OfficeMax 2009 Annual Report Download - page 31

Contract segment operating, selling and general and administrative expenses increased 1.1%
of sales to 19.2% of sales for 2009 from 18.1% of sales a year earlier. The increase was primarily
due to the deleveraging of fixed expenses from lower sales and increased incentive compensation
expenses, which were $22.1 million higher in 2009 compared to 2008, partially offset by cost
management initiatives, including lower payroll costs as a result of the reorganization of our U.S.
and Canadian sales forces, fewer personnel in our customer fulfillment and customer service
centers and the reduction in force at our corporate headquarters in the fourth quarter of 2008.
Contract segment income was $58.0 million, or 1.6% of sales, for 2009, compared to
$167.3 million for 2008. The decline in segment income was primarily attributable to the reduction
in sales and gross profit.
Contract other operating expenses for 2009 included $15.3 million of severance and other
charges, principally related to reorganizations of our U.S. and Canadian Contract sales forces,
customer fulfillment centers and customer service centers.
The Contract segment’s operating income (loss) improved $700.2 million to operating income
of $42.7 million for 2009, compared to an operating loss of $657.5 million for 2008.
2008 Compared With 2007
Contract segment sales for 2008 decreased 10.5% to $4,310.0 million from $4,816.1 million for
2007, reflecting a U.S. sales decline of 13.8% and an international sales decline of 1.7% in U.S.
dollars, or 2.4% in local currencies. U.S. sales declined in 2008 compared to the prior year primarily
due to: a) decreased sales from existing corporate accounts of 9%, b) our continued discipline in
account acquisition and retention which resulted in lower sales to new and retained customers and
c) lower sales from small market public website and catalog business customers. Early in the fourth
quarter of 2008, we entered into an alliance with Lyreco to service our respective global customers.
This agreement allows OfficeMax to supply global customers that have operations in European
countries and Asia through Lyreco, and allows Lyreco to supply global customers that have
operations in the United States and Mexico through OfficeMax.
Contract segment gross profit margin increased 0.2% of sales to 22.0% of sales for 2008
compared to 21.8% of sales in the previous year. The year-over-year increase was primarily due to
improved account profitability for existing and new customers which was partially offset by
deleveraging fixed delivery and occupancy costs from lower sales. Targeted cost controls helped to
reduce the impact of deleveraging. These targeted cost controls included year-over-year reductions
in our delivery fleet resulting from optimizing delivery routes, which helped to reduce the impact of
increased fuel costs.
Contract segment operating, selling and general and administrative expenses increased 0.6%
of sales to 18.1% of sales for 2008 from 17.5% of sales a year earlier. The increase was primarily
due to the deleveraging of fixed expenses from lower sales, including higher fixed marketing and
account administration costs, partially offset by targeted cost controls, including reduced selling
expenses and lower compensation costs as a result of fewer personnel in our customer fulfillment
centers and customer service centers, as well as reduced incentive compensation expense. We
also cycled on operating expense improvements that we started generating in the second half of
2007.
Contract segment income was $167.3 million, or 3.9% of sales, for 2008, compared to
$207.9 million for 2007. The decline in segment income was primarily attributable to the reduction
in sales and gross profit.
The Contract segment reported a non-cash charge of $815.5 million related to impairment of
the Contract segment’s goodwill balance in 2008. Contract other operating expense of $9.3 million
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