Business News
OfficeMax Reports Fourth Quarter and Full Year 2008 Financial Results Which Include Significant Non-Cash Impairment Charges
Wednesday 18. February 2009 - OfficeMax(R) Incorporated (NYSE:OMX) today announced the results for its fourth quarter and fiscal year ended December 27, 2008. Total sales decreased 14.3% in the fourth quarter of 2008 to $1,883.1 million compared to the fourth quarter of 2007, while total sales decreased 9.0% for the full year 2008 to $8,267.0 million compared to the full year 2007.
For the fourth quarter of 2008, OfficeMax reported a net loss of $396.0 million, or $5.21 per diluted share, compared to net income of $70.5 million, or $0.92 per diluted share, in the fourth quarter of 2007. For the full year 2008, OfficeMax reported a net loss of $1,661.6 million, or $21.90 per diluted share, compared with net income of $203.4 million, or $2.66 per diluted share, in 2007.
Net loss in the fourth quarter of 2008 includes a pre-tax $429.1 million ($392.0 million after-tax) non-cash charge recorded among the Contract and Retail segments related to impairment of goodwill, trade names, and store fixed assets, with a corresponding $6.5 million of non-cash minority interest (after-tax) impact related to our Mexico joint venture; a pre-tax $3.2 million ($1.9 million after-tax) non-cash impairment-related interest expense charge on the securitization notes payable related to the Lehman Brothers Holdings Inc. (“Lehman”) guaranteed installment notes; and a pre-tax $16.6 million ($10.5 million after-tax) charge, which was included in Contract, Retail, and Corporate for field/corporate reductions in force and certain store and site leases. Net income for the fourth quarter of 2007 included a pre-tax $32.4 million ($20.4 million after-tax) benefit related to the legacy additional consideration agreement with Boise Cascade, L.L.C.
The company has calculated adjusted income/loss and earnings/loss per share which are non-GAAP financial measures that exclude the effect of certain impairment items and other charges described in footnotes to the accompanying financial statements. A reconciliation to the company’s GAAP financial results is included in this press release.
Adjusted net income in the fourth quarter of 2008 was $1.9 million, or $0.02 per diluted share, compared to $50.1 million, or $0.65 per diluted share in the fourth quarter of 2007. For the full year 2008, adjusted net income was $100.1 million, or $1.30 per diluted share, down from $184.1 million, or $2.41 per diluted share, in 2007.
Sam Duncan, Chairman and CEO of OfficeMax, said, “Our fourth quarter results reflect the deteriorating economic environment we operated in for both our Contract and Retail segments. However, we proactively reduced costs and focused on strong capital management. We are pleased with our improvements in working capital and our efforts to minimize expenditures, and are confident that our cash position and existing access to capital will carry us through this challenging economic environment.”
Non-Cash Impairment Item
As previously announced in the second quarter of 2008, OfficeMax reduced the carrying value of goodwill and other intangible assets due to impairment based on management’s evaluation of the company’s sustained low stock price and reduced market capitalization, macroeconomic factors impacting industry conditions, actual recent results and forecasted operating performance, as well as other factors. Many of these same factors continued to worsen in the fourth quarter of 2008, which required the company to assess the carrying value of acquired goodwill and other assets for impairment. The company determined that the carrying value of goodwill and certain other assets were above the fair value and, as a result, recorded an additional non-cash impairment charge. The components of the fourth quarter of 2008 pre-tax $429.1 million non-cash impairment charge consist of $351.5 million for goodwill, $27.1 million for trade names, and $50.5 million for store fixed assets. Of this non-cash charge, $351.5 million is reported in the Contract segment and $77.6 million is reported in the Retail Segment. The $6.5 million minority interest income impact reflected our venture partner’s share of the portion of fixed asset impairment charges recorded at our Mexico joint venture.
Contract Segment Results
OfficeMax Contract segment sales decreased 18.4% to $953.9 million in the fourth quarter of 2008 compared to the fourth quarter of 2007, reflecting a U.S. Contract operations sales decline of 15.4%, and an International Contract operations sales decline of 25.4% in U.S. dollars (a sales decrease of 5.1% in local currencies). U.S. Contract sales declined in the fourth quarter compared to the prior year period primarily due to weaker sales from existing corporate accounts, our continued discipline in large corporate account acquisition and retention, and lower sales from small market customers. For the full year 2008, Contract segment sales decreased 10.5% to $4,310.0 million compared to the prior year, reflecting a U.S. Contract operations sales decline of 13.8%, and an International Contract operations sales decline of 1.7% in U.S. dollars (a sales decrease of 2.4% in local currencies).
Contract segment gross margin was relatively constant in the fourth quarter of 2008 at 21.6%, compared to 21.7% in the fourth quarter of 2007. Contract segment operating expense as a percentage of sales increased to 19.3% in the fourth quarter of 2008 from 17.3% in the fourth quarter of 2007. This was primarily due to deleveraging of fixed operating expenses from lower sales.
Contract segment operating loss was $335.8 million in the fourth quarter of 2008, including $351.5 million of non-cash impairment charges and a $6.9 million charge for field/corporate reductions in force. In the fourth quarter of 2008, Contract segment adjusted operating income decreased to $22.6 million, or 2.3% of sales, compared to operating income of $52.0 million, or 4.4% of sales, in the fourth quarter of 2007. For the full year 2008, Contract segment operating loss was $657.5 million, including $815.5 million of non- cash impairment charges; and other items consisting primarily of charges for field/corporate reductions in force. Contract segment adjusted operating income was $167.3 million, or 3.9% of sales, compared to operating income of $207.9 million, or 4.3% of sales, in 2007.
Retail Segment Results
OfficeMax Retail segment sales decreased 9.7% to $929.2 million in the fourth quarter of 2008 compared to the fourth quarter of 2007, reflecting a same-store sales decrease of 13.6% partially offset by sales from new stores. Retail same-store sales for the fourth quarter of 2008 declined across all major product categories due to weaker small business and consumer spending. For the full year 2008, OfficeMax Retail segment sales decreased 7.2% to $3,957.0 million compared to 2007, reflecting a same-store sales decrease of 10.8%, partially offset by sales from new stores.
Retail segment gross margin decreased to 27.0% in the fourth quarter of 2008 from 30.0% in the fourth quarter of 2007, primarily due to deleveraging of fixed occupancy costs from the same-store sales decrease and new stores, and a sales mix shift to a higher percentage of lower-margin technology category sales. Retail segment operating expense as a percentage of sales increased to 27.0% in the fourth quarter of 2008 from 26.2% in the fourth quarter of 2007. This was primarily due to deleveraging of expenses from the same-store sales decrease and the addition of new stores, partially offset by reduced payroll, store pre-opening, and advertising expenses.
Retail segment operating loss was $83.0 million in the fourth quarter of 2008. The fourth quarter operating loss includes $77.6 million of non-cash impairment charges and a $5.4 million charge related to certain store and site leases and field/corporate reductions in force. Retail segment adjusted operating income was break even, compared to operating income of $39.1 million, or 3.8% of sales, in the fourth quarter of 2007. For the full year 2008, Retail segment operating loss was $505.1 million in 2008, including $548.9 million of non-cash impairment charges and other items related primarily to certain store and site leases and field/corporate reductions in force. Retail segment adjusted operating income was $61.2 million, or 1.5% of sales, in 2008, compared to operating income of $173.7 million, or 4.1% of sales, in 2007.
OfficeMax ended 2008 with a total of 1,022 retail stores, consisting of 939 retail stores in the U.S. and 83 retail stores in Mexico. During the fourth quarter of 2008, OfficeMax opened 8 retail stores in the U.S. and 1 in Mexico, and closed 5 stores in the U.S. and 1 in Mexico. During 2008, OfficeMax opened 43 retail stores in the U.S. and 17 in Mexico, and closed 12 stores in the U.S. and 2 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. Corporate and Other segment operating expense was $12.0 million in the fourth quarter of 2008, including a $4.3 million charge for field/corporate reductions in force.
Balance Sheet and Cash Flow
As of December 27, 2008, OfficeMax had total debt of $354.4 million, excluding $1,470.0 million of timber securitization notes, which have recourse limited to the timber installment notes receivable and related guarantees. As of December 27, 2008, OfficeMax had $170.8 million in cash and cash equivalents, and $547 million in available (unused) borrowing capacity under its $700 million revolving credit facility. The company’s unused borrowing capacity as of December 27, 2008 reflects an available borrowing base of $614 million, no outstanding borrowings, and $67 million of letters of credit issued under the revolving credit facility.
For the full year 2008, OfficeMax generated $223.7 million of cash from operations due to good working capital management. By comparison, working capital in 2007 included several unique items that we have disclosed previously. OfficeMax invested $144.0 million for capital expenditures in 2008. OfficeMax expects capital expenditures for full year 2009 to be in the range of $50 million to $70 million.
In the fourth quarter of 2008, OfficeMax made accelerated tax payments of approximately $30 million related to one-half of the gain realized on the 2004 timberlands sale transaction due to the Lehman bankruptcy. The company anticipates that no further payments will be required on that half of the gain as we were able to utilize tax credits and other items to offset the remainder of the tax liability.
Outlook
Given the projected weak economic outlook, OfficeMax is cautious in its expectations for 2009. The company expects sales to decline in 2009 on a year- over-year basis as a result of the difficult economic environment. In addition, the company will be cycling significant expense reductions. As a result of these factors, and based on the current outlook, OfficeMax expects continued deleveraging of costs and expenses in 2009.
Mr. Duncan concluded, “Total sales to-date in 2009 have declined slightly greater than the 14.3% we experienced in our fourth quarter, and we anticipate sales will decline on a year-over-year basis for full year 2009. Despite the challenging economic environment, we remain committed to managing OfficeMax for the long-term and positioning the company for growth when the economic environment improves. We are placing a premium on maintaining positive cash flow through tight cost controls and conservative working capital management in the near term. We expect cash flow from operations to exceed capital expenditures in 2009. We also believe that our needs to access our revolving line of credit will be limited to seasonal periods, and expect to have little or no borrowings outstanding under the facility at year end.”