
$
|
33.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 26, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
$
|
899.6
|
|
|
$
|
10.1
|
|
|
$
|
(1.5
|
)
|
|
$
|
8.6
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
932.3
|
|
|
|
28.4
|
|
|
|
|
|
|
|
28.4
|
|
|
|
|
|
|
|
|
|
Corporate and Other
|
|
|
|
|
|
|
(11.8
|
)
|
|
|
|
|
|
|
(11.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,831.9
|
|
|
$
|
26.7
|
|
|
$
|
(1.5
|
)
|
|
$
|
25.2
|
|
|
$
|
(8.4
|
)
|
|
$
|
16.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
Segment
income
(loss)
|
|
|
Other
operating
income
(expense),
net
|
|
|
Operating
income (loss)
|
|
|
Interest
and
other,
net
|
|
|
Pre-tax
income
|
|
|
|
(millions)
|
|
Nine months ended September 25, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
$
|
2,720.8
|
|
|
$
|
72.6
|
|
|
$
|
(0.8
|
)
|
|
$
|
71.8
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
2,663.0
|
|
|
|
85.1
|
|
|
|
(14.4
|
)
|
|
|
70.7
|
|
|
|
|
|
|
|
|
|
Corporate and Other
|
|
|
|
|
|
|
(28.0
|
)
|
|
|
3.9
|
|
|
|
(24.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,383.8
|
|
|
$
|
129.7
|
|
|
$
|
(11.3
|
)
|
|
$
|
118.4
|
|
|
$
|
(23.3
|
)
|
|
$
|
95.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 26, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
$
|
2,708.8
|
|
|
$
|
44.0
|
|
|
$
|
(8.4
|
)
|
|
$
|
35.6
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
2,692.7
|
|
|
|
51.7
|
|
|
|
(31.2
|
)
|
|
|
20.5
|
|
|
|
|
|
|
|
|
|
Corporate and Other
|
|
|
|
|
|
|
(30.8
|
)
|
|
|
(0.1
|
)
|
|
|
(30.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,401.5
|
|
|
$
|
64.9
|
|
|
$
|
(39.7
|
)
|
|
$
|
25.2
|
|
|
$
|
(18.6
|
)
|
|
$
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
11. Share Based Payments
The Company sponsors several share-based compensation plans, which are described below. The Company recognizes
compensation expense from all share-based payment transactions with employees in the consolidated financial statements based on grant date fair value, with the offset recorded to additional paid-in capital. Pre-tax compensation expense related to
the Companys share-based plans was $2.5 million and $2.2 million for the third quarters of 2010 and 2009, respectively and $8.4 million and $6.0 million for the first nine months of 2010 and 2009, 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 $1.0 million and $0.9 million for the third quarters of
2010 and 2009, respectively and $3.3 million and $2.3 million for the first nine months of 2010 and 2009, respectively.
Restricted Stock and Restricted Stock Units
Pre-tax compensation expense related to restricted stock and Restricted Stock Units (RSUs) awards was $1.7 million and $1.4 million for the third quarters of 2010 and 2009, respectively and
$5.1 million and $4.3 million for the first nine months of 2010 and 2009, respectively. The grant date fair value used to calculate compensation expense related to restricted stock and RSUs is based on the closing price of the Companys
common stock on the grant date. The remaining compensation expense to be recognized related to outstanding restricted stock and RSUs, net of estimated forfeitures, is approximately $10.0 million. The remaining compensation expense is to be
recognized through the first quarter of 2013.
A summary of restricted stock and RSU activity for the first nine months of
2010 and 2009 is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Shares
|
|
|
Weighted-
Average
Grant
Date Fair
Value Per
Share
|
|
|
Shares
|
|
|
Weighted-
Average
Grant
Date Fair
Value Per
Share
|
|
Nonvested, balance at beginning of period
|
|
|
1,929,945
|
|
|
$
|
16.24
|
|
|
|
2,258,961
|
|
|
$
|
31.07
|
|
Granted
|
|
|
705,979
|
|
|
|
12.92
|
|
|
|
800,828
|
|
|
|
5.08
|
|
Vested
|
|
|
(1,309
|
)
|
|
|
33.69
|
|
|
|
(493,840
|
)
|
|
|
27.13
|
|
Forfeited
|
|
|
(680,497
|
)
|
|
|
20.40
|
|
|
|
(595,113
|
)
|
|
|
48.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, balance at end of period
|
|
|
1,954,118
|
|
|
$
|
13.58
|
|
|
|
1,970,836
|
|
|
$
|
16.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
Pre-tax compensation expense related to stock option awards was $0.8 million for each of the third quarters of 2010 and 2009, and
$3.3 million and $1.7 million for the first nine months of 2010 and 2009, respectively. The grant date fair value used to calculate compensation expense related to stock option awards is based on the Black-Scholes option pricing model. The
grant date fair value for stock options granted in the first nine months of 2010 was calculated using the following weighted-average assumptions: risk-free interest rate of 3.15% (based on the applicable Treasury note rate for the time period
options may be exercised); expected life of 3.0 years (based on the time period options are expected to be outstanding based on historical experience); and expected stock price volatility of 69.0% (based on a combination of the historical and
expected future volatility of the Companys common stock). The remaining compensation expense to be recognized related to outstanding stock options net of estimated forfeitures, is approximately $5.3 million. The majority of the remaining
compensation expense is to be recognized through the first quarter of 2013.
17
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
A summary of stock
option activity for the nine months ended September 25, 2010 and September 26, 2009 is presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Shares
|
|
|
Weighted Avg.
Exercise Price
|
|
|
Shares
|
|
|
Weighted Avg.
Exercise Price
|
|
Balance at beginning of period
|
|
|
3,249,773
|
|
|
$
|
15.14
|
|
|
|
1,495,795
|
|
|
$
|
31.95
|
|
Options granted
|
|
|
1,077,802
|
|
|
|
14.51
|
|
|
|
2,071,360
|
|
|
|
4.77
|
|
Options exercised
|
|
|
(381,720
|
)
|
|
|
4.80
|
|
|
|
|
|
|
|
|
|
Options forfeited and expired
|
|
|
(548,547
|
)
|
|
|
15.84
|
|
|
|
(213,282
|
)
|
|
|
33.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
3,397,308
|
|
|
$
|
15.99
|
|
|
|
3,353,873
|
|
|
$
|
15.07
|
|
Exercisable at end of period
|
|
|
1,344,190
|
|
|
|
|
|
|
|
1,252,446
|
|
|
|
|
|
The following table provides summarized information about stock options outstanding at
September 25, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$4.00 $5.00
|
|
|
1,393,802
|
|
|
|
5.4
|
|
|
|
4.76
|
|
|
|
260,725
|
|
|
|
4.72
|
|
$14.00 $15.00
|
|
|
920,041
|
|
|
|
6.4
|
|
|
|
14.51
|
|
|
|
|
|
|
|
|
|
$18.00 $28.00
|
|
|
377,100
|
|
|
|
1.8
|
|
|
|
27.71
|
|
|
|
377,100
|
|
|
|
27.71
|
|
$28.01 $39.00
|
|
|
695,194
|
|
|
|
2.2
|
|
|
|
34.33
|
|
|
|
695,194
|
|
|
|
34.33
|
|
At September 25,
2010, the aggregate intrinsic value was $12.2 million for outstanding stock options, including $2.4 million for exercisable stock options. The aggregate intrinsic value represents the total pre-tax intrinsic value which is calculated by
multiplying the number of shares underlying each stock option at the end of the quarter by the difference between the Companys closing per-share stock price on the last trading day of the third quarter of 2010 and the per-share exercise price
for each option. When the exercise price of an option exceeds the closing per-share stock price, the aggregate intrinsic value of the shares underlying the option is zero.
18
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
12. Shareholders Equity
and Noncontrolling Interest
The following table reflects changes in shareholders equity and noncontrolling interest
for the first nine months of 2010.
|
|
|
|
|
|
|
|
|
|
|
Shareholders
Equity
|
|
|
Noncontrolling
Interest
|
|
|
|
(thousands)
|
|
Balance at December 26, 2009
|
|
$
|
503,196
|
|
|
$
|
28,059
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
Net income attributable to OfficeMax and noncontrolling interest
|
|
|
58,427
|
|
|
|
2,249
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
9,717
|
|
|
|
400
|
|
Amortization of unrecognized retirement and benefit costs, net of tax
|
|
|
4,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to OfficeMax and noncontrolling interest
|
|
|
72,474
|
|
|
|
2,649
|
|
Preferred stock dividends
|
|
|
(2,480
|
)
|
|
|
|
|
Stock-based compensation
|
|
|
8,440
|
|
|
|
|
|
Non-controlling interest fair value adjustment
|
|
|
(7,437
|
)
|
|
|
7,437
|
|
Other
|
|
|
(1,741
|
)
|
|
|
(70
|
)
|
|
|
|
|
|
|
|
|
|
Balance at September 25, 2010
|
|
$
|
572,452
|
|
|
$
|
38,075
|
|
|
|
|
|
|
|
|
|
|
In accordance with an amended and restated joint venture agreement, the minority owner of Grupo OfficeMax,
our joint-venture in Mexico, can elect to require OfficeMax to purchase the minority owners 49% interest in the joint venture if certain earnings targets are achieved. Earnings targets are calculated quarterly on a rolling four-quarter basis.
Accordingly, the targets may be achieved in one quarter but not in the next. If the earnings targets are achieved and the minority owner elects to require OfficeMax to purchase the minority owners interest, the purchase price is based on the
joint ventures earnings and the current market multiples of similar companies. At the end of the third quarter of 2010, Grupo OfficeMax met the earnings targets and the estimated purchase price of the minority owners interest was $37.6
million. As the estimated purchase price was greater at the end of the third quarter of 2010 than the carrying value of the noncontrolling interest, the Company recorded an adjustment to state the noncontrolling interest at the estimated purchase
price, and, as the estimated purchase price approximates fair value, the offset was recorded to additional paid-in capital.
19
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
13. Comprehensive Income
Comprehensive income includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 25,
2010
|
|
|
September 26,
2009
|
|
|
September 25,
2010
|
|
|
September 26,
2009
|
|
|
|
(thousands)
|
|
|
(thousands)
|
|
Net income attributable to OfficeMax and noncontrolling interest
|
|
$
|
21,425
|
|
|
$
|
6,836
|
|
|
$
|
60,676
|
|
|
$
|
2,138
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
16,494
|
|
|
|
18,335
|
|
|
|
10,117
|
|
|
|
44,207
|
|
Amortization of unrecognized retirement and benefit costs, net of tax
|
|
|
1,212
|
|
|
|
348
|
|
|
|
4,330
|
|
|
|
3,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to OfficeMax and noncontrolling interest
|
|
|
39,131
|
|
|
|
25,519
|
|
|
|
75,123
|
|
|
|
49,816
|
|
Less: Comprehensive income (loss) attributable to noncontrolling interest
|
|
|
1,114
|
|
|
|
3
|
|
|
|
2,649
|
|
|
|
(880
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income available to OfficeMax
|
|
$
|
38,017
|
|
|
$
|
25,516
|
|
|
$
|
72,474
|
|
|
$
|
50,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14. Net Income Available to OfficeMax Common Shareholders
The computation of basic and diluted income per common share for the third quarter and the first nine months of 2010 and 2009 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 25,
2010
|
|
|
September 26,
2009
|
|
|
September 25,
2010
|
|
|
September 26,
2009
|
|
|
|
(thousands, except per-
share amounts)
|
|
|
(thousands, except per-
share amounts)
|
|
Net income available to OfficeMax common shareholders
|
|
$
|
19,966
|
|
|
$
|
5,656
|
|
|
$
|
56,506
|
|
|
$
|
1,090
|
|
Average sharesbasic
|
|
|
85,014
|
|
|
|
76,285
|
|
|
|
84,865
|
|
|
|
76,233
|
|
Restricted stock, stock options and other
|
|
|
1,529
|
|
|
|
867
|
|
|
|
1,577
|
|
|
|
613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average sharesdiluted(a)(b)(c)
|
|
|
86,543
|
|
|
|
77,152
|
|
|
|
86,442
|
|
|
|
76,846
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.23
|
|
|
$
|
0.07
|
|
|
$
|
0.67
|
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
0.23
|
|
|
$
|
0.07
|
|
|
$
|
0.65
|
|
|
$
|
0.01
|
|
(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
or average shares-diluted.
|
(b)
|
Outstanding options to purchase 2.1 million and 1.6 million shares of common stock for the third quarter and first nine months of 2010, respectively, were
excluded from the computation of diluted income per common share, because the impact would have been anti-dilutive as such options exercise prices were higher than the average market price during those periods.
|
(c)
|
Outstanding options to purchase 1.4 million and 1.9 million shares of common stock for the third quarter and first nine months of 2009, respectively, were
excluded from the computation of diluted income per common share, because the impact would have been anti-dilutive as such options exercise prices were higher than the average market price during those periods.
|
20
ITEM 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion contains statements about our future financial performance. These statements are only predictions. Our actual
results may differ materially from these predictions. In evaluating these statements, you should review Item 1A. Risk Factors of our annual report on Form 10-K for the year ended December 26, 2009, including
Cautionary and Forward-Looking Statements.
Overall Summary
Sales for the third quarter of 2010 decreased 1.0% year-over-year to $1,813.4 million, while sales of $5,383.8 million for the first nine
months of 2010 declined 0.3% compared to the first nine months of 2009. In local currency, sales for the third quarter of 2010 declined 2.0% compared to the third quarter of 2009 and sales for the first nine months of 2010 declined 2.7% compared to
the first nine months of 2009. Retail sales increased for the third quarter of 2010 year-over-year, but declined for the first nine months of 2010 compared to the prior year same period. Contract sales declined for the third quarter of 2010
year-over-year, but increased for the first nine months of 2010 compared to the prior year same period. In local currencies, Contract sales declined for both time periods of 2010 compared to the prior year same periods. Gross profit margin increased
2.2% of sales (220 basis points) to 25.9% of sales in the third quarter of 2010 year-over-year and 2.1% of sales (210 basis points) to 26.1% of sales in the first nine months of 2010 compared to the prior year same period, due in part to improved
product margins and reduced occupancy costs in both our Contract and Retail segments. Gross profit margin in the first nine months of 2010 also benefited from the reversal of inventory shrinkage reserves due to favorable results from our annual
physical inventory counts of $15.0 million. Total operating expenses were negatively impacted by higher compensation expense of $23.0 million for the third quarter of 2010 and $55.9 million for the first nine months of 2010, compared to $12.2
million for the third quarter of 2009 and $17.0 million for the first nine months of 2009. This increase was primarily due to timing, as we did not anticipate the favorable payout under our incentive plans for the full year of 2009 until the fourth
quarter of 2009. Total operating expenses were also negatively impacted by increased expenses related to our growth and profitability initiatives. We reported operating income of $40.9 million and $118.4 million in the third quarter and first
nine months of 2010, respectively, compared to operating income of $25.2 million for both the third quarter of 2009 and the first nine months of 2009. The net income available to OfficeMax common shareholders was $20.0 million, or $0.23 per
diluted share, in the third quarter of 2010 compared to $5.7 million, or $0.07 per diluted share, in the third quarter of 2009. The net income available to OfficeMax common shareholders was $56.5 million, or $0.65 per diluted share, in the first
nine months of 2010 compared to $1.1 million, or $0.01 per diluted share, in the first nine months of 2009.
As noted in the
discussion and analysis that follows, our operating results were impacted by significant items in both years. These items included charges for store closures and severance, and favorable adjustments to legacy reserves as well as gains from
non-operating legacy activities. Excluding the impact of these items, of which there were none in the third quarter of 2010, our adjusted operating income was $40.9 million and $129.7 million for the third quarter and first nine months of 2010,
respectively, and was $26.7 million and $64.9 million for the third quarter and first nine months of 2009, respectively. Excluding the impact of these items, of which there were none in the third quarter of 2010, our adjusted net income
available to OfficeMax common shareholders was $20.0 million, or $0.23 per diluted share, and $63.5 million, or $0.73 per diluted share, for the third quarter and first nine months of 2010, respectively, compared to $6.6 million, or $0.08 per
diluted share, and $20.9 million, or $0.27 per diluted share, for the third quarter and first nine months of 2009, respectively.
21
Results of
Operations, Consolidated
($ in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 25,
2010
|
|
|
September 26,
2009
|
|
|
September 25,
2010
|
|
|
September 26,
2009
|
|
Sales
|
|
$
|
1,813.4
|
|
|
$
|
1,831.9
|
|
|
$
|
5,383.8
|
|
|
$
|
5,401.5
|
|
Gross profit
|
|
|
470.4
|
|
|
|
434.7
|
|
|
|
1,403.6
|
|
|
|
1,295.2
|
|
Operating and selling expenses
|
|
|
341.7
|
|
|
|
339.0
|
|
|
|
1,026.7
|
|
|
|
1,021.4
|
|
General and administrative expenses
|
|
|
87.8
|
|
|
|
69.0
|
|
|
|
247.2
|
|
|
|
208.9
|
|
Other operating expenses
|
|
|
|
|
|
|
1.5
|
|
|
|
11.3
|
|
|
|
39.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
429.5
|
|
|
|
409.5
|
|
|
|
1,285.2
|
|
|
|
1,270.0
|
|
Operating income
|
|
$
|
40.9
|
|
|
$
|
25.2
|
|
|
$
|
118.4
|
|
|
$
|
25.2
|
|
Net income available to OfficeMax common shareholders
|
|
$
|
20.0
|
|
|
$
|
5.7
|
|
|
$
|
56.5
|
|
|
$
|
1.1
|
|
|
|
|
|
|
Gross profit margin
|
|
|
25.9
|
%
|
|
|
23.7
|
%
|
|
|
26.1
|
%
|
|
|
24.0
|
%
|
Operating and selling expenses
|
|
|
18.8
|
%
|
|
|
18.5
|
%
|
|
|
19.1
|
%
|
|
|
18.9
|
%
|
General and administrative expenses
|
|
|
4.8
|
%
|
|
|
3.7
|
%
|
|
|
4.6
|
%
|
|
|
3.9
|
%
|
In addition to assessing
our operating performance as reported under U.S. generally accepted accounting principles (GAAP), we evaluate our results of operations before non-operating legacy items and operating items that are not indicative of our core operating activities
such as severance, facility closure (including adjustments to legacy closures), and asset impairments. We believe our presentation of financial measures before, or excluding, these items, which are non-GAAP measures, enhances our investors
overall understanding of our recurring operational performance and provides useful information to both investors and management to evaluate the ongoing operations and prospects of OfficeMax by providing better comparisons. Whenever we use non-GAAP
financial measures, we designate these measures as adjusted and provide a reconciliation of the non-GAAP financial measures to the most closely applicable GAAP financial measure. Investors are encouraged to review the related GAAP
financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure. In the following tables, we reconcile our non-GAAP financial measures to our reported GAAP financial results for
both 2010 and 2009.
Although we believe the non-GAAP financial measures enhance an investors understanding of our
performance, our management does not itself, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. The non-GAAP
financial measures we use may not be consistent with the presentation of similar companies in our industry. However, we present such non-GAAP financial measures in reporting our financial results to provide investors with an additional tool to
evaluate our operating results in a manner that focuses on what we believe to be our ongoing business operations.
22
For the third quarter
of 2010, there were no reconciling items.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OfficeMax Incorporated and Subsidiaries
Non-GAAP Reconciliation-Impact of Special Items on
Income
|
|
|
|
Three Months Ended
September 25, 2010
|
|
|
Nine Months Ended
September 25, 2010
|
|
|
|
Operating
income
|
|
|
Net income
available to
OfficeMax
common
shareholders
|
|
|
Diluted
income
per
common
share
|
|
|
Operating
income
|
|
|
Net income
available to
OfficeMax
common
shareholders
|
|
|
Diluted
income
per
common
share
|
|
|
|
(millions, except per-share amounts)
|
|
|
(millions, except per-share amounts)
|
|
As reported
|
|
$
|
40.9
|
|
|
$
|
20.0
|
|
|
$
|
0.23
|
|
|
$
|
118.4
|
|
|
$
|
56.5
|
|
|
$
|
0.65
|
|
Store and facility closure charges and other adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.3
|
|
|
|
7.0
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As adjusted
|
|
$
|
40.9
|
|
|
$
|
20.0
|
|
|
$
|
0.23
|
|
|
$
|
129.7
|
|
|
$
|
63.5
|
|
|
$
|
0.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 26, 2009
|
|
|
Nine Months Ended
September 26, 2009
|
|
|
|
Operating
income
|
|
|
Net income
available to
OfficeMax
common
shareholders
|
|
|
Diluted
income
per
common
share
|
|
|
Operating
income
|
|
|
Net income
(loss)
available to
OfficeMax
common
shareholders
|
|
|
Diluted
income
(loss)
per
common
share
|
|
|
|
(millions, except per-share amounts)
|
|
|
(millions, except per-share amounts)
|
|
As reported
|
|
$
|
25.2
|
|
|
$
|
5.7
|
|
|
$
|
0.07
|
|
|
$
|
25.2
|
|
|
$
|
1.1
|
|
|
$
|
0.01
|
|
Store and facility closure charges and other adjustments
|
|
|
1.5
|
|
|
|
0.9
|
|
|
|
0.01
|
|
|
|
39.7
|
|
|
|
24.1
|
|
|
|
0.32
|
|
Boise Cascade Holdings, L.L.C. distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.6
|
)
|
|
|
(0.02
|
)
|
Voyageur Panel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.7
|
)
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As adjusted
|
|
$
|
26.7
|
|
|
$
|
6.6
|
|
|
$
|
0.08
|
|
|
$
|
64.9
|
|
|
$
|
20.9
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These reconciling items are described in more detail in this Managements Discussion and Analysis.
At the end of the third quarter of 2010, we had $587.9 million in cash and cash equivalents and $570.0 million in available
(unused) borrowing capacity under our credit facilities. The combination of cash and cash equivalents and estimated available borrowing capacity yields $1,157.9 million of overall liquidity. We had outstanding recourse debt of $294.0 million
(both current and long-term) and non-recourse obligations of $1,470.0 million related to the timber securitization notes. There is no recourse against OfficeMax on the securitized timber notes payable as recourse is limited to proceeds from the
applicable pledged installment notes receivable and underlying guarantees. There were no borrowings on our credit facilities during the first nine months of 2010.
For the first nine months of 2010, we generated $156.0 million of cash from operations reflecting net income, significant reductions in inventory levels and good working capital management. In the first
quarter of 2010, a significant amount of incentive compensation payments were made reflecting the achievement of the 2009 incentive plan performance targets.
We invested $50.2 million for capital expenditures in the first nine months of 2010 and expect capital expenditures for the full year 2010 to be in the range of $80 million to $90 million.
23
Outlook
Looking forward, we expect the macroeconomic environment through year-end to remain muted. Based on this assumption,
we anticipate that for the fourth quarter, total company sales will be slightly lower than the prior years fourth quarter, including the favorable impact of foreign currency translation, and the adjusted operating income margin rate will be
significantly higher than the prior years fourth quarter, primarily due to an unusually large amount of incentive compensation expense recorded in the fourth quarter of 2009. For the full year 2010, we anticipate that total company sales will
be slightly lower than 2009, including the favorable impact of foreign currency translation, and the year-over-year adjusted operating income margin rate improvement will be in line with to slightly greater than the 1.2% (120 basis points)
year-over-year margin improvement in the first nine months of 2010.
Operating Results
Sales for the third quarter of 2010 of $1,813.4 million decreased 1.0% compared to sales of $1,831.9 million for the third quarter of
2009, while sales for the first nine months of 2010 of $5,383.8 million decreased 0.3% compared to sales of $5,401.5 million for the first nine months of 2009. Sales for the third quarter and first nine months of 2010 benefited from the favorable
impact of foreign currency exchange rate changes, with the impact being less favorable in the third quarter of 2010 than in the first half of 2010. In local currency, the year-over-year sales decline for the third quarter of 2010 was 2.0% compared
to a year-over-year sales decline of 3.1% for the first half of 2010. Retail sales increased for the third quarter of 2010 year-over-year, but declined for the first nine months of 2010 compared to the prior year same period. Contract sales,
including the favorable impact of foreign currency changes, declined for the third quarter of 2010 year-over-year, but increased for the first nine months of 2010 compared to the prior year same period. In local currencies, Contract sales declined
for both time periods of 2010 compared to the prior year same periods. The decreases in both segments resulted primarily from the continued weak economic environment.
Gross profit margin increased 2.2% of sales (220 basis points) to 25.9% of sales in the third quarter of 2010 year-over-year and 2.1% of sales (210 basis points) to 26.1% of sales in the first nine months
of 2010 year-over-year. The gross profit margins increased in both our Contract and Retail segments, reflecting improved product margins, and reduced occupancy costs. Gross profit margin in the first nine months of 2010 also benefited from the
reversal of inventory shrinkage reserves due to favorable results from our annual physical inventory counts of $15.0 million.
Operating and selling expenses of 18.8% of sales in the third quarter of 2010 increased 0.3% of sales compared to 18.5% of sales in the
third quarter of 2009 and increased 0.2% of sales to 19.1% of sales for the first nine months of 2010 from 18.9% of sales in the first nine months of 2009. The percent of sales increases for operating and selling expenses for both periods of 2010
were due to increased incentive compensation, promotional expenses and costs associated with our growth and profitability initiatives and were partially offset by favorable sales/use tax settlements ($5.7 million), favorable trends in
benefit-related items and reduced salaries resulting from reorganizations in 2009. Incentive compensation expense increased $3.2 million and $13.9 million for the third quarter and the first nine months of 2010, respectively. This increase was
primarily due to timing, as we did not anticipate the favorable payout under our incentive plans for the full year of 2009 until the fourth quarter of 2009. The first nine months of 2010 also benefited from favorable legal settlements.
General and administrative expenses increased 1.1% of sales to 4.8% of sales in the third quarter of 2010, and 0.7% to 4.6% for the first
nine months of 2010. The increase primarily reflected higher incentive compensation expenses (as noted above) and increased payroll and other expenses resulting from our growth and profitability initiatives, and the impact of favorable property tax
settlements in the third quarter of 2009 ($5.5 million), partially offset by lower pension expense. Incentive compensation expense increased $7.6 million and $25.0 million in the third quarter and first nine months of 2010, respectively. This
increase was primarily due to timing, as we did not anticipate the favorable payout under our incentive plans for the full year of 2009 until the fourth quarter of 2009.
24
As noted above, our
results for the first nine months of 2010 and 2009 include several significant items, as follows:
|
|
|
Other operating expenses for the first nine months of 2010 and 2009 include charges recorded in our Retail segment (all in the first six months)
related to store closures in the U.S. and Mexico (2009 only) of $14.4 million and $31.2 million, respectively, which reduced net income available to OfficeMax common shareholders by $8.9 million and $18.8 million, or $0.10 and $0.25 per diluted
share, for 2010 and 2009, respectively.
|
|
|
|
Other operating expenses for the first nine months of 2010 and 2009 include severance charges recorded in our Contract segment. Charges in 2010
consisted of $0.8 million in the first quarter of 2010 related to a reorganization of U.S. customer service operations, while total charges of $8.4 million in 2009 consisted of $6.9 million in the second quarter principally related to U.S. and
Canadian sales force reorganizations and $1.5 million in the third quarter related to the reorganization of customer service centers. The effect of these items reduced net income by $0.9 million, or $0.01 per diluted share, for the third quarter of
2009 and by $0.5 million and $5.3 million, or $0.01 and $0.07 per diluted share, for the first nine months of 2010 and 2009, respectively.
|
|
|
|
Other operating expenses for the first nine months of 2010 include income of $3.9 million (all recorded in the second quarter) related to the
adjustment of a reserve associated with our legacy building materials manufacturing facility near Elma, Washington due to an agreement with the lessor to terminate the lease. This item increased net income by $2.4 million, or $0.03 per diluted share
for the first nine months of 2010.
|
|
|
|
Interest income for the first nine months of 2009 includes $4.4 million (all recorded in the second quarter) related to a tax escrow balance
established in a prior period in connection with our legacy Voyager Panel business sold in 2004. This item increased net income by $2.7 million, or $0.04 per diluted share.
|
|
|
|
Other income, net for the first nine months of 2009 includes $2.6 million of income (all recorded in the first quarter) for tax distributions related
to our investment in Boise Cascade Holdings, L.L.C. This item increased net income $1.6 million, or $0.02 per diluted share.
|
Interest income was $10.6 million and $10.9 million for the third quarters of 2010 and 2009, respectively. For the first nine months of 2010 and 2009, interest income was $31.9 and $36.4
million, respectively. The decrease was due primarily to the $4.4 million of interest income recorded in 2009 related to the tax escrow balance discussed above. As a result of the September 2008 bankruptcy filing by Lehman Brothers Holdings Inc.
(Lehman), we recorded no interest income on the Lehman portion of the timber notes receivable in 2010 or 2009. Interest expense decreased to $18.4 million in the third quarter of 2010 from $19.3 million in the third quarter of
2009 and to $55.1 million in the first nine months of 2010 from $58.0 million in the first nine months of 2009. The decrease in interest expense was due primarily to reduced debt resulting from debt repayments made in 2009.
For the third quarter of 2010, we recognized income tax expense of $11.7 million on pre-tax income of $33.1 million (effective tax rate
of 35.3%) compared to income tax expense of $9.9 million on pre-tax income of $16.8 million (effective tax rate of 59.3%) for the third quarter of 2009. For the first nine months of 2010, we recognized income tax expense of $34.4 million
on pre-tax income of $95.1 million (effective tax rate of 36.2%) compared to income tax expense of $4.4 million on pre-tax income of $6.6 million (effective tax rate of 67.4%) for the first nine months of 2009. The effective tax rate in
both years was impacted by the effects of state income taxes, income items not subject to tax, non-deductible expenses, the mix of domestic and foreign sources of income as well as low levels of profitability in 2009.
We reported net income attributable to OfficeMax and noncontrolling interest of $21.4 million and $60.7 million for the third
quarter and first nine months of 2010, respectively. After adjusting for joint venture earnings attributable to noncontrolling interest and preferred dividends, we reported net income available to OfficeMax
25
common shareholders of $20.0 million, or $0.23 per diluted share, and $56.5 million, or $0.65 per diluted share, for the third quarter and first nine months of 2010, respectively.
Adjusted net income available to OfficeMax common shareholders, as discussed above, was $20.0 million, or $0.23 per diluted share, for the third quarter of 2010 compared to $6.6 million, or $0.08 per diluted share, for the third quarter of
2009. There were no adjustments to net income available to OfficeMax common shareholders in the third quarter of 2010. For the first nine months of 2010 and 2009, adjusted net income available to OfficeMax common shareholders was $63.5 million,
or $0.73 per diluted share, for 2010 compared to $20.9 million, or $0.27 per diluted share, for 2009.
Segment
Discussion
We manage our business using three reportable segments: OfficeMax, Contract; OfficeMax, Retail; and
Corporate and Other.
OfficeMax, Contract (Contract segment or Contract) distributes a broad line of
items for the office, including office supplies and paper, technology products and solutions, office furniture, and print and document services. Contract sells directly to large corporate and government offices, as well as to 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, Australia and New Zealand, through office
products stores.
OfficeMax, Retail (Retail segment or Retail) is a retail distributor of office
supplies and paper, print and document services, technology products and solutions and office furniture. In addition, this segment contracts with large national retail chains to supply office and school supplies to be sold in their stores. Our
Retail office supply stores feature OfficeMax ImPress, an in-store module devoted to print-for-pay and related services. Our Retail segment has operations in the United States, Puerto Rico and the U.S. Virgin Islands. Our Retail segment also
operates office products stores in Mexico through a 51%-owned joint venture.
Corporate and Other includes support staff
services and certain other legacy expenses as well as the related assets and liabilities. 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.
Management evaluates the segments performances based on segment income which represents
operating income (loss) excluding the effect of certain operating matters such as severances, facility closures (including adjustments to legacy closures) and asset impairments, that are not indicative of our core operations.
26
OfficeMax,
Contract
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 25,
2010
|
|
|
September 26,
2009
|
|
|
September 25,
2010
|
|
|
September 26,
2009
|
|
Sales
|
|
$
|
877.3
|
|
|
$
|
899.6
|
|
|
$
|
2,720.8
|
|
|
$
|
2,708.8
|
|
Gross profit
|
|
|
199.9
|
|
|
|
179.7
|
|
|
|
618.3
|
|
|
|
555.8
|
|
Gross profit margin
|
|
|
22.8
|
%
|
|
|
20.0
|
%
|
|
|
22.7
|
%
|
|
|
20.5
|
%
|
Operating, selling and general and administrative expenses
|
|
|
180.4
|
|
|
|
169.6
|
|
|
|
545.7
|
|
|
|
511.8
|
|
Percentage of sales
|
|
|
20.6
|
%
|
|
|
18.9
|
%
|
|
|
20.0
|
%
|
|
|
18.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income
|
|
$
|
19.5
|
|
|
$
|
10.1
|
|
|
$
|
72.6
|
|
|
$
|
44.0
|
|
Percentage of sales
|
|
|
2.2
|
%
|
|
|
1.1
|
%
|
|
|
2.7
|
%
|
|
|
1.6
|
%
|
|
|
|
|
|
Sales by Product Line
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office supplies and paper
|
|
$
|
504.2
|
|
|
$
|
519.9
|
|
|
$
|
1,563.5
|
|
|
$
|
1,589.2
|
|
Technology products
|
|
|
283.9
|
|
|
|
292.2
|
|
|
|
892.2
|
|
|
|
868.0
|
|
Office furniture
|
|
|
89.2
|
|
|
|
87.5
|
|
|
|
265.1
|
|
|
|
251.6
|
|
Sales by Geography
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
611.0
|
|
|
$
|
629.5
|
|
|
$
|
1,863.0
|
|
|
$
|
1,930.4
|
|
International
|
|
|
266.3
|
|
|
|
270.1
|
|
|
|
857.8
|
|
|
|
778.4
|
|
Sales Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales growth
|
|
|
(2.5
|
)%
|
|
|
(14.3
|
)%
|
|
|
0.4
|
%
|
|
|
(19.3
|
)%
|
Contract segment sales
for the third quarter of 2010 of $877.3 million declined 2.5% from $899.6 million for the third quarter of 2009. A favorable impact from changes in foreign currency exchange rates partially offset the 4.3% decline in sales in local
currencies. The U.S. Contract sales decline of 2.9% in the third quarter of 2010 was improved from the 3.6% decline in the second quarter of 2010. Sales to existing customers declined 5.0% in the third quarter of 2010, improved from the 6.8% decline
in the second quarter of 2010. However, increased sales to newly acquired customers were offset by reduced sales due to lost customers in the third quarter of 2010, compared to the second quarter of 2010 when increased sales to newly acquired
customers outpaced reduced sales due to lost customers. International sales declined 7.4% in local currencies in the third quarter of 2010 compared to a 5.2% decline in local currencies in the second quarter of 2010, primarily as a result of
decreased sales to existing customers and continued international economic weakness.
Contract segment gross profit margin
increased 2.8% of sales (280 basis points) to 22.8% of sales for the third quarter of 2010 and 2.2% of sales (220 basis points) to 22.7% of sales for the first nine months of 2010 compared to the corresponding periods of 2009. The increases in gross
profit margins occurred both in the U.S. and internationally. U.S. gross profit margins increased due to profitability initiatives and lower customer retention and acquisition costs, as well as reduced delivery costs as a result of cost controls.
The first nine months of 2010 also benefited from the reversal of inventory shrinkage reserves due to favorable results from our annual physical inventory counts of $3.5 million. International margin improvements resulted from improved product
margins resulting from profitability initiatives.
Contract segment operating, selling and general and administrative expenses
increased 1.7% of sales to 20.6% of sales for the third quarter and 1.1% of sales to 20.0% of sales for the first nine months of 2010. The increases were primarily due to increased incentive compensation expense and costs associated with our growth
and profitability initiatives, partially offset by favorable trends in benefit-related items and lower payroll costs from the reorganization of our U.S. and Canadian sales forces and U.S. customer service operations, as well as from favorable
sales/use tax settlements. Incentive compensation expense increased $2.8 million and $14.4 million for the third quarter and the first nine months of 2010, respectively, compared to the same periods in 2009.
27
Contract segment
income was $19.5 million, or 2.2% of sales, and $10.1 million, or 1.1% of sales, for the third quarters of 2010 and 2009, respectively, and $72.6 million, or 2.7% of sales, and $44.0 million, or 1.6% of sales, for the first nine months of
2010 and 2009, respectively. The increase in segment income for both periods was primarily attributable to the gross margin rate improvements which were partially offset in each period by the higher incentive compensation expense and higher costs
associated with our new long-term growth initiatives. The first nine months of 2010 also benefited $6.0 million from changes in foreign currency exchange rates.
OfficeMax, Retail
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 25,
2010
|
|
|
September 26,
2009
|
|
|
September 25,
2010
|
|
|
September 26,
2009
|
|
Sales
|
|
$
|
936.1
|
|
|
$
|
932.3
|
|
|
$
|
2,663.0
|
|
|
$
|
2,692.7
|
|
Gross profit
|
|
|
270.5
|
|
|
|
255.1
|
|
|
|
785.3
|
|
|
|
739.4
|
|
Gross profit margin
|
|
|
28.9
|
%
|
|
|
27.4
|
%
|
|
|
29.5
|
%
|
|
|
27.5
|
%
|
Operating, selling and general and administrative expenses
|
|
|
238.1
|
|
|
|
226.7
|
|
|
|
700.2
|
|
|
|
687.7
|
|
Percentage of sales
|
|
|
25.4
|
%
|
|
|
24.4
|
%
|
|
|
26.3
|
%
|
|
|
25.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss)
|
|
$
|
32.4
|
|
|
$
|
28.4
|
|
|
$
|
85.1
|
|
|
$
|
51.7
|
|
Percentage of sales
|
|
|
3.5
|
%
|
|
|
3.0
|
%
|
|
|
3.2
|
%
|
|
|
1.9
|
%
|
|
|
|
|
|
Sales by Product Line
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office supplies and paper
|
|
$
|
426.9
|
|
|
$
|
417.3
|
|
|
$
|
1,132.5
|
|
|
$
|
1,120.0
|
|
Technology products
|
|
|
455.0
|
|
|
|
459.6
|
|
|
|
1,374.3
|
|
|
|
1,393.2
|
|
Office furniture
|
|
|
54.2
|
|
|
|
55.4
|
|
|
|
156.2
|
|
|
|
179.5
|
|
Sales by Geography
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
870.2
|
|
|
$
|
878.3
|
|
|
$
|
2,494.4
|
|
|
$
|
2,553.0
|
|
International
|
|
|
65.9
|
|
|
|
54.0
|
|
|
|
168.6
|
|
|
|
139.7
|
|
Sales Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales growth
|
|
|
0.4
|
%
|
|
|
(11.0
|
)%
|
|
|
(1.1
|
)%
|
|
|
(11.1
|
)%
|
Same-location sales growth
|
|
|
0.4
|
%
|
|
|
(11.5
|
)%
|
|
|
(0.9
|
)%
|
|
|
(12.2
|
)%
|
Retail segment sales for
the third quarter of 2010 increased by 0.4% to $936.1 million from $932.3 million for the third quarter of 2009, reflecting a same-store sales increase of 0.4%. For the first nine months of 2010, sales decreased 1.1% to $2,663.0 million
from $2,692.7 million for the first nine months of 2009, reflecting a same-store sales decrease of 0.9% as well as the impact of closed stores. U.S. same-store sales declined 0.9% for the third quarter of 2010 compared to a decline of 2.1% for the
second quarter of 2010 primarily due to continued weaker consumer and small business spending. Mexico same-store sales for the third quarter of 2010 increased 17.4% in local currency year-over-year due to unusually lower sales in the third quarter
of 2009 resulting from the H1N1 flu epidemic as well as new sales initiatives in 2010. We ended the first nine months of 2010 with 998 stores. In the U.S., we closed thirteen retail stores during the first nine months of 2010 (three in the third
quarter) and opened none, ending the quarter with 920 retail stores. Also during the first nine months of 2010, Grupo OfficeMax, our majority-owned joint venture in Mexico, opened one store (in the second quarter) and closed none, ending the quarter
with 78 retail stores.
Retail segment gross profit margin increased 1.5% of sales (150 basis points) year-over-year to 28.9%
of sales for the third quarter of 2010 and increased 2.0% of sales (200 basis points) year-over-year to 29.5% of sales for the first nine months of 2010 compared to the prior year same period . The gross profit margin increase was due to our
profitability initiatives and a sales mix shift to the higher-margin supplies category (which was slightly offset by an unfavorable mix shift within the technology category) as well as reduced inventory shrinkage and
28
freight expense and lower occupancy costs due to rent reductions and closed stores. Gross profit margin for the first nine months of 2010 also benefited from the reversal of inventory shrinkage
reserves due to favorable results from our annual physical inventory counts of $11.5 million.
Retail segment operating,
selling and general and administrative expenses increased 1.0% of sales to 25.4% of sales for the third quarter of 2010 year-over-year and increased 0.7% of sales to 26.3% of sales for the first nine months of 2010 compared to the same period in
2009. Incentive compensation expense increased $7.2 million and $21.9 million for the third quarter and the first nine months of 2010, respectively, compared to the same periods of 2009. Both periods of 2010 were also adversely impacted by increased
expenses resulting from our growth and profitability initiatives and the impact of property tax and other settlements in the third quarter of 2009, but benefited from favorable trends in benefit-related items, favorable sales and use tax settlements
and reduced salary and benefit expense due to closed stores and store staffing reductions. The first nine months of 2010 also benefited from favorable legal settlements.
Retail segment income was $32.4 million, or 3.5% of sales, for the third quarter of 2010, compared to $28.4 million, or 3.0% of sales, for the third quarter of 2009. Retail segment income was
$85.1 million, or 3.2% of sales, for the first nine months of 2010 compared to $51.7 million, or 1.9% of sales, for the first nine months of 2009. The increase in segment income for both periods of 2010 was primarily attributable to the
improved gross profit margins as noted above and significant improvement in our Mexican joint ventures earnings, which was partially offset in each period by the increased incentive compensation expense and increased costs from our new
long-term growth initiatives.
Corporate and Other
Corporate and Other segment loss was $11.0 million and $28.0 million for the third quarter and first nine months of 2010,
respectively, compared to $11.8 million and $30.8 million for the third quarter and first nine months of 2009, respectively, as decreased pension expense offset increased incentive compensation expense.
Liquidity and Capital Resources
At the end of the third quarter of 2010, the total liquidity available for OfficeMax was $1,157.9 million. This included cash and cash equivalents of $587.9 million and borrowing availability of
$570.0 million. The borrowing availability included $459.7 million and $46.4 million relating to our U.S. and Canadian credit agreements, respectively, as well as $63.9 million related to our credit agreement associated with our
subsidiaries in Australia and New Zealand (Australasian Credit Agreement). At the end of the third quarter of 2010, the Company was in compliance with all covenants under the three credit agreements. The U.S. and Canadian credit
agreements expire on July 12, 2012 and the Australasian Credit Agreement expires on March 15, 2013. At the end of the third quarter of 2010, we had $294.0 million of short-term and long-term recourse debt and $1,470.0 million of
non-recourse timber securitization notes outstanding.
Our primary ongoing cash requirements relate to working capital,
expenditures for property and equipment, technology enhancements and upgrades, lease obligations, pension funding and debt service. We expect to fund these requirements through a combination of available cash balance, cash flow from operations and,
if necessary, seasonal borrowings under our credit facilities. The following sections of this Managements Discussion and Analysis of Financial Condition and Results of Operations discuss in more detail our operating, investing, and financing
activities, as well as our financing arrangements.
Operating Activities
OfficeMaxs operating activities provided $156.0 million of cash during the first nine months of 2010 due principally to
positive earnings and a lower level of inventory, partially offset by a corresponding decline in vendor payables, as a result of reduced sales volume and continuing proactive working capital management. The
29
cash provided covered the payment of higher incentive compensation awards in the first quarter of 2010. During the first nine months of 2009 operating activities provided $369.1 million of cash,
due principally to significantly reduced inventories, partially offset by a decline in vendor payables and reduced accounts receivable, as a result of both sales volume declines and significant control efforts. In addition, 2009 includes net tax
refunds of $62.3 million and the receipt of $46.1 million from the initiation of borrowings against the accumulated earnings in our company-owned life insurance (COLI) policies. We ended the third quarter of 2010 with $41.6 million less
inventory than at the end of 2009 but with $21.3 million more inventory than at the end of the third quarter of 2009. Accounts payable at the end of the third quarter of 2010 were $47.9 million lower than at the end of 2009 and $36.5
million lower than the end of the third quarter of 2009, primarily reflecting reduced purchases and the timing of certain payments. In the first quarter of 2010, approximately $58 million of incentive compensation payments were made reflecting the
achievement of the 2009 incentive plan performance targets. The targets were not achieved in 2008. Therefore, the amount of incentive payments made in 2009 was insignificant.
During the first nine months of 2009, we monetized $61.1 million from our COLI policies by withdrawing the principal balances and borrowing against the accumulated earnings. The cash from loans of $46.1
million was reported in cash from operations and the cash from withdrawals of $15.0 million was reported in cash from investing activities. We continue to borrow against accumulated earnings in our COLI policies. We expect to periodically repay and
re-borrow on these loans in order to manage our investments and minimize interest expense. For 2010, there has been no material change in cash flows related to these activities.
We sponsor noncontributory defined benefit pension plans covering certain terminated employees, vested employees, retirees, and some
active OfficeMax Contract employees. Pension expense was $5.4 million and $11.3 million for the first nine months of 2010 and 2009, respectively. In the first nine months of 2010 and 2009, we made contributions to our pension plans totaling
$2.6 million and $5.3 million, respectively. For the full year, the minimum required funding contribution for 2010 is approximately $3.8 million and the expense is projected to be approximately $7.1 million. We intend to fully
fund our defined benefit plans by the end of 2014.
Investment Activities
Our investing activities used $48.5 million of cash during the first nine months of 2010 compared to $16.9 million of cash
provided during the first nine months of 2009. During the first nine months of 2009, we received $25.1 million in cash related to a tax escrow balance established in a prior period in connection with our legacy Voyageur Panel business sold in 2004
and $15.0 million related to withdrawals from COLI policies. We invested $50.2 million for capital expenditures in the first nine months of 2010 compared to $23.9 million in the first nine months of 2009. We expect our capital investments
in 2010 to total between $80 and $90 million, primarily for technology infrastructure investments and upgrades. We expect our joint venture in Mexico to open two stores in 2010.
Financing Activities
Our financing activities used $7.7
million of cash during the first nine months of 2010, compared to $23.4 million during the first nine months of 2009, as we had no significant debt
repayment requirements in the first nine months of 2010.
Financing Arrangements
Our debt structure consists of credit agreements, note agreements and other borrowings. Information regarding our debt structure is
included below. We lease our store space and certain other property and equipment under operating leases. These operating leases are not included in debt; however, they represent a significant commitment.
30
Credit Agreements
On July 12, 2007, the Company entered into an Amended and Restated Loan and Security Agreement (the
U.S. Credit Agreement) with a group of banks. The U.S. Credit 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. There were no borrowings outstanding under our U.S. Credit Agreement at the end of, or during, the first nine months of 2010. Letters of credit, which
may be issued under the U.S. Credit Agreement up to a maximum of $250 million, reduce available borrowing capacity. Stand-by letters of credit issued under the U.S. Credit Agreement totaled $56.5 million at the end of the first nine
months of 2010. Also at the end of the first nine months of 2010, the maximum aggregate borrowing amount available under the U.S. Credit Agreement was $516.2 million and availability under the U.S. Credit Agreement totaled $459.7 million. At
September 25, 2010, the Company was in compliance with all covenants under the U.S. Credit Agreement. The U.S. Credit Agreement expires on July 12, 2012.
On September 30, 2009, Grand & Toy Limited, the Companys wholly-owned subsidiary in Canada, entered into a Loan and Security Agreement (the Canadian Credit Agreement) with
a group of banks. The Canadian Credit Agreement permits Grand & Toy Limited to borrow up to a maximum of C$60 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. There were no borrowings outstanding under our Canadian Credit Agreement at the end of, or during, the first nine months of 2010. Letters of credit, which may be issued under
the Canadian Credit Agreement up to a maximum of C$10 million, reduce available borrowing capacity under the Canadian Credit Agreement. There were no letters of credit outstanding under the Canadian Credit Agreement at the end of the first nine
months of 2010. The maximum aggregate borrowing amount available under the Canadian Credit Agreement was $46.4 million (C$48.0 million) at the end of the first nine months of 2010 and was fully available. Grand & Toy Limited was in
compliance with all covenants under the Canadian Credit Agreement at the end of the first nine months of 2010. The Canadian Credit Agreement expires on July 12, 2012.
On March 15, 2010, the Companys five wholly-owned subsidiaries based in Australia and New Zealand (the Australasian subsidiaries) entered into the Australasian Credit Agreement with
a financial institution based in those countries. The Australasian Credit Agreement permits the Australasian subsidiaries to borrow up to a maximum of A$80 million subject to a borrowing base calculation that limits availability to a percentage
of eligible accounts receivable plus a percentage of the value of certain owned properties, less certain reserves. There were no borrowings outstanding under our Australasian Credit Agreement at the end of, or during, the first nine months of 2010.
The maximum aggregate borrowing amount available under the Australasian Credit Agreement was $63.9 million (A$65.9 million) at the end of the first nine months of 2010 and was fully available. The Australasian subsidiaries were in compliance with
all covenants under the Australasian Credit Agreement at the end of the first nine months of 2010. The Australasian Credit Agreement expires on March 15, 2013.
Timber Notes/Non-recourse debt
In October 2004, we sold our timberland
assets in exchange for $15 million in cash plus credit-enhanced timber installment notes in the amount of $1,635 million (the Installment Notes). The Installment Notes were issued by single-member limited liability companies
formed by affiliates of Boise Cascade, L.L.C (the Note Issuers). In order to support the Installment Notes, the Note Issuers transferred $1,635 million in cash to Lehman and Wachovia Corporation (Wachovia)
($817.5 million to each of Lehman and Wachovia) who issued collateral notes to the Note Issuers and guarantees on the performance of the Installment Notes. In December 2004, we completed a securitization transaction in which the Companys
interests in the Installment Notes and related guarantees were transferred to wholly-owned bankruptcy remote subsidiaries. The subsidiaries pledged the Installment Notes and related guarantees and issued securitized notes (the Securitization
Notes) in the amount of $1,470 million. The pledged Installment Notes receivable and Securitization Notes payable were
31
scheduled to mature in 2020 and 2019, respectively. The Securitization Notes have an initial term that is approximately three months shorter than the Installment Notes. We expected to refinance
our 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. Recourse on the Securitization Notes is limited to
the proceeds from the applicable pledged Installment Notes and underlying Lehman or Wachovia guaranty.
As a result, there is no recourse against OfficeMax, and the Securitization Notes have been reported as non-recourse debt in our Consolidated
Balance Sheets.
On September 15, 2008, Lehman filed for bankruptcy. Lehmans bankruptcy filing constituted an
event of default under the $817.5 million Installment Note guaranteed by Lehman (the Lehman Guaranteed Installment Note). We evaluated the carrying value of the Lehman Guaranteed Installment Note and reduced it to the estimated
amount we expect to collect ($81.8 million). Measuring impairment of a loan requires judgment and estimates, and the eventual outcome may differ from our estimate by a material amount. The Lehman Guaranteed Installment Note has been pledged as
collateral for the related Securitization Notes, and therefore it may not freely be transferred to any party other than the indenture trustee for the Securitization Note holders. Accordingly, the ultimate amount to be realized on the Lehman
Guaranteed Installment Note depends entirely on the proceeds from the Lehman bankruptcy estate, which may not be finally determined for several years. On April 14, 2010, Lehman filed its Debtors Disclosure Statement with the United States
Bankruptcy Court for the Southern District of New York. The Disclosure Statement indicated a range of estimated recoveries for general unsecured creditors of Lehman. As our estimate is similar to the estimate included in the Disclosure Statement, we
have not adjusted our estimated carrying value for the Lehman Guaranteed Installment Note.
Since recourse on the
Securitization Notes is limited to the proceeds from the applicable pledged Installment Notes and underlying Lehman or Wachovia guaranty, the Lehman Guaranteed Installment Note and the underlying Lehman guaranty will be transferred to the holders of
the Securitization Notes guaranteed by Lehman in order to settle and extinguish that liability. However, under current generally accepted accounting principles, we are required to continue to recognize the liability related to the Securitization
Notes guaranteed by Lehman until such time as the liability has been extinguished, which will occur when the Lehman Guaranteed Installment Note and the related guaranty are transferred to and accepted by the Securitization Note holders. We expect
that this will occur no later than the date when the assets of Lehman are distributed and the bankruptcy is finalized. Accordingly, we expect to recognize a non-cash gain equal to the difference between the carrying amount of the Securitization
Notes guaranteed by Lehman and the carrying value of the Lehman Guaranteed Installment Note in a later period when the liability is legally extinguished. The actual gain to be recognized in the future will be measured based on the carrying amounts
of the Lehman Guaranteed Installment Note and the Securitization Notes guaranteed by Lehman at the date of settlement.
At the
time of the sale of the timberlands in 2004, we generated a tax gain and recognized the related deferred tax liability. The timber installment note structure allowed the Company to defer the resulting tax liability of $543 million until 2020,
the maturity date for the Installment Notes. Due to the Lehman bankruptcy and note defaults, the Lehman portion of the gain will be triggered when the Lehman Guaranteed Installment Note is transferred to the Securitization Note holders as payment
and/or when the Lehman bankruptcy is resolved. At that time, we intend to reduce the estimated cash payments due by utilizing our available alternative minimum tax credits.
Disclosures of Financial Market Risks
Financial Instruments
Our debt is predominantly fixed-rate. At September 25, 2010, the estimated current fair value of our debt, including
the timber notes, was approximately $562.4 million less than the amount of debt reported in the Consolidated Balance Sheets. As previously discussed, there is no recourse against OfficeMax on the securitized timber notes payable as recourse is
limited to proceeds from the applicable pledged installment notes receivable
32
and underlying guarantees. The debt and receivable related to the timber notes have fixed interest rates and the estimated fair values of the timber notes are reflected in the following table.
The following table provides information about our financial instruments outstanding at September 25, 2010 and
December 26, 2009. The following table does not include our obligations for pension plans and other post retirement benefits, although market risk also arises within our defined benefit pension plans to the extent that the obligations of the
pension plans are not fully matched by assets with determinable cash flows. We sponsor noncontributory defined benefit pension plans covering certain terminated employees, vested employees, retirees, and some active OfficeMax employees. As our plans
were frozen in 2003, our active employees and all inactive participants who are covered by the plans are no longer accruing additional benefits. However, the pension plan obligations are still subject to change due to fluctuations in long-term
interest rates as well as factors impacting actuarial valuations, such as retirement rates and pension plan participants increased life expectancies. In addition to changes in pension plan obligations, the amount of plan assets available to
pay benefits, contribution levels and expense are also impacted by the return on the pension plan assets. The pension plan assets include OfficeMax common stock, U.S. equities, international equities, global equities and fixed-income securities, the
cash flows of which change as equity prices and interest rates vary. The risk is that market movements in equity prices and interest rates could result in assets that are insufficient over time to cover the level of projected obligations. This in
turn could result in significant changes in pension expense and funded status, further impacting future required contributions. Management, together with the trustees who act on behalf of the pension plan beneficiaries, assess the level of this risk
using reports prepared by independent external actuaries and take action, where appropriate, in terms of setting investment strategy and agreed contribution levels.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25, 2010
|
|
|
December 26, 2009
|
|
|
|
Carrying
Amount
|
|
|
Fair
value
|
|
|
Carrying
Amount
|
|
|
Fair
value
|
|
|
|
(millions)
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate debt
|
|
$
|
280.1
|
|
|
$
|
268.4
|
|
|
$
|
280.9
|
|
|
$
|
190.8
|
|
Variable-rate debt
|
|
|
13.9
|
|
|
|
13.6
|
|
|
|
16.7
|
|
|
|
16.4
|
|
Non-recourse debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wachovia
|
|
$
|
735.0
|
|
|
$
|
837.8
|
|
|
$
|
735.0
|
|
|
$
|
754.8
|
|
Lehman
|
|
|
735.0
|
|
|
|
81.8
|
|
|
|
735.0
|
|
|
|
81.8
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timber notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wachovia
|
|
$
|
817.5
|
|
|
$
|
917.7
|
|
|
$
|
817.5
|
|
|
$
|
823.6
|
|
Lehman
|
|
|
81.8
|
|
|
|
81.8
|
|
|
|
81.8
|
|
|
|
81.8
|
|
Facility
Closures
We conduct regular reviews of our real estate portfolio to identify underperforming facilities, and close
those facilities that are no longer strategically or economically viable. We record a liability for the cost associated with a facility closure at its estimated fair value in the period in which the liability is incurred, which is the
locations cease-use date. Upon closure, unrecoverable costs are included in facility closure reserves in 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.
During the first nine months of 2010, we
recorded pre-tax charges of $14.4 million (all in the first two quarters) in our Retail segment related to the closing of eight underperforming domestic stores prior to the end of their lease terms. During the first nine months of 2009, the
Company recorded pre-tax charges of $31.2 million related to the closing of 21 stores prior to the end of their lease terms, of which 17 were in the U.S. and four were in Mexico.
33
At September 25,
2010, the facility closure reserve was $67.6 million with $18.0 million included in current liabilities, and $49.6 million included in long-term liabilities. The majority of the reserve represents future lease obligations of $138.1
million, net of anticipated sublease income of approximately $70.5 million. Cash payments relating to the facility closures were $16.4 million and $19.2 million in the first nine months of 2010 and 2009, respectively.
In addition, we were the lessee of a legacy, building materials manufacturing facility near Elma, Washington. During 2006, we ceased
operations at the facility, fully impaired the assets and recorded a reserve, which is separate from the facility closure reserve above, for the related lease payments and other contract termination and closure costs. During the second quarter of
2010, we signed an agreement with the lessor to terminate the lease and recorded income of $3.9 million to adjust the associated reserve. This income is reported in other operating (income) expense in the Consolidated Statements of Operations. Also
during the second quarter, we contracted with a third party for the sale of the equipment, subject to a financing contingency. Subsequent to the third quarter, we closed on the sale of the equipment to the third party and completed the lease
termination. As a result of the equipment sale and lease termination, we will record income of approximately $5.5 million in the fourth quarter to adjust the associated reserve.
Contractual Obligations
For information regarding contractual obligations, see the caption Contractual Obligations in Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on Form 10-K for the year ended December 26, 2009. At September 25, 2010, there had not been a material change to the information regarding contractual obligations disclosed in our Annual Report
on Form 10-K for the year ended December 26, 2009.
In accordance with an amended and restated joint venture
agreement, the minority owner of Grupo OfficeMax, our joint-venture in Mexico, can elect to require OfficeMax to purchase the minority owners 49% interest in the joint venture if certain earnings targets are achieved. Earnings targets are
calculated quarterly on a rolling four-quarter basis. Accordingly, the targets may be achieved in one quarter but not in the next. If the earnings targets are achieved and the minority owner elects to require OfficeMax to purchase the minority
owners interest, the purchase price is based on the joint ventures earnings and the current market multiples of similar companies. At the end of the third quarter of 2010, Grupo OfficeMax met the earnings targets, and the estimated
purchase price of the minority owners interest was $37.6 million. As the estimated purchase price was greater at the end of the third quarter of 2010 than the carrying value of the noncontrolling interest, the Company recorded an adjustment to
state the noncontrolling interest at the estimated purchase price, and, as the estimated purchase price approximates fair value, the offset was recorded to additional paid-in capital.
Off-Balance-Sheet Activities and Guarantees
For information regarding off-balance-sheet activities and guarantees, see Off-Balance-Sheet Activities and Guarantees in Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 26, 2009. At September 25, 2010, there had not been a material change to the information regarding off-balance-sheet
activities and guarantees disclosed in our Annual Report on Form 10-K for the year ended December 26, 2009.
Seasonal Influences
Our business is seasonal, with Retail showing a more pronounced seasonal trend than Contract. Sales in the second quarter and summer months are historically the slowest of the year. Sales are stronger
during the first, third and fourth quarters that include the important new-year office supply restocking month of January, the back-to-school period and the holiday selling season, respectively.
34
Environmental
For information regarding environmental issues, see the caption Environmental in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 26, 2009. At September 25, 2010, there has not been a material change to
the information regarding environmental issues disclosed in the companys annual report on form 10-K for the year ending December 26, 2009.
Critical Accounting Estimates
For information regarding critical
accounting estimates, see the caption Critical Accounting Estimates in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the
year ended December 26, 2009. There have been no significant changes to the Companys critical accounting estimates during the first nine months of 2010.
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
For information regarding market risk see the caption Disclosures of Financial Market Risks herein and in Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations in the Companys Annual Report on Form 10-K for the year ended December 26, 2009. At September 25, 2010, except as disclosed herein in Disclosures of Financial Market Risks, there had
not been a material change to the information regarding market risk disclosed in the Companys Annual Report on Form 10-K for the year ended December 26, 2009.
ITEM 4.
|
CONTROLS AND PROCEDURES
|
(a) Disclosure Controls and Procedures
The Companys management, with the participation of the Companys Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Companys disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on that evaluation, these
officers have concluded that the Companys disclosure controls and procedures are effective for the purpose of ensuring that material information required to be included in this quarterly report is made known to them by others on a timely basis
and that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Companys management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls
over Financial Reporting
There was no change in the Companys internal control over financial reporting, as
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
35
PART IIOTHER
INFORMATION
ITEM 1.
|
LEGAL PROCEEDINGS
|
We are
involved in litigation and administrative proceedings arising in the normal course of our business. In the opinion of management, our recovery, if any, or our liability, if any, under pending litigation or administrative proceedings would not
materially affect our financial position, results of operations or cash flows. For information concerning legal proceedings, see Note 16, Legal Proceedings and Contingencies, of the Notes to Consolidated Financial Statements in
Item 8. Financial Statements and Supplementary Data in the Companys Annual Report on Form 10-K for the year ended December 26, 2009, and see Item 1. Legal Proceedings in its Quarterly Report on Form 10-Q
for the quarter ended March 27, 2010.
For
information regarding risk factors, see Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 26, 2009. There have been no material changes to the Companys risk factors during the first
nine months of 2010 except as previously reported in Item 1A. Risk Factors in our Quarterly Report on Form 10-Q for the quarter ended June 26, 2010.
ITEM 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
Information concerning our stock repurchases during the three months ended September 25, 2010 is below. All stock was withheld to satisfy our tax withholding obligations upon vesting of restricted
stock awards.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total Number of
Shares (or Units)
Purchased
|
|
|
Average Price
Paid Per Share
(or Unit)
|
|
|
Total Number of
Shares (or Units)
Purchased as Part of
Publicly
Announced
Plans or Programs
|
|
|
Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet
Be
Purchased
Under the Plans
or Programs
|
|
June 27 July 24, 2010
|
|
|
22
|
|
|
$
|
13.89
|
|
|
|
|
|
|
|
|
|
July 25 August 21, 2010
|
|
|
22
|
|
|
|
14.29
|
|
|
|
|
|
|
|
|
|
August 22 September 25, 2010
|
|
|
22
|
|
|
|
10.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
66
|
|
|
$
|
12.95
|
|
|
|
|
|
|
|
|
|
ITEM 3.
|
DEFAULTS UPON SENIOR SECURITIES
|
None
ITEM 4.
|
(REMOVED AND RESERVED)
|
ITEM 5.
|
OTHER INFORMATION
|
None
Required
exhibits are listed in the Index to Exhibits and are incorporated by reference.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
|
OFFICEMAX INCORPORATED
|
|
/s/ B
RUCE
B
ESANKO
|
Bruce Besanko
Executive Vice President, Chief Financial Officer and Chief Administrative Officer
(As Duly Authorized Officer and Principal
Financial Officer)
|
Date: October 29, 2010
37
OFFICEMAX
INCORPORATED
INDEX TO EXHIBITS
Filed with the Quarterly Report on Form 10-Q for the Quarter Ended September 25, 2010
|
|
|
Exhibit
Number
|
|
Exhibit Description
|
|
|
3.1(1)
|
|
Conformed Restated Certificate of Incorporation, reflecting all amendments to date.
|
|
|
3.2(2)
|
|
Amended and Restated Bylaws, as amended to February 12, 2009.
|
|
|
10.1(3)
|
|
Form of 2010 Director Restricted Stock Unit Award Agreement.
|
|
|
10.2(4)
|
|
Form of 2010 Restricted Stock Unit Award Agreement-Time Based.
|
|
|
31.1*
|
|
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
31.2*
|
|
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
32*
|
|
Section 906 Certifications of Chief Executive Officer and Chief Financial Officer of OfficeMax Incorporated.
|
*
|
Filed with this Form 10-Q.
|
(1)
|
Exhibit 3.1 was filed under the exhibit 3.1.1 in our Registration Statement on Form S-1 dated November 4, 2009, and is incorporated herein by
reference.
|
(2)
|
Exhibit 3.2 was filed under the exhibit 3.2 in our Current Report on Form 8-K dated February 18, 2009, and is incorporated herein by reference.
|
(3)
|
Exhibit 10.1 was filed under the exhibit 99.2 in our Current Report on Form 8-K dated August 3, 2010, and is incorporated herein by reference.
|
(4)
|
Exhibit 10.2 was filed under the exhibit 99.1 in our Current Report on Form 8-K dated August 18, 2010, and is incorporated herein by reference.
|
38
Officemax (NYSE:OMX)
Historical Stock Chart
From May 2024 to Jun 2024
Officemax (NYSE:OMX)
Historical Stock Chart
From Jun 2023 to Jun 2024