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 June 30, 2007

or

o                                 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

 

(I.R.S. Employer Identification No.)

organization)

 

 

263 Shuman Boulevard

 

 

Naperville, Illinois

 

60563

(Address of principal executive offices)

 

(Zip Code)

 

(630) 438-7800

(Registrant’s telephone number, including area code)

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  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x

 

Accelerated filer  o

 

Non-accelerated filer  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes  o       No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Shares Outstanding

Class

 

as of July 31, 2007

Common Stock, $2.50 par value

 

75,392,999

 

 




TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements

 

3

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations      

 

24

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

35

Item 4.

 

Controls and Procedures

 

36

PART II—OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

37

Item 1A.

 

Risk Factors

 

37

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

40

Item 3.

 

Defaults Upon Senior Securities

 

40

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

40

Item 5.

 

Other Information

 

40

Item 6.

 

Exhibits

 

40

 

2




PART I—FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

OfficeMax Incorporated and Subsidiaries
Consolidated Statements of Income (Loss)
(thousands, except per-share amounts)

 

 

Quarter Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

 

 

(unaudited)

 

Sales

 

$

2,132,417

 

$

2,040,951

 

Cost of goods sold and occupancy costs

 

1,596,619

 

1,521,954

 

Gross profit

 

535,798

 

518,997

 

Operating expenses:

 

 

 

 

 

Operating and selling

 

392,581

 

385,299

 

General and administrative

 

88,719

 

86,671

 

Other operating (income) expense, net

 

(1,447

)

456

 

Operating income

 

55,945

 

46,571

 

Interest expense

 

(29,959

)

(30,214

)

Interest income

 

21,776

 

22,103

 

Other income (expense), net

 

(2,232

)

6,727

 

Income from continuing operations before income taxes and minority interest

 

45,530

 

45,187

 

Income taxes

 

(17,757

)

(17,284

)

Income from continuing operations before minority interest

 

27,773

 

27,903

 

Minority interest, net of income tax

 

(337

)

(508

)

Income from continuing operations

 

27,436

 

27,395

 

Discontinued operations:

 

 

 

 

 

Operating loss

 

 

 

Income tax benefit

 

 

 

Loss from discontinued operations

 

 

 

Net income

 

27,436

 

27,395

 

Preferred dividends

 

(1,008

)

(1,009

)

Net income applicable to common shareholders

 

$

26,428

 

$

26,386

 

Basic income per common share:

 

 

 

 

 

Continuing operations

 

$

0.35

 

$

0.36

 

Discontinued operations

 

 

 

Basic income per common share

 

$

0.35

 

$

0.36

 

Diluted income per common share:

 

 

 

 

 

Continuing operations

 

$

0.35

 

$

0.35

 

Discontinued operations

 

 

 

Diluted income per common share

 

$

0.35

 

$

0.35

 

 

See accompanying notes to quarterly consolidated financial statements.

3




OfficeMax Incorporated and Subsidiaries
Consolidated Statements of Income (Loss)
(thousands, except per-share amounts)

 

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

 

 

(unaudited)

 

Sales

 

$

4,568,671

 

$

4,464,488

 

Cost of goods sold and occupancy costs

 

3,409,649

 

3,318,737

 

Gross profit

 

1,159,022

 

1,145,751

 

Operating expenses:

 

 

 

 

 

Operating and selling

 

813,349

 

818,344

 

General and administrative

 

182,656

 

175,904

 

Other operating (income) expense, net

 

(3,023

)

113,296

 

Operating income

 

166,040

 

38,207

 

Interest expense

 

(60,075

)

(61,717

)

Interest income

 

44,814

 

43,217

 

Other income (expense), net

 

(5,680

)

4,561

 

Income from continuing operations before income taxes and minority interest

 

145,099

 

24,268

 

Income taxes

 

(56,589

)

(9,290

)

Income from continuing operations before minority interest

 

88,510

 

14,978

 

Minority interest, net of income tax

 

(2,535

)

(1,689

)

Income from continuing operations

 

85,975

 

13,289

 

Discontinued operations:

 

 

 

 

 

Operating loss

 

 

(17,972

)

Income tax benefit

 

 

6,991

 

Loss from discontinued operations

 

 

(10,981

)

Net income

 

85,975

 

2,308

 

Preferred dividends

 

(2,015

)

(2,018

)

Net income applicable to common shareholders

 

$

83,960

 

$

290

 

Basic income (loss) per common share:

 

 

 

 

 

Continuing operations

 

$

1.12

 

$

0.15

 

Discontinued operations

 

 

(0.15

)

Basic income (loss) per common share

 

$

1.12

 

$

 

Diluted income (loss) per common share:

 

 

 

 

 

Continuing operations

 

$

1.10

 

$

0.15

 

Discontinued operations

 

 

(0.15

)

Diluted income (loss) per common share

 

$

1.10

 

$

 

 

See accompanying notes to quarterly consolidated financial statements.

4




OfficeMax Incorporated and Subsidiaries
Consolidated Balance Sheets
(thousands, except share and per-share amounts)

 

 

June 30,
2007

 

December 30,
2006

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

220,615

 

 

$

282,070

 

 

Receivables, net

 

523,896

 

 

556,733

 

 

Related party receivables

 

7,793

 

 

5,795

 

 

Inventories

 

1,053,769

 

 

1,071,486

 

 

Deferred income taxes

 

91,004

 

 

129,496

 

 

Other

 

66,217

 

 

51,264

 

 

Total current assets

 

1,963,294

 

 

2,096,844

 

 

Property and equipment:

 

 

 

 

 

 

 

Land and land improvements

 

37,368

 

 

36,195

 

 

Buildings and improvements

 

386,295

 

 

359,481

 

 

Machinery and equipment

 

804,059

 

 

794,010

 

 

Total property and equipment

 

1,227,722

 

 

1,189,686

 

 

Accumulated depreciation

 

(652,496

)

 

(610,061

)

 

Net property and equipment

 

575,226

 

 

579,625

 

 

Goodwill

 

1,236,058

 

 

1,216,032

 

 

Intangible assets, net

 

201,937

 

 

201,304

 

 

Investments in affiliates

 

175,000

 

 

175,000

 

 

Timber notes receivable

 

1,635,000

 

 

1,635,000

 

 

Restricted investments

 

22,377

 

 

22,292

 

 

Deferred charges

 

47,770

 

 

40,439

 

 

Other non-current assets

 

168,695

 

 

249,512

 

 

Total assets

 

$

6,025,357

 

 

$

6,216,048

 

 

 

See accompanying notes to quarterly consolidated financial statements.

5




OfficeMax Incorporated and Subsidiaries
Consolidated Balance Sheets
(thousands, except share and per-share amounts)

 

 

June 30,
2007

 

December 30,
2006

 

 

 

(unaudited)

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Short-term borrowings

 

$

6,985

 

 

$

 

 

Current portion of long-term debt

 

34,886

 

 

25,634

 

 

Accounts payable:

 

 

 

 

 

 

 

Trade

 

780,798

 

 

965,218

 

 

Related parties

 

42,295

 

 

32,482

 

 

Accrued expenses and other current liabilities:

 

 

 

 

 

 

 

Compensation and benefits

 

138,455

 

 

172,632

 

 

Other

 

319,614

 

 

332,937

 

 

Total current liabilities

 

1,323,033

 

 

1,528,903

 

 

Long-term debt:

 

 

 

 

 

 

 

Long-term debt, less current portion

 

349,579

 

 

384,246

 

 

Timber notes securitized

 

1,470,000

 

 

1,470,000

 

 

Total long-term debt

 

1,819,579

 

 

1,854,246

 

 

Other long-term obligations:

 

 

 

 

 

 

 

Compensation and benefits

 

271,243

 

 

287,122

 

 

Deferred gain on sale of assets

 

179,757

 

 

179,757

 

 

Other long-term obligations

 

300,536

 

 

350,491

 

 

Total other long-term obligations

 

751,536

 

 

817,370

 

 

Minority interest

 

32,005

 

 

29,885

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Preferred stock—no par value; 10,000,000 shares authorized; Series D ESOP: $.01 stated value; 1,149,580 and 1,216,335 shares outstanding

 

51,731

 

 

54,735

 

 

Common stock—$2.50 par value; 200,000,000 shares authorized; 75,374,649 and 74,903,220 shares outstanding

 

188,411

 

 

187,226

 

 

Additional paid-in capital

 

905,585

 

 

893,848

 

 

Retained earnings

 

999,239

 

 

941,830

 

 

Accumulated other comprehensive loss

 

(45,762

)

 

(91,995

)

 

Total shareholders’ equity

 

2,099,204

 

 

1,985,644

 

 

Total liabilities and shareholders’ equity

 

$

6,025,357

 

 

$

6,216,048

 

 

 

 

See accompanying notes to quarterly consolidated financial statements.

6




OfficeMax Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
(thousands)

 

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

 

 

(unaudited)

 

Cash provided by operations:

 

 

 

 

 

Net income (loss)

 

$

85,975

 

$

2,308

 

Items in net income (loss) not using (providing) cash:

 

 

 

 

 

Earnings from affiliates

 

(3,023

)

(2,871

)

Depreciation and amortization

 

65,106

 

60,316

 

Minority interest, net of income tax

 

2,535

 

1,689

 

Pension and other postretirement benefits expense

 

4,135

 

7,407

 

Discontinued operations

 

144

 

7,162

 

Other

 

14,811

 

17,593

 

Changes other than from acquisition of business:

 

 

 

 

 

Receivables

 

32,886

 

72,811

 

Inventories

 

18,359

 

144,721

 

Accounts payable and accrued liabilities

 

(253,383

)

(180,825

)

Current and deferred income taxes

 

20,643

 

20,382

 

Other

 

52,355

 

287

 

Cash provided by operations

 

40,543

 

150,980

 

Cash used for investment:

 

 

 

 

 

Expenditures for property and equipment

 

(59,440

)

(46,996

)

Other

 

(1,948

)

596

 

Cash used for investment

 

(61,388

)

(46,400

)

Cash used for financing:

 

 

 

 

 

Cash dividends paid on common stock

 

(24,453

)

(23,268

)

Short-term borrowings, net

 

6,985

 

(18,666

)

Payments of long-term debt

 

(25,474

)

(65,478

)

Proceeds from exercise of stock options

 

5,211

 

104,623

 

Other

 

(2,879

)

(33

)

Cash used for financing

 

(40,610

)

(2,822

)

Increase (decrease) in cash and cash equivalents

 

(61,455

)

101,758

 

Cash and cash equivalents at beginning of period

 

282,070

 

72,198

 

Cash and cash equivalents at end of period

 

$

220,615

 

$

173,956

 

 

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”, “we” or “our”) is a leader in both business-to-business and retail office products distribution. The Company provides office supplies and paper, print and document services, technology products and solutions and furniture to large, medium and small businesses, governmental offices, and consumers. OfficeMax customers are served by more than 36,000 associates through direct sales, catalogs, the Internet and a network of retail stores located throughout the United States, Canada, Australia, New Zealand and Mexico.

The accompanying quarterly consolidated financial statements include the accounts of OfficeMax and all majority-owned subsidiaries as well as those of variable interest entities in which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation. These financial statements are for the thirteen and twenty-six week periods ended on June 30, 2007 (also referred to as the “second quarter of 2007” and “year-to-date 2007”) and the thirteen and twenty-six week periods ended on July 1, 2006 (also referred to as the “second quarter of 2006” and “year-to-date 2006”). The Company’s fiscal year ends on the last Saturday in December. Due primarily to statutory audit requirements, the Company’s international businesses maintain December 31 year-ends.

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 Company’s Annual Report on Form 10-K for the year ended December 30, 2006.

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. Except as may be disclosed within these “Notes to Quarterly Consolidated Financial Statements,” 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.

In 2006, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 06-03, “How Sales Tax Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That is, Gross versus Net Presentation).” This EITF Issue clarifies that the presentation of taxes collected from customers and remitted to governmental authorities on a gross (included in revenues and costs) or net (excluded from revenues) basis is an accounting policy decision that should be disclosed pursuant to Accounting Principles Board (APB) Opinion No. 22, “Disclosure of Accounting Policies.” The EITF Issue is effective for the Company beginning in fiscal year 2007. We collect such taxes from our customers and account for them on a net (excluded from revenues) basis. The adoption of EITF Issue No. 06-03 did not impact our consolidated financial statements.

Certain amounts in prior years’ financial statements have been reclassified to conform with the current year’s presentation. These reclassifications did not affect net income (loss).

2. Discontinued Operations

In December 2004, the Company’s board of directors authorized management to pursue the divestiture of a facility near Elma, Washington that manufactured integrated wood-polymer building materials. The board of directors and management concluded that the operations of the facility were no longer consistent with the Company’s strategic direction. As a result of that decision, the Company

8




recorded the facility’s assets as held for sale on the Consolidated Balance Sheets and reported the results of its operations as discontinued operations.

During 2005, the Company experienced unexpected difficulties in achieving anticipated levels of production at the facility. These issues delayed the process of identifying and qualifying a buyer for the business. While management made substantial progress in addressing the manufacturing issues that caused production to fall below plan, during the fourth quarter of 2005, the Company concluded that it would be unable to attract a buyer in the near term and elected to cease operations at the facility during the first quarter of 2006.

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company recorded pre-tax charges of $67.8 million in the fourth quarter of 2004 and $28.2 million in the fourth quarter of 2005 to reduce the carrying value of the long-lived assets of the Elma, Washington facility to their estimated fair value. During the first quarter of 2006, management ceased operations at the facility and recorded pre-tax expenses of $18.0 million for contract termination and other closure costs. These charges and expenses were reflected within discontinued operations in the Consolidated Statements of Income (Loss).

The liabilities of the Elma, Washington facility are included in current liabilities ($15.6 million at June 30, 2007 and $15.5 million at December 30, 2006, respectively) in the Consolidated Balance Sheets. The estimated fair value of the related assets was zero at June 30, 2007 and December 30, 2006.

See Note 3, Discontinued Operations, of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K for the year ended December 30, 2006 for additional information related to the discontinued operations.

3. Integration Activities and Facility Closures

In September 2005, the board of directors approved a plan to relocate and consolidate the Company’s retail headquarters in Shaker Heights, Ohio and its existing corporate headquarters in Itasca, Illinois into a new facility in Naperville, Illinois. The Company began the consolidation and relocation process in the latter half of 2005. During the second quarter and first six months of 2006, the Company incurred and expensed approximately $10.9 million and $26.6 million, respectively, of costs related to the headquarters consolidation, all of which were reflected in the Corporate and Other segment. The consolidation and relocation process was completed during the second half of 2006.

During the first six months of 2006, the Company closed 109 underperforming domestic retail stores and recorded a pre-tax charge of $89.6 million ($11.3 million for employee severance, asset write-off and impairment and other closure costs and $78.3 million for estimated future lease obligations).

At June 30, 2007, approximately $35.8 million of the reserve for integration and facility closures was included in accrued liabilities, other, and $57.8 million was included in other long-term liabilities. At June 30, 2007, the integration and facility closure reserve included approximately $85.7 million for estimated future lease obligations, which represents the estimated net present value of the lease obligations and is net of anticipated future sublease income of approximately $89.8 million.

9




Integration and facility closure reserve account activity during the first six months of 2007 and 2006, including the headquarters consolidation and the 2006 store closures, as well as other previously disclosed integration and facility closure activities, was as follows:

 

 

Lease\
Contract
Terminations

 

Severance\
Retention

 

Asset
Write-off &
Impairment

 

Other

 

Total

 

 

 

(thousands)

 

Balance at December 30, 2006

 

 

$

107,824

 

 

 

$

10,838

 

 

 

$

 

 

$

3,142

 

$

121,804

 

Charges to income

 

 

 

 

 

 

 

 

 

 

 

 

Change in goodwill

 

 

 

 

 

 

 

 

 

 

 

 

Changes to estimated costs included in income

 

 

 

 

 

 

 

 

 

 

 

 

Cash payments

 

 

(24,122

)

 

 

(4,948

)

 

 

 

 

(1,072

)

(30,142

)

Non-cash charges

 

 

 

 

 

 

 

 

 

 

 

 

Accretion

 

 

1,973

 

 

 

 

 

 

 

 

 

1,973

 

Balance at June 30, 2007

 

 

$

85,675

 

 

 

$

5,890

 

 

 

$

 

 

$

2,070

 

$

93,635

 

 

 

 

Lease\
Contract
Terminations

 

Severance\
Retention

 

Asset
Write-off &
Impairment

 

Other

 

Total

 

 

 

(thousands)

 

Balance at December 31, 2005

 

 

$

91,455

 

 

 

$

21,502

 

 

 

$

 

 

$

739

 

$

113,696

 

Charges to income

 

 

78,330

 

 

 

10,721

 

 

 

10,065

 

 

17,051

 

116,167

 

Change in goodwill

 

 

(11,000

)

 

 

 

 

 

 

 

 

(11,000

)

Changes to estimated costs included in income

 

 

 

 

 

(1,080

)

 

 

 

 

 

(1,080

)

Cash payments

 

 

(40,859

)

 

 

(16,062

)

 

 

 

 

(14,638

)

(71,559

)

Non-cash charges

 

 

 

 

 

 

 

 

(10,065

)

 

(685

)

(10,750

)

Accretion

 

 

3,402

 

 

 

 

 

 

 

 

 

3,402

 

Balance at July 1, 2006

 

 

$

121,328

 

 

 

$

15,081

 

 

 

$

 

 

$

2,467

 

$

138,876

 

 

4. Net Income (Loss) Per Common Share

The computation of basic and diluted income (loss) per common share for the second quarter and first six months of 2007 and 2006 is as follows:

 

 

Quarter Ended

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

June 30,
2007

 

July 1, 2006

 

 

 

(thousands, except per-share amounts)

 

Basic income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

27,436

 

$

27,395

 

$

85,975

 

 

$

13,289

 

 

Preferred dividends

 

(1,008

)

(1,009

)

(2,015

)

 

(2,018

)

 

Basic income from continuing operations

 

26,428

 

26,386

 

83,960

 

 

11,271

 

 

Loss from discontinued operations

 

 

 

 

 

(10,981

)

 

Net income applicable to common shareholders

 

$

26,428

 

$

26,386

 

$

83,960

 

 

$

290

 

 

Average shares—basic

 

75,344

 

72,877

 

75,168

 

 

71,855

 

 

Basic income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.35

 

$

0.36

 

$

1.12

 

 

$

0.15

 

 

Discontinued operations

 

 

 

 

 

(0.15

)

 

Basic income per common share

 

$

0.35

 

$

0.36

 

$

1.12

 

 

$

 

 

 

10




 

 

 

Quarter Ended

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

June 30,
2007

 

July 1,
2006

 

 

 

(thousands, except per-share amounts)

 

Diluted income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic income from continuing operations

 

$

26,428

 

$

26,386

 

$

83,960

 

$

11,271

 

Preferred dividends eliminated

 

 

 

 

 

Diluted income from continuing operations

 

26,428

 

26,386

 

83,960

 

11,271

 

Loss from discontinued operations

 

 

 

 

(10,981

)

Net income applicable to common shareholders

 

$

26,428

 

$

26,386

 

$

83,960

 

$

290

 

Average shares—basic

 

75,344

 

72,877

 

75,168

 

71,855

 

Restricted stock, stock options and other

 

1,249

 

2,047

 

1,000

 

1,655

 

Average shares—diluted

 

76,593

 

74,924

 

76,168

 

73,510

 

Diluted income (loss) per common share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.35

 

$

0.35

 

$

1.10

 

$

0.15

 

Discontinued operations

 

 

 

 

(0.15

)

Diluted income per common share

 

$

0.35

 

$

0.35

 

$

1.10

 

$

 

 

5. Other Operating (Income) Expense, Net

The components of “Other operating (income) expense, net” in the Consolidated Statements of Income (Loss) are as follows:

 

 

Quarter Ended

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

June 30,
2007

 

July 1,
2006

 

 

 

(thousands)

 

Integration activities and facility closures (See Note 3)

 

$

 

$

1,899

 

$

 

$

116,167

 

Earnings from affiliates

 

(1,447

)

(1,443

)

(3,023

)

(2,871

)

 

 

$

(1,447

)

$

456

 

$

(3,023

)

$

113,296

 

 

6. Other Income (Expense), Net (non-operating)

The components of “Other income (expense), net” (non-operating) in the Consolidated Statements of Income (Loss) are as follows:

 

 

Quarter Ended

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

June 30,
2007

 

July 1,
2006

 

 

 

(thousands)

 

Additional Consideration Agreement adjustment (See Note 16)

 

$

 

$

9,232

 

$

 

$

9,232

 

Receivable securitization program costs

 

(2,623

)

(2,701

)

(5,260

)

(5,155

)

Other

 

391

 

196

 

(420

)

484

 

 

 

$

(2,232

)

$

6,727

 

$

(5,680

)

$

4,561

 

 

11




7. Income Taxes

The Company adopted Financial Accounting Standards Board Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of Financial Accounting Standards Board (FASB) Statement No. 109” at the beginning of 2007. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109, “Accounting for Income Taxes.” The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the implementation, the Company recognized a $4.0 million increase to reserves for uncertain tax positions. This increase was accounted for as an adjustment to the beginning balance of retained earnings on the Consolidated Balance Sheet. Including the cumulative effect of this increase, at the beginning of 2007, the Company had approximately $70 million of total gross unrecognized tax benefits. Of this total, approximately $30 million (net of the federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods. The remaining balance of approximately $40 million, if recognized, would be recorded as an adjustment to goodwill and would not affect the effective tax rate. It is possible that the Company’s liability for uncertain tax positions will be reduced by as much as $13.3 million by the end of second quarter 2008. Approximately $8.2 million of this amount would impact the Company’s effective tax rate with the remaining $5.1 million impacting goodwill. Such reductions would result from the effective settlement of tax positions with various tax authorities.

The Company or its subsidiaries file income tax returns in the U.S. federal jurisdiction, and multiple state and foreign jurisdictions. The Company has substantially concluded all U.S. federal income tax matters for 2002 and prior years. Years prior to 2003 are no longer subject to U.S. federal income tax examination. The Company is no longer subject to state income tax examinations by tax authorities in its major state jurisdictions for years before 2002.

The Company recognizes accrued interest and penalties associated with uncertain tax positions as part of income tax expense. As of January 1, 2007, the Company had $5.8 million of accrued interest and penalties associated with uncertain tax positions. Income tax expense for the six months ended June 30, 2007 includes interest and penalties of $1.1 million.

For the six months ended June 30, 2007, the Company paid income taxes, net of refunds received, of $43.4 million. For the six months ended July 1, 2006, the Company received income tax refunds, net of income taxes paid, of $21.1 million.

8. Comprehensive Income (Loss)

Comprehensive income (loss) includes the following:

 

 

Quarter Ended

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

June 30,
2007

 

July 1,
2006

 

 

 

(thousands)

 

Net income

 

$

27,436

 

$

27,395

 

$

85,975

 

$

2,308

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

36,168

 

8,014

 

41,110

 

(10,346

)

Amortization of unrecognized retirement and benefit costs

 

2,500

 

 

5,122

 

 

Comprehensive income (loss)

 

$

66,104

 

$

35,409

 

$

132,207

 

$

(8,038

)

 

12




9. Sales of Accounts Receivable

The Company sells, on a revolving basis, an undivided interest in a defined pool of receivables while retaining a subordinated interest in a portion of the receivables. The receivables are sold without legal recourse to third party conduits through a wholly owned bankruptcy-remote special purpose entity that is consolidated for financial reporting purposes. The Company continues servicing the sold receivables and charges the third party conduits a monthly servicing fee at market rates. The program qualifies for sale treatment under SFAS 140. At June 30, 2007 and December 30, 2006, $159.0 million and $180.0 million of sold accounts receivable were excluded from receivables in the accompanying Consolidated Balance Sheets. The Company’s subordinated retained interest in the transferred receivables was $142.0 million and $111.2 million at June 30, 2007 and December 30, 2006, respectively, and is included in receivables, net in the Consolidated Balance Sheets. See Note 19, Subsequent Events for additional information concerning the accounts receivable securitization program and a new loan agreement that the Company entered into on July 12, 2007.

10. Investments in Affiliates

In October 2004, the Company sold substantially all of its paper, forest products and timberland assets for approximately $3.7 billion in cash and other consideration to affiliates of Boise Cascade, L.L.C. (the “Sale”). In conjunction with the Sale, the Company invested $175 million in the equity units of affiliates of Boise Cascade, L.L.C. A portion (approximately $66 million) of the equity units received in exchange for the Company’s investment carry no voting rights. This investment is accounted for under the cost method as Boise Cascade, L.L.C. does not maintain separate ownership accounts for its members, the Company has less than a 20 percent voting interest in Boise Cascade, L.L.C. and does not have the ability to significantly influence its operating and financial policies. This investment is included in investment in affiliates in the Consolidated Balance Sheets. The Company has determined that it is not practicable to estimate the fair value of this investment. However, the Company has not observed any events or changes in circumstances that would have had a significant adverse effect on the fair value of the investment.

The Boise Cascade, L.L.C. non-voting equity units accrue dividends daily at the rate of 8% per annum on the liquidation value plus accumulated dividends. Dividends accumulate semiannually to the extent not paid in cash on the last day of June or December. The Company recognized dividend income on this investment of $1.4 million and $3.0 million for the quarter and six months ended June 30, 2007, respectively, and $1.4 million and $2.9 million for the quarter and six months ended July 1, 2006, respectively.

11. Goodwill and Intangible Assets

Goodwill

Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and intangible assets of businesses acquired. In accordance with the provisions of SFAS 142, “Goodwill and Other Intangible Assets,” we assess our acquired goodwill and intangible assets with indefinite lives for impairment at least annually in the absence of an indicator of possible impairment, and immediately upon an indicator of possible impairment. We completed our annual assessment in accordance with the provisions of the standard during the first quarters of 2007 and 2006, and concluded there was no impairment. During the first quarters of 2007 and 2006, we also evaluated the remaining useful lives of our finite-lived purchased intangible assets to determine if any adjustments to the useful lives were necessary. We determined that no adjustments to the useful lives of our finite-lived purchased intangible assets were necessary.

13




Changes in the carrying amount of goodwill by segment were as follows:

 

 

OfficeMax,
Contract

 

OfficeMax,
Retail

 

Total

 

 

 

(thousands)

 

Balance at December 30, 2006

 

 

$

528,090

 

 

 

$

687,942

 

 

$

1,216,032

 

Effect of foreign currency translation

 

 

19,110

 

 

 

 

 

19,110

 

Businesses acquired

 

 

916

 

 

 

 

 

916

 

Balance at June 30, 2007

 

 

$

548,116

 

 

 

$

687,942

 

 

$

1,236,058

 

 

Acquired Intangible Assets

Intangible assets represent the values assigned to trade names, customer lists and relationships, noncompete agreements and exclusive distribution rights of businesses acquired. The trade name assets have an indefinite life and are not amortized. All other intangible assets are amortized on a straight-line basis over their expected useful lives. Customer lists and relationships are amortized over three to 20 years, noncompete agreements over their terms, which are generally three to five years, and exclusive distribution rights over ten years. Intangible assets consisted of the following:

 

 

June 30, 2007

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

 

 

(thousands)

 

Trade names

 

 

$

173,150

 

 

 

$

 

 

 

$

173,150

 

 

Customer lists and relationships

 

 

42,640

 

 

 

(20,697

)

 

 

21,943

 

 

Noncompete agreements

 

 

12,870

 

 

 

(9,526

)

 

 

3,344

 

 

Exclusive distribution rights

 

 

6,031

 

 

 

(2,531

)

 

 

3,500

 

 

 

 

 

$

234,691

 

 

 

$

(32,754

)

 

 

$

201,937

 

 

 

 

 

December 30, 2006

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

 

 

(thousands)

 

Trade names

 

 

$

173,150

 

 

 

$

 

 

 

$

173,150

 

 

Customer lists and relationships

 

 

39,681

 

 

 

(17,678

)

 

 

22,003

 

 

Noncompete agreements

 

 

12,853

 

 

 

(8,213

)

 

 

4,640

 

 

Exclusive distribution rights

 

 

3,616

 

 

 

(2,105

)

 

 

1,511

 

 

 

 

 

$

229,300

 

 

 

$

(27,996

)

 

 

$

201,304

 

 

 

Intangible asset amortization expense totaled $1.4 million and $3.1 million for the quarter and six months ended June 30, 2007, respectively. Intangible asset amortization expense totaled $2.1 million and $3.8 million for the quarter and six months ended July 1, 2006, respectively.

12. Timber Notes Receivable

In October 2004, OfficeMax sold its timberlands in exchange for timber installment notes receivable in the amount of $1,635 million, which were credit enhanced with guarantees. The guarantees were issued by highly-rated financial institutions and were secured by the pledge of underlying collateral notes issued by the credit enhancement banks. The timber installment notes receivable are 15-year non-amortizing. There are two notes that total $817.5 million bearing interest at 4.982% and a third note in the amount of $817.5 million bearing interest at 5.112%. Interest earned on all of the notes is received semiannually. See sub-caption “Timber Notes” in Note 13, Debt, for additional information concerning a securitization transaction involving the timber installment notes receivable.

14




13. Debt

Credit Agreements

On June 24, 2005, the Company entered into a loan and security agreement for a revolving credit facility. The revolving credit facility permits the Company to borrow up to the maximum aggregate borrowing amount, which is equal to the lesser of (i) a percentage of the value of certain eligible inventory less certain reserves or (ii) $500 million. There were no borrowings outstanding under the revolver as of June 30, 2007 and December 30, 2006. There were no borrowings outstanding during the six months ended June 30, 2007. Letters of credit, which may be issued under the revolver up to a maximum of $100 million, reduce available borrowing capacity under the revolving credit facility. Letters of credit issued under the revolver totaled $86.3 million as of June 30, 2007 and $75.5 million as of December 30, 2006. As of June 30, 2007, the maximum aggregate borrowing amount available under the revolver was $500.0 million and excess availability under the revolver totaled $413.7 million.

Borrowings under the revolver bear interest at rates based on either the prime rate or the London Interbank Offered Rate (“LIBOR”). Margins are applied to the applicable borrowing rates and letter of credit fees under the revolver depending on the level of average excess availability. Fees on letters of credit issued under the revolver were charged at a weighted average rate of 1.0% during the first six months of 2007. The Company is also charged an unused line fee of 0.25% on the amount by which the maximum available credit of $500 million exceeds the average daily outstanding borrowings and letters of credit.

Borrowings under the revolver are secured by a lien on substantially all inventory and related proceeds. The revolving loan and security agreement contains customary conditions to borrowing including a monthly calculation of excess borrowing availability and reporting compliance. Covenants in the revolver agreement restrict the amount of letters of credit that may be issued, dividend distributions and other uses of cash if excess availability is less than $75 million. At June 30, 2007, the Company was in compliance with all covenants under the revolver agreement. The revolving credit agreement expires on June 24, 2010. See Note 19, Subsequent Events for additional information concerning the revolving credit facility and a new loan agreement that the Company entered into on July 12, 2007.

Timber Notes

In October 2004, the Company sold its timberlands and received credit-enhanced timber installment notes receivable in the amount of $1,635 million. (See Note 12, Timber Notes Receivable). In December 2004, the Company completed a securitization transaction in which its interest in the timber installment notes receivable and related guarantees were transferred to wholly-owned bankruptcy remote subsidiaries that were designated to be qualifying special purpose entities (the “OMXQs”). The OMXQs pledged the timber installment notes receivable and related guarantees and issued securitization notes in the amount of $1,470 million. Recourse on the securitization notes is limited to the pledged timber installment notes receivable. The securitization notes are 15-year non-amortizing, and were issued in two equal $735 million tranches paying interest of 5.42% and 5.54%, respectively.

 

As a result of these transactions, OfficeMax received $1,470 million in cash from the OMXQ’s, and over 15 years will earn approximately $82.5 million per year in interest income on the timber installment notes receivable and incur interest expense of approximately $80.5 million on the securitization notes. The pledged timber installment notes receivable and nonrecourse securitization notes will mature in 2020 and 2019, respectively. The securitization notes have an initial term that is approximately three months shorter than the installment notes. The Company expects to refinance its ownership of the installment notes in 2019 with a short-term secured borrowing to bridge the period from initial maturity of the securitization notes to the maturity of the installment notes.

15




The original entities issuing the credit enhanced timber installment notes are variable-interest entities (the “VIE’s”) under FASB Interpretation 46R, “Consolidation of Variable Interest Entities”. The OMXQs are considered to be the primary beneficiary, and therefore, the VIE’s are required to be consolidated with the OMXQ’s, which are also the issuers of the securitization notes. As a result, the accounts of the OMXQ’s have been consolidated into those of their ultimate parent, OfficeMax. The effect of the Company’s consolidation of the OMXQs is that the securitization transaction is treated as a financing, and both the timber notes receivable and the securitization notes payable are reflected in the Consolidated Balance Sheets.

Note Agreements

In October 2003, the Company issued $300 million of 6.50% senior notes due in 2010 and $200 million of 7.00% senior notes due in 2013. At the time of issuance, the senior note indentures contained a number of restrictive covenants, substantially all of which have been eliminated through the execution of supplemental indentures as described below. On November 5, 2004, the Company repurchased approximately $286.3 million of the 6.50% senior notes and received the requisite consents to adopt amendments to the indenture pursuant to a tender offer for these securities. As a result, the Company and the trustee executed a supplemental indenture that eliminated substantially all of the restrictive covenants, certain events of default and related provisions, and replaced them with the covenants contained in the Company’s other public debt. Those covenants include a limitation on mergers and similar transactions, a restriction on secured transactions involving Principal Properties, as defined, and a restriction on sale and leaseback transactions involving Principal Properties.

On December 23, 2004, both Moody’s Investors Service, Inc., and Standard & Poor’s Rating Services upgraded the credit rating on the Company’s 7.00% senior notes to investment grade. The upgrades were the result of actions the Company took to collateralize the notes by granting the note holders a security interest in $113 million in principal amount of General Electric Capital and Bank of America Corp. notes maturing in 2008 (the “pledged instruments”). These pledged instruments are reflected as restricted investments in the Consolidated Balance Sheets. As a result of these ratings upgrades, the original 7.00% senior note covenants have been replaced with the covenants found in the Company’s other public debt. During the first quarter of 2005, the Company purchased and cancelled $87.3 million of the 7.00% senior notes. As a result, $92.8 million of the pledged instruments were released from the security interest granted to the 7.00% senior note holders, and were sold during the second quarter of 2005. The remaining pledged instruments continue to be subject to the security interest, and are reflected as restricted investments in the Consolidated Balance Sheets.

Other

The Company’s joint venture in Mexico had short-term borrowings of $7.0 million as of June 30, 2007. These borrowings are unsecured with a current interest rate of approximately 9.1%. The Company had leased certain equipment at its integrated wood-polymer building materials facility near Elma, Washington under a capital lease. The lease agreement had a base term of seven years and an interest rate of 4.67%. During the first quarter of 2006, the Company paid $29.1 million to terminate the lease agreement.

Cash payments for interest were $11.2 million and $20.6 million for the quarter and six months ended June 30, 2007, respectively, and $11.1 million and $21.8 million for the quarter and six months ended July 1, 2006, respectively.

16




14. Retirement and Benefit Plans

The following represents the components of net periodic pension and other postretirement benefit costs (income):

 

 

Pension Benefits

 

Other Benefits

 

 

 

Quarter Ended

 

Quarter Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

June 30,
2007

 

July 1,
2006

 

 

 

(thousands)

 

Service cost

 

$

419

 

$

400

 

 

$

69

 

 

$

217

 

Interest cost

 

19,270

 

18,670

 

 

260

 

 

395

 

Expected return on plan assets

 

(22,254

)

(21,838

)

 

 

 

 

Recognized actuarial loss

 

5,055

 

5,789

 

 

82

 

 

173

 

Plan settlement/curtailment/closures expense

 

 

223

 

 

 

 

 

Amortization of prior service costs and other

 

 

 

 

(900

)

 

(893

)

Net periodic benefit cost (income)

 

$

2,490

 

$

3,244

 

 

$

(489

)

 

$

(108

)

 

 

 

Pension Benefits

 

Other Benefits

 

 

 

Six Months Ended

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

June 30,
2007

 

July 1,
2006

 

 

 

(thousands)

 

Service cost

 

$

838

 

$

800

 

$

165

 

$

434

 

Interest cost

 

38,542

 

37,340

 

649

 

790

 

Expected return on plan assets

 

(44,509

)

(43,676

)

 

 

Recognized actuarial loss

 

10,110

 

11,579

 

244

 

346

 

Plan settlement/curtailment/closures expense

 

 

1,580

 

 

 

Amortization of prior service costs and other

 

 

 

(1,904

)

(1,786

)

Net periodic benefit cost (income)

 

$

4,981

 

$

7,623

 

$

(846

)

$

(216

)

 

The minimum contribution requirement for the Company’s plans for 2007 is approximately $11 million. As of June, 30, 2007, the Company has made contributions totaling $4.2 million.

15. Segment Information

The Company manages its business using three reportable segments: OfficeMax, Contract; OfficeMax, Retail; and Corporate and Other. Each of the Company’s segments represents a business with differing products, services and/or distribution channels. Each of these segments requires distinct operating and marketing strategies. Management reviews the performance of the Company based on these segments.

OfficeMax, Contract distributes a broad line of items for the office, including office supplies and paper, technology products and solutions and office furniture. OfficeMax, Contract sells directly to large corporate and government offices, as well as small and medium-sized offices in the United States, Canada, Australia and New Zealand. This segment markets and sells through field salespeople, outbound telesales, catalogs, the Internet and in some markets, including Canada, Hawaii, Australia and New Zealand, through office products stores.

OfficeMax, Retail is a retail distributor of office supplies and paper, print and document services, technology products and solutions and office furniture. OfficeMax, Retail has operations in the United States, Puerto Rico and the U.S. Virgin Islands. OfficeMax, Retail office supply stores feature OfficeMax ImPress, an in-store module devoted to print-for-pay and related services. The retail segment also operates office supply stores in Mexico through a 51%-owned joint venture.

17




Substantially all products sold by OfficeMax, Contract and OfficeMax, Retail are purchased from independent third-party manufacturers or industry wholesalers, except office papers. These segments purchase office papers primarily from the paper operations of Boise Cascade, L.L.C., under a 12-year paper supply contract. (see Note 18, Commitments and Guarantees, of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K for the year ended December 30, 2006 for additional information related to the paper supply contract).

Corporate and Other includes corporate support staff services and related assets and liabilities.

Management evaluates the segments based on operating profits before interest expense, income taxes, minority interest, extraordinary items and cumulative effect of accounting changes. The income and expense related to certain assets and liabilities that are reported in the Corporate and Other segment have been allocated to the Contract and Retail segments. Certain expenses that management considers unusual or non-recurring are not allocated to the Contract and Retail segments.

An analysis of our operations by segment is as follows:

 

 

 

 

 

 

Income (Loss) Before Taxes

 

 

 

Sales

 

and Minority Interest (a)

 

 

 

Quarter Ended

 

Quarter Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

   June 30,   
2007

 

   July 1,   
2006

 

 

 

(thousands)

 

OfficeMax, Contract

 

$

1,197,166

 

$

1,146,742

 

 

$

41,019

 

 

$

44,424

 

OfficeMax, Retail

 

935,251

 

894,209

 

 

24,704

 

 

27,186

 

Corporate and Other

 

 

 

 

(9,778

)

 

(25,039

)

 

 

$

2,132,417

 

$

2,040,951

 

 

55,945

 

 

46,571

 

Interest expense

 

 

 

 

 

 

(29,959

)

 

(30,214

)

Interest income and other

 

 

 

 

 

 

19,544

 

 

28,830

 

 

 

 

 

 

 

 

$

45,530

 

 

$

45,187

 


 

 

 

 

 

 

 

Income (Loss) Before Taxes

 

 

 

Sales

 

and Minority Interest (a)

 

 

 

Six Months Ended

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

   June 30,   
2007

 

   July 1,   
2006

 

 

 

(thousands)

 

OfficeMax, Contract

 

$

2,461,661

 

$

2,377,504

 

 

$

100,896

 

 

$

111,473

 

OfficeMax, Retail

 

2,107,010

 

2,086,984

 

 

89,293

 

 

(10,806

)

Corporate and Other

 

 

 

 

(24,149

)

 

(62,460

)

 

 

$

4,568,671

 

$

4,464,488

 

 

166,040

 

 

38,207

 

Interest expense

 

 

 

 

 

 

(60,075

)

 

(61,717

)

Interest income and other

 

 

 

 

 

 

39,134

 

 

47,778

 

 

 

 

 

 

 

 

$

145,099

 

 

$

24,268

 


(a)          See Note 3, Integration Activities and Facility Closures and Note 5, Other Operating (Income) Expense, Net for an explanation of certain unusual and/or non-recurring items affecting the segments.

18




16. Commitments and Guarantees

In addition to commitments for leases and long-term debt, and purchase obligations for goods and services and capital expenditures entered into in the normal course of business, the Company has various other commitments, guarantees and obligations that are described in Note 18, Commitments and Guarantees, of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 30, 2006 (“Item 8. Financial Statements and Supplementary Data”). At June 30, 2007, other than a change in the average market price per ton of the benchmark paper grade used to calculate payments under the Additional Consideration Agreement with Boise Cascade L.L.C., described below, there had not been a material change to the information regarding commitments, guarantees and contractual obligations disclosed in the Company’s Annual Report on Form 10-K for the year ended December 30, 2006.

Pursuant to an Additional Consideration Agreement between OfficeMax and Boise Cascade, L.L.C., we may be required to make substantial cash payments to, or receive substantial cash payments from, Boise Cascade, L.L.C. Under the Additional Consideration Agreement, the Sale proceeds may be adjusted upward or downward based on paper prices during the six years following the Sale, subject to annual and aggregate caps. Specifically, we have agreed to pay Boise Cascade, L.L.C. $710,000 for each dollar by which the average market price per ton of a specified benchmark grade of cut-size office paper during any 12-month period ending on September 30 is less than $800. Boise Cascade, L.L.C. has agreed to pay us $710,000 for each dollar by which the average market price per ton exceeds $920. Under the terms of the agreement, neither party will be obligated to make a payment in excess of $45 million in any one year. Payments by either party are also subject to an aggregate cap of $125 million that declines to $115 million in the fifth year and $105 million in the sixth year.

As of June 30, 2007 and December 30, 2006, the net amount recognized in our Consolidated Balance Sheet related to the Additional Consideration Agreement (either receivable or payable) was zero. We record changes in the fair value of the Additional Consideration Agreement in our net income (loss) in the period they occur; however, any potential payments from Boise Cascade, L.L.C. to us are not recorded in net income (loss) until all contingencies have been satisfied, which is generally at the end of a 12-month measurement period ending on September 30. As of June 30, 2007, the average market price per ton of the benchmark grade used to calculate payments due under the Additional Consideration Agreement was $953, which represents the average for the first nine months of the 12-month measurement period ending on September 30, 2007. Market prices for paper are volatile and subject to significant fluctuations. Accordingly, the average market price per ton for the 12-month period ending on September 30, 2007 may be different than the average as of June 30, 2007. If the average price per ton of the benchmark grade remains at $953 through September 30, 2007, we would expect to receive a payment of approximately $25 million from Boise Cascade L.L.C.

17. Legal Proceedings and Contingencies

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 or results of operations. For information regarding legal proceedings and contingencies, see Note 19, Legal Proceedings and Contingencies, of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K for the year ended December 30, 2006 and “Item 16. Legal Proceedings and Contingencies” in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007.

19




18. Share Based Payments

Effective January 1, 2006, the Company adopted SFAS No. 123R, “Share Based Payment” using the modified prospective transition method. Under SFAS 123R, the Company must record compensation expense for all awards granted after the adoption date and for the unvested portion of previously granted awards that remain outstanding at the adoption date, under the fair value method. Prior to the adoption of SFAS 123R, the Company recognized compensation expense for share-based awards to employees using the fair-value-based guidance in SFAS 123. Due to the fact that the Company had previously accounted for share-based awards using SFAS 123, the adoption of SFAS 123R did not have a material impact on the Company’s financial position, results of operations or cash flows.

The Company sponsors several share-based compensation plans, which are described below. Compensation costs related to the Company’s share-based plans were $6.9 million and $14.4 million for the quarter and six months ended June 30, 2007, respectively. Compensation costs related to the Company’s share-based plans were $5.8 million and $10.5 million for the quarter and six months ended July 1, 2006, 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 Consolidated Statements of Income (Loss) for share-based compensation arrangements was $2.7 million and $5.6 million for the quarter and six months ended June 30, 2007, respectively. The total income tax benefit recognized in the Consolidated Statements of Income (Loss) for share-based compensation arrangements was $2.2 million and $4.0 million for the quarter and six months ended July 1, 2006, respectively.

2003 Director Stock Compensation Plan and OfficeMax Incentive and Performance Plan

In February 2003, the Company’s Board of Directors adopted the 2003 Director Stock Compensation Plan (the “2003 DSCP”) and the 2003 OfficeMax Incentive and Performance Plan (the “2003 Plan”), which were approved by shareholders in April 2003.

A total of 57,187 shares of common stock is reserved for issuance under the 2003 DSCP. Prior to December 8, 2005, the 2003 DSCP permitted non-employee directors to elect to receive some or all of their annual retainer and meeting fees in the form of options to purchase shares of the Company’s common stock. Non-employee directors who elected to receive a portion of their compensation in the form of stock options did not receive cash for that portion of their compensation. The difference between the $2.50-per-share exercise price of the options and the market value of the common stock on the date of grant was equal to the cash compensation that participating directors elected to forego and was recognized as compensation expense in the Consolidated Statements of Income (Loss). On December 8, 2005, the Board of Directors amended the 2003 DSCP to require the exercise price of any options issued to be fair market value. On February 14, 2007, the Board of Directors amended the 2003 DSCP to eliminate the choice to receive stock options. All options granted under the 2003 DSCP expire three years after the holder ceases to be a director.

The 2003 Plan was effective January 1, 2003, and replaced the Key Executive Performance Plan for Executive Officers, Key Executive Performance Plan for Key Executives/Key Managers, 1984 Key Executive Stock Option Plan (“KESOP”), Key Executive Performance Unit Plan (“KEPUP”) and Director Stock Option Plan (“DSOP”). No grants or awards have been made under the Key Executive Performance Plans, KESOP, KEPUP, or DSOP since 2003 and no future grants or awards will be made under these plans. A total of 5,209,540 shares of common stock is reserved for issuance under the 2003 Plan. The Company’s executive officers, key employees and nonemployee directors are eligible to receive awards under the 2003 Plan at the discretion of the Executive Compensation Committee of the Board of Directors. Eight types of awards may be granted under the 2003 Plan, including stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares, annual incentive awards and stock bonus awards.

20




Restricted Stock and Restricted Stock Units

In the first six months of 2007, the Company granted to employees 683,095 restricted stock units (“RSUs”). The weighted-average grant-date fair value of the RSUs was $53.01. As of June 30, 2007, 670,960 of these RSUs remained outstanding and vest half in 2009 and half in 2010. The remaining compensation expense to be recognized related to this grant, net of estimated forfeitures, is $26 million.

In 2006, the Company granted to employees and directors 1,157,479 RSUs. The weighted-average grant-date fair value of the RSUs was $28.79. As of June 30, 2007, 1,025,996 of these RSUs remained outstanding which vest after defined service periods as follows: 10,808 units in 2007, 507,594 in 2008 and 507,594 in 2009. The remaining compensation expense to be recognized related to this grant, net of estimated forfeitures, is approximately $16 million.

In 2005, the Company granted to employees and directors 728,123 RSUs. The weighted-average grant-date fair value of the RSUs was $33.15. As of June 30, 2007, 81,566 of these RSUs remained outstanding, which vest after defined service periods as follows: 29,666 units in 2007, 45,900 units in 2008 and 3,000 units in both 2009 and 2010. The remaining compensation expense to be recognized related to this grant, net of estimated forfeitures, is $0.5 million.

In 2004, the Company granted 14,765 shares of restricted stock to nonemployee directors. The restricted stock granted to directors vests six months from their termination or retirement from board service, and 7,170 of these restricted stock shares remain outstanding at June 30, 2007.

Shares of restricted stock are restricted until they vest and cannot be sold by the recipient until the restriction has lapsed. RSUs are restricted until they vest and are convertible into one common share after the restriction has lapsed. No entries are made in the financial statements on the grant date of restricted stock and RSU awards. The Company recognizes compensation expense related to these awards over the vesting periods based on the closing prices of the Company’s common stock on the grant dates. If these awards contain performance criteria, management periodically reviews actual performance against the criteria and adjusts compensation expense accordingly. For the quarter and six months ended June 30, 2007, the Company recognized $6.8 million and $14.1 million, respectively, of pretax compensation expense and additional paid-in capital related to restricted stock and RSU awards. For the quarter and six months ended July 1, 2006, the Company recognized $5.5 million and $10.0 million, respectively, of pretax compensation expense and additional paid-in capital related to restricted stock and RSU awards.

Restricted shares and RSUs are not included as shares outstanding in the calculation of basic earnings per share, but are included in the number of shares used to calculate diluted earnings per share, if dilutive. When the restriction lapses on restricted stock, the par value of the stock is reclassified from additional paid-in-capital to common stock. When the restriction lapses on RSUs, the units are converted to unrestricted common shares, and the par value of the stock is reclassified from additional paid-in-capital to common stock. Unrestricted shares are included in shares outstanding for purposes of calculating both basic and diluted earnings per share. Restricted stock and RSUs may be eligible to receive all dividends declared on the Company’s common shares during the vesting period; however, such dividends are not paid until the restrictions lapse.

Stock Units

The Company has a shareholder approved deferred compensation program for certain of its executive officers that allows them to defer a portion of their cash compensation. Previously, these officers could allocate their deferrals to a stock unit account. The Company matched deferrals used to purchase stock units with a 25% Company allocation of stock units. As a result of an amendment to the plan, no additional deferrals can be allocated to the stock unit accounts. At June 30, 2007, 12,789 stock units were allocated to the accounts of executive officers. A stock unit is equal in value to one share of the Company’s

21




common stock. The value of deferred stock unit accounts is paid in shares of the Company’s common stock when an officer retires or terminates employment.

Stock Options

In addition to the 2003 DSCP and the 2003 Plan discussed above, the Company has the following shareholder-approved stock option plans: the Key Executive Stock Option Plan (“KESOP”), the Director Stock Option Plan (“DSOP”) and the Director Stock Compensation Plan (“DSCP”). No further grants will be made under the KESOP, DSOP and DSCP.

The KESOP provided for the grant of options to purchase shares of common stock to key employees of the Company. The exercise price of awards under the KESOP was equal to the fair market value of the Company’s common stock on the date the options were granted. Options granted under the KESOP expire, at the latest, ten years and one day following the grant date.

The DSOP, which was available only to nonemployee directors, provided for annual grants of options. The exercise price of awards under the DSOP was equal to the fair market value of the Company’s common stock on the date the options were granted. The options granted under the DSOP expire upon the earlier of three years after the director ceases to be a director or ten years after the grant date.

The DSCP permitted nonemployee directors to elect to receive grants of options to purchase shares of the Company’s common stock in lieu of cash compensation. The difference between the $2.50-per-share exercise price of DSCP options and the market value of the common stock subject to the options was intended to offset the cash compensation that participating directors elected not to receive. Options granted under the DSCP expire three years after the holder ceases to be a director.

Under the KESOP and DSOP, options may not, except under unusual circumstances, be exercised until one year following the grant date. Under the DSCP, options may be exercised six months after the grant date.

A summary of stock option activity for the quarters ended June 30, 2007 and July 1, 2006 is presented in the table below:

 

 

2007

 

2006

 

 

 

Shares

 

Weighted Avg.
Exercise Price

 

Shares

 

Weighted Avg.
Exercise Price

 

Balance at beginning of period

 

1,753,188

 

 

$

31.81

 

 

5,759,545

 

 

$

32.39

 

 

Options granted

 

 

 

 

 

 

 

 

 

Options exercised

 

(167,213

)

 

31.16

 

 

(3,201,705

)

 

32.68

 

 

Options forfeited and expired

 

 

 

 

 

(12,500

)

 

37.57

 

 

Balance at end of period

 

1,585,975

 

 

$

31.88

 

 

2,545,340

 

 

$

32.00

 

 

Exercisable at end of period

 

1,417,843

 

 

 

 

 

2,297,808

 

 

 

 

 

 

The following table provides summarized information about stock options outstanding at June 30, 2007:

 

 

Options Outstanding

 

Options Exercisable

 

Range of Exercise Prices

 

 

 

Options
Outstanding

 

Weighted
Average
Contractual
Life (Years)

 

Weighted
Average
Exercise
Price

 

Options
Exercisable

 

Weighted
Average
Exercise
Price

 

$2.50

 

 

11,171

 

 

 

 

 

 

$

2.50

 

 

 

11,171

 

 

 

$

2.50

 

 

$18.00—$28.00

 

 

574,844

 

 

 

3.1

 

 

 

27.65

 

 

 

574,844

 

 

 

27.65

 

 

$28.01—$39.00

 

 

999,960

 

 

 

4.3

 

 

 

34.64

 

 

 

831,828

 

 

 

35.11

 

 

 

22




The remaining compensation expense to be recognized related to outstanding stock options, net of estimated forfeitures, is approximately $0.6 million. At June 30, 2007, the aggregate intrinsic value of outstanding stock options and exercisable stock options was $11.8 million and $10.6 million, respectively. The aggregate intrinsic value represents the total pre-tax intrinsic value (i.e. the difference between the Company’s closing stock price on the last trading day of the second quarter of 2007 and the exercise price, multiplied by the quantities of in-the-money options at the end of the quarter).

19. Subsequent Events

On July 12, 2007, the Company entered into an Amended and Restated Loan and Security Agreement (the “Loan Agreement”) with a group of banks. The Loan Agreement amended the Company’s existing revolving credit facility and replaced the Company’s accounts receivable securitization program. The sold accounts receivable under the accounts receivable securitization program at that date were refinanced with borrowings under the new Loan Agreement and excess cash. The new Loan Agreement permits the Company to borrow up to a maximum of $700 million in accordance with a borrowing base calculation equal to a percentage of eligible accounts receivable plus a percentage of the value of the eligible inventory less certain reserves. The Loan Agreement may be increased (up to a maximum of $800 million) at the Company’s request or reduced from time to time, in each case according to terms detailed in the Loan Agreement.

Borrowings under the revolver bear interest at rates based on either the prime rate or “LIBOR”. Margins are applied to the applicable borrowing rates and letter of credit fees under the revolver depending on the level of average excess availability. The Company is also charged an unused line fee of 0.25% on the amount by which the maximum available credit exceeds the average daily outstanding borrowings. Borrowings under the revolver are secured by a lien on all personal property of the Company including domestic inventory and accounts receivable. The Loan Agreement expires on July 12, 2012.

23




ITEM 2.                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Summary

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 Part II, Item 1A, “Risk Factors” of this Form 10-Q, including “Cautionary and Forward-Looking Statements.”

Financial Performance

We evaluate our results of operations both before and after certain gains and losses that management believes are not indicative of our core operating activities, such as the items described below. 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.

Results for the first six months of 2007 included a loss from a sale of OfficeMax, Contract’s operations in Mexico. These operations were sold to OfficeMax de Mexico, our 51% owned joint venture that operates OfficeMax stores in Mexico. The net impact of the transaction was a $1.1 million increase in minority interest, net of income tax, which is included in the Consolidated Statement of Income (Loss).

Results for the first six months of 2006 included various items related to the Company’s previously announced restructuring activities and its transition to an independent office products distribution company, which are not expected to be ongoing, including the following:

·                    In the first six months of 2006, we recorded pre-tax charges of $89.6 million and $26.6 million related to the closing of 109 retail stores and the consolidation of our corporate headquarters, respectively. These charges were included in Other operating (income) expense, net in the Consolidated Statements of Income (Loss) and were reflected in the Retail segment (store closures) and the Corporate and Other segment (headquarters consolidation), respectively. See sub-caption “Integration Activities and Facility Closures” below for additional information regarding the store closures and the headquarters consolidation.

·                    In the first six months of 2006, we recognized an $11 million loss from discontinued operations related to a manufacturing facility near Elma, Washington. See sub-caption “Discontinued Operations” below for more information regarding the loss from discontinued operations.

·                    During the second quarter of 2006, we reduced a liability related to the Additional Consideration Agreement that was entered into in connection with the sale of the paper, forest products and timberland assets, which resulted in a credit to Other, income (expense), net (non-operating) of $9.2 million.

24




Results of Operations, Consolidated
($ in millions, except per share amounts)

 

 

Quarter Ended

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

June 30,
2007

 

July 1,
2006

 

Sales

 

$

2,132.4

 

$

2,041.0

 

$

4,568.7

 

$

4,464.5

 

Income from continuing operations before income taxes and minority interest

 

$

45.5

 

$

45.2

 

$

145.1

 

$

24.3

 

Net income

 

$

27.4

 

$

27.4

 

$

86.0

 

$

2.3

 

Diluted income (loss) per common share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.35

 

$

0.35

 

$

1.10

 

$

0.15

 

Discontinued operations

 

 

 

 

(0.15

)

Diluted income per common share

 

$

0.35

 

$

0.35

 

$

1.10

 

$

 

 

 

 

(percentage of sales)

 

Gross profit margin

 

25.1

%

25.4

%

25.4

%

25.7

%

Operating and selling expenses

 

18.4

%

18.9

%

17.8

%

18.3

%

General and administrative expenses

 

4.2

%

4.2

%

4.0

%

4.0

%

Other operating (income) expense, net

 

(0.1

)%

%

%

2.5

%

Operating profit margin

 

2.6

%

2.3

%

3.6

%

0.9

%

 

Sales for the second quarter of 2007 increased 4.5% to $2,132.4 million from $2,041.0 million for the second quarter of 2006. Year-to-date, sales increased 2.3% to $4,568.7 million in 2007 from $4,464.5 million in 2006. The year-over-year sales increases reflect same-location sales growth for both our Contract and Retail segments as well as the impact of new stores. For more information about our segment results, see the discussion of segment results below.

Gross profit margin declined 0.3% of sales to 25.1% of sales for the second quarter of 2007 compared to 25.4% of sales in the previous year. Gross profit margin declined 0.3% of sales to 25.4% of sales for the first six months of 2007 compared to 25.7% of sales in the previous year. The gross profit margin decreases reflect lower gross margins in our Contract segment partially offset by improved gross margins in our Retail segment.

Operating and selling expenses decreased by 0.5% of sales to 18.4% of sales in the second quarter of 2007 from 18.9% of sales a year earlier. Year-to-date, operating and selling expenses decreased by 0.5% of sales to 17.8% of sales in 2007 from 18.3% of sales a year earlier. The improvements in operating and selling expenses as a percent of sales were primarily the result of reduced occupancy and advertising expenses in the Retail segment and a shift of expense to general and administrative in the Contract segment.

General and administrative expenses were 4.2% of sales for the second quarter of 2007 and 4.2% of sales for the second quarter of 2006. General and administrative expenses were 4.0% of sales for the first six months of 2007 and 4.0% of sales for the first six months of 2006. General and administrative expenses as a percent of sales reflect a shift in expense from operating and selling in the Contract segment and increased incentive compensation expense offset by lower legacy-related costs.

Other operating (income) expense, net includes dividends earned on our investment in affiliates of Boise Cascade, L.L.C., which were $1.4 million and $3.0 million for the second quarter and first six months of 2007, respectively, and $1.4 million and $2.9 million for the second quarter and first six months of 2006, respectively. In the second quarter of 2006, the reserve related to the closure of the 109 underperforming retail stores was reduced due to favorable negotiations with lessors and sub-tenants which resulted in other

25




operating income of $9.0 million. Also in the second quarter of 2006, expenses of $10.9 million, primarily related to the headquarters consolidation, were included in Other operating (income) expense, net. In the first six months of 2006, we reported $113.3 million of expense in Other operating (income) expense, net which included $89.6 million related to the 109 domestic store closures and $26.6 million primarily related to the headquarters consolidation.

Interest expense was $30.0 million in the second quarter of 2007 versus $30.2 million for the prior year. Year-to-date, interest expense was $60.1 million in 2007 and $61.7 million in 2006. Interest expense includes interest related to the timber securitization notes of approximately $20.1 million for the second quarters of 2007 and 2006 and $40.2 million for the first six months of 2007 and 2006. The interest expense associated with the timber securitization notes is offset by interest income earned on the timber notes receivable of approximately $20.6 million for the second quarters of 2007 and 2006 and $41.2 million for the first six months of 2007 and 2006. The interest income on the timber notes receivable is included in interest income and is not netted against the related interest expense in our Consolidated Statements of Income (Loss).

Excluding the interest income earned on the timber notes receivable, interest income was $1.2 million and $1.5 million for the quarters ended June 30, 2007 and July 1, 2006, respectively, and $3.6 million and $2.0 million for the six months ended June 30, 2007 and July 1, 2006, respectively.

Other income (expense), net (non-operating) was ($2.2) million and $6.7 million for the second quarters of 2007 and 2006, respectively, and ($5.7) million and $4.6 million for the first six months of 2007 and 2006, respectively. During the second quarter of 2006, we reduced a portion of the liability related to the Additional Consideration Agreement that was entered into in connection with the sale of the paper, forest products and timberland assets, which resulted in a credit to Other income (expense), net (non-operating) of $9.2 million. Other income (expense), net (non-operating) also includes costs related to the receivable securitization program, which amounted to ($2.6) million and ($2.7) million for the second quarters of 2007 and 2006, respectively, and ($5.3) million and ($5.2) million for the first six months of 2007 and 2006, respectively.

Our effective tax rate attributable to continuing operations for the second quarter of 2007 was 39.0% compared to 38.2% for the comparable period of 2006. Year-to-date, our effective tax rate attributable to continuing operations was 39.0% in 2007 compared to 38.3% in 2006. Income taxes for both periods were affected by the impact of state income taxes and non-deductible expenses and the mix of domestic and foreign sources of income.

As a result of the foregoing factors, net income for the second quarter of 2007 was $27.4 million, or $0.35 per diluted share, compared with a net income of $27.4 million, or $0.35 per diluted share, for the second quarter of 2006. For the second quarter of 2006, excluding the after-tax effect of the store closures, our headquarters consolidation and the Additional Consideration Agreement adjustment, net income was $23.0 million, or $0.29 per diluted share. Net income for the first six months of 2007 was $86.0 million, or $1.10 per diluted share, compared with net income of $2.3 million, or $0.00 per diluted share, for the first six months of 2006. For the first six months of 2007, excluding the after-tax effect of a loss from the sale of our Contract operations in Mexico to our joint venture in Mexico, net income was $87.1 million, or $1.12 per diluted share. For the first six months of 2006, excluding the after-tax effect of the store closures, our headquarters consolidation, the Additional Consideration Agreement adjustment and the loss from discontinued operations, net income was $78.6 million, or $1.04 per diluted share.

26




OfficeMax, Contract
($ in millions)

 

 

Quarter Ended

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

June 30,
2007

 

July 1,
2006

 

Sales

 

$

1,197.2

 

$

1,146.7

 

$

2,461.7

 

$

2,377.5

 

Segment income

 

$

41.0

 

$

44.4

 

$

100.9

 

$

111.5

 

Sales by Product Line

 

 

 

 

 

 

 

 

 

Office supplies and paper

 

$

659.5

 

$

613.2

 

$

1,371.5

 

$

1,283.5

 

Technology products

 

$

386.8

 

$

385.9

 

$

795.7

 

$

789.0

 

Office furniture

 

$

150.9

 

$

147.6

 

$

294.5

 

$

305.0

 

Sales by Geography

 

 

 

 

 

 

 

 

 

United States

 

$

886.4

 

$

867.1

 

$

1,829.4

 

$

1,784.6

 

International

 

$

310.8

 

$

279.6

 

$

632.3

 

$

592.9

 

Sales growth

 

4.4

%

0.8

%

3.5

%

5.1

%

Same-location sales growth

 

4.3

%

(0.2

)%

3.5

%

%

 

 

 

(percentage of sales)

 

Gross profit margin

 

21.4

%

22.1

%

21.8

%

22.7

%

Operating expenses

 

18.0

%

18.2

%

17.7

%

18.0

%

Operating profit margin

 

3.4

%

3.9

%

4.1

%

4.7

%

 

For the second quarter of 2007, Contract segment sales were $1,197.2 million, up 4.4% from $1,146.7 million for the second quarter of 2006. For the first six months of 2007, Contract segment sales were $2,461.7 million, up 3.5% from $2,377.5 million for the first six months of 2006. In local currencies, sales increased 2.9% and 1.8%, year-over-year during the second quarter and first six months of 2007, respectively. The sales growth was realized in both the United States and International operations, primarily in large corporate accounts.

Contract segment gross profit margin decreased 0.7% of sales to 21.4% of sales for the second quarter of 2007. Contract segment gross profit margin decreased 0.9% of sales to 21.8% of sales for the first six months of 2007. The decreases in gross profit margin were primarily due to the continued impact of new and renewing accounts with lower gross margin rates and the impact of paper price increases, which were not successfully passed on to our customers.

Operating expenses for the Contract segment were 18.0% of sales for the second quarter of 2007, down from 18.2% of sales for the second quarter of 2006. Operating expenses for the Contract segment were 17.7% of sales for the first six months of 2007, down from 18.0% in the prior year. The year-over-year improvements in operating expenses as a percentage of sales were the result of targeted cost controls, particularly in the international business, and the reorganization of the Contract segment that we began in the fourth quarter of 2006 and completed in the second quarter of 2007. The cost savings were partially offset by a temporary increase in sales compensation incurred during the first quarter of 2007 with the transition to a new commission structure.

Contract segment income decreased to $41.0 million for the second quarter of 2007, or 3.4% of sales, compared to $44.4 million, or 3.9% of sales, for 2006. Contract segment income decreased to $100.9 million for the first six months of 2007, or 4.1% of sales, compared to $111.5 million, or 4.7% of sales, for 2006. The year-over-year decreases in Contract segment income were primarily the result of the decrease in gross profit margin.

27




OfficeMax, Retail
($ in millions)

 

 

Quarter Ended

 

Six Months Ended

 

 

 

June 30,
2007

 

July 1,
2006

 

June 30,
2007

 

July 1,
2006

 

Sales

 

 

$

935.3

 

 

$

894.2

 

$

2,107.0

 

$

2,087.0

 

Segment income (loss)

 

 

$

24.7

 

 

$

27.2

 

$

89.3

 

$

(10.8

)

Sales by Product Line

 

 

 

 

 

 

 

 

 

 

 

Office supplies and paper

 

 

$

355.2

 

 

$

344.7

 

$

793.5

 

$

791.7

 

Technology products

 

 

$

493.8

 

 

$

464.8

 

$

1,122.8

 

$

1,093.5

 

Office furniture

 

 

$

86.3

 

 

$

84.7

 

$

190.7

 

$

201.8

 

Sales by Geography

 

 

 

 

 

 

 

 

 

 

 

United States

 

 

$

884.3

 

 

$

853.0

 

$

1,997.9

 

$

1,997.5

 

International

 

 

$

51.0

 

 

$

41.2

 

$

109.1

 

$

89.5

 

Sales growth

 

 

4.6

%

 

(6.2

)%

1.0

%

(3.0

)%

Same-location sales growth

 

 

1.6

%

 

(0.9

)%

1.0

%

0.4

%

 

 

 

(percentage of sales)

 

Gross profit margin

 

29.9

%

29.7

%

29.6

%

29.1

%

Operating expenses

 

27.3

%

26.7

%

25.4

%

29.6

%

Operating profit margin

 

2.6

%

3.0

%

4.2

%

(0.5

)%

 

Retail segment sales were $935.3 million for the second quarter of 2007 compared to $894.2 million for the second quarter of 2006. Retail segment same-location sales increased 1.6% year-over-year. Adjusted for our initiative to eliminate mail-in-rebates and to provide instant rebates in lieu of national vendor sponsored mail-in-rebates, same-location sales increased approximately 2.7% year-over-year during the second quarter. During the second quarter of 2007, we opened four new retail stores in the U.S. and five new stores in Mexico. During the second quarter of 2006, we opened six new domestic stores and two new stores in Mexico.

Retail segment sales were $2,107.0 million for the first six months of 2007 compared to $2,087.0 million for the first six months of 2007. Retail segment same-location sales increased 1.0% year-over-year. Adjusted for our initiative to eliminate mail-in-rebates and to provide instant rebates in lieu of national vendor sponsored mail-in-rebates, same-location sales increased approximately 2.5% year-over-year. During the first six months of 2007, we opened nine new retail stores in the U.S. and nine new stores in Mexico. During the first six months of 2006, we opened nine new retail stores in the U.S. and five new stores in Mexico.

Retail segment gross margin increased 0.2% of sales to 29.9% of sales for the second quarter of 2007, from 29.7% of sales for the comparable period of 2006. Retail segment gross margin increased 0.5% of sales to 29.6% of sales for the first six months of 2007, from 29.1% of sales for the comparable period of 2006. The gross margin improvements were primarily due to increased vendor funding partially offset by prior year physical inventory gains.

Retail segment operating expenses were 27.3% of sales for the second quarter of 2007 compared to 26.7% for the second quarter of 2006. Excluding the impact of the adjustment to the store closing charges, Retail segment operating expenses were 27.7% of sales for the second quarter of 2006. Operating expenses as a percent of sales for the second quarter of 2007 benefited from reduced occupancy and advertising costs, partially offset by an increase in allocated gen