OfficeMax 2011 Annual Report Download - page 53

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Operating Results
2011 Compared with 2010
Sales for 2011 decreased 0.4% to $7,121.2 million, compared to $7,150.0 million for 2010, and included the
favorable impact of currency exchange rates relating to our international subsidiaries and the favorable impact of
an extra week in fiscal year 2011 in our domestic subsidiaries. On a local currency basis, sales declined 1.7%.
After adjusting for the favorable impact of foreign currency rates ($91 million) and the favorable impact of the
extra week in U.S. operations ($86 million), sales declined by 2.9%. These declines are the result of the
competitive environment for our products, lower sales in our existing Contract business, and weak store traffic in
our Retail segment. The sales declines also included an unfavorable impact from inclement weather in the U.S.
during the first quarter of 2011.
Gross profit margin decreased by 0.5% of sales (50 basis points) to 25.4% of sales in 2011 compared to
25.9% of sales in 2010, due to lower customer margins from more promotional activities, customer incentives
and continued economic pressures on our consumers’ spending as well as increased delivery and freight expense
from higher fuel costs and higher import duties associated with purchases in prior periods. These declines were
partially offset by lower occupancy expenses. The extra week in U.S. operations resulted in a $28 million
favorable impact to gross profit in 2011 compared to 2010.
Operating, selling and general and administrative expenses of 23.7% of sales in 2011 were flat as a percent of
sales as compared to the prior year. These expenses as a percent of sales were flat in the Contract segment, and
increased slightly in the Retail segment. For 2011, operating, selling and general and administrative expenses
increased $1.9 million compared to the prior year due to the unfavorable impact of foreign exchange rates
($21 million), the unfavorable impact of the extra week in U.S. operations ($20 million) and the unfavorable impact
of tax and legal settlements in 2010 ($14 million) that did not recur in 2011. These items were partially offset by
lower incentive compensation expense ($45 million), as the Company did not meet its earnings targets under the
incentive compensation plans for 2011. Favorable settlements in 2010 included $9 million of favorable sales/use tax
settlements and adjustments through the year as well as a $5 million gain related to the resolution of a legal dispute.
As noted above, our results for 2011 include several significant items, as follows:
• We recognized a non-cash impairment charge of $11.2 million associated with leasehold improvements
and other assets at certain of our Retail stores in the U.S. After tax, this charge reduced net income
available to OfficeMax common shareholders by $6.8 million, or $0.08 per diluted share.
• We recorded $14.9 million of severance charges ($13.9 million in Contract, $0.3 million in Retail and
$0.7 million in Corporate) related primarily to reorganizations in Canada, Australia, New Zealand, and
the U.S. sales and supply chain organizations. In addition, we recorded $5.6 million of charges in our
Retail segment related to store closures in the U.S. After tax, the cumulative effect of these items
reduced net income by $13.6 million or $0.16 per diluted share.
Interest income was $44.0 million and $42.6 million for 2011 and 2010, respectively. The increase was due
primarily to increases in cash balances and interest rates in our international businesses. Interest expense was
$73.1 million and $73.3 million in 2011 and 2010, respectively.
For 2011, we recognized income tax expense of $19.5 million on pre-tax income of $57.6 million (an
effective tax expense rate of 33.9%) compared to income tax expense of $41.9 million on pre-tax income of
$115.7 million (an effective tax expense rate of 36.2%) for 2010. The effective tax rate in both years was
impacted by the effects of state income taxes, income items not subject to tax, non-deductible expenses and the
mix of domestic and foreign sources of income. In 2011, the Company recorded an increase ($10.8 million) to
the valuation allowances relating to several state net operating losses. This negative impact was offset by other
one time favorable rate changes and other items related to nondeductible permanent items.
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