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17
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion containsstatements about our future financial performance. These
statements are only predictions. Our actual resultsmay differ materially from these predictions. In
evaluating these statements, you should review “Item 1A, Risk Factors” of this Form 10-K, including
“Cautionary and Forward-Looking Statements.”
Executive Summary
Sales for 2006 were $9.0billion, compared to $9.2 billion for 2005 and $13.3 billion for 2004. Net
income for 2006 was $91.7 million, or $1.19 per diluted share, compared to anet loss of $73.8 million,
or $(0.99) per diluted share, for 2005 and net income of $173.1 million, or$1.77 per diluted share, for
2004.
We evaluateour results ofoperationsboth 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 believeour presentation of financial measures before,or excluding, these items, which are
non-GAAP measures, enhances our investors’ overall understanding ofour recurring operational
performance and provides useful information to both investorsand management.
Results for the years of 2006, 2005 and 2004 include various items related to our transition from a
predominately manufacturing-based company to an independentoffice products distribution
company and our previously announced restructuring activities that are not expected to be ongoing.
Many ofthese items have been included inour integration activities and facility closures reserve. For
more information about these reserves, see the discussion of “Integration Activities and Facility
Closures” below. Some of themore significant effects of these actions on our results include:
•In 2006, we recorded pre-tax charges of $89.5 million related to the closing of 109
underperforming, domestic retail stores, $10.3 million primarily related to the reorganization of
our contract segment and $46.4million primarily related to the consolidation of our corporate
headquarters. These charges were includedin other operating, net in theConsolidated
Statements ofIncome (Loss) and were reflected in the Retail segment (storeclosures),
Contract segment (reorganization) and Corporate and Other segment (headquarters
consolidation), respectively. During 2006, we reduced the liability related to the Additional
Consideration Agreement that was entered into in connection with the sale of the paper, forest
products and timberland assets, which resulted in a credit to Other Income (Expense), net
(non-operating) of $48.0 million. We also recorded an $18.0 million pre-taxcharge for the
closureof our Elma, Washingtonmanufacturing facility which was reflected inDiscontinued
Operations in theConsolidated Statements of Income (Loss).
•In 2005, we recorded pre-tax charges of $25.0 million related to the consolidation and
relocation ofour corporate headquarters, $17.9 million related to the write-down ofimpaired
assets, primarily as a result of retail store closures, $5.4 million related to the restructuring of
ourinternational operations, and $31.9 million for one-time severance payments,professional
fees and asset write-downs. These charges were reflected inthe Retail segment (retail store
impairment), Contract segment(international restructuring) and Corporate andOther segment
(headquarters consolidation, severance, professional fees and asset write-downs), respectively.
In addition, we recognized a $9.8 million pre-tax charge in the Contract segment for a legal
settlementwith the Department of Justice related to allegations that the company submitted
false claims whenitsold office supply products manufactured incountries not permitted bythe
Trade Agreements Act to U.S. government agencies. We incurred $14.4 million of costs related
to our early retirement ofdebt, and recorded a $28.2 million pre-tax charge for thewrite-down
of impaired assets at our Elma, Washington manufacturing facility, which is accounted for as a
discontinued operation.