Business News

OfficeMax Reports Third Quarter 2010 Financial Results

Thursday 28. October 2010 - OfficeMax Incorporated (NYSE: OMX) today announced the results for its fiscal third quarter ended September 25, 2010. Total sales were $1,813.4 million in the third quarter of 2010, a decrease of 1.0% from the third quarter of 2009. For the third quarter of 2010, OfficeMax reported net income available to OfficeMax common shareholders of $20.0 million, or $0.23 per diluted share.

Sam Duncan, Chairman and CEO of OfficeMax, said, “I am very pleased with our third quarter results. During the quarter, we drove strong margin increases over the prior year period, reflecting improved customer acquisition and retention costs as we maintained our disciplined approach to serving both new and existing business customers. Additionally, we successfully managed through the very important back-to-school season, rolling out a staggered advertising campaign which proved effective, despite a challenging environment. Overall, the improvements we achieved in the third quarter reflect our continued focus on key initiatives and the successful execution of our five-year plan.”
Adjusted income and adjusted diluted income per share are non-GAAP financial measures that exclude the effect of certain charges described below and in the footnotes to the accompanying financial statements. A reconciliation to the company’s GAAP financial results is included in this press release.
Adjusted operating income in the third quarter of 2010 was $40.9 million, or 2.3% of sales, compared to $26.7 million, or 1.5% of sales in the third quarter of 2009. Adjusted operating income for both the third quarters of 2010 and 2009 include approximately equivalent amounts of favorable tax settlements. Adjusted net income available to OfficeMax common shareholders in the third quarter of 2010 was $20.0 million, or $0.23 per diluted share, compared to $6.6 million, or $0.08 per diluted share, in the third quarter of 2009.
OfficeMax Contract segment sales decreased 2.5% compared to the prior year period to $877.3million in the third quarter of 2010 (a decrease of 4.3% in local currency). This decline reflected a U.S. Contract operations sales decrease of 2.9% and an International Contract operations sales decrease of 1.4% in U.S. dollars (a sales decrease of 7.4% in local currencies).
Contract segment gross profit margin increased to 22.8% in the third quarter of 2010 from 20.0% in the third quarter of 2009, reflecting improved gross profit margin at both the U.S. and International businesses primarily due to OfficeMax’s profitability initiatives and lower customer acquisition and retention costs. Contract segment operating, selling & administrative expense as a percentage of sales increased to 20.6% in the third quarter of 2010 from 18.9% in the third quarter of 2009. The increase was a result of higher incentive compensation expense and costs associated with growth and profitability initiatives, partially offset by favorable sales/use tax settlements. Contract segment income was $19.5 million, or 2.2% of sales, in the third quarter of 2010 compared to $10.1 million, or 1.1% of sales, in the third quarter of 2009.
OfficeMax Retail segment sales increased 0.4% to $936.1 million in the third quarter of 2010 compared to the third quarter of 2009, reflecting a same-store sales increase of 0.4%. A slight decline in same-store sales in the U.S. was more than offset by stronger sales in Mexico compared to weak sales in the third quarter of 2009 during the influenza epidemic.
Retail segment gross profit margin increased to 28.9% in the third quarter of 2010 from 27.4% in the third quarter of 2009, primarily due to OfficeMax’s profitability initiatives, reduced freight and occupancy costs, and reduced inventory shrinkage expense. Retail segment operating, selling & administrative expense as a percentage of sales increased to 25.4% in the third quarter of 2010 compared to 24.4% in the third quarter of 2009 primarily due to higher incentive compensation expense, costs related to growth initiatives. Additionally, favorable property tax settlements in the third quarter of 2009 were partially offset by favorable sales/use tax settlements in the third quarter of 2010. Retail segment income was $32.4 million, or 3.5% of sales, in the third quarter of 2010 compared to $28.4 million, or 3.0% of sales, in the third quarter of 2009.
OfficeMax ended the third quarter of 2010 with a total of 998 retail stores, consisting of 920 retail stores in the U.S. and 78 retail stores in Mexico. During the third quarter of 2010, OfficeMax closed three retail stores in the U.S.
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, selling & administrative expense was $11.0 million in the third quarter of 2010 compared to $11.8 million in the third quarter of 2009.
Balance Sheet and Cash Flow
As of September 25, 2010, OfficeMax had total debt of $294.0 million, excluding $1,470 million of non-recourse debt which relates to timber securitization notes that have recourse limited to the timber installment notes receivable and related guarantees. At the end of the third quarter 2010, OfficeMax had $570.0 million in available borrowing capacity under its revolving credit facilities.
During the first nine months of 2010, OfficeMax generated $156.0 million of cash provided by operations. OfficeMax invested $21.6 million for capital expenditures in the third quarter of 2010 compared to $5.4 million in the third quarter of 2009.
Outlook
Mr. Duncan added, “Looking forward through the balance of 2010, we expect the macroeconomic environment to remain muted. Consequently, in the fourth quarter, we will continue to take a disciplined approach to generating sales and investing in the business. As we complete the first year of our five-year plan, we will work with our incoming CEO, Ravi Saligram, to ensure a seamless transition.”
Bruce Besanko, EVP, Chief Financial Officer and Chief Administrative Officer of OfficeMax, said, “We are very pleased with our performance through the first nine months of 2010. To date in the fourth quarter, the company’s domestic sales are lower than the comparable prior year period. As a result of our disciplined cash flow management and strong financial foundation, we are confident that we are in an excellent position to achieve our 2010 objectives.”
Based on these assumptions, OfficeMax anticipates that for the fourth quarter, total company sales will be slightly lower than the prior year’s fourth quarter, including the favorable impact of foreign currency translation, and the adjusted operating income margin rate will be significantly higher than the prior year’s fourth quarter, primarily due to an unusually large amount of incentive compensation expense recorded in the fourth quarter of 2009. For the full year 2010, OfficeMax anticipates that total company sales will be slightly lower than 2009, including the favorable impact of foreign currency translation, and the year-over-year adjusted operating income margin rate improvement will be in line with, to slightly greater than, the 120-basis point year-over-year margin improvement in the first nine months of 2010.
The company’s outlook also includes the following assumptions for the full year 2010:
— Pension expense of approximately $7 million and cash contributions to
the frozen pension plans of approximately $4 million
— Capital expenditures of approximately $80-90 million, primarily related
to technology and infrastructure investments and upgrades
— Depreciation & amortization of approximately $100-105 million
— Interest expense of approximately $73-75 million and interest income of
approximately $41-43 million
— Effective tax rate approximately in line with the effective tax rate in
the first nine months of 2010
— Cash flow from operations exceeding capital expenditures
— Liquidity position remaining strong
— Net reduction in retail store count for the year with two planned
openings in Mexico and approximately 15 store closings in the U.S.
Forward-Looking Statements
Certain statements made in this press release and other written or oral statements made by or on behalf of the company constitute “forward-looking statements” within the meaning of the federal securities laws, including statements regarding the company’s future performance, as well as management’s expectations, beliefs, intentions, plans, estimates or projections relating to the future. Management believes that these forward-looking statements are reasonable. However, the company cannot guarantee that the macroeconomy will perform within the assumptions underlying its projected outlook; that its initiatives will be successfully executed and produce the results underlying its expectations, due to the uncertainties inherent in new initiatives, including customer acceptance, unexpected expenses or challenges, or slower-than-expected results from initiatives; or that its actual results will be consistent with the forward-looking statements and you should not place undue reliance on them. These statements are based on current expectations and speak only as of the date they are made. The company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of future events, new information or otherwise. Important factors regarding the company that may cause results to differ from expectations are included in the company’s Annual Report on Form 10-K for the year ended December 26, 2009, under Item 1A “Risk Factors”, and in the company’s other filings with the SEC.