Business News

OfficeMax Reports Second Quarter 2008 Financial Results

Wednesday 30. July 2008 - - Contract Segment Gross Margin Improves - Retail Segment Implements Reorganization of Store Management - Net Income Includes Non-Cash Impairment Charge

OfficeMax(R) Incorporated (NYSE:OMX) today announced the results for its second quarter ended June 28, 2008. Total sales decreased 6.9% in the second quarter of 2008 to $1.98 billion compared to the second quarter of 2007. For the second quarter of 2008, OfficeMax reported a net loss of $894.2 million, or $11.79 per diluted share, compared to net income of $27.4 million, or $0.35 per diluted share, in the second quarter of 2007. Results for the second quarter of 2008 included three items that are not considered indicative of core operating activities, herein referred to as unusual items, which if excluded, would increase income before taxes by $942.4 million and net income by $913.6 million, or $12.03 per diluted share. These unusual items were a non-cash expense of $935.3 million recorded in the Contract and Retail segments related to impairment of goodwill and intangible assets; an expense of $10.2 million recorded in the Retail segment related to employee severance from the reorganization of Retail store management; and a gain of $3.1 million recorded in the Corporate and Other segment related to the legacy Voyageur Panel business sold in 2004.

Sam Duncan, Chairman and CEO of OfficeMax, said “In the second quarter, sales for both our Contract and Retail segments continued to reflect the weaker U.S. economic environment along with our more disciplined approach to customer acquisition and retention. While we incurred a non-cash accounting charge related to impairment in both operating segments, we were pleased with the performance of our Contract segment, as we improved gross margin rates and reduced expenses, other than those related to impairment. In our Retail segment, lower sales and gross margin rates, together with higher expenses, resulted in lower operating income margin for the quarter. Across our company, we continue to address aspects of our business that are manageable as we navigate the difficult sales environment.”

Non-Cash Unusual Item Related to Impairment

The company is required for accounting purposes to assess the carrying value of goodwill and other intangible assets annually or whenever circumstances indicate that a decline in value may have occurred. Based on the company’s sustained low stock price and reduced market capitalization, macroeconomic factors impacting industry business conditions, recent and forecasted segment operating performance, the competitive environment, along with other factors, the company determined that indicators of potential impairment were present during the second quarter of 2008. As a result, the company assessed the carrying value of acquired goodwill and intangible assets with indefinite lives for impairment. The measurement of impairment of goodwill and indefinite life intangibles consists of two steps, which require the company to determine the fair value of its reporting units and to allocate reporting unit fair value to the individual assets and liabilities, similar to a purchase price allocation. The company has not completed the fair value allocation process necessary to determine the final impairment of goodwill and other intangible assets. Accordingly, in the second quarter of 2008, OfficeMax recorded an estimate of a non-cash impairment charge associated with goodwill and other assets that reduced income before taxes by $935.3 million and net income by $909.3 million, or $11.98 per diluted share.

The components of the $935.3 million estimated non-cash impairment charge consist of $850.0 million for goodwill, $80.0 million for trade names, and $5.3 million for fixed assets. The non-cash charge has been recorded in both the Contract and Retail operating segments. The estimates and assumptions made in assessing the fair value of the reporting units and the valuation of the underlying assets and liabilities are inherently subject to significant uncertainties. Accordingly, an adjustment to the estimated impairment charge will be required when the company finalizes its analysis, which is expected to be completed by the end of 2008. Any such adjustment could be material, but will be non-cash.

Contract Segment Results

OfficeMax Contract segment sales decreased 7.1% to $1.11 billion in the second quarter of 2008 compared to the second quarter of 2007, reflecting U.S. Contract sales decline of 12.9%, partially offset by International Contract operations sales growth of 9.4% in U.S. dollars (a sales decrease of 0.1% in local currencies). U.S. Contract sales declined compared to the prior year period primarily due to weaker sales from existing corporate customer accounts, our continued discipline in account acquisition and retention, and lower sales from small market customers.

Contract segment gross margin increased to 21.7% in the second quarter of 2008 from 21.4% in the second quarter of 2007, primarily due to improved account profitability, partly offset by deleveraging of fixed delivery and occupancy costs. Contract segment operating expense as a percent of sales increased to 59.2% in the second quarter of 2008 from 18.0% in the second quarter of 2007, primarily due to the $464.0 million non-cash unusual expense item related to the impairment of goodwill and other intangible assets, representing 41.7% of sales. The non-impairment related Contract operating expense as a percent of sales improved from the second quarter of 2007, primarily due to targeted cost reductions and reduced incentive compensation expense, partially offset by deleveraging of fixed expenses from lower sales. For the second quarter of 2008, the Contract segment generated an operating loss of $416.8 million, or 37.5% of sales, with $464.0 million, or 41.7% of sales, due to the unusual expense item, compared to operating income of $41.0 million, or 3.4% of sales, in the second quarter of 2007.

Retail Segment Results

OfficeMax Retail segment sales decreased 6.7% to $872.7 million in the second quarter of 2008 compared to the second quarter of 2007, reflecting a same-store sales decrease of 10.0% partly offset by sales from new stores. Retail same-store sales for the second quarter of 2008 declined across all major product categories due to weaker U.S. consumer and small business spending.

Retail segment gross margin decreased to 27.7% in the second quarter of 2008 from 29.9% in the second quarter of 2007, primarily due to deleveraging of fixed occupancy-related costs and increased inventory shrinkage, partly offset by a sales mix shift to an increased percentage of higher-margin office supplies category sales. Retail segment operating expense as a percent of sales increased to 82.8% in the second quarter of 2008 from 27.3% in the second quarter of 2007, primarily due to the $471.3 million non-cash unusual expense item related to the impairment of goodwill and other intangible assets representing 54.0% of sales, and the $10.2 million unusual expense item related to employee severance from the reorganization of Retail store management representing 1.2% of sales. The remainder of the increase in Retail segment operating expense as a percent of sales from the second quarter of 2007 was primarily due to deleveraging of expenses from the same store sales decrease and new stores, partially offset by reduced incentive compensation expense. For the second quarter of 2008, the Retail segment generated an operating loss of $480.7 million, or 55.1% of sales, with $481.5 million, or 55.2% of sales, due to the two unusual expense items, compared to operating income of $24.7 million, or 2.6% of sales, in the second quarter of 2007.

During the second quarter of 2008, OfficeMax opened 12 retail stores in the U.S. and 5 retail stores in Mexico. OfficeMax ended the second quarter of 2008 with a total of 999 retail stores, consisting of 920 retail stores in the U.S. and 79 retail stores in Mexico.

Corporate and Other Segment Results

The OfficeMax Corporate and Other segment includes support staff services and certain other expenses that are not fully allocated to the Retail and Contract segments. During the second quarter of 2008, the Corporate and Other segment benefited from a $3.1 million unusual item related to the legacy Voyageur Panel business sold in 2004. Including this unusual item, Corporate and Other segment operating expense decreased to $5.1 million in the second quarter of 2008 from $9.8 million in the second quarter of 2007, primarily due to lower incentive compensation expense.

As of June 28, 2008, OfficeMax had total debt of $383.8 million, excluding $1.470 billion of timber securitization notes which have recourse limited to $1.635 billion of timber installment notes receivable. During the second quarter of 2008, OfficeMax used $7.8 million of cash from operations, a decrease of $130.9 million from the second quarter of 2007. OfficeMax invested $42.7 million for capital expenditures in the second quarter of 2008 compared to $31.3 million in the second quarter of 2007.

“Despite the headwinds of a tough U.S. economy, we continued implementing our turnaround plan and operating initiatives during the second quarter,” Mr. Duncan concluded. “We continue to build the foundation for OfficeMax to generate long-term shareholder value.”