Business News

OfficeMax Reports Third Quarter 2012 Financial Results

Tuesday 06. November 2012 - - Achieves Year-Over-Year Improvement in EPS - Continued Momentum in U.S. Contract Business, including Digital Initiatives - Extinguishes Lehman Timber Notes from Balance Sheet

OfficeMax Incorporated (NYSE:OMX), a leader in office and facility supplies, technology and services, today announced the results for its fiscal third quarter ended September 29, 2012.
Consolidated Results
Reported Results
Total sales were $1,744.6 million in the third quarter of 2012, a decrease of 1.7% from the third quarter of 2011. For the third quarter of 2012, OfficeMax reported operating income of $33.5 million, compared to $41.3 million in the third quarter of 2011, and net income available to OfficeMax common shareholders of $433.0 million, or $4.92 per diluted share, compared to $21.5 million, or $0.25 per diluted share, in the third quarter of 2011.
Adjusted Results
Excluding the impact of changes in foreign exchange rates, the impact of stores closed and opened, and the shift in weeks resulting from our fiscal calendar, adjusted total sales in the third quarter of 2012 decreased 1.2% from the third quarter of 2011. A reconciliation to the company’s GAAP sales results is included in this press release.
Results for the third quarter of 2012 included a non-cash gain of $670.8 million related to the extinguishment of non-recourse debt guaranteed by Lehman Brothers Holdings, Inc. which increased net income by $416.4 million, or $4.73 per diluted share. The third quarter of 2012 also included $11.4 million of expenses to impair fixed assets associated with certain stores and to record a change in the estimated lease obligation of a previously closed store in the U.S. which reduced net income by $7.0 million or $0.08 per diluted share. Excluding these items, adjusted operating income in the third quarter of 2012 was $44.9 million, or 2.6% of sales, an increase from $41.3 million, or 2.3% of sales, in the third quarter of 2011; and adjusted net income available to OfficeMax common shareholders was $23.6 million, or $0.27 per diluted share, an increase from $21.5 million, or $0.25 per diluted share, in the third quarter of 2011.
“Our team’s focus on strengthening the core business resulted in stronger operating margins for the quarter, driven primarily by our U.S. and international Contract businesses. While we continued to drive sales growth in our U.S. Contract business including digital initiatives, Retail sales were challenged by weaker demand for technology products, especially personal computers,” said Ravi Saligram, President and CEO of OfficeMax. “We are also pleased to have extinguished the Lehman non-recourse liability from our balance sheet.”
Contract Segment Results
Contract segment sales decreased 0.3% compared to the prior year period to $880.9 million in the third quarter of 2012. This decrease reflected a U.S. Contract operations sales increase of 3.9% and an international Contract operations sales decrease of 8.9% in U.S. dollars (a decrease of 7.2% on a local currency basis).
Contract segment gross profit margin increased to 22.8% in the third quarter of 2012 from 22.7% in the third quarter of 2011, reflecting lower occupancy expense. Contract segment operating, selling and general and administrative expenses as a percentage of sales decreased to 19.8% in the third quarter of 2012 from 20.1% in the third quarter of 2011 primarily due to lower payroll expense from reorganizations and facility closures in 2011, partially offset by higher incentive compensation expense. Contract segment income was $26.5 million, or 3.0% of sales, in the third quarter of 2012 compared to $23.3 million, or 2.6% of sales, in the third quarter of 2011.
Retail Segment Results
Retail segment sales decreased 3.1% to $863.7 million in the third quarter of 2012 compared to the third quarter of 2011, reflecting a same-store sales decrease on a local currency basis of 2.1% primarily due to lower technology product category sales. The decrease reflected a U.S. Retail operations same-store sales decrease of 2.6%, partially offset by a Mexico retail operations same-store sales increase of 2.2% on a local currency basis.
Retail segment gross profit margin increased to 30.0% in the third quarter of 2012 from 29.0% in the third quarter of 2011, due to higher customer margins driven primarily by a sales mix shift from the relatively lower margin technology category, and lower occupancy and delivery expenses. Retail segment operating, selling and general and administrative expenses as a percentage of sales were 26.8% in the third quarter of 2012 and 25.8% in the third quarter of 2011. The increase was primarily due to higher advertising and incentive compensation expense. Retail segment income was $27.7 million, or 3.2% of sales, in the third quarter of 2012 compared to $28.5 million, or 3.2% of sales, in the third quarter of 2011.
OfficeMax ended the third quarter of 2012 with a total of 960 Retail stores, consisting of 872 Retail stores in the U.S. and 88 Retail stores in Mexico. During the third quarter of 2012, OfficeMax opened three stores in Mexico.
Corporate and Other Segment Results
The Corporate and Other segment includes support staff services and certain other expenses that are not fully allocated to the Retail and Contract segments. Corporate and Other segment operating, selling and general and administrative expenses were $9.3 million in the third quarter of 2012 compared to $10.5 million in the third quarter of 2011. The decrease was primarily due to lower pension expense.
Balance Sheet and Cash Flow
As of September 29, 2012, OfficeMax had total debt of $236.4 million, excluding $735.0 million of non-recourse debt related to the Wells Fargo-backed timber notes. In September 2012, $735.0 million of non-recourse debt related to Lehman was extinguished from the balance sheet.
During the first nine months of 2012, OfficeMax generated $157.8 million of cash flow from operations and invested $48.2 million in capital expenditures.
“We maintained our focus on driving cost efficiencies and gross margins, even as we continued to invest in key growth initiatives,” said Bruce Besanko, EVP, Chief Financial Officer and Chief Administrative Officer of OfficeMax. “At the same time, we achieved strong free cash flow and continued our comprehensive analysis of our balance sheet.”
Outlook
Fourth Quarter 2012
Based on the current environment, OfficeMax anticipates that total company sales for the fourth quarter will be approximately in line with, to slightly lower than, the fourth quarter of 2011, including the projected favorable impact of foreign currency translation and excluding the additional week in the fourth quarter of 2011, which generated $86 million in sales. Additionally, OfficeMax anticipates that for the fourth quarter of 2012, adjusted operating income margin will be slightly lower than the 1.7% for the prior year period due to the benefit of the highly profitable additional week in the fourth quarter of 2011.
Full Year 2012
For the full year 2012, OfficeMax anticipates that total company sales will be lower than the prior year, including the projected unfavorable impact of foreign currency translation and excluding the additional week in 2011, which generated $86 million in sales. For the full year 2012, OfficeMax anticipates that adjusted operating income margin will be slightly higher than the 1.7% for the prior year despite the benefit of the highly profitable additional week in 2011. The company’s full year 2012 outlook also includes the following:
— Capital expenditures of approximately $70-80 million, primarily related
to investments in IT, ecommerce, infrastructure improvements, and
maintenance
— Depreciation & amortization of approximately $70-80 million
— Pension expense of approximately $3 million excluding any non-cash
expense associated with a lump sum payout initiative in the fourth
quarter of 2012, and cash contributions to the frozen pension plans of
$21 million
— Interest expense of approximately $70 million and interest income of
approximately $44 million
— An adjusted effective tax rate approximately in line with the adjusted
effective tax rate in the full year 2011
— Cash flow from operations exceeding capital expenditures
— A net reduction in Retail store count for the year with up to 45 store
closures and one opening in the U.S., as well as 8-10 store openings and
1-2 store closures in Mexico