10-K 1 d407819d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-K

 

 

Annual Report Pursuant to Sections 13 or 15(d)

of the Securities Exchange Act of 1934

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 29, 2012 December 29, 2012

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

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered
Common Stock, $2.50 par value                  
American & Foreign Power Company Inc.
       Debentures, 5% Series due 2030
 

New York Stock Exchange

New York Stock Exchange

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No    ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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 “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

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

The aggregate market value of the voting common stock held by nonaffiliates of the registrant, computed by reference to the price at which the common stock was sold as of the close of business on June 29, 2012, was $431,736,474. Registrant does not have any nonvoting common equity securities.

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

 

Class

 

Shares Outstanding as of February 8, 2013

Common Stock, $2.50 par value   86,884,058

Document incorporated by reference

Portions of the registrant’s proxy statement relating to its 2013 annual meeting of shareholders to be held on April 29, 2013 (“OfficeMax Incorporated’s proxy statement”) are incorporated by reference into Part III of this Form 10-K.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I   
Item 1.    Business      1   
Item 1A.    Risk Factors      5   
Item 1B.    Unresolved Staff Comments      9   
Item 2.    Properties      10   
Item 3.    Legal Proceedings      11   
Item 4.    Mine Safety Disclosures      11   
   Executive Officers of the Registrant      12   
PART II   
Item 5.   

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     14   
Item 6.    Selected Financial Data      16   
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      19   
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk      44   
Item 8.    Financial Statements and Supplementary Data      45   
Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure      90   
Item 9A.    Controls and Procedures      90   
Item 9B.    Other Information      90   
PART III   
Item 10.    Directors, Executive Officers and Corporate Governance      91   
Item 11.    Executive Compensation      91   
Item 12.   

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     91   
Item 13.    Certain Relationships and Related Transactions, and Director Independence      92   
Item 14.    Principal Accountant Fees and Services      92   
PART IV   
Item 15.    Exhibits, Financial Statement Schedules      93   
   Signatures      94   
   Index to Exhibits      96   


Table of Contents

PART I

 

ITEM 1.    BUSINESS

As used in this Annual Report on Form 10-K for the fiscal year ended December 29, 2012, the terms “OfficeMax,” the “Company,” “we” and “our” refer to OfficeMax Incorporated and its consolidated subsidiaries and predecessors. Our Securities and Exchange Commission (“SEC”) filings, which include this Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all related amendments to those reports, are available free of charge on our website at investor.officemax.com by clicking on “SEC filings.” Our SEC filings are available as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

General Overview

OfficeMax is a leader in both business-to-business and retail office products distribution. We provide 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 served by approximately 29,000 associates through direct sales, catalogs, the Internet and retail stores located throughout the United States, Canada, Australia, New Zealand, Mexico, the U.S. Virgin Islands and Puerto Rico. Our common stock trades on the New York Stock Exchange under the ticker symbol OMX, and our corporate headquarters is in Naperville, Illinois.

OfficeMax Incorporated (formerly Boise Cascade Corporation) was organized as Boise Payette Lumber Company of Delaware, a Delaware corporation, in 1931 as a successor to an Idaho corporation formed in 1913. In 1957, the Company’s name was changed to Boise Cascade Corporation. On December 9, 2003, Boise Cascade Corporation acquired 100% of the voting securities of OfficeMax, Inc. That acquisition more than doubled the size of our office products distribution business and expanded that business into the U.S. retail channel. In connection with the sale of our paper, forest products and timberland assets described below, the Company’s name was changed from Boise Cascade Corporation to OfficeMax Incorporated, and the names of our office products segments were changed from Boise Office Solutions, Contract and Boise Office Solutions, Retail to OfficeMax, Contract and OfficeMax, Retail. The Boise Cascade Corporation and Boise Office Solutions names were used in documents furnished to or filed with the SEC prior to the sale of our paper, forest products and timberland assets.

On October 29, 2004, we sold our paper, forest products and timberland assets to affiliates of Boise Cascade, L.L.C., a new company formed by Madison Dearborn Partners LLC (the “Sale”). With the Sale, we completed the Company’s transition, begun in the mid-1990s, from a predominately commodity manufacturing-based company to an independent office products distribution company. On October 29, 2004, as part of the Sale, we invested $175 million in the securities of affiliates of Boise Cascade, L.L.C. Due to restructurings conducted by those affiliates, our investment is currently in Boise Cascade Holdings, L.L.C. (the “Boise Investment”).

The accompanying 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.

On February 20, 2013, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Office Depot, Inc. and certain other parties. In accordance with the Merger Agreement, each share of OfficeMax Incorporated common stock issued and outstanding immediately prior to the Second Effective Time (as defined in the Merger Agreement), other than shares to be cancelled pursuant to the terms of the Merger Agreement, shall be converted into the right to receive 2.69 shares of Office Depot, Inc. common stock, together with cash in lieu of fractional shares, if any, and unpaid dividends and distributions, if any.

 

1


Table of Contents

The completion of the proposed merger is subject to various customary conditions, including among others (i) shareholder approval by both companies, (ii) expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, and (iii) effectiveness of a registration statement registering Office Depot, Inc. common stock.

The Merger Agreement contains certain termination rights for both parties, and further provides for the payment of fees and expenses upon termination under specified circumstances. The proposed merger is expected to be completed by December 31, 2013.

For additional information relating to the proposed merger, please see our Form 8-K filed on February 22, 2013.

Fiscal Year

The Company’s fiscal year-end is the last Saturday in December. Fiscal year 2012 ended on December 29, 2012, fiscal year 2011 ended on December 31, 2011, and fiscal year 2010 ended on December 25, 2010. Due primarily to statutory requirements, the Company’s international businesses maintain calendar years with December 31 year-ends, with the exception of, Grupo OfficeMax S. de R.L. de C.V. (“Grupo OfficeMax”), our majority-owned joint-venture in Mexico, for which the fiscal year-end is the last Saturday in December beginning with the 2012 fiscal year. Grupo OfficeMax reported one month in arrears in 2011 and 2010. This practice was discontinued in 2012, resulting in fiscal year 2012 including 13 months for Grupo OfficeMax. This change in accounting policy did not have a material impact on the Company’s financial statements, and, therefore, prior year’s amounts have not been restated. Due to the use of a fiscal year that does not agree to a calendar month end, fiscal year 2011 included 53 weeks for our U.S. businesses. Fiscal years 2012 and 2010 included 52 weeks for our U.S. businesses.

Segments

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. We present information pertaining to each of our segments and the geographic areas in which they operate in Note 14, “Segment Information,” of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.

Contract

We distribute a broad line of items for the office, including office supplies and paper, technology products and solutions, office furniture, print and document services and facilities products through our Contract segment. Contract sells directly to large corporate and government offices, as well as to small and medium-sized offices and consumers in the United States, Canada, Australia, New Zealand and Puerto Rico. This segment markets and sells through field salespeople, outbound telesales, catalogs, the Internet and, primarily in foreign markets, through office products stores. The majority of the products sold by this segment are purchased from outside manufacturers or from industry wholesalers. We also source substantially all of our private label products direct from manufacturers. We purchase office papers primarily from Boise White Paper, L.L.C., under a paper supply contract entered into on June 25, 2011. (See Note 15, “Commitments and Guarantees,” of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K for additional information related to the paper supply contract.)

As of the end of the year, Contract operated 40 distribution centers in the U.S., Puerto Rico, Canada, Australia and New Zealand as well as four customer service and outbound telesales centers in the U.S. Contract also operated 44 office products stores in Canada, Hawaii, Australia and New Zealand.

Contract sales were $3.6 billion for each of 2012, 2011 and 2010.

 

2


Table of Contents

Retail

Retail is a retail distributor of office supplies and paper, print and document services, technology products and solutions, office furniture and facilities products. 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 products 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 Grupo OfficeMax. The majority of the products sold by this segment are purchased from outside manufacturers or from industry wholesalers. We also source substantially all of our private label products direct from manufacturers. As mentioned above, we purchase office papers primarily from Boise White Paper, L.L.C., under a paper supply contract entered into on June 25, 2011. (See Note 15, “Commitments and Guarantees,” of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K for additional information related to the paper supply contract.)

As of the end of the year, our Retail segment operated 941 stores in the U.S., Puerto Rico, the U.S. Virgin Islands, and Mexico, three large distribution centers in the U.S., and one small distribution center in Mexico. Each store offers approximately 11,000 stock keeping units (SKUs) of name-brand and OfficeMax private-branded merchandise and a variety of business services targeted at serving the small business customer, including OfficeMax ImPress. In addition to our in-store ImPress capabilities, our Retail segment operated six OfficeMax ImPress print on demand facilities with enhanced fulfillment capabilities as of the end of the year. These 8,000 square foot operations are located within some of our Contract distribution centers, and serve the print and document needs of our large contract customers in addition to supporting our retail stores by providing services that cannot be deployed at every retail store.

Retail sales were $3.3 billion for 2012 and $3.5 billion for each of 2011 and 2010.

Competition

Domestic and international office products markets are highly and increasingly competitive. Customers have many options when purchasing office supplies and paper, print and document services, technology products and solutions, office furniture and facilities products. We compete with contract stationers, office supply superstores including Staples and Office Depot, mass merchandisers such as Wal-Mart and Target, wholesale clubs such as Costco, computer and electronics superstores such as Best Buy, Internet merchandisers such as Amazon.com, direct-mail distributors, discount retailers, drugstores and supermarkets, as well as the direct marketing efforts of manufacturers, including some of our suppliers. The other large office supply superstores have increased their presence in close proximity to our stores in recent years and are expected to continue to do so in the future. In addition, many of our competitors have expanded their office products assortment, and we expect they will continue to do so. We anticipate increasing competition from our two domestic office supply superstore competitors and various other competitors for print-for-pay and related services. Increased competition in the office products markets, together with increased advertising, has heightened price awareness among end-users. Such heightened price awareness has led to margin pressure on office products and impacted the results of both our Retail and Contract segments. In addition to price, competition is also based on customer service, the quality and breadth of product selection and convenient locations. Some of our competitors are larger than us and have greater financial resources, which affords them greater purchasing power, increased financial flexibility and more capital resources for expansion and improvement, which may enable them to compete more effectively.

We believe our excellent customer service and the efficiency and convenience for our customers of our combined contract and retail distribution channels gives our Contract segment a competitive advantage among business-to-business office products distributors. Our ability to network our distribution centers into an integrated system enables us to serve large national accounts that rely on us to deliver consistent products, prices and services to multiple locations, and to meet the needs of medium and small businesses at a competitive cost.

 

3


Table of Contents

We believe our Retail segment competes favorably based on the quality of our customer service, our innovative store formats, the breadth and depth of our merchandise offering and our everyday low prices, as well as our specialized service offerings, including OfficeMax ImPress, and our ability to create office product merchandise solutions for other retailers to incorporate into their stores.

Seasonal Influences

The Company’s business is seasonal, with Retail showing a more pronounced seasonal trend than Contract. Sales in the second quarter 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.

Environmental Matters

Our discussion of environmental matters is presented under the caption “Environmental” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K. In addition, certain environmental matters are discussed in Note 16, “Legal Proceedings and Contingencies,” of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.

Capital Investment

Information concerning our capital expenditures is presented under the caption “Investment Activities” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K.

Acquisitions and Divestitures

We engage in acquisition and divestiture discussions with other companies and make acquisitions and divestitures from time to time. It is our policy to review our operations periodically and to dispose of assets that do not meet our criteria for return on investment.

Geographic Areas

Our discussion of financial information by geographic area is presented in Note 14, “Segment Information,” of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.

Identification of Executive Officers

Information with respect to our executive officers is set forth as the last item of Part I of this Form 10-K.

Employees

On December 29, 2012, we had approximately 29,000 employees, including approximately 10,000 part-time employees.

 

4


Table of Contents
ITEM 1A. RISK FACTORS

Cautionary and Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements. Statements that are not historical or current facts, including statements about our expectations, anticipated financial results and future business prospects, are forward-looking statements. You can identify these statements by our use of words such as “may,” “expect,” “believe,” “should,” “plan,” “anticipate” and other similar expressions. You can find examples of these statements throughout this report, including “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K. We cannot guarantee that our actual results will be consistent with the forward-looking statements we make in this report. In addition, forward-looking statements could be affected by the planned merger with Office Depot, including disruption from the transaction making it more difficult to maintain relationships with customers, employees or suppliers; unexpected costs or unexpected liabilities that may arise from the transaction, whether or not consummated; the inability to retain key personnel; future regulatory or legislative actions that could adversely affect OfficeMax and Office Depot; and business plans of the customers and suppliers of OfficeMax and Office Depot; and events or occurrences that may result in the merger not consummating. We have listed below some of the inherent risks and uncertainties that could cause our actual results to differ materially from those we project. We do not assume an obligation to update any forward-looking statement.

Current macroeconomic conditions have had and may continue to have an impact on our business and our financial condition. Economic conditions, both domestically and abroad, directly influence our operating results. Current and future economic conditions that affect consumer and business spending, including the level of unemployment, energy costs, inflation, availability of credit and the financial condition and growth prospects of our customers may continue to adversely affect our business and the results of our operations. We may continue to face challenges if macroeconomic conditions do not improve or if they worsen.

The impact of the weak economy on our customers could adversely impact the overall demand for our products and services, which would have a negative effect on our revenues, as well as impact our customers’ ability to pay their obligations, which could have a negative effect on our bad debt expense and cash flows.

In addition, we sponsor noncontributory defined benefit pension plans covering certain terminated employees, vested employees, retirees, and some active employees (the “Pension Plans”). The Pension Plans are under-funded and we may be required to make contributions in subsequent years in order to maintain required funding levels, which would have an adverse impact on our cash flows and our financial results. Additional future contributions of common stock or cash to the Pension Plans, financial market performance and Internal Revenue Service (“IRS”) funding requirements could materially change these expected payments.

Our business may be adversely affected by the actions of and risks associated with our third-party vendors. We use and resell many manufacturers’ branded items and services and are therefore dependent on the availability and pricing of key products and services including ink, toner, paper and technology products. As a reseller, we cannot control the supply, design, function, cost or vendor-required conditions of sale of many of the products we offer for sale. Disruptions in the availability of these products or the products and services we consume may adversely affect our sales and result in customer dissatisfaction. Further, we cannot control the cost of manufacturers’ products, and cost increases must either be passed along to our customers or will result in erosion of our earnings. Failure to identify desirable products and make them available to our customers when desired and at attractive prices could have an adverse effect on our business and our results of operations. In addition, a material interruption in service by the carriers that ship goods within our supply chain may adversely affect our sales. Many of our vendors are small or medium sized businesses which are impacted by current macroeconomic conditions, both in the U.S. and Asia. We may have no warning before a vendor fails, which may have an adverse effect on our business and results of operations.

Our product offering also includes many of our own proprietary branded products. While we have focused on the quality of our proprietary branded products, we rely on third party manufacturers for these products. Such

 

5


Table of Contents

third-party manufacturers may prove to be unreliable, the quality of our globally sourced products may not meet our expectations, such products may not meet applicable regulatory requirements which may require us to recall those products, or such products may infringe upon the intellectual property rights of third parties. Furthermore, economic and political conditions in areas of the world where we source such products may adversely affect the availability and cost of such products. In addition, our proprietary branded products compete with other manufacturers’ branded items that we offer. As we continue to increase the number and types of proprietary branded products that we sell, we may adversely affect our relationships with our vendors, who may decide to reduce their product offerings through OfficeMax and increase their product offerings through our competitors. Finally, if any of our customers are harmed by our proprietary branded products, they may bring product liability and other claims against us. Any of these circumstances could have an adverse effect on our business and financial performance.

Intense competition in our markets could harm our ability to maintain profitability. Domestic and international office products markets are highly and increasingly competitive. Customers have many options when purchasing office supplies and paper, print and document services, technology products and solutions, office furniture and facilities products. We compete with contract stationers, office supply superstores including Staples and Office Depot, mass merchandisers such as Wal-Mart and Target, wholesale clubs such as Costco, computer and electronics superstores such as Best Buy, Internet merchandisers such as Amazon.com, direct-mail distributors, discount retailers, drugstores and supermarkets. In addition, an increasing number of manufacturers of computer hardware, software and peripherals, including some of our suppliers, have expanded their own direct marketing efforts. The other large office supply superstores have increased their presence in close proximity to our stores in recent years and are expected to continue to do so in the future. In addition, many of our competitors have expanded their office products assortment, and we expect they will continue to do so. We anticipate increasing competition from our two domestic office supply superstore competitors and various other competitors for print-for-pay and related services. Increased competition in the office products markets, together with increased advertising, has heightened price awareness among end-users. Such heightened price awareness has led to margin pressure on office products and impacted the results of both our Retail and Contract segments. In addition to price, competition is also based on customer service, differentiation from competitors, the quality and breadth of product selection and convenient locations. Some of our competitors are larger than us and have greater financial resources, which afford them greater purchasing power, increased financial flexibility and more capital resources for expansion and improvement, which may enable them to compete more effectively.

We may be unable to generate additional sales through new distribution opportunities or replace lost sales. Our long-term success depends, in part, on our ability to expand our product sales in a manner that achieves appropriate sales and profit levels. This could include selling our products through other retailers, opening new stores or entering into novel distribution arrangements. We have also increased our investments and resources in selling our service offerings and through our digital channel. Failure to increase our sales and further utilize our core assets could result in company restructurings and associated charges relating to severance and impairment of assets.

When we sell our products through other retailers we rely on those retailers to provide an appropriate customer experience and our sales are dependent on the foot traffic and sales of the retail partner. Although we may have influence over the appearance of the area within the store where our products appear, we have no control over store marketing, staffing or any other aspects of our retail partners’ operations.

Although we frequently test new store designs, formats, sizes and market areas, if we are unable to generate the required sales or profit levels, as a result of macroeconomic or operational challenges, we may not open new stores. Similarly, we will only continue to operate existing stores if they meet required sales or profit levels. In the current macroeconomic environment, the results of our existing stores are impacted not only by a reduced sales environment, but by a number of things that are not within our control, such as loss of traffic resulting from store closures by other significant retailers in the stores’ immediate vicinities. If our stores’ performance suffers, we may be subject to impairment charges. In addition, if we are required to close stores, we will incur additional costs. These items could adversely affect our financial results.

 

6


Table of Contents

Our international operations expose us to the unique risks inherent in foreign operations. Our foreign operations encounter risks similar to those faced by our U.S. operations, as well as risks inherent in foreign operations, such as local customs and regulatory constraints, foreign trade policies, competitive conditions, foreign currency fluctuations and unstable political and economic conditions.

We may be unable to attract and retain qualified associates. We attempt to attract and retain an appropriate level of personnel in both field operations and corporate functions. We face many external risks and internal factors in meeting our labor needs, including competition for qualified personnel, prevailing wage rates, as well as rising employee benefit costs, including insurance costs and compensation programs. Failure to attract and retain sufficient qualified personnel could interfere with our ability to implement our strategies and adequately provide services to customers.

We are more leveraged than some of our competitors, which could adversely affect our business plans. A relatively greater portion of our cash flow is used to service financial obligations including leases and to satisfy Pension Plans funding obligations (discussed previously). This reduces the funds we have available for working capital, capital expenditures, acquisitions, new stores, store remodels and other purposes. Similarly, our relatively greater leverage increases our vulnerability to, and limits our flexibility in planning for, adverse economic and industry conditions and creates other competitive disadvantages compared with other companies with relatively less leverage.

Compromises of our information security affecting customer or associate data may adversely affect our business. Through our sales and marketing activities, we collect and store certain personal information that our customers provide to purchase products or services, enroll in promotional programs, register on our website, or otherwise communicate and interact with us. We also gather and retain information about our associates in the normal course of business. We may share information about such persons with vendors that assist with certain aspects of our business. Despite instituted safeguards for the protection of such information, we cannot be certain that all of our systems are entirely free from vulnerability to attack. Computer hackers may attempt to penetrate our networks or our vendors’ network security and, if successful, misappropriate confidential customer or business information. In addition, a Company employee, contractor or other third party with whom we do business may attempt to circumvent our security measures in order to obtain such information or inadvertently cause a breach involving such information. Loss of customer or business information could disrupt our operations and expose us to claims from customers, financial institutions, payment card associations and other persons, which could have a material adverse effect on our business, financial condition and results of operations.

We cannot ensure systems and technology will be fully integrated or updated. We cannot ensure our systems and technology will be successfully updated. We have plans to continue to update the financial reporting platform as well as other technology and systems. We will be implementing ongoing upgrades over the next several years which is a complicated and difficult endeavor. Failure to successfully complete these upgrades could have an adverse impact on our business and results of operations. Over the last several years, we have partially integrated the systems of our Contract and Retail businesses. If we do not ultimately fully integrate our systems, it may constrain our ability to provide the level of service our customers demand which could thereby cause us to operate inefficiently. In addition, if we are unable to continually add software and hardware, effectively manage and upgrade our systems and network infrastructure and develop disaster recovery plans, our business could be disrupted, thus subjecting us to liability and potentially harming our reputation. Any disruption to the Internet or our technology infrastructure, including a disruption affecting our Web sites and information systems, may cause a decline in our customer satisfaction, jeopardize accurate financial reporting, impact our sales volumes or result in increased costs.

We retained responsibility for certain liabilities of the sold paper, forest products and timberland businesses. In connection with the Sale, we agreed to assume responsibility for certain liabilities of the businesses we sold. These obligations include liabilities related to environmental, health and safety, tax, litigation and employee benefit matters. Some of these retained liabilities could turn out to be significant, which could

 

7


Table of Contents

have an adverse effect on our results of operations. Our exposure to these liabilities could harm our ability to compete with other office products distributors, who would not typically be subject to similar liabilities. In particular, we are exposed to risks arising from our ability to meet the funding obligations of our Pension Plans and withdrawal requests from participants pursuant to legacy benefit plans, each of which could require cash to be redirected and adversely impact our cash flows and financial results.

Our investment in Boise Cascade Holdings, L.L.C. subjects us to the risks associated with the building products industry and the U.S. housing market. When we sold our paper, forest products and timberland assets, we purchased an equity interest in Boise Cascade Holdings, L.L.C. This continuing interest subjects us to market risks associated with the building products industry. This industry is subject to cyclical market pressures. Historical prices for products have been volatile, and industry participants have limited influence over the timing and extent of price changes. The relationship between supply and demand in this industry significantly affects product pricing. Demand for building products is driven mainly by factors such as new construction and remodeling rates, business and consumer credit availability, interest rates and weather. The supply of building products fluctuates based on manufacturing capacity. Excess manufacturing capacity, both domestically and abroad, can result in significant variations in product prices. Our ability to realize the carrying value of our equity interest in Boise Cascade Holdings, L.L.C. is dependent upon many factors, including the operating performance of Boise Cascade, L.L.C. and other market factors that may not be specific to Boise Cascade Holdings, L.L.C.

Our obligation to purchase paper from Boise White Paper L.L.C. concentrates our supply of an important product primarily with a single supplier. When we sold our paper, forest products and timberland assets, we agreed to purchase substantially all of our requirements of paper for resale from Boise Cascade, L.L.C., or its affiliates or assigns, currently Boise White Paper L.L.C., on a long term basis. We entered into a new Paper Purchase Agreement which we entered into on June 25, 2011, which has an initial term that expires at the end of 2017. The purchase requirements diminish under this new agreement starting in 2013, and we have greater flexibility to purchase paper from other paper suppliers. The price we pay for this paper is market based and therefore subject to fluctuations in the supply and demand for the products. In addition, until the restrictions end completely, our purchase obligation limits our ability to take advantage of spot purchase opportunities and exposes us to potential interruptions in supply, which could impact our ability to compete effectively with our competitors, who would not typically be restricted in this way.

We have substantial business operations in states in which the regulatory environment is particularly challenging. Our operations in California and other heavily regulated states with relatively more aggressive enforcement efforts expose us to a particularly challenging regulatory environment, including, without limitation, consumer protection laws, advertising regulations, escheat, and employment and wage and hour regulations. This regulatory environment requires the Company to maintain a heightened compliance effort and exposes us to defense costs, possible fines and penalties, and liability to private parties for monetary recoveries and attorneys’ fees, any of which could have an adverse effect on our business and results of operations.

We are subject to certain legal proceedings that may adversely affect our results of operations and financial condition. We are periodically involved in various legal proceedings, which may involve state and federal governmental inquiries and investigations, employment, tort, consumer litigation and intellectual property litigation. In addition, we may be subject to investigations by regulatory agencies and customers audits. These legal proceedings, investigations and audits could expose us to significant defense costs, fines, penalties, and liability to private parties for monetary recoveries and attorneys’ fees, any of which could have a material adverse effect on our business and results of operations.

Our results may be adversely affected by disruptions or catastrophic events. Unforeseen events, including public health issues and natural disasters such as earthquakes, hurricanes and other adverse weather and climate conditions, whether occurring in the United States or abroad, could disrupt our operations, disrupt the operations of our suppliers or customers, have an adverse impact on consumer spending and confidence levels or result in political or economic instability. Moreover, in the event of a natural disaster or public health issue, we may be

 

8


Table of Contents

required to suspend operations in some or all of our locations, which could have a material adverse effect on our business, financial condition and results of operations. These events could also reduce demand for our products or make it difficult or impossible to receive products from suppliers.

Fluctuations in our effective tax rate may adversely affect our results of operations. We are a multi-national, multi-channel provider of office products and services. As a result, our effective tax rate is derived from a combination of applicable tax rates in the various countries, states and other jurisdictions in which we operate. Our effective tax rate may be lower or higher than our tax rates have been in the past due to numerous factors, including the sources of our income, any agreements we may have with taxing authorities in various jurisdictions and the tax filing positions we take in various jurisdictions.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

9


Table of Contents
ITEM 2. PROPERTIES

The majority of OfficeMax facilities are rented under operating leases. (For more information about our operating leases, see Note 8, “Leases,” of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.) Our properties are in good operating condition and are suitable and adequate for the operations for which they are used. We constantly evaluate the real estate market to determine the best locations for new stores. We analyze our existing stores and markets on a case by case basis. 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. (For more information about facilities closures, see Note 2, “Facilities Closures Reserves, “ of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.)

Our facilities by segment are presented in the following table.

Contract

As of the end of the year, Contract operated 40 distribution centers in 18 states, Puerto Rico, Canada, Australia (including two smaller distribution centers) and New Zealand. The following table sets forth the locations of these facilities.

 

Arizona

     1       Maine      1       Texas      1   

California

     2       Maryland      1       Utah      1   

Colorado

     1       Michigan      1       Washington      1   

Florida

     1       Minnesota      1       Puerto Rico      1   

Georgia

     1       North Carolina      1       Canada      7   

Hawaii

     1       Ohio      1       Australia      10   

Illinois

     1       Pennsylvania      1       New Zealand      3   

Kansas

     1               

Contract also operated 44 office products stores in Hawaii (2), Canada (22), Australia (4) and New Zealand (16) and four customer service and outbound telesales centers in Illinois (2), Oklahoma and Virginia.

Retail

As of the end of the year, Retail operated 941 stores in 47 states, Puerto Rico, the U.S. Virgin Islands and Mexico. The following table sets forth the locations of these facilities.

 

Alabama

     9       Maine      1       Oregon      12   

Alaska

     4       Maryland      1       Pennsylvania      27   

Arizona

     40       Massachusetts      7       Rhode Island      1   

Arkansas

     2       Michigan      38       South Carolina      6   

California

     66       Minnesota      40       South Dakota      4   

Colorado

     27       Mississippi      5       Tennessee      18   

Connecticut

     3       Missouri      28       Texas      69   

Florida

     51       Montana      3       Utah      12   

Georgia

     30       Nebraska      10       Virginia      26   

Hawaii

     8       Nevada      13       Washington      19   

Idaho

     6       New Jersey      2       West Virginia      2   

Illinois

     52       New Mexico      9       Wisconsin      35   

Indiana

     14       New York      28       Wyoming      2   

Iowa

     9       North Carolina      26       Puerto Rico      13   

Kansas

     11       North Dakota      3       U.S. Virgin Islands      2   

Kentucky

     5       Ohio      49       Mexico(a)      90   

Louisiana

     2       Oklahoma      1         

 

10


Table of Contents

 

(a) Locations operated by Grupo OfficeMax.

Retail also operated three large distribution centers in Alabama, Nevada and Pennsylvania; and one small distribution center in Mexico through our joint venture.

 

ITEM 3. LEGAL PROCEEDINGS

Information concerning legal proceedings is set forth in Note 16, “Legal Proceedings and Contingencies,” of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K, and is incorporated herein by reference.

 

ITEM 4. MINE SAFETY DISCLOSURES

None.

 

11


Table of Contents

EXECUTIVE OFFICERS OF THE REGISTRANT

Our executive officers are elected by the Board of Directors and hold office until a successor is chosen or qualified or until their earlier resignation or removal. The following lists our executive officers and gives a brief description of their business experience as of February 25, 2013:

Ravichandra (“Ravi”) K. Saligram, 56, was elected as Chief Executive Officer and President of the Company, as well as a director of the Company, in November 2010. Until his election as Chief Executive Officer and President of the Company, Mr. Saligram had been Executive Vice President, ARAMARK Corporation (“ARAMARK”), a global professional services company, since November 2006, President, ARAMARK International since June 2003, and ARAMARK’s Chief Globalization Officer since June 2009. Mr. Saligram held the position of Senior Vice President, ARAMARK from November 2004 until November 2006. From 1994 until 2002, Mr. Saligram served in various capacities for the InterContinental Hotels Group, a global hospitality company, including as President of Brands & Franchise, North America; Chief Marketing Officer & Managing Director, Global Strategy; President, International; and President, Asia Pacific. Earlier in his career, Mr. Saligram held various general and brand management positions with S. C. Johnson & Son, Inc. in the United States and overseas. Since 2006, he has been a director of Church & Dwight Co., Inc., a consumer and specialty products company.

James Barr IV, 50, was first elected an officer of the Company in November 2011. He has served as executive vice president and chief digital officer since that time. From March 2010 to November 2011, Mr. Barr served as chief executive officer of Barr & Associates, a provider of e-commerce consulting services. Prior to that, from January 2008 to March 2010, he served as president, online for Sears Holdings Corporation, a department store. In this position he held full P&L accountability for multi-channel strategy and online sites such as sears.com and kmart.com. From 1996 to 2008, Mr. Barr held various positions at Microsoft Corporation, a computer software company. He served as Microsoft Corporation’s general manager, e-commerce and marketplaces from 2001 to 2008. In that position he had full business responsibility and led the global business-to-consumer e-commerce strategy.

Bruce H. Besanko, 54, was first elected an officer of the Company in February 2009. Mr. Besanko has served as executive vice president and chief financial officer since that time, and as chief administrative officer since October 2009. Mr. Besanko previously served as executive vice president and chief financial officer of Circuit City Stores, Inc. (“Circuit City”), a leading specialty retailer of consumer electronics and related services, from July 2007 to February 2009. Prior to that, Mr. Besanko served as senior vice president, finance and chief financial officer for The Yankee Candle Company, Inc., a leading designer, manufacturer, wholesaler and retailer of premium scented candles, since April 2005. He also served as vice president, finance for Best Buy Co., Inc., a retailer of consumer electronics, home office products, entertainment software, appliances and related services, from 2002 to 2005. On November 10, 2008, Circuit City and several of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Virginia. Circuit City’s Chapter 11 plan of liquidation was confirmed by the Bankruptcy Court on September 14, 2010. A liquidating trustee is currently liquidating any remaining assets of Circuit City and its subsidiaries, and otherwise administering the liquidation in accordance with the confirmed plan.

Matthew R. Broad, 53, was first elected an officer of the Company in October 2004 and has served as executive vice president, general counsel since that time. Prior to that, Mr. Broad served as associate general counsel for Boise Cascade Corporation.

Larry A. Hartley, 47, was first elected an officer of the Company in February 2005. He has served as senior vice president, supply chain since that time. He served as vice president, logistics from December 2003 until February 2005, when he was promoted to senior vice president, supply chain. Prior to that, Mr. Hartley had served as vice president, logistics for Boise Cascade Corporation since 2001.

 

12


Table of Contents

John C. Kenning, 51, was first elected an officer of the Company on April 3, 2012. He has served as executive vice president and president of contract since that time. From January 2009 until March 2012, Mr. Kenning served as president, North America commercial of ADT Security Services, Inc., a provider of security products and services. In that position he was responsible for North American P&L including $2 billion in revenue and 10,000 employees. Prior to that, from 2006 to January 2009, Mr. Kenning served as senior vice president, global strategic sales and global partners of Nortel Networks, Inc., a telecommunications company.

Ronald Lalla, 54, was first elected an officer of the Company on March 19, 2012. He has served as executive vice president and chief merchandising officer since that time. From April 2008 until March 2011, Mr. Lalla served as chief merchandising officer and chief technology officer of Katz Group Canada Ltd., one of Canada’s leading drug store operators with more than 1,800 drug stores across the country. In that position he was responsible for developing and executing Katz Group’s merchandising and marketing strategy. Prior to that, from January 2003 to January 2008, Mr. Lalla served as executive vice president, global merchandising at Corporate Express Inc., an office supply company, where he was responsible for global merchandising and sourcing strategy. Prior to his time at Corporate Express Inc., he held several leadership positions of increasing responsibility at Kmart Corporation, a mass merchandise retailer.

Michael J. Lewis, 62, was first elected an officer of the Company in May 2011. Mr. Lewis has served as executive vice president and president of retail since that time. From 2010 until early 2011, Mr. Lewis served as global head of a merchandising center for Wal-Mart Stores, Inc. (“Wal-Mart”), an international mass-merchandise retailer, and was responsible for brand management and supply chain and supported all merchandising for Wal-Mart private brands in the grocery and personal care businesses. Prior to that, Mr. Lewis was president of Wal-Mart’s Midwest division from 2005 to 2010, with responsibility for more than 850 Wal-Mart stores and more than 250,000 associates. He also served as president of the retail division of Nash Finch Company, a national, wholesale food distributor, from 2003 to 2005. Prior to that, Mr. Lewis was the president of Conquest Management Corporation, an investment and management consulting firm specializing in growth strategies for major retail and consumer goods companies, from 1995 to 2003.

Deborah A. O’Connor, 50, was first elected an officer of the Company in July 2008. Ms. O’Connor has served as senior vice president, finance and chief accounting officer since that time. Ms. O’Connor previously served as senior vice president and controller of the ServiceMaster Company, a company providing residential and commercial lawn care, landscape maintenance, termite and pest control, home warranty, cleaning and disaster restoration, furniture repair, and home inspection services, from December 1999 to December 2007.

Stephen B. Parsons, 48, was first elected an officer of the Company in July 2011. He has served as executive vice president and chief human resources officer since that time. From February 2008 to July 2011, Mr. Parsons served as senior vice president, human resources and labor relations, of Rite Aid Corporation (“Rite Aid”), a retail drug store chain. In that role, he was responsible for all aspects of human resources and change management, serving 92,000 associates across more than 4,700 stores and 12 distribution centers. From June 2007 to February 2008 he served as group vice president, human resources for Rite Aid. From June 2005 until its acquisition by Rite Aid in June 2007, Mr. Parsons served as senior vice president, human resources, of Brooks Eckerd Pharmacy, North America’s fourth largest retail drug store chain prior to its acquisition by Rite Aid.

 

13


Table of Contents

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed on the New York Stock Exchange (the “Exchange”). The Exchange requires each listed company to make an annual report available to its shareholders. We are making this Form 10-K available to our shareholders in lieu of a separate annual report. The reported high and low sales prices for our common stock, as well as the frequency and amount of dividends paid on such stock, are included in Note 17, “Quarterly Results of Operations (unaudited),” of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K. See the discussion of dividend payment limitations under the caption “Financing Arrangements” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Form 10-K. The approximate number of holders of our common stock, based upon actual record holders on February 8, 2013, was 9,236.

We maintain a corporate governance page on our website that includes key information about our corporate governance initiatives. That information includes our Corporate Governance Guidelines, Code of Ethics and charters for our Audit, Executive Compensation and Governance and Nominating Committees, as well as our Committee of Outside Directors. The corporate governance page can be found at investor.officemax.com by clicking on “Corporate Governance.” You also may obtain copies of these policies, charters and codes by contacting our Investor Relations Department at 263 Shuman Boulevard, Naperville, Illinois 60563, or by telephone at: (630) 864-6800.

Information concerning securities authorized for issuance under our equity compensation plans is included in “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Form 10-K.

Stock Repurchases

Information concerning our stock repurchases during the three months ended December 29, 2012, is presented in the following table.

 

Period

   Total Number
of Shares
Purchased(a)
     Average Price
Paid per Share
     Total Number
of Shares
Purchased as Part
of Publicly
Announced Plans
or Programs
     Maximum Number
of Shares That May Yet
Be Purchased Under
the Plans or Programs
 

September 30 – October 27

     4,133       $ 7.41                   

October 28 – November 24

     15,831         8.00                   

November 25 – December 29

     16         10.00                   
  

 

 

          

Total

     19,980       $ 7.88                   
  

 

 

          

 

(a) All stock was withheld to satisfy minimum statutory tax withholding obligations upon vesting of restricted stock awards.

 

14


Table of Contents

Performance Graph

The following graph compares the five-year cumulative total return (assuming dividend reinvestment) for the Standard & Poor’s SmallCap 600 Index, the Standard & Poor’s 600 Specialty Retail Index and OfficeMax.

 

LOGO

ANNUAL RETURN PERCENTAGE

Years Ending

 

Company\Index Name

   Dec 08      Dec 09      Dec 10      Dec 11      Dec 12  

OfficeMax Incorporated

     –62.75         82.26         32.60         -74.75         105.92   

S&P SmallCap 600 Index

     –34.26         33.53         25.76         0.02         14.09   

S&P 600 Specialty Retail Index

     –36.51         77.65         40.68         2.72         21.12   

INDEXED RETURNS

Years Ending

 

Company\Index Name

   Base Period
Dec 07
     Dec 08      Dec 09      Dec 10      Dec 11      Dec 12  

OfficeMax Incorporated

   $ 100       $ 37.25       $ 67.89       $ 90.01       $ 22.73       $ 46.80   

S&P SmallCap 600 Index

     100         65.74         87.78         110.39         110.41         125.97   

S&P 600 Specialty Retail Index

     100         63.49         112.79         158.67         162.99         197.42   

 

15


Table of Contents
ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth our selected financial data for the years indicated and should be read in conjunction with the disclosures in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.

 

     2012(a)     2011(b)     2010(c)     2009(d)     2008(e)  
     (millions, except per-share amounts)  

Assets:

  

Current assets

   $ 1,984      $ 1,939      $ 2,014      $ 2,021      $ 1,855   

Property and equipment, net

     352        365        397        422        491   

Timber notes receivable

     818        899        899        899        899   

Other

     630        866        769        728        929   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 3,784      $ 4,069      $ 4,079      $ 4,070      $ 4,174   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and shareholders’ equity:

          

Current liabilities

   $ 1,057      $ 1,013      $ 1,044      $ 1,092      $ 1,184   

Long-term debt, less current portion

     226        229        270        275        290   

Non-recourse debt

     735        1,470        1,470        1,470        1,470   

Other

     687        756        645        702        918   

Noncontrolling interest

     45        32        49        28        22   

OfficeMax shareholders’ equity—preferred stock

     27        29        31        36        43   

OfficeMax shareholders’ equity—other

     1,007        540        570        467        247   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 3,784      $ 4,069      $ 4,079      $ 4,070      $ 4,174   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net sales

   $ 6,920      $ 7,121      $ 7,150      $ 7,212      $ 8,267   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to OfficeMax and noncontrolling interest

   $ 421      $ 38      $ 74      $ (1   $ (1,666

Joint venture results attributable to noncontrolling interest

     (4     (3     (3     2        8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to OfficeMax

   $ 417      $ 35      $ 71      $ 1      $ (1,658

Preferred dividends

     (2     (2     (2     (3     (4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to OfficeMax common shareholders

   $ 415      $ 33      $ 69      $ (2   $ (1,662
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income (loss) per common share

   $ 4.79      $ 0.38      $ 0.81      $ (0.03   $ (21.90

Diluted net income (loss) per common share

   $ 4.74      $ 0.38      $ 0.79      $ (0.03   $ (21.90

Cash dividends declared per common share

   $ 0.06      $      $      $      $ 0.45   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See notes on following page.

 

16


Table of Contents

Notes to Selected Financial Data

The company’s fiscal year-end is the last Saturday in December. For our U.S. businesses, there were 53 weeks in 2011 and 52 weeks for all other years presented.

 

  (a) 2012 included the following pre-tax items:

 

   

$11.4 million charge for impairment of fixed assets associated with certain of our retail stores. Our minority partner’s share of this charge of $0.4 million is included in joint venture results attributable to noncontrolling interest.

 

   

$56.4 million charge for accelerated pension expense related to participant settlements.

 

   

$41.0 million charge for costs related to retail store closures in the U.S.

 

   

$6.2 million charge for severance and other costs.

 

   

$670.8 million gain related to an agreement that legally extinguished our non-recourse debt guaranteed by Lehman Brothers Holdings, Inc. (“Lehman”).

 

  (b) 2011 included the following pre-tax items:

 

   

$14.9 million charge for severance and other costs.

 

   

$11.2 million charge for impairment of fixed assets associated with certain of our retail stores in the U.S.

 

   

$5.6 million charge for costs related to retail store closures in the U.S.

 

  (c) 2010 included the following pre-tax items:

 

   

$11.0 million charge for impairment of fixed assets associated with certain of our retail stores in the U.S.

 

   

$13.1 million charge for costs related to retail store closures in the U.S., partially offset by a $0.6 million severance reserve adjustment.

 

   

$9.4 million favorable adjustment of a reserve associated with our legacy building materials manufacturing facility near Elma, Washington due to the sale of the facility’s equipment and the termination of the lease.

 

  (d) 2009 included the following items:

 

   

$17.6 million pre-tax charge for impairment of fixed assets associated with certain of our retail stores in the U.S. and Mexico. Our minority partner’s share of this charge of $1.2 million is included in joint venture results attributable to noncontrolling interest.

 

   

$31.2 million pre-tax charge for costs related to retail store closures in the U.S. and Mexico. Our minority partner’s share of this charge of $0.5 million is included in joint venture results attributable to noncontrolling interest.

 

   

$18.1 million pre-tax charge for severance and other costs.

 

   

$4.4 million pre-tax gain related to interest earned on a tax escrow balance established in a prior period in connection with our legacy Voyageur Panel business.

 

   

$2.6 million pre-tax gain related to the Company’s Boise Investment.

 

   

$14.9 million of income tax benefit from the release of a tax uncertainty reserve upon resolution of an issue under IRS appeal regarding the deductibility of interest on certain of our industrial revenue bonds.

 

17


Table of Contents
  (e) 2008 included the following pre-tax items:

 

   

$1,364.4 million charge for impairment of goodwill, trade names and fixed assets. Our minority partner’s share of this charge of $6.5 million is included in joint venture results attributable to noncontrolling interest.

 

   

$735.8 million charge for non-cash impairment of the timber installment note receivable due from Lehman and $20.4 million of related interest expense.

 

   

$27.9 million charge for severance and costs associated with the termination of certain store and site leases.

 

   

$20.5 million gain related to the Company’s Boise Investment, primarily attributable to the sale of a majority interest in its paper and packaging and newsprint businesses.

 

18


Table of Contents
ITEM 7. MANAGEMENT’S 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 this Form 10-K, including “Cautionary and Forward-Looking Statements.”

Overall Summary

Sales for 2012 were $6,920.4 million, compared to $7,121.2 million for 2011, a decrease of 2.8%. Fiscal year 2011 contained an extra week of sales for our domestic businesses ($86 million), which negatively impacted 2012 sales comparisons. In addition, sales for 2012 were negatively impacted by a change in foreign currency exchange rates ($15 million). After adjusting for the impact of the extra week in 2011, the impact of the change in foreign currency exchange rates and the impact of stores closed and opened during 2011 and 2012, sales in 2012 declined by 0.8% compared to 2011.

Consolidated gross profit margin increased by 0.4 % of sales (40 basis points) to 25.8 % of sales in 2012 compared to 25.4% of sales in 2011, as higher customer margins and lower occupancy expense were partially offset by higher delivery expense.

Operating, selling and general and administrative expenses declined during 2012 due primarily to reduced costs from facility and store closures and the impact of the extra week in 2011, which were partially offset by higher incentive compensation expense. As a percentage of sales, expenses increased slightly as the impact of increased incentive compensation expense was nearly offset by the lower costs from facility closures and the impairment of store assets in 2011.

We reported operating income of $24.3 million in 2012 compared to $86.5 million in 2011. As noted in the discussion and analysis that follows, our operating results were impacted by a number of significant items in both years. These items included charges for the acceleration of pension expense related to participant settlements, asset impairments, store closures and severance. If we eliminate these items, our adjusted operating income for 2012 was $139.2 million compared to an adjusted operating income of $118.2 million for 2011. The reported net income available to OfficeMax common shareholders was $414.7 million, or $4.74 per diluted share, in 2012 compared to $32.8 million, or $0.38 per diluted share, in 2011. If we eliminate the impact of the significant items recorded in operating income discussed above as well as the gain related to an agreement that legally extinguished our non-recourse debt guaranteed by Lehman Brothers Holding, Inc. (“Lehman”) from the applicable periods, and the related income tax effects, our adjusted net income available to OfficeMax common shareholders was $68.5 million, or $0.78 per diluted share, compared to $53.3 million, or $0.61 per diluted share, for 2011. We estimate that the 53rd week added $8 million of operating income and $0.06 of diluted earnings per share in 2011.

On February 20, 2013, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Office Depot, Inc. and certain other parties. In accordance with the Merger Agreement, each share of OfficeMax Incorporated common stock issued and outstanding immediately prior to the Second Effective Time (as defined in the Merger Agreement), other than shares to be cancelled pursuant to the terms of the Merger Agreement, shall be converted into the right to receive 2.69 shares of Office Depot, Inc. common stock, together with cash in lieu of fractional shares, if any, and unpaid dividends and distributions, if any.

The completion of the proposed merger is subject to various customary conditions, including among others (i) shareholder approval by both companies, (ii) expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, and (iii) effectiveness of a registration statement registering Office Depot, Inc. common stock.

 

19


Table of Contents

The Merger Agreement contains certain termination rights for both parties, and further provides for the payment of fees and expenses upon termination under specified circumstances. The proposed merger is expected to be completed by December 31, 2013.

For additional information relating to the proposed merger, please see our Form 8-K filed on February 22, 2013.

Results of Operations, Consolidated

($ in thousands)

 

     2012     2011     2010  

Sales

   $ 6,920,384      $ 7,121,167      $ 7,150,007   

Gross profit

     1,784,457        1,809,180        1,849,652   

Operating, selling and general and administrative expenses

     1,645,245        1,690,967        1,689,130   

Asset impairments

     11,376        11,197        10,979   

Other operating expenses, net

     103,558        20,530        3,077   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     1,760,179        1,722,694        1,703,186   

Operating income

   $ 24,278      $ 86,486      $ 146,466   

Net income available to OfficeMax common shareholders

   $ 414,694      $ 32,771      $ 68,628   

Gross profit margin

     25.8     25.4     25.9

Operating, selling and general and administrative expenses

      

Percentage of sales

     23.8     23.7     23.7

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, such as the gain related to an agreement that legally extinguished our non-recourse debt guaranteed by Lehman, and certain operating items that are not indicative of our core operating activities such as accelerated pension expense related to participant settlements, facility closures and adjustments, asset impairments and severance. We believe our presentation of financial measures before, or excluding, these items, which are non-GAAP measures, enhances our investors’ overall understanding of our 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.

Although we believe the non-GAAP financial measures enhance an investor’s 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.

 

20


Table of Contents

In the following tables, we reconcile our non-GAAP financial measures to our reported GAAP financial results. (Totals in the tables may not sum down due to rounding.)

 

     NON-GAAP RECONCILIATIONS – SALES  
     2012 Sales Growth (Decline)     2011 Sales Growth (Decline)  
     2012     2011     Percent
Change
    2011     2010     Percent
Change
 
     ($ in thousands)     ($ in thousands)  

Sales as reported

   $ 6,920,384      $ 7,121,167        (2.8 )%    $ 7,121,167      $ 7,150,007        (0.4 )% 

Adjustment for unfavorable (favorable) impact of change in foreign exchange rates(a)

     15,184                (91,290        

Adjustment for the impact of the 53rd week in 2011

           (86,324       (86,324        

Adjustment for the impact of closed and opened stores

     (40,691     (81,644       (37,635     (55,600  
  

 

 

   

 

 

     

 

 

   

 

 

   

Sales adjusted for impact of change in foreign exchange rates, the 53rd week in 2011, and closed and opened stores

   $ 6,894,877      $ 6,953,199        (0.8 )%    $ 6,905,918      $ 7,094,407        (2.7 )% 
  

 

 

   

 

 

     

 

 

   

 

 

   

 

(a) Computed by assuming constant currency exchange rates between periods.

 

     NON-GAAP RECONCILIATION
OPERATING RESULTS FOR 2012(a)
     Operating
income
     Net income
available to
OfficeMax
common
shareholders(b)
  Diluted
income

per
common
share(b)
     (thousands, except per-share amounts)

As reported

     $24,278       $414,694   $4.74

Gain on extinguishment of non-recourse debt

           (416,944)   (4.77)

Pension settlement charges

     56,367       34,750   0.40

Store closure, severance and other charges

     47,191       29,281   0.33

Store asset impairment charge

     11,376       6,697   0.08
  

 

 

    

 

 

 

As adjusted

     $139,212       $68,478   $0.78
  

 

 

    

 

 

 

     NON-GAAP RECONCILIATION
OPERATING RESULTS FOR 2011(a)
     Operating
income
     Net income
available to
OfficeMax
common
shareholders
  Diluted
income
per
common
share
     (thousands, except per-share amounts)

As reported

     $86,486       $32,771   $0.38

Store closure and severance charges

     20,530       13,696   0.16

Store asset impairment charge

     11,197       6,841   0.08
  

 

 

    

 

 

 

As adjusted

     $118,213       $53,308   $0.61
  

 

 

    

 

 

 

 

21


Table of Contents
     NON-GAAP RECONCILIATION
OPERATING RESULTS FOR 2010(a)
     Operating
income
  Net income
available to
OfficeMax
common
shareholders
  Diluted
income
per
common
share
     (thousands, except per-share amounts)

As reported

   $146,466   $68,628   $0.79

Store closure charges and severance adjustments

   12,540   7,717   0.09

Store asset impairment charge

   10,979   6,708   0.08

Reserve adjustments related to legacy facility

   (9,463)   (5,782)   (0.07)
  

 

 

 

 

 

As adjusted

   $160,522   $77,271   $0.89
  

 

 

 

 

 

 

(a) Totals may not foot due to rounding.

(b) The conversion of preferred shares into common shares had a dilutive impact on earnings per share for 2012 due to the unusually large net income available to OfficeMax common shareholders, as a result of an agreement that legally extinguished our non-recourse debt guaranteed by Lehman. Therefore, preferred dividends are excluded from the income used to calculate diluted income per common share.

These items are described in more detail in this Management’s Discussion and Analysis.

At the end of the 2012 fiscal year, we had $495.1 million in cash and cash equivalents and $580.2 million in available (unused) borrowing capacity under our revolving credit facility. At year-end, we had outstanding recourse debt of $236.2 million (both current and long-term) and non-recourse obligations of $735.0 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. The non-recourse debt declined significantly in 2012 due to an agreement that legally extinguished our non-recourse debt guaranteed by Lehman. There were no borrowings on our credit agreements in 2012.

The funded status of our pension plans improved in 2012. Our pension obligations exceeded the assets held in trust to fund them by $301.4 million at year-end 2012, an improvement in funded status of $28.2 million, compared to the $329.6 million underfunding that existed at year-end 2011. This improvement in funded status was primarily due to higher than anticipated returns on investments and the impact of special-election lump sum benefit payments, which were partially offset by an unfavorable change in the discount rate.

For full year 2012, operations provided $185.2 million of cash, while capital expenditures, net of proceeds (including systems and infrastructure investments) and financing activities used $85.2 million and $34.8 million, respectively.

Outlook

Based on the current environment and our 2012 trends, we expect that total sales for the full year of 2013 will be in line with 2012, including the favorable impact of foreign currency translation. Additionally, we expect that the operating income margin rate for the full year of 2013 will be in line with the prior year adjusted rate, despite the negative impact of increased rent expense resulting from the completed non-cash amortization of liabilities related to the 2003 merger, as well of the discontinuation of dividend income due to the redemption of our non-voting securities of Boise Cascade L.L.C.

We anticipate cash flow from operations in 2013 to be higher than capital expenditures, which we expect to be approximately $100 million to $125 million, primarily related to investments in IT, ecommerce, infrastructure and maintenance. We anticipate a net reduction in our retail square footage for the year, with five to ten store closures and several new-format store openings in the U.S., and six expected store openings in Mexico.

 

 

22


Table of Contents

Operating Results

2012 Compared with 2011

Sales for 2012 decreased 2.8% (2.6% on constant currency basis) year-over-year to $6,920.4 million. Fiscal year 2011 contained an extra week of sales for our domestic businesses ($86 million), which negatively impacted 2012 sales comparisons. Sales for 2012 were also negatively impacted by a change in foreign currency exchange rates ($15 million). After adjusting for the impact of the extra week in 2011, the impact of the change in foreign currency exchange rates and the impact of stores closed and opened during 2011 and 2012, sales in 2012 declined by 0.8% compared to 2011. Sales declined in both our Retail and Contract segments. In our Retail segment, U.S. same-store sales declined 2.5% year-over-year, while Mexico same-store sales increased 1.6% year-over-year in local currencies. In our Contract segment, U.S. sales increased 0.8% year-over-year (2.3% after adjusting for the $35 million impact of the extra week in 2011), while international sales declined 3.6% in local currencies. The overall sale declines are the result of the impact of the extra week in 2011, the competitive environment for our products, lower sales to our existing international Contract customers, and weak store traffic in our Retail segment, which were partially offset by stronger sales in our U.S Contract business and in Mexico.

Gross profit margin increased by 0.4% of sales (40 basis points) to 25.8% of sales in 2012 compared to 25.4% of sales in 2011, as higher customer margins and lower occupancy expenses were partially offset by higher delivery expense and the mix impact of lower sales in our higher-margin Retail segment. The extra week in U.S. operations in 2011 resulted in a $28 million unfavorable impact to gross profit in 2012 compared to 2011.

Operating, selling and general and administrative expenses decreased $45.7 million to $1,645.2 million for 2012 compared to $1,691.0 million for 2011 due primarily to the impact of the extra week in 2011 ($20 million favorable) as well as reduced payroll expense from reorganizations and store and facility closures, lower depreciation from the impairment of store assets in 2011, lower equipment lease expense from closed stores, lower advertising expense and lower credit card processing fees resulting from credit card reform legislation, which were partially offset by higher incentive compensation expense and higher legal expense. As a percentage of sales, operating, selling and general and administrative expenses of 23.8% for 2012 were slightly higher compared to 23.7% for 2011 as the impact of the higher incentive compensation expense was nearly offset by reduced payroll expense from reorganizations and facility closures, lower depreciation expense from the impairment of store assets in 2011, lower advertising expense and lower credit card processing fees. Incentive compensation expense was $20 million higher in 2012 than in 2011 due to a higher level of performance under the incentive compensation plans in 2012 than in 2011.

As noted above, our results for 2012 include several significant items, as follows:

 

   

We recognized a non-cash impairment charge of $11.4 million associated with the impairment of leasehold improvements and other assets at certain of our Retail stores, primarily in the U.S. After tax, this charge reduced net income available to OfficeMax common shareholders by $6.7 million, or $0.08 per diluted share. This charge was included in asset impairments in the Consolidated Statements of Operations.

 

   

We recorded charges totaling $103.6 million associated with the acceleration of pension expense related to participant settlements ($56.4 million), store closures in the U.S. ($41.0 million) and severance and other charges ($6.2 million) primarily related to restructurings in Canada, Australia, New Zealand and the U.S Contract business. After tax, the cumulative effect of these items reduced net income by $64.0 million, or $0.73 per diluted share. These charges were included in other operating expenses, net in the Consolidated Statements of Operations.

 

   

We recorded a non-cash gain of $670.8 million related to an agreement that legally extinguished our non-recourse debt guaranteed by Lehman. The gain increased net income available to OfficeMax common shareholders by $416.9 or $4.77 per diluted share. This gain was included in gain on extinguishment of non-recourse debt in our Consolidated Statements of Operations.

 

 

23


Table of Contents

Interest income was $43.8 million and $44.0 million for 2012 and 2011, respectively. Interest expense was $69.8 million and $73.1 million in 2012 and 2011, respectively.

For 2012, we recognized income tax expense of $248.7 million on pre-tax income of $669.5 million (an effective tax expense rate of 37.1%) compared to income tax expense of $19.5 million on pre-tax income of $57.6 million (an effective tax expense rate of 33.9%) for 2011. The effective tax rate in both years was impacted by the mix of domestic and foreign sources of income, the effects of state income taxes, income items not subject to tax, and non-deductible expenses. In 2011, we recorded an increase to the valuation allowances relating to several state net operating losses. In 2012, we recorded an increase in our valuation allowance related to our foreign tax credit carryforwards. Both of these negative impacts were offset by other one-time favorable rate changes.

We reported net income attributable to OfficeMax and noncontrolling interest of $420.8 million for 2012. After adjusting for joint venture earnings attributable to noncontrolling interest and preferred dividends, we reported net income available to OfficeMax common shareholders of $414.7 million, or $4.74 per diluted share. Adjusted net income available to OfficeMax common shareholders, as discussed above, was $68.5 million, or $0.78 per diluted share, for 2012 compared to $53.3 million, or $0.61 per diluted share, for 2011.

2011 Compared with 2010

Sales for 2011 decreased 0.4% to $7,121.2 million, compared to $7,150.0 million for 2010, and included the favorable impact of a change in foreign currency exchange rates relating to our international subsidiaries ($91 million) and the favorable impact of an extra week in fiscal year 2011 in our domestic subsidiaries ($86 million). After adjusting for the favorable impact of the change in foreign currency exchange rates, the favorable impact of the extra week in U.S. operations and the impact of stores closed and opened in 2011 and 2010 sales declined by 2.7%. These declines are the result of the competitive environment for our products, lower sales in our existing Contract business and weak store traffic in our Retail segment. The sales declines also included an unfavorable impact from inclement weather in the U.S. during the first quarter of 2011.

Gross profit margin decreased by 0.5% of sales (50 basis points) to 25.4% of sales in 2011 compared to 25.9% of sales in 2010, due to lower customer margins from more promotional activities, customer incentives and continued economic pressures on our consumers’ spending as well as increased delivery and freight expense from higher fuel costs and higher import duties associated with purchases in prior periods. These declines were partially offset by lower occupancy expenses. The extra week in U.S. operations resulted in a $28 million favorable impact to gross profit in 2011 compared to 2010.

Operating, selling and general and administrative expenses of 23.7% of sales in 2011 were flat as a percent of sales as compared to the prior year. These expenses as a percent of sales were flat in the Contract segment, and increased slightly in the Retail segment. For 2011, operating, selling and general and administrative expenses increased $1.9 million compared to the prior year due to the unfavorable impact of foreign exchange rates ($21 million), the unfavorable impact of the extra week in U.S. operations ($20 million) and the unfavorable impact of tax and legal settlements in 2010 ($14 million) that did not recur in 2011. These items were partially offset by lower incentive compensation expense ($45 million), as the Company did not meet its earnings targets under the incentive compensation plans for 2011. Favorable settlements in 2010 included $9 million of favorable sales/use tax settlements and adjustments through the year as well as a $5 million gain related to the resolution of a legal dispute.

As noted above, our results for 2011 include several significant items, as follows:

 

   

We recognized a non-cash impairment charge of $11.2 million associated with leasehold improvements and other assets at certain of our Retail stores in the U.S. After tax, this charge reduced net income available to OfficeMax common shareholders by $6.8 million, or $0.08 per diluted share.

 

   

We recorded $14.9 million of severance charges ($13.9 million in Contract, $0.3 million in Retail and $0.7 million in Corporate) related primarily to reorganizations in Canada, Australia, New Zealand and the U.S. sales and supply chain organizations. In addition, we recorded $5.6 million of charges in our Retail segment related to store closures in the U.S. After tax, the cumulative effect of these items reduced net income by $13.6 million or $0.16 per diluted share.

 

24


Table of Contents

In addition, our results for 2010 include several significant items, as follows:

 

   

We recognized a non-cash impairment charge of $11.0 million associated with leasehold improvements and other assets at certain of our Retail stores in the U.S. After tax, this charge reduced net income available to OfficeMax common shareholders by $6.7 million, or $0.08 per diluted share.

 

   

We recorded $13.1 million of charges in our Retail segment related to store closures in the U.S offset by income of $0.6 million in our Retail segment to adjust previously established severance reserves. After tax, the cumulative effect of these items was a reduction of net income available to OfficeMax common shareholders of $7.8 million, or $0.09 per diluted share.

 

   

We recorded income of $9.4 million related to the adjustment of a reserve associated with our legacy building materials manufacturing facility near Elma, Washington due to the sale of the facility’s equipment and the termination of the lease. This item increased net income available to OfficeMax common shareholders by $5.8 million, or $0.07 per diluted share.

Interest income was $44.0 million and $42.6 million for 2011 and 2010, respectively. The increase was due primarily to increases in cash balances and interest rates in our international businesses. Interest expense was $73.1 million and $73.3 million in 2011 and 2010, respectively.

For 2011, we recognized income tax expense of $19.5 million on pre-tax income of $57.6 million (an effective tax expense rate of 33.9%) compared to income tax expense of $41.9 million on pre-tax income of $115.7 million (an effective tax expense rate of 36.2%) for 2010. 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 and the mix of domestic and foreign sources of income. In 2011, the Company recorded an increase ($10.8 million) to the valuation allowances relating to several state net operating losses. This negative impact was offset by other one time favorable rate changes and other items related to nontaxable permanent items.

We reported net income attributable to OfficeMax and noncontrolling interest of $38.1 million for 2011. After adjusting for joint venture earnings attributable to noncontrolling interest and preferred dividends, we reported net income available to OfficeMax common shareholders of $32.8 million, or $0.38 per diluted share. Adjusted net income available to OfficeMax common shareholders, as discussed above, was $53.3 million, or $0.61 per diluted share, for 2011 compared to $77.3 million, or $0.89 per diluted share, for 2010.

Segment Discussion

We report our results using three reportable segments: Contract; Retail; and Corporate and Other.

Contract distributes a broad line of items for the office, including office supplies and paper, technology products and solutions, office furniture, print and document services and facilities products. 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.

Retail is a retail distributor of office supplies and paper, print and document services, technology products and solutions, office furniture and facilities products. In addition, this segment contracts with large national retail chains to supply office and school supplies to be sold in their stores. Retail office supply 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. Retail also operates office products stores in Mexico through a 51%-owned joint venture, Grupo OfficeMax S. de R.L. de C.V. (“Grupo OfficeMax”).

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.

 

25


Table of Contents

Management evaluates the segments’ performances using segment income (loss) which is based on operating income (loss) after eliminating the effect of certain operating items that are not indicative of our core operations such as facility closures and adjustments, asset impairments, severances and accelerated pension expense related to participant settlements. These certain operating items are reported on the asset impairments and other operating expenses, net lines in the Consolidated Statements of Operations.

Contract

($ in thousands)

 

     2012     2011     2010  

Sales

   $ 3,605,760      $ 3,624,077      $ 3,634,244   

Gross profit

     814,278        809,492        826,981   

Gross profit margin

     22.6     22.3     22.8

Operating, selling and general and administrative expenses

     711,875        731,811        732,699   

Percentage of sales

     19.7     20.2     20.2
  

 

 

   

 

 

   

 

 

 

Segment income

   $ 102,403      $ 77,681      $ 94,282   

Percentage of sales

     2.8     2.1     2.6

Sales by Product Line

      

Office supplies and paper

   $ 2,061,908      $ 2,076,052      $ 2,086,629   

Technology products

     1,130,564        1,142,168        1,185,461   

Office furniture

     413,288        405,857        362,154   

Sales by Geography

      

United States

   $ 2,469,944      $ 2,449,313      $ 2,482,508   

International

     1,135,816        1,174,764        1,151,736   

Sales Growth (Decline)

     (0.5 )%      (0.3 )%      (0.6 )% 

2012 Compared with 2011

Contract segment sales for 2012 declined 0.5% to $3,605.8 million from $3,624.1 million for 2011. Fiscal year 2011 contained an extra week of sales in our Contract segment in the U.S. which negatively impacted the 2012 sales comparisons ($34.5 million). In addition, sales for 2012 were favorably impacted by a change in foreign currency exchange rates ($3.4 million). After adjusting for the impact of the extra week in 2011 and the impact of the change in foreign currency exchange rates, Contract segment sales in 2012 increased by 0.4% compared to 2011. U.S. Contract sales for 2012 increased 0.8% compared to 2011. After adjusting for the favorable impact of the extra week in 2011, U.S. Contract sales increased by 2.3%. In the U.S., sales to newly acquired customers outpaced the combined reductions in sales due to lost customers and in sales to existing customers. International sales for 2012 declined 3.3% (3.6% on a local currency basis) due to lower sales to existing customers.

Contract segment gross profit margin increased 0.3% of sales (30 basis points) to 22.6% of sales for 2012 compared to 22.3% of sales for the previous year. The increase in gross profit margin occurred both in the U.S. and internationally. U.S. gross profit margins increased due to higher customer margins and lower occupancy expenses, which were partially offset by increased delivery expense. The increased delivery expense resulted from the closure of distribution centers (customer fulfillment centers) and was more than offset by the reduction of occupancy and payroll costs in operating, selling and general and administrative expenses. International gross profit margin increased due to higher customer margins and lower delivery expense from lower fuel costs. These gross profit margin improvements were partially reduced by the mix impact of lower sales in our higher-margin international businesses. The extra week in U.S. operations in 2011 resulted in a $7 million unfavorable impact to gross profit in 2012 compared to 2011.

Contract segment operating, selling and general and administrative expenses decreased $19.9 million to $711.9 million in 2012 compared to $731.8 million in 2011 primarily due to the impact of the 53rd week in 2011

 

26


Table of Contents

and the reduced costs from facility closures, which were partially offset by increased incentive compensation expense. As a percentage of sales, operating, selling and general and administrative expenses decreased 0.5% of sales to 19.7% of sales for 2012 from 20.2% of sales for 2011. The decrease was primarily due to lower payroll expense from reorganizations and facility closures in 2011 and lower advertising expense, which were partially offset by increased incentive compensation expense. Incentive compensation expense was $10.8 million higher in 2012 than in 2011. Expenses in 2012 were approximately $7 million lower than in 2011 due to the extra week in 2011.

Contract segment income was $102.4 million, or 2.8% of sales, for 2012, compared to $77.7 million, or 2.1% of sales, for 2011. The increase in segment income was primarily attributable to the higher gross profit margin and the lower operating, selling and general and administrative expenses. The impact of the 53rd week in 2011 was negligible on operating income.

2011 Compared with 2010

Contract segment sales for 2011 decreased 0.3% to $3,624.1 million from $3,634.2 million for 2010, and included the favorable impact of a change in foreign currency exchange rates relating to our international subsidiaries and the favorable impact of an extra week in fiscal year 2011 in our domestic subsidiaries. After adjusting for the impact of the extra week in 2011 and the impact of the change in foreign currency exchange rates, Contract segment sales in 2011 decreased by 3.5% compared to 2010. U.S. Contract sales for 2011 declined 1.3% compared to 2010 (2.7% after adjusting for the impact of the extra week) due to a continued, highly competitive environment in the U.S. A decline in sales to existing customers, including a significant decrease in sales to the U.S. federal government, was partially offset by increased favorable impact of sales to newly acquired customers outpacing the reduction in sales due to lost customers. International sales for 2011 increased 2.0%, but declined 5.3% on a local currency basis. The declines are the result of decreased sales to existing customers and several large customers that were not retained in both Canada and Australia.

Contract segment gross profit margin decreased 0.5% of sales (50 basis points) to 22.3% of sales for 2011 compared to 22.8% of sales for the previous year. The decrease in gross profit margins occurred both in the U.S. and internationally. U.S. gross profit margins decreased due to lower customer margins and increased freight and delivery expenses from higher fuel costs, which were partially offset by lower occupancy expenses. The continued highly competitive U.S. market has resulted in downward pressure on customer margins. The extra week in U.S. operations resulted in a $7 million favorable impact to gross profit in 2011 compared to 2010. International margin declines resulted from lower customer margins due to increased competitive market conditions in Canada, and higher freight expense from higher fuel costs, which were partially offset by lower inventory shrink expense and lower occupancy expense.

Contract segment operating, selling and general and administrative expenses of 20.2% of sales for 2011 were flat to the prior year as lower incentive compensation expense was offset by the deleveraging of expenses from the lower sales and the unfavorable impact of sales/use tax settlements in 2010. Contract segment operating, selling and general and administrative expenses of $731.8 million in 2011 decreased $0.9 million from the prior year as the unfavorable impact of foreign currency rates ($20 million) and the unfavorable impact of the extra week ($7 million) were offset by lower incentive compensation expense ($20 million) and lower payroll and advertising expenses.

Contract segment income was $77.7 million, or 2.1% of sales, for 2011, compared to $94.3 million, or 2.6% of sales, for 2010. The decrease in segment income was primarily attributable to the decline in sales and the lower gross profit margin. The impact of the 53rd week was negligible on operating income.

 

27


Table of Contents

Retail

($ in thousands)

 

     2012     2011     2010  

Sales

   $ 3,314,624      $ 3,497,090      $ 3,515,763   

Gross profit

     970,179        999,688        1,022,671   

Gross profit margin

     29.3     28.6     29.1

Operating, selling and general and administrative expenses

     900,312        924,395        918,768   

Percentage of sales

     27.2     26.4     26.1
  

 

 

   

 

 

   

 

 

 

Segment income

   $ 69,867      $ 75,293      $ 103,903   

Percentage of sales

     2.1     2.2     3.0

Sales by Product Line

      

Office supplies and paper

   $ 1,411,522      $ 1,437,304      $ 1,468,646   

Technology products

     1,670,302        1,824,956        1,834,630   

Office furniture

     232,800        234,830        212,487   

Sales by Geography

      

United States

   $ 3,022,033      $ 3,222,424      $ 3,287,528   

International

     292,591        274,666        228,235   

Sales Growth (Decline)

      

Total sales growth (decline)

     (5.2 )%      (0.5 )%      (1.1 )% 

Same-location sales growth (decline)

     (2.2 )%      (1.7 )%      (1.2 )% 

2012 Compared with 2011

Retail segment sales for 2012 decreased by 5.2% to $3,314.6 million from $3,497.1 million for 2011, reflecting store closures, reduced store transactions and weaker technology product category sales. Fiscal year 2011 contained an extra week of sales in our Retail segment in the U.S. which negatively impacted the 2012 sales comparisons ($51.8 million). In addition, sales for 2012 were unfavorably impacted by a change in foreign currency exchange rates related to our Mexican joint venture ($18.5 million). Retail segment same-store sales declined 2.2% in 2012, on a constant currency basis. U.S. same-store sales declined 2.5% year-over-year primarily due to lower store transactions, partially offset by higher average ticket amounts, compared to 2011. Mexico same-store sales increased 1.6% year-over-year on a local currency basis in 2012 compared to 2011. We ended 2012 with 941 stores. In the U.S., we closed forty-six retail stores during 2012 and opened one, ending the year with 851 retail stores, while in Mexico, Grupo OfficeMax opened ten stores during 2012 and closed two, ending the year with 90 retail stores.

Retail segment gross profit margin increased 0.7% of sales (70 basis points) to 29.3% of sales for 2012 compared to 28.6% of sales for 2011. The gross profit margin increases were the result of higher customer margins in both the U.S. and Mexico, driven primarily by a product sales mix shift from the lower margin technology products, partially offset by higher occupancy expenses due to the deleveraging impact of the lower sales. The extra week in U.S. operations in 2011 resulted in a $21 million unfavorable impact to gross profit in 2012 compared to 2011.

Retail segment operating, selling and general and administrative expenses decreased $24.1 million to $900.3 million in 2012 compared to $924.4 million in 2011, as the impact of the extra week in 2011, lower depreciation from the impairment of store assets in 2011, lower equipment lease expense from closed stores and lower credit card processing fees from credit card reform legislation was partially offset by higher incentive compensation expense. As a percentage of sales, Retail segment operating, selling and general and administrative expenses increased 0.8% of sales to 27.2% of sales for 2012 from 26.4% of sales for 2011 due to the increased incentive compensation expense and the deleveraging impact of the lower sales. Incentive compensation expense was $9.3 million higher in 2012 than in 2011. Operating, selling and general and administrative expenses in 2012 were approximately $13 million lower than in 2011 due to the extra week in 2011.

 

28


Table of Contents

Retail segment income was $69.9 million, or 2.1% of sales, for 2012, compared to $75.3 million, or 2.2% of sales, for 2011. The decrease in segment income was primarily attributable to the sales decline, which was partially offset by the higher gross profit margins, the decreased operating expenses as noted above and the continued improvement in our Mexican joint venture’s earnings. There was $8 million of segment income in 2011 resulting from the 53rd week.

2011 Compared with 2010

Retail segment sales for 2011 decreased by 0.5% to $3,497.1 million from $3,515.8 million for 2010, and included the favorable impact of currency exchange rates relating to our Mexican joint venture ($8 million) and the favorable impact of an extra week in fiscal year 2011 in our domestic subsidiaries ($52 million). The sales declines reflect challenging economic conditions and an increased promotional environment as well as significant decline in certain technology categories. Same-store sales declined by 1.7% in 2011 on a constant currency basis, which included a U.S. same-store sales decline of 2.8%, partially offset by a 14.2% same-store sales increase in Mexico, on a local currency basis. The U.S. same-store sales decline reflected weaker back-to-school sales and continued weakness in store traffic, which was partially offset by slightly higher average ticket and a favorable holiday season. We ended 2011 with 978 stores. In the U.S., we closed twenty-two retail stores during 2011 and opened none, ending the year with 896 retail stores, while in Mexico, Grupo OfficeMax opened five stores during 2011 and closed two, ending the year with 82 retail stores.

Retail segment gross profit margin decreased 0.5% of sales (50 basis points) to 28.6% of sales for 2011 compared to 29.1% of sales for 2010. The gross profit margin declines were the result of lower customer margins in Mexico, higher freight and delivery expenses from increased fuel costs and higher inventory markdowns, which were partially offset by lower occupancy expenses. We had slightly higher customer margins in the U.S. reflecting the product-mix shift to supplies sales. Higher promotional activity resulted in increased sales but placed continued pressure on margins. The extra week in U.S. operations resulted in a $21 million favorable impact to gross profit in 2011 compared to 2010.

Retail segment operating, selling and general and administrative expenses increased 0.3% of sales to 26.4% of sales for 2011 from 26.1% of sales for 2010 as lower incentive compensation expense was more than offset by the deleveraging impact of the lower sales and the unfavorable impact of sales/use tax and legal settlements in 2010. Retail segment operating, selling and general and administrative expenses of $924.4 million in 2011 increased $5.6 million from the prior year as the unfavorable impact of the extra week ($13 million), the unfavorable impact of sales/use tax and legal settlements in 2010 ($12 million) and the unfavorable impact of foreign currency rates ($1 million) were partially offset by lower incentive compensation expense ($23 million). In addition, lower advertising expense and lower store fixture and equipment-related costs were more than offset by higher overhead associated with our profitability initiatives.

Retail segment income was $75.3 million, or 2.2% of sales, for 2011, compared to $103.9 million, or 3.0% of sales, for 2010. The decrease in segment income was primarily attributable to the sales decline, the lower gross profit margins and the increased operating expenses as noted above which was partially offset by continued improvement in our Mexican joint venture’s earnings. There was $8 million of segment income resulting from the 53rd week.

Corporate and Other

Corporate and Other segment loss was $33.1 million, $34.8 million and $37.7 million for 2012, 2011 and 2010, respectively. In 2012, compared to 2011, lower pension expense was partially offset by increased legacy costs and legal fees, and the change in incentive compensation expense was not material. In 2011, the benefit of lower incentive compensation expense was partially offset by increased pension expense compared to 2010.

 

29


Table of Contents

Liquidity and Capital Resources

At the end of fiscal year 2012, the total liquidity available for OfficeMax was $1,075.3 million. This includes cash and cash equivalents of $495.1 million, including $128.1 million in foreign cash balances, and borrowing availability of $580.2 million from our credit agreement associated with the Company and certain of our subsidiaries in the U.S., Puerto Rico and Canada. During the first quarter of 2012, we exercised our option to terminate our credit agreement associated with our subsidiaries in Australia and New Zealand effective March 30, 2012. At the end of the fiscal year 2012, the Company was in compliance with all covenants under the one remaining credit agreement. The credit agreement associated with the Company and certain of our subsidiaries in the U.S., Puerto Rico and Canada expires on October 7, 2016. At the end of fiscal year 2012, we had $236.2 million of short-term and long-term recourse debt and $735.0 million of non-recourse timber securitization notes outstanding.

Under certain circumstances there are restrictions on our ability to repatriate certain amounts of foreign cash balances. If the Company chose to repatriate certain unrestricted foreign cash balances, it could result in a repatriation provision of approximately $2.5 million in excess of the amount already accrued and $4.8 million in cash taxes due.

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 and cash flow from operations. We also have the revolving credit facility as additional liquidity. The following sections of this Management’s 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

Our operating activities provided cash of $185.2 million in 2012 compared to $53.7 million in 2011. Cash from operations for 2012 was higher than the prior year primarily reflecting favorable working capital changes and higher earnings. Our earnings included two non-cash items related to our gain on extinguishment of non-recourse debt, the pre-tax gain of $670.8 million and the non-cash portion of the related tax expense of $253.8 million, as well as higher non-cash pension expense due to the acceleration of pension expense related to participant distributions, all of which are reported as non-cash adjustments to income in our Consolidated Statements of Cash Flows.

Inventory balances at the end of 2012 were lower than at the end of 2011, primarily due to closed stores in the U.S. Accounts payable was higher at the end of 2012 then at the end of 2011, primarily in the U.S., despite the decreased inventory balances, due to the deferral of certain payments into 2013 resulting from late reconciliation issues at the end of 2012 that have subsequently been resolved. Collections from our domestic receivables were higher during 2012 than during 2011, as there was increased vendor-supported promotional activity at the end of 2011 that was subsequently collected in 2012.

Our operating activities generated cash of $88.1 million in 2010. Cash from operations in 2010 was net of $44.4 million of payments of loans on company-owned life insurance policies (“COLI policies”) as well as $72.4 million of increased working capital primarily from larger holdings of our international inventories and the timing of repayments and obligations.

Cash from operations in 2011 and 2010 included the impact of approximately $55 million and $58 million, respectively, of incentive compensation payments made associated with the achievement of incentive plan performance targets for 2010 and 2009, respectively. The Company accrued a minimal amount of incentive compensation in 2011, as performance targets were generally not achieved. Therefore, 2012 incentive compensation payments were minimal. Incentive compensation expense was higher in 2012 than in 2011, which will result in incentive compensation payments in 2013, although not at the same levels as 2011 and 2010.

 

30


Table of Contents

Two large transactions significantly affected the balance sheet during 2012. The first was our settlement agreement that legally extinguished our non-recourse debt guaranteed by Lehman, which reduced non-recourse debt and timber notes receivable, along with the use of available minimum tax credits and net operating losses to offset the recognition of the related deferred tax gain, which reduced deferred taxes. The second was the non-cash pension expense, which reduced accumulated other comprehensive loss and increased deferred tax assets.

We sponsor noncontributory defined benefit pension plans covering certain terminated employees, vested employees, retirees, and some active employees, primarily in Contract. Pension expense was $3.3 million, $10.9 million and $7.3 million for the years ended December 29, 2012, December 31, 2011 and December 25, 2010, respectively. In 2012, 2011 and 2010, we made cash contributions to our pension plans totaling $21.1 million, $3.3 million and $3.4 million, respectively. The estimated minimum required funding contribution in 2013 is $3.3 million and the expense is projected to be $2.7 million compared to expense of $3.3 million in 2012. In addition, we may elect to make additional voluntary contributions. See “Critical Accounting Estimates” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information.

During 2012, our pension plans were amended to provide a one-time special election period during which certain former employees, alternate payees, and beneficiaries could elect to have their pension benefits under the Plan paid as an immediate lump sum payment or an immediately commencing annuity. Approximately 9,800 participants were eligible to elect an immediate lump sum payment or annuity. Of those participants eligible, approximately 300 elected an annuity while approximately 5,600 elected an immediate lump sum payment. The associated distributions by the pension plans from plan funds were approximately $150 million, and resulted in a non-cash pre-tax charge by the Company of $56 million to expense the accumulated loss relating to these participants that otherwise would have been amortized over their life expectancies. This action reduced the pension benefit obligation liability by approximately $190 million.

Investing Activities

In 2012, capital spending of $87.2 million consisted of system improvements relating to our growth initiatives, overall software enhancements and infrastructure improvements, as well as spending on new stores in Mexico. In 2011, capital spending of $69.6 million consisted of system improvements, overall software enhancements and infrastructure enhancements, as well as spending on new stores in Mexico. We also invested in leasehold improvements. This spending was partially offset by proceeds from the sale of assets associated with closed facilities. Details of the capital investment by segment are included in the following table:

 

     Capital Investment  
     2012      2011      2010  
     (millions)  

Contract

   $ 39.3       $ 26.0       $ 61.2   

Retail

     47.3         35.8         32.3   

Corporate and Other

     0.6         7.8           
  

 

 

    

 

 

    

 

 

 

Total

   $ 87.2       $ 69.6       $ 93.5   
  

 

 

    

 

 

    

 

 

 

During 2012, we began considering potential options to sell our Croxley-branded wholesale, distribution and manufacturing business in New Zealand (“Croxley”), a wholly-owned subsidiary included in our Contract segment. We are in the process of assessing whether there is market or third-party interest that achieves our value expectations. As such, management is not assured that a sale will occur within twelve months. Croxley’s net book value was approximately $49 million at December 29, 2012.

 

31


Table of Contents

Financing Activities

Our financing activities used cash of $34.8 million in 2012, $18.0 million in 2011 and $28.5 million in 2010. Dividend payments totaled $5.6 million in 2012, $3.3 million in 2011 and $2.7 million in 2010. We had net debt payments of $32.5 million, $6.1 million and $22.5 million in 2012, 2011 and 2010, respectively.

We suspended our dividend to shareholders of common stock on December 18, 2008. In the third quarter of 2012, we reinstated the payment of quarterly cash dividends on our common stock, given progress in executing our strategic plan to achieve sustainable, profitable growth. The quarterly dividends are expected to be $0.02 per common share, or $0.08 per common share on an annualized basis. During 2012, we paid $3.5 million in common stock dividends.

Financing Arrangements

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. Our obligations under operating leases are shown in the “Contractual Obligations” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Our debt structure consists of credit agreements, note agreements, and other borrowings as described below. For more information, see the “Contractual Obligations” and “Disclosures of Financial Market Risks” sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Credit Agreements

On October 7, 2011, we entered into a Second Amended and Restated Loan and Security Agreement (the “Credit Agreement”) with a group of banks. The Credit Agreement amended both our then existing credit agreement to which we were a party along with certain of our subsidiaries in the U.S. and our then existing credit agreement to which our subsidiary in Canada was a party and consolidated them into a single credit agreement. The Credit Agreement permits us to borrow up to a maximum of $650 million, of which $50 million is allocated to our Canadian subsidiary, and $600 million is allocated to the Company and its other participating U.S. subsidiaries, subject to a borrowing base calculation that limits availability to a percentage of eligible trade and credit card receivables plus a percentage of the value of eligible inventory less certain reserves. The Credit Agreement may be increased (up to a maximum of $850 million) at our request and the approval of the lenders participating in the increase, or may be reduced from time to time at our request, in each case according to the terms detailed in the Credit Agreement. Letters of credit, which may be issued under the Credit Agreement up to a maximum of $250 million, reduce available borrowing capacity. Stand-by letters of credit issued under the Credit Agreement totaled $41.0 million at the end of fiscal year 2012. At the end of fiscal year 2012, the maximum aggregate borrowing amount available under the Credit Agreement was $621.2 million and availability under the Credit Agreement totaled $580.2 million. At the end of fiscal year 2012, we were in compliance with all covenants under the Credit Agreement. The Credit Agreement expires on October 7, 2016 and allows the payment of dividends, subject to availability restrictions and if no default has occurred.

Borrowings under the Credit Agreement are subject to interest at rates based on either the prime rate, the federal funds rate, LIBOR or the Canadian Dealer Offered Rate. An additional percentage, which varies depending on the level of average borrowing availability, is added to the applicable rates. Fees on letters of credit issued under the Credit Agreement are charged at rates between 1.25% and 2.25% depending on the type of letter of credit (i.e., stand-by or commercial) and the level of average borrowing availability. The Company is also charged an unused line fee of between 0.375% and 0.5% on the amount by which the maximum available credit exceeds the average daily outstanding borrowings and letters of credit. The fees on letters of credit were 1.75% and the unused line fee was 0.5% at December 29, 2012.

 

32


Table of Contents

On March 15, 2010, the Company’s five wholly-owned subsidiaries based in Australia and New Zealand entered into a Facility Agreement (the “Australia/New Zealand Credit Agreement”) with a financial institution based in those countries. The Australia/New Zealand Credit Agreement permitted the subsidiaries in Australia and New Zealand to borrow up to a maximum of A$80 million subject to a borrowing base calculation that limited availability to a percentage of eligible accounts receivable plus a percentage of the value of certain owned properties, less certain reserves. During the first quarter of 2012, the Company exercised its option to terminate the Australia/New Zealand Credit Agreement effective March 30, 2012.

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 issuance of the Installment Notes, the Note Issuers transferred a total of $1,635 million in cash to Lehman and Wachovia Corporation (“Wachovia”) ($817.5 million to each of Lehman and Wachovia) who issued collateral notes (the “Collateral Notes”) to the Note Issuers and guaranteed the respective Installment Notes. In December 2004, we completed a securitization transaction in which the Company’s 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. Recourse on the Securitization Notes is limited to the proceeds of 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, 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. Lehman’s bankruptcy filing constituted an event of default under the $817.5 million Installment Note guaranteed by Lehman (the “Lehman Guaranteed Installment Note”). We are required for accounting purposes to assess the carrying value of assets whenever circumstances indicate that a decline in value may have occurred. In 2008, we evaluated the carrying value of the Lehman Guaranteed Installment Note and reduced it to the estimated amount we then expected to collect ($81.8 million) by recording a non-cash impairment charge of $735.8 million, pre-tax.

An initial distribution of approximately $50 million was received from Lehman in the second quarter of 2012 by the Note Issuers, pursuant to a stipulation entered into on October 7, 2011 and approved by the bankruptcy court on December 14, 2011. The funds were released to the Securitization Note holders in the third quarter of 2012.

During the third quarter of 2012, we entered into an agreement that extinguished the Securitization Notes guaranteed by Lehman. Upon effectiveness of the agreement, the trustee for the Securitization Note holders released OfficeMax and its affiliates from the non-recourse liabilities following the transfer from OfficeMax to the trustee for the Securitization Note holders of the claims, the Lehman Guaranteed Installment Note and the guaranty. As a result of the extinguishment of this debt, in the third quarter we recognized a non-cash, pre-tax gain of $670.8 million, equal to the difference between the combined amount of the carrying value of the Securitization Notes guaranteed by Lehman ($735.0 million) and the related interest payable ($17.6 million) and the combined amount of the carrying value of the Lehman Guaranteed Installment Note and the initial distribution made by the Lehman estate (together $81.8 million.)

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 notes structure allowed the Company to defer the resulting tax liability until 2020 ($529 million as of December 29, 2012), the maturity date for the Installment Notes. In the third quarter of 2012, as a result of the agreement transferring our rights to the remaining receivable and the extinguishment of Securitization Notes guaranteed by Lehman, we recognized $269 million of the deferred tax

 

33


Table of Contents

gain in the third quarter of 2012. Due to available alternative minimum tax credits and net operating losses, which offset a significant portion of the taxable income, the Company made a cash tax payment of $15 million in the fourth quarter of 2012. At December 29, 2012, the remaining deferred tax gain of $260 million is related to the Installment Notes guaranteed by Wachovia (the “Wachovia Guaranteed Installment Notes”), and will be recognized upon maturity.

Through December 29, 2012, we have received all payments due under the Wachovia Guaranteed Installment Notes, which have consisted only of interest due on the notes, and have made all payments due on the related Securitization Notes guaranteed by Wachovia, again consisting only of interest due. As all amounts due on the Wachovia Guaranteed Installment Notes are current and we have no reason to believe that we will not be able to collect all amounts due according to the contractual terms of the Wachovia Guaranteed Installment Notes, the notes are reflected in our Consolidated Balance Sheets at their original principal amount of $817.5 million. Wachovia was acquired by Wells Fargo & Company in a stock transaction in 2008. An additional adverse impact on our financial results presentation could occur if Wells Fargo & Company became unable to perform its obligations under the Wachovia Guaranteed Installment Notes, thereby resulting in a significant impairment impact.

The Wachovia Guaranteed Installment Notes and related Securitization Notes are scheduled to mature in 2020 and 2019, respectively. The Securitization Notes have an initial term that is approximately three months shorter than the Wachovia Guaranteed Installment Notes. We expect that if the Securitization Notes are still outstanding in 2019, we will refinance them with a short-term borrowing to bridge the period from initial maturity of the Securitization Notes to the maturity of the Wachovia Guaranteed Installment Notes.

Investment in Boise Cascade Holdings, L.L.C.

In connection with the sale of the paper, forest products and timberland assets in 2004, we invested $175 million in affiliates of Boise Cascade, L.L.C. Due to restructurings conducted by those affiliates, our investment is currently in Boise Cascade Holdings, L.L.C., a building products company.

The Boise Investment is accounted for under the cost method, as Boise Cascade Holdings, L.L.C. does not maintain separate ownership accounts for its members’ interests, and we do not have the ability to significantly influence the operating and financial policies of Boise Cascade Holdings, L.L.C.

In exchange for its investment in Boise Cascade Holdings, L.L.C., we received voting securities and non-voting securities. 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. These dividends accumulate semiannually to the extent not paid in cash on the last day of June and December. It is our policy to record the income associated with these dividends as a reduction of operating, selling and general and administrative expenses in the Consolidated Statements of Operations. The voting securities do not accrue dividends.

We recognized dividend income from the non-voting securities of $8.5 million in 2012, $7.8 million in 2011 and $7.3 million in 2010 in the Corporate and Other segment. The dividend receivable associated with these dividends was $45.1 million and $38.0 million at December 29, 2012 and December 31, 2011, respectively, and was recorded in the Corporate and Other segment in other non-current assets in the Consolidated Balance Sheets.

During 2012, we received a distribution of $1.7 million from Boise Cascade Holdings, L.L.C., for the income tax liability associated with our share of allocated earnings, the majority of which was used to reduce the accrued dividend balance. No such distributions were received in 2011 or 2010.

A subsidiary of Boise Cascade Holdings, L.L.C., Boise Cascade, L.L.C. filed a registration statement with the Securities and Exchange Commission in November 2012 to register stock for an initial public offering (“Boise IPO”). Boise Cascade, L.L.C. announced the commencement of the Boise IPO on January 23, 2013, and the Boise IPO was completed on February 11, 2013.

In February of 2013, we received approximately $129 million in cash proceeds related to the Boise investment. We received approximately $112 million related to the redemption of all of the non-voting equity

 

34


Table of Contents

securities at the original investment amount of $66 million plus the related accrued dividends of approximately $46 million. As a result of the redemption of the non-voting equity securities, the income associated with the dividends on those securities will cease in the first quarter of 2013. We also received a distribution of approximately $17 million related to the voting equity securities.

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 was deferred. The redemption of the non-voting equity securities is expected to trigger recognition of a pre-tax operating gain of approximately $68 million representing the portion of the deferred gain attributable to the non-voting equity securities. The remaining $112 million of deferred gain attributable to the voting equity securities will be recognized when the voting-equity securities are sold or redeemed. We do not expect to pay any cash taxes as a result of the redemption of the non-voting equity securities and the distribution on the voting equity securities.

Throughout the year, we review the carrying value of this investment whenever events or circumstances indicate that its fair value may be less than its carrying amount. At year-end, based on information related to the Boise IPO, we estimated the fair value of the Boise investment, and determined that there was no impairment of this investment. We will continue to monitor and assess this investment.

Contractual Obligations

In the following table, we set forth our contractual obligations as of December 29, 2012. Some of the figures included in this table are based on management’s estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties and other factors. Because these estimates and assumptions are necessarily subjective, the amounts we will actually pay in future periods may vary from those reflected in the table.

 

     Payments Due by Period  
     2013      2014-2015      2016-2017      Thereafter      Total  
     (millions)  

Recourse debt

   $ 10.2       $ 1.8       $ 20.4       $ 204.3       $ 236.7   

Interest payments on recourse debt

     14.8         28.7         26.5         99.0         169.0   

Non-recourse debt

                             735.0         735.0   

Interest payments on non-recourse debt

     39.8         79.7         79.7         79.7         278.9   

Operating leases

     351.4         542.3         309.2         198.6         1,401.5   

Purchase obligations

     28.1         10.9         0.7         0.2         39.9   

Pension obligations (estimated payments)

     3.3         62.4         40.8         52.4         158.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 447.6       $ 725.8       $ 477.3       $ 1,369.2       $ 3,019.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Debt includes amounts owed on our note agreements, revenue bonds and credit agreements assuming the debt is held to maturity. The amounts above include both current and non-current liabilities. Not included in the table above are contingent payments for uncertain tax positions of $6.3 million. These amounts are not included due to our inability to predict the timing of settlement of these amounts. The “Expected Payments” table under the caption “Financial Instruments” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations presents principal cash flows and related weighted average interest rates by expected maturity dates. For more information, see Note 10, “Debt,” of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” in this form 10-K.

There is no recourse against OfficeMax on the Securitization Notes as recourse is limited to proceeds from the pledged Installment Notes receivable and underlying guaranty. The non-recourse debt remains outstanding until it is legally extinguished, which will be when paid in cash or when the Installment Notes and related guaranty is transferred to and accepted by the Securitization Note holders. During 2012, we entered into an agreement that extinguished the Securitization Notes guaranteed by Lehman, and resulted in the transfer from OfficeMax to the trustee for the Securitization Note holders of the Lehman Guaranteed Installment Note. Interest payments on non-recourse debt will be completely offset by interest income received on the Installment Notes.

 

35


Table of Contents

We enter into operating leases in the normal course of business. We lease our retail store space as well as certain other property and equipment under operating leases. Some of our retail store leases require percentage rentals on sales above specified minimums and contain escalation clauses. The minimum lease payments shown in the table above do not include contingent rental expense. Some lease agreements provide us with the option to renew the lease or purchase the leased property. Our future operating lease obligations would change if we exercised these renewal options and if we entered into additional operating lease agreements. As a result of purchase accounting from the 2003 acquisition of the U.S. retail business, we recorded an asset relating to store leases with terms below market value and a liability for store leases with terms above market value. The asset will be amortized through 2027 ($4 million per year), while the liability was amortized through 2012 ($11 million per year). From the acquisition date through 2012, the net amortization of these items reduced rent expense by approximately $7 million per year. Beginning in 2013, the completed amortization of the liability will result in no further reduction of rent expense, and the amortization of the asset will continue to result in additional rent expense of approximately $4 million per year. The net impact will be an increase in rent expense compared to prior years of approximately $11 million per year. For more information related to our lease obligations, see Note 8, “Leases,” of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” in this Form 10-K. Lease obligations for closed facilities are included in operating leases and a liability equal to the fair value of these obligations is included in the Company’s Consolidated Balance Sheets. For more information, see Note 2, “Facility Closure Reserves,” of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” in this Form 10-K.

Our Consolidated Balance Sheet as of December 29, 2012 includes $365.6 million of long-term liabilities associated with our retirement and benefit and other compensation plans and $322.2 million of other long-term liabilities. Certain of these amounts have been excluded from the above table as either the amounts are fully or partially funded, or the timing and/or the amount of any cash payment is uncertain. Actuarially-determined liabilities related to pension and postretirement benefits are recorded based on estimates and assumptions. Key factors used in developing estimates of these liabilities include assumptions related to discount rates, rates of return on investments, future compensation costs, healthcare cost trends, benefit payment patterns and other factors. Changes in assumptions related to the measurement of funded status could have a material impact on the amount reported. Pension obligations in the table above represent the estimated, minimum contributions required per Internal Revenue Service funding rules.

In accordance with an amended and restated joint venture agreement, the minority owner of Grupo OfficeMax can elect to require OfficeMax to purchase the minority owner’s 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 owner’s interest, the purchase price is based on the joint venture’s earnings and the current market multiples of similar companies. At the end of 2012, Grupo OfficeMax met the earnings targets and the estimated purchase price of the minority owner’s interest was $43.7 million. This represents an increase in the estimated purchase price from the prior year which is attributable to higher market multiples for similar companies as of the measurement date and higher earnings for Grupo OfficeMax. As the estimated purchase price was greater than the carrying value of the noncontrolling interest as of the end of the year, 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.

In addition to the contractual obligations quantified in the table above, we have other obligations for goods and services entered into in the normal course of business. These contracts, however, are either not enforceable or legally binding or are subject to change based on our business decisions.

 

36


Table of Contents

Off-Balance-Sheet Activities and Guarantees

Note 15, “Commitments and Guarantees,” of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” in this Form 10-K describes certain of our off-balance sheet arrangements as well as the nature of our guarantees, including the approximate terms of the guarantees, how the guarantees arose, the events or circumstances that would require us to perform under the guarantees and the maximum potential undiscounted amounts of future payments we could be required to make.

Seasonal Influences

Our business is seasonal, with Retail showing a more pronounced seasonal trend than Contract. Sales in the second quarter are historically the slowest of the year. Sales are stronger during the first, third and fourth quarters which include the important new-year office supply restocking month of January, the back-to-school period and the holiday selling season, respectively.

Disclosures of Financial Market Risks

Financial Instruments

Our debt is predominantly fixed-rate. At December 29, 2012, the estimated current fair value of our debt, based on quoted market prices when available or then-current interest rates for similar obligations with like maturities, including the timber notes, was approximately $162 million more 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 and underlying guarantees. The debt and receivables related to the timber notes have fixed interest rates and are reflected in the tables below, along with the carrying amounts and estimated fair values.

We were not a party to any material derivative financial instruments in 2012 or 2011.

 

37


Table of Contents

The following tables provide information about our financial instruments outstanding at December 29, 2012 that are sensitive to changes in interest rates. For debt obligations, the tables present principal cash flows and related weighted average interest rates by expected maturity dates. For obligations with variable interest rates, the table sets forth payout amounts based on rates as of December 29, 2012 and does not attempt to project future rates. The following tables do 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 investment advisors and take action, where appropriate, in terms of setting investment strategy and agreed contribution levels.

 

     Expected Payments  
     ($ in millions)  
     2013     2014     2015     2016     2017     Thereafter     Total  

Recourse debt:

              

Fixed-rate debt payments

   $ 0.4      $ 0.3      $ 0.2      $ 20.3      $ 0.1      $ 204.3      $ 225.6   

Weighted average interest rates

     6.3     4.5     3.5     7.3     3.2     6.3     6.4

Variable-rate debt payments

   $ 9.8      $ 1.3      $      $      $      $      $ 11.1   

Weighted average interest rates

     7.1     8.1             7.2

Non-recourse debt:

              

Securitization Notes-Wachovia(a)

   $      $      $      $      $      $ 735.0      $ 735.0   

Average interest rates

               5.4     5.4

 

(a) There is no recourse against OfficeMax on the Securitization Notes as recourse is limited to proceeds from the pledged Installment Notes receivables and underlying guaranty. The debt remains outstanding until it is legally extinguished, which will be when paid in cash or when the Installment Notes and guaranty are transferred to and accepted by the Securitization Note holders.

 

     2012      2011  
     Carrying
amount
     Fair
value
     Carrying
amount
     Fair
value
 
     (millions)  

Financial assets:

           

Timber notes receivable

           

Wachovia

   $ 817.5       $ 986.4       $ 817.5       $ 943.7   

Lehman

                     81.8         81.8   

Financial liabilities:

           

Recourse debt

   $ 236.2       $ 229.4       $ 268.2       $ 240.8   

Non-recourse debt

           

Wachovia

   $ 735.0       $ 903.9       $ 735.0       $ 858.8   

Lehman

                     735.0         81.8   

 

38


Table of Contents

Changes in foreign currency exchange rates expose us to financial market risk. We occasionally use derivative financial instruments, such as forward exchange contracts, to manage our exposure associated with commercial transactions and certain liabilities that are denominated in a currency other than the currency of the operating unit entering into the underlying transaction. We generally do not enter into derivative instruments for any other purpose. We do not speculate using derivative instruments.

The estimated fair values of our other financial instruments, including cash and cash equivalents and receivables are the same as their carrying values. Concentration of credit risks with respect to trade receivables is limited due to the wide variety of vendors, customers and channels to and through which our products are sourced and sold, as well as their dispersion across many geographic areas. In the fourth quarter of 2011, we became aware of financial difficulties at one of our large Contract customers. We granted the customer extended payment terms and implemented creditor oversight provisions. The receivable from this customer was $30 million at December 29, 2012, and substantially all of that balance has been collected to date. Based on our ongoing sales to this customer, we continue to carry similar receivable balances, which we monitor closely.

Asset Impairments

We are required for accounting purposes to assess the carrying value of other intangible assets annually or whenever circumstances indicate that a decline in value may have occurred. No impairment was recorded related to other intangible assets in 2012, 2011 or 2010.

For other long lived assets, we are also required to assess the carrying value when circumstances indicate that a decline in value may have occurred. Based on the operating performance of certain of our retail stores due to the macroeconomic factors and market specific change in expected demographics, we determined that there were indicators of potential impairment relating to our retail stores in 2012, 2011 and 2010. Therefore, we performed the required impairment tests and recorded non-cash charges of $11.4 million, $11.2 million and $11.0 million, respectively, to impair long-lived assets pertaining to certain retail stores.

Facility Closure Reserves

We conduct regular reviews of our real estate portfolio to identify underperforming facilities, and close those facilities that are no longer strategically or economically beneficial. 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, primarily the location’s 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 payments.

In 2012, we recorded charges of $41.0 million related to the closing of 29 underperforming domestic stores prior to the end of their lease terms, all of which was associated with the lease liability. During 2011, we recorded charges of $5.6 million related to the closing of six underperforming domestic stores prior to the end of their lease term, of which $5.4 million was related to the lease liability and $0.2 million was related to asset impairments. In 2010, we recorded charges of $13.1 million related to facility closures, of which $11.7 million was related to the lease liability and other costs associated with closing eight domestic stores prior to the end of their lease terms.

At December 29, 2012, the facility closure reserve was $74.6 million, with $21.8 million included in current liabilities and $52.8 million included in long-term liabilities. The vast majority of the reserve represents future lease obligations of $126.8 million, net of anticipated sublease income of approximately $52.2 million. Cash payments relating to the facility closures were $20.7 million in 2012 and $22.3 million in both 2011 and 2010. We anticipate payments in 2013 to be approximately $22 million.

In addition, we were the lessee of a legacy, building materials manufacturing facility near Elma, Washington until the end of 2010. During 2006, we ceased operations at the facility, fully impaired the assets and

 

39


Table of Contents

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 2010, we sold the facility’s equipment and terminated the lease. As a result, we recorded pre-tax income of approximately $9.4 million to adjust the associated reserve. This income is reported in other operating expenses, net in our Consolidated Statements of Operations.

Environmental

As an owner and operator of real estate, we may be liable under environmental laws for the cleanup of past and present spills and releases of hazardous or toxic substances on or from our properties and operations. We can be found liable under these laws if we knew of, or were responsible for, the presence of such substances. In some cases, this liability may exceed the value of the property itself.

Environmental liabilities that relate to the operation of the paper and forest products businesses and timberland assets prior to the closing of the sale of our paper, forest products and timberland assets in 2004 continue to be our liabilities. We have been notified that we are a “potentially responsible party” under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) or similar federal and state laws, or have received a claim from a private party, with respect to certain sites where hazardous substances or other contaminants are or may be located. These sites relate to operations either no longer owned by the Company or unrelated to its ongoing operations. For sites where a range of potential liability can be determined, we have established appropriate reserves. We cannot predict with certainty the total response and remedial costs, our share of the total costs, the extent to which contributions will be available from other parties, or the amount of time necessary to complete the cleanups. Based on our investigations; our experience with respect to cleanup of hazardous substances; the fact that expenditures will, in many cases, be incurred over extended periods of time; and in some cases the number of solvent potentially responsible parties, we do not believe that the known actual and potential response costs will, in the aggregate, materially affect our financial position, our results of operations or our cash flows.

Critical Accounting Estimates

The Securities and Exchange Commission defines critical accounting estimates as those that are most important to the portrayal of our financial condition and results. These estimates require management’s most difficult, subjective or complex judgments, often as a result of the need to estimate matters that are inherently uncertain. The accounting estimates that we currently consider critical are as follows:

Vendor Rebates and Allowances

We participate in volume purchase rebate programs, some of which provide for tiered rebates based on defined levels of purchase volume. We also participate in programs that enable us to receive additional vendor subsidies by promoting the sale of vendor products. Vendor rebates and allowances are accrued as earned. Rebates and allowances received as a result of attaining defined purchase levels are accrued over the incentive period based on the terms of the vendor arrangement and estimates of qualifying purchases during the rebate program period. These estimates are reviewed on a quarterly basis and adjusted for changes in anticipated product sales and expected purchase levels. Vendor rebates and allowances earned are recorded as a reduction in the cost of merchandise inventories and are included in operations (as a reduction of cost of goods sold) in the period the related product is sold.

We provide an allowance to cover disputes in the event that our interpretation of the contract terms differ from our vendors’ and our vendors seek to recover some of the consideration from us as well as for uncollectible accounts. These allowances are based on specific information regarding disputes and historical experience as well as the current financial condition of our vendors. If actual recoveries are different than those estimated, adjustments to the recorded allowance may be required.

 

40


Table of Contents

Merchandise Inventories

Inventories consist of office products merchandise and are stated at the lower of weighted average cost or net realizable value. We estimate the realizable value of inventory using assumptions about future demand, market conditions and product obsolescence. If the estimated realizable value is less than cost, the inventory value is reduced to its estimated realizable value. If expectations regarding future demand and market conditions are inaccurate or unexpected changes in technology or other factors affect demand, we could be exposed to additional losses.

Throughout the year, we perform physical inventory counts at a significant number of our locations. For periods subsequent to each location’s last physical inventory count, an allowance for estimated shrinkage is provided based on historical shrinkage results and current business trends. If actual losses as a result of inventory shrinkage are different than management’s estimates, adjustments to the allowance for inventory shrinkage may be required.

Pensions and Other Postretirement Benefits

The Company sponsors noncontributory defined benefit pension plans covering certain terminated employees, vested employees, retirees, and some active employees, primarily in Contract. The Company also sponsors various retiree medical benefit plans. At December 29, 2012, the funded status of our defined benefit pension and other postretirement benefit plans was a liability of $325.4 million. Changes in assumptions related to the measurement of funded status could have a material impact on the amount reported. We are required to calculate our pension expense and liabilities using actuarial assumptions, including a discount rate assumption and a long-term asset return assumption. We base our discount rate assumption on the rates of return for a theoretical portfolio of high-grade corporate bonds (rated AA- or better) with cash flows that generally match our expected benefit payments in future years. We base our long-term asset return assumption on the average rate of earnings expected on invested funds. We believe that the accounting estimate related to pensions is a critical accounting estimate because it is highly susceptible to change from period to period, based on the performance of plan assets, actuarial valuations and changes in interest rates, and the effect on our financial position and results of operations could be material.

For 2013, our discount rate assumption used in the measurement of our net periodic benefit cost is 3.88%, and our expected return on plan assets is 7.80%. Using these assumptions, our 2013 pension expense will be approximately $2.7 million. If we were to decrease our estimated discount rate assumption used in the measurement of our net periodic benefit cost to 3.63% and our expected return on plan assets to 7.55%, our 2013 pension expense would be approximately $4.6 million. If we were to increase our discount rate assumption used in the measurement of our net periodic benefit cost to 4.13% and our expected return on plan assets to 8.05%, our 2013 pension expense would be approximately $0.7 million.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company is subject to tax audits in numerous jurisdictions in the U.S. and around the world. Tax audits by their very nature are often complex and can require several years to complete. In the normal course of business, the Company is subject to challenges from the IRS and other tax authorities regarding amounts of taxes

 

41


Table of Contents

due. These challenges may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. We recognize the benefits of tax positions that are more likely than not of being sustained upon audit based on the technical merits of the tax position in the consolidated financial statements; positions that do not meet this threshold are not recognized. For tax positions that are at least more likely than not of being sustained upon audit, the largest amount of the benefit that is more likely than not of being sustained is recognized in the consolidated financial statements. Years prior to 2006 are no longer subject to U.S. federal income tax examination. During 2012, the Company effectively completed all audit work related to U.S. federal income tax returns for the years 2006 through 2009 and expects final completion to occur in 2013. The Company is no longer subject to state income tax examinations by tax authorities in its major state jurisdictions for years before 2003, and the Company is no longer subject to income tax examinations prior to 2005 for its major foreign jurisdictions.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making the assessment of whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Significant judgment is required in determining our uncertain tax positions. We have established accruals for uncertain tax positions using management’s best judgment and adjust these liabilities as warranted by changing facts and circumstances. A change in our uncertain tax positions, in any given period, could have a significant impact on our results of operations and cash flows for that period.

The determination of the Company’s provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is also required in assessing the timing and amounts of deductible and taxable items.

Facility Closure Reserves

The Company conducts regular reviews of its real estate portfolio to identify underperforming facilities, and closes those facilities that are no longer strategically or economically beneficial. A liability for the cost associated with such a closure is recorded at its fair value in the period in which it is incurred, primarily the location’s cease-use date. These costs are included in facility closure reserves and include provisions for the present value of future lease obligations, less contractual or estimated sublease income. At December 29, 2012, the vast majority of the reserve represents future lease obligations of $126.8 million, net of anticipated sublease income of approximately $52.2 million. For each closed location, we estimate future sublease income based on current real estate trends by market and location-specific factors, including the age and quality of the location, as well as our historical experience with similar locations. If we had used different assumptions to estimate future sublease income our reserves would be different and the difference could be material. In addition, if actual sublease income is different than our estimates, adjustments to the recorded reserves may be required.

Environmental and Asbestos Reserves

Environmental and asbestos liabilities that relate to the operation of the paper and forest products businesses and timberland assets prior to the sale of the paper, forest products and timberland assets continue to be liabilities of OfficeMax. We are subject to a variety of environmental laws and regulations. We estimate our environmental liabilities based on various assumptions and judgments, as we cannot predict with certainty the total response and remedial costs, our share of total costs, the extent to which contributions will be available from other parties or the amount of time necessary to complete any remediation. In making these judgments and assumptions, we consider, among other things, the activity to date at particular sites, information obtained through consultation with applicable regulatory authorities and third-party consultants and contractors and our historical experience at

 

42


Table of Contents

other sites that are judged to be comparable. Due to the number of uncertainties and variables associated with these assumptions and judgments and the effects of changes in governmental regulation and environmental technologies, the precision of the resulting estimates of the related liabilities is subject to uncertainty. We regularly monitor our estimated exposure to our environmental and asbestos liabilities. As additional information becomes known, our estimates may change.

Self-insurance

The Company is self-insured for certain losses related to workers’ compensation and medical claims as well as general and auto liability. The expected ultimate cost for claims incurred is recognized as a liability in the Consolidated Balance Sheets. The expected ultimate cost of claims incurred is estimated based principally on an analysis of historical claims data and estimates of claims incurred but not reported. Losses are accrued on a discounted basis and charged to operations when it is probable that a loss has been incurred and the amount can be reasonably estimated. If actual losses are different than those estimated adjustments to the accrued liabilities may be required.

Indefinite-Lived Intangibles and Other Long-Lived Assets Impairment

GAAP requires us to assess indefinite-lived intangible assets for impairment at least annually in the absence of an indicator of possible impairment and immediately upon an indicator of possible impairment. In assessing impairment, we are required to make estimates of the fair values of the assets. If we determine the fair values are less than the carrying amount recorded on our Consolidated Balance Sheets, we must recognize an impairment loss in our financial statements. We are also required to assess our definite-lived intangibles and long-lived assets for impairment whenever an indicator of possible impairment exists. In assessing impairment, the statement requires us to make estimates of the fair values of the assets. If we determine the fair values are less than the carrying values of the assets, we must recognize an impairment loss in our financial statements.

The measurement of impairment of indefinite life intangibles and other long-lived assets includes estimates and assumptions which are inherently subject to significant uncertainties. In testing for impairment, we measure the estimated fair value of our intangibles and fixed assets based upon discounted future operating cash flows using a discount rate reflecting a market-based, weighted average cost of capital. In estimating future cash flows, we use our internal budgets and operating plans, which include many assumptions about future growth prospects, margin rates and cost factors. Differences in assumptions used in projecting future operating cash flows and in selecting an appropriate discount rate could have a significant impact on the determination of fair value and impairment amounts.

Recently Issued or Newly Adopted Accounting Standards

In July 2012, the FASB issued guidance that permits an entity to make a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset, other than goodwill, is impaired. If, after making the qualitative assessment, an entity determines it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, then performing a quantitative impairment test is unnecessary. The guidance was effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. This guidance, which the Company adopted for the third quarter of 2012, did not have any impact on the Company’s results of operations, financial position or cash flows.

In February 2013, the FASB issued guidance which expands disclosure requirements for other comprehensive income. The guidance requires the reporting of the effect of the reclassification of items out of accumulated other comprehensive income (AOCI) on each affected net income line item. The guidance is effective for interim and annual periods beginning on or after December 15, 2012 and is to be applied prospectively. The adoption of this guidance affects the presentation of certain elements of the Company’s

 

43


Table of Contents

financial statements, but these changes in presentation will not have a material impact on our financial statements.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information concerning quantitative and qualitative disclosures about market risk is included under the caption “Disclosures of Financial Market Risks” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K and is incorporated herein by reference.

 

44


Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

OfficeMax Incorporated and Subsidiaries

Consolidated Statements of Operations

 

     Fiscal year ended  
     December 29,
2012
    December 31,
2011
    December 25,
2010
 
     (thousands, except per-share amounts)  

Sales

   $ 6,920,384      $ 7,121,167      $ 7,150,007   

Cost of goods sold and occupancy costs

     5,135,927        5,311,987        5,300,355   
  

 

 

   

 

 

   

 

 

 

Gross profit

     1,784,457        1,809,180        1,849,652   

Operating expenses

      

Operating, selling, and general and administrative expenses

     1,645,245        1,690,967        1,689,130   

Asset impairments

     11,376        11,197        10,979   

Other operating expenses, net

     103,558        20,530        3,077   
  

 

 

   

 

 

   

 

 

 

Operating income

     24,278        86,486        146,466   

Interest expense

     (69,765     (73,136     (73,333

Interest income

     43,772        44,000        42,635   

Gain on extinguishment of non-recourse debt

     670,766                 

Other income (expense), net

     489        287        (32
  

 

 

   

 

 

   

 

 

 

Pre-tax income

     669,540        57,637        115,736   

Income tax expense

     (248,722     (19,517     (41,872
  

 

 

   

 

 

   

 

 

 

Net income attributable to OfficeMax and noncontrolling interest

     420,818        38,120        73,864   

Joint venture results attributable to noncontrolling interest

     (4,028     (3,226     (2,709
  

 

 

   

 

 

   

 

 

 

Net income attributable to OfficeMax

   $ 416,790      $ 34,894      $ 71,155   

Preferred dividends

     (2,096     (2,123     (2,527
  

 

 

   

 

 

   

 

 

 

Net income available to OfficeMax common shareholders

   $ 414,694      $ 32,771      $ 68,628   
  

 

 

   

 

 

   

 

 

 

Net income per common share

      

Basic

   $ 4.79      $ 0.38      $ 0.81   

Diluted

   $ 4.74      $ 0.38      $ 0.79   

See accompanying notes to consolidated financial statements

 

45


Table of Contents

OfficeMax Incorporated and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

 

     Fiscal year ended  
     December 29,
2012
    December 31,
2011
    December 25,
2010
 
     (thousands)  

Net income attributable to OfficeMax and noncontrolling interest

   $ 420,818      $ 38,120      $ 73,864   

Other comprehensive income (loss):

      

Cumulative foreign currency translation adjustment

     17,587        (8,949     22,076   

Pension and postretirement liability adjustment, net of tax

     37,127        (88,754     16,356   

Unrealized hedge gain (loss), net of tax

     (157     1,041        (884
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     54,557        (96,662     37,548   
  

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to OfficeMax and noncontrolling interest

   $ 475,375      $ (58,542   $ 111,412   
  

 

 

   

 

 

   

 

 

 

Less:

      

Joint venture results attributable to noncontrolling interest

   $ 4,028      $ 3,226      $ 2,709   

Cumulative foreign currency translation adjustment attributable to noncontrolling interest

     2,417        (2,754     786   
  

 

 

   

 

 

   

 

 

 

Joint venture comprehensive income attributable to noncontrolling interest

   $ 6,445      $ 472      $ 3,495   
  

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to OfficeMax

   $ 468,930      $ (59,014   $ 107,917   
  

 

 

   

 

 

   

 

 

 

 

See accompanying notes to consolidated financial statements

 

46


Table of Contents

OfficeMax Incorporated and Subsidiaries

Consolidated Balance Sheets

 

     December 29,
2012
    December 31,
2011
 
     (thousands, except share
and per-share amounts)
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 495,056      $ 427,111   

Receivables, net

     528,279        558,635   

Inventories

     812,454        821,999   

Deferred income taxes and receivables

     68,568        63,382   

Other current assets

     79,527        67,847   
  

 

 

   

 

 

 

Total current assets

     1,983,884        1,938,974   

Property and equipment:

    

Land and land improvements

     40,404        40,245   

Buildings and improvements

     501,055        484,900   

Machinery and equipment

     797,378        783,492   
  

 

 

   

 

 

 

Total property and equipment

     1,338,837        1,308,637   

Accumulated depreciation

     (986,611     (943,701
  

 

 

   

 

 

 

Net property and equipment

     352,226        364,936   

Intangible assets, net

     80,765        81,520   

Investment in Boise Cascade Holdings, L.L.C.

     175,000        175,000   

Timber notes receivable

     817,500        899,250   

Deferred income taxes

     108,759        370,439   

Other non-current assets

     266,181        239,156   
  

 

 

   

 

 

 

Total assets

   $ 3,784,315      $ 4,069,275   
  

 

 

   

 

 

 

 

See accompanying notes to consolidated financial statements

 

47


Table of Contents

OfficeMax Incorporated and Subsidiaries

Consolidated Balance Sheets

(thousands, except share and per-share amounts)

 

     December 29,
2012
    December 31,
2011
 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 699,636      $ 654,918   

Income tax payable

     4,222        9,553   

Accrued expenses and other current liabilities:

    

Compensation and benefits

     122,662        101,516   

Other

     219,889        208,447   

Current portion of debt

     10,232        38,867   
  

 

 

   

 

 

 

Total current liabilities

     1,056,641        1,013,301   

Long-term debt, less current portion

     225,962        229,323   

Non-recourse debt

     735,000        1,470,000   

Other long-term items:

    

Compensation and benefits obligations

     365,568        393,293   

Deferred gain on sale of assets

     179,757        179,757   

Other long-term liabilities

     142,397        182,685   

Noncontrolling interest in joint venture

     44,617        31,923   

Shareholders’ equity:

    

Preferred stock—no par value; 10,000,000 shares authorized; Series D ESOP: $.01 stated value; 608,693 and 638,353 shares outstanding

     27,391        28,726   

Common stock—$2.50 par value; 200,000,000 shares authorized; 86,883,521 and 86,158,662 shares outstanding

     217,209        215,397   

Additional paid-in capital

     1,018,667        1,015,374   

Accumulated deficit

     (91,373     (500,843

Accumulated other comprehensive loss

     (137,521     (189,661
  

 

 

   

 

 

 

Total OfficeMax shareholders’ equity

     1,034,373        568,993   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 3,784,315      $ 4,069,275   
  

 

 

   

 

 

 

 

See accompanying notes to consolidated financial statements

 

48


Table of Contents

OfficeMax Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

 

     Fiscal year ended  
     December 29,
2012
    December 31,
2011
    December 25,
2010
 
     (thousands)  

Cash provided by operations:

      

Net income attributable to OfficeMax and noncontrolling interest

   $ 420,818      $ 38,120      $ 73,864   

Non-cash items in net income:

      

Dividend income from investment in Boise Cascade Holdings, L.L.C.

     (8,455     (7,846     (7,254

Depreciation and amortization

     74,124        84,218        100,936   

Non-cash gain on extinguishment of non-recourse debt

     (670,766              

Non-cash impairment charges

     11,376        11,197        10,979   

Pension and other postretirement benefits expense

     57,076        8,328        4,965   

Deferred income tax expense

     227,111        7,419        26,123   

Other

     56,312        19,296        2,530   

Changes in operating assets and liabilities:

      

Receivables

     37,368        (14,674     6,678   

Inventories

     20,508        17,269        (27,606

Accounts payable and accrued liabilities

     59,956        (54,873     (51,515

Current and deferred income taxes

     (13,756     (1,425     20,775   

Payments of loans on company-owned life insurance policies

                   (44,442

Other

     (86,471     (53,350     (27,896
  

 

 

   

 

 

   

 

 

 

Cash provided by operations

     185,201        53,679        88,137   
  

 

 

   

 

 

   

 

 

 

Cash used for investment:

      

Expenditures for property and equipment

     (87,178     (69,632     (93,511

Proceeds from sales of assets, net

     1,934        259        6,173   
  

 

 

   

 

 

   

 

 

 

Cash used for investment

     (85,244     (69,373     (87,338
  

 

 

   

 

 

   

 

 

 

Cash used for financing:

      

Cash dividends paid:

      

Common stock

     (3,470              

Preferred stock

     (2,096     (3,286     (2,698
  

 

 

   

 

 

   

 

 

 
     (5,566     (3,286     (2,698

Borrowings (payments) of short-term debt, net

     5,969        20        (654

Payments of long-term debt

     (38,517     (6,136     (21,858

Purchase of preferred stock

     (1,046     (2,125     (5,233

Proceeds from exercise of stock options

     1,029        1,949        1,961   

Payments related to other share-based compensation

     (1,370     (4,854       

Other

     4,665        (3,520     13   
  

 

 

   

 

 

   

 

 

 

Cash used for financing

     (34,836     (17,952     (28,469
  

 

 

   

 

 

   

 

 

 

Effect of exchange rates on cash and cash equivalents

     2,824        (1,569     3,426   

Increase (decrease) in cash and cash equivalents

     67,945        (35,215     (24,244
  

 

 

   

 

 

   

 

 

 

Balance at beginning of the year

     427,111        462,326        486,570   
  

 

 

   

 

 

   

 

 

 

Balance at end of the year

   $ 495,056      $ 427,111      $ 462,326   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements

 

49


Table of Contents

OfficeMax Incorporated and Subsidiaries

Consolidated Statements of Equity

 

          For the fiscal years ended December 29, 2012, December 31, 2011 and December 25, 2010  

Common
Shares
Outstanding

   

 

  Preferred
Stock
    Common
Stock
    Additional
Paid-In
Capital
    Retained
Earnings
(Accumulated
Deficit)
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
OfficeMax
Share-
holders’
Equity
        Non-
controlling
Interest
 
          (thousands, except share amounts)  
  84,624,726     

Balance at December 26, 2009

  $ 36,479      $ 211,562      $ 989,912      $ (602,242   $ (132,515   $ 503,196        $ 28,059   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 
 

Comprehensive income:

               
 

Net income

                         71,155               71,155          2,709   
 

Cumulative foreign currency translation adjustment

            21,290        21,290          786   
 

Pension and postretirement liability adjustment, net of tax

            16,356        16,356            
 

Unrealized hedge loss, net of tax

            (884     (884         
 

Preferred stock dividend declared

                         (2,527       (2,527         
  950     

Restricted stock unit activity

                  7,972                      7,972            
 

Non-controlling interest fair value adjustment

                  (17,763                   (17,763       17,763   
  408,519     

Stock options exercised

           1,021        940                      1,961            
  23,515     

Other

    (5,578     61        5,518        8               9          (71

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 
  85,057,710     

Balance at December 25, 2010

  $ 30,901      $ 212,644      $ 986,579      $ (533,606   $ (95,753   $ 600,765        $ 49,246   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 
 

Comprehensive income:

               
 

Net income

                         34,894               34,894          3,226   
 

Cumulative foreign currency translation adjustment

            (6,195     (6,195       (2,754
 

Pension and postretirement liability adjustment, net of tax

            (88,754     (88,754         
 

Unrealized hedge loss, net of tax

            1,041        1,041            
 

Preferred stock dividend declared

                         (2,123            (2,123         
  685,373     

Restricted stock unit activity

           1,711        3,908                      5,619            
 

Non-controlling interest fair value adjustment

                  17,763                      17,763          (17,763
  405,988     

Stock options exercised

           1,015        934                      1,949            
  9,591     

Other

    (2,175     27        6,190        (8            4,034          (32

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 
  86,158,662     

Balance at December 31, 2011

  $ 28,726      $ 215,397      $ 1,015,374      $ (500,843   $ (189,661   $ 568,993        $ 31,923   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 
 

Comprehensive income:

               
 

Net income

                         416,790               416,790          4,028   
 

Cumulative foreign currency translation adjustment

            15,170        15,170          2,417   
 

Pension and postretirement liability adjustment, net of tax

            37,127        37,127            
 

Unrealized hedge loss, net of tax

            (157     (157         
 

Cash dividend declared:

               
 

Common stock

                         (5,217            (5,217         
 

Preferred stock

                         (2,096            (2,096         
  452,854     

Restricted stock unit activity

           1,132        1,056                      2,188            
 

Non-controlling interest fair value adjustment

                  (6,253                   (6,253       6,253   
  212,441     

Stock options exercised

           531        498                      1,029            
  59,564     

Other

    (1,335     149        7,992        (7            6,799          (4

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 
  86,883,521     

Balance at December 29, 2012

  $ 27,391      $ 217,209      $ 1,018,667      $ (91,373   $ (137,521   $ 1,034,373        $ 44,617   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

See accompanying notes to consolidated financial statements

 

50


Table of Contents

Notes to Consolidated Financial Statements

 

1. Summary of Significant Accounting Policies

Nature of Operations

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, solutions and office furniture and facilities products to large, medium and small businesses, government offices and consumers. OfficeMax customers are served by approximately 29,000 associates through direct sales, catalogs, the Internet and a network of retail stores located throughout the United States, Canada, Australia, New Zealand and Mexico. The Company’s common stock is traded on the New York Stock Exchange under the ticker symbol OMX. The Company’s corporate headquarters is located in Naperville, Illinois, and the OfficeMax website address is www.officemax.com.

The Company manages its business using three reportable segments: OfficeMax, Contract (“Contract segment” or “Contract”); OfficeMax, Retail (“Retail segment” or “Retail”); and Corporate and Other. The Contract segment markets and sells office supplies and paper, technology products and solutions, office furniture, print and document services and facilities products directly to large corporate and government offices, as well as to small and medium-sized offices through field salespeople, outbound telesales, catalogs, the Internet and, primarily in foreign markets, through office products stores. The Retail segment markets and sells office supplies and paper, print and document services, technology products and solutions and office furniture to small and medium-sized businesses and consumers through a network of retail stores. Management reviews the performance of the Company based on these segments. We present information pertaining to our segments in Note 14, “Segment Information”.

Consolidation

The 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 1960’s, 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.

Fiscal Year

The Company’s fiscal year-end is the last Saturday in December. Fiscal year 2012 ended on December 29, 2012, fiscal year 2011 ended on December 31, 2011, and fiscal year 2010 ended on December 25, 2010. Due primarily to statutory requirements, the Company’s international businesses maintain calendar years with December 31 year-ends, with the exception of, Grupo OfficeMax S. de R.L. de C.V. (“Grupo OfficeMax”), our majority-owned joint-venture in Mexico, for which the fiscal year-end is the last Saturday in December beginning with the 2012 fiscal year. Grupo OfficeMax reported one month in arrears in 2011 and 2010. This practice was discontinued in 2012, resulting in fiscal year 2012 including 13 months for Grupo OfficeMax. This change in accounting policy did not have a material impact on the Company’s financial statements, and, therefore, prior year’s amounts have not been restated. Due to the use of a fiscal year that does not agree to a calendar month end, fiscal year 2011 included 53 weeks for our U.S. businesses. Fiscal years 2012 and 2010 included 52 weeks for our U.S. businesses.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the

 

51


Table of Contents

reported amounts of assets and liabilities and disclosures about contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results are likely to differ from those estimates, but management does not believe such differences will materially affect the Company’s financial position, results of operations or cash flows. Significant items subject to such estimates and assumptions include the recognition of vendor rebates and allowances; the carrying amount of intangibles and long lived assets; inventories; income tax assets and liabilities; facility closure reserves; self insurance; environmental and asbestos liabilities; and assets and obligations related to employee benefits including the pension plans.

Foreign Currency Translation

Local currencies are considered the functional currencies for the Company’s operations outside the United States. Assets and liabilities of foreign operations are translated into U.S. dollars at the rate of exchange in effect at the balance sheet date with the related translation adjustments reported in shareholders’ equity as a component of accumulated other comprehensive loss. Revenues and expenses are translated into U.S. dollars at average monthly exchange rates prevailing during the year. Foreign currency transaction gains and losses related to assets and liabilities that are denominated in a currency other than the functional currency are reported in the Consolidated Statements of Operations in the periods they occur.

Revenue Recognition

Revenue from the sale of products is recognized at the time both title and the risk of ownership are transferred to the customer, which generally occurs upon delivery to the customer or third-party delivery service for contract, catalog and Internet sales, and at the point of sale for retail transactions. Service revenue is recognized as the services are rendered. Revenue is reported less an appropriate provision for returns and net of coupons, rebates and other sales incentives. The Company offers rebate programs to some of its Contract customers. Customer rebates are recorded as a reduction in sales and are accrued as earned by the customer.

Revenue from the sale of extended warranty contracts is reported on a commission basis at the time of sale, except in a limited number of states where state law specifies the Company as the legal obligor. In such states, the revenue from the sale of extended warranty contracts is recorded at the gross amount and recognized ratably over the contract period. The performance obligations and risk of loss associated with extended warranty contracts sold by the Company are assumed by an unrelated third party. Costs associated with these contracts are recognized in the same period as the related revenue.

Fees for shipping and handling charged to customers in connection with sale transactions are included in sales. Costs related to shipping and handling are included in cost of goods sold and occupancy costs. Taxes collected from customers are accounted for on a net basis and are excluded from sales.

Cost of goods sold and occupancy costs

Cost of goods sold and occupancy costs include inventory costs, net of estimable vendor allowances and rebates, cash discounts on purchased inventory, freight costs to bring merchandise to our stores and warehouses, delivery costs to bring merchandise to our customers, provisions for inventory value and physical adjustments, as well as occupancy costs, including depreciation or facility rent of inventory-holding and selling locations and related utilities, real estate taxes and building repairs and maintenance expense. Freight and delivery costs include all costs, including payroll, associated with our Retail (PowerMax) distribution centers and all private fleet and third party transportation services, including Company delivery personnel.

 

52


Table of Contents

Operating, selling and general and administrative expenses

Operating, selling and general and administrative expenses include employee payroll, payroll taxes and benefits and other expenses related to selling activities, distribution center activities in our Contract segment such as picking/packing and shipping/receiving, as well as management and staff functions, such as information technology, human resources, finance, legal, merchandising and product development functions. Expenses related to selling activities include costs associated with store personnel, advertising, sales force personnel and other selling activities. Operating, selling and general and administrative expenses also include expenses and income related to our frozen pension plans and other legacy operating activities, such as dividends related to our investment in Boise Cascade Holdings, L.L.C.

Cash and Cash Equivalents

Cash equivalents include short-term debt instruments that have an original maturity of three months or less at the date of purchase. The Company’s banking arrangements allow the Company to fund outstanding checks when presented to the financial institution for payment. This cash management practice frequently results in a net cash overdraft position for accounting purposes, which occurs when total issued checks exceed available cash balances at a single financial institution. The Company records its outstanding checks and bank overdrafts in accounts payable in the Consolidated Balance Sheets. The impact of outstanding checks and bank overdrafts are reported in cash provided by operations and cash used for financing, respectively, in the Consolidated Statements of Cash Flows.

Accounts Receivable

Accounts receivable relate primarily to amounts owed by customers for trade sales of products and services and amounts due from vendors under volume purchase rebate, cooperative advertising and various other marketing programs. An allowance for doubtful accounts is recorded to provide for estimated losses resulting from uncollectible accounts, and is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. Management believes that the Company’s exposure to credit risk associated with accounts receivable is limited due to the size and diversity of its customer and vendor base, which extends across many different industries and geographic regions. In the fourth quarter of 2011, we became aware of financial difficulties at one of our large Contract customers. We granted the customer extended payment terms and implemented creditor oversight provisions. The receivable from this customer was $30 million at December 29, 2012, and the customer is paying according to the agreed upon terms. Substantially all of this balance has been collected to date. Based on our ongoing sales to this customer, we continue to carry similar receivable balances, which we monitor closely.

At December 29, 2012 and December 31, 2011, the Company had allowances for doubtful accounts of $4.3 million and $3.9 million, respectively.

Vendor Rebates and Allowances

We participate in volume purchase rebate programs, some of which provide for tiered rebates based on defined levels of purchase volume. We also participate in programs that enable us to receive additional vendor subsidies by promoting the sale of vendor products. Vendor rebates and allowances are accrued as earned. Rebates and allowances received as a result of attaining defined purchase levels are accrued over the incentive period based on the terms of the vendor arrangement and estimates of qualifying purchases during the rebate program period. These estimates are reviewed on a quarterly basis and adjusted for changes in anticipated product sales and expected purchase levels. Vendor rebates and allowances earned are recorded as a reduction in the cost of merchandise inventories and are included in operations (as a reduction of cost of goods sold) in the period the related product is sold.

 

53


Table of Contents

Merchandise Inventories

Inventories consist of office products merchandise and are stated at the lower of weighted average cost or net realizable value. The Company estimates the realizable value of inventory using assumptions about future demand, market conditions and product obsolescence. If the estimated realizable value is less than cost, the inventory value is reduced to its estimated realizable value.

Throughout the year, the Company performs physical inventory counts at a significant number of our locations. For periods subsequent to each location’s last physical inventory count, an allowance for estimated shrinkage is provided based on historical shrinkage results and current business trends.

Property and Equipment

Property and equipment are recorded at cost. The Company calculates depreciation using the straight-line method over the estimated useful lives of the assets or the terms of the related leases. The estimated useful lives of depreciable assets are generally as follows: building and improvements, three to 40 years; machinery and equipment, which also include delivery trucks, furniture and office and computer equipment, three to 15 years. Leasehold improvements are reported as building and improvements and are typically amortized over the lesser of the term of the lease or the estimated lives of the improvements, which generally range from two to 20 years.

Long-Lived Assets Impairment

Long-lived assets, such as property, leasehold improvements, equipment and capitalized software costs, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized equal to the amount by which the carrying amount of the asset exceeds the fair value of the asset, which is estimated based on discounted cash flows. In 2012, 2011 and 2010 the Company determined that there were indicators of impairment, completed tests for impairment and recorded impairment of assets of individual retail stores, which consist primarily of leasehold improvements and fixtures. See Note 5, “Intangible Assets and Other Long-lived Assets,” for further discussion regarding impairment of long-lived assets.

Intangible Assets Impairment

Intangible assets represent the values assigned to trade names, customer lists and relationships and exclusive distribution rights of businesses acquired. Intangible assets with definite lives, which would include our customer lists and relationships and exclusive distribution rights of businesses acquired, are amortized over those lives and are reviewed for impairment in the same manner as long-lived assets discussed above. Intangible assets with indefinite lives, which would include our trade name assets, are not amortized but are tested for impairment at least annually, or more frequently if events and circumstances indicate that the asset might be impaired. Beginning in 2012, we may make a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset, other than goodwill, is impaired. If, after making the qualitative assessment, we determine it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, then performing a quantitative impairment test is unnecessary. If a quantitative impairment test is performed, the asset’s fair value is estimated and compared to its carrying value. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. At the end of 2012, 2011 2010, we performed quantitative impairment tests of our trade name assets and no impairment was recorded as a result.

Investment in Boise Cascade Holdings, L.L.C.

Investments in other companies are accounted for under the cost method, if the Company does not exercise significant influence over the other company. At December 29, 2012 and December 31, 2011, the Company held

 

54


Table of Contents

an investment in Boise Cascade Holdings, L.L.C. (the “Boise Investment”) which is accounted for under the cost method. In exchange for its investment in Boise Cascade Holdings, L.L.C., the Company received voting securities and non-voting securities. The non-voting securities of Boise Cascade Holdings, L.L.C. accrue dividends. It is the Company’s policy to record the income associated with the dividends on the non-voting securities as a reduction of operating, selling and general and administrative expenses in the Consolidated Statements of Operations. The voting securities do not accrue dividends. See Note 9, “Investment in Boise Cascade Holdings, L.L.C.,” for additional information related to the Company’s investments in affiliates.

Capitalized Software Costs

The Company capitalizes certain costs related to the acquisition and development of internal use software that is expected to benefit future periods. These costs are amortized using the straight-line method over the expected life of the software, which is typically three to seven years. Other non-current assets in the Consolidated Balance Sheets include unamortized capitalized software costs of $48.0 million and $32.5 million at December 29, 2012 and December 31, 2011, respectively. Amortization of capitalized software costs totaled $10.3 million, $10.5 million and $17.5 million in 2012, 2011 and 2010, respectively. Software development costs that do not meet the criteria for capitalization are expensed as incurred.

Pension and Other Postretirement Benefits

The Company sponsors noncontributory defined benefit pension plans covering certain terminated employees, vested employees, retirees and some active employees, primarily in Contract. The Company also sponsors various retiree medical benefit plans. The type of retiree medical benefits and the extent of coverage vary based on employee classification, date of retirement, location, and other factors. The Company explicitly reserves the right to amend or terminate its retiree medical plans at any time, subject only to constraints, if any, imposed by the terms of collective bargaining agreements. Amendment or termination may significantly affect the amount of expense incurred.

The Company recognizes the funded status of its defined benefit pension, retiree healthcare and other postretirement plans in the Consolidated Balance Sheets, with changes in the funded status recognized through accumulated other comprehensive loss, net of tax, in the year in which the changes occur. Actuarially-determined liabilities related to pension and postretirement benefits are recorded based on estimates and assumptions. Key factors used in developing estimates of these liabilities include assumptions related to discount rates, rates of return on investments, future compensation costs, healthcare cost trends, benefit payment patterns and other factors.

The Company measures changes in the funded status of its plans using actuarial models. Since the majority of participants in the plans are inactive, the actuarial models use an attribution approach that generally spreads recognition of the effects of individual events over the life expectancies of the participants. Net pension and postretirement benefit income or expense is also determined using assumptions which include discount rates and expected long-term rates of return on plan assets. The Company bases the discount rate assumption on the rates of return for a theoretical portfolio of high-grade corporate bonds (rated AA- or better) with cash flows that generally match our expected benefit payments in future years. The long-term asset return assumption is based on the average rate of earnings expected on invested funds, and considers several factors including the asset allocation, actual historical rates of return, expected rates of return and external data.

The Company’s policy is to fund its pension plans based upon actuarial recommendations and in accordance with applicable laws and income tax regulations. Pension benefits are primarily paid through trusts funded by the Company. All of the Company’s postretirement medical plans are unfunded. The Company pays postretirement benefits directly to the participants.

 

55


Table of Contents

See Note 12, “Retirement and Benefit Plans,” for additional information related to the Company’s pension and other postretirement benefits.

Facility Closure Reserves

The Company conducts regular reviews of its real estate portfolio to identify underperforming facilities, and closes those facilities that are no longer strategically or economically 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 location’s 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 payments. See Note 2, “Facility Closure Reserves,” for additional information related to the Company’s facility closure reserves.

Environmental and Asbestos Matters

Environmental and asbestos liabilities that relate to the operation of the paper and forest products businesses and timberland assets prior to the sale of the paper, forest products and timberland assets continue to be liabilities of OfficeMax. The Company accrues for losses associated with these types of obligations when such losses are probable and reasonably estimated.

Self-insurance

The Company is self-insured for certain losses related to workers’ compensation and medical claims as well as general and auto liability. The expected ultimate cost for claims incurred is recognized as a liability in the Consolidated Balance Sheets. The expected ultimate cost of claims incurred is estimated based principally on an analysis of historical claims data and estimates of claims incurred but not reported. Losses are accrued on a discounted basis and charged to operations when it is probable that a loss has been incurred and the amount can be reasonably estimated.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company is subject to tax audits in numerous jurisdictions in the U.S. and around the world. Tax audits by their very nature are often complex and can require several years to complete. In the normal course of business, the Company is subject to challenges from the IRS and other tax authorities regarding amounts of taxes due. These challenges may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. The benefits of tax positions that are more likely than not of being sustained upon audit based on the technical merits of the tax position are recognized in the consolidated financial statements; positions that do not meet this threshold are not recognized. For tax positions that are at least more likely than not of being sustained upon audit, the largest amount of the benefit that is more likely than not of being sustained is recognized in the consolidated financial statements. See Note 7, “Income Taxes,” for further discussion.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax

 

56


Table of Contents

assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making the assessment of whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Accruals for income tax exposures, including penalties and interest, expected to be settled within the next year are included in income tax payable with the remainder included in other long-term liabilities in the Consolidated Balance Sheets. Interest and penalties related to income tax exposures are recognized as incurred and included in income tax expense in the Consolidated Statements of Operations.

Advertising Costs

Advertising costs are either expensed the first time the advertising takes place or, in the case of direct-response advertising, capitalized and charged to expense in the periods in which the related sales occur. Advertising expense was $211.6 million in 2012, $225.3 million in 2011 and $228.3 million in 2010, and is recorded in operating, selling and general and administrative expenses in the Consolidated Statements of Operations.

Pre-Opening Expenses

The Company incurs certain non-capital expenses prior to the opening of a store. These pre-opening expenses consist primarily of straight-line rent from the date of possession, store payroll and supplies, and are expensed as incurred and reflected in operating, selling and general and administrative expenses. The Company recorded approximately $1.1 million and $1.0 million in pre-opening costs in 2012 and 2011, respectively. No pre-opening costs were recorded in 2010.

Leasing Arrangements

The Company conducts a substantial portion of its business in leased properties. Some of the Company’s leases contain escalation clauses and renewal options. The Company recognizes rental expense for leases that contain predetermined fixed escalation clauses on a straight-line basis over the expected term of the lease. The difference between the amounts charged to expense and the contractual minimum lease payment is recorded in other long-term liabilities in the Consolidated Balance Sheets. At December 29, 2012 and December 31, 2011, other long-term liabilities included approximately $47.2 million and $52.3 million, respectively, related to these future escalation clauses.

The expected term of a lease is calculated from the date the Company first takes possession of the facility, including any periods of free rent and any option or renewal periods management believes are probable of exercise. This expected term is used in the determination of whether a lease is capital or operating and in the calculation of straight-line rent expense. Rent abatements and escalations are considered in the calculation of minimum lease payments in the Company’s capital lease tests and in determining straight-line rent expense for operating leases. Straight-line rent expense is also adjusted to reflect any allowances or reimbursements provided by the lessor.

Derivative Instruments and Hedging Activities

The Company records all derivative instruments on the balance sheet at fair value. Changes in the fair value of derivative instruments are recorded in current earnings or deferred in accumulated other comprehensive loss, depending on whether a derivative is designated as, and is effective as, a hedge and on the type of hedging transaction. Changes in fair value of derivatives that are designated as cash flow hedges are deferred in accumulated other comprehensive income loss until the underlying hedged transactions are recognized in earnings, at which time any deferred hedging gains or losses are also recorded in earnings. If a derivative

 

57


Table of Contents

instrument is designated as a fair value hedge, changes in the fair value of the instrument are reported in current earnings and offset the change in fair value of the hedged assets, liabilities or firm commitments. The Company has no material outstanding derivative instruments at December 29, 2012 and did not have any material hedge transactions in 2012, 2011 or 2010.

Recently Issued or Newly Adopted Accounting Standards

In July 2012, the FASB issued guidance that permits an entity to make a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset, other than goodwill, is impaired. If, after making the qualitative assessment, an entity determines it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, then performing a quantitative impairment test is unnecessary. This guidance, which was adopted for the third quarter of 2012, did not have any impact on the Company’s results of operations, financial position, or cash flows.

In February 2013, the FASB issued guidance which expands disclosure requirements for other comprehensive income. The guidance requires the reporting of the effect of the reclassification of items out of accumulated other comprehensive income (AOCI) on each affected net income line item. The guidance is effective for interim and annual periods beginning on or after December 15, 2012 and is to be applied prospectively. The adoption of this guidance affects the presentation of certain elements of the Company’s financial statements, but these changes in presentation will not have a material impact on our financial statements.

 

2. Facility Closure Reserves

We conduct regular reviews of our real estate portfolio to identify underperforming facilities, and close those facilities that are no longer strategically or economically beneficial. 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, primarily the location’s 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. These facility closure charges are included in other operating expenses, net in the Consolidated Statements of Operations. Accretion expense is recognized over the life of the required payments and is included in operating, selling, and general and administrative expenses in the Consolidated Statements of Operations.

During 2012, we recorded facility closure charges of $41.0 million in our Retail segment related to closing 29 underperforming domestic stores prior to the end of their lease terms, all of which was related to the lease liability.

During 2011, we recorded facility closure charges of $5.6 million in our Retail segment related to closing six underperforming domestic stores prior to the end of their lease terms, of which $5.4 million was related to the lease liability and $0.2 million was related to asset impairments. During 2010, we recorded facility closure charges of $13.1 million in our Retail segment, of which $11.7 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 other items.

 

58


Table of Contents

Facility closure reserve account activity during 2012, 2011 and 2010 was as follows:

 

     Total  
     (thousands)  

Balance at December 26, 2009

   $ 61,572   

Charges related to stores closed in 2010

     13,069   

Transfer of deferred rent balance

     5,985   

Changes to estimated costs included in income

     (1,358

Cash payments

     (22,260

Accretion

     4,665   
  

 

 

 

Balance at December 25, 2010

   $ 61,673   

Charges related to stores closed in 2011

     5,406   

Transfer of deferred rent and other balances

     928   

Changes to estimated costs included in income

     262   

Cash payments

     (22,311

Accretion

     3,117   
  

 

 

 

Balance at December 31, 2011

   $ 49,075   

Charges related to stores closed in 2012

     41,042   

Transfer of deferred rent and other balances

     1,976   

Cash payments

     (20,740

Accretion

     3,290   
  

 

 

 

Balance at December 29, 2012

   $ 74,643   
  

 

 

 

Reserve balances were classified in the Consolidated Balance Sheets as follows:

 

     December 29,
2012
     December 31,
2011
 
     (thousands)  

Accrued expenses and other current liabilities - Other

   $ 21,794       $ 10,635   

Other long-term liabilities

     52,849         38,440   
  

 

 

    

 

 

 

Total

   $ 74,643       $ 49,075   
  

 

 

    

 

 

 

The facilities closure reserve consisted of the following:

 

     December 29,
2012
 
     (thousands)  

Estimated future lease obligations

   $ 126,842   

Less: anticipated sublease income

     (52,199
  

 

 

 

Total

   $ 74,643   
  

 

 

 

In addition, we were the lessee of a legacy building materials manufacturing facility near Elma, Washington until the end of 2010. During 2006, we ceased operations at the facility, fully impaired the assets and recorded a reserve for the related lease payments and other contract termination and closure costs. This reserve balance was not included in the facilities closure reserve described above. During 2010, we sold the facility’s equipment and terminated the lease and recorded income of approximately $9.4 million to adjust the associated reserve. This income is reported in other operating expenses, net in our Consolidated Statements of Operations.

 

3. Severance and Other Charges

Over the past few years, we have incurred significant charges related to Company personnel restructuring and reorganizations. These charges were included in other operating expenses, net in the Consolidated Statements of Operations.

 

59


Table of Contents

We recorded $6.2 million and $14.9 million of severance charges, related primarily to reorganizations in the sales and supply chain operations in the U.S., Canada and Australia/New Zealand contract operations in 2012 and 2011, respectively. As of December 29, 2012, $6.0 million of the severance charges remain unpaid and are included in accrued expenses and other current liabilities in the Consolidated Balance Sheets.

 

4. 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”). 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) ($817.5 million to each of Lehman and Wachovia). 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.

In December 2004, we completed a securitization transaction in which the Company’s 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 15-year non-amortizing, and were issued in two equal $735 million tranches paying interest of 5.54% and 5.42%, respectively. The Securitization Notes are reported as non-recourse debt in the Company’s Consolidated Balance Sheets.

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. Lehman’s bankruptcy filing constituted an event of default under the $817.5 million Installment Note guaranteed by Lehman (the “Lehman Guaranteed Installment Note”). We are required for accounting purposes to assess the carrying value of assets whenever circumstances indicate that a decline in value may have occurred. In 2008, we evaluated the carrying value of the Lehman Guaranteed Installment Note and reduced it to the estimated amount we then expected to collect ($81.8 million) by recording a non-cash impairment charge of $735.8 million, pre-tax.

An initial distribution of approximately $50 million on one of two claims was received from Lehman in the second quarter of 2012 by the Note Issuers, pursuant to a stipulation entered into on October 7, 2011 and approved by the bankruptcy court on December 14, 2011. The funds were released to the Securitization Note holders in the third quarter of 2012.

During the third quarter of 2012, we entered into an agreement that extinguished the Securitization Notes guaranteed by Lehman. Upon effectiveness of the agreement, the trustee for the Securitization Note holders released OfficeMax and its affiliates from the non-recourse liabilities following the transfer from OfficeMax to the trustee for the Securitization Note holders of the claims, the Lehman Guaranteed Installment Note and the guaranty. As a result of the extinguishment of this debt, we recognized a non-cash, pre-tax gain of $670.8 million, equal to the difference between the combined amount of the carrying value of the Securitization Notes guaranteed by Lehman ($735.0 million) and the related interest payable ($17.6 million) and the combined amount of the carrying value of the Lehman Guaranteed Installment Note and the initial distribution made by the Lehman estate (together $81.8 million.)

 

60


Table of Contents

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 notes structure allowed the Company to defer the resulting tax liability until 2020 ($529 million as of December 31, 2011), the maturity date for the Installment Notes. In the third quarter of 2012 as a result of the agreement transferring our rights to the remaining receivable and the extinguishment of Securitization Notes guaranteed by Lehman, $269 million of the deferred tax gain was recognized. Due to available alternative minimum tax credits and net operating losses, which will offset a significant portion of the taxable income, the Company made a cash tax payment of $15 million in the fourth quarter of 2012. At December 29, 2012, the remaining deferred tax gain of $260 million is related to the Installment Notes guaranteed by Wachovia (the “Wachovia Guaranteed Installment Notes”), and will be recognized upon maturity.

Through December 29, 2012, we have received all payments due under the Wachovia Guaranteed Installment Notes, which have consisted only of interest due on the notes, and have made all payments due on the related Securitization Notes guaranteed by Wachovia, again consisting only of interest due. As all amounts due on the Wachovia Guaranteed Installment Notes are current and we have no reason to believe that we will not be able to collect all amounts due according to the contractual terms of the Wachovia Guaranteed Installment Notes, the notes are reflected in our Consolidated Balance Sheets at their original principal amount of $817.5 million. The Wachovia Guaranteed Installment Notes and related Securitization Notes are scheduled to mature in 2020 and 2019, respectively. The Securitization Notes have an initial term that is approximately three months shorter than the Wachovia Guaranteed Installment Notes.

 

5. Intangible Assets and Other Long-lived Assets

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. Customer lists and relationships are amortized over three to 20 years and exclusive distribution rights over ten years. Intangible assets consisted of the following at year-end:

 

     2012  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
 
     (thousands)  

Trade names

   $ 66,000       $      $ 66,000   

Customer lists/relationships and exclusive distribution rights

     34,698         (19,933     14,765   
  

 

 

    

 

 

   

 

 

 

Total

   $ 100,698       $ (19,933   $ 80,765   
  

 

 

    

 

 

   

 

 

 

 

     2011  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
 
     (thousands)  

Trade names

   $ 66,000       $      $ 66,000   

Customer lists/relationships and exclusive distribution rights

     34,963         (19,443     15,520   
  

 

 

    

 

 

   

 

 

 

Total

   $ 100,963       $ (19,443   $ 81,520   
  

 

 

    

 

 

   

 

 

 

Intangible asset amortization expense totaled $1.7 million, $1.7 million and $2.0 million in 2012, 2011 and 2010 respectively. The estimated amortization expense is approximately $1.4 to $1.7 million in each of the next five years.

 

61


Table of Contents

The changes in the intangible carrying amounts were as follows:

 

     Trade names      Customer
lists/relationships
and exclusive
distribution rights
    Total  
     (thousands)  

Net carrying amount, December 26, 2009

   $ 66,000       $ 17,806      $ 83,806   

Amortization

             (1,955     (1,955

Effect of foreign currency translation

             1,380        1,380   
  

 

 

    

 

 

   

 

 

 

Net carrying amount, December 25, 2010

   $ 66,000       $ 17,231      $ 83,231   

Amortization

             (1,686     (1,686

Effect of foreign currency translation

             (25     (25
  

 

 

    

 

 

   

 

 

 

Net carrying amount, December 31, 2011

   $ 66,000       $ 15,520      $ 81,520   

Amortization

             (1,665     (1,665

Effect of foreign currency translation

             910        910   
  

 

 

    

 

 

   

 

 

 

Net carrying amount, December 29, 2012

   $ 66,000       $ 14,765      $ 80,765   
  

 

 

    

 

 

   

 

 

 

Our trade name assets are intangible assets with indefinite lives. They are not amortized, but are tested for impairment at least annually or more frequently if events and circumstances indicate that the asset might be impaired. Beginning in 2012, we may make a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset, other than goodwill, is impaired. If, after making the qualitative assessment, we determine it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, then performing a quantitative impairment test is unnecessary. If a quantitative impairment test is performed, the asset’s fair value is estimated and compared to its carrying value. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. At the end of 2012, 2011 2010, we performed quantitative impairment tests of our trade name assets and no impairment was recorded as a result.

Other Long-Lived Assets

We are also required to test our long-lived assets for impairment whenever an indicator of potential impairment exists. In 2012, 2011 and 2010, we noted the existence of indicators of potential impairment for the assets of individual retail stores (“store assets” or “stores”), which consist primarily of leasehold improvements and fixtures, and performed impairment testing for these assets. We performed the first step of impairment testing for other long-lived assets on the store assets and determined that for some stores the estimated future undiscounted cash flows derived from the assets was less than those assets’ carrying amounts and therefore impairment existed for those store assets. We then performed the second step of impairment testing, which was to calculate the amount of the impairment loss. The loss was measured as the excess of the carrying value over the fair value of the assets, with the fair value determined based on estimated future discounted cash flows. As a result of these tests, we impaired $11.4 million, $11.2 million and $11.0 million of store assets in 2012, 2011 and 2010, respectively.

 

62


Table of Contents
6. Net Income Per Common Share

Basic net income per common share is calculated using net income available to holders of our common stock divided by the weighted average number of shares of common stock outstanding during the applicable periods presented. Diluted net income per common share is similar to basic net income per common share except that the weighted average number of shares of common stock outstanding is increased to include, if their inclusion is dilutive, the number of additional shares of common stock that would have been outstanding assuming the issuance of all potentially dilutive shares, such as common stock to be issued upon exercise of options, the vesting of non-vested restricted shares, and the conversion of outstanding preferred stock. Net income per common share was determined by dividing net income, as adjusted, by weighted average shares outstanding as follows:

Basic Net Income per Common Share

 

     2012      2011      2010  
     (thousands, except per-share amounts)  

Net income available to OfficeMax common shareholders

   $ 414,694       $ 32,771       $ 68,628   

Average shares—basic

     86,594         85,881         84,908   
  

 

 

    

 

 

    

 

 

 

Net income available to OfficeMax common shareholders per common share:

        

Basic

   $ 4.79       $ 0.38       $ 0.81   

Diluted Net Income per Common Share

 

     2012      2011      2010  
     (thousands, except per-share amounts)  

Net income available to OfficeMax common shareholders

   $ 414,694       $ 32,771       $ 68,628   

Preferred dividends (a)

     2,096                   
  

 

 

    

 

 

    

 

 

 

Diluted net income attributable to OfficeMax

     416,790         32,771         68,628   

Average shares—basic

     86,594         85,881         84,908   

Restricted stock, stock options, preferred share conversion and other(a)(b)

     1,345         1,116         1,604   
  

 

 

    

 

 

    

 

 

 

Average shares—diluted

     87,939         86,997         86,512   

Diluted net income attributable to OfficeMax per common share:

        

Diluted

   $ 4.74       $ 0.38       $ 0.79   

 

(a) The assumed conversion of outstanding preferred stock was anti-dilutive in 2010 and 2011, and therefore no adjustment was required to determine diluted income from continuing operations or average shares-diluted.
(b) Options to purchase 3.8 million, 3.7 million and 1.7 million shares of common stock were outstanding during 2012, 2011 and 2010, respectively, but were not included in the computation of diluted income per common share because the impact would have been anti-dilutive as the option price was higher than the average market price during the year.

 

63


Table of Contents
7. Income Taxes

The income tax expense attributable to income from continuing operations as shown in the Consolidated Statements of Operations includes the following components:

 

     2012     2011     2010  
     (thousands)  

Current income tax (expense) benefit:

      

Federal

   $ (3,806   $ (128   $ 9,507   

State

     (8,075     (1,593     (2,735

Foreign

     (9,730     (10,377     (22,521
  

 

 

   

 

 

   

 

 

 

Total

   $ (21,611   $ (12,098   $ (15,749

Deferred income tax (expense) benefit:

      

Federal

   $ (212,221   $ (5,342   $ (24,628

State

     (9,288     (4,056     (2,552

Foreign

     (5,602     1,979        1,057   
  

 

 

   

 

 

   

 

 

 

Total

   $ (227,111   $ (7,419   $ (26,123
  

 

 

   

 

 

   

 

 

 

Total income tax expense

   $ (248,722   $ (19,517   $ (41,872
  

 

 

   

 

 

   

 

 

 

During 2012, 2011 and 2010, cash payments or cash refunds received, net, for income taxes were as follows:

 

     2012      2011      2010  
     (thousands)  

Cash tax payments (refunds), net

   $ 35,367       $ 13,524       $ (5,026

The income tax expense attributable to income from continuing operations for the years ended December 29, 2012, December 31, 2011 and December 25, 2010 differed from the amounts computed by applying the statutory U.S. federal income tax rate of 35% to pre-tax income from continuing operations as a result of the following:

 

     2012     2011     2010  
     (thousands)  

Income tax expense at statutory rate

   $ (234,339   $ (20,173   $ (40,507

State taxes expense, net of federal effect

     (22,434     (723     (2,346

Foreign tax provision differential

     6,222        4,354        338   

Effect on deferreds due to tax restructuring

            5,960          

Net operating loss valuation allowance and credits

     (5,121     (10,818     (590

Change in tax contingency liability

     (4,336     (695     (308

Tax effect of foreign earnings, net

     6,728        (2,517     (2,291

Employee stock ownership plan dividend deduction

     733        743        885   

Other permanent items, net

     3,825        4,352        2,947   
  

 

 

   

 

 

   

 

 

 

Total income tax expense

   $ (248,722   $ (19,517   $ (41,872
  

 

 

   

 

 

   

 

 

 

 

64


Table of Contents

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at year-end are presented in the following table:

 

     2012     2011  
     (thousands)  

Impairment of note receivable

   $      $ 278,269   

Minimum tax and other credits carryover

     121,434        228,224   

Net operating loss carryovers

     31,798        151,787   

Deferred gain on Boise Investment

     68,936        68,936   

Compensation obligations

     177,784        172,403   

Operating reserves and accrued expenses

     50,239        55,679   

Investments and deferred charges

     5,901        3,441   

Property and equipment

            1,558   

Allowances for receivables

     12,358        12,306   

Inventory

     6,258        4,216   

Tax goodwill

     1,319        2,907   

Other

            6,891   
  

 

 

   

 

 

 

Total deferred tax assets

   $ 476,027      $ 986,617   

Valuation allowance on NOLs and credits

   $ (30,665   $ (25,543
  

 

 

   

 

 

 

Total deferred tax assets after valuation allowance

   $ 445,362      $ 961,074   

Timberland installment gain related to Wachovia Guaranteed Installment Note

   $ (260,040   $ (260,040

Timberland installment gain related to Lehman Guaranteed Installment Note

            (269,284

Property and equipment

     (3,290       

Undistributed earnings

     (6,238     (5,823

Other

     (3,157       
  

 

 

   

 

 

 

Total deferred tax liabilities

   $ (272,725   $ (535,147
  

 

 

   

 

 

 

Total net deferred tax assets

   $ 172,637      $ 425,927   
  

 

 

   

 

 

 

Deferred tax assets and liabilities are reported in our Consolidated Balance Sheets as follows:

 

     2012      2011  
     (thousands)  

Current deferred income tax assets

   $ 63,878       $ 55,488   

Long-term deferred income tax assets

     108,759         370,439   
  

 

 

    

 

 

 

Total net deferred tax assets

   $ 172,637       $ 425,927   
  

 

 

    

 

 

 

In assessing the value of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making the assessment of whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management believes it is more likely than not that the Company will realize the benefits of these deductible differences, except for certain state net operating losses and other credit carryforwards as noted below. The amount of the deferred tax assets considered realizable, however, could be reduced if estimates of future taxable income during the carryforward period are reduced. During 2011, the Company restructured its domestic entities to better support operations resulting in a reduction in the tax rate related to certain deferred items which was offset by the impairment of state net operating losses.

The Company has a deferred tax asset related to alternative minimum tax credit carryforwards of approximately $100 million, which are available to reduce future regular federal income taxes, if any, over an

 

65


Table of Contents

indefinite period. The Company also has deferred tax assets related to various state net operating losses of approximately $15.0 million, net of the valuation allowance, that expire between 2013 and 2029.

The Company has established a valuation allowance related to net operating loss carryforwards and other credit carryforwards in jurisdictions where the Company has substantially reduced operations because management believes it is more likely than not that these items will expire before the Company is able to realize their benefits. The valuation allowance was $30.7 million and $25.5 million at December 29, 2012 and December 31, 2011, respectively. In 2012, the Company increased the valuation allowances relating to its available foreign tax credits. The valuation allowance is reviewed and adjusted based on management’s assessments of realizable deferred tax assets.

As discussed in Note 4, “Timber Notes/Non-Recourse Debt,” 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 notes structure allowed the Company to defer the resulting tax liability until 2020, the maturity date for the Installment Notes. In 2011, a legal entity restructuring reduced the liability for the installment gain by $14 million to $529 million. The recognition of the tax gain related to the Securitization Notes guaranteed by Lehman ($269 million) was triggered in full by the agreement entered into in the third quarter of 2012 and was recognized. The recognized gain amount was predominately offset by alternative minimum tax credits and net operating losses, and the Company made a cash tax payment of $15 million for the remainder. At December 29, 2012, the remaining tax liability of $260 million is related to the Wachovia Guaranteed Installment Notes and will be recognized when the Wachovia Guaranteed Installment Notes are paid.

Pre-tax income related to continuing operations from domestic and foreign sources is as follows:

 

     2012      2011      2010  
     (thousands)  

Domestic

   $ 607,487       $ 21,202       $ 53,444   

Foreign

     62,053         36,435         62,292   
  

 

 

    

 

 

    

 

 

 

Total

   $ 669,540       $ 57,637       $ 115,736   
  

 

 

    

 

 

    

 

 

 

As of December 29, 2012, the Company had $6.3 million of total unrecognized tax benefits, $6.2 million of which would affect the Company’s effective tax rate if recognized. During 2012, the reserve was reduced for tax positions related to positions that the Company had effectively settled with the IRS. Any future adjustments would result from the effective settlement of tax positions with various tax authorities. The Company does not anticipate any tax settlements to occur within the next twelve months. The reconciliation of the beginning and ending unrecognized tax benefits is as follows:

 

     2012     2011     2010  
     (thousands)  

Unrecognized gross tax benefits balance at beginning of year

   $ 21,172      $ 20,863      $ 8,247   

Increase related to prior year tax positions

     2,178        570        12,983   

Decrease related to prior year tax positions

     (12,232              

Settlements

     (4,781     (261     (367
  

 

 

   

 

 

   

 

 

 

Unrecognized tax benefits balance at end of year

   $ 6,337      $ 21,172      $ 20,863   
  

 

 

   

 

 

   

 

 

 

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. During 2012, the Company effectively completed all audit work related to U.S. federal income tax returns for the years 2006 through 2009 and expects final completion to occur in 2013. The Company is no longer subject to state income tax examinations by tax authorities in its major state jurisdictions for years before 2003, and the Company is no longer subject to income tax examinations prior to 2005 for its major foreign jurisdictions.

 

66


Table of Contents

The Company recognizes accrued interest and penalties associated with uncertain tax positions as part of income tax expense. As of December 29, 2012, the Company had approximately $0.6 million of accrued interest and penalties associated with uncertain tax positions.

Deferred taxes are not recognized for temporary differences related to investments in certain foreign subsidiaries because such earnings are considered to be indefinitely reinvested in the business. The determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable because of the complexities associated with its hypothetical calculation.

 

8. Leases

The Company leases its retail stores as well as certain other property and equipment under operating leases. These leases are noncancelable and generally contain multiple renewal options for periods ranging from three to five years, and require the Company to pay all executory costs such as maintenance and insurance. Rental payments include minimum rentals plus, in some cases, contingent rentals based on a percentage of sales above specified minimums. Rental expense for operating leases included the following components:

 

     2012     2011     2010  
     (thousands)  

Minimum rentals

   $ 324,952      $ 336,924      $ 338,924   

Contingent rentals

     1,096        1,060        1,187   

Sublease rentals

     (233     (504     (422
  

 

 

   

 

 

   

 

 

 

Total

   $ 325,815      $ 337,480      $ 339,689   
  

 

 

   

 

 

   

 

 

 

For operating leases with remaining terms of more than one year, the minimum lease payment requirements are:

 

     Total  
     (thousands)  

2013

   $ 351,376   

2014

     300,599   

2015

     241,670   

2016

     182,050   

2017

     127,165   

Thereafter

     198,601   
  

 

 

 

Total

   $ 1,401,461   
  

 

 

 

These minimum lease payments do not include contingent rental payments that may be due based on a percentage of sales in excess of stipulated amounts. These future minimum lease payment requirements have not been reduced by $22.6 million of minimum sublease rentals due in the future under noncancelable subleases. These sublease rentals include amounts related to closed stores and other facilities that are accounted for in the facility closures reserve.

As a result of purchase accounting from the 2003 acquisition of the U.S. retail business, we recorded an asset relating to store leases with terms below market value and a liability for store leases with terms above market value. The asset will be amortized through 2027 ($4 million per year), while the liability was amortized through 2012 ($11 million per year). From the acquisition date through 2012, the net amortization of these items reduced rent expense by approximately $7 million per year. Beginning in 2013, the completed amortization of the liability will result in no further reduction of rent expense and the amortization of the asset will continue to result in additional rent expense of approximately $4 million per year.

 

67


Table of Contents
9. Investment in Boise Cascade Holdings, L.L.C.

In connection with the sale of the paper, forest products and timberland assets in 2004, we invested $175 million in affiliates of Boise Cascade, L.L.C. Due to restructurings conducted by those affiliates, our investment is currently in Boise Cascade Holdings, L.L.C., a building products company.

The Boise Investment is accounted for under the cost method, as Boise Cascade Holdings, L.L.C. does not maintain separate ownership accounts for its members’ interests, and we do not have the ability to significantly influence the operating and financial policies of Boise Cascade Holdings, L.L.C.

In exchange for its investment in Boise Cascade Holdings, L.L.C., we received voting securities and non-voting securities. 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. These dividends accumulate semiannually to the extent not paid in cash on the last day of June and December. It is our policy to record the income associated with these dividends as a reduction of operating, selling and general and administrative expenses in the Consolidated Statements of Operations. The voting securities do not accrue dividends.

We recognized dividend income from the non-voting securities of $8.5 million in 2012, $7.8 million in 2011 and $7.3 million in 2010 in the Corporate and Other segment. The dividend receivable associated with these dividends was $45.1 million and $38.0 million at December 29, 2012 and December 31, 2011, respectively, and was recorded in the Corporate and Other segment in other non-current assets in the Consolidated Balance Sheets.

During 2012, we received a distribution of $1.7 million from Boise Cascade Holdings, L.L.C., for the income tax liability associated with our share of allocated earnings, the majority of which was used to reduce the accrued dividend balance. No such distributions were received in 2011 or 2010.

A subsidiary of Boise Cascade Holdings, L.L.C., Boise Cascade, L.L.C. filed a registration statement with the Securities and Exchange Commission in November 2012 to register stock for an initial public offering (“Boise IPO”). Boise Cascade, L.L.C. announced the commencement of the Boise IPO on January 23, 2013, and the Boise IPO was completed on February 11, 2013.

In February of 2013, we received approximately $129 million in cash proceeds related to the Boise investment. We received approximately $112 million related to the redemption of all of the non-voting equity securities at the original investment amount of $66 million plus the related accrued dividends of approximately $46 million. As a result of the redemption of the non-voting equity securities, the income associated with the dividends on those securities will cease in the first quarter of 2013. We also received a distribution of approximately $17 million related to the voting equity securities.

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 was deferred. The redemption of the non-voting equity securities is expected to trigger recognition of a pre-tax operating gain of approximately $68 million representing the portion of the deferred gain attributable to the non-voting equity securities. The remaining $112 million of deferred gain attributable to the voting equity securities will be recognized when the voting-equity securities are sold or redeemed.

Throughout the year, we review the carrying value of this investment whenever events or circumstances indicate that its fair value may be less than its carrying amount. At year-end, based on information related to the Boise IPO, we estimated the fair value of the Boise investment, and determined that there was no impairment of this investment. We will continue to monitor and assess this investment.

 

68


Table of Contents
10. Debt

The Company’s debt, almost all of which is unsecured, consists of both recourse and non-recourse obligations as follows at year-end:

 

     2012     2011  
     (thousands)  

Recourse debt:

    

7.35% debentures, due in 2016

   $ 17,967      $ 17,967   

Medium-term notes, Series A, with interest rates averaging 7.9%, paid in 2012

            35,000   

Revenue bonds, with interest rates averaging 6.4% , due in varying amounts periodically through 2029

     185,505        185,505   

American & Foreign Power Company Inc. 5% debentures, due in 2030