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ESSENDANT INC 10-K 2013
Form 10-K
Table of Contents

 

 

United States

Securities and Exchange Commission

Washington, DC 20549

 

 

 

(Mark one)   FORM 10-K  

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

or

[    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     

Commission file number: 0-10653

 

 

UNITED STATIONERS INC.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware   36-3141189
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer Identification No.)

One Parkway North Boulevard

Suite 100

Deerfield, Illinois 60015-2559

(847) 627-7000

(Address, Including Zip Code and Telephone Number, Including Area Code, of Registrant’s

Principal Executive Offices)

 

 

 

(Title of Class)

 

Name of Exchange on which registered:

Securities registered pursuant to
Section 12(b) of the Act:
Common Stock, $0.10 par value per share
  NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 and Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer x    Accelerated filer ¨    Non-accelerated filer ¨    Smaller reporting company ¨
   (Do not check if a smaller reporting company)            

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The aggregate market value of the common stock of United Stationers Inc. held by non-affiliates as of June 30, 2012 was approximately $1.093 billion.

On February 15, 2013, United Stationers Inc. had 40,391,103 shares of common stock outstanding.

Documents Incorporated by Reference:

Certain portions of United Stationers Inc.’s definitive Proxy Statement relating to its 2013 Annual Meeting of Stockholders, to be filed within 120 days after the end of United Stationers Inc.’s fiscal year, are incorporated by reference into Part III.

 

 

 


Table of Contents

UNITED STATIONERS INC.

FORM 10-K

For The Year Ended December 31, 2012

TABLE OF CONTENTS

 

            Page No.  
Part I        
Item 1.      Business      1   
Item 1A.      Risk Factors      5   
Item 1B.      Unresolved Comment Letters      8   
Item 2.      Properties      8   
Item 3.      Legal Proceedings      8   
Item 4.      Submission of Matters to a Vote of Security Holders      9   
     Executive Officers of the Registrant      9   
Part II        
Item 5.     

Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities

     11   
Item 6.     

Selected Financial Data

     14   
Item 7.     

Management’s Discussion and Analysis of Financial Condition and
Results of Operations

     15   
Item 7A.     

Quantitative and Qualitative Disclosures About Market Risk

     31   
Item 8.     

Financial Statements and Supplementary Data

     32   
Item 9.     

Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure

     69   
Item 9A.     

Controls and Procedures

     69   
Part III        
Item 10.     

Directors, Executive Officers and Corporate Governance

     70   
Item 11.     

Executive Compensation

     70   
Item 12.     

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     70   
Item 13.     

Certain Relationships and Related Transactions, and Director
Independence

     70   
Item 14.     

Principal Accounting Fees and Services

     70   
Part IV        
Item 15.     

Exhibits and Financial Statement Schedules

     71   
    

Signatures

     76   
    

Schedule II—Valuation and Qualifying Accounts

     77   


Table of Contents

PART I

ITEM 1.  BUSINESS.

General

United Stationers Inc. is a leading national wholesale distributor of business products, with consolidated net sales of $5.1 billion. United stocks a broad and deep line of over 130,000 products, including technology products, traditional office products, office furniture, janitorial and breakroom supplies, and industrial supplies. With the acquisition of O.K.I. Supply Co. (OKI) in November 2012, the Company now has operations in Canada and Dubai, United Arab Emirates (UAE). The Company’s network of 72 distribution centers allows it to ship products to approximately 25,000 reseller customers, enabling the Company to ship most products overnight to more than 90% of the U.S. and next day delivery to major cities in Mexico and Canada.

Except where otherwise noted, the terms “United” and “the Company” refer to United Stationers Inc. and its consolidated subsidiaries. The parent holding company, United Stationers Inc. (USI), was incorporated in 1981 in Delaware. USI’s only direct wholly owned subsidiary—and its principal operating company—is United Stationers Supply Co. (USSC), incorporated in 1922 in Illinois.

Products

United stocks over 130,000 products in these categories:

Technology Products. The Company is a leading national wholesale distributor of computer supplies and peripherals. It stocks approximately 15,000 items, including imaging supplies, data storage, digital cameras, computer accessories and computer hardware items such as printers and other peripherals. United provides these products to value-added computer resellers, office products dealers, drug stores, grocery chains and e-commerce merchants. Technology products generated about 31% of the Company’s 2012 consolidated net sales.

Traditional Office Products. The Company is one of the largest national wholesale distributors of a broad range of office supplies. It carries over 25,000 brand-name and private label products, such as filing and record storage products, business machines, presentation products, writing instruments, paper products, shipping and mailing supplies, calendars and general office accessories. These products contributed approximately 27% of net sales during the year.

Janitorial and Breakroom Supplies. United is a leading wholesaler of janitorial and breakroom supplies throughout the nation. The Company holds over 13,000 items in these lines: janitorial and breakroom supplies (cleaners and cleaning accessories), foodservice consumables (such as disposable cups, plates and utensils), safety and security items, and paper and packaging supplies. This product category provided about 25% of the latest year’s net sales primarily from Lagasse, Inc. (Lagasse), a wholly owned subsidiary of USSC.

Industrial Supplies. With the acquisition of OKI, United increased its industrial supplies stock to over 75,000 items including hand and power tools, safety and security supplies, janitorial equipment and supplies, other various industrial MRO (maintenance, repair and operations) items and oil field and welding supplies. In 2012, this product category accounted for roughly 8% of the Company’s net sales.

Office Furniture. United is one of the largest office furniture wholesaler distributors in the nation. It stocks approximately 4,500 products including desks, filing and storage solutions, seating and systems furniture, along with a variety of products for niche markets such as education, government, healthcare and professional services. Innovative marketing programs and related services help drive this business across multiple customer channels. This product category represented approximately 6% of net sales for the year.

The remainder of the Company’s consolidated net sales came from freight, advertising and software related revenue.

 

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United offers private brand products within each of its product categories to help resellers provide quality value-priced items to their customers. These include Innovera® technology products, Universal® office products, Windsoft® paper products, Boardwalk® and UniSan® janitorial and sanitation products, Alera® office furniture, and Anchor Brand® and Best Welds ® welding, industrial, safety and oil field pipeline products.

During 2012, private brand products accounted for approximately 16% of United’s net sales.

Customers

United serves a diverse group of approximately 25,000 customers. They include independent office products dealers; contract stationers; office products superstores; computer products resellers; office furniture dealers; mass merchandisers; mail order companies; sanitary supply, paper and foodservice distributors; drug and grocery store chains; healthcare distributors; e-commerce merchants; oil field, welding supply and industrial/MRO distributors; and other independent distributors. The Company had one customer, W.B. Mason Co., Inc., which constituted 11.6% of its 2012 consolidated net sales. No other single customer accounted for more than 10% of 2012 consolidated net sales.

Sales to independent resellers—which include United Stationers Supply, Lagasse and ORS Nasco resellers, as well as new channel customers—contributed approximately 88% of consolidated net sales. The Company provides these customers with value-added services designed to help them market their products and services while improving operating efficiencies and reducing costs. National accounts comprised about 12% of the Company’s 2012 consolidated net sales.

Marketing and Customer Support

United’s customers can purchase most of the products the Company distributes at similar prices from many other sources. Many reseller customers purchase their products from more than one source, frequently using “first call” and “second call” distributors. A “first call” distributor typically is a reseller’s primary wholesaler and has the first opportunity to fill an order. If the “first call” distributor cannot meet the demand, or do so on a timely basis, the reseller will contact its “second call” distributor.

United’s marketing and logistic capabilities differentiate the Company from its competitors by providing exceptional value-added services to resellers:

 

   

A broad line of products for one-stop shopping with high levels of products in stock, and an average line fill rate better than 97% in 2012;

   

Comprehensive printed product catalogs for easy shopping and reference guides as well as digital catalogs and search capabilities to power e-commerce Web sites;

   

Advanced e-business capabilities including software alternatives to help reseller customers run their businesses and to help resellers and suppliers target profitable growth opportunities;

   

Delivery of integrated marketing campaigns that include annual marketing planning, the use of direct mail and emails, customer business reviews, and enhanced reseller branding;

   

Extensive promotional materials and marketing programs to increase sales and build loyalty;

   

Efficient order processing, resulting in a 99.7% order accuracy rate for the year;

   

High-quality customer service from several state-of-the-art customer care centers;

   

National distribution capabilities that enable the Company to ship most products overnight to more than 90% of the U.S. and next day delivery to major cities in Mexico and Canada;

   

Training programs designed to help resellers improve their sales and marketing techniques;

   

End-consumer research to help resellers better understand their markets.

United’s marketing programs emphasize two other major strategies. First, the Company produces product content that is used to populate an extensive array of print and electronic catalogs for business product resellers. The printed catalogs usually are customized with each reseller’s name, then sold to the resellers who, in turn, distribute them to their customers. In addition, the Company typically produces a number of promotional publications each quarter. United also develops separate monthly, quarterly and semi-annual publications covering most of its product categories, including its private brand lines that offer a large selection of popular commodity products. United sends

 

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out weekly emails as part of its eDeals program to drive sales and promote specific products and solutions. Since catalogs and electronic content provide product exposure to end consumers and generate demand, United tries to maximize their distribution on behalf of its suppliers and customers.

Second, United provides its resellers with a variety of dealer support and marketing services. These programs are designed to help resellers differentiate themselves by making it easier for customers to buy from them, and often allow resellers to reach customers they had not traditionally served.

Resellers can place orders with the Company through a variety of electronic order entry systems or by phone, fax and e-mail. Electronic order entry systems allow resellers to forward their customers’ orders directly to United, resulting in the delivery of pre-sold products to the reseller. In 2012, United received approximately 94% of its orders electronically.

Distribution

The Company uses a network of 72 distribution centers to provide over 130,000 items on a national basis to approximately 25,000 reseller customers. This network, combined with the Company’s depth and breadth of inventory in technology products, traditional office products, office furniture, janitorial and breakroom supplies, and industrial supplies, enables the Company to ship most products on an overnight basis to more than 90% of the U.S. and next day delivery to major cities in Mexico and Canada. United’s domestic operations generated approximately $5.0 billion of its approximately $5.1 billion in 2012 consolidated net sales, with its international operations contributing another $0.1 billion to 2012 net sales.

Distribution centers are supplemented with 38 re-distribution points across the nation to facilitate delivery. United has a dedicated fleet of approximately 526 trucks, most of which are under contract to the Company. This enables United to make direct deliveries to resellers from regional distribution centers and local distribution points.

The “Wrap and Label” program is another important service for resellers. It gives resellers the option to receive individually packaged orders ready to be delivered to their end consumers. For example, when a reseller places orders for several individual consumers, United can pick and pack the items separately, placing a label on each package with the consumer’s name, ready for delivery to the end consumer by the reseller. Resellers benefit from the “Wrap and Label” program because it eliminates the need to break down bulk shipments and repackage orders before delivering them to consumers.

In addition to providing value-adding programs for resellers, United also remains committed to reducing its operating costs. The Company continues to target the removal of costs through a combination of new and continuing activities. These activities include process improvement and work simplification activities that help increase efficiency throughout the business and improve customer satisfaction.

Purchasing and Merchandising

As a leading wholesale distributor of business products, United leverages its broad product selection as a key merchandising strategy. The Company orders products from approximately 1,400 manufacturers. This purchasing volume means United receives substantial supplier allowances and can realize significant economies of scale in its logistics and distribution activities. In 2012, United’s largest supplier was Hewlett-Packard Company, which represented approximately 18% of its total purchases.

The Company’s Merchandising Department is responsible for selecting merchandise and for managing the entire supplier relationship. Product selection is based on three factors: end-consumer acceptance; anticipated demand for the product; and the manufacturer’s total service, price and product quality. As part of its effort to create an integrated supplier approach, United introduced the “Preferred Supplier Program.” In exchange for working closely with United to maximize a combined market strategy and operating contribution, as well as demonstrating compliance with United’s supply requirements and a proven track record of successful partnership, participating suppliers’ products are treated as preferred brands in the Company’s marketing efforts.

 

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Competition

There is only one other nationwide broad line office products wholesale distributor in North America. United and this firm compete on the basis of breadth of product lines, availability of products, speed of delivery to resellers, order fill rates, net pricing to resellers, and the quality of marketing and other value-added services.

The Company also competes with specialty distributors of office products, office furniture, technology products, janitorial and breakroom supplies and industrial supplies. These distributors typically offer more limited product lines and compete nationally, regionally or locally. In most cases, competition is based primarily upon net pricing, minimum order quantity, speed of delivery, and value-added marketing and logistics services.

The Company also competes with manufacturers who often sell their products directly to resellers and may offer lower prices. United believes that it provides an attractive alternative to manufacturer direct purchases by offering a combination of value-added services, including 1) a broad line of business products from multiple manufacturers on a “one-stop shop” basis, 2) marketing and catalog programs, 3) same- to second-day delivery, 4) lower minimum order quantities, and 5) Wrap and Label capabilities.

Seasonality

United’s sales generally are relatively steady throughout the year. However, sales also reflect seasonal buying patterns for consumers of traditional office products. In particular, the Company’s sales of traditional office products usually are higher than average during January, when many businesses begin operating under new annual budgets and release previously deferred purchase orders. Janitorial and breakroom supplies sales are somewhat higher in the summer months. Industrial supplies sales are somewhat higher in summer months as well.

Employees

As of February 15, 2013, United employed approximately 6,100 people.

Management believes it has good relations with its associates. Approximately 580 of the shipping, warehouse and maintenance associates at certain of the Company’s Baltimore, Los Angeles and New Jersey distribution centers are covered by collective bargaining agreements. The bargaining agreements in the Los Angeles and New Jersey distribution centers were successfully renegotiated in 2011 and are set to expire in 2014. The bargaining agreement in Baltimore was renegotiated in 2012 and is scheduled to expire in 2015. The Company has not experienced any work stoppages during the past five years.

Availability of the Company’s Reports

The Company’s principal Web site address is www.unitedstationers.com. This site provides United’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K—as well as amendments and exhibits to those reports filed or furnished under Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) for free as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). In addition, copies of these filings (excluding exhibits) may be requested at no cost by contacting the Investor Relations Department:

United Stationers Inc.

Attn: Investor Relations Department

One Parkway North Boulevard

Suite 100

Deerfield, IL 60015-2559

Telephone: (847) 627-7000

E-mail: IR@ussco.com

 

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ITEM 1A.  RISK FACTORS.

Any of the risks described below could have a material adverse effect on the Company’s business, financial condition or results of operations. These risks are not the only risks facing United; the Company’s business operations could also be materially adversely affected by risks and uncertainties that are not presently known to United or that United currently deems immaterial.

United’s operating results depend on employment rates and the strength of the general economy.

The customers that United serves are affected by changes in economic conditions outside the Company’s control, including national, regional and local slowdowns in general economic activity and job markets. Demand for the products and services the Company offers, particularly in the office product, technology and furniture categories, is affected by the number of white collar and other workers employed by the businesses United’s customers serve. The persistent high unemployment rates in recent years have adversely affected United’s results of operations. If employment continues to grow at a slow rate, demand for the products the Company sells will be adversely affected.

United may not achieve its growth, cost-reduction and margin enhancement goals.

United has set goals to improve its profitability over time by reducing expenses, growing sales to existing and new customers, and increasing sales of higher margin products as a percentage of total sales. There can be no assurance that United will achieve its enhanced profitability goals. Factors that could have a significant effect on the Company’s efforts to achieve these goals include the following:

 

   

Failure to achieve the Company’s revenue and margin growth objectives in its sales channels and product categories;

   

Impact on gross margin from competitive pricing pressures;

   

Failure to maintain or improve the Company’s sales mix between lower margin and higher margin products;

   

Inability to pass along cost increases from United’s suppliers to its customers;

   

Failure to increase sales of United’s private brand products; and

   

Failure of customers to adopt the Company’s product pricing and marketing programs.

The loss of one or more significant customers could significantly reduce United’s revenues and profitability.

In 2012 United’s largest customer accounted for 11.6% of net sales and United’s top five customers accounted for approximately 26% of net sales. Increasing direct purchases by major customers from manufacturers, as well as the loss of one or more key customers, changes in the sales mix or sales volume to key customers, or a significant downturn in the business or financial condition of any of them could significantly reduce United’s sales and profitability.

United’s reliance on supplier allowances and promotional incentives could impact profitability.

Supplier allowances and promotional incentives that are often based on volume contribute significantly to United’s profitability. If United does not comply with suppliers’ terms and conditions, or does not make requisite purchases to achieve certain volume hurdles, United may not earn certain allowances and promotional incentives. Additionally, suppliers may reduce the allowances they pay United if they conclude that the value United creates does not justify the allowances. If United’s suppliers reduce or otherwise alter their allowances or promotional incentives, United’s profit margin for the sale of the products it purchases from those suppliers may decline. The loss or diminution of supplier allowances and promotional support could have an adverse effect on the Company’s results of operation.

United relies on independent resellers for a significant percentage of its net sales.

Sales to independent resellers account for a significant portion of United’s net sales. Independent resellers compete with national distributors and retailers that have substantially greater financial resources and technical and marketing capabilities. Over the years, several of the Company’s independent reseller customers have been acquired by competitors or have ceased operation. If United’s customer base of independent resellers declines, the Company’s business and results of operations may be adversely affected.

United operates in a competitive environment.

The Company operates in a competitive environment. Competition is based largely upon service capabilities and price, as the Company’s competitors include wholesalers that offer products that are the same as or similar to the products the Company offers to the same customers or potential customers. United also faces competition from

 

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some of its own suppliers, which sell their products directly to United’s customers. These competitive pressures are exacerbated by the ongoing decline in the overall demand for office products, driven in part by changes in technology that alter the types of office products consumers’ use. The competitive arena is also increasingly shifting online. The Company’s financial condition and results of operations depend on its ability to compete effectively on price, product selection and availability, marketing support, logistics and other ancillary services; diversify its product offering; and provide services and capabilities that enable its customers to succeed online.

The loss of key suppliers or supply chain disruptions could decrease United’s revenues and profitability.

United believes its ability to offer a combination of well-known brand name products, competitively priced private brand products, and support services is an important factor in attracting and retaining customers. The Company’s ability to offer a wide range of products and services is dependent on obtaining adequate product supply and services from manufacturers or other suppliers. United’s agreements with its suppliers are generally terminable by either party on limited notice. The loss of, or a substantial decrease in the availability of products or services from key suppliers at competitive prices could cause the Company’s revenues and profitability to decrease. In addition, supply interruptions could arise due to transportation disruptions, labor disputes or other factors beyond United’s control. Disruptions in United’s supply chain could result in a decrease in revenues and profitability. Many of the Company’s independent resellers use third party technology vendors (“3PVs”) to automate their business operations. The 3PVs play an important role in the independent dealer channel, as most purchase orders, order confirmations, stock availability checks, invoices and advanced ship notices are exchanged between United and its independent resellers over 3PV networks. The 3PVs also provide e-commerce portals that United’s customers use to transact online business with their customers. If United is unable to obtain services from one or more 3PVs on terms that are acceptable to United, or if a 3PV fails to provide quality services to United’s customers, United’s business, financial condition and results of operations could be adversely affected.

A significant disruption or failure of the Company’s information technology systems or in its design, implementation or support of the information technology systems and e-commerce services it provides to customers could disrupt United’s business, result in increased costs and decreased revenues, harm the Company’s reputation and expose the Company to liability.

The Company relies on information technology in all aspects of its business, including managing and replenishing inventory, filling and shipping customer orders, and coordinating sales and marketing activities. Several of the Company’s software applications are legacy systems which the Company must periodically update, enhance and replace. A significant disruption or failure of the Company’s existing information technology systems or in the Company’s development and implementation of new systems could put it at a competitive disadvantage and could adversely affect its results of operations.

The Company also develops, licenses and implements business management software and e-commerce services for customers. Defects or errors in the software or e-commerce services the Company provides to customers or failure to adequately protect customer information could result in increased costs, litigation, customer attrition, reduced market acceptance of the Company’s goods and services and damage to the Company’s reputation.

United is exposed to the credit risk of its customers.

United extends credit to its customers. The failure of a significant customer or a significant group of customers to timely pay all amounts due United could have a material adverse effect on the Company’s financial condition and results of operations. The Company’s trade receivables are generally unsecured or subordinated to other lenders, and many of the Company’s customers are thinly capitalized. The extension of credit involves considerable judgment and is based on management’s evaluation of a variety of factors, including customers’ financial condition and payment history and the availability of collateral to secure customers’ receivables. There can be no assurance that United has assessed and will continue to assess the creditworthiness of its existing or future customers accurately.

United must manage inventory effectively in order to maximize supplier allowances while minimizing excess and obsolete inventory.

To maximize supplier allowances and minimize excess and obsolete inventory, United must project end-consumer demand for over 130,000 items in stock. If United underestimates demand for a particular manufacturer’s products, the Company will lose sales, reduce customer satisfaction, and earn a lower level of allowances from that manufacturer. If United overestimates demand, it may have to liquidate excess or obsolete inventory at a loss.

 

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United is focusing on increasing its sales of private brand products. These products can present unique inventory challenges. United sources some of its private brand products overseas, resulting in longer order-lead times than for comparable products sourced domestically. These longer lead-times make it more difficult to forecast demand accurately and require larger inventory investments to support high service levels.

United may not be successful in identifying, consummating and integrating future acquisitions.

Historically, part of United’s growth and expansion into new product categories or markets has come from targeted acquisitions. Going forward, United may not be able to identify attractive acquisition candidates or complete the acquisition of any identified candidates at favorable prices and upon advantageous terms. Furthermore, competition for attractive acquisition candidates may limit the number of acquisition candidates or increase the overall costs of making acquisitions. Acquisitions involve significant risks and uncertainties, including difficulties integrating acquired business systems and personnel with United’s business; the potential loss of key employees, customers or suppliers; the assumption of liabilities and exposure to unforeseen liabilities of acquired companies; the difficulties in achieving target synergies; and the diversion of management attention and resources from existing operations. Difficulties in identifying, completing or integrating acquisitions could impede United’s revenues, profitability and net worth. In addition, some of the Company’s acquisitions have included foreign operations, and future acquisitions may increase United’s international presence. International operations present a variety of unique risks, including the costs and difficulties of managing foreign enterprises, limitations on the repatriation and investment of funds, currency fluctuations, cultural differences that affect customer preferences and business practices, and unstable political or economic conditions. There can be no assurance that United will manage these risks effectively.

The security of private information United’s customers provide to the Company could be compromised.

Through United’s sales, marketing and e-commerce activities, the Company collects and stores personally identifiable information and credit card data that customers provide when they buy products or services, enroll in promotional programs, or otherwise communicate with United. United also gathers and retains information about its employees in the normal course of business. United uses vendors to assist with certain aspects of United’s business and, to enable the vendors to perform services for United, the Company shares some of the information provided by customers and employees. Similarly, to enable United to provide goods and services to its customers, United’s customers share with United information their customers provide to them. Loss or disclosure of customer or business information by United or its vendors could disrupt the Company’s operations and expose United to claims from customers, financial institutions, regulators, payment card associations and other persons, any of which could have an adverse effect on the Company’s business, financial condition and results of operations. In addition, compliance with more stringent privacy and information security laws and standards may result in significant expense due to increased investment in technology and the development of new operational processes.

The Company is subject to costs and risks associated with laws, regulations, and industry standards affecting United’s business.

United is subject to a wide range of state, federal and foreign laws and industry standards, including laws and standards regarding labor and employment, government contracting, product liability, the storage and transportation of hazardous materials, privacy and data security, imports and exports, and intellectual property, as well as laws relating to the Company’s international operations, including the Foreign Corrupt Practices Act and foreign tax laws. These laws, regulations and standards may change, sometimes significantly, as a result of political or economic events. The complex legal and regulatory environment exposes United to compliance and litigation costs and risks that could materially affect United’s operations and financial results.

United’s financial condition and results of operation depend on the availability of financing sources to meet its business needs.

The Company depends on various external financing sources to fund its operating, investing, and financing activities. The Company’s financing agreements include covenants by the Company to maintain certain financial ratios and comply with other obligations. If the Company violates a covenant or otherwise defaults on its obligations under a financing agreement, the Company’s lenders may refuse to extend additional credit, demand repayment of outstanding indebtedness and terminate the financing agreements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” included below under Item 7.

The Company’s primary external financing sources terminate or mature in one to three years. If the Company defaults on its obligations under a financing agreement or is unable to obtain or renew financing sources on commercially reasonable terms, its business and financial condition could be materially adversely affected.

 

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The Company relies heavily on the ability to recruit, retain and develop high-performing managers and the lack of execution in these areas could harm the Company’s ability to carry out its business strategy.

United’s ability to implement its business strategy depends largely on the efforts, skills, abilities and judgment of the Company’s executive management team. United’s success also depends to a significant degree on its ability to recruit and retain sales and marketing, operations and other senior managers. The Company may not be successful in attracting and retaining these employees, which may in turn have an adverse effect on the Company’s results of operations and financial condition.

Unexpected events could disrupt normal business operations, which might result in increased costs and decreased revenues.

Unexpected events, such as hurricanes, fire, war, terrorism, and other natural or man-made disruptions, may increase the cost of doing business or otherwise impact United’s financial performance. In addition, damage to or loss of use of significant aspects of the Company’s infrastructure due to such events could have an adverse affect on the Company’s operating results and financial condition.

ITEM 1B.  UNRESOLVED COMMENT LETTERS.

None.

ITEM 2.  PROPERTIES.

The Company considers its properties to be suitable with adequate capacity for their intended uses. The Company evaluates its properties on an ongoing basis to improve efficiency and customer service and leverage potential economies of scale. Substantially all owned facilities are subject to liens under USSC’s debt agreements (see the information under the caption “Liquidity and Capital Resources” included below under Item 7). As of December 31, 2012, these properties consisted of the following:

Offices. The Company leases approximately 205,000 square feet for its corporate headquarters in Deerfield, Illinois. Additionally the Company owns 49,000 square feet of office space in Orchard Park, New York and leases 39,000 square feet of office space in Tulsa, Oklahoma, 20,000 square feet in Muskogee, Oklahoma and 16,300 square feet in Denver, Colorado.

Distribution Centers. The Company utilizes 72 distribution centers totaling approximately 12.5 million square feet of warehouse space. Of the 12.5 million square feet of distribution center space, 2.2 million square feet is owned and 10.3 million square feet is leased.

ITEM 3.  LEGAL PROCEEDINGS.

The Company is involved in legal proceedings arising in the ordinary course of or incidental to its business. The Company has established reserves, which are not material, for potential losses that are probable and reasonably estimable that may result from those proceedings. In many cases, however, it is difficult to determine whether a loss is probable or even possible or to estimate the amount or range of potential loss, particularly where proceedings may be in relatively early stages or where plaintiffs are seeking substantial or indeterminate damages. Matters frequently need to be more developed before a loss or range of loss can reasonably be estimated. The Company believes that pending legal proceedings will be resolved with no material adverse effect upon its financial condition or results of operations.

 

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of security holders during the fourth quarter of 2012.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company are as follows:

 

Name, Age and
Position with the Company

  

Business Experience

P. Cody Phipps
51, President and Chief Executive Officer

   P. Cody Phipps was promoted to Chief Executive Officer in May 2011. Prior to that time he served as the Company’s President and Chief Operating Officer from September 2010 and as the Company’s President, United Stationers Supply from October 2006 to September 2010. He joined the Company in August 2003 as its Senior Vice President, Operations. Prior to joining the Company, Mr. Phipps was a partner at McKinsey & Company, Inc., a global management consulting firm where he led the firm’s North American Operations Effectiveness Practice and co-founded and led its Service Strategy and Operations Initiative. Prior to joining McKinsey, Mr. Phipps worked as a consultant with The Information Consulting Group, a systems consulting firm, and as an IBM account marketing representative.

S. David Bent
52, Senior Vice President and Chief Information Officer

   S. David Bent was named as the Company’s Senior Vice President, eBusiness Services and Corporate Chief Information officer in July 2009. He joined the Company as its Senior Vice President and Chief Information Officer in May 2003. From August 2000 until such time, Mr. Bent served as the Corporate Vice President and Chief Information Officer of Acterna Corporation, a multi-national telecommunications test equipment and services company, and also served as General Manager of its Software Division from October 2002. Previously, he spent 18 years with the Ford Motor Company. During his Ford tenure, Mr. Bent most recently served during 1999 and 2000 as the Chief Information Officer of Visteon Automotive Systems, a tier one automotive supplier, and from 1998 through 1999 as its Director, Enterprise Processes and Systems.

Eric A. Blanchard
56, Senior Vice President, General Counsel and Secretary

   Eric A. Blanchard has served as the Company’s Senior Vice President, General Counsel and Secretary since January 2006. From November 2002 until December 2006 he served as the Vice President, General Counsel and Secretary at Tennant Company. Previously Mr. Blanchard was with Dean Foods Company where he held the positions of Chief Operating Officer, Dairy Division from January 2002 to October 2002, Vice President and President, Dairy Division from 1999 to 2002 and General Counsel and Secretary from 1988 to 1999.

Timothy P. Connolly
49, President, Operations and Logistics Services

   Timothy P. Connolly was named as the Company’s President, Operations and Logistics Services in January 2011. Prior to this position he served as Senior Vice President, Operations from December 2006. From February 2006 to December 2006, Mr. Connolly was Vice President, Field Operations Support and Facility Engineering at the Field Support Center. He joined the Company in August 2003 as Region Vice President Operations, Midwest. Before joining the Company, Mr. Connolly was the Regional Vice President, Midwest Region for Cardinal Health where he directed operations, sales, human resources, finance, and customer service for one of Cardinal’s largest pharmaceutical distribution centers.

 

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Name, Age and
Position with the Company

  

Business Experience

Barbara J. Kennedy
46, Senior Vice President, Human Resources

   Barbara J. Kennedy has been United Stationers’ Senior Vice President, Human Resources since August 2008. Before she joined the Company, Ms. Kennedy held various human resources management positions, serving most recently as Executive Vice President, Human Resources, Safety, Recruiting and Driver Services for Swift Transportation. Prior to joining Swift, she served as Vice President, Human Resources at Barr-Nunn Transportation.

Fareed A. Khan
47, Senior Vice President and Chief Financial Officer

   Fareed A. Khan was appointed to the position of Senior Vice President and Chief Financial Officer effective July 18, 2011. Prior to his new position, he spent 12 years with USG Corporation where he most recently served as executive vice president, finance and strategy. His responsibilities included leading all finance, accounting, corporate strategy, information technology, pension, and investor relations activities. Prior to that, Mr. Khan served as president and chief executive officer of USG Building Systems, USG Corporations largest operating unit comprised of the United States Gypsum Company and USG Interiors Inc. Other senior level management positions held by Mr. Khan at USG included a variety of strategy, business development, marketing, supply chain management, and general management roles. Before joining USG in 1999, Mr. Khan was a consultant with McKinsey & Company, where he served global clients on a variety of projects including acquisition analysis, supply chain optimization, and organization redesign.

Todd A. Shelton
46, President, United Stationers Supply

   Todd Shelton was appointed President, United Stationers Supply, on September 1, 2010. Prior to his new position, he served as President of Lagasse, Inc., a wholly-owned subsidiary of United Stationers Supply Co. Mr. Shelton previously held the position of Chief Operating Officer of Lagasse following the acquisition of the Sweet Paper Sales Company in 2005. He joined Lagasse in 2001 as Vice President, Finance and has held various leadership roles in sales, customer service, operations, and procurement. Before joining Lagasse, Mr. Shelton was a Partner and Vice President, Marketing at Wes-Pak, Inc., a privately-held manufacturer of retail and medical products. He began his career at Baxter Healthcare with roles in finance, IT, sales and marketing.

Executive officers are elected by the Board of Directors. Except as required by individual employment agreements between executive officers and the Company, there exists no arrangement or understanding between any executive officer and any other person pursuant to which such executive officer was elected. Each executive officer serves until his or her successor is appointed and qualified or until his or her earlier removal or resignation.

 

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PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Common Stock Information

USI’s common stock is quoted through the NASDAQ Global Select Market (“NASDAQ”) under the symbol USTR. The following table shows the high and low closing sale prices per share for USI’s common stock as reported by NASDAQ:

 

     High      Low  

2012

     

First Quarter

   $ 34.73       $ 28.81   

Second Quarter

     30.83         24.64   

Third Quarter

     27.79         24.19   

Fourth Quarter

     31.39         26.09   

2011

     

First Quarter

   $ 35.71       $ 31.05   

Second Quarter

     37.06         32.68   

Third Quarter

     36.38         26.04   

Fourth Quarter

     34.52         26.01   

On February 15, 2013, the closing sale price of Company’s common stock as reported by NASDAQ was $34.70 per share. On February 15, 2013, there were approximately 501 holders of record of common stock. A greater number of holders of USI common stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions.

On March 1, 2011, the Company’s Board of Directors approved a two-for-one stock split of the Company’s issued common shares, which was paid in the form of a 100% stock dividend. All stockholders received one additional share on May 31, 2011 for each share owned at the close of business on the record date of May 16, 2011. This did not change the proportionate interest that a stockholder maintains in the Company. All shares and per share amounts in this report reflect the two-for-one stock split.

 

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Stock Performance Graph

The following graph compares the performance of the Company’s common stock over a five-year period with the cumulative total returns of (1) The NASDAQ Stock Market Index (U.S. companies), and (2) a group of companies included within Value Line’s Office Equipment Industry Index. The graph assumes $100 was invested on December 31, 2007 in the Company’s common stock and in each of the indices and assumes reinvestment of all dividends (if any) at the date of payment. The following stock price performance graph is presented pursuant to SEC rules and is not meant to be an indication of future performance.

 

LOGO

 

     2007      2008      2009      2010      2011      2012  

United Stationers (USTR)

   $ 100.00       $ 72.47       $ 123.09       $ 138.09       $ 143.25       $ 138.95   

NASDAQ (U.S. Companies)

   $ 100.00       $ 61.17       $ 87.93       $ 104.13       $ 104.68       $ 123.84   

Value Line Office Equipment

   $ 100.00       $ 71.04       $ 98.15       $ 114.00       $ 85.81       $ 80.96   

Common Stock Repurchases

During 2012, the Company repurchased 2.5 million shares of common stock at an aggregate cost of $69.9 million. During 2011, the Company repurchased 5.1 million shares of common stock at an aggregate cost of $162.7 million. As of February 15, 2013, the Company had approximately $55.1 million remaining under share repurchase authorizations from its Board of Directors.

Purchases may be made from time to time in the open market or in privately negotiated transactions. Depending on market and business conditions and other factors, the Company may continue or suspend purchasing its common stock at any time without notice.

Acquired shares are included in the issued shares of the Company and treasury stock, but are not included in average shares outstanding when calculating earnings per share data.

 

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The following table reports purchases of equity securities during the fourth quarter of fiscal 2012 by the Company and any affiliated purchasers pursuant to SEC rules, including any treasury shares withheld to satisfy employee withholding obligations upon vesting of restricted stock and the execution of stock option exercises.

 

Period

   Total Number
of Shares
Purchased
     Average Price
Paid per Share
     Total Number of
Shares Purchased
as Part of a
Publicly
Announced
Program
     Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the
Program
 

October 1, 2012 to October 31, 2012

     90,351       $ 26.57         90,351       $ 55,093,151   

November 1, 2012 to November 30, 2012

                             55,093,151   

December 1, 2012 to December 31, 2012

                             55,093,151   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Fourth Quarter

     90,351       $ 26.57         90,351       $ 55,093,151   
  

 

 

    

 

 

    

 

 

    

 

 

 

Stock and Cash Dividends

On March 1, 2011, the Company’s Board of Directors approved a two-for-one stock split of the Company’s issued common shares, which was paid in the form of a 100% stock dividend. All stockholders received one additional share on May 31, 2011 for each share owned at the close of business on the record date of May 16, 2011. This did not change the proportionate interest that a stockholder maintains in the Company. All shares and per share amounts in this report reflect the two-for-one stock split.

The following table sets forth the quarterly dividends paid by the Company over the past two years.

 

Board Approval

 

Record Date

 

Payment Date

 

Dividend Per Share

March 1, 2011

  March 15, 2011   April 15, 2011   $0.13

May 11, 2011

  June 15, 2011   July 15, 2011   $0.13

July 14, 2011

  September 15, 2011   October 14, 2011   $0.13

October 19, 2011

  December 15, 2011   January 13, 2012   $0.13

February 24, 2012

  March 15, 2012   April 13, 2012   $0.13

May 16, 2012

  June 15, 2012   July 13, 2012   $0.13

July 12, 2012

  September 14, 2012   October 15, 2012   $0.13

October 17, 2012

  December 14, 2012   January 15, 2013   $0.14

Securities Authorized for Issuance under Equity Compensation Plans

The information required by Item 201(d) of Regulation S-K (Securities Authorized for Issuance under Equity Compensation Plans) is included in Item 12 of this Annual Report.

 

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ITEM 6.  SELECTED FINANCIAL DATA.

The selected consolidated financial data of the Company for the years ended December 31, 2008 through 2012 have been derived from the Consolidated Financial Statements of the Company, which have been audited by Ernst & Young LLP, an independent registered public accounting firm. The adoption of new accounting pronouncements, changes in certain accounting policies, and reclassifications are reflected in the financial information presented below. The selected consolidated financial data below should be read in conjunction with, and is qualified in its entirety by, Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements of the Company included in Items 7 and 8, respectively, of this Annual Report. Except for per share data, all amounts presented are in thousands:

 

     Years Ended December 31,  
     2012     2011     2010     2009     2008  

Income Statement Data:

          

Net sales

   $ 5,080,106      $ 5,005,501      $ 4,832,237      $ 4,710,291      $ 4,986,878   

Cost of goods sold

     4,305,502        4,265,422        4,101,682        4,019,650        4,246,199   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     774,604        740,079        730,555        690,641        740,679   

Operating expenses (1):

          

Warehousing, marketing and administrative expenses

     573,693        541,752        520,754        503,013        548,222   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     200,911        198,327        209,801        187,628        192,457   

Interest expense

     23,619        27,592        26,229        27,797        28,563   

Interest income

     (343     (223     (237     (474     (1,048

Other (income) expense, net (2)

            (1,918     809        204        8,079   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     177,635        172,876        183,000        160,101        156,863   

Income tax expense

     65,805        63,880        70,243        59,116        58,449   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 111,830      $ 108,996      $ 112,757      $ 100,985      $ 98,414   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share—basic:

          

Net income per common share—basic

   $ 2.77      $ 2.49      $ 2.43      $ 2.16      $ 2.09   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share—diluted:

          

Net income per common share—diluted

   $ 2.73      $ 2.42      $ 2.34      $ 2.10      $ 2.06   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per share

   $ 0.53      $ 0.52      $      $      $   

Balance Sheet Data:

          

Working capital (3)

   $ 755,578      $ 767,761      $ 750,653      $ 721,503      $ 807,631   

Total assets (3)

     2,075,204        1,994,882        1,908,663        1,808,516        1,881,516   

Total debt (4)

     524,376        496,757        441,800        441,800        663,100   

Total stockholders’ equity

     738,092        704,679        759,598        706,713        565,638   

Statement of Cash Flows Data:

          

Net cash provided by (used in) operating activities

   $ 189,814      $ 130,363      $ 114,823      $ 239,395      $ (129,305

Net cash used in investing activities

     (107,266     (27,918     (42,745     (14,829     (28,366

Net cash (used in) provided by financing activities

     (63,457     (111,929     (69,355     (216,667     146,430   

 

(1) Includes severance and other charges/reversals and gains in the following years: 2012—$6.2 million charge for a distribution network optimization and cost reduction program. 2011—$0.7 million reversal of a charge for early retirement/workforce realignment, $4.4 million charge for a transition agreement with the company’s former Chief Executive Officer, and a $1.6 million asset impairment charge. 2010—$11.9 million liability reversal for vacation pay policy change, $8.8 million liability reversal for Retiree Medical Plan termination, and $9.1 million charge for early retirement/workforce realignment. 2009—$3.4 million severance charge. 2008—$9.8 million gain on sales of three buildings and an unfavorable $6.7 million asset impairment charge.

 

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(2) Primarily represents items in the following years: 2011—a reversal of prior acquisition earn-out and deferred payment liabilities. 2010—an accounting charge to bring prior acquisition earn-out liabilities to fair value. 2008 through 2009—a loss on the sale of certain trade accounts receivable through the Company’s Prior Receivables Securitization Program.
(3) In accordance with Generally Accepted Accounting Principles (“GAAP”), working capital and total assets in 2008 exclude $23.0 million of certain trade accounts receivable sold through the Company’s Prior Receivables Securitization Program.
(4) Total debt includes current maturities where applicable.

FORWARD LOOKING INFORMATION

This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. Forward-looking statements often contain words such as “expects”, “anticipates”, “estimates”, “intends”, “plans”, “believes”, “seeks”, “will”, “is likely”, “scheduled”, “positioned to”, “continue”, “forecast”, “predicting”, “projection”, “potential” or similar expressions. Forward-looking statements include references to goals, plans, strategies, objectives, projected costs or savings, anticipated future performance, results or events and other statements that are not strictly historical in nature. These forward-looking statements are based on management’s current expectations, forecasts and assumptions. This means they involve a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied here. These risks and uncertainties include, without limitation, those set forth above under the heading “Risk Factors.”

Readers should not place undue reliance on forward-looking statements contained in this Annual Report on Form 10-K. The forward-looking information herein is given as of this date only, and the Company undertakes no obligation to revise or update it.

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion should be read in conjunction with both the information at the end of Item 6 of this Annual Report on Form 10-K appearing under the caption, “Forward Looking Information”, and the Company’s Consolidated Financial Statements and related notes contained in Item 8 of this Annual Report.

Company Overview

The Company is a leading wholesale distributor of business products, with 2012 net sales of approximately $5.1 billion. The Company sells its products through a national distribution network of 72 distribution centers to over 25,000 resellers, who in turn sell directly to end consumers.

Key Trends and Recent Results

The following is a summary of selected trends, events or uncertainties that the Company believes may have a significant impact on its future performance.

 

   

The 2012 strategy was guided by five focus areas, including: 1) investing in growth markets such as industrial, janitorial and breakroom, and new channels; 2) optimizing the Company’s distribution network; 3) structuring the organization for success; 4) driving additional cost savings in the Company’s War on Waste (WOW) program; and 5) strengthening the Company’s value proposition and improving margins.

   

The Company is beginning to see long-term declining demand trends in certain office products categories as a result of the digitization of the workplace. In addition, online sales of these products continue to gain a larger share of the market. The Company’s core independent and national account customers value the scale and services that United provides in helping them succeed in this changing marketplace.

   

The Company continues to show progress in many areas, continuing to outperform certain segments in the markets in which it competes, improving margins, lowering costs in certain areas while continuing to invest in growth areas of the business, generating solid cash flow, and returning capital to shareholders. The Company’s recent acquisition of O.K.I. Supply Co. (OKI) is expected to increase the Company’s industrial

 

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platform to about 12% of total annual consolidated revenue and demonstrates the Company’s strategic focus to expand the role of wholesale distribution services into areas where they are currently underpenetrated. More information related to this acquisition is noted below.

   

The Company has been successful in outperforming certain segments in the markets in which it competes as a result of its continued focus on building capabilities that help customers and suppliers capitalize on opportunities in an evolving market. This progress allows the Company to enter 2013 with momentum to continue driving its “Winning-from-the-Middle” strategy, despite the continued weak economy.

   

The Company is not counting on any improvement in the economy or jobs environment, meaning that continued progress needs to come as a result of strong execution of its strategies. In addition, the changing market requires the Company to adapt and evolve proactively and from a position of strength. As a result, the Company announced a first quarter 2013 workforce reduction and facility closure program as part of the Company’s efforts to continue optimizing its distribution network and structuring the organization for success. These actions are expected to result in a pre-tax charge in the range of $9 million to $11 million for certain OKI facility closures, severance costs, and other related expenses. Cash outflows will occur primarily through 2014. Annualized savings associated with these actions are expected to exceed the costs of the charge, with most of the savings materializing in early 2014. Management plans to invest a portion of these savings in growth and other strategic initiatives.

   

Sales growth of 1.9%, workday adjusted, for 2012 included over 17% growth in the industrial supplies product category. Excluding OKI, consolidated sales growth was 1.5%, workday adjusted, and industrial supplies sales grew by nearly 12%. Janitorial and breakroom supplies category sales also grew by over 5% versus 2011. The favorable results were impacted by softening market conditions but aided by continued implementation of strategic initiatives including expanding market coverage and growing wholesale penetration in these categories. These advances were partially offset by declines in technology products of 3.5%. Office products and furniture category sales were relatively flat compared to the prior year.

   

Diluted earnings per share for 2012 were $2.73 compared to $2.42 in 2011. Adjusted earnings per share in 2012 grew 12% to $2.82 from an adjusted $2.51 in 2011. Refer to the Adjusted Operating Income, Net Income and Earnings Per Share table included later in this section for more detail on the adjustments. Earnings per share growth was achieved through higher operating income of $0.05 per share; the impact of share repurchases of $0.25 per share; and lower interest expense of $0.06 per share. This favorable earnings growth was partially offset by the favorable 2011 impact of renegotiated acquisition related earn-outs which did not repeat in 2012 of $0.03 per share.

   

Gross margin as a percent of sales for 2012 was 15.2% versus 14.8% in 2011. This margin increase was mainly due to higher inventory purchase-related supplier allowances and WOW initiative savings. These improvements were partially offset by competitive pricing pressures and a less favorable margin mix of product sales.

   

Operating expenses in 2012 totaled $573.7 million or 11.3% of sales. Adjusted operating expenses in 2012 were $567.4 million or 11.2% of sales, excluding the previously reported $6.2 million pre-tax charge for the distribution network optimization and targeted cost reduction program. Adjusted operating expenses in 2011 were $536.4 million or 10.7% of sales, which excluded $0.7 million for a partial reversal of a workforce realignment charge, a $4.4 million equity compensation charge related to a transition agreement with the Company’s former chief executive officer, as well as a $1.6 million asset impairment charge related to an equity investment. Higher employee-related expenses and increased depreciation/amortization were partially offset by lower bad debt expense and savings from WOW initiatives.

   

Operating income in 2012 was $200.9 million or 4.0% of sales, compared with $198.3 million or 4.0% of sales in the prior year. Adjusted operating income was $207.2 million or 4.1% of sales, compared with $203.6 million or 4.1% of sales in 2011.

   

Operating cash flows for 2012 were $189.8 million versus $130.4 million in 2011. The improvement in 2012 operating cash flows was mainly due to stronger earnings combined with lower working capital needs. Cash flow used in investing activities, including net capital expenditures and acquisitions, totaled $107.3 million in 2012. Included in the 2012 amount was $75.3 million related to the acquisition of OKI. Gross capital expenditures totaled $32.8 million in 2012, compared to $28.0 million in 2011.

   

During 2012, the Company repurchased 2.5 million shares for $69.9 million, which was partially funded by additional borrowings under the company’s debt facilities. The Company also paid $21.3 million in dividends during the year. The amount remaining under Board share repurchase authorizations at December 31, 2012 was $55.1 million.

 

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On October 17, 2012, the Board of Directors approved a $0.14 per share dividend to shareholders of record on December 14, 2012, paid on January 15, 2013. Subsequently, on February 20, 2013, the Board of Directors approved a $0.14 per share dividend to shareholders of record on March 15, 2013 payable on April 15, 2013.

   

During the fourth quarter of 2012, the Company acquired 100% of the outstanding shares of OKI for an all cash purchase price of $90 million. OKI has consolidated annual revenues of approximately $150 million across its domestic U.S. platform and its operations in Canada and Dubai, UAE. The Company’s net cash outflow as a result of this transaction was $75.3 million as $4.5 million was reserved for as payable upon completion of a two year indemnification period. There was also approximately $10 million in cash on the balance sheet of OKI upon acquisition.

   

The Company had approximately $985 million of total committed debt capacity at December 31, 2012. Outstanding debt at December 31, 2012 and 2011 was $524.4 million and $496.8 million, respectively. Debt-to-total capitalization at the end of 2012 increased to 41.5% from 41.3% for the prior year. On January 18, 2013, the Company entered into an amended receivables securitization program which, among other things, secured lower cost financing and increased the maximum amount of financing from $150 million to $200 million and extended the term of the program through January 18, 2016.

Critical Accounting Policies, Judgments and Estimates

The Company’s significant accounting policies are more fully described in Note 2 of the Consolidated Financial Statements. As described in Note 2, the preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results may differ from those estimates. The Company believes that such differences would have to vary significantly from historical trends to have a material impact on the Company’s financial results.

The Company’s critical accounting policies are most significant to the Company’s financial condition and results of operations and require especially difficult, subjective or complex judgments or estimates by management. In most cases, critical accounting policies require management to make estimates on matters that are uncertain at the time the estimate is made. The basis for the estimates is historical experience, terms of existing contracts, observance of industry trends, information provided by customers or vendors, and information available from other outside sources, as appropriate. These critical accounting policies include the following:

Supplier Allowances

Supplier allowances (fixed or variable) are common practice in the business products industry and have a significant impact on the Company’s overall gross margin. Gross margin is determined by, among other items, file margin (determined by reference to invoiced price), as reduced by customer discounts and rebates as discussed below, and increased by supplier allowances and promotional incentives. Receivables related to supplier allowances totaled $96.9 million and $81.3 million as of December 31, 2012 and 2011, respectively. These receivables are included in “Accounts receivable” in the Consolidated Balance Sheets.

The majority of the Company’s annual supplier allowances and incentives are variable, based solely on the volume and mix of the Company’s product purchases from suppliers. These variable allowances are recorded based on the Company’s annual inventory purchase volumes and product mix and are included in the Company’s Consolidated Financial Statements as a reduction to cost of goods sold, thereby reflecting the net inventory purchase cost. The remaining portion of the Company’s annual supplier allowances and incentives are fixed and are earned based primarily on supplier participation in specific Company advertising and marketing publications. Fixed allowances and incentives are taken to income through lower cost of goods sold as inventory is sold.

Supplier allowances and incentives attributable to unsold inventory are carried as a component of net inventory cost. The potential amount of variable supplier allowances often differs based on purchase volumes by supplier and product category. As a result, changes in the Company’s sales volume (which can increase or reduce inventory purchase requirements) and changes in product sales mix (especially because higher-margin products often benefit from higher supplier allowance rates) can create fluctuations in variable supplier allowances.

 

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Customer Rebates

Customer rebates and discounts are common practice in the business products industry and have a significant impact on the Company’s overall sales and gross margin. Such rebates are reported in the Consolidated Financial Statements as a reduction of sales. Accrued customer rebates of $56.3 million and $55.7 million as of December 31, 2012 and 2011, respectively, are primarily included as a component of “Accrued liabilities” in the Consolidated Balance Sheets.

Customer rebates include volume rebates, sales growth incentives, advertising allowances, participation in promotions and other miscellaneous discount programs. These rebates are paid to customers monthly, quarterly and/or annually. Volume rebates and growth incentives are based on the Company’s annual sales volumes to its customers. The aggregate amount of customer rebates depends on product sales mix and customer mix changes.

Revenue Recognition

Revenue is recognized when a service is rendered or when title to the product has transferred to the customer. Management records an estimate for future product returns related to revenue recognized in the current period. This estimate is based on historical product return trends and the gross margin associated with those returns. Management also records customer rebates that are based on annual sales volume to the Company’s customers. Annual rebates earned by customers include growth components, volume hurdle components, and advertising allowances.

Shipping and handling costs billed to customers are treated as revenues and recognized at the time title to the product has transferred to the customer. Freight costs are included in the Company’s Consolidated Financial Statements as a component of cost of goods sold and not netted against shipping and handling revenues. Net sales do not include sales tax charged to customers.

Additional revenue is generated from the sale of software licenses, delivery of subscription services (including the right to use software and software maintenance services), and professional services. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fees are fixed and determinable, and collection is considered probable. If collection is not considered probable, the Company recognizes revenue when the fees are collected. If fees are not fixed and determinable, the Company recognizes revenues when the fees become due from the customer.

Accounts Receivable

In the normal course of business, the Company extends credit to customers that satisfy pre-defined credit criteria. Accounts receivable, as shown in the Consolidated Balance Sheets, include such trade accounts receivable and are net of allowances for doubtful accounts and anticipated discounts. The Company makes judgments as to the collectability of trade accounts receivable based on historical trends and future expectations. Management estimates an allowance for doubtful accounts, which addresses the collectability of trade accounts receivable. This allowance adjusts gross trade accounts receivable downward to its estimated collectible or net realizable value. To determine the allowance for doubtful accounts, management reviews specific customer risks and the Company’s trade accounts receivable aging. Uncollectible trade receivable balances are written off against the allowance for doubtful accounts when it is determined that the trade receivable balance is uncollectible.

Goodwill and Intangible Assets

During the quarter ended September 30, 2011, the Company voluntarily changed the date of its annual goodwill and indefinite-lived intangible asset impairment test from the last day of the fourth quarter (December 31) to the first day of the fourth quarter (October 1). This change is preferable under the circumstances as it (1) results in better alignment with the Company’s annual strategic planning and forecasting process and (2) provides the Company with additional time in a given fiscal reporting period to accurately assess the recoverability of goodwill and indefinite-lived intangible assets and to measure any indicated impairment. The Company believes that the change in accounting principle related to the annual testing date will not delay, accelerate, or avoid an impairment charge. In accordance with Accounting Standards Codification (“ASC”) Topic 350 “Intangibles—Goodwill and other”, if

 

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indicators of impairment are deemed to be present, the Company would perform an interim impairment test and any resulting impairment loss would be charged to expense in the period identified. This change is not applied retrospectively as it is impracticable to do so because retrospective application would require the application of significant estimates and assumptions with the use of hindsight. Accordingly, the change was applied prospectively.

Goodwill is initially recorded based on the premium paid for acquisitions and is subsequently tested for impairment. The Company tests goodwill for impairment annually as mentioned and whenever events or circumstances indicate that an impairment may have occurred, such as a significant adverse change in the business climate, loss of key personnel or a decision to sell or dispose of a reporting unit. Determining whether an impairment has occurred requires valuation of the respective reporting unit, which the Company estimates using a discounted cash flow method. When available and as appropriate, comparative market multiples are used to corroborate discounted cash flow results. If this analysis indicates goodwill is impaired, an impairment charge would be taken based on the amount of goodwill recorded versus the implied fair value of goodwill computed by independent appraisals. The Company also adopted Accounting Standards Update (“ASU”) 2011-08 which allows for the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The Company applied this qualitative approach to two of its four reporting units. The other two reporting units were evaluated for impairment using the discounted cash flow and market based approach to determine fair value as mentioned. At the annual impairment test date of October 1, 2012, the Company’s reporting units did not fail the first step of the goodwill impairment test prescribed by related accounting guidance.

Intangible assets are initially recorded at their fair market values determined on quoted market prices in active markets, if available, or recognized valuation models. Intangible assets that have finite useful lives are amortized on a straight-line basis over their useful lives. Intangible assets that have indefinite useful lives are not amortized but are tested at least annually for impairment or whenever events or circumstances indicate impairment may have occurred. See Note 4 to the Consolidated Financial Statements.

Insured Loss Liability Estimates

The Company is primarily responsible for retained liabilities related to workers’ compensation, vehicle, and certain employee health benefits. The Company records expense for paid and open claims and an expense for claims incurred but not reported based upon historical trends and certain assumptions about future events. The Company has an annual per-person maximum cap, provided by a third-party insurance company, on certain employee medical benefits. In addition, the Company has a per-occurrence maximum on workers’ compensation and auto claims.

Inventories

Approximately 77% and 78% of total inventory as of December 31, 2012 and 2011, respectively has been valued under the last-in, first-out (“LIFO”) accounting method. LIFO results in a better matching of costs and revenues. The remaining inventory is valued under the first-in, first-out (“FIFO”) accounting method. Inventory valued under the FIFO and LIFO accounting methods is recorded at the lower of cost or market. If the Company had valued its entire inventory under the lower of FIFO cost or market, inventory would have been $107.8 million and $96.1 million higher than reported as of December 31, 2012 and 2011, respectively. The annual change in the LIFO reserve as of December 31, 2012, 2011 and 2010 resulted in an $11.7 million increase, an $11.4 million increase and a $3.8 million increase, respectively, in cost of sales. The change in the LIFO reserve in 2012 resulted in an $11.7 million increase in cost of goods sold which included a LIFO liquidation relating to decrements in the Company’s office products and technology LIFO pools. These decrements resulted in liquidation of LIFO inventory quantities carried at lower costs in prior years as compared with the cost of current year purchases. This liquidation resulted in LIFO income of $3.3 million which was more than offset by LIFO expense of $15.0 million related to current inflation for an overall net increase in cost of sales of $11.7 million as referenced above. The $11.4 million change in the LIFO reserve for 2011 includes the LIFO liquidation impact relating to a decrement in the Company’s furniture LIFO pool. This decrement resulted in the liquidation of LIFO inventory quantities carried at lower costs in prior years as compared with the cost of current year purchases. This liquidation resulted in LIFO income of $4.2 million which was more than offset by LIFO expense of $15.6 million related to current inflation or a net increase in cost of sales of $11.4 million referenced above. There were no LIFO liquidations in 2010.

 

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The Company also records adjustments to inventory for shrinkage. Inventory that is obsolete, damaged, defective or slow moving is recorded at the lower of cost or market. These adjustments are determined using historical trends and are adjusted, if necessary, as new information becomes available. The Company charges certain warehousing and administrative expenses to inventory each period with $33.3 million and $33.8 million remaining in inventory as of December 31, 2012 and December 31, 2011, respectively.

Derivative Financial Instruments

The Company’s risk management policies allow for the use of derivative financial instruments to prudently manage foreign currency exchange rate and interest rate exposure. The policies do not allow such derivative financial instruments to be used for speculative purposes. At this time, the Company uses interest rate swaps which are subject to the management, direction and control of its financial officers. Risk management practices, including the use of all derivative financial instruments, are presented to the Board of Directors for approval.

All derivatives are recognized on the balance sheet date at their fair value. All derivatives are currently in a net liability position and are included in “Accrued liabilities” and “Other Long-Term Liabilities” on the Consolidated Balance Sheets. The interest rate swaps that the Company has entered into are classified as cash flow hedges in accordance with accounting guidance on derivative instruments and hedging activities as they are hedging a forecasted transaction or the variability of cash flow to be paid by the Company. Changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge are recorded in other comprehensive income, net of tax, until earnings are affected by the forecasted transaction or the variability of cash flow, and then are reported in current earnings.

The Company formally documents all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives designated as cash flow hedges to specific forecasted transactions or variability of cash flow.

The Company formally assesses, at both the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting changes in cash flow of hedged items. When it is determined that a derivative is not highly effective as a hedge then hedge accounting is discontinued prospectively in accordance with accounting guidance on derivative instruments and hedging activities. This has not occurred as all cash flow hedges contain no ineffectiveness. See Note 19, “Derivative Financial Instruments”, for further detail.

Income Taxes

The Company accounts for income taxes using the liability method in accordance with the accounting guidance for income taxes. The Company estimates actual current tax expense and assesses temporary differences that exist due to differing treatments of items for tax and financial statement purposes. These temporary differences result in the recognition of deferred tax assets and liabilities. A provision has not been made for deferred U.S. income taxes on the undistributed earnings of the Company’s foreign subsidiaries as these earnings have historically been permanently invested except to the extent a liability was recorded in purchase accounting for the undistributed earnings of the foreign subsidiaries of OKI as of the date of the acquisition. It is not practicable to determine the amount of unrecognized deferred tax liability for such unremitted foreign earnings. The Company accounts for interest and penalties related to uncertain tax positions as a component of income tax expense.

Pension and Postretirement Health Benefits

To select the appropriate actuarial assumptions, management relied on current market conditions, historical information and consultation with and input from the Company’s outside actuaries. The expected long-term rate of return on plan assets assumption is based on historical returns and the future expectation of returns for each asset category, as well as the target asset allocation of the asset portfolio. There was no rate of compensation increase in each of the past three fiscal years.

 

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The following tables summarize the Company’s actuarial assumptions for discount rates, expected long-term rates of return on plan assets, and rates of increase in compensation for the years ended December 31, 2012, 2011 and 2010:

 

     2012     2011     2010  

Pension plan assumptions:

      

Assumed discount rate, general

     4.30     5.00     5.75

Assumed discount rate, union

     4.45     5.00     5.75

Rate of compensation increase

     —          —          —     

Expected long-term rate of return on plan assets

     7.75     7.75     7.75

Postretirement health benefits assumptions:

      

Assumed average healthcare cost trend

     n/a        n/a        3.00

Assumed discount rate

     n/a        n/a        5.75

On April 15, 2010, the Company notified the participants that it would terminate its post-retirement health care benefit plan (“Retiree Medical Plan”) effective December 31, 2010. The termination eliminated any future obligation of the Company to provide cost sharing benefits to current or future retirees. During the twelve month period ended December 31, 2010, the company recorded a reduction of operating expense (pre-tax) of $8.8 million for the reversal of actuarially-based liabilities resulting from the termination of the Retiree Medical Plan.

Calculating the Company’s obligations and expenses related to its pension and Retiree Medical Plan requires using certain actuarial assumptions. As more fully discussed in Notes 11 and 12 to the Consolidated Financial Statements included in Item 8 of this Annual Report, these actuarial assumptions include discount rates, expected long-term rates of return on plan assets, and rates of increase in compensation and healthcare costs. To select the appropriate actuarial assumptions, management relies on current market trends and historical information. The expected long-term rate of return on plan assets assumption is based on historical returns and the future expectation of returns for each asset category, as well as the target asset allocation of the asset portfolio. Pension expense for 2012 was $5.7 million, compared to $1.6 million in 2011 and $2.5 million in 2010. A one percentage point decrease in the assumed discount rate would have resulted in an increase in pension expense for 2012 of approximately $2.4 million and increased the year-end projected benefit obligation by $28.7 million. Additionally, a one percentage point decrease in the expected rate of return assumption would have resulted in an increase in the net periodic benefit cost for 2012 of approximately $1.3 million.

Results for the Years Ended December 31, 2012, 2011 and 2010

The following table presents the Consolidated Statements of Income as a percentage of net sales:

 

     Years Ended December 31,  
     2012     2011     2010  

Net sales

     100.00     100.00     100.00

Cost of goods sold

     84.76        85.22        84.88   
  

 

 

   

 

 

   

 

 

 

Gross margin

     15.24        14.78        15.12   

Operating expenses:

      

Warehousing, marketing and administrative expenses

     11.28        10.82        10.78   
  

 

 

   

 

 

   

 

 

 

Operating income

     3.96        3.96        4.34   

Interest expense, net

     0.46        0.55        0.54   

Other (income) expense, net

     —          (0.04     0.01   
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     3.50        3.45        3.79   

Income tax expense

     1.30        1.27        1.46   
  

 

 

   

 

 

   

 

 

 

Net income

     2.20     2.18     2.33
  

 

 

   

 

 

   

 

 

 

The above table includes all items that are separately itemized in the tables below for 2012 and 2011.

 

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Adjusted Operating Income and Diluted Earnings Per Share

The following table presents Adjusted Operating Income, Net Income and Diluted Earnings Per Share for the years ended December 31, 2012 and 2011 (in thousands, except share data). The table shows Adjusted Operating Income, Net Income and Diluted Earnings Per Share in 2012 excluding the effects of the distribution network optimization and cost reduction program, and in 2011, excluding the effects of an equity compensation charge, an asset impairment charge, and a reversal of a prior year charge for early retirement/workforce realignment (see “Comparison of Results for the Years Ended December 31, 2012 and 2011” below for more detail). Generally Accepted Accounting Principles require that the effects of these items be included in the Consolidated Statements of Income. The Company believes that excluding these items is an appropriate comparison of its ongoing operating results to last year and that it is helpful to provide readers of its financial statements with a reconciliation of these items to its Consolidated Statements of Income reported in accordance with Generally Accepted Accounting Principles.

 

     For the Years Ended December 31,  
     2012     2011  
     Amount     % to
Net Sales
    Amount     % to
Net Sales
 

Sales

   $ 5,080,106        100.00   $ 5,005,501        100.00
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

   $ 774,604        15.24   $ 740,079        14.78
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

   $ 573,693        11.28   $ 541,752        10.82

Early retirement/workforce realignment

     —          —          723        0.01

Equity compensation charge

     —          —          (4,409     (0.09 )% 

Facility closures and severance charge

     6,247        (0.12 )%      —          —     

Asset impairment charge

     —          —          (1,635     (0.03 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted operating expenses

   $ 567,446        11.16   $ 536,431        10.71
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

   $ 200,911        3.96   $ 198,327        3.96

Operating expense items noted above

     6,247        0.12     5,321        0.11
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted operating income

   $ 207,158        4.08   $ 203,648        4.07
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 111,830        $ 108,996     

Operating expense items noted above, net of tax

     3,873          3,920     
  

 

 

     

 

 

   

Adjusted net income

   $ 115,703        $ 112,916     
  

 

 

     

 

 

   

Net income per share—diluted

   $ 2.73        $ 2.42     

Per share operating expense items noted above

     0.09          0.09     
  

 

 

     

 

 

   

Adjusted net income per share—diluted

   $ 2.82        $ 2.51     
  

 

 

     

 

 

   

Adjusted net income per diluted share—growth rate over the prior year period

     12      

Weighted average number of common shares—diluted

     40,991          45,014     

 

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Comparison of Results for the Years Ended December 31, 2012 and 2011

Net Sales. Net sales for the year ended December 31, 2012 were approximately $5.1 billion, up 1.9%, workday adjusted, compared with $5.0 billion in 2011. The following table shows net sales by product category for 2012 and 2011 (in thousands):

 

     Years Ended
December 31,
 
     2012(1)      2011(1)  

Technology products

   $ 1,563,481       $ 1,625,842   

Traditional office products (including cut-sheet paper)

     1,366,604         1,360,855   

Janitorial and breakroom supplies

     1,282,379         1,222,225   

Industrial supplies

     409,266         349,370   

Office furniture

     324,698         325,009   

Freight revenue

     99,319         88,893   

Other

     34,359         33,307   
  

 

 

    

 

 

 

Total net sales

   $ 5,080,106       $ 5,005,501   
  

 

 

    

 

 

 

 

(1) Certain prior period amounts have been reclassified to conform to the current presentation. Such reclassifications include changes between several product categories due to several specific products being reclassified to different categories. These changes did not impact the Consolidated Statements of Income.

Sales in the technology products category decreased 3.5%, workday adjusted, in 2012 compared to 2011. This category represented the largest percentage of the Company’s consolidated net sales in 2012, accounting for 30.8% of sales. Technology sales declined mainly due to the loss of some business from a key national account customer.

Sales of traditional office products in 2012 rose 0.8%, workday adjusted, versus 2011. Traditional office supplies represented 26.9% of the Company’s consolidated net sales for 2012. While the demand for office products remains challenging, cut-sheet paper, private brands, public sector and new channels growth helped drive a slight increase in 2012. These improvements were partially offset by declines in national accounts.

Sales of janitorial and breakroom supplies increased 5.3%, workday adjusted, in 2012 as compared to 2011. This category accounted for 25.2% of the Company’s 2012 consolidated net sales. The Company has continued to outperform the market in this category, despite a slowing demand pattern. The Company is increasing share with current customers by cross-selling into new and other categories as well as by increasing its presence in the eCommerce arena. Some new national account business that was attained in 2012 also more than offset the shift of other national account business to direct purchases from manufacturers.

Sales of industrial supplies increased 17.6%, workday adjusted, accounting for 8.1% of the Company’s net sales in 2012. Excluding OKI sales, this category increased nearly 12% and was driven by strong execution of strategic growth initiatives despite a moderation in the underlying demand for industrial products. Growth in this category remains above market growth rates.

Office furniture sales in 2012 were up 0.3%, workday adjusted, compared to 2011. Office furniture accounted for approximately 6.4% of the Company’s 2012 consolidated net sales. These flat year-over-year sales continued to be negatively impacted by a challenging transactional market and a sourcing shift in some national account business.

The remainder of the Company’s consolidated net sales came from freight, advertising and software related revenue.

Gross Profit and Gross Margin Rate. Gross profit for 2012 was $774.6 million, compared to $740.1 million in 2011. Gross profit as a percentage of net sales (the gross margin rate) for 2012 was 15.2%, as compared to 14.8% for 2011. Gross margin was positively affected by lower cost of goods sold, primarily driven by inventory purchase-related supplier allowances (50 bps), and WOW initiative savings (15 bps), particularly in occupancy and freight costs. These improvements were partially offset by competitive pricing pressures and a less favorable margin mix of product sales (30 bps).

 

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Operating Expenses. Operating expenses in 2012 were $573.7 million or 11.3% as a percent of sales for the year, compared to $541.8 million or 10.8% in 2011. Excluding the non-operating items previously mentioned, adjusted operating expenses were $567.4 million or 11.2% of sales in 2012, compared to $536.4 million or 10.7% of sales in the prior year. Other expenses increased 20 bps, mainly due to favorable adjustments in 2011 related to the amount of inventory capitalized out of operating expenses in 2011. Employee-related expenses also increased 30 bps. These items were partially offset by lower bad debt expense (10 bps).

Interest Expense, net. Net interest expense for 2012 was $23.3 million, compared with $27.4 million in 2011. Interest expense decreased as two interest rate swaps matured in early 2012.

Other (Income) Expense, net. There was no Other Income for 2012, compared with $1.9 million of Other Expense in 2011. Net Other Income for 2011 reflected a reversal of prior acquisition earn-out and deferred payment liabilities related to a 2010 acquisition.

Income Taxes. Income tax expense was $65.8 million in 2012, compared with $63.9 million in 2011. The Company’s effective tax rate was 37.0% in 2012 and 2011. The effective tax rate was impacted by several items in both years including a reduction in income tax valuation allowances on deferred tax assets.

Net Income. Net income for 2012 was $111.8 million and diluted earnings per share were $2.73, compared to 2011 net income of $109.0 million and diluted earnings per share of $2.42. Included in the 2012 results is a $6.2 million pre-tax charge related to a distribution network optimization and cost reduction program. Excluding this non-operating item, adjusted net income for 2012 was $115.7 million and adjusted diluted earnings per share were $2.82. Included in the 2011 results are a favorable $0.7 million (pre-tax) reversal of a charge taken in the fourth quarter of 2010 related to a voluntary early retirement and workforce realignment program, a $4.4 million (pre-tax) compensation charge related to a transition agreement with the Company’s former Chief Executive Officer, and a $1.6 million asset impairment charge related to an equity investment. Excluding these non-operating items, adjusted net income for 2011 was $112.9 million and adjusted diluted earnings per share were $2.51. Adjusted diluted earnings per share in 2012 was $2.82, up 12.0% versus the adjusted 2011 amount. Earnings per share growth was driven by higher operating income, the impact of 2012 share repurchases, which contributed approximately $0.25 per share and a reduction in interest expense, which contributed $0.06 per share. 2012 was also favorably impacted by a $1.2 million or $0.03 per share benefit and 2011 was favorably impacted by a $1.4 million or $0.03 per share benefit related to reduction in income tax valuation allowances on deferred tax assets. Prior year diluted earnings per share were also positively impacted by the renegotiation of acquisition related earn-out.

Comparison of Results for the Years Ended December 31, 2011 and 2010

Net Sales. Net sales for the year ended December 31, 2011 were approximately $5.0 billion, up 3.2%, workday adjusted, compared with $4.8 billion in 2010. The following table shows net sales by product category for 2011 and 2010 (in thousands):

 

     Years Ended
December 31,
 
     2011(1)      2010(1)  

Technology products

   $ 1,625,842       $ 1,654,960   

Traditional office products (including cut-sheet paper)

     1,360,855         1,333,490   

Janitorial and breakroom supplies

     1,222,225         1,105,349   

Industrial supplies

     349,370         282,305   

Office furniture

     325,009         346,649   

Freight revenue

     88,893         83,798   

Other

     33,307         25,686   
  

 

 

    

 

 

 

Total net sales

   $ 5,005,501       $ 4,832,237   
  

 

 

    

 

 

 

 

(1) Certain prior period amounts have been reclassified to conform to the current presentation. Such reclassifications include changes between several product categories due to several specific products being reclassified to different categories. These changes did not impact the Consolidated Statements of Income.

 

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Sales in the technology products category decreased 2.1%, workday adjusted, in 2011 compared to 2010. This category continues to represent the largest percentage of the Company’s consolidated net sales in 2011, accounting for 32.5% of sales. Technology sales declined due to lower purchases by resellers within the independent dealer channel and a sourcing shift in some national account business. This sales decline was partially offset by growth in new channels and from other targeted initiatives.

Sales of traditional office products in 2011 rose 1.7%, workday adjusted, versus 2010. Traditional office supplies represented 27.2% of the Company’s consolidated net sales for 2011. Sales increased with growth in public sector and other targeted initiatives, partially offset by slight decreases in the independent dealer channel and national accounts.

Sales of janitorial and breakroom supplies increased 10.1%, workday adjusted, in 2011 as compared to 2010. This category accounted for 24.4% of the Company’s 2011 consolidated net sales. This growth reflects increases across all channels and is a result of continued strategic incentives to build market share.

Sales of industrial supplies increased 23.3%, workday adjusted, reflecting a more favorable economic environment with improvement in the manufacturing sector, continued growth from investments, and strong execution of sales initiatives. This category accounted for 7.0% of the Company’s net sales in 2011.

Office furniture sales in 2011 were down 6.6%, workday adjusted, compared to 2010. Office furniture accounted for 6.5% of the Company’s 2011 consolidated net sales. Sales were negatively impacted by a challenging transactional market and a sourcing shift in some national account business.

The remainder of the Company’s consolidated net sales came from freight, advertising and software related revenue.

Gross Profit and Gross Margin Rate. Gross profit for 2011 was $740.1 million, compared to $730.6 million in 2010. Gross profit as a percentage of net sales (the gross margin rate) for 2011 was 14.8%, as compared to 15.1% for 2010. The 2011 pricing margin decreased approximately 60 basis points (bps) as a percent of sales due to an unfavorable sales-margin mix and competitive pricing pressures. Net freight out costs increased 10 bps from the prior year due to diesel fuel cost increases. Supplier allowances grew 15 bps as a percent of sales due to increased supplier allowances resulting from the achievement of higher rebate rates through volume growth and supplier program enhancements. The net impact of increased inflation from 2010 to 2011 added 10 bps to margin as a percentage of sales. Finally, services revenues and margins contributed an additional 10 bps to the gross margin rate.

Operating Expenses. Operating expenses in 2011 were $541.8 million or 10.8% as a percent of sales for the year compared to $520.8 million or 10.8% in 2010. Excluding the non-operating items previously mentioned, adjusted operating expenses were $536.4 million or 10.7% of sales in 2011 compared to $532.4 million or 11.0% of sales in the prior year. United continued to support strategic initiatives but this spending was partially offset by lower variable management compensation expense, which decreased 15 bps in 2011 compared to 2010. Lower depreciation costs of 10 bps resulted from lower capital spending in the past several years.

Interest Expense, net. Net interest expense for 2011 was $27.4 million, compared with $26.0 million in 2010. Interest expense increased slightly as the Company had higher average outstanding debt in 2011.

Other (Income) Expense, net. Other Income for 2011 was $1.9 million, compared with $0.8 million of Other Expense in 2010. Net Other Income for 2011 reflected a reversal of prior acquisition earn-out and deferred payment liabilities related to a 2010 acquisition. Net Other Expense for 2010 reflected an accounting charge to bring this prior acquisition earn-out and deferred payment liabilities to fair value.

Income Taxes. Income tax expense was $63.9 million in 2011, compared with $70.2 million in 2010. The Company’s effective tax rate was 37.0% in 2011, compared to 38.4% in 2010. This effective tax rate decrease relates to a reduction in income tax valuation allowances on deferred tax assets.

Net Income. Net income for 2011 was $109.0 million and diluted earnings per share were $2.42 compared to 2010 net income of $112.8 million and diluted earnings per share of $2.34. Included in the 2011 results are a favorable $0.7 million (pre-tax) reversal of a charge taken in the fourth quarter of 2010 related to a voluntary early retirement and workforce realignment program, a $4.4 million (pre-tax) compensation charge related to a transition agreement with the Company’s former Chief Executive Officer, and a $1.6 million asset impairment charge related to an equity investment. Excluding these non-operating items, adjusted net income for 2011 was $112.9 million and adjusted diluted earnings per share were $2.51. Included in the 2010 results are a favorable $11.9 million (non-cash/pre-tax)

 

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adjustment to reverse vacation pay liabilities, a charge of $9.1 million (pre-tax) related to an early retirement/workforce realignment program, and an $8.8 million (non-cash/pre-tax) liability reversal for the termination of the Retiree Medical Plan. Excluding these non-operating items, adjusted net income for 2010 was $105.6 million and adjusted diluted earnings per share were $2.19. Record adjusted diluted earnings per share in 2011 of $2.51 were up 15% versus the adjusted 2010 amount. Earnings per share growth was driven by: the impact of 2011 share repurchases, which contributed approximately $0.06 per share; a reduction in other (income) expense, which included a $1.9 million or $0.04 per share benefit from the negotiation of a lower liability for certain earn-outs and deferred payments involved in a 2010 acquisition; and a $1.4 million or $0.03 per share benefit related to a reduction in income tax valuation allowances on deferred tax assets.

Liquidity and Capital Resources

Debt

The Company’s outstanding debt consisted of the following amounts (in millions):

 

     As of
December 31,
2012
    As of
December 31,
2011
 

2011 Credit Agreement

   $ 238.1      $ 361.8   

2007 Master Note Purchase Agreement (Private Placement)

     135.0        135.0   

Receivables Securitization Program

     150.0        —     

Mortgage & Capital Lease

     1.3        —     
  

 

 

   

 

 

 

Debt

     524.4        496.8   

Stockholders’ equity

     738.1        704.7   
  

 

 

   

 

 

 

Total capitalization

   $ 1,262.5      $ 1,201.5   
  

 

 

   

 

 

 

Adjusted debt-to-total capitalization ratio

     41.5     41.3
  

 

 

   

 

 

 

Operating cash requirements and capital expenditures are funded from operating cash flow and available financing. Financing available from debt and the sale of accounts receivable as of December 31, 2012, is summarized below (in millions):

Availability

 

Maximum financing available under:

     

2011 Credit Agreement

   $ 700.0      

2007 Master Note Purchase Agreement

     135.0      

Receivables Securitization Program (1)

     150.0      
  

 

 

    

Maximum financing available

      $ 985.0   

Amounts utilized:

     

2011 Credit Agreement

     238.1      

2007 Master Note Purchase Agreement

     135.0      

Receivables Securitization Program (1)

     150.0      

Outstanding letters of credit

     9.4      

Mortgage & Other

     1.6      
  

 

 

    

Total financing utilized

        534.1   
     

 

 

 

Available financing, before restrictions

        450.9   

Restrictive covenant limitation

        46.7   
     

 

 

 

Available financing as of December 31, 2012

      $ 404.2   
     

 

 

 

 

(1) Prior to January 18, 2013, the Receivables Securitization Program provided for maximum funding available of the lesser of $150 million or the total amount of eligible receivables less excess concentrations and applicable reserves. As of January 18, 2013 the maximum amount available under this program was increased to the lesser of $200 million or the total amount of eligible receivables less excess concentrations and applicable reserves.

 

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The 2011 Credit Agreement prohibits the Company from exceeding a Leverage Ratio of 3.50 to 1.00 and imposes limits on the Company’s ability to repurchase stock and issue dividends when the Leverage Ratio is greater than 3.00 to 1.00. The 2011 Credit Agreement contains additional representations and warranties, covenants and events of default that are customary for facilities of this type.

The Company believes that its operating cash flow and financing capacity, as described, provide adequate liquidity for operating the business for the foreseeable future.

Disclosures About Contractual Obligations

The following table aggregates all contractual obligations that affect financial condition and liquidity as of December 31, 2012 (in millions):

 

     Payment due by period         

Contractual obligations

   2013      2014 &
2015
     2016 &
2017
     Thereafter      Total  

Debt

   $ —         $ 136.3       $ 388.1       $ —         $ 524.4   

Fixed interest payments on long-term debt (1)

     1.5         5.1         5.4         —           12.0   

Operating leases

     50.2         81.0         47.9         30.0         209.1   

Purchase obligations

     3.6         3.7         —           —           7.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations

   $ 55.3       $ 226.1       $ 441.4       $ 30.0       $ 752.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The Company has entered into several interest rate swap transactions on a portion of its long-term debt. The fixed interest payments noted in the table are based on the notional amounts and fixed rates inherent in the swap transactions and related debt instruments. For more detail see Note 19, “Derivative Financial Instruments”, in the Notes to the Consolidated Financial Statements.

On December 4, 2012, the Company’s Board of Directors approved a $13 million cash contribution to the Company’s pension plans to be funded on or before January 2, 2013. Additional fundings, if any, for 2013 have not yet been determined.

At December 31, 2012, the Company had a liability for unrecognized tax benefits of $3.1 million as discussed in Note 14, “Income Taxes”, and an accrual for the related interest, that are excluded from the Contractual Obligations table. Due to the uncertainties related to these tax matters, the Company is unable to make a reasonably reliable estimate when cash settlement with a taxing authority may occur.

Credit Agreement and Other Debt

On October 15, 2007, USI and USSC entered into a Master Note Purchase Agreement (the “2007 Note Purchase Agreement”) with several purchasers. The 2007 Note Purchase Agreement allows USSC to issue up to $1 billion of senior secured notes, subject to the debt restrictions contained in the Credit Agreement. Pursuant to the 2007 Note Purchase Agreement, USSC issued and sold $135 million of floating rate senior secured notes due October 15, 2014 at par in a private placement (the “Series 2007-A Notes”). Interest on the Series 2007-A Notes is payable quarterly in arrears at a rate per annum equal to three-month LIBOR plus 1.30%, beginning January 15, 2008. USSC may issue additional series of senior secured notes from time to time under the 2007 Note Purchase Agreement but has no specific plans to do so at this time. Obligations of USSC under the 2011 Credit Agreement and the 2007 Note Purchase Agreement are guaranteed by USI and certain of USSC’s domestic subsidiaries. USSC’s obligations under these agreements and the guarantors’ obligations under the guaranties are secured by liens on substantially all of the Company’s assets, other than real property and certain accounts receivable already collateralized as part of the Receivables Securitization Program.

On September 21, 2011, USI and USSC entered into a Third Amended and Restated Five-Year Revolving Credit Agreement (the “2011 Credit Agreement”) with U.S. Bank National Association and Wells Fargo Bank, National Association as Syndication Agents; Bank of America, N.A. and PNC Bank, National Association, as Documentation Agents; JPMorgan Chase Bank, National Association, as Administrative Agent, and the lenders identified therein.

 

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The 2011 Credit Agreement is a revolving credit facility with an aggregate committed principal amount of $700 million. The 2011 Credit Agreement also provides a sublimit for the issuance of letters of credit in an aggregate amount not to exceed $100 million at any one time and provides a sublimit for swing line loans in an aggregate outstanding principal amount not to exceed $50 million at any one time. These amounts, as sublimits, do not increase the maximum aggregate principal amount, and any undrawn issued letters of credit and all outstanding swing line loans under the facility reduce the remaining availability under the 2011 Credit Agreement. The Company had outstanding letters of credit under the 2011 Credit Agreement of $9.4 million and $10.3 million as of December 31, 2012 and December 31, 2011, respectively. Subject to the terms and conditions of the 2011 Credit Agreement, USSC may seek additional commitments to increase the aggregate committed principal amount to a total amount of $1 billion. The 2011 Credit Agreement expires on September 21, 2016.

Borrowings under the 2011 Credit Agreement bear interest at LIBOR for specified interest periods or at the Alternate Base Rate (as defined in the 2011 Credit Agreement), plus, in each case, a margin determined based on the Company’s permitted debt to EBITDA ratio (calculated as provided in Section 6.20 of the 2011 Credit Agreement) (the “Leverage Ratio”). In addition, the Company is required to pay the lenders a fee on the unutilized portion of the commitments under the 2011 Credit Agreement at a rate per annum determined based on the Company’s Leverage Ratio.

On January 18, 2013, the Company’s accounts receivable securitization program (as amended to date, the “Receivables Securitization Program” or the “Program”) was amended and restated to increase the maximum amount of financing from $150 million to $200 million and to extend the term of the Program through January 18, 2016. The parties to the Program are USI, USSC, United Stationers Financial Services (“USFS”), United Stationers Receivables, LLC (“USR”), and PNC Bank, National Association (the “Investor”). The Program is governed by the following agreements:

 

   

The Transfer and Administration Agreement among USSC, USFS, USR, and the Investor;

   

The Receivables Sale Agreement between USSC and USFS;

   

The Receivables Purchase Agreement between USFS and USR; and

   

The Performance Guaranty executed by USI in favor of USR.

Pursuant to the Receivables Sale Agreement, USSC sells to USFS, on an on-going basis, all the customer accounts receivable and related rights originated by USSC. Pursuant to the Receivables Purchase Agreement, USFS sells to USR, on an on-going basis, all the accounts receivable and related rights purchased from USSC. Pursuant to the Transfer and Administration Agreement, USR then sells the receivables and related rights to the Investor. The Program now provides for maximum funding available of the lesser of $200 million or the total amount of eligible receivables less excess concentrations and applicable reserves. USFS retains servicing responsibility over the receivables. USR is a wholly-owned, bankruptcy remote special purpose subsidiary of USFS. The assets of USR are not available to satisfy the creditors of any other person, including USFS, USSC or USI, until all amounts outstanding under the Program are repaid and the Program has been terminated.

The receivables sold to the Investor remain on USI’s Consolidated Balance Sheets, and amounts advanced to USR by the Investor or any successor Investor are recorded as debt on USI’s Consolidated Balance Sheets. The cost of such debt is recorded as interest expense on USI’s Consolidated Statements of Income. As of December 31, 2012 and December 31, 2011, $400.2 million and $421.0 million, respectively, of receivables had been sold. At December 31, 2012, $150 million had been borrowed by USR related to these receivables sold. No amounts had been borrowed as of December 31, 2011.

Subject to the terms and conditions of the 2011 Credit Agreement, USSC is permitted to incur up to $300 million of indebtedness in addition to borrowings under the 2011 Credit Agreement, plus up to $200 million under the Receivables Securitization Program and up to $135 million in replacement or refinancing of the 2007 Note Purchase Agreement. The 2011 Credit Agreement and the 2007 Note Purchase Agreement also impose limits on the Company’s ability to repurchase stock and issue dividends when the Leverage Ratio is greater than 3.00 to 1.00. The 2011 Credit Agreement, the 2007 Note Purchase Agreement, and the Transfer and Administration Agreement each

 

   

prohibit the Company from exceeding a Leverage Ratio of 3.50 to 1.00,

   

contain additional representations and warranties, covenants and events of default that are customary for such facilities,

 

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contain cross-default provisions under which, if a termination event occurs under any of those agreements, the lenders under all of the agreements may cease to make additional loans, accelerate any loans then outstanding and/or terminate the agreements to which they are party.

On November 6, 2007, USSC entered into an interest rate swap transaction (the “November 2007 Swap Transaction”) with U.S. Bank National Association as the counterparty. USSC entered into the November 2007 Swap Transaction to mitigate USSC’s floating rate risk on an aggregate of $135 million of LIBOR-based interest rate risk. Under the terms of the November 2007 Swap Transaction, USSC was required to make quarterly fixed rate payments to the counterparty calculated based on a notional amount of $135 million at a fixed rate of 4.674%, while the counterparty was obligated to make quarterly floating rate payments to USSC based on the three-month LIBOR on the same referenced notional amount. The November 2007 Swap Transaction had an effective date of January 15, 2008 and a maturity date of January 15, 2013.

On December 20, 2007, USSC entered into an interest rate swap transaction (the “December 2007 Swap Transaction”) with Key Bank National Association as the counterparty. USSC entered into the December 2007 Swap Transaction to mitigate USSC’s floating rate risk on an aggregate of $200 million of LIBOR-based interest rate risk. Under the terms of the December 2007 Swap Transaction, USSC was required to make quarterly fixed rate payments to the counterparty calculated based on a notional amount of $200 million at a fixed rate of 4.075%, while the counterparty was obligated to make quarterly floating rate payments to USSC based on the three-month LIBOR on the same referenced notional amount. The December 2007 Swap Transaction was effective as of December 21, 2007 and matured on June 21, 2012.

On March 13, 2008, USSC entered into an interest rate swap transaction (the “March 2008 Swap Transaction”) with U.S. Bank National Association as the counterparty. USSC entered into the March 2008 Swap Transaction to mitigate USSC’s floating rate risk on an aggregate of $100 million of LIBOR-based interest rate risk. Under the terms of the March 2008 Swap Transaction, USSC was required to make quarterly fixed rate payments to the counterparty calculated based on a notional amount of $100 million at a fixed rate of 3.212%, while the counterparty was obligated to make quarterly floating rate payments to USSC based on the three-month LIBOR on the same referenced notional amount. The March 2008 Swap Transaction was effective as of March 31, 2008 and matured on June 29, 2012.

On July 18, 2012, the Company entered into a two-year forward, three-year interest rate swap transaction (the “July 2012 Swap Transaction”) with U.S. Bank National Association as the counterparty. The Company entered into the July 2012 Swap Transaction to mitigate its interest rate risk on $150 million of future one-month LIBOR-based debt. The swap transaction has an effective date of July 18, 2014 and a maturity date of July 18, 2017. The swap transaction effectively fixes the interest rate on $150 million of future borrowings at 1.0535% plus the applicable interest margin on the underlying borrowings.

At December 31, 2012 funding levels (including amounts sold under the Receivables Securitization Program), a 50 basis point movement in interest rates would result in a $1.9 million increase or decrease in annualized interest expense on a pre-tax basis, and upon cash flows from operations. At December 31, 2011 funding levels (including amounts sold under the Receivables Securitization Program), a 50 basis point movement in interest rates would not result in a material increase or decrease in annualized interest expense on a pre-tax basis, nor upon cash flows from operations.

Refer to Note 9, “Long-Term Debt”, for further descriptions of the provisions of 2011 Credit Agreement and the 2007 Note Purchase Agreement.

Cash Flows

Cash flows for the Company for the years ended December 31, 2012, 2011 and 2010 are summarized below (in thousands):

 

     Years Ended December 31,  
     2012     2011     2010  

Net cash provided by operating activities

   $ 189,814      $ 130,363      $ 114,823   

Net cash used in investing activities

     (107,266     (27,918     (42,745

Net cash used in financing activities

     (63,457     (111,929     (69,355

 

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Cash Flows From Operations

Net cash provided by operating activities for 2012 totaled $189.8 million versus $130.4 million in 2011. The improvement in operating cash flows was mainly due to stronger earnings and lower working capital needs.

In 2011, the improvement in operating cash flows over 2010 was mainly due to lower working capital needs, which resulted from increased payables leverage.

Cash Flows From Investing Activities

Net cash used in investing activities for the years ended December 31, 2012, 2011 and 2010 was $107.3 million, $27.9 million, and $42.7 million, respectively. Gross capital spending for 2012, 2011 and 2010 was $32.8 million, $28.0 million and $27.3 million, respectively, which was used for various investments in fleet equipment, information technology systems, technology hardware, and distribution center equipment including several facility projects. Additionally, 2012 cash flows included the net cash outflow of $75.3 million for the acquisition of OKI. Included in 2010 cash flows was $15.5 million related to the acquisition of MBS Dev and an investment in a managed print services and technology solution business. The Company expects gross capital spending (before the impact of any sales proceeds) for 2013 to be approximately $35 million.

Cash Flows From Financing Activities

The Company’s cash flow from financing activities is largely dependent on levels of borrowing under the Company’s credit agreements, the acquisition of businesses, the acquisition or issuance of treasury stock, and quarterly dividend payments that were initiated in 2011.

Net cash used in financing activities for 2012, 2011 and 2010 totaled $63.5 million, $111.9 million, and $69.4 million, respectively. Cash outflows from financing activities in 2012 included the repurchase of shares at a cost of $69.9 million and the payment of cash dividends of $21.3 million, partially offset by an increase in outstanding debt of $26.4 million. The increase in cash outflows from 2010 to 2011 reflects the repurchase of shares at a cost of $162.7 million and the payment of cash dividends of $17.5 million, partially offset by $9.3 million from share-based compensation programs and an increase in debt of $55.0 million.

Seasonality

The Company experiences seasonality in its working capital needs, with highest requirements in December through February, reflecting a build-up in inventory prior to and during the peak January sales period. See the information under the heading “Seasonality” in Part I, Item 1 of this Annual Report on Form 10-K. The Company believes that its current financing availability is sufficient to satisfy the seasonal working capital needs for the foreseeable future.

Inflation/Deflation and Changing Prices

The Company maintains substantial inventories to accommodate the prompt service and delivery requirements of its customers. Accordingly, the Company purchases its products on a regular basis in an effort to maintain its inventory at levels that it believes are sufficient to satisfy the anticipated needs of its customers, based upon historical buying practices and market conditions. Although the Company historically has been able to pass through manufacturers’ price increases to its customers on a timely basis, competitive conditions will influence how much of future price increases can be passed on to the Company’s customers. Conversely, when manufacturers’ prices decline, lower sales prices could result in lower margins as the Company sells existing inventory. As a result, changes in the prices paid by the Company for its products could have a material effect on the Company’s net sales, gross margins and net income. See the information under the heading “Comparison of Results for the Years Ended December 31, 2012 and 2011” in Part I, Item 7 of this Annual Report on Form 10-K for further analysis on these changes in prices in 2012.

New Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04. The amendments in this ASU generally represent clarifications of fair value measurement, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information

 

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about fair value measurements has changed. This ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements. On January 1, 2012, the Company adopted these amendments on a prospective basis and there was no impact on its financial position or results of operations.

In June 2011, the FASB issued ASU No. 2011-05, which requires entities to present items of net income and other comprehensive income either in a single continuous statement of comprehensive income or in two separate, but consecutive, statements of net income and other comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 was subsequently amended by ASU No. 2011-12, which deferred the requirement for companies to present reclassification adjustments for each component of accumulated other comprehensive income in both other comprehensive income and net income on the face of the financial statements. On January 1, 2012, the Company adopted the effective portions of ASU No. 2011-05, which are reflected in its financial position and results of operations.

In July 2012, the FASB issued ASU No. 2012-02, on testing indefinite-lived intangible assets for impairment. Under the guidance, testing the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill has been simplified. The guidance allows an organization the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. An organization electing to perform a qualitative assessment is no longer required to calculate the fair value of an indefinite-lived intangible asset unless the organization determines, based on a qualitative assessment, that it is “more likely than not” that the asset is impaired. The guidance is effective for impairment tests for fiscal years beginning after September 15, 2012. The Company will adopt this guidance on January 1, 2013 but does not expect the adoption of this guidance to have a material impact on its Consolidated Financial Statements.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company is subject to market risk associated principally with changes in interest rates and foreign currency exchange rates.

Interest Rate Risk

The Company’s exposure to interest rate risk is principally limited to the Company’s outstanding debt at December 31, 2012 and 2011 of $524.4 million and $496.8 million respectively. As of December 31, 2012 and 2011, the Company had $523.1 million of outstanding debt with interest based on variable market rates, $135 million of which the Company had hedged with a fixed interest rate swap that expired on January 15, 2013. See Note 2, “Summary of Significant Accounting Policies”, and Note 19, “Derivative Financial Instruments”, to the Consolidated Financial Statements. As of December 31, 2012 and 2011, the overall weighted average effective borrowing rate of the Company’s debt was 2.5%. A 50 basis point movement in interest rates would result in a $1.9 million increase or decrease in annualized interest expense, on a pre-tax basis, nor upon cash flows from operations.

Foreign Currency Exchange Rate Risk

The Company’s foreign currency exchange rate risk is limited principally to the Mexican Peso, the Canadian Dollar, the Arab Emirate Dirham, as well as product purchases from Asian countries valued and paid in U.S. Dollars. Many of the products the Company sells in Mexico are purchased in U.S. dollars, while the sale is invoiced in the local currency. The Company’s foreign currency exchange rate risk is not material to its financial position, results of operations and cash flows. The Company has not previously hedged these transactions, but it may enter into hedging transactions in the future.

 

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act to mean a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Consolidated Financial Statements.

Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012 in relation to the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies and the Company’s overall control environment. That assessment was supported by testing and monitoring performed both by the Company’s Internal Audit organization and its Finance organization.

Based on that assessment, management concluded that as of December 31, 2012, the Company’s internal control over financial reporting was effective. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors.

Ernst & Young LLP, an independent registered public accounting firm, who audited and reported on the Consolidated Financial Statements included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting as stated in their report which appears on page 31 of this Annual Report on Form 10-K.

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of United Stationers Inc.

We have audited United Stationers Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). United Stationers Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying report, Management Report of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, United Stationers Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of United Stationers Inc. and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2012, and our report dated February 22, 2013, expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Chicago, Illinois

February 22, 2013

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of United Stationers Inc.

We have audited the accompanying consolidated balance sheets of United Stationers Inc. and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2012. Our audits also included the financial statement schedule listed in the index at Item 15(a). These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Stationers Inc. and subsidiaries at December 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), United Stationers Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2013 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Chicago, Illinois

February 22, 2013

 

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UNITED STATIONERS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

 

     Years Ended December 31,  
     2012     2011     2010  

Net sales

   $ 5,080,106      $ 5,005,501      $ 4,832,237   

Cost of goods sold

     4,305,502        4,265,422        4,101,682   
  

 

 

   

 

 

   

 

 

 

Gross profit

     774,604        740,079        730,555   

Operating expenses:

      

Warehousing, marketing and administrative expenses

     573,693        541,752        520,754   
  

 

 

   

 

 

   

 

 

 

Operating income

     200,911        198,327        209,801   

Interest expense

     23,619        27,592        26,229   

Interest income

     (343     (223     (237

Other (income) expense, net

     —          (1,918     809   
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     177,635        172,876        183,000   

Income tax expense

     65,805        63,880        70,243   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 111,830      $ 108,996      $ 112,757   
  

 

 

   

 

 

   

 

 

 

Net income per share—basic:

      

Net income per share—basic

   $ 2.77      $ 2.49      $ 2.43   
  

 

 

   

 

 

   

 

 

 

Average number of common shares outstanding—basic

     40,337        43,822        46,376   

Net income per share—diluted:

      

Net income per share—diluted

   $ 2.73      $ 2.42      $ 2.34   
  

 

 

   

 

 

   

 

 

 

Average number of common shares outstanding—diluted

     40,991        45,014        48,286   

See notes to Consolidated Financial Statements.

 

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UNITED STATIONERS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in thousands)

 

     Years Ended December 31,  
     2012     2011     2010  

Net income

   $ 111,830      $ 108,996      $ 112,757   

Other comprehensive income (loss), net of tax:

      

Unrealized translation adjustment

     1,567        (2,143     994   

Minimum pension liability adjustment

     (4,645     (20,285     (2,770

Unrealized interest rate swap adjustments

     5,719        9,189        529   
  

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     2,641        (13,239     (1,247
  

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 114,471      $ 95,757      $ 111,510   
  

 

 

   

 

 

   

 

 

 

See notes to Consolidated Financial Statements.

 

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UNITED STATIONERS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)

 

     As of December 31,  
     2012     2011  
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 30,919      $ 11,783   

Accounts receivable, less allowance for doubtful accounts of $22,716 in 2012 and $28,323 in 2011

     658,760        659,215   

Inventories

     767,206        741,507   

Other current assets

     30,118        48,093   
  

 

 

   

 

 

 

Total current assets

     1,487,003        1,460,598   

Property, plant and equipment, at cost:

    

Land

     13,250        12,268   

Buildings

     61,722        58,963   

Fixtures and equipment

     301,444        290,092   

Leasehold improvements

     28,762        25,152   

Capitalized software costs

     77,308        69,879   
  

 

 

   

 

 

 

Total property, plant and equipment

     482,486        456,354   

Less—accumulated depreciation and amortization

     338,963        326,916   
  

 

 

   

 

 

 

Net property, plant and equipment

     143,523        129,438   

Intangible assets, net

     67,192        56,285   

Goodwill

     357,226        328,061   

Other

     20,260        20,500   
  

 

 

   

 

 

 

Total assets

   $ 2,075,204      $ 1,994,882   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current liabilities:

    

Accounts payable

   $ 495,278      $ 499,265   

Accrued liabilities

     205,228        193,572   
  

 

 

   

 

 

 

Total current liabilities

     700,506        692,837   

Deferred income taxes

     18,054        14,750   

Long-term debt

     524,376        496,757   

Other long-term liabilities

     94,176        85,859   
  

 

 

   

 

 

 

Total liabilities

     1,337,112        1,290,203   

Stockholders’ equity:

    

Common stock, $0.10 par value; authorized—100,000,000 shares, issued—74,435,628 shares at December 31, 2012 and 2011

     7,444        7,444   

Additional paid-in capital

     404,196        409,190   

Treasury stock, at cost—34,116,220 and 32,281,847 shares at December 31, 2012 and 2011, respectively

     (963,220     (908,667

Retained earnings

     1,343,437        1,253,118   

Accumulated other comprehensive loss, net of tax

     (53,765     (56,406
  

 

 

   

 

 

 

Total stockholders’ equity

     738,092        704,679   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,075,204      $ 1,994,882   
  

 

 

   

 

 

 

See notes to Consolidated Financial Statements.

 

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UNITED STATIONERS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(dollars in thousands, except share data)

 

    Common Stock     Treasury Stock     Additional
Paid-in

Capital
    Accumulated
Other
Comprehensive

Income (Loss)
    Retained
Earnings
    Total
Stockholders’

Equity
 
    Shares     Amount     Shares     Amount          

As of December 31, 2009

    74,435,628      $ 7,444        (26,474,990   $ (700,294   $ 387,131      $ (41,920   $ 1,054,352      $ 706,713   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    —          —          —          —          —          —          112,757        112,757   

Unrealized translation adjustments

    —          —          —          —          —          994        —          994   

Minimum pension liability adjustments, net of tax benefit of $1,690

    —          —          —          —          —          (2,770     —          (2,770

Unrealized benefit on interest rate swaps, net of tax loss of $326

    —          —          —          —          —          529        —          529   
           

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

    —          —          —          —          —          (1,247     112,757        111,510   

Acquisition of treasury stock

    —          —          (4,011,586     (116,310     —          —          —          (116,310

Stock compensation

    —          —          2,238,670        43,906        13,779        —          —          57,685   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2010

    74,435,628      $ 7,444        (28,247,906   $ (772,698   $ 400,910      $ (43,167   $ 1,167,109      $ 759,598   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    —          —          —          —          —          —          108,996        108,996   

Unrealized translation adjustments

    —          —          —          —          —          (2,143     —          (2,143

Minimum pension liability adjustments, net of tax benefit of $12,644

    —          —          —          —          —          (20,285     —          (20,285

Unrealized benefit on interest rate swaps, net of tax loss of $5,728

    —          —          —          —          —          9,189        —          9,189   
           

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

    —          —          —          —          —          (13,239     108,996        95,757   

Cash dividend declared, $0.52 per share

    —          —          —          —          —          —          (22,987     (22,987

Acquisition of treasury stock

    —          —          (5,004,690     (159,547     —          —          —          (159,547

Stock compensation

    —          —          970,749        23,578        8,280        —          —          31,858   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2011

    74,435,628      $ 7,444        (32,281,847   $ (908,667   $ 409,190      $ (56,406   $ 1,253,118      $ 704,679   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    —          —          —          —          —          —          111,830        111,830   

Unrealized translation adjustments

    —          —          —          —          —          1,567        —          1,567   

Minimum pension liability adjustments, net of tax benefit of $2,847

    —          —          —          —          —          (4,645     —          (4,645

Unrealized benefit on interest rate swaps, net of tax loss of $3,505

    —          —          —          —          —          5,719        —          5,719   
           

 

 

   

 

 

   

 

 

 

Other comprehensive income

    —          —          —          —          —          2,641        111,830        114,471   

Cash dividend declared, $0.53 per share

    —          —          —          —          —          —          (21,511     (21,511

Acquisition of treasury stock

    —          —          (2,454,037     (69,908     —          —          —          (69,908

Stock compensation

    —          —          619,664        15,355        (4,994     —          —          10,361   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2012

    74,435,628      $ 7,444        (34,116,220   $ (963,220   $ 404,196      $ (53,765   $ 1,343,437      $ 738,092   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to Consolidated Financial Statements.

 

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UNITED STATIONERS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

 

     Years Ended December 31,  
     2012     2011     2010  

Cash Flows From Operating Activities:

      

Net income

   $ 111,830      $ 108,996      $ 112,757   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation

     29,994        28,927        31,669   

Amortization of intangible assets

     6,083        5,126        5,171   

Share-based compensation

     8,746        15,734        14,100   

Amortization of capitalized financing costs

     995        974        735   

Excess tax benefits related to share-based compensation

     (648     (6,858     (5,477

Loss on the disposition of property, plant and equipment

     122        59        117   

Asset impairment charge

Deferred income taxes

    

 

—  

(6,713

  

   

 

1,635

20,914

  

  

   

 

—  

12,916

  

  

Changes in operating assets and liabilities, excluding the effects of acquisitions:

      

Decrease (increase) in accounts receivable

     21,820        (31,686     13,928   

Decrease (increase) in inventories

     10,374        (58,376     (92,055

Decrease (increase) in other assets

     21,105        (18,656     (2,593

Increase in accounts payable

     16,264        89,195        35,384   

Decrease in checks in-transit

     (32,008     (11,803     (5,178

Increase (decrease) in accrued liabilities

     276        (1,228     4,550   

Increase (decrease) in other liabilities

     1,574        (12,590     (11,201
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     189,814        130,363        114,823   

Cash Flows From Investing Activities:

      

Capital expenditures

     (32,787     (27,981     (27,276

Proceeds from the disposition of property, plant and equipment

     775        63        58   

Acquisitions and investment, net of cash acquired

     (75,254     —          (15,527
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (107,266     (27,918     (42,745

Cash Flows From Financing Activities:

      

Net (repayments) borrowings under Revolving Credit Facility

     (123,633     91,757        —     

Borrowings under Receivables Securitization Program

     150,000        —          —     

Repayments of debt

     —          (376,800     —     

Proceeds from the issuance of debt

     —          340,000        —     

Net proceeds from the exercise of stock options

     864        9,264        38,450   

Acquisition of treasury stock, at cost

     (69,908     (162,674     (113,183

Payment of cash dividends

     (21,285     (17,517     —     

Excess tax benefits related to share-based compensation

     648        6,858        5,477   

Payment of debt issuance costs

     (143     (2,817     (99
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (63,457     (111,929     (69,355

Effect of exchange rate changes on cash and cash equivalents

     45        (34     23   
  

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

     19,136        (9,518     2,746   

Cash and cash equivalents, beginning of period

     11,783        21,301        18,555   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 30,919      $ 11,783      $ 21,301   
  

 

 

   

 

 

   

 

 

 

See notes to Consolidated Financial Statements.

 

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UNITED STATIONERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  Basis of Presentation

The accompanying Consolidated Financial Statements represent United Stationers Inc. (“USI”) with its wholly owned subsidiary United Stationers Supply Co. (“USSC”), and USSC’s subsidiaries (collectively, “United” or the “Company”). The Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States and include the accounts of USI and its subsidiaries. All intercompany transactions and balances have been eliminated. The Company operates in a single reportable segment as a leading national wholesale distributor of business products, with net sales of approximately $5.1 billion for the year ended December 31, 2012. The Company stocks over 130,000 items on a national basis from over 1,400 manufacturers. These items include a broad spectrum of technology products, traditional office products, office furniture, janitorial and breakroom supplies, and industrial supplies. In addition, the Company also offers private brand products. The Company sells its products through a national distribution network of 72 distribution centers to its approximately 25,000 reseller customers, who in turn sell directly to end-consumers. The Company’s customers include independent office products dealers; contract stationers; office products superstores; computer products resellers; office furniture dealers; mass merchandisers; mail order companies; sanitary supply, paper and foodservice distributors; drug and grocery store chains; healthcare distributors; e-commerce merchants; oil field, welding supply and industrial/MRO distributors; and other independent distributors.

Acquisition of MBS Dev, Inc.

During the first quarter of 2010, the Company completed the acquisition of all of the capital stock of MBS Dev, Inc. (“MBS Dev”), a software solutions provider to business products resellers. MBS Dev’s solutions allow the Company to accelerate e-business development and enable customers and suppliers to implement more effectively their e-marketing and e-merchandising programs, as well as enhance their back office operations. The purchase price included $12 million plus $3 million in deferred payments and an additional potential $3 million earn-out based upon the achievement of certain financial goals by December 31, 2014. During the first quarter of 2011, the Company paid $1 million related to the deferred payments. Subsequently, in the fourth quarter of 2011 the Company agreed to accelerate payment of the $2 million remaining in deferred payments in consideration for termination of its obligation to pay the earn-out component. As a result, the remaining $2 million was paid in the first quarter of 2012.

Acquisition of O.K.I. Supply Co.

During the fourth quarter of 2012, USSC completed the acquisition of all of the capital stock of O.K.I. Supply Co. (OKI), a welding, safety and industrial products wholesaler. This acquisition was completed with a purchase price of $90 million. The purchase price includes approximately $4.5 million reserved for as a payable upon completion of a two year indemnification period. In total, the purchase price, net of cash acquired, was $79.8 million. The acquisition extends the Company’s position as the leading pure-wholesale industrial distributor in the United States and brings expanded categories and services to customers. The purchase was financed through the Company’s existing debt agreements.

The acquisition was accounted for under the purchase method of accounting in accordance with ASC 805, Business Combinations, with the excess purchase price over the fair market value of the assets acquired and liabilities assumed allocated to goodwill. Based on the preliminary purchase price allocation, the purchase price of $79.8 million, net of cash received, has resulted in goodwill of $29.2 million. The preliminary purchase price allocation is based upon certain estimates made by an independent, third party valuation company. The final purchase price allocation will be completed in accordance with accounting guidance during 2013.

The purchase included $17.0 million of intangible assets with definite lives related to trademarks and trade names, content, customer lists, and certain non-compete agreements. Neither the goodwill nor the intangible assets are expected to generate a tax deduction. For financial accounting purposes, there were certain items including amortizable intangible assets, the excess of fair value of assets over tax basis, and the undistributed earnings of acquired foreign subsidiaries that were treated as temporary differences. A deferred tax liability of $13.5 million was recorded through purchase accounting for these temporary differences. The weighted average useful life of amortizable intangibles is expected to be approximately 12 years. The Company recorded amortization expense related to these amortizable intangibles of $0.3 million in 2012. Additionally, included within other current assets are

 

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$3.2 million of held-for-sale assets which the Company plans to sell in 2013. These assets are valued at their fair-value at the date of acquisition less the estimated cost to sell these assets.

Preliminary Purchase Price Allocation

(dollars in thousands)

 

Purchase Price, net of cash acquired

     $ 79,754   

Preliminary Allocation of Purchase Price:

    

Accounts receivable

   $ (20,944  

Inventories

     (35,358  

Other current assets

     (4,083  

Property, plant and equipment

     (7,650  

Intangible assets

     (16,990  
  

 

 

   

Total assets acquired

       (85,025

Trade accounts payable

     11,975     

Accrued liabilities

     7,691     

Deferred taxes

     13,517     

Long-term debt

     1,252     
  

 

 

   

Total liabilities assumed

       34,435   
    

 

 

 

Goodwill

     $ 29,164   
    

 

 

 

OKI contributed $20.5 million to the Company’s 2012 net financial sales after its acquisition on November 1, 2012. Had the OKI acquisition been completed as of the beginning of 2010, the Company’s unaudited pro forma net sales for the years ended December 31, 2012, 2011 and 2010 would have been $5.2 billion, $5.2 billion, and $5.0 billion, respectively. Had the OKI acquisition been completed as of the beginning of 2010, the Company’s unaudited pro forma net income for the years ended December 31, 2012, 2011 and 2010 would have been $112.6 million, $113.6 million, and $115.1 million, respectively.

Investments

During the second quarter of 2010, the Company invested $5 million to acquire a minority interest in the capital stock of a managed print services and technology solution business. During the first quarter of 2011, a non-deductible asset impairment charge of $1.6 million was taken based on an independent third-party valuation analysis with respect to the fair value of this investment. This charge and the Company’s share of the earnings and losses of this investment are included in the Operating Expenses section of the Consolidated Statements of Income.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current presentation. Such reclassifications were limited to the Consolidated Balance Sheets and did not impact the Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, or Consolidated Statements of Cash Flows.

Stock Dividends

On March 1, 2011, the Company’s Board of Directors approved a two-for-one stock split of the Company’s issued common shares, which was paid in the form of a 100% stock dividend. All stockholders received one additional share on May 31, 2011 for each share owned at the close of business on the record date of May 16, 2011. This did not change the proportionate interest that a stockholder maintains in the Company. All shares and per share amounts in this report reflect the two-for-one stock split.

2.  Summary of Significant Accounting Policies

Principles of Consolidation

The Consolidated Financial Statements include the accounts of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation. For all acquisitions, account balances and results of operations are included in the Consolidated Financial Statements as of the date acquired.

 

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Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results could differ from these estimates.

Various assumptions and other factors underlie the determination of significant accounting estimates. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial techniques. The Company periodically reevaluates these significant factors and makes adjustments where facts and circumstances dictate.

Supplier Allowances

Supplier allowances (fixed or variable) are common practice in the business products industry and have a significant impact on the Company’s overall gross margin. Gross margin is determined by, among other items, file margin (determined by reference to invoiced price), as reduced by customer discounts and rebates as discussed below, and increased by supplier allowances and promotional incentives. Receivables related to supplier allowances totaled $96.9 million and $81.3 million as of December 31, 2012 and 2011, respectively. These receivables are included in “Accounts receivable” in the Consolidated Balance Sheets.

The majority of the Company’s annual supplier allowances and incentives are variable, based solely on the volume and mix of the Company’s product purchases from suppliers. These variable allowances are recorded based on the Company’s annual inventory purchase volumes and product mix and are included in the Company’s Consolidated Financial Statements as a reduction to cost of goods sold, thereby reflecting the net inventory purchase cost. The remaining portion of the Company’s annual supplier allowances and incentives are fixed and are earned based primarily on supplier participation in specific Company advertising and marketing publications. Fixed allowances and incentives are taken to income through lower cost of goods sold as inventory is sold.

Supplier allowances and incentives attributable to unsold inventory are carried as a component of net inventory cost. The potential amount of variable supplier allowances often differs based on purchase volumes by supplier and product category. As a result, changes in the Company’s sales volume (which can increase or reduce inventory purchase requirements) and changes in product sales mix (especially because higher-margin products often benefit from higher supplier allowance rates) can create fluctuations in variable supplier allowances.

Customer Rebates

Customer rebates and discounts are common practice in the business products industry and have a significant impact on the Company’s overall sales and gross margin. Such rebates are reported in the Consolidated Financial Statements as a reduction of sales. Customer rebates of $56.3 million and $55.7 million as of December 31, 2012 and 2011, respectively, are included as a component of “Accrued liabilities” in the Consolidated Balance Sheets.

Customer rebates include volume rebates, sales growth incentives, advertising allowances, participation in promotions and other miscellaneous discount programs. These rebates are paid to customers monthly, quarterly and/or annually. Estimates for volume rebates and growth incentives are based on estimated annual sales volume to the Company’s customers. The aggregate amount of customer rebates depends on product sales mix and customer mix changes. Reported results reflect management’s current estimate of such rebates. Changes in estimates of sales volumes, product mix, customer mix or sales patterns, or actual results that vary from such estimates may impact future results.

Revenue Recognition

Revenue is recognized when a service is rendered or when title to the product has transferred to the customer. Management records an estimate for future product returns related to revenue recognized in the current period. This estimate is based on historical product return trends and the gross margin associated with those returns. Management also records customer rebates that are based on annual sales volume to the Company’s customers. Annual rebates earned by customers include growth components, volume hurdle components, and advertising allowances.

Shipping and handling costs billed to customers are treated as revenues and recognized at the time title to the product has transferred to the customer. Freight costs are included in the Company’s Consolidated Financial

 

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Statements as a component of cost of goods sold and not netted against shipping and handling revenues. Net sales do not include sales tax charged to customers.

Additional revenue is generated from the sale of software licenses, delivery of subscription services (including the right to use software and software maintenance services), and professional services. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fees are fixed and determinable, and collection is considered probable. If collection is not considered probable, the Company recognizes revenue when the fees are collected. If fees are not fixed and determinable, the Company recognizes revenues when the fees become due from the customer.

Share-Based Compensation

At December 31, 2012, the Company had two active share-based employee compensation plans covering key associates and/or non-employee directors of the Company. See Note 3 to the Consolidated Financial Statements.

Accounts Receivable

Generally, the Company extends credit to customers that satisfy pre-defined credit criteria. Accounts receivable, as shown in the Consolidated Balance Sheets, include such trade accounts receivable and are net of allowances for doubtful accounts and anticipated discounts. The Company makes judgments as to the collectability of trade accounts receivable based on historical trends and future expectations. Management estimates an allowance for doubtful accounts, which addresses the collectability of trade accounts receivable. This allowance adjusts gross trade accounts receivable downward to its estimated collectible or net realizable value. To determine the allowance for doubtful accounts, management reviews specific customer risks and the Company’s trade accounts receivable aging. Uncollectible trade receivable balances are written off against the allowance for doubtful accounts when it is determined that the trade receivable balance is uncollectible.

Goodwill and Intangible Assets

Goodwill is initially recorded based on the premium paid for acquisitions and is subsequently tested for impairment. See Note 4 to the Consolidated Financial Statements.

Intangible assets are initially recorded at their fair market values determined on quoted market prices in active markets, if available, or recognized valuation models. Intangible assets that have finite useful lives are amortized on a straight-line basis over their useful lives. Intangible assets that have indefinite useful lives are not amortized but are tested at least annually for impairment or whenever events or circumstances indicate an impairment may have occurred. See Note 4 to the Consolidated Financial Statements.

Insured Loss Liability Estimates

The Company is primarily responsible for retained liabilities related to workers’ compensation, vehicle, and certain employee health benefits. The Company records expense for paid and open claims and an expense for claims incurred but not reported based upon historical trends and certain assumptions about future events. The Company has an annual per-person maximum cap, provided by a third-party insurance company, on certain employee medical benefits. In addition, the Company has a per-occurrence maximum on workers’ compensation and auto claims.

Leases

The Company leases real estate and personal property under operating leases. Certain operating leases include incentives from landlords including, landlord “build-out” allowances, rent escalation clauses and rent holidays or periods in which rent is not payable for a certain amount of time. The Company accounts for landlord “build-out” allowances as deferred rent at the time of possession and amortizes this deferred rent on a straight-line basis over the term of the lease.

The Company also recognizes leasehold improvements associated with the “build-out” allowances and amortizes these improvements over the shorter of (1) the term of the lease or (2) the expected life of the respective improvements. The Company accounts for rent escalation and rent holidays as deferred rent at the time of possession and amortizes this deferred rent on a straight-line basis over the term of the lease. As of December 31, 2012, any capital leases to which the Company is a party are immaterial to the Company’s financial statements.

 

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Inventories

Approximately 77% and 78% of total inventory as of December 31, 2012 and 2011, respectively, has been valued under the last-in, first-out (“LIFO”) accounting method. LIFO results in a better matching of costs and revenues. The remaining inventory is valued under the first-in, first-out (“FIFO”) accounting method. Inventory valued under the FIFO and LIFO accounting methods is recorded at the lower of cost or market. If the Company had valued its entire inventory under the lower of FIFO cost or market, inventory would have been $107.8 million and $96.1 million higher than reported as of December 31, 2012 and 2011, respectively. The annual change in the LIFO reserve as of December 31, 2012, 2011 and 2010 resulted in an $11.7 million increase, an $11.4 million increase and a $3.8 million increase, respectively, in cost of sales. The change in the LIFO reserve in 2012 resulted in an $11.7 million increase in cost of goods sold which included a LIFO liquidation relating to decrements in the Company’s office products and technology LIFO pools. These decrements resulted in liquidation of LIFO inventory quantities carried at lower costs in prior years as compared with the cost of current year purchases. This liquidation resulted in LIFO income of $3.3 million which was more than offset by LIFO expense of $15.0 million related to current inflation for an overall net increase in cost of sales of $11.7 million as referenced above. The $11.4 million change in the LIFO reserve for 2011 includes the LIFO liquidation impact relating to a decrement in the Company’s furniture LIFO pool. This decrement resulted in the liquidation of LIFO inventory quantities carried at lower costs in prior years as compared with the cost of current year purchases. This liquidation resulted in LIFO income of $4.2 million which was more than offset by LIFO expense of $15.6 million related to current inflation or a net increase in cost of sales of $11.4 million as referenced above. There were no LIFO liquidations in 2010.

The Company also records adjustments to inventory for shrinkage. Inventory that is obsolete, damaged, defective or slow moving is recorded at the lower of cost or market. These adjustments are determined using historical trends and are adjusted, if necessary, as new information becomes available. The Company charges certain warehousing and administrative expenses to inventory each period with $33.3 million and $33.8 million remaining in inventory as of December 31, 2012 and December 31, 2011, respectively.

Pension and Postretirement Health Benefits

On April 15, 2010, the Company notified the participants that it would terminate the Retiree Medical Plan effective December 31, 2010. The termination eliminated any future obligation of the Company to provide cost sharing benefits to current or future retirees. During the twelve month period ended December 31, 2010, the company recorded a pre-tax gain of $8.8 million for the reversal of actuarially-based liabilities resulting from the amendment of the Retiree Medical Plan.

Calculating the Company’s obligations and expenses related to its pension and Retiree Medical Plan requires selection and use of certain actuarial assumptions. As more fully discussed in Notes 11 and 12 to the Consolidated Financial Statements, these actuarial assumptions include discount rates, expected long-term rates of return on plan assets, and rates of increase in compensation and healthcare costs. To select the appropriate actuarial assumptions, management relies on current market conditions and historical information. Pension expense for 2012 was $5.7 million, compared to $1.6 million and $2.5 million in 2011 and 2010, respectively.

Cash Equivalents

An unfunded check balance (payments in-transit) exists for the Company’s primary disbursement accounts. Under the Company’s cash management system, the Company utilizes available borrowings, on an as-needed basis, to fund the clearing of checks as they are presented for payment. As of December 31, 2012, and 2011, outstanding checks totaling $39.4 million and $71.4 million, respectively, were included in “Accounts payable” in the Consolidated Balance Sheets.

All highly liquid debt instruments with an original maturity of three months or less are considered cash equivalents. Cash equivalents are stated at cost, which approximates market value. There were no short term investments as of December 31, 2012 and December 31, 2011.

Property, Plant and Equipment

Property, plant and equipment is recorded at cost. Depreciation and amortization are determined by using the straight-line method over the estimated useful lives of the assets. The estimated useful life assigned to fixtures and equipment is from two to ten years; the estimated useful life assigned to buildings does not exceed forty years; leasehold improvements are amortized over the lesser of their useful lives or the term of the applicable lease. Repair and maintenance costs are charged to expense as incurred.

 

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Software Capitalization

The Company capitalizes internal use software development costs in accordance with accounting guidance on accounting for costs of computer software developed or obtained for internal use. Amortization is recorded on a straight-line basis over the estimated useful life of the software, generally not to exceed ten years. Capitalized software is included in “Property, plant and equipment” on the Consolidated Balance Sheets. The total costs are as follows (in thousands):

 

     As of December 31,  
     2012     2011  

Capitalized software development costs

   $ 77,308      $ 69,879   

Accumulated amortization

     (53,943     (52,061
  

 

 

   

 

 

 

Net capitalized software development costs

   $ 23,365      $ 17,818   
  

 

 

   

 

 

 

Derivative Financial Instruments

The Company’s risk management policies allow for the use of derivative financial instruments to prudently manage foreign currency exchange rate and interest rate exposure. The policies do not allow such derivative financial instruments to be used for speculative purposes. At this time, the Company uses interest rate swaps which are subject to the management, direction and control of its financial officers. Risk management practices, including the use of all derivative financial instruments, are presented to the Board of Directors for approval.

All derivatives are recognized on the balance sheet date at their fair value. All derivatives are currently in a net liability position and are included in “Accrued liabilities” and “Other Long-Term Liabilities” on the Consolidated Balance Sheets. The interest rate swaps that the Company has entered into are classified as cash flow hedges in accordance with accounting guidance on derivative instruments and hedging activities as they are hedging a forecasted transaction or the variability of cash flow to be paid by the Company. Changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge are recorded in other comprehensive income, net of tax, until earnings are affected by the forecasted transaction or the variability of cash flow, and then are reported in current earnings.

The Company formally documents all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives designated as cash flow hedges to specific forecasted transactions or variability of cash flow.

The Company formally assesses, at both the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting changes in cash flow of hedged items. When it is determined that a derivative is not highly effective as a hedge then hedge accounting is discontinued prospectively in accordance with accounting guidance on derivative instruments and hedging activities. This has not occurred as all cash flow hedges contain no ineffectiveness. See Note 19, “Derivative Financial Instruments”, for further detail.

Income Taxes

The Company accounts for income taxes using the liability method in accordance with the accounting guidance for income taxes. The Company estimates actual current tax expense and assesses temporary differences that exist due to differing treatments of items for tax and financial statement purposes. These temporary differences result in the recognition of deferred tax assets and liabilities. A provision has not been made for deferred U.S. income taxes on the undistributed earnings of the Company’s foreign subsidiaries as these earnings have historically been permanently invested, except to the extent a liability was recorded in purchase accounting for the undistributed earnings of the foreign subsidiaries of OKI as of the date of the acquisition. It is not practicable to determine the amount of unrecognized deferred tax liability for such unremitted foreign earnings.

The current and deferred tax balances and income tax expense recognized by the Company are based on management’s interpretation of the tax laws of multiple jurisdictions. Income tax expense also reflects the Company’s best estimates and assumptions regarding, among other things, the level of future taxable income, interpretation of tax laws, and tax planning. Future changes in tax laws, changes in projected levels of taxable income, and tax planning could impact the effective tax rate and current and deferred tax balances recorded by the Company. Management’s estimates as of the date of the Consolidated Financial Statements reflect its best

 

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judgment giving consideration to all currently available facts and circumstances. As such, these estimates may require adjustment in the future, as additional facts become known or as circumstances change. Further, in accordance with the accounting guidance on income taxes, the tax effects from uncertain tax positions are recognized in the Consolidated Financial Statements, only if it is more likely than not that the position will be sustained upon examination, based on the technical merits of the position. The Company accounts for interest and penalties related to uncertain tax positions as a component of income tax expense.

Foreign Currency Translation

The functional currency for the Company’s foreign operations is the local currency. Assets and liabilities of these operations are translated into U.S. currency at the rates of exchange at the balance sheet date. The resulting translation adjustments are included in other comprehensive income (loss) in the Consolidated Statements of Comprehensive Income, a separate component of stockholders’ equity. Income and expense items are translated at average monthly rates of exchange. Realized gains and losses from foreign currency transactions were not material.

New Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04. The amendments in this ASU generally represent clarifications of fair value measurement, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements. On January 1, 2012, the Company adopted these amendments on a prospective basis and there was no impact on its financial position or results of operations.

In June 2011, the FASB issued ASU No. 2011-05, which requires entities to present items of net income and other comprehensive income either in a single continuous statement of comprehensive income or in two separate, but consecutive, statements of net income and other comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 was subsequently amended by ASU No. 2011-12, which deferred the requirement for companies to present reclassification adjustments for each component of accumulated other comprehensive income in both other comprehensive income and net income on the face of the financial statements. On January 1, 2012, the Company adopted the effective portions of ASU No. 2011-05, which are reflected in the Consolidated Financial Statements.

In September 2011, the FASB issued ASU 2011-08, “Intangibles—Goodwill and Other (Topic 350).” The guidance in ASU 2011-08 is intended to reduce complexity and costs by allowing the reporting entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The update is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted though and the Company adopted this early. There was no impact due to early adoption.

In July 2012, the FASB issued ASU No. 2012-02, on testing indefinite-lived intangible assets for impairment. Under the guidance, testing the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill has been simplified. The guidance allows an organization the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. An organization electing to perform a qualitative assessment is no longer required to calculate the fair value of an indefinite-lived intangible asset unless the organization determines, based on a qualitative assessment, that it is “more likely than not” that the asset is impaired. The guidance is effective for impairment tests for fiscal years beginning after September 15, 2012. The Company will adopt this guidance on January 1, 2013 but does not expect the adoption of this guidance to have a material impact on the Consolidated Financial Statements.

 

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3.  Share-Based Compensation

Overview

As of December 31, 2011, the Company has two active equity compensation plans. A description of these plans is as follows:

Amended and Restated 2004 Long-Term Incentive Plan (“LTIP”)

In March 2004, the Company’s Board of Directors adopted the LTIP to, among other things, attract and retain managerial talent, further align the interest of key associates to those of the Company’s shareholders and provide competitive compensation to key associates. Award vehicles include stock options, stock appreciation rights, full value awards, cash incentive awards and performance-based awards. Key associates and non-employee directors of the Company are eligible to become participants in the LTIP, except that non-employee directors may not be granted incentive stock options.

Nonemployee Directors’ Deferred Stock Compensation Plan

Pursuant to the United Stationers Inc. Nonemployee Directors’ Deferred Stock Compensation Plan, non-employee directors may defer receipt of all or a portion of their retainer and meeting fees. Fees deferred are credited quarterly to each participating director in the form of stock units, based on the fair market value of the Company’s common stock on the quarterly deferral date. Each stock unit account generally is distributed and settled in whole shares of the Company’s common stock on a one-for-one basis, with a cash-out of any fractional stock unit interests, after the participant ceases to serve as a Company director. For the years ended December 31, 2012, 2011 and 2010, the Company recorded compensation expense of $0.2 million, $0.2 million, and $0.1 million, respectively. As of December 31, 2012, 2011 and 2010, the accumulated number of stock units outstanding under this plan was 62,421; 89,285; and 83,854; respectively.

Accounting For Share-Based Compensation

The following table summarizes the share-based compensation expense (in thousands):

 

     Year Ended December 31,  
     2012     2011     2010  

Numerator:

      

Pre-tax expense

   $ 8,746      $ 15,734      $ 14,100   

Tax effect

     (3,323     (5,977     (5,412
  

 

 

   

 

 

   

 

 

 

After tax expense

   $ 5,423      $ 9,757      $ 8,688   
  

 

 

   

 

 

   

 

 

 

Denominator:

      

Denominator for basic shares—Weighted average shares

     40,337        43,822        46,376   

Denominator for diluted shares—Adjusted weighted average shares and the effect of dilutive securities

     40,991        45,014        48,286   

Net expense per share:

      

Net expense per share—basic

   $ 0.13      $ 0.22      $ 0.19   
  

 

 

   

 

 

   

 

 

 

Net expense per share—diluted

   $ 0.13      $ 0.22      $ 0.18   
  

 

 

   

 

 

   

 

 

 

The following tables summarize the intrinsic value of options outstanding, exercisable, and exercised for the applicable periods listed below:

Intrinsic Value of Options

(in thousands of dollars)

 

     Outstanding      Exercisable  

As of December 31, 2012

   $ 8,420       $ 8,420   

As of December 31, 2011

     13,668         13,668   

As of December 31, 2010

     19,937         19,937   

 

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Intrinsic Value of Options Exercised

(in thousands of dollars)

 

For the year ended

      

December 31, 2012

   $ 2,380   

December 31, 2011

     8,911   

December 31, 2010

     21,347   

The following tables summarize the intrinsic value of restricted shares outstanding and vested for the applicable periods listed below:

Intrinsic Value of Restricted Shares

(in thousands of dollars)

 

Outstanding

      

As of December 31, 2012

   $ 40,222   

As of December 31, 2011

     32,634   

As of December 31, 2010

     49,856   

Intrinsic Value of Restricted Shares Vested

(in thousands of dollars)

 

For the year ended

      

December 31, 2012

   $ 8,812   

December 31, 2011

     27,576   

December 31, 2010

     9,079   

The aggregate intrinsic values summarized in the tables above are based on the closing sale price per share for the Company’s Common Stock on the last day of trading in each respective fiscal period which was $30.99, $32.56, and $31.91 per share for the 2012, 2011, and 2010 periods ended. Additionally, the aggregate intrinsic value of options exercisable does not include the value of options for which the exercise price exceeds the stock price as of the last day of trading in each respective fiscal period.

As of December 31, 2012, there was $15.9 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted. This cost is expected to be recognized over a weighted-average period of 1.9 years.

Stock Options

The fair value of option awards and modifications to option awards is estimated on the date of grant or modification using a Black-Scholes option valuation model that uses various assumptions including the expected stock price volatility, risk-free interest rate, and expected life of the option.

Stock options generally vest in annual increments over three years and have a term of 10 years. Compensation costs for all stock options are recognized, net of estimated forfeitures, on a straight-line basis as a single award typically over the vesting period. The Company estimates expected volatility based on historical volatility of the price of its common stock. The Company estimates the expected term of share-based awards by using historical data relating to option exercises and employee terminations to estimate the period of time that options granted are expected to be outstanding. The interest rate for periods during the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. As of December 31, 2012, there was no unrecognized compensation cost related to stock option awards granted. There were no stock options granted during 2012, 2011, or 2010.

 

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The following table summarizes the transactions, excluding restricted stock, under the Company’s equity compensation plans for the last three years:

 

     2012     Weighted
Average
Exercise
Price
     2011     Weighted
Average
Exercise
Price
     2010     Weighted
Average
Exercise
Price
 

Options outstanding—January 1

     1,715,380      $ 24.62         2,563,708      $ 24.18         4,768,448      $ 22.51   

Granted

     —          —           —          —           —          —     

Exercised

     (217,634     18.69         (847,528     23.26         (2,199,930     20.54   

Cancelled

     (125,896     32.35         (800     29.51         (4,810     29.51   
  

 

 

      

 

 

      

 

 

   

Options outstanding—December 31

     1,371,850      $ 24.86         1,715,380      $ 24.62         2,563,708      $ 24.18   
  

 

 

      

 

 

      

 

 

   

Number of options exercisable

     1,371,850      $ 24.86         1,715,380      $ 24.62         2,563,708      $ 24.18   
  

 

 

      

 

 

      

 

 

   

 

* Aggregate intrinsic value of options exercisable does not include the value of options for which the exercise price exceeds the stock price as of December 31, 2012.

The following table summarizes outstanding and exercisable options granted under the Company’s equity compensation plans as of December 31, 2012:

 

Exercise Prices

   Outstanding      Remaining
Contractual
Life (Years)
     Exercisable  

15.01—20.00

     126,950         0.6         126,950   

20.01—25.00

     763,862         2.9         763,862   

25.01—30.00

     478,792         4.4         478,792   

30.01—35.00

     2,246         4.4         2,246   
  

 

 

       

 

 

 

Total

     1,371,850         3.2         1, 371,850   
  

 

 

       

 

 

 

Restricted Stock and Restricted Stock Units

The Company granted 461,512 shares of restricted stock and 245,737 restricted stock units (“RSU”s) during 2012. During 2011, the Company granted 30,097 shares of restricted stock and 332,888 RSUs. During 2010, the Company granted 303,674 shares of restricted stock and 249,632 RSUs. The restricted stock granted in each period generally vests in three equal annual installments on the anniversaries of the date of the grant. The majority of the RSUs granted in 2012, 2011 and 2010 vest in three annual installments based on the terms of the agreements, to the extent earned based on the Company’s cumulative economic profit performance against target economic profit goals, and have a minimum and maximum payout of zero to 150%, respectively. Included in the 2012, 2011 and 2010 grants were 426,064; 147,843; and 297,496 shares of restricted stock and RSUs granted to employees who were not executive officers, as of December 31, 2012, 2011 and 2010, respectively. In addition, there were 41,051; 39,314; and 44,176 RSUs granted to non-employee directors during the years ended December 31, 2012, 2011 and 2010, respectively. For the years ended December 31, 2012, 2011 and 2010, respectively, there were also 240,134; 175,828; and 211,634 shares of restricted stock and RSUs granted to executive officers. The restricted stock granted to executive officers vests with respect to each officer in annual increments over three years provided that the following conditions are satisfied: (1) the officer is still employed as of the anniversary date of the grant; and (2) the Company’s cumulative diluted earnings per share for the four calendar quarters immediately preceding the vesting date exceed $0.50 per diluted share as defined in the officers’ restricted stock agreement. As of December 31, 2012, there was $15.9 million of total unrecognized compensation cost related to non-vested

 

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restricted stock and RSUs granted. A summary of the status of the Company’s restricted stock and RSU grants and changes during the last three years is as follows:

 

Restricted Stock and RSUs

   2012     Weighted
Average
Grant Date
Fair Value
     2011     Weighted
Average
Grant Date
Fair Value
     2010     Weighted
Average
Grant Date
Fair Value
 

Nonvested—January 1

     1,002,125      $ 26.42         1,562,626      $ 20.13         1,409,620      $ 18.21   

Granted

     707,249        27.84         362,985        30.81         553,306        26.36   

Vested

     (324,345     22.00         (853,384     17.14         (368,436     22.83   

Cancelled

     (87,123     28.16         (70,102     21.97         (31,864     21.37   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Nonvested—December 31

     1,297,906      $ 28.61         1,002,125      $ 26.42         1,562,626      $ 20.13   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

4.  Goodwill and Intangible Assets

During 2011, the Company voluntarily changed the date of its annual goodwill and indefinite-lived intangible asset impairment test from the last day of the fourth quarter (December 31) to the first day of the fourth quarter (October 1). This change is preferable under the circumstances as it (1) results in better alignment with the Company’s annual strategic planning and forecasting process and (2) provides the Company with additional time in a given fiscal reporting period to accurately assess the recoverability of goodwill and indefinite-lived intangible assets and to measure any indicated impairment. The Company believes that the change in accounting principle related to the annual testing date will not delay, accelerate, or avoid an impairment charge. In accordance with Accounting Standards Codification (“ASC”) Topic 350 “Intangibles—Goodwill and other”, if indicators of impairment are deemed to be present, the Company would perform an interim impairment test and any resulting impairment loss would be charged to expense in the period identified. This change is not applied retrospectively as it is impracticable to do so because retrospective application would require the application of significant estimates and assumptions with the use of hindsight. Accordingly, the change was applied prospectively.

Accounting guidance on goodwill and intangible assets requires that goodwill be tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. Based on the test completed in 2012, the Company concluded that the fair value of each of the reporting units was in excess of the carrying value. The Company also adopted Accounting Standards Update (“ASU”) 2011-08 which allows for the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The Company applied this qualitative approach to two of its four reporting units. The other two reporting units were evaluated for impairment using the discounted cash flow and market based approach to determine fair value. The Consolidated Balance Sheets contain a material amount of goodwill related to MBS Dev, $13.6 million as of December 31, 2012. The goodwill impairment analysis on this reporting unit resulted in a fair value that exceeded the carrying value of the entity by approximately $2 million as of the last goodwill impairment testing date of October 1, 2012. This valuation performed for goodwill impairment testing as of October 1, 2012 was based on both a discounted cash flow method and comparative market multiples. The key assumptions driving the fair value of MBS Dev for purposes of this goodwill impairment test include forecasted revenues and margins. The discounted cash flow method also relied on a terminal value growth rate and the weighted average cost of capital of a market participant. Continued economic uncertainty could have a negative effect on the fair value of the reporting unit. At the Company’s annual impairment test date of October 1, 2012, the Company’s other reporting units are not at risk of failing the first step of the goodwill impairment test prescribed by related accounting guidance.

In the review of the indefinite lived intangible assets, it was determined that a trade name acquired in a past acquisition was no longer in use and therefore was fully impaired. The Company wrote off the value of this indefinite lived intangible, $0.7 million, in the fourth quarter of 2012 and included this amount within operating expenses in the Consolidated Statement of Income and within depreciation and amortization in the Consolidated Statement of Cash Flows. The Company does not believe any triggering event occurred during the three-month period ended December 31, 2012 that would require an interim impairment assessment on the remaining indefinite live intangibles. As a result, none of the goodwill or intangible assets, other than the asset previously discussed, with indefinite lives were tested for impairment during the three-month period ended December 31, 2012.

 

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As of December 31, 2012 and 2011, the Company’s Consolidated Balance Sheets reflected $357.2 million and $328.1 million of goodwill, and $67.2 million and $56.3 million in net intangible assets, respectively.

Net intangible assets consist primarily of customer lists, trademarks, and non-compete agreements purchased as part of past acquisitions. The Company has no intention to renew or extend the terms of acquired intangible assets and accordingly, did not incur any related costs during 2012 or 2011. Amortization of intangible assets purchased as part of these acquisitions totaled $6.1 million, $5.2 million, and $5.2 million for the years ended December 31, 2012, 2011, and 2010, respectively. Accumulated amortization of intangible assets as of December 31, 2012 and 2011 totaled $32.1 million and $26.7 million, respectively.

The following table summarizes the intangible assets of the Company by major class of intangible assets and the cost, accumulated amortization, net carrying amount, and weighted average life, if applicable (in thousands):

 

     December 31, 2012      December 31, 2011  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
     Weighted
Average
Useful
Life
(years)
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
     Weighted
Average
Useful
Life
(years)
 

Intangible assets subject to amortization

                     

Customer relationships and other intangibles

   $ 79,170       $ (30,369   $ 48,801         14       $ 65,860       $ (25,163   $ 40,697         14   

Non-compete agreements

     4,740         (1,588     3,152         4         4,100         (1,512     2,588         4   

Trademarks

     3,040         (101     2,939         5         —           —          —           —     
  

 

 

    

 

 

   

 

 

       

 

 

    

 

 

   

 

 

    

Total

   $ 86,950       $ (32,058   $ 54,892          $ 69,960       $ 26,675      $ 43,285      

Intangible assets not subject to amortization

                     

Trademarks

     12,300         —          12,300         n/a         13,000         —          13,000         n/a   
  

 

 

    

 

 

   

 

 

       

 

 

    

 

 

   

 

 

    

Total

   $ 99,250       $ (32,058   $ 67,192          $ 82,960       $ (26,675   $ 56,285      
  

 

 

    

 

 

   

 

 

       

 

 

    

 

 

   

 

 

    

The following table summarizes the amortization expense expected to be incurred over the next five years on intangible assets (in thousands):

 

Year

   Amounts  

2013

   $ 6,776   

2014

     6,600   

2015

     6,526   

2016

     6,512   

2017

     6,410   

5.  Severance and Restructuring Charges

On February 13, 2012, the Company approved a distribution network optimization and cost reduction program. This program was substantially completed in the first quarter of 2012 and the Company recorded a $6.2 million pre-tax charge in that period in connection with these actions. The pre-tax charge is comprised of facility closure expenses of $2.6 million and severance and related expense of $3.6 million which were included in operating expenses. Cash outlays associated with facility closures in 2012 were $2.1 million. Cash outlays associated with this severance charge in 2012 were $1.9 million. During 2012, the Company reversed a portion of these severance charges totaling $0.3 million. As of December 31, 2012, the Company had accrued liabilities for these actions of $1.9 million, for which the cash outflows are expected to occur primarily in 2013.

On December 31, 2010, the Company approved an early retirement program for eligible employees and a focused workforce realignment to support strategic initiatives. The Company recorded a pre-tax charge of $9.1 million in the fourth quarter of 2010 for estimated severance pay, benefits and outplacement costs related to these actions. This

 

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charge was included in the operating expenses on the Consolidated Statements of Income for the quarter ending December 31, 2010. Cash outlays associated with this severance charge in 2012 were $2.4 million. Cash outlays associated with this severance charge in 2011 totaled $5.6 million. During 2011, the Company reversed a portion of these severance charges totaling $0.9 million. During 2012, the Company reversed a portion of these severance charges totaling $0.1 million. As of December 31, 2012 and December 31, 2011, the Company had accrued liabilities for these actions of $0.1 million and $2.6 million, respectively.

6.  Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss as of December 31, 2012, 2011 and 2010 included the following (in thousands):

 

     As of December 31,  
     2012     2011     2010  

Unrealized currency translation adjustments

   $ (5,760   $ (7,327   $ (5,184

Unrealized loss on interest rate swaps, net of tax

     (713     (6,432     (15,621

Minimum pension liability adjustments, net of tax

     (47,292     (42,647     (22,362
  

 

 

   

 

 

   

 

 

 

Total accumulated other comprehensive loss

   $ (53,765   $ (56,406   $ (43,167
  

 

 

   

 

 

   

 

 

 

7.  Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if dilutive securities were exercised into common stock. Stock options, restricted stock and deferred stock units are considered dilutive securities. Stock options to purchase 0.5 million, 0.1 million, and 0.8 million shares of common stock were outstanding at December 31, 2012, 2011, and 2010, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

 

     Years Ended December 31,  
     2012      2011      2010  

Numerator:

        

Net income

   $ 111,830       $ 108,996       $ 112,757   

Denominator: