Notes to Quarterly Consolidated Financial Statements (unaudited)
1. Basis of Presentation
Nature of Operations
OfficeMax Incorporated (OfficeMax, the Company, we or our) is a leader in both business-to-business and retail office products distribution. The Company
provides office supplies and paper, print and document services, technology products and solutions, office furniture and facilities products to large, medium and small businesses, government offices and consumers. OfficeMax customers are served by
approximately 27,000 associates through direct sales, catalogs, the Internet and a network of retail stores located throughout the United States, Canada, Australia, New Zealand and Mexico.
The accompanying quarterly consolidated financial statements include the accounts of OfficeMax and all majority-owned subsidiaries,
except our 88%-owned subsidiary that formerly owned assets in Cuba that were confiscated by the Cuban government in the 1960s, which is accounted for as an investment due to various asset restrictions. We also consolidate the variable interest
entities in which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation. These financial statements are for the thirteen-week and thirty-nine-week periods ended on
September 28, 2013 (also referred to as the third quarter of 2013 or the three months ended September 28, 2013 and the first nine months of 2013 or the nine months ended September 28,
2013, respectively) and the thirteen-week and thirty-nine-week periods ended on September 29, 2012 (also referred to as the third quarter of 2012 or the three months ended September 29, 2012 and the
first nine months of 2012 or the nine months ended September 29, 2012, respectively). The Companys fiscal year ends on the last Saturday in December with the exception of the Companys international businesses
in the OfficeMax, Contract segment that, due primarily to statutory requirements, maintain fiscal years with December 31 year-ends and end their quarters on the last calendar day of the month. Grupo OfficeMax S. de R.L. de C.V.
(Grupo OfficeMax), our majority-owned joint-venture in Mexico, reported one month in arrears in the first nine months of 2012. This practice was discontinued in the fourth quarter of 2012, resulting in fiscal year 2012 including 13
months for Grupo OfficeMax. This change in accounting policy did not have a material impact on the Companys financial statements. The fiscal year end for Grupo OfficeMax is the last Saturday in December beginning with the 2012 fiscal year.
The Company manages its business using three reportable segments: OfficeMax, Contract (Contract segment or
Contract); OfficeMax, Retail (Retail segment or Retail); and Corporate and Other. Management reviews the performance of the Company based on these segments. We present information pertaining to our segments in
Note 13, Segment Information.
The Company has prepared the quarterly consolidated financial statements
included herein pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Some information and note disclosures, which would normally be included in comprehensive annual financial statements prepared in
accordance with accounting principles generally accepted in the United States, have been condensed or omitted pursuant to those SEC rules and regulations. These quarterly consolidated financial statements should be read together with the
consolidated financial statements and the accompanying notes included in the Companys Annual Report on Form 10-K for the year ended December 29, 2012.
The quarterly consolidated financial statements included herein have not been audited by an independent registered public accounting firm, but in the opinion of management, include all adjustments
necessary to present fairly the results for the periods indicated. Except as disclosed within these Notes to Quarterly Consolidated Financial Statements (unaudited), the adjustments made were of a normal, recurring nature. Quarterly
results are not necessarily indicative of results which may be expected for a full year.
Recently Issued or Newly
Adopted Accounting Standards
In February 2013, the Financial Accounting Standards Board (FASB) issued
guidance which expands disclosure requirements for other comprehensive income. The guidance requires the reporting of the effect of the
9
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
reclassification of items out of accumulated other comprehensive income on each affected net income line item. The guidance is effective for interim and annual periods beginning on or after
December 15, 2012 and is to be applied prospectively. This guidance, which was adopted in the first quarter of 2013, affects the presentation of certain elements of the Companys financial statements, but these changes in presentation did
not have a material impact on those financial statements.
In July 2013, the FASB issued guidance which affects the
presentation of an unrecognized tax benefit in the Companys financial statements. The guidance is expected to reduce diversity in practice and better reflect the manner in which an entity would settle at the reporting date any additional
income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The guidance is effective prospectively for interim and annual periods beginning
after December 15, 2013, with early adoption and retrospective application permitted. The Company anticipates that adoption of this guidance may affect the presentation of certain elements of the Companys financial statements, but these
changes in presentation will not have a material impact on our financial statements.
2. Merger Agreement
On February 20, 2013, OfficeMax entered into an Agreement and Plan of Merger (the Merger Agreement)
with Office Depot, Inc. (Office Depot), Dogwood Merger Sub Inc., a wholly owned direct subsidiary of Office Depot, Dogwood Merger Sub LLC, a wholly owned direct subsidiary of Office Depot, Mapleby Holdings Merger Corporation, a wholly
owned direct subsidiary of OfficeMax (New OfficeMax), and Mapleby Merger Corporation, a wholly owned direct subsidiary of New OfficeMax, pursuant to which, through a series of transactions (the Merger Transactions), OfficeMax
will become an indirect wholly-owned subsidiary of Office Depot and OfficeMax stockholders will become stockholders of Office Depot.
After giving effect to the Merger Transactions, each share of OfficeMax common stock issued and outstanding immediately prior to the effective time will be converted into the right to receive 2.69 shares
of Office Depot common stock (the exchange ratio), together with cash in lieu of fractional shares, if any, and unpaid dividends and distributions, if any, pursuant to the Merger Agreement. The exchange ratio is fixed and will not be
adjusted for changes in the market value of shares of Office Depot common stock or OfficeMax common stock. Because the exchange ratio was fixed at the time the Merger Agreement was executed and because the market value of Office Depot common stock
and OfficeMax common stock will fluctuate during the pendency of the Merger Transactions, OfficeMax stockholders cannot be sure of the value of the shares of Office Depot common stock they will receive relative to the value of their shares of
OfficeMax common stock.
Prior to the closing of the Merger Transactions (the Closing), OfficeMax will redeem each
issued and outstanding share of OfficeMax Series D preferred stock for shares of OfficeMax common stock (excluding any shares of OfficeMax Series D preferred stock surrendered by the holder for conversion) in accordance with the Certificate of
Designation for the OfficeMax Series D preferred stock. The shares of OfficeMax common stock issued upon such redemption or conversion will then be converted as a result of the Merger Transactions into the right to receive shares of Office Depot
common stock in accordance with the exchange ratio, together with cash in lieu of fractional shares, if any, and unpaid dividends and distributions, if any, pursuant to the Merger Agreement.
After giving effect to the Merger Transactions, each outstanding OfficeMax stock option will be converted into an option to purchase, on
the same terms and conditions as the OfficeMax stock option, a number of shares of Office Depot common stock that is equal to the number of shares of OfficeMax common stock subject to the OfficeMax stock option multiplied by the exchange ratio, at
an exercise price per share of Office Depot common stock equal to the exercise price per share of OfficeMax common stock subject to the OfficeMax stock option divided by the exchange ratio. Each other OfficeMax stock-based award will be converted as
a result of the
10
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
Merger Transactions into an award, on the same terms and conditions as the OfficeMax stock-based award, with respect to a number of shares of Office Depot common stock that is equal to the number
of shares of OfficeMax common stock underlying such OfficeMax stock-based award multiplied by the exchange ratio, except that any then outstanding OfficeMax stock-based awards that vest based on the attainment of performance goals with a performance
period that has not completed prior to the closing date will be converted into time-based awards that will vest at target levels at the originally scheduled vesting date, subject to any accelerated vesting upon a qualifying termination of employment
in accordance with the terms of the 2003 OfficeMax Incentive and Performance Plan.
The Closing is subject to various
conditions, including (i) approval of OfficeMaxs stockholders; (ii) approval of Office Depots stockholders; (iii) the expiration or earlier termination of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended; (iv) receipt of approvals or clearances required under the Canadian Competition Act and the Mexican Federal Law on Economic Competition; (v) there being no law or injunction, or agreement with a
governmental authority under any antitrust laws, prohibiting consummation of the Merger Transactions; (vi) the effectiveness of a registration statement on Form S-4 under the Securities Act of 1933, as amended, with respect to shares of Office
Depot common stock to be issued pursuant to the Merger Agreement; (vii) approval for listing such shares on the New York Stock Exchange; (viii) subject to certain exceptions, the accuracy of the representations and warranties of the
parties; (ix) compliance by the parties in all material respects with their respective obligations and covenants; (x) the delivery of certain tax opinions from counsel to each of OfficeMax and Office Depot; and (xi) the absence of a
material adverse effect. In addition, OfficeMaxs obligation to consummate the Merger Transactions is subject to the completion of certain transactions by and with the holder of Office Depots convertible preferred stock. Some of the above
conditions, including the approvals of OfficeMaxs and Office Depots stockholders and the effectiveness of the registration statement, have already been satisfied.
The Merger Agreement contains certain termination rights in favor of OfficeMax and Office Depot, including if the Merger Transactions are not completed on or before December 31, 2013 (which date will
be automatically extended to April 30, 2014 if certain conditions to Closing related to antitrust approvals have not been satisfied). The Merger Agreement also provides that, upon termination of the Merger Agreement under certain circumstances,
OfficeMax may be required to pay Office Depot, or Office Depot may be required to pay OfficeMax, a termination fee of $30 million.
We recorded $30.5 million and $49.1 million of expenses in the third quarter and first nine months of 2013, respectively, related to the proposed Merger Transactions which are included in asset
impairments and other operating expenses (income), net in the Consolidated Statements of Operations.
3. Facility Closure Reserves
We conduct regular reviews of our real estate portfolio to identify underperforming facilities, and close those
facilities that are no longer strategically or economically beneficial. We record a liability for the cost associated with a facility closure at its estimated fair value in the period in which the liability is incurred, primarily the locations
cease-use date. Upon closure, unrecoverable costs are included in facility closure reserves and include provisions for the present value of future lease obligations, less contractual or estimated sublease income. These facility closure charges are
included in asset impairments and other operating expenses (income), net in the Consolidated Statements of Operations. Accretion expense is recognized over the life of the required payments and is included in operating, selling, and general and
administrative expenses in the Consolidated Statements of Operations.
During the first nine months of 2013, we recorded
facility closure charges of $4.1 million (all in the third quarter) in our Retail segment associated with the closing of six underperforming domestic stores prior to the end
11
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
of their lease terms. During the first nine months of 2012, we recorded facility closure charges of $26.9 million in our Retail segment, of which $1.6 million was recorded in the third quarter
related to a change in the estimated lease obligation of a previously closed domestic store and $25.3 million was recorded in the first quarter primarily related to the closure of 15 underperforming domestic stores prior to the end of their lease
terms.
Facility closure reserve account activity during the first nine months of 2013 was as follows:
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|
|
|
|
Total
|
|
|
|
(thousands)
|
|
Balance at December 29, 2012
|
|
$
|
74,643
|
|
Charges related to stores closed in 2013
|
|
|
4,121
|
|
Transfer of deferred rent and other balances
|
|
|
648
|
|
Cash payments
|
|
|
(21,151
|
)
|
Accretion
|
|
|
1,884
|
|
|
|
|
|
|
Balance at September 28, 2013
|
|
$
|
60,145
|
|
|
|
|
|
|
Reserve balances were classified in the Consolidated Balance Sheets as follows:
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|
|
|
|
|
|
September 28,
2013
|
|
|
|
(thousands)
|
|
Accrued expenses and other current liabilitiesOther
|
|
$
|
19,386
|
|
Other long-term liabilities
|
|
|
40,759
|
|
|
|
|
|
|
Total
|
|
$
|
60,145
|
|
|
|
|
|
|
The facilities closure reserve consisted of the following:
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|
|
|
|
|
|
September 28,
2013
|
|
|
|
(thousands)
|
|
Estimated future lease obligations
|
|
$
|
102,353
|
|
Less: anticipated sublease income
|
|
|
(42,208
|
)
|
|
|
|
|
|
Total
|
|
$
|
60,145
|
|
|
|
|
|
|
4. Severance and Other Charges
The first nine months of 2013 included severance charges recorded in the second quarter of $4.5 million, related
primarily to reorganizations in our Contract segment sales and supply chain operations in the U.S., New Zealand and Australia. These charges were included in asset impairments and other operating expenses (income), net in the Consolidated Statements
of Operations. There were no such charges in the first nine months 2012.
As of September 28, 2013, $3.7 million of the
severance charges remain unpaid and are included in accrued expenses and other current liabilities in the Consolidated Balance Sheets.
5. Timber Notes/Non-Recourse Debt
In October 2004, we sold our timberland assets in exchange for $15 million in cash plus credit-enhanced timber
installment notes in the amount of $1,635 million (the Installment Notes). The Installment Notes were issued by single-member limited liability companies formed by affiliates of Boise Cascade, L.L.C. (the Note Issuers).
The Installment Notes are 15-year non-amortizing obligations and were issued in two equal
12
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
$817.5 million tranches bearing interest at 5.11% and 4.98%, respectively. In order to support the issuance of the Installment Notes, the Note Issuers transferred a total of
$1,635 million in cash to Lehman Brothers Holdings Inc. (Lehman) and Wells Fargo & Company (Wells) (which at the time was Wachovia Corporation) ($817.5 million to each of Lehman and Wells). Lehman and
Wells issued collateral notes (the Collateral Notes) to the Note Issuers. Concurrently with the issuance of the Installment and Collateral Notes, Lehman and Wells guaranteed the respective Installment Notes and the Note Issuers pledged
the Collateral Notes as security for the performance of the Installment Note obligations.
In December 2004, we completed a
securitization transaction in which the Companys interests in the Installment Notes and related guarantees were transferred to wholly-owned bankruptcy remote subsidiaries. The subsidiaries pledged the Installment Notes and related guarantees
and issued securitized notes (the Securitization Notes) in the amount of $1,470 million ($735 million through the structure supported by the Lehman guaranty and $735 million through the structure supported by the Wells
guaranty). As a result of these transactions, we received $1,470 million in cash. Recourse on the Securitization Notes is limited to the proceeds of the applicable pledged Installment Notes and underlying Lehman or Wells guaranty, and therefore
there is no recourse against OfficeMax. The Securitization Notes are 15-year non-amortizing, and were issued in two equal $735 million tranches paying interest of 5.54% and 5.42%, respectively. The Securitization Notes are reported as
non-recourse debt in the Companys Consolidated Balance Sheets.
On September 15, 2008, Lehman, the guarantor of
half of the Installment Notes and the Securitization Notes, filed a petition in the United States Bankruptcy Court for the Southern District of New York seeking relief under chapter 11 of the United States Bankruptcy Code. Lehmans
bankruptcy filing constituted an event of default under the $817.5 million Installment Note guaranteed by Lehman (the Lehman Guaranteed Installment Note). During the third quarter of 2012, we entered into an agreement that
extinguished the Securitization Notes guaranteed by Lehman. Upon effectiveness of the agreement, the trustee for the Securitization Note holders released OfficeMax and its affiliates from the non-recourse liabilities following the transfer from
OfficeMax to the trustee for the Securitization Note holders of the claims arising from the bankruptcy, the Lehman Guaranteed Installment Note and the related guaranty.
At the time of the sale of the timberlands in 2004, we generated a tax gain and recognized the related deferred tax liability. The timber installment notes structure allowed the Company to defer the
resulting tax liability of $529 million until 2020, the maturity date for the Installment Notes. In the third quarter of 2012, as a result of the agreement transferring our rights to the remaining receivable and the extinguishment of Securitization
Notes guaranteed by Lehman, $269 million of the deferred tax gain was recognized. At September 28, 2013, the remaining deferred tax gain of $260 million is related to the Installment Notes guaranteed by Wells (the Wells Guaranteed
Installment Notes), and will be recognized upon maturity.
Through September 28, 2013, we have received all
payments due under the Wells Guaranteed Installment Notes, which have consisted only of interest due on the notes, and have made all payments due on the related Securitization Notes guaranteed by Wells, again consisting only of interest due. As all
amounts due on the Wells Guaranteed Installment Notes are current and we have no reason to believe that we will not be able to collect all amounts due according to the contractual terms of the Wells Guaranteed Installment Notes, the notes are
reflected in our Consolidated Balance Sheets at their original principal amount of $817.5 million. The Wells Guaranteed Installment Notes and related Securitization Notes are scheduled to mature in 2020 and 2019, respectively. The
Securitization Notes have an initial term that is approximately three months shorter than the Wells Guaranteed Installment Notes.
6. Net Income Per Common Share
Basic net income per common share is calculated using net income available to holders of our common stock divided by
the weighted average number of shares of common stock outstanding during the applicable
13
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
periods presented. Diluted net income per common share is similar to basic net income per common share except that the weighted average number of shares of common stock outstanding is increased
to include, if their inclusion is dilutive, the number of additional shares of common stock that would have been outstanding assuming the issuance of all potentially dilutive shares, such as common stock to be issued upon the exercise of stock
options, the vesting of restricted stock units, and the conversion of outstanding preferred stock. Net income per common share was determined by dividing net income, as adjusted, by weighted average shares outstanding as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 28,
2013
|
|
|
September 29,
2012
|
|
|
September 28,
2013
|
|
|
September 29,
2012
|
|
|
|
(thousands, except per-
share amounts)
|
|
|
(thousands, except per-
share amounts)
|
|
Net income available to OfficeMax common shareholders
|
|
$
|
30,380
|
|
|
$
|
432,986
|
|
|
$
|
76,681
|
|
|
$
|
448,564
|
|
Average sharesbasic
|
|
|
87,239
|
|
|
|
86,661
|
|
|
|
87,063
|
|
|
|
86,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to OfficeMax common shareholders per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.35
|
|
|
$
|
5.00
|
|
|
$
|
0.88
|
|
|
$
|
5.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 28,
2013
|
|
|
September 29,
2012
|
|
|
September 28,
2013
|
|
|
September 29,
2012
|
|
|
|
(thousands, except per-
share amounts)
|
|
|
(thousands, except per-
share amounts)
|
|
Net income available to OfficeMax common shareholders
|
|
$
|
30,380
|
|
|
$
|
432,986
|
|
|
$
|
76,681
|
|
|
$
|
448,564
|
|
Preferred dividends eliminated(a)
|
|
|
|
|
|
|
522
|
|
|
|
|
|
|
|
1,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income attributable to OfficeMax
|
|
|
30,380
|
|
|
|
433,508
|
|
|
|
76,681
|
|
|
|
450,145
|
|
Average sharesbasic
|
|
|
87,239
|
|
|
|
86,661
|
|
|
|
87,063
|
|
|
|
86,526
|
|
Restricted stock, stock options, preferred share conversion and other(a)(b)(c)
|
|
|
1,944
|
|
|
|
1,443
|
|
|
|
1,629
|
|
|
|
1,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average sharesdiluted
|
|
|
89,183
|
|
|
|
88,104
|
|
|
|
88,692
|
|
|
|
87,979
|
|
Diluted net income attributable to OfficeMax per common share:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.34
|
|
|
$
|
4.92
|
|
|
$
|
0.86
|
|
|
$
|
5.12
|
|
(a)
|
The assumed conversion of outstanding preferred stock was anti-dilutive for the three and nine months ended September 28, 2013 and therefore no adjustment was
required to determine diluted net income attributable to OfficeMax or average shares-diluted.
|
(b)
|
Options to purchase 2.4 million and 2.3 million shares of common stock were outstanding during the third quarter and first nine months of 2013, respectively,
but were not included in the computation of diluted income per common share because the impact would have been anti-dilutive as such options exercise prices were higher than the average market price during those periods.
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(c)
|
Options to purchase 4.2 million and 4.3 million shares of common stock were outstanding during the third quarter and first nine months of 2012, respectively,
but were not included in the computation of diluted income per common share because the impact would have been anti-dilutive as such options exercise prices were higher than the average market price during those periods.
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7. Income Taxes
The Company and its subsidiaries file income tax returns in the U.S. Federal jurisdiction, and multiple state and
foreign jurisdictions. Years prior to 2010 are no longer subject to U.S. Federal income tax examination.
14
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
During the first quarter of 2013, the Company received notice that all audit work related to U.S. federal income tax returns for the years 2006 through 2009 is complete and closed. The Company is
no longer subject to state income tax examinations by tax authorities in its major state jurisdictions for years before 2003, and the Company is no longer subject to income tax examinations prior to 2005 for its major foreign jurisdictions.
As discussed in Note 5, Timber Notes/Non-Recourse Debt, at the time of the sale of the timberlands in 2004,
we generated a tax gain and recognized the related deferred tax liability. The timber installment notes structure allowed the Company to defer the resulting tax liability until 2020, the maturity date for the Installment Notes. As the tax gain
associated with the Lehman Guaranteed Installment Note was recognized in 2012, the remaining tax liability of $260 million at September 28, 2013, is related to the Wells Guaranteed Installment Notes and will be recognized when the Wells
Guaranteed Installment Notes are paid.
As of September 28, 2013, the Company had $6.3 million of total unrecognized
tax benefits, all of which would affect the Companys effective tax rate if recognized. Any future adjustments would result from the effective settlement of tax positions with various tax authorities. The Company does not anticipate any tax
settlements to occur within the next twelve months. The reconciliation of the beginning and ending unrecognized tax benefits is as follows:
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|
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Amount
|
|
|
|
(thousands)
|
|
Unrecognized gross tax benefits balance at December 29, 2012
|
|
$
|
6,337
|
|
Increase related to prior year tax positions
|
|
|
1,111
|
|
Decrease related to prior year tax positions
|
|
|
(5
|
)
|
Lapse of statute
|
|
|
(374
|
)
|
Settlements
|
|
|
(765
|
)
|
|
|
|
|
|
Unrecognized tax benefits balance at September 28, 2013
|
|
$
|
6,304
|
|
|
|
|
|
|
During the first nine months of 2013 and 2012, cash payments, net of refunds received, for income taxes
were as follows:
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|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(thousands)
|
|
Cash tax payments, net
|
|
$
|
8,697
|
|
|
$
|
9,104
|
|
8. Investment in Boise Cascade Holdings, L.L.C.
In connection with the sale of the paper, forest products and timberland assets in 2004, we invested $175 million
in affiliates of Boise Cascade, L.L.C. Due to restructurings conducted by those affiliates, our investment is currently in Boise Cascade Holdings, L.L.C. (BCH), a building products company.
Our investment in BCH (the Boise Investment) is accounted for under the cost method, as BCH does not maintain separate
ownership accounts for its members interests, and we do not have the ability to significantly influence the operating and financial policies of BCH. In exchange for investing in BCH, we received voting equity securities and non-voting equity
securities.
A subsidiary of BCH, Boise Cascade, L.L.C., filed a registration statement with the SEC in November 2012 to
register stock for an initial public offering (the Boise IPO). Boise Cascade, L.L.C. completed the Boise IPO on February 11, 2013 and became Boise Cascade Company (BCC). In connection with the Boise IPO, BCHs
equity interest in Boise Cascade, L.L.C. was automatically exchanged for 29.7 million shares of common stock of BCC. Subsequent to the Boise IPO, BCH executed a Fourth Amended and Restated Operating Agreement on February 26, 2013, pursuant
to which BCHs then-existing Series B and Series C common units were exchanged
15
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
for newly issued common units of Boise Cascade Holdings L.L.C., after which OfficeMax owns 5.9 million of the outstanding 29.7 million common units of BCH, representing a 20.01%
ownership interest in BCH.
The non-voting securities of BCH were redeemed at the original investment amount of $66 million in
February 2013. Prior to the redemption, the non-voting securities accrued dividends daily at the rate of 8% per annum on the liquidation value plus the accumulated dividends. These dividends accumulated semiannually to the extent not paid in
cash on the last day of June and December. The accumulated dividend receivable on the non-voting securities of $46.1 million was also collected in February 2013. Our policy was to record the income associated with dividends on the non-voting
securities as a reduction of operating, selling and general and administrative expenses in the Consolidated Statements of Operations. The income associated with the dividends on the non-voting securities ceased in the first quarter of 2013 as a
result of the redemption of those securities. The Company recognized dividend income on the non-voting securities of $1.0 million in 2013 (all in the first quarter) prior to the redemption, and $2.2 million and $6.3 million during the third quarter
and first nine months of 2012, respectively.
The voting securities do not accrue dividends. However, in February and April
2013, we received distributions of $17.3 million and $4.4 million, respectively, related to the voting securities. Based on the accumulated earnings of BCH, these distributions were recorded as reductions in the carrying value of the Boise
Investment.
In July 2013, we received a $71.8 million distribution resulting from BCHs sale of 13.9 million common
shares of BCC through a secondary public offering and a repurchase by BCC, from BCH, of 3.9 million shares BCC common stock. Following these transactions, BCH owns 15.8 million shares of BCC common stock. Based on the accumulated earnings
of BCH, $46.4 million of the $71.8 million distribution was recorded as a reduction in the carrying value of the Boise Investment. The remaining $25.4 million was recorded as income from dividends on the voting securities in asset impairments and
other operating expenses (income), net in the Consolidated Statement of Operations. BCHs sale of BCC shares is expected to result in OfficeMax being allocated taxable income as a partner of the BCH entity. This allocation of taxable income, in
turn, might result in cash taxes being due for the year when combined with OfficeMaxs other taxable income or loss and credits.
The Boise Investment represented a continuing involvement in the operations of the business we sold in 2004. Therefore, $179.8 million of gain realized from the sale was deferred. The redemption of
the non-voting equity securities, as well as the portion of the distributions related to the voting equity securities that were recorded as reductions of the carrying value of Boise Investment, triggered recognition of pre-tax operating gains from
partial recognition of the deferred gain, approximately $47.7 million and $137.7 million was recorded in the third quarter and nine months ended September 28, 2013, respectively. The gains were reported in asset impairments and other operating
expenses (income), net in the Consolidated Statements of Operations for the third quarter and first nine months of 2013, respectively. The remaining $42.0 million of deferred gain attributable to the voting equity securities will be recognized in
earnings as the Companys investment is reduced.
As of September 28, 2013, based on the trading value of the
publicly traded shares of BCC on that date, there was no indication of impairment of the Boise Investment.
9. Debt
Credit Agreements
On October 7, 2011, the Company entered into a Second Amended and Restated Loan and Security Agreement (the Credit Agreement) with a group of banks. The Credit Agreement permits the
Company to borrow up to a maximum of $650 million, of which $50 million is allocated to the Companys Canadian subsidiary and $600 million is allocated to the Company and its other participating U.S. subsidiaries, in each case
16
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
subject to a borrowing base calculation that limits availability to a percentage of eligible trade and credit card receivables plus a percentage of the value of eligible inventory less certain
reserves. The Credit Agreement may be increased (up to a maximum of $850 million) at the Companys request and the approval of the lenders participating in the increase, or may be reduced from time to time at the Companys request, in
each case according to the terms detailed in the Credit Agreement. Letters of credit, which may be issued under the Credit Agreement up to a maximum of $250 million, reduce available borrowing capacity. At the end of the third quarter of 2013,
the Company was in compliance with all covenants under the Credit Agreement. The Credit Agreement expires on October 7, 2016, although the Company may terminate it earlier upon prior notice. If the Credit Agreement has not been terminated or
amended prior to completion of the Merger Transactions, the Merger Transactions will result in a default under the Credit Agreement.
Borrowings under the Credit Agreement are subject to interest at rates based on either the prime rate, the federal funds rate, LIBOR or the Canadian Dealer Offered Rate. An additional percentage, which
varies depending on the level of average borrowing availability, is added to the applicable rates. Fees on letters of credit issued under the Credit Agreement are charged at rates between 1.25% and 2.25% depending on the type of letter of credit
(i.e., stand-by or commercial) and the level of average borrowing availability. The Company is also charged an unused line fee of between 0.375% and 0.5% on the amount by which the maximum available credit exceeds the average daily outstanding
borrowings and letters of credit. The fees on letters of credit were 1.75% and the unused line fee was 0.5% at the end of the third quarter of 2013.
Availability under the Credit Agreement at the end of the third quarter of 2013 was as follows:
|
|
|
|
|
|
|
Total
|
|
|
|
(millions)
|
|
Maximum aggregate available borrowing amount
|
|
$
|
590.4
|
|
Less: Stand-by letters of credit
|
|
|
(37.8
|
)
|
|
|
|
|
|
Amount available for borrowing
|
|
$
|
552.6
|
|
|
|
|
|
|
There were no borrowings under the Credit Agreement during the first nine months of 2013.
Other
At the end of the third quarter of 2013, Grupo OfficeMax had total outstanding borrowings of $6.1 million. This included $1.0 million outstanding under a 60-month installment note due in the first
quarter of 2014 and $1.2 million outstanding under a 54-month installment note due in the third quarter of 2014. Payments on the installment loans are made monthly. The remaining $3.9 million of borrowings is a simple revolving loan. Recourse on the
Grupo OfficeMax loans is limited to Grupo OfficeMax. The installment loan maturing in the third quarter of 2014 is secured by certain owned property of Grupo OfficeMax. All other Grupo OfficeMax loan facilities are unsecured.
Cash Paid for Interest
Cash payments for interest, net of interest capitalized and including interest payments related to the Securitization Notes, were $36.0 million and $38.0 million for the first nine months of 2013 and
2012, respectively. Excluding interest payments related to the Securitization Notes, cash payments for interest, net of interest capitalized, were $16.1 million and $18.1 million for the first nine months of 2013 and 2012, respectively. Cash
interest payments made on the Securitization Notes are completely offset by interest payments received on the Installment Notes.
17
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
10. Financial Instruments, Derivatives and Hedging Activities
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade accounts receivable, other assets (non-derivatives), short-term borrowings and
trade accounts payable approximate fair value because of the short maturity of these instruments. The following table presents the carrying amounts and estimated fair values of the Companys other financial instruments at September 28,
2013 and December 29, 2012. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 28, 2013
|
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
(thousands)
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Timber notes receivable
|
|
$
|
|
|
|
$
|
938,255
|
|
|
$
|
|
|
|
$
|
938,255
|
|
|
$
|
817,500
|
|
Boise Investment
|
|
$
|
|
|
|
$
|
85,411
|
|
|
$
|
|
|
|
$
|
85,411
|
|
|
$
|
40,896
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Recourse debt
|
|
$
|
18,084
|
|
|
$
|
210,340
|
|
|
$
|
|
|
|
$
|
228,424
|
|
|
$
|
232,356
|
|
Non-recourse debt
|
|
$
|
|
|
|
$
|
857,001
|
|
|
$
|
|
|
|
$
|
857,001
|
|
|
$
|
735,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2012
|
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
(thousands)
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Timber notes receivable
|
|
$
|
|
|
|
$
|
986,365
|
|
|
$
|
|
|
|
$
|
986,365
|
|
|
$
|
817,500
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Recourse debt
|
|
$
|
|
|
|
$
|
229,431
|
|
|
$
|
|
|
|
$
|
229,431
|
|
|
$
|
236,194
|
|
Non-recourse debt
|
|
$
|
|
|
|
$
|
903,912
|
|
|
$
|
|
|
|
$
|
903,912
|
|
|
$
|
735,000
|
|
In establishing a fair value, there is a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The basis of the fair value measurement is categorized in three levels, in order of priority, described as follows:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active, or financial instruments for which all significant inputs are observable
either directly or indirectly.
Level 3: Prices or valuation techniques that require inputs that are both significant to
the fair value measurement and unobservable thus reflecting assumptions about the market participants.
The carrying amounts
shown in the table are included in the Consolidated Balance Sheets under the indicated captions. The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
|
|
|
Timber notes receivable:
Timber notes receivable as of September 28, 2013 consists solely of the Wells Guaranteed Installment Notes. The
fair value of the Wells Guaranteed Installment Notes is determined as the present value of expected future cash flows discounted at the current interest rate for loans of similar terms with comparable credit risk (Level 2 inputs).
|
18
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
|
|
|
Boise Investment:
The fair value of the Boise Investment is calculated as the sum of the market value of OfficeMaxs indirect investment in
BCC, the primary investment of BCH, plus OfficeMaxs portion of any cash held by BCH as of the balance sheet date (together, Level 2 inputs). OfficeMaxs indirect investment in BCC is calculated using the number of shares OfficeMax
indirectly holds in BCC multiplied by the closing stock price of BCC as of the last trading day prior to the balance sheet date. Prior to the first quarter of 2013, it was not considered practicable to estimate the fair value of the Boise
Investment. BCH and its subsidiaries were untraded companies without observable market inputs. However, as discussed in Note 8, Investment in Boise Cascade Holdings, L.L.C., BCC became a publicly traded company through the Boise IPO
executed in the first quarter of 2013. As of September 28, 2013, the Boise Investment constitutes an indirect interest in BCCs publicly traded securities (NYSE: BCC). The availability of quoted market prices for the indirect investment
made the estimate of fair value practicable beginning in the first quarter of 2013.
|
|
|
|
Recourse debt:
The Companys debt instruments are not widely traded. Recourse debt for which there were trades on the last day of the
period (the measurement date) was valued using the unadjusted quoted price from the last trade on the measurement date (Level 1 input). Recourse debt for which there were no transactions on the measurement date was valued based on quoted
market prices near the measurement date when available or by discounting the future cash flows of each instrument using rates based on the most recently observable trade or using rates currently offered to the Company for similar debt instruments of
comparable maturities (Level 2 inputs).
|
|
|
|
Non-recourse debt:
Non-recourse debt as of September 28, 2013 consists solely of the Securitization Notes supported by Wells. The fair
value of the Securitization Notes supported by Wells is estimated by discounting the future cash flows of the instrument at rates currently available to the Company for similar instruments of comparable maturities (Level 2 inputs).
|
During the first nine months of 2013, there were no significant changes to the techniques used to measure
fair value except as noted above for the estimate of fair value of the Boise Investment. Other than routine borrowings and payments of recourse debt, there were no changes to the financial instruments for which fair value is being calculated. Any
changes in the level of inputs for recourse debt is due to the existence or nonexistence of trades on the measurement date from which to obtain unadjusted quoted prices.
Derivatives and Hedging Activities
Changes in foreign currency
exchange rates expose us to financial market risk. We occasionally use derivative financial instruments, such as forward exchange contracts, to manage our exposure associated with commercial transactions and certain liabilities that are denominated
in a currency other than the currency of the operating unit entering into the underlying transaction. We do not enter into derivative instruments for any other purpose. We do not speculate using derivative instruments. The fair values of derivative
financial instruments were not material at the end of the third quarter of 2013 or at 2012 fiscal year-end.
19
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
11. Retirement and Benefit Plans
Components of Net Periodic Benefit Cost (Income)
The following represents the components of net periodic benefit cost (income) for pension and other postretirement benefits which are
recorded in operating, selling and general and administrative expense in the Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Pension Benefits
|
|
|
Other Postretirement
Benefits
|
|
|
|
September 28,
2013
|
|
|
September 29,
2012
|
|
|
September 28,
2013
|
|
|
September 29,
2012
|
|
|
|
(thousands)
|
|
Service cost
|
|
$
|
761
|
|
|
$
|
935
|
|
|
$
|
39
|
|
|
$
|
73
|
|
Interest cost
|
|
|
11,924
|
|
|
|
16,171
|
|
|
|
175
|
|
|
|
235
|
|
Expected return on plan assets
|
|
|
(17,375
|
)
|
|
|
(20,773
|
)
|
|
|
|
|
|
|
|
|
Recognized actuarial loss
|
|
|
5,300
|
|
|
|
4,488
|
|
|
|
66
|
|
|
|
50
|
|
Amortization of prior service credits
|
|
|
|
|
|
|
|
|
|
|
(988
|
)
|
|
|
(1,002
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost (income)
|
|
$
|
610
|
|
|
$
|
821
|
|
|
$
|
(708
|
)
|
|
$
|
(644
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Pension Benefits
|
|
|
Other Postretirement
Benefits
|
|
|
|
September 28,
2013
|
|
|
September 29,
2012
|
|
|
September 28,
2013
|
|
|
September 29,
2012
|
|
|
|
(thousands)
|
|
Service cost
|
|
$
|
2,284
|
|
|
$
|
2,805
|
|
|
$
|
119
|
|
|
$
|
219
|
|
Interest cost
|
|
|
35,770
|
|
|
|
48,515
|
|
|
|
532
|
|
|
|
700
|
|
Expected return on plan assets
|
|
|
(52,125
|
)
|
|
|
(62,320
|
)
|
|
|
|
|
|
|
|
|
Recognized actuarial loss
|
|
|
15,901
|
|
|
|
13,465
|
|
|
|
197
|
|
|
|
151
|
|
Amortization of prior service credits
|
|
|
|
|
|
|
|
|
|
|
(2,963
|
)
|
|
|
(3,006
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost (income)
|
|
$
|
1,830
|
|
|
$
|
2,465
|
|
|
$
|
(2,115
|
)
|
|
$
|
(1,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows
We expect to make $3.0 million of contributions to the Companys pension plans in 2013, which we expect to fund with cash. As of September 28, 2013, $2.3 million in cash has been
contributed in 2013.
12. Share-Based Compensation
The Company sponsors several share-based compensation plans. The Company recognizes compensation expense from all
share-based payment transactions with employees in the consolidated financial statements at fair value. Pre-tax compensation expense related to the Companys share-based plans was $1.9 million and $2.6 million for the third quarters
of 2013 and 2012, respectively, and $6.8 million and $7.7 million for the first nine months of 2013 and 2012, respectively. Compensation expense is generally recognized on a straight-line basis over the vesting period of grants. The total
income tax benefit recognized in the Consolidated Statements of Operations for share-based compensation arrangements was $0.7 million and $1.0 million for the third quarters of 2013 and 2012, respectively, and $2.6 million and $3.0 million
for the first nine months of 2013 and 2012, respectively.
20
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
Restricted Stock and Restricted Stock Units
Restricted stock is restricted until it vests and cannot be sold by the recipient until its restrictions have lapsed. Each restricted
stock unit (RSU) is convertible into one share of common stock after its restrictions have lapsed. The Company recognizes compensation expense related to these awards over the vesting periods based on the awards grant date fair
values. The Company calculates the grant date fair value of the RSU awards by multiplying the number of RSUs by the closing price of the Companys common stock on the grant date. If these awards contain performance criteria, the grant date fair
value is set assuming performance at target, and management periodically reviews actual performance against the criteria and adjusts compensation expense accordingly. Pre-tax compensation expense and additional paid-in capital related to restricted
stock and RSU awards was $1.1 million and $0.7 million for the third quarters of 2013 and 2012, respectively, and $3.9 million and $1.6 million for the first nine months of 2013 and 2012, respectively. The remaining compensation expense to
be recognized related to outstanding restricted stock and RSU awards, net of estimated forfeitures, is approximately $6.1 million and will be recognized through the first quarter of 2016.
As a result of a special non-recurring dividend of $1.50 per share of common stock (the Special Dividend), which is further
described in Note 14, Shareholders Equity and Noncontrolling Interest, outstanding RSU awards were equitably adjusted to maintain the awards pre-dividend value, under existing anti-dilution provisions of the Companys
share-based compensation plans. The adjustment resulted in an increase in the number of RSUs subject to previously existing RSU awards. The adjustment did not result in additional compensation expense because the fair value of the awards after
adjustment was substantially equal to the fair value of the awards before the adjustment.
A summary of restricted stock and
RSU activity for the first nine months of 2013 is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-Average
Grant
Date
Fair Value Per
Common Share
|
|
Unvested, December 29, 2012
|
|
|
1,317,756
|
|
|
$
|
10.70
|
|
Granted
|
|
|
1,416,052
|
|
|
|
11.71
|
|
Special Dividend adjustment
|
|
|
269,714
|
|
|
|
11.39
|
|
Vested
|
|
|
(26,536
|
)
|
|
|
11.52
|
|
Forfeited
|
|
|
(785,737
|
)
|
|
|
11.92
|
|
|
|
|
|
|
|
|
|
|
Unvested September 28, 2013
|
|
|
2,191,249
|
|
|
$
|
10.99
|
|
|
|
|
|
|
|
|
|
|
In the above table, granted RSUs include 216,730 shares of performance-based RSUs reserved for issuance
in 2012 which were not considered granted or outstanding until 2013 when the associated performance measures were established.
Unvested restricted stock and RSUs are not included as shares outstanding in the calculation of basic earnings per share, but, except as
described below, are included in the number of shares used to calculate diluted earnings per share as long as all applicable performance criteria are met, and their effect is dilutive. Unvested RSUs outstanding at September 28, 2013 in the
above table do not include 215,965 shares of performance-based RSUs that were reserved for issuance in 2012 for which associated performance measures have not yet been established. Therefore, they are not considered granted or outstanding and
have been excluded from the number of shares used to calculate diluted earnings per share.
There are 905,710 unvested
performance based RSUs as of September 28, 2013 that would be converted into time based RSUs upon completion of the Merger Transactions, including the 215,965 shares of performance-based RSUs discussed above that have been reserved for issuance
but are not considered granted in the above table. For more information related to the Merger Transactions, see Note 2, Merger Agreement.
21
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
Stock Options
The Companys stock options are issued with an exercise price equal to fair market value on the grant date and typically expire
within seven years of the grant date. Stock options granted under the 2003 OfficeMax Incentive and Performance Plan generally vest over a three year period. Pre-tax compensation expense related to stock options was $0.8 million and $1.9 million for
the third quarters of 2013 and 2012, respectively, and $2.9 million and $6.1 million for the first nine months of 2013 and 2012, respectively. The remaining compensation expense to be recognized related to outstanding stock options, net of estimated
forfeitures, is approximately $1.8 million and will be recognized through the fourth quarter of 2015.
As a result of the
Special Dividend discussed in Note 14, Shareholders Equity and Noncontrolling Interest, outstanding stock options were equitably adjusted to maintain the stock options pre-dividend value, under existing anti-dilution
provisions of the Companys share-based compensation plans. The adjustment resulted in an increase in the number of shares underlying each stock option and a decrease in the per-share exercise price of each stock option. The adjustment did not
result in additional compensation expense because the fair value of the awards after the adjustment was substantially equal to the fair value of the awards before the adjustment.
A summary of stock option activity for the first nine months of 2013 is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Wtd. Avg.
Exercise Price
|
|
Balance at December 29, 2012
|
|
|
5,212,738
|
|
|
$
|
10.57
|
|
Options granted
|
|
|
3,500
|
|
|
|
9.76
|
|
Special Dividend adjustment
|
|
|
635,142
|
|
|
|
9.56
|
|
Options exercised
|
|
|
(512,196
|
)
|
|
|
4.60
|
|
Options forfeited and expired
|
|
|
(381,293
|
)
|
|
|
11.50
|
|
|
|
|
|
|
|
|
|
|
Balance at September 28, 2013
|
|
|
4,957,891
|
|
|
$
|
9.76
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 28, 2013
|
|
|
2,789,496
|
|
|
|
|
|
Weighted average fair value of options granted (Black-Scholes) during 2013
|
|
$
|
5.07
|
|
|
|
|
|
The following table provides summarized information about stock options outstanding at September 28,
2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
Options
Outstanding
|
|
|
Weighted
Average
Contractual
Life (Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Options
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
$2.21
|
|
|
12,645
|
|
|
|
|
|
|
$
|
2.21
|
|
|
|
12,645
|
|
|
$
|
2.21
|
|
$3.50 $9.00
|
|
|
2,589,353
|
|
|
|
5.0
|
|
|
|
5.09
|
|
|
|
1,008,158
|
|
|
|
4.97
|
|
$11.00 $15.00
|
|
|
1,251,698
|
|
|
|
3.9
|
|
|
|
13.96
|
|
|
|
1,032,563
|
|
|
|
13.76
|
|
$16.00 $22.00
|
|
|
1,104,195
|
|
|
|
4.1
|
|
|
|
16.03
|
|
|
|
736,130
|
|
|
|
16.03
|
|
At September 28, 2013, the aggregate intrinsic value was $19.5 million for outstanding stock
options and $7.8 million for those stock options that were exercisable. The aggregate intrinsic value represents the total pre-tax intrinsic value (i.e. the difference between the Companys closing stock price on the last trading day of the
third quarter of 2013 and the exercise price, multiplied by the number of in-the-money stock options at the end of the quarter).
During the first nine months of 2013, the Company granted stock options for 3,500 shares of our common stock and estimated the fair value of each stock option award on the date of grant using the
Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 0.63%, expected annual dividends of $0.08 per share, expected life of 4.5 years and expected stock price volatility of 69.94%.
22
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
The risk-free interest rate assumptions are based on the applicable U.S. Treasury Bill
rates over the options expected lives; the expected life assumptions are based on the time period stock options are expected to be outstanding based on historical experience; and the expected stock price volatility assumptions are based on the
historical and implied volatility of the Companys common stock.
13. Segment Information
The Company manages its business using three reportable segments: Contract, Retail, and Corporate and Other. Management
reviews the performance of the Company based on these segments.
Contract distributes a broad line of items for the office,
including office supplies and paper, technology products and solutions, office furniture, print and document services and facilities products. Contract sells directly to large corporate and government offices, as well as to small and medium-sized
offices and consumers in the United States, Canada, Australia and New Zealand. This segment markets and sells through field salespeople, outbound telesales, catalogs, the Internet and in some markets, including Canada, Australia and
New Zealand, through office products stores. Substantially all products sold by Contract are purchased from third-party manufacturers or industry wholesalers. Contract purchases office papers for its businesses in the U.S., Canada, and Puerto
Rico primarily from Boise White Paper, L.L.C., under a paper supply contract entered into on June 25, 2011.
Retail is a
retail distributor of office supplies and paper, print and document services, technology products and solutions, office furniture and facilities products. In addition, this segment contracts with large national retail chains to supply office and
school supplies to be sold in their stores. Retail office supply stores feature OfficeMax ImPress, an in-store module devoted to print-for-pay and related services. Retail has operations in the United States, Puerto Rico and the U.S. Virgin Islands.
Retail also operates office products stores in Mexico through Grupo OfficeMax. Substantially all products sold by Retail are purchased from third-party manufacturers or industry wholesalers. Retail purchases office papers for its U.S. businesses
primarily from Boise White Paper, L.L.C., under the paper supply contract described above.
Corporate and Other includes
corporate support staff services and certain other legacy expenses as well as the related assets and liabilities. The income and expense related to certain assets and liabilities that are reported in the Corporate and Other segment have been
allocated to the Contract and Retail segments.
Management evaluates the segments performances using segment income
(loss) which is based on operating income after eliminating the effect of certain legacy operating items such as income associated with our Boise Investment and certain other operating items such as store closure costs, costs related to the proposed
Merger Transactions, impairment charges and severance charges, all of which are not indicative of our core operations.
23
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
The following tables contain details of the Companys operations by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
Segment
income
(loss)(1)
|
|
|
Asset
impairment,
and other
operating
income
(expenses), net
|
|
|
Operating
income
|
|
|
|
(thousands)
|
|
Three months ended September 28, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
$
|
841,866
|
|
|
$
|
8,819
|
|
|
$
|
|
|
|
$
|
8,819
|
|
Retail
|
|
|
822,993
|
|
|
|
26,223
|
|
|
|
(4,121
|
)
|
|
|
22,102
|
|
Corporate and Other
|
|
|
|
|
|
|
(6,683
|
)
|
|
|
42,550
|
|
|
|
35,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,664,859
|
|
|
$
|
28,359
|
|
|
$
|
38,429
|
|
|
$
|
66,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 29, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
$
|
880,898
|
|
|
$
|
26,485
|
|
|
$
|
|
|
|
$
|
26,485
|
|
Retail
|
|
|
863,681
|
|
|
|
27,733
|
|
|
|
(11,432
|
)
|
|
|
16,301
|
|
Corporate and Other
|
|
|
|
|
|
|
(11,496
|
)
|
|
|
2,169
|
|
|
|
(9,327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,744,579
|
|
|
$
|
42,722
|
|
|
$
|
(9,263
|
)
|
|
$
|
33,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
Segment
income
(loss)(1)
|
|
|
Asset
impairment,
and other
operating
income
(expenses), net
|
|
|
Operating
income
|
|
|
|
(thousands)
|
|
Nine months ended September 28, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
$
|
2,612,819
|
|
|
$
|
41,304
|
|
|
$
|
(4,311
|
)
|
|
$
|
36,993
|
|
Retail
|
|
|
2,351,818
|
|
|
|
44,389
|
|
|
|
(4,165
|
)
|
|
|
40,224
|
|
Corporate and Other
|
|
|
|
|
|
|
(24,121
|
)
|
|
|
114,720
|
|
|
|
90,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,964,637
|
|
|
$
|
61,572
|
|
|
$
|
106,244
|
|
|
$
|
167,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 29, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
$
|
2,720,320
|
|
|
$
|
79,276
|
|
|
$
|
|
|
|
$
|
79,276
|
|
Retail
|
|
|
2,499,570
|
|
|
|
53,400
|
|
|
|
(36,698
|
)
|
|
|
16,702
|
|
Corporate and Other
|
|
|
|
|
|
|
(27,889
|
)
|
|
|
6,307
|
|
|
|
(21,582
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,219,890
|
|
|
$
|
104,787
|
|
|
$
|
(30,391
|
)
|
|
$
|
74,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Beginning in 2013, segment income (loss) for all periods presented excludes dividend income from our Boise Investment due to the redemption of the non-voting securities
in the first quarter of 2013 which totaled $1.0 million for the first nine months of 2013 (all in the first quarter) and $2.2 million and $6.3 million during the third quarter and first nine months of 2012, respectively, and were reported in
operating, selling and general and administrative expenses in the Consolidated Statements of Operations.
|
Interest expense, interest income, gain on extinguishment of non-recourse debt and other income, net are not recorded by segments.
24
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
14. Shareholders Equity and Noncontrolling Interest
The following table reflects changes in shareholders equity and noncontrolling interest for the first nine months
of 2013.
|
|
|
|
|
|
|
|
|
|
|
Shareholders
Equity
|
|
|
Noncontrolling
Interest
|
|
|
|
(thousands)
|
|
Balance at December 29, 2012
|
|
$
|
1,034,373
|
|
|
$
|
44,617
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
Net income attributable to OfficeMax and noncontrolling interest
|
|
|
78,195
|
|
|
|
2,843
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(12,749
|
)
|
|
|
(867
|
)
|
Amortization of unrecognized retirement and benefit costs, net of tax
|
|
|
11,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to OfficeMax and noncontrolling interest
|
|
|
76,695
|
|
|
|
1,976
|
|
Common stock dividends
|
|
|
(135,040
|
)
|
|
|
|
|
Preferred stock dividends
|
|
|
(2,009
|
)
|
|
|
|
|
Stock-based compensation activity
|
|
|
9,058
|
|
|
|
|
|
Non-controlling interest fair value adjustment
|
|
|
(15,493
|
)
|
|
|
15,493
|
|
Other
|
|
|
(915
|
)
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
Balance at September 28, 2013
|
|
$
|
966,669
|
|
|
$
|
62,062
|
|
|
|
|
|
|
|
|
|
|
Special Dividend
On May 6, 2013, the Company declared a special non-recurring dividend of $1.50 per share of common stock totaling $131.5 million to shareholders of record as of the close of business on June 12,
2013, of which $130.7 million was paid in the third quarter of 2013. As a result of the Special Dividend, outstanding stock options and RSUs were equitably adjusted to maintain the awards pre-dividend value under existing anti-dilution
provisions of the Companys share-based compensation plans. See Note 12, Share-Based Compensation, for further information.
Preferred Stock
At September 28, 2013, 583,222 shares of
7.375% Series D ESOP convertible preferred stock were outstanding, compared with 608,693 shares outstanding at December 29, 2012. The Series D ESOP convertible preferred stock is shown in the Consolidated Balance Sheets at its
liquidation preference of $45 per share. All shares outstanding have been allocated to participants in the plan. Each ESOP preferred share is entitled to one vote, bears an annual cumulative dividend of $3.31875 per share and is convertible at any
time by the trustee into common stock using a conversion ratio established in accordance with the Certificate of Designation for the OfficeMax Series D preferred stock (Certificate of Designation), which was 0.9312 shares of common stock
per share of preferred stock as of September 28, 2013. Upon redemption, ESOP participants receive $45 of cash or common stock and cash, at the Companys election, for each ESOP preferred share, as the ESOP preferred shares may not be
redeemed for less than the liquidation preference.
Prior to the closing of the Merger Transactions (the Closing),
OfficeMax will redeem each issued and outstanding share of OfficeMax Series D preferred stock for shares of OfficeMax common stock (excluding any shares of OfficeMax Series D preferred stock surrendered by the holder for conversion) in accordance
with the Certificate of Designation for the OfficeMax Series D preferred stock. The shares of OfficeMax common stock issued upon such redemption or conversion will then be converted as a result of the Merger Transactions into the right to receive
shares of Office Depot common stock in accordance with the exchange ratio, together with cash in lieu of fractional shares, if any, and unpaid dividends and distributions, if any, pursuant to the Merger Agreement.
25
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
Changes in Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) by component includes the following for the first nine months of 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and
Postretirement
Liability
Adjustment
|
|
|
Foreign
Currency
Translation
Adjustment
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
|
(thousands)
|
|
Balance at December 29, 2012
|
|
$
|
(288,450
|
)
|
|
$
|
150,929
|
|
|
$
|
(137,521
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
4,335
|
|
|
|
(12,749
|
)
|
|
|
(8,414
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unrecognized retirement and benefit costs
|
|
|
13,135
|
|
|
|
|
|
|
|
13,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period other comprehensive income (loss)
|
|
|
17,470
|
|
|
|
(12,749
|
)
|
|
|
4,721
|
|
Income taxes
|
|
|
(6,221
|
)
|
|
|
|
|
|
|
(6,221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income (loss)
|
|
|
11,249
|
|
|
|
(12,749
|
)
|
|
|
(1,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 28, 2013
|
|
$
|
(277,201
|
)
|
|
$
|
138,180
|
|
|
$
|
(139,021
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All amounts reclassified out of accumulated other comprehensive income (loss) were recorded in operating,
selling, and general and administrative expenses in the Consolidated Statements of Operations.
15. Commitments and Guarantees
Commitments
In accordance with an amended and restated joint venture agreement, the minority owner of Grupo OfficeMax, our joint-venture in Mexico, can elect to require OfficeMax to purchase the minority owners
49% interest in the joint venture if certain earnings targets are achieved. Earnings targets are calculated quarterly on a rolling four-quarter basis. Accordingly, the targets may be achieved in one quarter but not in the next. If the earnings
targets are achieved and the minority owner elects to require OfficeMax to purchase the minority owners interest, the purchase price is based on the joint ventures earnings and the current market multiples of similar companies. At the
end of the third quarter of 2013, Grupo OfficeMax met the earnings targets and the estimated purchase price of the minority owners interest was $61.1 million. This represents an increase in the estimated purchase price from the prior year
which is attributable to higher market multiples for similar companies as of the measurement date. As the estimated purchase price was greater than the carrying value of the noncontrolling interest as of the end of the year, the Company recorded an
adjustment to state the noncontrolling interest at the estimated purchase price, and, as the estimated purchase price approximates fair value, the offset was recorded to additional paid-in capital.
16. Legal Proceedings and Contingencies
As previously disclosed, eight putative class action lawsuits challenging the Merger Transactions were filed on behalf
of a putative class consisting of OfficeMax stockholders.
Six lawsuits were filed in the Circuit Court of the Eighteenth
Judicial Circuit of DuPage County, Illinois (the State Court): (i) Venkata S. Donepudi v. OfficeMax Incorporated, et al. (Case Number 2013L000188), filed on February 25, 2013; (ii) Beth Koeneke v. OfficeMax Incorporated,
et al. (Case Number 2013CH000776), filed on February 28, 2013; (iii) Marc Schmidt v. Saligram, et al. (Case Number 2013MR000411), filed on
26
Notes to Quarterly Consolidated Financial Statements (unaudited)(Continued)
March 13, 2013; (iv) The Feivel & Helene Gottlieb Defined Benefit Pension Plan v. OfficeMax Incorporated, et al. (Case Number 2013L000246), filed on March 14, 2013;
(v) Norman Klumpp v. Bryant, et al. (Case Number 2013CH1107), filed on March 28, 2013; and (vi) J. David Lewis v. OfficeMax Incorporated, et al. (Case Number 2013CH001123), filed on March 29, 2013. The above-referenced actions
have been consolidated in Venkata S. Donepudi v. OfficeMax Incorporated, et al. (Case Number 2013L000188) (the State Action). A consolidated amended class action complaint was filed in the State Action on April 25, 2013.
Two lawsuits were filed in the United States District Court for the Northern District of Illinois, Eastern Division: (i) Eric
Hollander v. OfficeMax Incorporated, et al. (Case Number 1:13-cv-03330), filed on May 2, 2013; and (ii) Thomas and Beverly DeFabio v. OfficeMax Incorporated, et al. (Case Number 1:13-cv-03385), filed on May 6, 2013 (the Federal
Actions).
The State Action and the Federal Actions named OfficeMax, Office Depot and the directors of OfficeMax, among
others, as defendants. Each of the lawsuits was brought by a purported holder or holders of OfficeMax common stock, both individually and on behalf of a putative class of OfficeMax stockholders. The lawsuits generally alleged, among other things,
that the directors of OfficeMax breached their fiduciary duties to OfficeMax stockholders by agreeing to a transaction with inadequate and unfair consideration and pursuant to an inadequate and unfair process. The lawsuits further allege that
OfficeMax and Office Depot, among others, aided and abetted the OfficeMax directors in the breach of their fiduciary duties. In addition, the lawsuits alleged that the disclosure in the definitive joint proxy statement/prospectus of OfficeMax and
Office Depot filed with the SEC on June 10, 2013 was inadequate.
OfficeMax believes that these lawsuits are without
merit and that no further disclosure was required to supplement the joint proxy statement/prospectus under applicable laws; however, to eliminate the burden, expense and uncertainties inherent in such litigation, on June 25, 2013, the
defendants entered into a Memorandum of Understanding (the Memorandum of Understanding) regarding the settlement of the State Action and the Federal Actions. The Memorandum of Understanding outlines the terms of the parties
agreement in principle to settle and release all claims which were or could have been asserted in the State Action and the Federal Actions. In consideration for such settlement and release, the parties to the State Action and the Federal Actions
agreed that OfficeMax and Office Depot would make certain supplemental disclosures to the joint proxy statement/prospectus, which OfficeMax made in a Current Report on Form 8-K filed with the SEC on June 27, 2013. The Memorandum of
Understanding contemplates that the parties will attempt in good faith to agree promptly upon a stipulation of settlement to be submitted to the State Court for approval at the earliest practicable time. The stipulation of settlement will be subject
to customary conditions, including approval by the State Court, which will consider the fairness, reasonableness and adequacy of such settlement. The stipulation of settlement will provide that OfficeMax (or its successors in interest) will pay, on
behalf of all defendants, the plaintiffs attorneys fees and expenses, subject to approval by the State Court, in the amount of $0.7 million, following dismissal of both the State Action and the Federal Actions with prejudice. There can
be no assurance that the parties will ultimately enter into a stipulation of settlement or that the State Court will approve the settlement even if the parties were to enter into such stipulation. In such event, or if the transactions contemplated
by the Merger Agreement are not consummated for any reason, the proposed settlement will be null and void and of no force and effect.
17. Subsequent Events
On November 1, 2013, the Federal Trade Commission cleared the proposed merger of OfficeMax and Office Depot. The
proposed merger is expected to close on November 5, 2013.
On November 4, 2013, as a condition of the proposed merger, all of
the shares of Series D ESOP convertible preferred stock were redeemed at a price of $45 per share, plus all accrued and unpaid dividends thereon to the redemption date, paid in shares of OfficeMax common stock.
27