UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2007

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

For the transition period from                      to                      .

Commission File Number: 1-5057

OFFICEMAX INCORPORATED

(Exact name of registrant as specified in its charter)

Delaware

 

82-0100960

(State or other jurisdiction of incorporation or

 

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

organization)

 

 

263 Shuman Boulevard

 

 

Naperville, Illinois

 

60563

(Address of principal executive offices)

 

(Zip Code)

 

(630) 438-7800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   x       No  o

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

Large accelerated filer  x

Accelerated filer  o

Non-accelerated filer  o

 

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

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

 

Shares Outstanding

Class

 

as of April 28, 2007

Common Stock, $2.50 par value

 

75,344,977

 

 




TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION

Item 1.

 

Financial Statements

 

3

Item 2.

 

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

 

21

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

31

Item 4.

 

Controls and Procedures

 

31

PART II—OTHER INFORMATION

Item 1.

 

Legal Proceedings

 

32

Item 1A.

 

Risk Factors

 

32

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

35

Item 3.

 

Defaults Upon Senior Securities

 

35

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

35

Item 5.

 

Other Information

 

36

Item 6.

 

Exhibits

 

36

 

2




PART I—FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

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

 

 

Quarter Ended

 

 

 

March 31,
2007

 

April 1,
2006

 

 

 

(unaudited)

 

Sales

 

$

2,436,253

 

$

2,423,537

 

Cost of goods sold and occupancy costs

 

1,813,029

 

1,796,783

 

Gross profit

 

623,224

 

626,754

 

Operating expenses:

 

 

 

 

 

Operating and selling

 

420,768

 

433,045

 

General and administrative

 

93,937

 

89,233

 

Other operating (income) expense, net

 

(1,576

)

112,840

 

Operating income (loss)

 

110,095

 

(8,364

)

Interest expense

 

(30,116

)

(31,503

)

Interest income

 

23,037

 

21,114

 

Other expense, net

 

(3,447

)

(2,166

)

Income (loss) from continuing operations before income taxes and minority interest

 

99,569

 

(20,919

)

Income taxes

 

(38,832

)

7,994

 

Income (loss) from continuing operations before minority interest

 

60,737

 

(12,925

)

Minority interest, net of income tax

 

(2,198

)

(1,181

)

Income (loss) from continuing operations

 

58,539

 

(14,106

)

Discontinued operations:

 

 

 

 

 

Operating loss

 

 

(17,972

)

Income tax benefit

 

 

6,991

 

Loss from discontinued operations

 

 

(10,981

)

Net income (loss)

 

58,539

 

(25,087

)

Preferred dividends

 

(1,008

)

(1,009

)

Net income (loss) applicable to common shareholders

 

$

57,531

 

$

(26,096

)

Basic income (loss) per common share:

 

 

 

 

 

Continuing operations

 

$

0.77

 

$

(0.21

)

Discontinued operations

 

 

(0.16

)

Basic income (loss) per common share

 

$

0.77

 

$

(0.37

)

Diluted income (loss) per common share:

 

 

 

 

 

Continuing operations

 

$

0.76

 

$

(0.21

)

Discontinued operations

 

 

(0.16

)

Diluted income (loss) per common share

 

$

0.76

 

$

(0.37

)

 

See accompanying notes to quarterly consolidated financial statements.

3




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

 

 

March 31,
2007

 

December 30,
2006

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

139,645

 

 

$

282,070

 

 

Receivables, net

 

547,782

 

 

556,733

 

 

Related party receivables

 

11,926

 

 

5,795

 

 

Inventories

 

1,018,035

 

 

1,071,486

 

 

Deferred income taxes

 

101,564

 

 

129,496

 

 

Other

 

63,663

 

 

51,264

 

 

Total current assets

 

1,882,615

 

 

2,096,844

 

 

Property and equipment:

 

 

 

 

 

 

 

Land and land improvements

 

36,324

 

 

36,195

 

 

Buildings and improvements

 

374,096

 

 

359,481

 

 

Machinery and equipment

 

794,562

 

 

794,010

 

 

Total property and equipment

 

1,204,982

 

 

1,189,686

 

 

Accumulated depreciation

 

(629,562

)

 

(610,061

)

 

Net property and equipment

 

575,420

 

 

579,625

 

 

Goodwill

 

1,219,173

 

 

1,216,032

 

 

Intangible assets, net

 

199,865

 

 

201,304

 

 

Investments in affiliates

 

175,000

 

 

175,000

 

 

Timber notes receivable

 

1,635,000

 

 

1,635,000

 

 

Restricted investments

 

22,377

 

 

22,292

 

 

Deferred charges

 

41,461

 

 

40,439

 

 

Other non-current assets

 

249,670

 

 

249,512

 

 

Total assets

 

$

6,000,581

 

 

$

6,216,048

 

 

 

See accompanying notes to quarterly consolidated financial statements.

4




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

 

 

March 31,
2007

 

December 30,
2006

 

 

 

(unaudited)

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

34,885

 

 

$

25,634

 

 

Accounts payable:

 

 

 

 

 

 

 

Trade

 

742,836

 

 

965,218

 

 

Related parties

 

38,194

 

 

32,482

 

 

Accrued expenses and other current liabilities:

 

 

 

 

 

 

 

Compensation and benefits

 

136,212

 

 

172,632

 

 

Other

 

383,131

 

 

332,937

 

 

Total current liabilities

 

1,335,258

 

 

1,528,903

 

 

Long-term debt:

 

 

 

 

 

 

 

Long-term debt, less current portion

 

349,622

 

 

384,246

 

 

Timber notes securitized

 

1,470,000

 

 

1,470,000

 

 

Total long-term debt

 

1,819,622

 

 

1,854,246

 

 

Other long-term obligations:

 

 

 

 

 

 

 

Compensation and benefits

 

276,471

 

 

287,122

 

 

Deferred gain on sale of assets

 

179,757

 

 

179,757

 

 

Other long-term obligations

 

320,873

 

 

350,491

 

 

Total other long-term obligations

 

777,101

 

 

817,370

 

 

Minority interest

 

30,309

 

 

29,885

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Preferred stock—no par value; 10,000,000 shares authorized; Series D ESOP: $.01 stated value; 1,193,762 and 1,216,335 shares outstanding

 

53,715

 

 

54,735

 

 

Common stock—$2.50 par value; 200,000,000 shares authorized; 75,328,168 and 74,903,220 shares outstanding

 

188,272

 

 

187,226

 

 

Additional paid-in capital

 

897,640

 

 

893,848

 

 

Retained earnings

 

983,094

 

 

941,830

 

 

Accumulated other comprehensive loss

 

(84,430

)

 

(91,995

)

 

Total shareholders’ equity

 

2,038,291

 

 

1,985,644

 

 

Total liabilities and shareholders’ equity

 

$

6,000,581

 

 

$

6,216,048

 

 

 

See accompanying notes to quarterly consolidated financial statements.

5




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

 

 

Quarter Ended

 

 

 

March 31,
2007

 

April 1,
2006

 

 

 

(unaudited)

 

Cash provided by (used for) operations:

 

 

 

 

 

Net income (loss)

 

$

58,539

 

$

(25,087

)

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

 

 

 

 

 

Earnings from affiliates

 

(1,576

)

(1,428

)

Depreciation and amortization

 

32,083

 

31,114

 

Minority interest, net of income tax

 

2,198

 

1,181

 

Pension and other postretirement benefits expense

 

2,352

 

4,271

 

Discontinued operations

 

377

 

11,210

 

Other

 

7,481

 

8,566

 

Changes other than from acquisition of business:

 

 

 

 

 

Receivables

 

9,016

 

50,234

 

Inventories

 

53,451

 

200,073

 

Accounts payable and accrued liabilities

 

(251,026

)

(214,362

)

Current and deferred income taxes

 

41,067

 

(15,184

)

Other

 

(34,355

)

21,357

 

Cash provided by (used for) operations

 

(80,393

)

71,945

 

Cash used for investment:

 

 

 

 

 

Expenditures for property and equipment

 

(28,124

)

(23,321

)

Other

 

 

596

 

Cash used for investment

 

(28,124

)

(22,725

)

Cash used for financing:

 

 

 

 

 

Cash dividends paid on common stock

 

(11,235

)

(10,620

)

Short-term borrowings, net

 

 

11,012

 

Payments of long-term debt

 

(25,681

)

(45,466

)

Proceeds from exercise of stock options

 

3,903

 

 

Other

 

(895

)

300

 

Cash used for financing

 

(33,908

)

(44,774

)

Increase (decrease) in cash and cash equivalents

 

(142,425

)

4,446

 

Cash and cash equivalents at beginning of period

 

282,070

 

72,198

 

Cash and cash equivalents at end of period

 

$

139,645

 

$

76,644

 

 

See accompanying notes to quarterly consolidated financial statements.

6




Notes to Quarterly Consolidated Financial Statements (Unaudited)

1.                 Basis of Presentation

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

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

The Company has prepared the quarterly consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Some information and note disclosures, which would normally be included in comprehensive annual financial statements prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted pursuant to those rules and regulations. These quarterly consolidated financial statements should be read together with the consolidated financial statements and the accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 30, 2006.

The quarterly consolidated financial statements included herein have not been audited by an independent registered public accounting firm, but in the opinion of management, include all adjustments necessary to present fairly the results for the periods. Except as may be disclosed within these “Notes to Quarterly Consolidated Financial Statements,” the adjustments made were of a normal, recurring nature. Quarterly results are not necessarily indicative of results which may be expected for a full year.

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

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

2.                 Discontinued Operations

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

7




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

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

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

The liabilities of the Elma, Washington facility are included in current liabilities ($15.9 million at March 31, 2007 and $15.5 million at December 30, 2006, respectively) in the Consolidated Balance Sheets. The estimated fair value of the related assets was zero at March 31, 2007 and December 30, 2006.

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

3.                 Integration Activities and Facility Closures

In September 2005, the board of directors approved a plan to relocate and consolidate the Company’s retail headquarters in Shaker Heights, Ohio and its existing corporate headquarters in Itasca, Illinois into a new facility in Naperville, Illinois. The Company began the consolidation and relocation process in the latter half of 2005. During the first quarter of 2006,  the Company incurred and expensed approximately $15.7 million of costs related to the headquarters consolidation, all of which were reflected in the Corporate and Other segment. The consolidation and relocation process was completed during the second half of 2006.

During the first quarter of 2006, the Company closed 109 underperforming domestic retail stores and recorded a pre-tax charge of $98.6 million ($11.3 million for employee severance, asset write-off and impairment and other closure costs and $87.3 million for estimated future lease obligations).

At March 31, 2007, approximately $40.1 million of the reserve for integration and facility closures was included in accrued liabilities, other, and $64.3 million was included in other long-term liabilities. At March 31, 2007, the integration and facility closure reserve included approximately $94 million for estimated future lease obligations, which represents the estimated net present value of the lease obligations and is net of anticipated sublease income of approximately $98 million.

8




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

 

 

Lease\
Contract
Terminations

 

Severance\
Retention

 

Asset
Write-off &
Impairment

 

Other

 

Total

 

 

 

(thousands)

 

Balance at December 30, 2006

 

 

$

107,824

 

 

 

$

10,838

 

 

 

$

 

 

$

3,142

 

$

121,804

 

Charges to income

 

 

 

 

 

 

 

 

 

 

 

 

Change in goodwill

 

 

 

 

 

 

 

 

 

 

 

 

Changes to estimated costs included in income

 

 

 

 

 

 

 

 

 

 

 

 

Cash payments

 

 

(15,125

)

 

 

(3,019

)

 

 

 

 

(351

)

(18,495

)

Non-cash charges

 

 

 

 

 

 

 

 

 

 

 

 

Accretion

 

 

1,044

 

 

 

 

 

 

 

 

 

1,044

 

Balance at March 31, 2007

 

 

$

93,743

 

 

 

$

7,819

 

 

 

$

 

 

$

2,791

 

$

104,353

 

 

 

 

 

 

 

 

 

Lease\
Contract
Terminations

 

Severance\
Retention

 

Asset
Write-off &
Impairment

 

Other

 

Total

 

 

 

(thousands)

 

Balance at December 31, 2005

 

 

$

91,455

 

 

 

$

21,502

 

 

 

$

 

 

$

739

 

$

113,696

 

Charges to income

 

 

87,338

 

 

 

9,304

 

 

 

9,062

 

 

8,564

 

114,268

 

Change in goodwill

 

 

 

 

 

 

 

 

 

 

 

 

Changes to estimated costs included in income

 

 

 

 

 

 

 

 

 

 

 

 

Cash payments

 

 

(17,796

)

 

 

(6,087

)

 

 

 

 

(6,922

)

(30,805

)

Non-cash charges

 

 

 

 

 

 

 

 

(9,062

)

 

(685

)

(9,747

)

Accretion

 

 

1,272

 

 

 

 

 

 

 

 

 

1,272

 

Balance at April 1, 2006

 

 

$

162,269

 

 

 

$

24,719

 

 

 

$

 

 

$

1,696

 

$

188,684

 

 

9




4.                 Net Income (Loss) Per Common Share

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

 

 

Quarter Ended

 

 

 

March 31,
2007

 

April  1,
2006

 

 

 

(thousands, except per- share amounts)

 

Basic income (loss) per common share:

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

 

$

58,539

 

 

$

(14,106

)

Preferred dividends

 

 

(1,008

)

 

(1,009

)

Basic income (loss) from continuing operations

 

 

57,531

 

 

(15,115

)

Loss from discontinued operations

 

 

 

 

(10,981

)

Basic income (loss)

 

 

$

57,531

 

 

$

(26,096

)

Average shares—basic

 

 

74,992

 

 

70,833

 

Basic income (loss) per common share:

 

 

 

 

 

 

 

Continuing operations

 

 

$

0.77

 

 

$

(0.21

)

Discontinued operations

 

 

 

 

(0.16

)

Basic income (loss) per common share

 

 

$

0.77

 

 

$

(0.37

)

 

 

 

Quarter Ended

 

 

 

March 31,
2007

 

April 1,
2006

 

 

 

(thousands, except per- share amounts)

 

Diluted income (loss) per common share:

 

 

 

 

 

 

 

Basic income (loss) from continuing operations

 

 

$

57,531

 

 

$

(15,115

)

Preferred dividends eliminated

 

 

 

 

 

Diluted income (loss) from continuing operations

 

 

57,531

 

 

(15,115

)

Loss from discontinued operations

 

 

 

 

(10,981

)

Diluted income (loss)

 

 

$

57,531

 

 

$

(26,096

)

Average shares—basic

 

 

74,992

 

 

70,833

 

Restricted stock, stock options and other

 

 

752

 

 

 

Average shares - diluted (a)

 

 

75,744

 

 

70,833

 

Diluted income (loss) per common share:

 

 

 

 

 

 

 

Continuing operations

 

 

$

0.76

 

 

$

(0.21

)

Discontinued operations

 

 

 

 

(0.16

)

Diluted income (loss) per common share

 

 

$

0.76

 

 

$

(0.37

)


(a)           Options to purchase 5.7 million shares of common stock were outstanding during the quarter ended April 1, 2006, but were not included in the computation of diluted income (loss) per common share because the impact would have been anti-dilutive due to the net loss recognized in that quarter.

5.                 Other Operating (Income) Expense, Net

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

 

 

Quarter Ended

 

 

 

March 31,
2007

 

April 1,
2006

 

 

 

(thousands)

 

Integration activities and facility closures (See Note 3)

 

 

$

 

 

$

114,268

 

Earnings from affiliates

 

 

(1,576

)

 

(1,428

)

 

 

 

$

(1,576

)

 

$

112,840

 

 

10




6. Income Taxes

The Company adopted Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of Financial Accounting Standards Board (FASB) Statement No. 109” at the beginning of 2007. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109, “Accounting for Income Taxes.” The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the implementation, the Company recognized a $4.0 million increase to reserves for uncertain tax positions. This increase was accounted for as an adjustment to the beginning balance of retained earnings on the Consolidated Balance Sheet. Including the cumulative effect of this increase, at the beginning of 2007, the Company had approximately $70 million of total gross unrecognized tax benefits. Of this total, approximately $30 million (net of the federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods. The remaining balance of approximately $40 million, if recognized, would be recorded as an adjustment to goodwill and would not affect the effective tax rate. As of April 1, 2007, it is possible that the Company’s liability for uncertain tax positions will be reduced by as much as $13.1 million by the end of first quarter 2008. Approximately $8.0 million of this amount would impact the Company’s effective tax rate with the remaining $5.1 million impacting goodwill. Such reductions would result from the effective settlement of tax positions with various tax authorities.

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

The Company recognizes accrued interest and penalties associated with uncertain tax positions as part of income tax expense. As of January 1, 2007, the Company had $5.8 million of accrued interest and penalties.

During the first quarter of 2007 and 2006, the Company paid income taxes, net of refunds received, of $6.4 million and $3.0 million, respectively.

7.                 Comprehensive Income (Loss)

Comprehensive income (loss) includes the following:

 

 

Quarter Ended

 

 

 

March 31,
2007

 

April 1,
2006

 

 

 

(thousands)

 

Net income (loss)

 

 

$

58,539

 

 

$

(25,087

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

4,942

 

 

(18,360

)

Amortization of unrecognized retirement and benefit costs

 

 

2,622

 

 

 

Comprehensive income (loss)

 

 

$

66,103

 

 

$

(43,447

)

 

8.                 Sales of Accounts Receivable

The Company sells, on a revolving basis, an undivided interest in a defined pool of receivables while retaining a subordinated interest in a portion of the receivables. The receivables are sold without legal recourse to third party conduits through a wholly owned bankruptcy-remote special purpose entity that is

11




consolidated for financial reporting purposes. The Company continues servicing the sold receivables and charges the third party conduits a monthly servicing fee at market rates. The program qualifies for sale treatment under SFAS 140. At March 31, 2007 and December 30, 2006, $178.5 million and $180.0 million of sold accounts receivable were excluded from receivables in the accompanying Consolidated Balance Sheets. The Company’s subordinated retained interest in the transferred receivables was $140.4 million and $111.2 million at March 31, 2007 and December 30, 2006, respectively, and is included in receivables, net in the Consolidated Balance Sheets.

9.                 Investments in Affiliates

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

The Boise Cascade, L.L.C. non-voting equity units accrue dividends daily at the rate of 8% per annum on the liquidation value plus accumulated dividends. Dividends accumulate semiannually to the extent not paid in cash on the last day of June or December. The Company recognized dividend income on this investment of $1.6 million and $1.4 million for the quarters ended March 31, 2007 and April 1, 2006, respectively.

10.          Goodwill and Intangible Assets

Goodwill

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

Changes in the carrying amount of goodwill by segment are as follows

 

 

OfficeMax,
Contract

 

OfficeMax,
Retail

 

Total

 

 

 

(thousands)

 

Balance at December 30, 2006

 

 

$

528,090

 

 

 

$

687,942

 

 

$

1,216,032

 

Effect of foreign currency translation

 

 

3,137

 

 

 

 

 

3,137

 

Businesses acquired

 

 

4

 

 

 

 

 

4

 

Balance at March 31, 2007

 

 

$

531,231

 

 

 

$

687,942

 

 

$

1,219,173

 

 

12




Acquired Intangible Assets

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

 

 

March 31, 2007

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

 

 

(thousands)

 

Trade names

 

 

$

173,150

 

 

 

$

 

 

 

$

173,150

 

 

Customer lists and relationships

 

 

40,223

 

 

 

(18,931

)

 

 

21,292

 

 

Noncompete agreements

 

 

12,854

 

 

 

(8,865

)

 

 

3,989

 

 

Exclusive distribution rights

 

 

3,675

 

 

 

(2,241

)

 

 

1,434

 

 

 

 

 

$

229,902

 

 

 

$

(30,037

)

 

 

$

199,865

 

 

 

 

 

December 30, 2006

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

 

 

(thousands)

 

Trade names

 

 

$

173,150

 

 

 

$

 

 

 

$

173,150

 

 

Customer lists and relationships

 

 

39,681

 

 

 

(17,678

)

 

 

22,003

 

 

Noncompete agreements

 

 

12,853

 

 

 

(8,213

)

 

 

4,640

 

 

Exclusive distribution rights

 

 

3,616

 

 

 

(2,105

)

 

 

1,511

 

 

 

 

 

$

229,300

 

 

 

$

(27,996

)

 

 

$

201,304

 

 

 

Intangible asset amortization expense totaled $1.8 million and $1.7 million for the quarters ended March 31, 2007, and April 1, 2006, respectively.

11.          Timber Notes Receivable

In October 2004, OfficeMax sold its timberlands as part of the Sale. In exchange for the timberlands, the Company received timber installment notes receivable in the amount of $1,635 million, which were credit enhanced with guarantees. The guarantees were issued by highly-rated financial institutions and were secured by the pledge of underlying collateral notes issued by the credit enhancement banks. The timber installment notes receivable are 15-year non-amortizing. There are two notes that total $817.5 million bearing interest at 4.982% and a third note in the amount of $817.5 million bearing interest at 5.112%. Interest earned on all of the notes is received semiannually. See sub-caption “Timber Notes” in Note 12, Debt, for additional information concerning a securitization transaction involving the timber installment notes receivable.

13




12.          Debt

Credit Agreements

On June 24, 2005, the Company entered into a loan and security agreement for a new revolving credit facility. The revolving credit facility permits the Company to borrow up to the maximum aggregate borrowing amount, which is equal to the lesser of (i) a percentage of the value of certain eligible inventory less certain reserves or (ii) $500 million. There were no borrowings outstanding under the revolver as of March 31, 2007 and December 30, 2006. There were no borrowings outstanding during the first quarter of 2007. The average amount outstanding under the revolving credit facility during the first quarter of 2006 was $71.6 million. Letters of credit, which may be issued under the revolver up to a maximum of $100 million, reduce available borrowing capacity under the revolving credit facility. Letters of credit issued under the revolver totaled $84.2 million as of March 31, 2007 and $80.2 million as of April 1, 2006. As of March 31, 2007, the maximum aggregate borrowing amount available under the revolver was $500.0 million and excess availability under the revolver totaled $415.8 million.

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

Borrowings under the revolver are secured by a lien on substantially all inventory and related proceeds. The revolving loan and security agreement contains customary conditions to borrowing including a monthly calculation of excess borrowing availability and reporting compliance. Covenants in the revolver agreement restrict the amount of letters of credit that may be issued, dividend distributions and other uses of cash if excess availability is less than $75 million. At March 31, 2007, the Company was in compliance with all covenants under the revolver agreement. The revolving credit agreement expires on June 24, 2010.

Timber Notes

In October 2004, the Company sold its timberlands as part of the Sale and received credit-enhanced timber installment notes receivable in the amount of $1,635 million. (See Note 11, Timber Notes Receivable). In December 2004, the Company completed a securitization transaction in which its interest in the timber installment notes receivable and related guarantees were transferred to wholly-owned bankruptcy remote subsidiaries that were designated to be qualifying special purpose entities (the “OMXQs”). The OMXQs pledged the timber installment notes receivable and related guarantees and issued securitization notes in the amount of $1,470 million. Recourse on the securitization notes is limited to the pledged timber installment notes receivable. The securitization notes are 15-year non-amortizing, and were issued in two equal $735 million tranches paying interest of 5.42% and 5.54%, respectively.

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

The original entities issuing the credit enhanced timber installment notes are variable-interest entities (the “VIE’s”) under FASB Interpretation 46R, “Consolidation of Variable Interest Entities”. The

14




OMXQs are considered to be the primary beneficiary, and therefore, the VIE’s are required to be consolidated with the OMXQ’s, which are also the issuers of the securitization notes. As a result, the accounts of the OMXQ’s have been consolidated into those of their ultimate parent, OfficeMax. The effect of the Company’s consolidation of the OMXQs is that the securitization transaction is treated as a financing, and both the timber notes receivable and the securitization notes payable are reflected in the Consolidated Balance Sheets.

Note Agreements

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

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

Other

The Company had leased certain equipment at its integrated wood-polymer building materials facility near Elma, Washington under a capital lease. The lease agreement had a base term of seven years and an interest rate of 4.67%. During the first quarter of  2006 the Company paid $29.1 million to terminate the lease agreement.

Cash payments for interest were $9.8 million and $10.7 million for the quarters ended March 31, 2007 and April 1, 2006, respectively.

15




13.          Retirement and Benefit Plans

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

 

 

Pension Benefits

 

Other Benefits

 

 

 

Quarter Ended

 

Quarter Ended

 

 

 

March 31,
2007

 

April 1,
2006

 

March 31,
2007

 

April 1,
2006

 

 

 

(thousands)

 

Service cost

 

$

419

 

$

400

 

 

$

226

 

 

 

$

217

 

 

Interest cost

 

19,271

 

18,670

 

 

400

 

 

 

395

 

 

Expected return on plan assets

 

(22,254

)

(21,838

)

 

 

 

 

 

 

Recognized actuarial loss

 

5,055

 

5,790

 

 

129

 

 

 

173

 

 

Plan settlement/curtailment/closures expense

 

 

1,357

 

 

 

 

 

 

 

Amortization of prior service costs and other

 

 

 

 

(893

)

 

 

(893

)

 

Net periodic benefit cost (income)

 

$

2,491

 

$

4,379

 

 

$

(138

)

 

 

$

(108

)

 

 

The minimum contribution requirement for 2007 is approximately $11 million.

14.          Segment Information

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

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

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

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

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

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

16




An analysis of our operations by segment is as follows:

 

 

 

 

Income (Loss) Before Taxes

 

 

 

Sales

 

and Minority Interest (a)

 

 

 

Quarter Ended

 

Quarter Ended

 

 

 

March 31,
2007

 

April 1,
2006

 

March 31,
2007

 

April 1,
2006

 

 

 

(thousands)

 

OfficeMax, Contract

 

$

1,264,495

 

$

1,230,762

 

$

59,876

 

$

67,049

 

OfficeMax, Retail

 

1,171,758

 

1,192,775

 

64,590

 

(37,992

)

Corporate and Other

 

 

 

(14,371

)

(37,421

)

 

 

$

2,436,253

 

$

2,423,537

 

110,095

 

(8,364

)

Interest expense

 

 

 

 

 

(30,116

)

(31,503

)

Interest income and other

 

 

 

 

 

19,590

 

18,948

 

 

 

 

 

 

 

$

99,569

 

$

(20,919

)


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

15.          Commitments and Guarantees

In addition to commitments for leases and long-term debt, and purchase obligations for goods and services and capital expenditures entered into in the normal course of business, the Company has various other commitments, guarantees and obligations that are described in Note 18, Commitments and Guarantees, of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” and under the caption “Contractual Obligations” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 30, 2006. At March 31, 2007, there had not been a material change to the information regarding commitments, guarantees and contractual obligations disclosed in the Company’s Annual Report on Form 10-K for the year ended December 30, 2006.

16.          Legal Proceedings and Contingencies

We are involved in litigation and administrative proceedings arising in the normal course of our business. In the opinion of management, our recovery, if any, or our liability, if any, under pending litigation or administrative proceedings would not materially affect our financial position or results of operations. For information regarding legal proceedings and contingencies, see Note 19, Legal Proceedings and Contingencies, of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K for the year ended December 30, 2006. In addition, over the past several years and continuing into 2007, we have been named a defendant in a number of cases where the plaintiffs allege asbestos-related injuries from exposure to asbestos products or exposure to asbestos while working at job sites. The claims vary widely and often are not specific about the plaintiffs’ contacts with the Company. None of the claimants seeks damages from us individually, and we are generally one of numerous defendants. Many of the cases filed against us have been voluntarily dismissed, although we have settled some cases. The settlements we have paid have been covered mostly by insurance, and we believe any future settlements or judgments in these cases would be similarly covered. To date, no asbestos case against us has gone to trial, and the nature of these cases makes any prediction as to the outcome of pending litigation inherently subjective. At this time, however, we believe our involvement in asbestos litigation is not material to either our financial position or our results of operations.

17




17.          Share Based Payments

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

The Company sponsors several share-based compensation plans, which are described below. Compensation costs related to the Company’s share-based plans were $7.5 million and $4.7 million for the first quarter of 2007 and 2006, respectively. Compensation expense is generally recognized on a straight-line basis over the vesting period of grants. The total income tax benefit recognized in the Consolidated Statements of Income (Loss) for share-based compensation arrangements was $2.9 million and $1.8 million for the first quarter of 2007 and 2006, respectively.

2003 Director Stock Compensation Plan and OfficeMax Incentive and Performance Plan

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

A total of 58,668 shares of common stock is reserved for issuance under the 2003 DSCP. Prior to December 8, 2005, the 2003 DSCP permitted non-employee directors to elect to receive some or all of their annual retainer and meeting fees in the form of options to purchase shares of the Company’s common stock. Non-employee directors who elected to receive a portion of their compensation in the form of stock options did not receive cash for that portion of their compensation. The difference between the $2.50-per-share exercise price of the options and the market value of the common stock on the date of grant was equal to the cash compensation that participating directors elected to forego and was recognized as compensation expense in the Consolidated Statements of Income (Loss). On February 14, 2007, the Board of Directors amended the 2003 DSCP to eliminate the choice to receive stock options. All options granted under the 2003 DSCP expire three years after the holder ceases to be a director.

The 2003 Plan was effective January 1, 2003, and replaced the Key Executive Performance Plan for Executive Officers, Key Executive Performance Plan for Key Executives/Key Managers, 1984 Key Executive Stock Option Plan (“KESOP”), Key Executive Performance Unit Plan (“KEPUP”) and Director Stock Option Plan (“DSOP”). No grants or awards have been made under the Key Executive Performance Plans, KESOP, KEPUP, or DSOP since 2003 and no future grants or awards will be made under these plans. A total of 5,215,087 shares of common stock is reserved for issuance under the 2003 Plan. The Company’s executive officers, key employees and nonemployee directors are eligible to receive awards under the 2003 Plan at the discretion of the Executive Compensation Committee of the Board of Directors. Eight types of awards may be granted under the 2003 Plan, including stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares, annual incentive awards and stock bonus awards.

Restricted Stock and Restricted Stock Units

In the first quarter of 2007, the Company granted to employees 662,055 restricted stock units (“RSUs”). The weighted-average grant-date fair value of the RSUs was $53.12. As of March 31, 2007, 661,455 of these RSUs remained outstanding and vest half in 2009 and half in 2010. The remaining compensation expense to be recognized related to this grant, net of estimated forfeitures, is $31 million.

18




In 2006, the Company granted to employees and directors 1,157,479 RSUs. The weighted-average grant-date fair value of the RSUs was $28.79. As of March 31, 2007, 1,056,363 of these RSUs remained outstanding which vest after defined service periods as follows: 10,808 units in 2007, 522,777 in 2008 and 522,778 in 2009. The remaining compensation expense to be recognized related to this grant, net of estimated forfeitures, is approximately $21 million.

In 2005, the Company granted to employees and directors 728,123 RSUs. The weighted-average grant-date fair value of the RSUs was $33.15. As of March 31, 2007, 81,566 of these RSUs remained outstanding, which vest after defined service periods as follows: 29,666 units in 2007, 45,900 units in 2008 and 3,000 units in both 2009 and 2010. The remaining compensation expense to be recognized related to this grant, net of estimated forfeitures, is $0.6 million.

In 2004, the Company granted 14,765 shares of restricted stock to nonemployee directors. The restricted stock granted to directors vests six months from their termination or retirement from board service, and 7,170 of these restricted stock shares remain outstanding at March 31, 2007.

Shares of restricted stock are restricted until they vest and cannot be sold by the recipient until the restriction has lapsed. RSUs are restricted until they vest and are convertible into one common share after the restriction has lapsed. No entries are made in the financial statements on the grant date of restricted stock and RSU awards. The Company recognizes compensation expense related to these awards over the vesting periods based on the closing prices of the Company’s common stock on the grant dates. If these awards contain performance criteria, management periodically reviews actual performance against the criteria and adjusts compensation expense accordingly. For the first quarter of 2007 and 2006, the Company recognized $7.4 million and $4.5 million, respectively, of pretax compensation expense and additional paid-in capital related to restricted stock and RSU awards.

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

Stock Units

The Company has a shareholder approved deferred compensation program for certain of its executive officers that allows them to defer a portion of their cash compensation. Previously, these officers could allocate their deferrals to a stock unit account. The Company matched deferrals used to purchase stock units with a 25% Company allocation of stock units. As a result of an amendment to the plan, no additional deferrals can be allocated to the stock unit accounts. At March 31, 2007, 12,789 stock units were allocated to the accounts of executive officers. A stock unit is equal in value to one share of the Company’s common stock. The value of deferred stock unit accounts is paid in shares of the Company’s common stock when an officer retires or terminates employment.

19




Stock Options

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

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

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

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

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

A summary of stock option activity for the quarters ended March 31, 2007 and April 1, 2006 is presented in the table below:

 

 

2007

 

2006

 

 

 

Shares

 

Weighted Avg.
Exercise Price

 

Shares

 

Weighted Avg.
Exercise Price

 

Balance at beginning of period

 

1,753,188

 

 

$

31.81

 

 

5,759,545

 

 

$

32.39

 

 

Options granted

 

 

 

 

 

 

 

 

 

Options exercised

 

(124,532

)

 

31.94

 

 

(16,892

)

 

21.94

 

 

Options forfeited and expired

 

 

 

 

 

(20,100

)

 

36.82

 

 

Balance at end of period

 

1,628,656

 

 

$

31.80

 

 

5,722,553

 

 

$

32.40

 

 

Exercisable at end of period

 

1,401,191

 

 

 

 

 

5,415,687

 

 

 

 

 

 

The following table provides summarized information about stock options outstanding at March 31, 2007:

 

 

Options Outstanding

 

Options Exercisable

 

Range of Exercise Prices

 

 

 

Options
Outstanding

 

Weighted
Average
Contractual
Life (Years)

 

Weighted
Average
Exercise
Price

 

Options
Exercisable

 

Weighted
Average
Exercise
Price

 

$2.50

 

 

12,652

 

 

 

 

 

 

$

2.50

 

 

 

12,652

 

 

 

$

2.50

 

 

$18.00—$28.00

 

 

587,344

 

 

 

3.4

 

 

 

27.64

 

 

 

587,344

 

 

 

27.64

 

 

$28.01—$39.00

 

 

1,028,660

 

 

 

4.5

 

 

 

34.54

 

 

 

801,195

 

 

 

35.14

 

 

 

The remaining compensation expense to be recognized related to outstanding stock options, net of estimated forfeitures, is approximately $0.7 million. At March 31, 2007, the aggregate intrinsic value of outstanding stock options was $34.1 million and exercisable stock options was $29.5 million. The aggregate

20




intrinsic value represents the total pre-tax intrinsic value (i.e. the difference between the Company’s closing stock price on the last trading day of the first quarter of 2007 and the exercise price, multiplied by the quantities of in-the-money options at the end of the quarter).

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

Summary

The following discussion contains statements about our future financial performance. These statements are only predictions. Our actual results may differ materially from these predictions. In evaluating these statements, you should review Part II, Item 1A, “Risk Factors” of this Form 10-Q, including “Cautionary and Forward-Looking Statements.”

Financial Performance

We evaluate our results of operations both before and after certain gains and losses that management believes are not indicative of our core operating activities, such as the items described below. We believe our presentation of financial measures before, or excluding, these items, which are non-GAAP measures, enhances our investors’ overall understanding of our recurring operational performance and provides useful information to both investors and management.

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

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

·       In the first quarter of 2006, we recorded pre-tax charges of $98.6 million and $15.7 million related to the closing of 109 retail stores and the consolidation of our corporate headquarters, respectively. These charges were included in Other operating (income) expense, net in the Consolidated Statements of Income (Loss) and were reflected in the Retail segment (store closures) and the Corporate and Other segment (headquarters consolidation), respectively. See sub-caption “Integration Activities and Facility Closures” below for additional information regarding the store closures and the headquarters consolidation.

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

21




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

 

 

Quarter Ended

 

 

 

March  31,
2007

 

April 1,
2006

 

Sales

 

 

$

2,436.3

 

 

$

2,423.5

 

Income (loss) from continuing operations before income taxes and minority interest

 

 

$

99.6

 

 

$

(20.9

)

Net income (loss)

 

 

$

58.5

 

 

$

(25.1

)

Diluted income (loss) per common share:

 

 

 

 

 

 

 

Continuing operations

 

 

$

0.76

 

 

$

(0.21

)

Discontinued operations

 

 

 

 

(0.16

)

Diluted income (loss) per common share

 

 

$

0.76

 

 

$

(0.37

)

 

 

 

(percentage of sales)

 

Gross profit margin

 

25.6

%

25.9

%

Operating and selling expenses

 

17.3

%

17.9

%

General and administrative expenses

 

3.8

%

3.7

%

Other operating (income) expense, net

 

%

4.6

%

Operating profit margin

 

4.5

%

(0.3

)%

 

Sales for the first quarter of 2007 increased 0.5% to $2,436.3 million from $2,423.5 million for the first quarter of 2006. The year-over-year sales increase reflects a 1.6% increase in comparable store sales. Sales for the first quarter of 2006 included sales from 109 domestic superstores that were closed near the end of that quarter.

Gross profit margin declined 0.3% of sales to 25.6% of sales for the first quarter of 2007 compared to 25.9% of sales in the previous year. The gross profit margin decrease reflects lower gross margins at our Contract segment partially offset by improved gross margins in our Retail segment. For more information about our segment results, see the discussion of segment results below.

Operating and selling expenses decreased by 0.6% of sales to 17.3% of sales in the first quarter of 2007 from 17.9% of sales a year earlier. The improvement in operating and selling expenses as a percent of sales was the result of reduced payroll-related and occupancy expenses in the Retail segment and a shift of expense to general and administrative in the Contract segment.

General and administrative expenses were 3.8% of sales for the first quarter of 2007 and 3.7% of sales for the first quarter of 2006. The year-over-year increase in general and administrative expenses was due to a shift in expense from operating and selling in the Contract segment as well as increased incentive compensation expense partially offset by lower legacy-related costs.

In the first quarter of  2006, we reported $112.8 million of expense in Other operating (income) expense, net which included $98.6 million related to the 109 domestic store closures and $15.7 million primarily related to the headquarters consolidation. Other operating (income) expense, net also includes dividends earned on our investment in affiliates of Boise Cascade, L.L.C., which were $1.6 million for 2007 and $1.4 million for 2006, respectively

Interest expense was $30.1 million in the first quarter of 2007 versus $31.5 million for the prior year. The year-over-year decrease in interest expense was a result of lower average borrowings. Interest expense includes interest related to the timber securitization notes of approximately $20.1 million for 2007 and 2006. The interest expense associated with the timber securitization notes is offset by interest income

22




earned on the timber notes receivable of approximately $20.6 million for both 2007 and 2006. The interest income on the timber notes receivable is included in interest income and is not netted against the related interest expense in our Consolidated Statements of Income (Loss).

Excluding the interest income earned on the timber notes receivable, interest income was $2.4 million and $0.5 million for the quarters ended March 31, 2007 and April 1, 2006, respectively. The additional interest income in 2007 included interest earned on the cash and short-term investments we held.

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

As a result of the foregoing factors, net income for the first quarter of 2007 was $58.5 million, or $0.76 per diluted share compared with a net loss of $25.1 million, or $(0.37) per diluted share for the first quarter of 2006. Net income for the first quarter of 2007, excluding the after-tax effect of a loss from the sale of our Contract operations in Mexico to our joint venture in Mexico was $59.7 million, or $0.77 per diluted share. For the first quarter of 2006, excluding the after-tax effect of the charges for store closures, our headquarters consolidation and the loss from discontinued operations, net income from continuing operations was $55.7 million, or $0.77 per diluted share.

OfficeMax, Contract
($ in millions)

 

 

Quarter Ended

 

 

 

March 31,
2007

 

April 1,
2006

 

Sales

 

 

$

1,264.5

 

 

$

1,230.7

 

Segment income

 

 

$

59.9

 

 

$

67.0

 

Sales by Product Line

 

 

 

 

 

 

 

Office supplies and paper

 

 

$

712.0

 

 

$

670.3

 

Technology products

 

 

$

408.9

 

 

$

403.1

 

Office furniture

 

 

$

143.6

 

 

$

157.3

 

Sales by Geography

 

 

 

 

 

 

 

United States

 

 

$

943.0

 

 

$

917.5

 

International

 

 

$

321.5

 

 

$

313.2

 

Sales growth

 

 

2.7

%

 

9.5

%

Same-location sales growth

 

 

2.7

%

 

0

%

 

 

 

(percentage of sales)

 

Gross profit margin

 

22.1

%

23.2

%

Operating expenses

 

17.4

%

17.8

%

Operating profit margin

 

4.7

%

5.4

%

 

For the first quarter of 2007, Contract segment sales were $1,264.5 million, up 2.7% from $1,230.7 million for the first quarter of 2006. Same-location sales for the Contract segment increased by 2.7% year-over-year, with sales growth both in the United States and International operations. The sales growth was realized primarily in large corporate accounts.

23




Contract segment gross profit margin decreased 1.1% of sales to 22.1% of sales for the first quarter of 2007. The decrease in gross profit margin was primarily due to the impact of new and renewing accounts with lower gross margin rates and the impact of paper price increases.

Operating expenses for the Contract segment were 17.4% of sales for the first quarter of 2007, down from 17.8% of sales for the first quarter of 2006. The year-over-year improvement in operating expenses as a percentage of sales was the result of targeted cost controls, driven by our reorganization of the Contract segment that we began in the fourth quarter of 2006. The cost savings were partially offset by a temporary increase in sales compensation we incurred during the transition to a new commission structure.

Contract segment income decreased $7.1 million to $59.9 million for 2007, or 4.7% of sales, compared to $67.0 million, or 5.4% of sales, for 2006, as a result of the decrease in gross profit margin.

24




OfficeMax, Retail
($ in millions)

 

 

Quarter Ended

 

 

 

March 31,
2007

 

April 1,
2006

 

Sales

 

 

$

1,171.8

 

 

$

1,192.8

 

Segment income (loss)

 

 

$

64.6

 

 

$

(38.0

)

Sales by Product Line

 

 

 

 

 

 

 

Office supplies and paper

 

 

$

444.4

 

 

$

451.5

 

Technology products

 

 

$

624.3

 

 

$

625.2

 

Office furniture

 

 

$

103.1

 

 

$

116.1

 

Sales by Geography

 

 

 

 

 

 

 

United States

 

 

$

1,113.7

 

 

$

1,144.5

 

International

 

 

$

58.1

 

 

$

48.3

 

Sales growth

 

 

(1.8

)%

 

(0.5

)%

Same-location sales growth

 

 

0.5

%

 

1.2

%

 

 

 

(percentage of sales)

 

Gross profit margin

 

29.3

%

28.6

%

Operating expenses

 

23.8

%

31.8

%

Operating profit margin

 

5.5

%

(3.2

)%

 

Retail segment sales were $1,171.8 million for the first quarter of 2007 compared to $1,192.8 million for the first quarter of 2006. Retail segment same-location sales increased 0.5% year-over-year. During the first quarter of 2007, we opened five new retail stores in the U.S. During the first quarter of 2006, we closed 109 domestic stores and opened six. Adjusted for our initiative to eliminate mail-in-rebates and to provide instant rebates in lieu of national vendor sponsored mail-in-rebates, same-location sales increased 2.2% year-over-year.

Retail segment gross margin increased 0.7% of sales to 29.3% of sales for 2007, from 28.6% of sales for 2006. The gross margin improvement was primarily due to improved promotional and marketing strategies and increased vendor funding.

Retail segment operating expenses were 23.8% of sales for the first quarter of 2007 compared to 31.8% for the first quarter of 2006. Excluding the impact of the store closing charges, Retail segment operating expenses were 23.5% of sales for the first quarter of 2006. Operating expenses for the first quarter of 2007 benefited from reduced payroll-related and occupancy costs, offset by an increase in advertising in support of our Impress business, and allocated general and administrative expenses.

For the first quarter of 2007, the Retail segment reported operating income of $64.6 million, or 5.5% of sales, compared to an operating loss of $38.0 million, or (3.2%) of sales, in 2006. Excluding the impact of the store closing related charges in 2006, Retail segment operating income for the first quarter of 2006 was $60.6 million, or 5.1% of sales for 2006.

Corporate and Other

Corporate and Other expenses were $14.4 million and $37.4 million in the first quarter of 2007 and 2006, respectively. Excluding the expenses related to headquarters consolidation, Corporate and Other expenses were $21.7 million for the first quarter of 2006. The year-over-year decrease in our Corporate and Other expenses were primarily due to lower legacy-related costs.

25




Discontinued Operations

In December 2004, the Company’s board of directors authorized management to pursue the divestiture of a facility near Elma, Washington that manufactured integrated wood-polymer building materials. The board of directors and management concluded that the operations of the facility were no longer consistent with the Company’s strategic direction. As a result of that decision, the Company recorded the facility’s assets as held for sale on the Consolidated Balance Sheets and the results of its operations and planned divestiture as discontinued operations.

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

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

Integration Activities and Facility Closures

In September 2005, the board of directors approved a plan to relocate and consolidate the Company’s retail headquarters in Shaker Heights, Ohio and its existing corporate headquarters in Itasca, Illinois into a new facility in Naperville, Illinois. The Company began the consolidation and relocation process in the latter half of 2005. During the first quarter of 2006, the Company incurred and expensed approximately $15.7 million of costs related to the headquarters consolidation, all of which were reflected in the Corporate and Other segment. The consolidation and relocation process was completed during the second half of 2006.

During the first quarter of 2006, the Company closed 109 underperforming domestic retail stores and recorded a pre-tax charge of $98.6 million ($11.3 million for employee severance, asset write-off and impairment and other closure costs and $87.3 million for estimated future lease obligations).

At March 31, 2007, approximately $40.1 million of the reserve for integration and facility closures was included in accrued liabilities, other, and $64.3 million was included in other long-term liabilities. At March 31, 2007, the integration and facility closure reserve included approximately $94 million for estimated future lease obligations, which represents the estimated net present value of the lease obligations and is net of anticipated sublease income of approximately $98 million.

26




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

 

 

Lease\
Contract
Terminations

 

Severance\
Retention

 

Asset
Write-off &
Impairment

 

Other

 

Total

 

 

 

(thousands)

 

Balance at December 30, 2006

 

 

$

107,824

 

 

 

$

10,838

 

 

 

$

 

 

$

3,142

 

$

121,804

 

Charges to income

 

 

 

 

 

 

 

 

 

 

 

 

Change in goodwill

 

 

 

 

 

 

 

 

 

 

 

 

Changes to estimated costs included in income

 

 

 

 

 

 

 

 

 

 

 

 

Cash payments

 

 

(15,125

)

 

 

(3,019

)

 

 

 

 

(351

)

(18,495

)

Non-cash charges

 

 

 

 

 

 

 

 

 

 

 

 

Accretion

 

 

1,044

 

 

 

 

 

 

 

 

 

1,044

 

Balance at March 31, 2007

 

 

$

93,743

 

 

 

$

7,819

 

 

 

$

 

 

$

2,791

 

$

104,353

 

                                                                                               

 

 

Lease\
Contract
Terminations

 

Severance\
Retention

 

Asset
Write-off &
Impairment

 

Other

 

Total

 

 

 

(thousands)

 

Balance at December 31, 2005

 

 

$

91,455

 

 

 

$

21,502

 

 

 

$

 

 

$

739

 

$

113,696

 

Charges to income

 

 

87,338

 

 

 

9,304

 

 

 

9,062

 

 

8,564

 

114,268

 

Change in goodwill

 

 

 

 

 

 

 

 

 

 

 

 

Changes to estimated costs included in income

 

 

 

 

 

 

 

 

 

 

 

 

Cash payments

 

 

(17,796

)

 

 

(6,087

)

 

 

 

 

(6,922

)

(30,805

)

Non-cash charges

 

 

 

 

 

 

 

 

(9,062

)

 

(685

)

(9,747

)

Accretion

 

 

1,272

 

 

 

 

 

 

 

 

 

1,272

 

Balance at April 1, 2006

 

 

$

162,269

 

 

 

$

24,719

 

 

 

$

 

 

$

1,696

 

$

188,684

 

 

Liquidity and Capital Resources

As of March 31, 2007, we had $139.6 million of cash and cash equivalents and $384.5 million of short-term and long-term debt, excluding the $1.5 billion of timber securitization notes. We also had $22.4 million of restricted investments on deposit which are pledged to secure a portion of the outstanding debt. As of  December 30, 2006, we had $282.1 million of cash and cash equivalents, $409.9 million of short-term and long-term debt, excluding the $1.5 billion of timber securitization notes, and $22.3 million of restricted investments. Since the first quarter of 2006, we reduced our net debt (total debt excluding the timber securitization notes less cash and restricted investments) by approximately $138.5 million.

Our ratio of current assets to current liabilities was 1.41:1 at March 31, 2007, compared with 1.37:1 at December 30, 2006. The increase in our ratio of current assets to current liabilities at March 31, 2007 resulted primarily from the seasonal decrease in  accounts payable in the first quarter of 2007.

The Company’s primary ongoing cash requirements relate to working capital, expenditures for property and equipment, lease obligations and debt service. The Company expects to fund these requirements through a combination of cash flow from operations and seasonal borrowings under its revolving credit facility. The sections that follow discuss in more detail our operating, investing, and financing activities, as well as our financing arrangements.

27




Operating Activities

The Company’s operating activities used $80.4 million of cash during the first quarter of 2007 while generating $71.9 million of cash during the first quarter of 2006. For the first quarter of 2007, items included in net income (loss) provided $101.5 million of cash, and changes in working capital used $181.9 million, principally due to the seasonal reduction in accounts payable. For the first quarter of 2006, items included in net income (loss) provided $29.8 million of cash, and changes in working capital provided $42.1 million, primarily due to the reduction in inventories as a result of closing 109 retail stores during the period. At March 31, 2007, $178.5 million of sold accounts receivable were excluded from “Receivables” in our Consolidated Balance Sheet, compared to $180.0 million excluded at December 30, 2006. The decrease at March 31, 2007 in sold accounts receivable of $1.5 million from the amount at December 30, 2006, used cash from operations during 2007.

Investment Activities

The Company’s investing activities used $28.1 million of cash during the first quarter of 2007, compared to $22.7 million during the first quarter of 2006. Investment activities during the first quarter of 2007 were expenditures for property and equipment. The Company expects expenditures for property and equipment in 2007 to total between $180 and $200 million, excluding acquisitions. The Company’s capital spending in 2007 will be for leasehold improvements, new stores, quality and efficiency projects, replacement projects and integration projects.

Financing Activities

Our financing activities used $33.9 million of cash during the first quarter of 2007, compared with $44.8 million during the first quarter of 2006. Dividend payments totaled $11.2 million and $10.6 million during the first quarter of 2007 and 2006, respectively. In both years, the Company’s quarterly dividend was 15 cents per common share. During the first quarter of 2007, the Company used $25.7 million of cash to reduce debt as compared to $34.5 million for the same period in 2006. Excluding the timber securitization notes, our debt-to-equity ratio was .19:1 at March 31, 2007 and .21:1 at December 30, 2006.

Our debt structure consists of credit agreements, note agreements and other borrowings. Information regarding our debt structure is included below. For additional information, see Note 13, Debt, of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of the Company’s Annual Report on Form 10-K for the year ended December 30, 2006.

Credit Agreements

On June 24, 2005, the Company entered into a loan and security agreement for a new revolving credit facility. The revolving credit facility permits the Company to borrow up to the maximum aggregate borrowing amount, which is equal to the lesser of (i) a percentage of the value of certain eligible inventory less certain reserves or (ii) $500 million. There were no borrowings outstanding under the revolver as of March 31, 2007 and December 30, 2006. There were no borrowings outstanding during the first quarter of 2007. The average amount outstanding under the revolving credit facility during the first quarter of 2006 was $71.6 million. Letters of credit, which may be issued under the revolver up to a maximum of $100 million, reduce available borrowing capacity under the revolving credit facility. Letters of credit issued under the revolver totaled $84.2 million as of March 31, 2007 and $80.2 million as of April 1, 2006. As of March 31, 2007, the maximum aggregate borrowing amount available under the revolver was $500.0 million and excess availability under the revolver totaled $415.8 million.

Borrowings under the revolver bear interest at rates based on either the prime rate or the London Interbank Offered Rate (“LIBOR”). Margins are applied to the applicable borrowing rates and letter of credit fees under the revolver depending on the level of average excess availability. Fees on letters of credit

28




issued under the revolver were charged at a weighted average rate of 1.0% during the first quarter of 2007. The Company is also charged an unused line fee of 0.25% on the amount by which the maximum available credit of $500 million exceeds the average daily outstanding borrowings and letters of credit.

Borrowings under the revolver are secured by a lien on substantially all inventory and related proceeds. The revolving loan and security agreement contains customary conditions to borrowing including a monthly calculation of excess borrowing availability and reporting compliance. Covenants in the revolver agreement restrict the amount of letters of credit that may be issued, dividend distributions and other uses of cash if excess availability is less than $75 million. At March 31, 2007, the Company was in compliance with all covenants under the revolver agreement. The revolving credit agreement expires on June 24, 2010.

Timber Notes

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

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

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

Note Agreements

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

29




restriction on secured transactions involving Principal Properties, as defined, and a restriction on sale and leaseback transactions involving Principal Properties.

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

Other

The Company had leased certain equipment at its integrated wood-polymer building materials facility near Elma, Washington under a capital lease. The lease agreement had a base term of seven years and an interest rate of 4.67%. During the first quarter of  2006 the Company paid $29.1 million to terminate the lease agreement.

Cash payments for interest were $9.8 million and $10.7 million for the quarters ended March 31, 2007 and April 1, 2006, respectively.

Contractual Obligations

For information regarding contractual obligations, see the caption “Contractual Obligations” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 30, 2006. In the first quarter of 2007, the Company adopted Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of Financial Accounting Standards Board (FASB) Statement No. 109”, see Note 6, Income Taxes, of “Notes to Quarterly Consolidated Financial Statements (Unaudited)” in this Form 10-Q. As of March 31, 2007, the Company had approximately $70 million of total gross unrecognized tax benefits.

Off-Balance-Sheet Activities and Guarantees

For information regarding off-balance-sheet activities and guarantees, see Note 8, Sales of Accounts Receivable, of “Notes to Quarterly Consolidated Financial Statements (Unaudited)” in this Form 10-Q and the caption “Off-Balance-Sheet Activities and Guarantees” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 30, 2006. At March 31, 2007, there had not been a material change to the information regarding off-balance-sheet-activities and guarantees disclosed in the Company’s Annual Report on Form 10-K for the year ended December 30, 2006.

Inflationary and Seasonal Influences

We believe that neither inflation nor deflation has had a material effect on our financial condition or results of operations; however, there can be no assurance that we will not be affected by inflation or deflation in the future. The Company’s business is seasonal, with OfficeMax, Retail showing a more pronounced seasonal trend than OfficeMax, Contract. Sales in the second quarter and summer months are historically the slowest of the year. Sales are stronger during the first, third and fourth quarters that include

30




the important new-year office supply restocking month of January, the back-to-school period and the holiday selling season, respectively.

Environmental

For information regarding environmental issues, see the caption “Environmental” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 30, 2006.

Critical Accounting Estimates

For information regarding critical accounting estimates, see the caption “Critical Accounting Estimates” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 30, 2006.

ITEM 3.                QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For information regarding market risk see the caption “Disclosures of Financial Market Risk” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 30, 2006. At March 31, 2007, there had not been a material change to the information regarding market risk disclosed in the Company’s Annual Report on Form 10-K for the year ended December 30, 2006.

ITEM 4.                CONTROLS AND PROCEDURES

(a)           Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, these officers have concluded that the Company’s disclosure controls and procedures are effective for the purpose of ensuring that material information required to be included in this quarterly report is made known to them by others on a timely basis and that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

(b)          Changes in Internal Controls over Financial Reporting

There was no change in the Company’s internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-1(f) of the Exchange Act, during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II—OTHER INFORMATION

ITEM 1.                LEGAL PROCEEDINGS

For information concerning legal proceedings, see “Item 3. Legal Proceedings” and Note 19, Legal Proceedings and Contingencies, of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K for the year ended December 30, 2006. In addition, over the past few years and continuing into 2007, we have been named a defendant in a number of cases where the plaintiffs allege asbestos-related injuries from exposure to asbestos products or exposure to asbestos while working at job sites. The claims vary widely and often are not specific about the plaintiffs’ contacts with the Company. None of the claimants seeks damages from us individually, and we are generally one of numerous defendants. Many of the cases filed against us have been voluntarily dismissed, although we have settled some cases. The settlements we have paid have been covered mostly by insurance, and we believe any future settlements or judgments in these cases would be similarly covered. To date, no asbestos case against us has gone to trial, and the nature of these cases makes any prediction as to the outcome of pending litigation inherently subjective. At this time, however, we believe our involvement in asbestos litigation is not material to either our financial position or our results of operations.

ITEM 1A.        RISK FACTORS

Cautionary and Forward-Looking Statements

This Quarterly Report on Form 10-Q 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,” “will,” “expect,” “believe,” “should,” “plan,” “anticipate” and other similar expressions. You can find examples of these statements throughout this report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations. We cannot guarantee that our actual results will be consistent with the forward-looking statements we make in this report. 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.

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 and office furniture. We compete with worldwide contract stationers, office supply superstores, mass merchandisers, wholesale clubs, computer and electronics superstores, Internet merchandisers, direct-mail distributors, discount retailers, drugstores, supermarkets and thousands of local and regional contract stationers. 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 our markets 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. In recent years, two package delivery companies have established retail stores that compete directly with us for copy, printing, packaging and shipping business, and offer a limited assortment of office products and services similar to the ones we offer. We anticipate increasing competition from our two domestic office supply superstore competitors and various other providers, including the two package delivery companies, for print-for-pay and related services. Print-for-pay and related services have historically been a key point of difference for OfficeMax stores and are expected to become an increasingly more important part of our future strategies. Any or all of our competitors may become even more aggressive in the future. Increased competition in the office products markets, together with increased advertising, has heightened price awareness among end-users.

32




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 than we can.

We may be unable to open and remodel stores successfully.   Our business plans include the opening and remodeling of a significant number of retail stores. For these plans to be successful, we must identify and lease favorable store sites, develop remodeling plans, hire and train associates and adapt management and systems to meet the needs of these operations. These tasks are difficult to manage successfully. If we are not able to open and remodel stores as quickly as we have planned, our future financial performance could be materially and adversely affected. Further, we cannot ensure that the new or remodeled stores will achieve the sales or profit levels that we anticipate. This is particularly true as we introduce different store designs, formats and sizes or enter into new market areas. In particular, the “Advantage” prototype store format we intend to utilize for new and remodeled stores is new and there can be no assurance as to whether or to what extent that format will be successful.

Economic conditions directly influence our operating results.   Economic conditions, both domestically and abroad, directly influence our operating results. Current and future economic conditions, including the level of unemployment, energy costs and the financial condition and growth prospects of our Contract customers may adversely affect our business and the results of our operations.

Our quarterly operating results are subject to fluctuation.   Our quarterly operating results have fluctuated in the past and are likely to do so in the future. Factors that may contribute to these quarter-to-quarter fluctuations could include the effects of seasonality, our level of advertising and marketing, new store openings, changes in product mix and competitors’ pricing. These quarterly fluctuations could have an adverse effect on both our operating results and the price of our common stock.

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. As a retailer, we face the challenge of filling many positions at wage scales that are low, although appropriate for our industry and in light of competitive factors. As a result, we face many external risks and internal factors in meeting our labor needs, including competition for qualified personnel, overall unemployment levels, prevailing wage rates, as well as rising employee benefit costs, including insurance costs and compensation programs. Changes in any of these factors, including especially a shortage of available workforce in the areas in which we operate, could interfere with our ability to adequately provide services to customers and result in increasing our labor costs, which could have an adverse effect on our business and results of our operations.

We cannot assure that new associates will perform effectively.   In conjunction with our headquarters consolidation, we have hired approximately 600 new employees to replace existing associates who did not relocate to the new headquarters. As a result, we now have a significant number of associates with limited experience with OfficeMax performing key functions. Although we have carefully selected and trained these associates, there is still a risk that institutional knowledge may be lost and operations may be conducted less efficiently or effectively. Also, if we are unable to continue to attract and retain qualified associates for our remaining open positions, as well as train new associates and transition them smoothly into their roles, it could adversely affect our operating results.

Our expanded offering of proprietary branded products may not improve our financial performance and may expose us to product liability claims.   Our product offering includes many 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 third party manufacturers may prove to be unreliable, or the

33




quality of our globally sourced products may not meet our expectations. 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.

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 debt and other financial obligations including leases. 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.

We cannot ensure new systems and technology will be implemented successfully.   Our acquisition of OfficeMax, Inc., in December 2003, required the integration and coordination of our existing contract stationer systems with the retail systems of the acquired company. Integrating and coordinating these systems has been complex and still requires a number of system enhancements and conversions that, if not done properly, could divert the attention of our workforce during development and implementation and constrain for some time our ability to provide the level of service our customers demand. Also, when implemented, the systems and technology enhancements may not provide the benefits anticipated and could add costs and complications to our ongoing operations. A failure to effectively implement changes to these systems or to realize the intended efficiencies could have an adverse effect on our business and results of our operations.

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

Our business may be adversely affected by the actions of and risks associated with our third-party vendors.   We are a reseller of other manufacturer’s branded items and are thereby dependent on the availability and pricing of key products including ink, toner, paper and technology products. As a reseller, we cannot control the supply, design, function or cost of many of the products we offer for sale. Disruptions in the availability of these products may adversely affect our sales and result in customer dissatisfaction. Further, we cannot control the cost of manufacturer’s 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 results of operations.

Our investment in Boise Cascade, L.L.C. subjects us to the risks associated with the paper and forest products industry.   When we sold our paper, forest products and timberland assets, we purchased an equity interest in affiliates of Boise Cascade, L.L.C. In addition, we have an ongoing obligation to purchase paper from an affiliate of Boise Cascade, L.L.C. These continuing interests subject us to market risks associated with the paper and forest products industry. These industries are 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 these industries significantly affects product pricing. Demand for building products is driven mainly by factors such as new

34




construction and remodeling rates, interest rates and weather. The supply of paper and building products fluctuates based on manufacturing capacity, and excess capacity, both domestically and abroad, can result in significant variations in product prices. The level of supply and demand for forest products will affect the price we pay for paper. Our ability to realize the carrying value of our equity interest in affiliates of Boise Cascade, 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, L.L.C., due in part to the fact that there is not a liquid market for our equity interest. Our exposure to these risks could decrease our ability to compete effectively with our competitors, who typically are not subject to such risks.

Compromises of customer debit and credit card data in 2004, regardless of the source of the breach, may damage the OfficeMax brand and our reputation.   Compromises of customer debit and credit card data in 2004 were later tied to fraudulent transactions outside the U.S. While we have no knowledge of a security breach at OfficeMax, it is possible that information security compromises that involved OfficeMax customer data, including breaches that occurred at third party processors, may damage our reputation. Such damage to our reputation could adversely affect our operating results.

We have substantial business operations in states in which the regulatory environment is particularly challenging.   Our operations in California and other similar states expose us to many regulations relating to the conduct of our business, including, without limitation, consumer protection laws, advertising regulations, and employment and wage and hour regulations. This regulatory environment requires the company to implement 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.

ITEM 2.                UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Information concerning our stock repurchases during the three months ended March 31, 2007 is below. All stock was withheld to satisfy our tax withholding obligations upon vesting of restricted stock awards.

Period

 

 

 

Total Number
of Shares (or Units)
Purchased

 

Average Price
Paid Per Share
(or Unit)

 

Total Number
of Shares (or Units)
Purchased as Part
of Publicly 
Announced Plans
or Programs

 

Maximum
Number (or Approximate 
Dollar Value) of Shares
(or Units) that May Yet
Be Purchased Under
the Plans or Programs

 

December 31, 2006— January 27, 2007

 

 

1,923

 

 

 

49.69

 

 

 

 

 

 

 

 

January 28— February 24, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

February 25— March 31, 2007

 

 

133,460

 

 

 

49.22

 

 

 

 

 

 

 

 

Total

 

 

135,383

 

 

 

49.23

 

 

 

 

 

 

 

 

 

ITEM 3.                DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4.                SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

We held our annual meeting of shareholders on April 25, 2007. A total of 76,120,392 shares of common and preferred stock were outstanding and entitled to vote at the meeting. Of the total outstanding, 71,770,228 shares were represented at the meeting.

35




Shareholders cast votes for election of the following directors whose terms expire in 2008:

 

 

In Favor

 

Withheld

 

Not Voted

 

Dorrit J. Bern

 

70,417,445

 

1,352,783

 

 

 

 

Warren F. Bryant

 

70,844,260

 

925,968

 

 

 

 

Brian C. Cornell

 

70,539,327

 

1,230,901

 

 

 

 

Joseph M. DePinto

 

70,524,456

 

1,245,772

 

 

 

 

Sam K. Duncan

 

69,693,422

 

2,076,806

 

 

 

 

Rakesh Gangwal

 

70,366,501

 

1,403,727

 

 

 

 

Gary G. Michael

 

69,882,940

 

1,887,288

 

 

 

 

Francesca Ruiz de Luzuriaga

 

70,482,284

 

1,287,944

 

 

 

 

David M. Szymanski

 

70,494,457

 

1,275,771

 

 

 

 

 

Our shareholders approved the appointment of KPMG LLP as our independent registered public accounting firm for 2007 by a vote of 70,938,568 shares of stock for, 485,194 shares of stock against and 346,466 shares of stock abstaining.

Our shareholders voted to approve an amendment to our Restated Certificate of Incorporation, as amended, to remove the supermajority voting requirements by a vote of 70,918,516 shares of stock for, 381,200 shares of stock against and 470,512 shares of stock abstaining.

Our shareholders approved the shareholder proposal requesting that the board of directors establish an engagement process with proponents of a shareholder proposal that is approved by a specified vote at an annual meeting by a vote of 33,224,515 shares of stock for, 31,416,013 shares of stock against and 496,889 shares of stock abstaining. There were 6,632,811 broker non-votes on this matter.

ITEM 5.                OTHER INFORMATION

None

ITEM 6.                EXHIBITS

Exhibits.

Required exhibits are listed in the Index to Exhibits and are incorporated by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

OFFICEMAX INCORPORATED

 

 

 

 

 

 

 

 

/s/ DON CIVGIN

 

 

Don Civgin

 

 

Executive Vice President and Chief Financial Officer

 

 

(As Duly Authorized Officer and Principal Financial Officer)

 

 

 

 

 

 

 

 

 

 

 

/s/ PHILLIP DEPAUL

 

 

Phillip DePaul

 

 

Senior Vice President, Controller and Chief Accounting Officer

 

 

(As Duly Authorized Officer and Principal Accounting Officer)

 

 

 

Date:  May 7, 2007

 

 

 

37




OFFICEMAX INCORPORATED
INDEX TO EXHIBITS

Filed With the Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2007

Number

 

Description

 

 

3.1

(1)

Restated Certificate of Incorporation, as amended and restated to date

3.2

(2)

Bylaws, as amended October 20, 2006

10.1

(3)

Form of 2007 Annual Incentive Award Agreement

10.2

(4)

Form of 2007 Restricted Stock Unit Award Agreement

31.1

*

CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

*

CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32

*

Section 906 Certifications of Chief Executive Officer and Chief Financial Officer of OfficeMax Incorporated


*                    Filed with this Form 10-Q.

(1)          Exhibit 3.1 was filed under the same exhibit number in our Current Report on Form 8-K dated May 1, 2007, and is incorporated herein by reference.

(2)          Exhibit 3.2 was filed under exhibit number 3.1 in our Current Report on Form 8-K dated October 25, 2006, and is incorporated herein by reference.

(3)          Exhibit 10.1 was filed under exhibit number 99.1 in our Current Report on Form 8-K dated February 20, 2007, and is incorporated herein by reference.

(4)          Exhibit 10.2 was filed under exhibit number 99.2 in our Current Report on Form 8-K dated February 20, 2007, and is incorporated herein by reference.

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