OfficeMax 2008 Annual Report Download - page 28

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also cycled on operating expense improvements that we started generating in the second half of
2007.
Total Contract segment operating expenses for 2008 included a non-cash charge of
$815.5 million related to impairment of the Contract segment’s goodwill balance. Other operating
expense of $9.3 million included employee severance costs in our U.S and international operations
and the costs to consolidate manufacturing facilities in New Zealand. For more information
regarding impairment charges, see discussion of ‘‘Goodwill and other asset impairments’’ in this
section.
The Contract segment’s reported segment income decreased $865.4 million to a loss of
$657.5 million, or 15.2% of sales for 2008, compared to segment income of $207.9 million, or 4.3%
of sales, for 2007.
2007 Compared With 2006
Contract segment sales for 2007 increased 2.2% to $4,816.1 million, from $4,714.5 million for
2006, reflecting a U.S. sales decline of 1.2%, offset by international sales growth of 12.3% in U.S.
dollars, or 2.8% in local currencies. The U.S. sales decline reflects a weaker economic environment
in the second half of 2007, as well as our initiative to terminate existing unprofitable contracts and
be more disciplined in new account acquisition.
Contract segment gross profit margin decreased 0.7% of sales to 21.8% of sales for 2007
compared to 22.5% of sales in the previous year. The year-over-year decrease was primarily due to
the continued impact of new and renewing accounts with lower gross margin rates and the impact
of paper price increases throughout the year.
Contract segment operating, selling and administrative expenses decreased 0.6% of sales to
17.5% of sales for 2007 from 18.1% of sales a year earlier. The year-over-year improvement in
operating expenses as a percentage of sales is the result of targeted cost controls, including the
reorganization of the Contract segment that we began in the fourth quarter of 2006, lower incentive
compensation expense and lower promotion and marketing costs.
Other operating expense for the Contract segment in 2006 was $10.3 million, and consisted of
costs primarily related to severance due to the Contract segment reorganization.
Contract segment income increased $10.2 million to $207.9 million, or 4.3% of sales for 2007,
compared to $197.7 million, or 4.2% of sales, for 2006.
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