ITEM 1. BUSINESS.
General
United Stationers Inc. is a leading wholesale distributor of business products, with consolidated net sales of approximately $4.8 billion. United stocks a broad and deep line of approximately 100,000 products, including technology products, traditional office products, office furniture, janitorial and breakroom supplies, and industrial supplies. The Company's network of 64 distribution centers allows it to ship these items to over 25,000 reseller customers, reaching more than 90% of the population of the U.S. and major cities in Mexico on an overnight basis.
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 approximately 100,000 stockkeeping units ("SKUs") in these categories:
Technology Products. The Company is a leading national wholesale distributor of computer supplies and peripherals. It stocks approximately 10,000 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 35% of the Company's 2010 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 about 20,000 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 28% 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 8,000 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 23% of the latest year's net sales primarily from Lagasse, Inc. (Lagasse), a wholly owned subsidiary of USSC.
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 7% of net sales for the year.
Industrial Supplies. USSC acquired ORS Nasco Holding, Inc. (ORS Nasco) in December 2007, and as a result, now stocks over 55,000 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 2010, this product category accounted for roughly 6% of the Company's net sales.
The remainder of the Company's consolidated net sales came from freight, advertising and software related revenue.
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, UniSan® janitorial and sanitation products, Alera® office furniture and Anchor Brand® in the welding, industrial, safety and oil field pipeline categories.
During 2010, private brand products accounted for about 14% of United's net sales.
Customers
United serves a diverse group of over 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, Staples, which constituted 10.7% of its 2010 consolidated net sales. No other single customer accounted for more than 10% of 2010 consolidated net sales.
Sales to independent resellers-which include our United Stationers Supply, Lagasse and ORS Nasco resellers, as well as new channel customers-contributed approximately 85% 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 comprise about 15% of the Company's 2010 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 2010;
•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;
•Expanded services offerings labeled Orbit Point which is a new suite of services designed to help resellers pursue, win, and support large, national, regional, and multi-location accounts;
•Delivery of integrated marketing campaigns that include annual marketing planning, regular and consumer touchpoints, 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 99.6% order accuracy rate for the year;
•High-quality customer service from several state-of-the-art customer care centers;
•National distribution capabilities that enable next- to second-day delivery to the contiguous U.S. and major cities in Mexico, providing a 98% on-time delivery rate in 2010;
•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 commercial dealers, contract stationers and retail dealers. The printed catalogs usually are customized with each reseller's name, then sold to the resellers who, in turn, distribute them to their customers. The Company markets its broad product offering primarily through the Everything for the Workplace (EFTW) catalog. This is available in both print and electronic versions and can include various selling prices (rather than the manufacturer's suggested retail price). In addition, the Company typically produces a number of promotional catalogs each quarter. United also develops separate monthly, quarterly and semi-annual flyers covering most of its product categories, including its private brand lines that offer a large selection of popular commodity products. United sends 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 2010, United received approximately 93% of its orders electronically.
Distribution
The Company uses a network of 64 distribution centers to provide about 100,000 items to over 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 products on an overnight basis to more than 90% of the population of the U.S. and major cities in Mexico. United's domestic operations generated approximately $4.7 billion of its approximately $4.8 billion in 2010 consolidated net sales, with its international operations contributing another $0.1 billion to 2010 net sales.
Distribution centers are supplemented with 30 re-distribution points across the nation to facilitate delivery. United has a dedicated fleet of approximately 550 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.
United's inventory locator system allows it to provide resellers with timely delivery of the products they order. If a reseller asks for an item that is out of stock at the nearest distribution center, the system has the capability to automatically search for the product at other facilities within the shuttle network. When the item is found, the alternate location coordinates shipping with the primary facility. For most resellers, the result is a single on-time delivery of all items. This system gives United added inventory support while minimizing working capital requirements. As a result, the Company can provide higher service levels to its reseller customers, reduce back orders, and minimize time spent searching for substitute merchandise. These factors contribute to a high order fill rate and efficient levels of inventory. To meet its delivery commitments and to maintain high order fill rates, United carries a significant amount of inventory, which contributes to its overall working capital requirements.
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 appreciate 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. Its "War on Waste" (WOW) program, which began in 2007, is targeting the removal of $100 million in costs over five years through a combination of new and continuing activities. In addition, WOW includes process improvement and work simplification activities that will 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 over 1,000 manufacturers. This purchasing volume means United receives substantial supplier allowances and can realize significant economies of scale in its logistics and distribution activities. In 2010, United's largest supplier was Hewlett-Packard Company, which represented approximately 20% 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.
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 16, 2011, United employed approximately 5,950 people.
Management believes it has good relations with its associates. Approximately 570 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 are scheduled to expire in 2011, and the bargaining agreement in Baltimore is scheduled to expire in 2012. 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
ITEM 1A.
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 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 office products, technology and furniture, is affected by the number of white collar and other workers employed by the businesses United's customers serve. An interruption of growth in these markets or a general economic downturn, together with the negative effect this has on the number of workers employed, may adversely affect United's business, financial condition and results of operations.
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 and growing sales to existing and new customers. 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 growth objectives in its sales channels;
•Inability to achieve the Company's annual "War on Waste" (WOW) initiatives to reduce expenses and improve productivity and quality;
•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 a significant customer could significantly reduce United's revenues and profitability.
United's top five customers accounted for approximately 26% of the Company's 2010 net sales. The loss of one or more key customers, changes in the sales mix or sales volume to key customers, a significant downturn in the business or financial condition of any of them or the failure of any of them to timely pay all amounts due United 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. In addition, 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 be harmed. 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 dealers and distributors for a significant percentage of its net sales.
Sales to independent office product dealers and janitorial and sanitation distributors account for a significant portion of United's net sales. Independent dealers and distributors compete with national retailers that have substantially greater financial resources and technical and marketing capabilities. Over the years, several of the Company's independent dealer and distributor customers have been acquired by national retailers or have ceased operation. If United's customer base of independent dealers and distributors 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 are primarily 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 some of its own suppliers, which sell their products directly to United's customers. 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.
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.
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-General" included below under Item 7.
One of the Company's external financing sources is a receivables securitization program that is dependent on lenders' commitments that must be renewed annually. The Company's other 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.
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 100,000 SKUs 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.
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. In addition, United generally does not have the right to return excess inventory of private brand products to the manufacturers.
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.
The Company is subject to costs and risks associated with laws and regulations affecting United's business.
United is subject to a wide range of state and federal laws, including laws regarding labor and employment, wages and hours, product liability, product safety, the storage and transportation of hazardous materials, privacy and data security, imports and exports, and intellectual property. These laws and regulations 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.
The security of private information United's customers provide to the Company could be compromised.
Through United's sales and marketing activities, the Company collects and stores personally identifiable information and credit card data that our 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. 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.
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.
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.
ITEM 1B. UNRESOLVED COMMENT LETTERS.
None.
ITEM 2.
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, 2010, 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 21,000 square feet of office space in Tulsa, Oklahoma, 20,000 square feet in Muskogee, Oklahoma and 5,700 square feet in Denver, Colorado.
Distribution Centers. The Company utilizes 64 distribution centers totaling approximately 12.6 million square feet of warehouse space. Of the 12.6 million square feet of distribution center space, 2.1 million square feet is owned and 10.5 million square feet is leased.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in legal proceedings arising in the ordinary course of its business. The Company is not involved in any legal proceedings that it believes will result, individually or in the aggregate, in a material adverse effect upon its financial condition or results of operations.
ITEM 4.
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 2010.
EXECUTIVE OFFICERS OF THE REGISTRANT (as of February 25, 2011)
The executive officers of the Company are as follows:
Name, Age and
Position with the Company
Business Experience
Richard W. Gochnauer
61, Chief Executive Officer
Richard W. Gochnauer has served as the Company's Chief Executive Officer since December 2002, having also served as the Company's President from such date until September 2010. He joined the Company as its Chief Operating Officer and as a Director in July 2002. From 1994 until he joined the Company, Mr. Gochnauer held the positions of Vice Chairman and President, International, and President and Chief Operating Officer of Golden State Foods, a privately-held food company that manufactures and distributes food and paper products. Prior to that, he served as Executive Vice President of the Dial Corporation, with responsibility for its household and laundry consumer products businesses.
S. David Bent
50, 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
54, 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.
Name, Age and
Position with the Company
Business Experience
Timothy P. Connolly
47, 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.
Barbara J. Kennedy
44, 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.
P. Cody Phipps
49, President and Chief Operating Officer
P. Cody Phipps was promoted to President and Chief Operating Officer in September 2010. Prior to that time he served as the Company's President, United Stationers Supply from October 2006 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.
Victoria J. Reich
53, Senior Vice President and Chief Financial Officer
Victoria J. Reich joined the Company in June 2007 as its Senior Vice President and Chief Financial Officer. Prior to joining the Company, Ms. Reich spent ten years with Brunswick Corporation where she most recently was President of Brunswick European Group from August 2003 until June 2006. She served as Brunswick's Senior Vice President and Chief Financial Officer from 2000 to 2003 and as Vice President and Controller from 1996 until 2000. Before joining Brunswick, Ms. Reich spent 17 years at General Electric Company where she held various financial management positions.
Name, Age and
Position with the Company
Business Experience
Todd A. Shelton
44, 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.
Stephen A. Schultz
44, Group President, Lagasse and ORS Nasco
Stephen A. Schultz was appointed to the position of Group President, Lagasse and ORS Nasco in September 2008. Prior to this appointment, he held the position of President, Lagasse, Inc.from August 2001. In October 2003, he assumed the additional position of Senior Vice President, Category Management-Janitorial/Sanitation, of the Company. Mr. Schultz joined Lagasse in early 1999 as Vice President, Marketing and Business Development, and became a Senior Vice President of Lagasse in late 2000. Before joining Lagasse, he served for nearly 10 years in various executive sales and marketing roles for Hospital Specialty Company, a manufacturer and distributor of hygiene products for the institutional janitorial and sanitation industry.
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.
PART II
ITEM 5.
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:
On February 16, 2011, the closing sale price of Company's common stock as reported by NASDAQ was $68.31 per share. On February 16, 2011, there were approximately 541 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.
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, 2005 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.
Common Stock Repurchases
As of December 31, 2010, the Company had $87.7 million remaining under share repurchase authorizations from its Board of Directors. During 2010, the Company repurchased 2.0 million shares of common stock at an aggregate cost of $113.2 million. The Company did not repurchase any common stock during 2009.
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.
Dividends
The Company's policy has been to maintain a balanced approach to capital deployment including investments in the business, acquisitions, and returning capital to shareholders via share repurchases. The Company has not paid cash dividends since 1995. Any payment of dividends will depend upon the Company's consolidated financial position, results of operations and other factors deemed relevant by the Company's Board of Directors. Furthermore, as a holding company, USI's ability to pay cash dividends in the future depends upon the receipt of dividends or other payments from its operating subsidiary, USSC. The Company's debt agreements impose limited restrictions on the payment of dividends and share repurchases. For further information on the Company's debt agreements, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" in Item 7, and Note 9 to the Consolidated Financial Statements included in Item 8 of this Annual Report.
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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data of the Company for the years ended December 31, 2006 through 2010 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, reclassifications of discontinued operations and certain other 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:
(1)Certain prior period amounts have been reclassified to conform to the current presentation. Such reclassifications were limited to Balance Sheet and Cash Flow Statement presentation and did not impact the Statements of Income. Specifically, the Company reclassified certain offsets to "Accrued Liabilities" related to merchandise return reserves to "Inventory". This reclassification began in the fourth quarter of 2007, with prior periods updated to conform to this presentation. For the year ended December 31, 2006, $7.0 million were reclassified to "Inventory" out of "Accrued Liabilities" with corresponding changes made to the Statement of Cash Flows within "Cash Flows From Operating Activities".
(2)In 2006, the Company recorded $60.6 million, or $1.21 per diluted share in favorable benefits from the Company's product content syndication program and certain marketing program changes.
(3)Includes restructuring, severance and other charges in the following years: 2010-$11.9 million reversal for vacation pay policy change, $8.8 million reversal for Retiree Medical Plan termination, and $9.1 million charge for early retirement/workforce realignment. 2009-$3.4 million severance charge. 2007-$1.4 million charge for the 2006 Workforce Reduction Program. 2006-$6.0 million charge for the 2006 Workforce Reduction Program, partially offset by a $4.1 million reversal of previously established restructuring reserves.
(4)Primarily represents items in the following years: 2010-an accounting change to bring prior acquisition earn-out liabilities to fair value. 2006 through 2009-a loss on the sale of certain trade accounts receivable through the Company's Prior Receivables Securitization Program. For further information on the Company's Prior Receivables Securitization Program, see Note 10 "Off-Balance Sheet Financing" under Item 8 of this Annual Report.
(5)In accordance with Generally Accepted Accounting Principles ("GAAP"), total assets exclude $23.0 million in 2008, $248.0 million in 2007, and $225.0 million in 2006 of certain trade accounts receivable sold through the Company's Prior Receivables Securitization Program. For further information on the Company's Prior Receivables Securitization Program, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Off-Balance Sheet Arrangements-Prior Receivables Securitization Program" under Item 7
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.
Overview and Recent Results
The Company is a leading wholesale distributor of business products, with 2010 net sales of approximately $4.8 billion. The Company sells its products through a national distribution network of 64 distribution centers to over 25,000 resellers, who in turn sell directly to end consumers.
As reported in the Company's press release, dated February 10, 2011, first quarter sales to date were up approximately 3%. Early positive results have been seen from the Company's growth strategies with signs that segments of the economy are gradually improving.
Key Company and Industry Trends
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 Company is developing growth strategies that do not rely exclusively on improvement in the general economy. These strategies include initiatives to penetrate the government and public sector channels, open new channels and new routes to market by continuing to develop new capabilities and services, develop advanced supply chain analysis capabilities to convince resellers and suppliers to leverage the Company's services and distribution network, and provide innovative new services to industrial resellers. The Company is also continuing its efforts to cross sell janitorial and breakroom supplies into other channels as well as advancing e-business capabilities.
•Sales growth of 2.6% for the year 2010 was largely driven by targeted growth initiatives that overcame lackluster economic conditions. The Company made significant progress on its growth strategies during 2010 including advancing its e-business capabilities, helping suppliers and resellers reduce supply chain costs, expanding its public sector business, adding new channel customers, and leveraging the Company's broad distribution platform to add industrial products to more distribution centers. While there are signs that segments of the economy are gradually improving, the Company's focus remains on growth initiatives that are not totally dependent on an economic recovery.
•Net income for 2010 was $112.8 million and diluted earnings per share were $4.67 compared to 2009 net income of $101.0 million and diluted earnings per share of $4.19. Included in the 2010 results are a favorable $11.9 million (non-cash/pre-tax) adjustment to reverse vacation pay liabilities, a charge of $9.1 million (pre-tax) related to a voluntary early retirement and workforce realignment program, and an $8.8 million (non-cash/pre-tax) liability reversal for the termination of the post-retirement health care benefit plan. Excluding these non-operating items, adjusted net income for 2010 was $105.6 million and adjusted diluted earnings per share were $4.37. Included in the 2009 results were a $14.0 million favorable negotiated settlement with a service supplier and a $3.4 million pre-tax severance charge. Excluding these non-operating items, 2009 adjusted net income was $94.3 million and adjusted diluted earnings per share were $3.91. Record adjusted diluted earnings per share in 2010 of $4.37 were up 12% versus the adjusted 2009 amount.
•Sales for 2010 increased 2.6% to approximately $4.8 billion. Industrial supplies led the growth with an increase of 22.8% over the prior year buoyed by improvement in the manufacturing sector and continued growth from the Company's investments and initiatives. Office products and technology also grew 3.9% and 2.0%, respectively. These favorable items were partially offset by furniture and janitorial/breakroom which declined 2.8% and 1.0%, respectively. Janitorial/breakroom was negatively impacted by difficult prior year flu-related product sales comparisons and the shift of some national account business that is now serviced directly by manufacturers.
•Gross margin as a percent of sales for 2010 was 15.1% versus 14.7% in 2009. The gross margin rate in 2010 was favorable versus the prior year mainly due to increased supplier allowances resulting from volume growth and program enhancements. The Company's War on Waste (WOW) program also helped to partially offset margin pressures resulting from competitive pricing, lower product inflation, higher LIFO expense, and higher fuel costs. Going forward, gross margins are expected to benefit from sales growth and enhanced marketing programs to earn additional supplier allowances, as well as from WOW savings. These factors should more than counter the negative effects of a competitive pricing environment and higher fuel costs.
•Operating expenses in 2010 were $520.8 million or 10.8% as a percent of sales for the year compared to $503.0 million or 10.7% in 2009. Excluding the non-operating items previously mentioned, adjusted operating expenses were $532.4 million or 11.0% of sales in 2010 compared to $513.6 million or 10.9% of sales in the prior year. Spending to support strategic initiatives was maintained and certain employee-related costs were reinstated throughout the year. Despite this, overall expenses as a percent of sales remained relatively constant. The Company will continue to target aggressive WOW savings as well as savings in the second half of 2011 from the early retirement and realignment actions.
•Operating income was $209.8 million or 4.3% of sales in 2010 compared to $187.6 million or 4.0% of sales in the prior year. Excluding the non-operating items noted above, 2010 adjusted operating income was $198.2 million or 4.1% versus $177.0 million or 3.8% in 2009.
•Operating cash flows for 2010 were $114.8 million versus $239.4 million in 2009. In 2010, inventory investments were made to support sales growth, while the prior-year's cash flow was higher due to a significant reduction in inventory. Cash flow used in investing activities was $42.7 million compared to the prior-year amount of $14.8 million. Included in the current year amount was $15.5 million related to an investment and an acquisition. Capital spending ended 2010 at $27.3 million versus $14.9 million in 2009.
•During 2010, the Company repurchased 2.0 million shares of common stock for $113.2 million under its publicly-announced share repurchase programs. On October 25, 2010, the Company announced that its Board of Directors authorized the purchase of an additional $100.0 million of the Company's common stock. As of February 16, 2011, the Company had approximately $78.2 million remaining of its existing share repurchase authorizations from the Board of Directors.
•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, which allows the Company to accelerate e-business development and enable customers and suppliers to leverage the internet. 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. The $3 million in deferred payments are to be paid to the former owners over the course of the next four years, the timing of which is based upon the achievement of certain financial goals. As a result of the acquisition, the Company recorded $14.2 million of goodwill, $3.7 million in intangible assets, and $4.3 million of liabilities, at fair value, to be paid for the deferred payments and the earn-out. At year end 2010, in accordance with accounting guidelines, the Company revalued the earn-out liabilities to $5.1 million based on the fair value of
each earn-out as of that date and recorded a non-cash, pre-tax charge of $0.8 million in Other Expense, net. Net of cash held by MBS Dev at closing, the initial cash outlay was $10.5 million. In addition, 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.
•The Company announced two senior management changes during the year. First, Mr. Richard W. Gochnauer will resign from the position of Chief Executive Officer at the Company's annual shareholders' meeting in May 2011. Subsequent to this, Mr. P. Cody Phipps will become Chief Executive Officer of the Company. Mr. Phipps was named President and Chief Operating Officer of the Company in September 2010, and has contributed significantly to United Stationers' success during his seven years with the Company. In addition, Ms. Victoria J. Reich has decided to leave the Company for personal reasons by the end of 2011. Ms. Reich will remain in her role as Senior Vice President and Chief Financial Officer, participate in the identification and recruitment of her successor and provide continued support until the transition is complete.
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 and 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 estimated customer discounts and rebates as discussed below, and increased by estimated supplier allowances and promotional incentives. These allowances and incentives are estimated on an ongoing basis and the potential variation between the actual amount of these margin contribution elements and the Company's estimates of them could be material to its financial results. Reported results include management's current estimate of such allowances and incentives.
In 2010, approximately 18% of the Company's estimated annual supplier allowances and incentives were fixed, which were 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.
The remaining 82% of the Company's estimated supplier allowances and incentives in 2010 were 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. 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 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 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 estimated annual sales volume to the Company's customers. Annual rebates earned by customers include growth components, volume hurdle components, and advertising allowances.
Shipping, handling and fuel costs billed to customers are treated as revenues and recognized at the time title to the product has transferred to the customer. Freight costs for inbound and outbound shipments are included in the Company's 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 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 on the Consolidated Balance Sheets, include such trade accounts receivable and are net of allowances for doubtful accounts and anticipated discounts. To determine an estimate for an allowance for doubtful accounts, the Company makes judgments as to the collectability of accounts receivable based on historical trends and future expectations. This allowance adjusts gross trade accounts receivable downward to its estimated collectible or net realizable value. To determine the appropriate allowance for doubtful accounts, management undertakes a two-step process. First, management reviews specific customer accounts receivable balances and specific customer circumstances to determine whether a further allowance is necessary. As part of this specific-customer analysis, management considers items such as account agings, bankruptcy filings, litigation,
government investigations, historical charge-off patterns, accounts receivable concentrations and the current level of receivables compared with historical customer account balances. Second, a set of general allowance percentages are applied to accounts receivable generated as a result of sales. These percentages are based on historical trends for non-specific customer write-offs. Periodically, management reviews these allowance percentages, adjusting for current information and trends.
The primary risks in the methodology used to estimate the allowance for doubtful accounts are its dependence on historical information to predict the collectability of accounts receivable and timeliness of current financial information from customers. To the extent actual collections of accounts receivable differ from historical trends, the allowance for doubtful accounts and related expense for the current period may be overstated or understated.
Goodwill and Intangible Assets
Goodwill is initially recorded based on the premium paid for acquisitions and is subsequently tested for impairment. The Company tests goodwill for impairment annually 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. At our annual impairment test date of December 31, 2010, the Company's reporting units are not at risk of failing 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 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, property and general liability 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 both a per-occurrence maximum loss and an annual aggregate maximum cap on workers' compensation and auto claims.
Inventories
Inventory constituting approximately 79% of total inventory as of December 31, 2010 and 2009, 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 $84.7 million and $80.9 million higher than reported as of December 31, 2010 and December 31, 2009, respectively. The change in the LIFO reserve since December 31, 2009, resulted in a $3.8 million increase in cost of sales.
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 $29.8 million and $25.3 million remaining in inventory as of December 31, 2010 and December 31, 2009, 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 primarily uses interest rate swaps which are subject to the management, direction and control of our 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 in a net receivable position are included in "Other assets", and those in a net liability position are included in "Other long-term liabilities". 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. At this time, this has not occurred as all cash flow hedges contain no ineffectiveness. See Note 20, "Derivative Financial Instruments", for further detail.
Income Taxes
The Company accounts for income taxes in accordance with accounting guidance on 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.
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 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 also accounts for interest and penalties related to uncertain tax positions as a component of income tax expense.
Pension and Postretirement Health Benefits
For the year ending December 31, 2009, the rate of compensation increase was 3.75% prior to March 1, 2009. At that time, the Company froze pension service benefits for employees not covered by collective bargaining agreements. 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 2010.
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 and healthcare costs for the years ended December 31, 2010, 2009 and 2008:
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. Costs associated with the Company's Retiree Medical Plan were $0.1 million for each of the years ended 2009 and 2008.
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 12 and 13 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 2010 was $2.5 million, compared to $6.3 million in 2009 and $5.6 million in 2008. A one percentage point decrease in the assumed discount rate would have resulted in an increase in pension expense for 2010 of approximately $1.8 million and increased the year-end projected benefit obligation by $21.0 million.
Results for the Years Ended December 31, 2010, 2009 and 2008
The following table presents the Consolidated Statements of Income as a percentage of net sales:
The above table includes all items that are separately itemized in the tables below for 2010 and 2009. Operating expenses for 2008 included a $5.1 million gain on the sale of distribution centers, $4.7 million gain on sale of former corporate headquarters, and $6.7 million asset impairment charge.
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, 2010 and 2009 (in millions, except share data). The table shows Adjusted Operating Income, Net Income and Diluted Earnings per Share excluding the effects of the vacation pay policy change in 2010, early retirement/workforce realignment in 2010, Retiree Medical Plan termination in 2010, negotiated settlement with a service supplier in 2009, and the first quarter severance charges in 2009 (see "Comparison of Results for the Years Ended December 31, 2010 and 2009" 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.
Comparison of Results for the Years Ended December 31, 2010 and 2009
Net Sales. Net sales for the year ended December 31, 2010 were approximately $4.8 billion, up 2.6%, compared with $4.7 billion in 2009. The following table shows net sales by product category for 2010 and 2009 (in millions):
(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 increased 2.0% in 2010 compared to 2009. This category continues to represent the largest percentage of the Company's consolidated net sales in 2010 accounting for about 35%. Printer imaging growth and double-digit growth in hardware contributed to this sales increase. Overall, gains from growth strategies were partially offset by timing shifts and the Company's decision to exit low-margin business. Technology sales continue to be driven through targeted marketing programs, growth in private brands, expansion of product portfolio, and managed print services.
Sales of traditional office products in 2010 rose 3.9% versus 2009. Traditional office supplies represented approximately 28% of the Company's consolidated net sales for 2010. Cut sheet paper and traditional office products both grew reflecting gains from the Company's strategic growth initiatives including business garnered through supply chain efficiency work with various buying groups and suppliers. These efforts more than offset generally slow market conditions throughout the year.
Sales of janitorial and breakroom supplies declined 1.0% in 2010 as compared to 2009. This category accounted for nearly 23% of the Company's 2010 consolidated net sales. Slowing sales due to lower flu-related product sales and the shift of some volume direct to the manufacturer were partially offset by growth initiatives.
Office furniture sales in 2010 were down 2.8% compared to 2009. Office furniture accounted for approximately 7% of the Company's 2010 consolidated net sales. This category, which typically has higher margins, has been slowly recovering from the recession as consumers put off high dollar discretionary purchases of furniture. Current year growth trends are favorable to the declines seen in 2009 as investments to serve the contract furniture dealer channel are starting to show progress.
Sales of industrial supplies increased 22.8%, 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 6% of the Company's net sales in 2009.
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 2010 was $730.6 million, compared to $690.6 million in 2009. Gross profit as a percentage of net sales (the gross margin rate) for 2010 was 15.1%, as compared to 14.7% for 2009. The 2010 gross margin rate improved approximately 60 basis points (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 Company also leveraged occupancy margin costs which improved 10 bps as sales rose and renegotiated leases brought overall costs down. These items were partially offset by competitive pricing pressures combined with a product mix shift (10 bps) and lower product cost inflation (15 bps). Gross margin also benefited from WOW savings which helped to offset increasing fuel costs.
Operating Expenses. Operating expenses in 2010 were $520.8 million or 10.8% as a percent of sales for the year compared to $503.0 million or 10.7% in 2009. Excluding the non-operating items previously mentioned, adjusted operating expenses were $532.4 million or 11.0% of sales in 2010 compared to $513.6 million or 10.9% of sales in the prior year. The reinstatement of certain employee-related costs throughout the year added approximately 50 bps to the operating expense ratio. Spending to support strategic initiatives was also maintained which raised employee related costs and headcount. Despite these cost restorations and investments in the business, overall expenses as a percent of sales remained relatively constant. This is due to several factors. First, lower depreciation costs of 10 bps resulted from lower capital spending in the past several years. In addition, bad debt costs declined by 10 bps as the credit environment appeared to be slowly improving and bad debt as a percent of sales returned to more typical, historic levels for the Company. Lastly, rising inventory levels contributed approximately 20 bps improvement in operating expenses as the amount of inventory capitalized was higher than in the prior year. WOW savings also helped to offset the higher variable compensation and spending on growth initiatives.
Interest Expense, net. Net interest expense for 2010 was $26.0 million, compared with $27.3 million in 2009. Interest expense declined slightly as average outstanding debt declined slightly from 2009.
Other Expense, net. Other Expense for 2010 was $0.8 million, compared with $0.2 million in 2009. Net Other Expense for 2010 reflected an accounting charge to bring prior acquisition earn-out liabilities to fair value. Net Other Expense for 2009 reflected costs associated with the sale of certain trade accounts receivable through the Company's Prior Receivables Securitization Program. The Prior Receivables Securitization Program was terminated in the first quarter of 2009. This program was replaced with the Current Receivables Securitization Program which qualifies for on-balance sheet treatment meaning that all borrowing costs from the 2009 Receivables Securitization Program are included in Interest Expense, net. There have been no borrowings under the 2009 Receivables Securitization Program because of significantly reduced funding requirements resulting from strong operating cash flow.
Income Taxes. Income tax expense was $70.2 million in 2010, compared with $59.1 million in 2009. The Company's effective tax rate was 38.4% in 2010, compared to 36.9% in 2009. This effective tax rate increase relates to higher income tax contingencies and the mix of income between jurisdictions and legal entities.
Net Income. Net income for 2010 was $112.8 million and diluted earnings per share were $4.67 compared to 2009 net income of $101.0 million and diluted earnings per share of $4.19. Included in the 2010 results are a favorable $11.9 million (non-cash/pre-tax) 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 $4.37. Included in the 2009 results were a $14.0 million favorable negotiated settlement with a service supplier and a $3.4 million pre-tax severance charge. Excluding these non-operating items, 2009 adjusted net income was $94.3 million and adjusted diluted earnings
per share were $3.91. Record adjusted diluted earnings per share in 2010 of $4.37 were up 12% versus the adjusted 2009 amount.
Comparison of Results for the Years Ended December 31, 2009 and 2008
Net Sales. Net sales for the year ended December 31, 2009 were approximately $4.7 billion, down 5.2%, on a workday adjusted basis, compared with $5.0 billion in 2008. The following table shows net sales by product category for 2009 and 2008 (in millions):
(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 declined 2.6%, after adjusting for one less selling day, in 2009 compared to 2008. This category continues to represent the largest percentage of the Company's consolidated net sales and accounted for approximately 35% for 2009. Discretionary products in this category experienced a year-over-year decline while consumables were relatively flat to the prior year. Increased penetration and sales of the Company's Innovera private brand products, mainly in imaging and supplies, helped limit the overall decline in this category versus the prior year.
Sales of traditional office products in 2009 fell 4.3% per selling day versus 2008. Traditional office supplies represented approximately 27% of the Company's consolidated net sales for 2009. While the decline can be attributed to reduced sales of durable products, there was 4.4% growth within this category in cut-sheet paper sales, which typically earn a lower margin than other traditional office products sales.
Sales growth in the janitorial and breakroom supplies category remained strong, rising 6.5% in 2009, adjusted for one less sales day, as compared to 2008. This category accounted for nearly 24% of the Company's 2009 consolidated net sales. This growth can be attributed to management's focus on cross-selling and channel development activities, sales to a new major paper and janitorial buying group, and sales of flu-related products.
Office furniture sales in 2009 were down 29.2%, after adjusting for selling days, compared to 2008. Office furniture accounted for approximately 8% of the Company's 2009 consolidated net sales. This category, which typically has higher margins, has been negatively impacted by the recession as consumers put off high dollar discretionary purchases of furniture.
Sales of industrial supplies declined 23.3% per selling day, reflecting the overall decline in the United States manufacturing, pipeline, and commercial construction activity, combined with continued de-stocking in the distributor channel. This category accounted for 5% of the Company's net sales in 2009.
The remainder of the Company's consolidated net sales came from freight and advertising revenue.
Gross Profit and Gross Margin Rate. Gross profit for 2009 was $690.6 million, compared to $740.7 million in 2008. Gross profit as a percentage of net sales (the gross margin rate) for 2009 was 14.7%, as compared to 14.9% for 2008. The 2009 gross margin rate declined 20 basis points (bps) from 2008 due to: a less favorable sales product mix as consumers moved to more value driven and consumable commodities, reducing pricing margin by 20 bps; a 75 bps decline from lower product cost inflation during 2009 and reduced purchasing activity throughout the year, which spurred a 15 bps decline in supplier allowances and purchase discounts. Partially offsetting these declines were a 60 bps favorable LIFO change related to reduced inflation, inventory mix and inventory decrements and a 30 bps improvement in freight related components, driven by cost containment initiatives and lower fuel costs.
Operating Expenses. Operating expenses were $503.0 million or 10.7% as a percent of sales for the year compared to $548.2 million or 11.0% in 2008. Included in 2009 operating expenses are a $14.0 million gain related to a negotiated settlement with a service supplier and a $3.4 million severance charge. Operating expenses in 2008 include a $9.8 million gain on the sale of three buildings and a $6.7 million asset impairment charge. Excluding these items operating expenses declined 7% and were 10.9% of sales versus 11.1% in the prior year. The decline is due to: reduced salaries and wages as a percent of sales of 5 bps resulting from lower headcount and a temporary wage reduction during the year; lower bad debt costs of 7 bps as the economy began to stabilize and a 25 bps reduction in discretionary expenses, resulting from management efforts to control costs. These improvements were partially offset by increased healthcare costs of 10 bps and 5 bps of expenses related to the Company's continued execution of its plan to expand ORS Nasco's presence to 18 key markets by leveraging existing company distribution centers.
Interest Expense, net. Net interest expense for 2009 was $27.3 million, compared with $27.5 million in 2008. Interest expense remained relatively flat as borrowings under the Company's Prior Receivables Securitization Program were replaced with debt borrowings which kept the average overall debt levels for 2009 relatively flat for the year versus 2008.
Other Expense, net. Other Expense for 2009 was $0.2 million, compared with $8.1 million in 2008. Net Other Expense for 2009 and 2008 primarily reflected costs associated with the sale of certain trade accounts receivable through the Company's Prior Receivables Securitization Program. The 2009 decline was due to the termination of the Prior Receivables Securitization Program in the first quarter of 2009. This program was replaced with the 2009 Receivables Securitization Program which qualifies for on-balance sheet treatment meaning that all borrowing costs from the 2009 Receivables Securitization Program are included in Interest Expense, net. There have been no borrowings under the 2009 Receivables Securitization Program because of significantly reduced funding requirements resulting from strong operating cash flow.
Income Taxes. Income tax expense was $59.1 million in 2009, compared with $58.4 million in 2008. The Company's effective tax rate was 36.9% in 2009, compared to 37.3% in 2008.
Net Income. Net income for 2009 totaled $101.0 million, or $4.19 per diluted share, compared with net income of $98.4 million, or $4.13 per diluted share for 2008. Adjusting for the impact of the negotiated settlement with a service provider and first quarter 2009 severance charge, 2009 adjusted diluted earnings per share were $3.91. Adjusted 2008 earnings per diluted share were $4.05 after excluding the $9.8 million gain on the sale of two distribution centers and the Company's former corporate headquarters and a pre-tax asset impairment charge of $6.7 million related to capitalized software development costs.
Liquidity and Capital Resources
General
USI is a holding company and, as a result, its primary sources of funds are cash generated from the operating activities of its operating subsidiary, USSC, including the sale of certain accounts receivable, and cash from borrowings by USSC. Restrictive covenants in USSC's debt agreements restrict USSC's ability to pay cash dividends and make other distributions to USI. In addition, the right of USI to participate in any distribution of earnings or assets of USSC is subject to the prior claims of the creditors, including trade creditors, of USSC.
The Company's outstanding debt under GAAP, together with funds generated from the sale of accounts receivable under the Company's Current Receivables Securitization Program (as defined below), consisted of the following amounts (in thousands):
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, 2010, is summarized below (in millions):
(1)The 2009 Receivables Securitization Program provides for maximum funding available of the lesser of $100 million or the total amount of eligible receivables less excess concentrations and applicable reserves.
The Credit Agreement, 2007 Note Purchase Agreement, and Transfer and Administration Agreement prohibit the Company from exceeding a Leverage Ratio of 3.25 to 1.00 and impose other restrictions on the Company's ability to incur additional debt. These agreements also contain additional covenants, requirements and events of default that are customary for these types of agreements. The 2007 Credit Agreement, 2007 Note Purchase Agreement, and the Transfer and Administration Agreement all contain cross-default provisions. As a result, if an event of default, including the failure to make any required payments when due, 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.
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, 2010 (in thousands):
(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 20, "Derivative Financial Instruments", in the Notes to the Consolidated Financial Statements. In addition, as of December 31, 2010 and 2009 the Company has $6.8 million of outstanding debt that is based on variable market rates not subject to the Company's interest rate swap transactions. The projected interest payments on this portion of the Company's outstanding debt are not included in this table. See Note 9, "Long-Term Debt" for further detail.
At December 31, 2010, the Company had a liability for unrecognized tax benefits of $4.5 million as discussed in Note 15, "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 March 3, 2009, USI entered into an accounts receivables securitization program (as amended to date, the "Current Receivables Securitization Program" or the "Current Program") that replaced the securitization program that USI terminated on March 2, 2009 (the "Prior Receivables Securitization Program" or the "Prior Program"). The parties to the Current Program are USI, USSC, United Stationers Financial Services ("USFS"), and United Stationers Receivables, LLC ("USR"), and Bank of America, National Association ("Bank of America") and Enterprise Funding Company LLC ("Enterprise" and, together with Bank of America and Enterprise, the "Investors"). The Current Program is governed by the following agreements:
•The Transfer and Administration Agreement among USSC, USFS, USR and the Investors;
•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, as well as the accounts receivable and related rights USFS acquired from its then subsidiary USS Receivables Company, Ltd. ("USSRC"), upon the termination of the Prior Program. Pursuant to the Transfer and Administration Agreement, USR then sells the receivables and related rights to Bank of America, as agent on behalf of the Investors. The maximum investment to USR at any one time outstanding under the Current Program cannot exceed $100 million. 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 facility are repaid and the Current Program has been terminated. The maturity date of the Current Program is November 23, 2013, subject to the extension of the commitments of the Investors under the Current Program, which expire on January 20, 2012.
The receivables sold to Bank of America will remain on USI's Condensed Consolidated Balance Sheet, and amounts advanced to USR by Bank of America or any successor Investor will be recorded as debt on USI's Condensed Consolidated Balance Sheet. The cost of such debt will be recorded as interest expense on USI's income statement. As of December 31, 2010 and 2009, $405.5 million and $445.3 million, respectively, of receivables had been sold to the agent. However, no amounts had been borrowed by USR as of those periods ending December 31, 2010 and 2009.
On July 5, 2007, USI and USSC entered into a Second Amended and Restated Five-Year Revolving Credit Agreement with PNC Bank, National Association and U.S. Bank National Association, as Syndication Agents, KeyBank National Association and LaSalle Bank, National Association, as Documentation Agents, and JPMorgan Chase Bank, National Association, as Agent (as amended on December 21, 2007, the "2007 Credit Agreement"). The 2007 Credit Agreement provides a Revolving Credit Facility with a committed principal amount of $425 million and a Term Loan in the principal amount of $200 million. Interest on both the Revolving Credit Facility and the Term Loan is based on the three-month LIBOR plus an interest margin based upon the Company's debt to EBITDA ratio (or "Leverage Ratio", as defined in the 2007 Credit Agreement). The 2007 Credit Agreement prohibits the Company from exceeding a Leverage Ratio of 3.25 to 1.00 and imposes other restrictions on the Company's ability to incur additional debt. The Revolving Credit Facility expires on July 5, 2012, which is also the maturity date of the Term Loan.
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 2007 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. USSC used the proceeds from the sale of these notes to repay borrowings under the 2007 Credit Agreement.
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 is 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 is 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 has an effective date of January 15, 2008 and a termination 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 is 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 is 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 has an effective date of December 21, 2007 and a termination date of 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 is 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 is 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 had an effective date of March 31, 2008 and a termination date of June 29, 2012.
The Company had outstanding letters of credit under the 2007 Credit Agreement of $18.6 million and $17.9 million as of December 31, 2010 and December 31, 2009, respectively.
At December 31, 2010 and 2009 funding levels (including amounts sold under the Current 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.
As of December 31, 2010 and 2009, the Company had an industrial development bond outstanding with a balance of $6.8 million. This bond is scheduled to mature in December 2011 and carries market-based interest rates.
Refer to Note 9, "Long-Term Debt", for further descriptions of the provisions of 2007 Credit Agreement and the 2007 Note Purchase Agreement.
Cash Flows
Cash flows for the Company for the years ended December 31, 2010, 2009 and 2008 are summarized below (in thousands):
Cash Flows From Operations
Net cash provided by operating activities for the year ended December 31, 2010 totaled $114.8 million, compared with net cash provided by operating activities of $239.4 million in 2009. In 2010, inventory investments were made to support sales growth, while the prior-year's cash flow was higher due to a significant reduction in inventory. These inventory reductions accounted for a cash inflow of approximately $89.8 million in 2009, while the 2010 re-investments led to cash outflows of $92.1 million. This reduction in 2010 operating cash flows versus 2009 was partially offset by an $11.8 million increase in net income and improved receivables collections leading to a cash inflow of $13.9 million in 2010 versus a $31.2 million reduction in 2009 (net $45.1 million favorable change).
Net cash provided by operating activities for the year ended December 31, 2009 totaled $239.4 million, compared with net cash used in operating activities of $129.3 million in 2008. After excluding the impacts of accounts receivable sold under the Receivables Securitization Program (see table below), cash flows provided by operating activities were $262.4 million for 2009 compared to adjusted cash flows provided
by operating activities of $95.7 million for 2008. Adjusted operating cash flows for 2009 were favorably impacted by a return of accounts payable balances to more typical levels, as a percentage of inventories, at December 31, 2009. Payables were at $390.9 million at December 31, 2009 up from $341.1 million at December 31, 2008 due to the timing of inventory purchases and investment buys. Favorability was also seen with inventories declining $89.6 million to $590.9 million at December 31, 2009 from $680.5 million at December 31, 2008. These two items combined accounted for approximately $139.4 million of the increase in adjusted operating cash flows compared to 2008.
Internally, the Company views accounts receivable sold through its Prior Receivables Securitization Program (the "Prior Program") and the 2009 Receivables Securitization Program (the "2009 Program"), or collectively, the "Programs", to be a financing mechanism based on the following considerations and reasons:
•During the first quarter of 2009, the company entered into the 2009 Program that was structured to maintain the related accounts receivable and debt on its balance sheet, with costs of the 2009 Program now included within "Interest Expense, net". In contrast, the Prior Program was structured for off-balance sheet treatment with costs included in "Other Expense, net";
•The Prior Program historically was the Company's preferred source of floating rate financing, primarily because it had generally carried a lower cost than other traditional borrowings;
•The Programs' characteristics are similar to those of traditional debt, including being securitized, having an interest component and being viewed as traditional debt by the Programs' financial providers in determining capacity to support and service debt;
•The terms of the Programs are structured similarly to those in many revolving credit facilities, including provisions addressing maximum commitments, costs of borrowing, financial covenants and events of default;
•As with debt, the Company elects, in accordance with the terms of the Programs, how much is funded through the Programs at any given time;
•Provisions of the 2007 Credit Agreement and the 2007 Note Purchase Agreement aggregate true debt (including borrowings under the Credit Facility) together with the balance of accounts receivable sold under the Programs into the concept of "Consolidated Funded Indebtedness." This effectively treats the Programs as debt for purposes of requirements and covenants under those agreements; and
•For purposes of managing working capital requirements, the Company evaluates working capital before any sale of accounts receivables sold through the Programs to assess accounts receivable requirements and performance, on measures such as days outstanding and working capital efficiency.
Net cash provided by operating activities excluding the effects of receivables sold and net cash used in financing activities including the effects of receivables sold for the years ended December 31, 2010, 2009 and 2008 is provided below as an additional liquidity measure (in thousands):
Cash Flows From Investing Activities
Net cash used in investing activities for the years ended December 31, 2010, 2009 and 2008 was $42.7 million, $14.8 million, and $28.4 million, respectively. Gross capital spending for 2010 and 2009 was $27.3 million and $14.9 million, respectively, which was used for various investments in information technology systems, technology hardware, and distribution center equipment including several facility projects. Capital spending rose in 2010 as the economy began to stabilize and the Company made investments in various growth initiatives and other infrastructure projects. Also included in 2010 investing 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. During 2008, the Company used cash for investing activities to acquire Emco Distribution LLC for $15.2 million. Capital spending for 2008 was $31.7 million which was used for various investments in information technology systems, technology hardware, and distribution center equipment including several facility projects. Proceeds from the sales of two distribution centers and the Company's former corporate headquarters were $18.2 million. The Company expects gross capital spending (before the impact of any sales proceeds) for 2011 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 and the acquisition or issuance of treasury stock.
Net cash used in financing activities for 2010 and 2009 totaled $69.4 million and $216.7 million, respectively, compared to a source of cash of $146.4 million in 2008. Adjusted to include the change in accounts receivable sold, as noted above, 2009 and 2008 financing cash flows were a use of cash of $239.7 million and $78.6 million, respectively. The reduction in cash outflows from 2009 to 2010 reflects repayments of borrowings of $244.3 million in 2009 versus no such repayments in 2010 and net proceeds from share-based compensation arrangements of $38.5 million in 2010 compared to $4.8 million in 2009. These favorable items totaling $278.0 million were partially offset by share repurchases of $113.2 million in 2010 while there were no such repurchases in 2009. The change from 2008 to 2009 reflects a $231.4 million change in cash used to reduce net borrowings. This was partially offset by a reduction in share repurchases of $67.5 million from 2008 to 2009.
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 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, 2010 and 2009" in Part I, Item 7 of this Annual Report or Form 10-K for further analysis on these changes in prices in 2010.
New Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board ("FASB") issued guidance now codified within Accounting Standards Codification ("ASC") Topic 810 "Consolidations", which requires entities to perform an analysis to determine whether the enterprise's variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as one with the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and obligation to absorb losses of the entity that could potentially be significant to the variable interest. The guidance was effective as of the beginning of the annual reporting period commencing after November 15, 2009. The Company adopted these provisions as of January 1, 2010. The adoption of the guidance codified within ASC 810 did not have any effect on the Company's financial position or results of operations.
In October 2009, the FASB issued Accounting Standards Update ("ASU") No. 2009-13, "Multiple-Deliverable Revenue Arrangements" ("ASU 2009-13"). ASU 2009-13 establishes the accounting and reporting guidance for arrangements that include multiple revenue-generating activities, and provides amendments to the criteria for separating deliverables, and measuring and allocating arrangement consideration to one or more units of accounting. The amendments in ASU 2009-13 also establish a hierarchy for determining the selling price of a deliverable. Enhanced disclosures are also required to provide information about a vendor's multiple-deliverable revenue arrangements, including information about the nature and terms of the arrangement, significant deliverables, and the vendor's performance within arrangements. The amendments also require providing information about the significant judgments made and changes to those judgments and about how the application of the relative selling-price method affects the timing or amount of revenue recognition. The amendments in ASU 2009-13 are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, or January 1, 2011 for the Company. Early application is permitted. The adoption of ASU 2009-13 is not expected to have a material impact on the Company's financial position or results of operations.
In December 2009, the FASB issued ASU 2009-16, "Accounting for Transfers of Financial Assets". This ASU eliminates the concept of a "qualifying special-purpose entity," clarifies when a transferor of financial assets has surrendered control over the transferred financial assets, defines specific conditions for reporting a transfer of a portion of a financial asset as a sale, requires that a transferor recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of a transfer of financial assets accounted for as a sale, and requires enhanced disclosures to provide financial statement users with greater transparency about a transferor's continuing involvement with transferred financial assets. The adoption of this ASU did not have any impact on the consolidated financial statements.
In January 2010, the FASB issued ASC Topic 820 "Fair Value Measurements and Disclosures", which updated and clarified previously issued guidance to improve disclosures about fair value measurements. These new disclosures include stating separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfers. In addition, it states that a reporting entity should present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using Level 3 inputs. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of ASC Topic 820 did not have an impact on the Company's financial position and/or its results of operations. See Note 21, "Fair Value Measurements", for information and related disclosures regarding the Company's fair value measurements.
In February 2010, the FASB issued ASU 2010-09, "Amendments to Certain Recognition and Disclosure Requirements", ("ASU 2010-09"), which eliminated the requirement under ASC Topic 855, "Subsequent Events" ("ASC 855") for SEC registrants to disclose the date through which they have evaluated subsequent events in the financial statements. The Company adopted the provisions of ASU 2010-09 upon issuance with no material impact to the financial position or results of operations.
In July 2010, the FASB issued ASU 2010-20, "Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses". This Update is intended to provide financial statement users with additional information to assist them in assessing credit risk exposures and the adequacy of the allowance for credit losses. ASU 2010-20 is effective for interim and annual reporting periods ending on and after December 15, 2010. The impact of adoption did not have a significant impact on its consolidated financial statements.
In December 2010, the FASB issued ASU 2010-29, "Business Combinations" (Topic 805). This ASU specifies that if a company presents comparative financial statements, the company should disclose revenue and earnings of the combined entity as though the business combination that occurred during the year had occurred as of the beginning of the comparable prior annual reporting period only. The ASU also expands the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the pro forma revenue and earnings. This ASU is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of ASU 2010-29 is not expected to have a material impact on the Company's financial position or results of operations.
ITEM 7A.
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 risks is principally limited to the Company's outstanding debt at December 31, 2010 and 2009 of $441.8 million. As of December 31, 2010, 98% of the Company's outstanding debt is priced at variable interest rates based primarily on the applicable bank prime rate, the LIBOR or the applicable commercial paper rates related to the Receivables Securitization Program. While the Company does have $441.8 million of outstanding debt with interest based on variable market rates at December 31, 2010 and 2009, the Company has hedged $435.0 million of this debt with three separate fixed interest rate swaps. See Note 2, "Summary of Significant Accounting Policies", and Note 20, "Derivative Financial Instruments", to the Consolidated Financial Statements. As of December 31, 2010 and 2009, the overall weighted average effective borrowing rate of the Company's debt was 5.0%. At year-end $6.8 million of outstanding debt was based on variable market rates not subject to the Company's interest rate swap transactions. 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.
Foreign Currency Exchange Rate Risk
The Company's foreign currency exchange rate risk is limited principally to the Mexican Peso, 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.
ITEM 8.
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, 2010 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, 2010, 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 42 of this Annual Report on Form 10-K.
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, 2010, 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, 2010, 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, 2010 and 2009, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2010, and our report dated February 25, 2011, expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
February 25, 2011
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, 2010 and 2009, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2010. 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, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, 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, 2010, 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 25, 2011 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
February 25, 2011
UNITED STATIONERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
See notes to Consolidated Financial Statements.
UNITED STATIONERS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
See notes to Consolidated Financial Statements.
UNITED STATIONERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands, except share data)
See notes to Consolidated Financial Statements.
UNITED STATIONERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
See notes to Consolidated Financial Statements.
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 $4.8 billion for the year ended December 31, 2010. The Company stocks about 100,000 items from over 1,000 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 64 distribution centers to its over 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 and Investment
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, which allows the Company to accelerate e-business development and enable customers and suppliers to utilize the internet. 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. The $3 million in deferred payments are to be paid to the former owners over the course of the next four years, the timing of which is based upon the achievement of certain financial goals. As a result of the acquisition, the Company recorded $14.2 million of goodwill, $3.7 million in intangible assets, and $4.3 million of liabilities, at fair value, related to the deferred payments and the earn-out. At year end 2010, in accordance with accounting guidelines, the Company revalued the earn-out liabilities to $5.1 million based on the fair value of each earn-out as of that date and recorded a non-cash, pre-tax charge of $0.8 million in Other Expense, net. Net of cash held by MBS Dev at closing, the initial cash outlay was $10.5 million.
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.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current presentation. Such reclassifications were limited to Balance Sheet and Cash Flow Statement presentation and did not impact the Statements of Income.
The Company reclassified certain software costs related to ORS Nasco acquisition in 2008 from "Fixtures and equipment" to "Capitalized software costs". The reclassification began in the fourth quarter of 2010, with prior periods updated to conform to this presentation. For the year ended December 31, 2009, $5.5 million was reclassified to "Capitalized software costs" out of "Fixtures and equipment".
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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 $80.8 million and $78.2 million as of December 31, 2010 and 2009, respectively. These receivables are included in "Accounts receivable" in the Consolidated Balance Sheets.
In 2010, approximately 18% of the Company's annual supplier allowances and incentives were fixed, which 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.
The remaining 82% of the Company's annual supplier allowances and incentives in 2010 were 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. 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.
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
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 $56.1 million and $59.5 million as of December 31, 2010 and 2009, 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 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 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, 2010, 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
In the normal course of business, the Company extends credit to customers that satisfy pre-defined credit criteria. Accounts receivable, as shown on 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
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
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. The Company tests goodwill for impairment annually 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.
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, property and general liability and certain employee health benefits. The Company records an expense for paid and open claims and an expense for claims incurred but not reported based on historical trends and on 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 both a per-occurrence maximum loss and an annual aggregate maximum cap 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.
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
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, 2010, the Company is not a party to any capital leases.
Inventories
Inventory constituting approximately 79% of total inventory as of December 31, 2010 and 2009, 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 $84.7 million and $80.9 million higher than reported as of December 31, 2010 and December 31, 2009, respectively. The annual change in the LIFO reserve as of December 31, 2010, 2009 and 2008, resulted in a $3.8 million increase, a $3.8 million reduction, and a $24.3 million increase, respectively, in cost of sales. During 2009 and 2008, inventory quantities for the portion of inventory accounted for under the LIFO accounting method were reduced. These reductions resulted in liquidations of LIFO inventory quantities carried at lower costs prevailing in years prior to 2009 and 2008, respectively, as compared with the cost of purchases in each of those years. In 2009, these liquidations resulted in LIFO income of $18.6 million partially offset by LIFO expense of $14.8 million related to 2009 inflation. In 2008, these liquidations resulted in LIFO income of $5.4 million partially offset by $29.7 million related to 2008 inflation.
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 $29.8 million and $25.3 million remaining in inventory as of December 31, 2010 and December 31, 2009, respectively.
Pension and Postretirement Health Benefits
The Company implemented a plan to freeze pension service benefits for employees not covered by collective bargaining agreements. The plan freeze was put in place effective March 1, 2009.
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. Costs associated with the Company's Retiree Medical Plan were $0.1 million for each of the years ended 2009 and 2008.
The Company adopted the recognition and related disclosure provisions of Financial Accounting Standards Board ("FASB") accounting guidance related to employers' accounting for defined benefit pension and other postretirement plans on December 31, 2006 for its pension and Retiree Medical Plan. The Company has adopted the measurement date provisions of this accounting guidance for the fiscal year ending December 31, 2008, in accordance with the statement. This adoption measures the plan assets and benefit obligations as of the Company's fiscal year end.
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
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 12 and 13 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 2010 was $2.5 million, compared to $6.3 million and $5.6 million in 2009 and 2008, 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, 2010, and 2009, outstanding checks totaling $83.3 million and $88.4 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.
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.
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
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
not to exceed ten years. Capitalized software is included in "Property, plant and equipment, at cost" on the Consolidated Balance Sheet. The total costs are as follows (in thousands):
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 primarily uses interest rate swaps which are subject to the management, direction and control of our 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 in a net receivable position are included in "Other assets", and those in a net liability position are included in "Other long-term liabilities". 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. At this time, this has not occurred as all cash flow hedges contain no ineffectiveness. See Note 20, "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
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
subsidiaries as these earnings have historically been permanently invested. 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 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 accumulated other comprehensive loss, 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 June 2009, the FASB issued guidance now codified within ASC Topic 810, "Consolidations", which requires entities to perform an analysis to determine whether the enterprise's variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as one with the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and obligation to absorb losses of the entity that could potentially be significant to the variable interest. The guidance was effective as of the beginning of the annual reporting period commencing after November 15, 2009. The Company adopted these provisions as of January 1, 2010. The adoption of the guidance codified within ASC 810 did not have any effect on the Company's financial position or results of operations.
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
In October 2009, the FASB issued ASU 2009-13, "Multiple-Deliverable Revenue Arrangements". ASU 2009-13 establishes the accounting and reporting guidance for arrangements that include multiple revenue-generating activities, and provides amendments to the criteria for separating deliverables, and measuring and allocating arrangement consideration to one or more units of accounting. The amendments in ASU 2009-13 also establish a hierarchy for determining the selling price of a deliverable. Enhanced disclosures are also required to provide information about a vendor's multiple-deliverable revenue arrangements, including information about the nature and terms of the arrangement, significant deliverables, and the vendor's performance within arrangements. The amendments also require providing information about the significant judgments made and changes to those judgments and about how the application of the relative selling-price method affects the timing or amount of revenue recognition. The amendments in ASU 2009-13 are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, or January 1, 2011 for the Company. Early application is permitted. The adoption of ASU 2009-13 is not expected to have a material impact on the Company's financial position or results of operations.
In December 2009, the FASB issued ASU 2009-16, "Accounting for Transfers of Financial Assets". This ASU eliminates the concept of a "qualifying special-purpose entity," clarifies when a transferor of financial assets has surrendered control over the transferred financial assets, defines specific conditions for reporting a transfer of a portion of a financial asset as a sale, requires that a transferor recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of a transfer of financial assets accounted for as a sale, and requires enhanced disclosures to provide financial statement users with greater transparency about a transferor's continuing involvement with transferred financial assets. The adoption of this ASU did not have any impact on the consolidated financial statements.
In January 2010, the FASB issued ASC Topic 820 "Fair Value Measurements and Disclosures", which updated and clarified previously issued guidance to improve disclosures about fair value measurements. These new disclosures include stating separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfers. In addition, it states that a reporting entity should present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using Level 3 inputs. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of ASC Topic 820 did not have an impact on the Company's financial position and/or its results of operations. See Note 21, "Fair Value Measurements", for information and related disclosures regarding the Company's fair value measurements.
In February 2010, the FASB issued ASU 2010-09, "Amendments to Certain Recognition and Disclosure Requirements", ("ASU 2010-09"), which eliminated the requirement under ASC Topic 855, "Subsequent Events" ("ASC 855") for SEC registrants to disclose the date through which they have evaluated subsequent events in the financial statements. The Company adopted the provisions of ASU 2010-09 upon issuance with no material impact to the financial position or results of operations.
In July 2010, the FASB issued ASU 2010-20, "Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses." This Update is intended to provide financial statement users with additional information to assist them in assessing credit risk exposures and the
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
adequacy of the allowance for credit losses. ASU 2010-20 is effective for interim and annual reporting periods ending on and after December 15, 2010. The impact of adoption did not have a significant impact on its consolidated financial statements.
In December 2010, the FASB issued ASU 2010-29, "Business Combinations" (Topic 805). This ASU specifies that if a company presents comparative financial statements, the company should disclose revenue and earnings of the combined entity as though the business combination that occurred during the year had occurred as of the beginning of the comparable prior annual reporting period only. The ASU also expands the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the pro forma revenue and earnings. This ASU is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of ASU 2010-29 is not expected to have a material impact on the Company's financial position or results of operations.
3. Share-Based Compensation
Overview
As of December 31, 2010, 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. During 2010, the Company granted 151,837 shares of restricted stock and 124,816 restricted stock units (RSUs) under the LTIP. The Company granted no stock options under the LTIP during 2010.
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, 2010, 2009 and 2008, the Company recorded compensation expense of $0.1 million, $0.1 million, and $0.3 million, respectively. As of December 31, 2010, 2009 and 2008, the accumulated number of stock units outstanding under this plan was 41,927; 39,568; and 46,203; respectively.
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Share-Based Compensation (Continued)
Accounting For Share-Based Compensation
The following table summarizes the share-based compensation expense (in thousands):
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)
Intrinsic Value of Options Exercised
(in thousands of dollars)
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Share-Based Compensation (Continued)
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)
Intrinsic Value of Restricted Shares Vested
(in thousands of dollars)
As of December 31, 2010, there was $21.8 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 1.8 years.
Accounting guidance on share-based payments requires that cash flows resulting from the tax benefits from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) be classified as financing cash flows. For the years ended December 31, 2010, 2009 and 2008, respectively, the $5.5 million, $0.7 million and $0.1 million excess tax benefits classified as financing cash inflows on the Consolidated Statement of Cash Flows would have been classified as operating cash inflows if the Company had not adopted this guidance on share-based payments.
Stock Options
The fair value of each option award is estimated on the date of grant 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, 2010, there was no unrecognized compensation cost related to stock option awards granted. There were no stock options granted during 2010, 2009, or 2008.
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Share-Based Compensation (Continued)
The following table summarizes the transactions, excluding restricted stock, under the Company's equity compensation plans for the last three years:
The following table summarizes outstanding and exercisable options granted under the Company's equity compensation plans as of December 31, 2010:
Restricted Stock and Restricted Stock Units
The Company granted 151,837 shares of restricted stock and 124,816 restricted stock units ("RSU"s) during 2010. During 2009, the Company granted 320,017 shares of restricted stock and 226,087 RSUs. During 2008, the Company granted 147,448 shares of restricted stock and 44,173 RSUs. The restricted stock granted in each period vests in three equal annual installments on the anniversaries of the date of the grant. The RSUs granted in 2010 vest in three annual installments on the appropriate calendar year ends, to the extent earned based on the Company's cumulative economic profit performance against target economic profit goals. The RSUs granted in 2009 vest on December 31, 2012 to the extent earned based on the Company's cumulative economic profit performance against target economic profit goals. Included in the 2010, 2009 and 2008 grants were 148,748; 366,193; and 88,316 restricted stock and RSUs granted to employees who were not executive officers, as of December 31, 2010, 2009 and 2008, respectively. In addition, there were 22,088; 19,613; and 20,173 RSUs granted to non-employee directors during the years ended December 31, 2010, 2009 and 2008, respectively. For the years ended December 31, 2010, 2009 and 2008, respectively, there were also 105,817; 160,298; and 83,132
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Share-Based Compensation (Continued)
restricted stock and RSUs granted to executive officers. This 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 $1.00 per diluted share as defined in the officers' restricted stock agreement. As of December 31, 2010, there was $21.8 million of total unrecognized compensation cost related to non-vested 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:
4. Goodwill and Intangible Assets
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. The Company performs an annual impairment test on goodwill and intangible assets with indefinite lives at December 31st of each year. Based on this latest test, the Company concluded that the fair value of each of the reporting units was in excess of the carrying value as of December 31, 2010.
As of December 31, 2010 and 2009, the Company's Consolidated Balance Sheets reflected $328.6 million and $314.4 million of goodwill, respectively. As of December 31, 2010 and 2009, the Company had $61.4 million and $62.9 million in net intangible assets. Net intangible assets as of December 31, 2010 consist primarily of customer listings and non-compete agreements purchased as part of the Sweet Paper acquisition, ORS Nasco acquisition, MBS Dev acquisition and the Emco Distribution acquisition. The Company has no intention to renew or extend the terms of acquired intangible assets and accordingly, did not incur any related costs during 2010 or 2009. Amortization of intangible assets purchased as part of these acquisitions totaled $5.2 million, $5.0 million, and $4.8 million for the years ended December 31, 2010, 2009, and 2008, respectively. Accumulated amortization of intangible assets as of December 31, 2010 and 2009 totaled $21.5 million and $16.4 million, respectively.
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Goodwill and Intangible Assets (Continued)
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):
The following table summarizes the amortization expense expected to be incurred over the next five years on intangible assets from acquisitions completed as of December 31, 2010 (in thousands):
5. Severance and Restructuring Charges
On December 31, 2010, the Company approved an early retirement program for eligible employees and a focused workforce realignment to align resources with 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 two programs. This charge is included in "Warehousing, marketing and administrative expenses" on the Company's Statements of Income. There were no cash outlays associated with this severance charge in 2010. As of December 31, 2010, the Company had accrued liabilities for the 2010 Early Retirement/Workforce Realignment of $9.1 million.
On January 27, 2009, the Company announced a plan to eliminate staff positions through an involuntary separation plan. The severance charge included workforce reductions of 250 associates. The Company recorded a pre-tax charge of $3.4 million in the first quarter of 2009 for estimated severance pay and benefits, and outplacement costs. This charge is included in "Warehousing, marketing and administrative expenses" on the Company's Statements of Income. Cash outlays associated with the severance charge in 2009 totaled $2.9 million.
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss as of December 31, 2010, 2009 and 2008 included the following (in thousands):
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 0.4 million, 1.9 million, and 1.6 million shares of common stock were outstanding at December 31, 2010, 2009, and 2008, 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 amount of antidilutive options in prior years is not material. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
Common Stock Repurchases
As of December 31, 2010, the Company had Board authorization to repurchase $87.7 million of USI common stock. In 2010, the Company repurchased 1,957,893 shares of USI's common stock at an aggregate cost of $113.2 million. There were no repurchases of the Company's shares in 2009. In 2008, the Company repurchased 1,233,832 shares of USI's common stock at an aggregate cost of $67.5 million. 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Earnings Per Share (Continued)
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. During 2010, 2009 and 2008, the Company reissued 1,119,335; 450,348; and 190,869 shares, respectively, of treasury stock to fulfill its obligations under its equity incentive plans.
8. Segment Information
Accounting guidance on segments of an enterprise requires companies to report financial and descriptive information about their reportable operating segments, including segment profit or loss, certain specific revenue and expense items, and segment assets, as well as information about the revenues derived from the Company's products and services, the countries in which the Company earns revenues and holds assets, and major customers. This statement also requires companies that have a single reportable segment to disclose information about products and services, information about geographic areas, and information about major customers. This statement requires the use of the management approach to determine the information to be reported. The management approach is based on the way management organizes the enterprise to assess performance and make operating decisions regarding the allocation of resources. The accounting guidance on segments of an enterprise permits the aggregation, based on specific criteria, of several operating segments into one reportable operating segment. Management has chosen to aggregate its operating segments and report segment information as one reportable segment. A discussion of the factors relied upon and processes undertaken by management in determining that the Company meets the aggregation criteria is provided below, followed by the required disclosure regarding the Company's single reportable segment.
Management defines operating segments as individual operations that the Chief Operating Decision Maker ("CODM") (in the Company's case, the Chief Executive Officer) reviews for the purpose of assessing performance and making operating decisions. When evaluating operating segments, management considers whether:
•The component engages in business activities from which it may earn revenues and incur expenses;
•The operating results of the component are regularly reviewed by the enterprise's CODM;
•Discrete financial information is available about the component; and
•Other factors are present, such as management structure, presentation of information to the Board of Directors and the nature of the business activity of each component.
Based on the factors referenced above, management has determined that the Company has three operating segments, USSC (referred to by the Company as "Supply"), the first-tier operating subsidiary of USI; Lagasse and ORS Nasco. Supply also includes operations in Mexico conducted through a USSC subsidiary, as well as Azerty, which has been consolidated into Supply.
Management has also concluded that the Company's three operating segments meet all of the aggregation criteria required by the accounting guidance. Such determination is based on company-wide similarities in (1) the nature of products and/or services provided, (2) customers served, (3) production processes and/or distribution methods used, (4) economic characteristics including gross margins and operating expenses and (5) regulatory environment. Management further believes aggregate presentation provides more useful information to the financial statement user and is, therefore, consistent with the principles and objectives of the FASB-issued accounting guidance.
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Segment Information (Continued)
The following discussion sets forth the required disclosure regarding single reportable segment information:
The Company operates as a single reportable segment as a leading wholesale distributor of business products, with 2010 net sales of approximately $4.8 billion-including foreign operations in Mexico. For the years ended December 31, 2010, 2009 and 2008, the Company's net sales from foreign operations in Mexico totaled $101.0 million, $92.3 million and $96.0 million, respectively. The Company stocks about 100,000 items from over 1,000 manufacturers. This includes a broad spectrum of manufacturers' brand and private brand office products, computer supplies, office furniture, business machines, presentation products, janitorial and breakroom supplies and industrial supplies. The Company primarily serves commercial and contract office products dealers and other independent distributors. The Company sells its products through a national distribution network to over 25,000 resellers, who in turn sell directly to end-consumers. These products are distributed through the Company's network of 64 distribution centers. As of December 31, 2010, 2009, and 2008, long-lived assets of the Company's foreign operations in Mexico totaled $4.7 million in each year.
The Company's product offerings, comprised of about 100,000 SKUs, may be divided into the following primary categories: (i) traditional office products, which include writing instruments, paper products, organizers and calendars and various office accessories; (ii) technology products such as computer supplies and peripherals; (iii) office furniture, such as 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; (iv) janitorial and breakroom supplies, which includes janitorial and breakroom supplies, foodservice consumables, safety and security items, and paper and packaging supplies; and (v) industrial supplies which includes hand and power tools, safety and security supplies, janitorial equipment and supplies and welding products. In 2010, the Company's largest supplier was Hewlett-Packard Company, which represented approximately 20% of its total purchases. No other supplier accounted for more than 5% of the Company's total purchases.
The Company's customers include independent office products dealers and contract stationers, office products mega-dealers, office products superstores, computer products resellers, office furniture dealers, mass merchandisers, mail order companies, sanitary supply distributors, drug and grocery store chains, e-commerce dealers and other independent distributors. The Company had one customer, Staples, which constituted 10.7% of its 2010 consolidated net sales. No other single customer
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Segment Information (Continued)
accounted for more than 10% of the 2010 consolidated net sales. The following table shows net sales by product category for 2010, 2009 and 2008 (in millions):
(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.
9. Long-Term Debt
USI is a holding company and, as a result, its primary sources of funds are cash generated from operating activities of its direct operating subsidiary, USSC, and from borrowings by USSC. The 2007 Credit Agreement (as defined below), the 2007 Master Note Purchase Agreement (as defined below) and the Current Receivables Securitization Program (as defined below) contain restrictions on the ability of USSC to transfer cash to USI.
Long-term debt consisted of the following amounts (in thousands):
As of December 31, 2010 and 2009, 98% of the Company's outstanding debt is priced at variable interest rates based primarily on the applicable bank prime rate, the London InterBank Offered Rate ("LIBOR") or the applicable commercial paper rates related to the Current Receivables Securitization Program. While the Company had primarily all of its outstanding debt based on LIBOR at December 31, 2010 and 2009, the Company had hedged $435.0 million of this debt with three separate interest rate swaps further discussed in Note 2, "Summary of Significant Accounting Policies", and Note 20, "Derivative Financial Instruments", to the Consolidated Financial Statements. As of December 31, 2010 and 2009, the overall weighted average effective borrowing rate of the Company's debt was 5.0%. At year-end funding levels based on $6.8 million, 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.
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Long-Term Debt (Continued)
Current Receivables Securitization Program
On March 3, 2009, USI entered into an accounts receivables securitization program (as amended to date, the "Current Receivables Securitization Program" or the "Current Program") that replaced the securitization program that USI terminated on March 2, 2009 (the "Prior Receivables Securitization Program" or the "Prior Program"). The parties to the Current Program are USI, USSC, USFS, and USR, and Bank of America, National Association ("Bank of America") and Enterprise Funding Company LLC ("Enterprise" and, together with Bank of America, the "Investors"). The Current Program is governed by the following agreements:
•The Transfer and Administration Agreement among USSC, USFS, USR, and the Investors;
•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, as well as the accounts receivable and related rights USFS acquired from its then subsidiary, USSRC, upon the termination of the Prior Program. Pursuant to the Transfer and Administration Agreement, USR then sells the receivables and related rights to Bank of America, as agent on behalf of the Investors. The maximum investment to USR at any one time outstanding under the Current Program cannot exceed $100 million. 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 facility are repaid and the Current Program has been terminated. The maturity date of the Current Program is November 23, 2013, subject to the extension of the commitments of the Investors under the Current Program, which expire on January 20, 2012.
The receivables sold to Bank of America will remain on USI's Condensed Consolidated Balance Sheet, and amounts advanced to USR by Bank of America or any successor Investor will be recorded as debt on USI's Condensed Consolidated Balance Sheet. The cost of such debt will be recorded as interest expense on USI's income statement. As of December 31, 2010 and 2009, $405.5 million and $445.3 million, respectively, of receivables had been sold to the agent. However, no amounts had been borrowed by USR as of those periods.
The Transfer and Administration Agreement prohibits the Company from exceeding a Leverage Ratio of 3.25 to 1.00 and imposes other restrictions on the Company's ability to incur additional debt. This agreement also contains additional covenants, requirements and events of default that are customary for this type of agreement, including the failure to make any required payments when due.
Credit Agreement and Other Debt
On July 5, 2007, USI and USSC entered into a Second Amended and Restated Five-Year Revolving Credit Agreement with PNC Bank, National Association and U.S. Bank National Association, as Syndication Agents, KeyBank National Association and LaSalle Bank, National Association, as
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Long-Term Debt (Continued)
Documentation Agents, and JPMorgan Chase Bank, National Association, as Agent (as amended on December 21, 2007, the "2007 Credit Agreement"). The 2007 Credit Agreement provides a Revolving Credit Facility with a committed principal amount of $425 million and a Term Loan in the principal amount of $200 million. Interest on both the Revolving Credit Facility and the Term Loan is based on the three-month LIBOR plus an interest margin based upon the Company's debt to EBITDA ratio (or "Leverage Ratio", as defined in the 2007 Credit Agreement). The 2007 Credit Agreement prohibits the Company from exceeding a Leverage Ratio of 3.25 to 1.00 and imposes other restrictions on the Company's ability to incur additional debt. The Revolving Credit Facility expires on July 5, 2012, which is also the maturity date of the Term Loan.
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 2007 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. USSC used the proceeds from the sale of these notes to repay borrowings under the 2007 Credit Agreement.
USSC has entered into several interest rate swap transactions to mitigate its floating rate risk on a portion of its total long-term debt. See Note 20, "Derivative Financial Instruments", for further detail on these swap transactions and their accounting treatment.
The 2007 Credit Agreement also provides for the issuance of letters of credit in an aggregate amount of up to a sublimit of $90 million and provides a sublimit for swingline loans in an aggregate outstanding principal amount not to exceed $30 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 swingline loans under the facility reduce the remaining availability under the 2007 Credit Agreement.
The Company had outstanding letters of credit under the 2007 Credit Agreement of $18.6 million and $17.9 million as of December 31, 2010 and December 31, 2009, respectively. Approximately $7.0 million of these letters of credit were used to guarantee the industrial development bond.
As of December 31, 2010 and 2009, the Company had an industrial development bond outstanding with a balance of $6.8 million. This bond is scheduled to mature in 2011 and carries market-based interest rates.
Obligations of USSC under the 2007 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 Company assets, including accounts receivable, chattel paper, commercial tort claims, documents, equipment, fixtures, instruments, inventory, investment property, pledged deposits and all other tangible and intangible personal property (including proceeds) and certain real property, but excluding accounts receivable (and related credit support) subject to any accounts receivable securitization program permitted under the 2007 Credit Agreement. Also securing these obligations are first priority pledges of all of the capital stock of USSC and the domestic subsidiaries of USSC.
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Long-Term Debt (Continued)
Debt maturities as of December 31, 2010, were as follows (in thousands):
10. Off-Balance Sheet Financing
General
On March 28, 2003, USSC entered into a third-party receivables securitization program with JP Morgan Chase Bank, as trustee (the "Prior Receivables Securitization Program" or the "Prior Program"). On March 2, 2009, in preparation for entering into a new securitization program (see Note 9, "Debt" for more information on the new program), USI's subsidiaries USFS and USSRC terminated the Prior Program. The Prior Program typically had been the Company's preferred source of floating rate financing, primarily because it generally carried a lower cost than other traditional borrowings.
Under the Prior Program, USSC sold, on a revolving basis, its eligible trade accounts receivable (except for certain excluded accounts receivable, which initially included all accounts receivable of Lagasse, Inc. and foreign operations) to USSRC. USSRC, in turn, ultimately transferred the eligible trade accounts receivable to a trust. The trust then sold investment certificates, which represented an undivided interest in the pool of accounts receivable owned by the trust, to third-party investors. Affiliates of J.P. Morgan Chase Bank, PNC Bank and Fifth Third Bank acted as funding agents. The funding agents, or their affiliates, provided standby liquidity funding to support the sale of the accounts receivable by USSRC under 364-day liquidity facilities. The Prior Program was accounted for as a sale in accordance with FASB accounting guidance on the accounting for transfers and servicing of financial assets and extinguishments of liabilities. Trade accounts receivable sold under the Prior Program were excluded from accounts receivable in the Consolidated Financial Statements.
The Company recognized certain costs and/or losses related to the Prior Program. Costs related to the Prior Program varied on a daily basis and generally were related to certain short-term interest rates. The annual interest rate on the certificates issued under the Prior Program for the first two months of 2009 ranged between 0.6% and 2.3%. In addition to the interest on the certificates, the Company paid certain bank fees related to the program. Losses recognized on the sale of accounts receivable, which represented the interest and bank fees that were the financial cost of funding under the Prior Program including amortization of previously capitalized bank fees and excluding servicing revenues, totaled $8.1 million for 2008. Proceeds from the collections under the Prior Program for 2009 totaled $0.6 billion. All costs and/or losses related to the Prior Program are included in the Condensed Consolidated Statements of Income under the caption "Other Expense, net."
The Company maintained responsibility for servicing the sold trade accounts receivable and those transferred to the trust. No servicing asset or liability was recorded because the fees received for servicing the receivables approximated the related costs.
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Off-Balance Sheet Financing (Continued)
USSRC determined the level of funding achieved by the sale of trade accounts receivable under the Prior Program, subject to a maximum amount. It retained a residual interest in the eligible receivables transferred to the trust, such that amounts payable in respect of the residual interest would be distributed to USSRC upon payment in full of all amounts owed by USSRC to the trust (and by the trust to its investors).
11. Leases, Contractual Obligations and Contingencies
The Company has entered into non-cancelable long-term leases for certain property and equipment. Future minimum lease payments under operating leases in effect as of December 31, 2010 having initial or remaining non-cancelable lease terms in excess of one year are as follows (in thousands):
(1)Operating leases are net of immaterial sublease income.
Operating lease expense was approximately $50.8 million, $52.5 million, and $53.5 million in 2010, 2009, and 2008, respectively.
12. Pension Plans and Defined Contribution Plan
Pension Plans
As of December 31, 2010, the Company has pension plans covering approximately 3,300 of its active associates. Non-contributory plans covering non-union associates provide pension benefits that are based on years of credited service and a percentage of annual compensation. Non-contributory plans covering union members generally provide benefits of stated amounts based on years of service. The Company funds the plans in accordance with all applicable laws and regulations. The Company uses December 31 as its measurement date to determine its pension obligations. The non-union plans have been closed to new associates beginning January 1, 2008. In addition, effective January 1, 2008, in accordance with new measurement provisions required by applicable accounting guidance (see Note 2 for "New Accounting Pronouncements"), the Company changed its measurement date to determine its pension obligations to its fiscal year end.
Effective March 1, 2009, the Company froze pension service benefits for employees not covered by collective bargaining agreements. As a result, the Company incurred a curtailment loss of $0.2 million in the first quarter of 2009. The Company also reduced the Pension Benefit Obligation ("PBO") by $11.8 million as a result of this action. The PBO reduction led to an $11.8 million reduction in the "Accrued pension benefits liability" and a corresponding increase in accumulated other comprehensive income, net of tax.
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Pension Plans and Defined Contribution Plan (Continued)
Change in Projected Benefit Obligation
The following table sets forth the plans' changes in Projected Benefit Obligation for the years ended December 31, 2010 and 2009 (in thousands):
The accumulated benefit obligation for the plan as of December 31, 2010 and 2009 totaled $151.1 million and $136.2 million, respectively.
Plan Assets and Investment Policies and Strategies
The following table sets forth the change in the plans' assets for the years ended December 31, 2010 and 2009 (in thousands):
The Company's pension plan investment allocations, as a percentage of the fair value of total plan assets, as of December 31, 2010 and 2009, by asset category are as follows:
The investment policies and strategies for the Company's pension plan assets are established with the goals of generating above-average investment returns over time, while containing risks within acceptable levels and providing adequate liquidity for the payment of plan obligations. The Company recognizes that there typically are tradeoffs among these objectives, and strives to minimize risk associated with a given expected return.
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Pension Plans and Defined Contribution Plan (Continued)
The Company's defined benefit plan assets are measured at fair value on a recurring basis and are invested primarily in a diversified mix of fixed income investments and equity securities. The Company establishes target ranges for investment allocation and sets specific allocations. The target allocations for plan assets are 82 percent equity securities and 18 percent corporate bonds and U.S. Treasuries. Equity securities include investments in large cap and small cap corporations located in the U.S. and a mix of both international and emerging market corporations fixed income securities include investment grade bonds and U.S. treasuries. Other types of investments include commodity futures and Real Estate Investment Trusts (REITs).
The fair values of the Company's pension plan assets at December 31, 2010 and 2009 by asset category are as follows:
Fair Value Measurements at
December 31, 2010 (in thousands)
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Pension Plans and Defined Contribution Plan (Continued)
Fair Value Measurements at
December 31, 2009 (in thousands)
(a)A separately managed, diversified portfolio consisting of publically traded large cap stocks. The portfolio is predominately comprised of U.S. companies but may also hold international company stock.
(b)A daily valued mutual fund investment. The fund invests in publically traded companies domiciled outside the U.S. and includes companies located in emerging market countries.
(c)A daily valued mutual fund investment. The fund invests in publically traded companies domiciled in emerging market countries.
(d)A daily valued commingled fund investment. The fund invests in publically traded, small capitalization companies that are considered value in style. The majority of holdings are domiciled in the U.S. though the fund may hold international stocks. The fund allows for monthly liquidity.
(e)A daily valued mutual fund investment. The fund invests in publically traded, small capitalization companies that are considered growth in style. The majority of holdings are domiciled in the U.S. though the fund may hold international stocks.
(f)A daily valued mutual fund investment. The fund invests in publically traded Real Estate Investment Trusts. This is an index mutual fund that tracks the Morgan Stanley REIT Index. The fund normally invests at least 98% of assets that are included in the Morgan Stanley REIT Index.
(g)A separately managed fixed income portfolio utilized to match the duration of the Plan's liabilities. This liability driven investment portfolio is comprised of Treasury securities including STRIPS and zero coupon bonds as well as high quality corporate bonds.
(h)A daily valued mutual fund investment. This fund combines a commodities position, typically through swap agreements, with a portfolio of inflation indexed bonds and other fixed income securities. The commodities position is constructed to track the performance of the Dow Jones UBS Commodity Index.
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Pension Plans and Defined Contribution Plan (Continued)
Plan Funded Status
The following table sets forth the plans' funded status as of December 31, 2010 and 2009 (in thousands):
Amounts Recognized in Consolidated Balance Sheet
Components of Net Periodic Benefit Cost
Net periodic pension cost for the years ended December 31, 2010, 2009 and 2008 for pension and supplemental benefit plans includes the following components (in thousands):
The estimated net actuarial loss and prior service cost that will be amortized from accumulated other comprehensive loss into the net periodic benefit cost during 2011 are approximately $1.9 million and $0.1 million, respectively.
Assumptions Used
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 and healthcare costs for the years ended December 31, 2010, 2009 and 2008:
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Pension Plans and Defined Contribution Plan (Continued)
For the year ending December 31, 2009, the rate of compensation increase was 3.75% prior to March 1, 2009 when the Company froze pension service benefits for employees not covered by collective bargaining agreements. 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 2010. The change in the assumed discount rate in 2008 did not have a material impact on the Company's net periodic pension cost.
Contributions
The May 15, 2011 contribution amount has not yet been determined.
Estimated Future Benefit Payments
The estimated future benefit payments under the Company's pension plans are as follows (in thousands):
Defined Contribution Plan
The Company has a defined contribution plan. Salaried associates and non-union hourly paid associates are eligible to participate after completing six consecutive months of employment. The plan permits associates to have contributions made as 401(k) salary deferrals on their behalf, or as voluntary after-tax contributions, and provides for Company contributions, or contributions matching associates' salary deferral contributions, at the discretion of the Board of Directors. Company contributions to match associates' contributions were approximately $4.7 million, $2.8 million and $5.1 million in 2010, 2009 and 2008, respectively. Effective May 1, 2009 through December 31, 2009, the Company temporarily suspended the matching of employee contributions to the Plan for all exempt associates, which was reinstated beginning January 1, 2010 at a reduced matching percentage. Effective December 31, 2010, the Company made a discretionary contribution to reinstate the full matching percentage for exempt employee contributions.
13. 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 of the Retiree Medical plan 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. Costs associated with the Company's Retiree Medical Plan were $0.1 million for each of the years ended 2009 and 2008.
The plan was unfunded and provided healthcare benefits to substantially all retired non-union associates and their dependents. Eligibility requirements were based on the individual's age (minimum age of 55), years of service and hire date. The benefits were subject to retiree contributions, deductible, co-payment provision and other limitations.
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Postretirement Health Benefits (Continued)
Accrued Postretirement Benefit Obligation
The following table provides the plan's change in Accrued Postretirement Benefit Obligation ("APBO") for the years ended December 31, 2010 and 2009 (in thousands):
The balance of $73 thousand represents remaining runout claims not paid by December 31, 2010.
Plan Assets and Investment Policies and Strategies
The Company did not fund its postretirement healthcare plan (see "Plan Funded Status" below). Accordingly, as of December 31, 2010 and 2009, the postretirement healthcare plan held no assets. The following table provides the change in plan assets for the years ended December 31, 2010 and 2009 (in thousands):
Plan Funded Status
The Company's postretirement healthcare plan was unfunded. The following table sets forth the plans' funded status as of December 31, 2010 and 2009 (in thousands):
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Postretirement Health Benefits (Continued)
Components of Net Periodic Postretirement Benefit Cost
The costs of postretirement healthcare benefits for the years ended December 31, 2010, 2009 and 2008 were as follows (in thousands):
Assumptions Used
The weighted-average assumptions used in accounting for the Company's Retiree Medical Plan for the three years presented are set forth below:
14. Preferred Stock
USI's authorized capital shares include 15 million shares of preferred stock. The rights and preferences of preferred stock are established by USI's Board of Directors upon issuance. As of December 31, 2010 and 2009, USI had no preferred stock outstanding and all 15 million shares are classified as undesignated preferred stock.
15. Income Taxes
The provision for income taxes consisted of the following (in thousands):
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Income Taxes (Continued)
The Company's effective income tax rates for the years ended December 31, 2010, 2009 and 2008 varied from the statutory federal income tax rate as set forth in the following table (in thousands):
The deferred tax assets and liabilities resulted from temporary differences in the recognition of certain items for financial and tax accounting purposes. The sources of these differences and the related tax effects were as follows (in thousands):
In the Consolidated Balance Sheets, these deferred assets and liabilities were classified on a net basis as current and non-current, based on the classification of the related asset or liability or the expected reversal date of the temporary difference.
Accounting for Uncertainty in Income Taxes
At December 31, 2010, the gross unrecognized tax benefits decreased to $4.5 million. At December 31, 2009 and 2008, the Company had $5.0 million and $8.0 million, respectively, in gross unrecognized tax
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Income Taxes (Continued)
benefits. The following table shows the changes in gross unrecognized tax benefits, for the years ended December 31, 2010, 2009 and 2008 (in thousands):
At December 31, 2010, 2009 and 2008, $4.5 million, $5.0 million and $8.0 million, respectively, of these gross unrecognized tax benefits would, if recognized, decrease the Company's effective tax rate.
The Company recognizes net interest and penalties related to unrecognized tax benefits in income tax expense. The gross amount of interest and penalties reflected in the Consolidated Statement of Income for the years ended December 31, 2010, 2009 and 2008 were income of $0.1 million and $0.7 million and expense of $0.2 million, respectively. The Consolidated Balance Sheets at December 31, 2010 and 2009 include $1.0 and $1.1 million, respectively, accrued for the potential payment of interest and penalties.
As of December 31, 2010, the Company's U.S. Federal income tax returns for 2007 and subsequent years remain subject to examination by tax authorities. In addition, the Company's state income tax returns for the 2001 and subsequent tax years remain subject to examinations by state and local income tax authorities. Although the Company is not currently under examination by the IRS, a number of state and local examinations are currently ongoing. Due to the potential for resolution of ongoing examinations and the expiration of various statutes of limitation, it is reasonably possible that the Company's gross unrecognized tax benefits balance may change within the next twelve months by a range of zero to $2.4 million.
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Supplemental Cash Flow Information
In addition to the information provided in the Consolidated Statements of Cash Flows, the following are supplemental disclosures of cash flow information for the years ended December 31, 2010, 2009 and 2008 (in thousands):
17. Other Expense
The following table sets forth the components of other expense (dollars in thousands):
The Company revalued the MBS Dev earn-out acquisition liabilities to $5.1 million based on the fair value of each earn-out as of that date and recorded a non-cash, pre-tax charge of $0.8 million in Other Expense, net. See Note 1, "Acquisition and Investments", for further information.
18. Fair Value of Financial Instruments
The estimated fair value of the Company's financial instruments approximates their net carrying values. The estimated fair values of the Company's financial instruments are as follows (in thousands):
The fair value of the interest rate swaps is estimated based upon the amount that the Company would receive or pay to terminate the agreements as of December 31 of each year. See Note 20, "Derivative Financial Instruments", for further information.
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Other Assets and Liabilities
Other assets and liabilities as of December 31, 2010 and 2009 were as follows (in thousands):
20. Derivative Financial Instruments
Interest rate movements create a degree of risk to the Company's operations by affecting the amount of interest payments. Interest rate swap agreements are used to manage the Company's exposure to interest rate changes. The Company designates its floating-to-fixed interest rate swaps as cash flow hedges of the variability of future cash flows at the inception of the swap contract to support hedge accounting.
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 is 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 is 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 has an effective date of January 15, 2008 and a termination date of January 15, 2013. Notwithstanding the terms of the November 2007 Swap Transaction, USSC is ultimately obligated for all amounts due and payable under its credit agreements.
Subsequently, on December 20, 2007, USSC entered into another 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 is required to make quarterly fixed rate payments to the counterparty calculated
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
20. Derivative Financial Instruments (Continued)
based on a notional amount of $200 million at a fixed rate of 4.075%, while the counterparty is 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 has an effective date of December 21, 2007 and a termination date of June 21, 2012. Notwithstanding the terms of the December 2007 Swap Transaction, USSC is ultimately obligated for all amounts due and payable under its credit agreements.
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 is 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 is 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 had an effective date of March 31, 2008 and a termination date of June 29, 2012. Notwithstanding the terms of the March 2008 Swap Transaction, USSC is ultimately obligated for all amounts due and payable under its credit agreements.
The hedged transactions described above qualify as cash flow hedges in accordance with accounting guidance on derivative instruments. This guidance requires companies to recognize all of their derivative instruments as either assets or liabilities in the statement of financial position at fair value. The Company does not offset fair value amounts recognized for interest rate swaps executed with the same counterparty.
For derivative instruments that are designated and qualify as a cash flow hedge (for example, hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings (for example, in "interest expense" when the hedged transactions are interest cash flows associated with floating-rate debt).
The Company has entered into these interest rate swap agreements, described above, that effectively convert a portion of its floating-rate debt to a fixed-rate basis. This reduces the impact of interest rate changes on future interest expense. By using such derivative financial instruments, the Company exposes itself to credit risk and market risk. Credit risk is the risk that the counterparty to the interest rate swap agreements (as noted above) will fail to perform under the terms of the agreements. The Company attempts to minimize the credit risk in these agreements by only entering into transactions with credit worthy counterparties. The market risk is the adverse effect on the value of a derivative financial instrument that results from a change in interest rates.
Approximately 98% ($435 million) of the Company's debt had its interest payments designated as the hedged forecasted transactions to interest rate swap agreements at December 31, 2010.
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
20. Derivative Financial Instruments (Continued)
The interest rate swap agreements accounted for as cash flow hedges that were outstanding and recorded at fair value on the statement of financial position as of December 31, 2010 were as follows (in thousands):
(1)These interest rate derivatives qualify for hedge accounting. Therefore, the fair value of each interest rate derivative is included in the Company's Consolidated Balance Sheets as either a component of "Other assets" or "Other long-term liabilities" with an offsetting component in "Stockholders' Equity" as part of "Accumulated Other Comprehensive Loss". Fair value adjustments of the interest rate swaps will be deferred and recognized as an adjustment to interest expense over the remaining term of the hedged instrument.
The Company's agreements with its derivative counterparties provide that if an event of default occurs on any Company debt of $25 million or more, the counterparties can terminate the swap agreements. If an event of default had occurred and the counterparties had exercised their early termination rights under the swap agreements as of December 31, 2010, the Company would have been required to pay the aggregate fair value net liability of $25.2 million plus accrued interest to the counterparties.
These interest rate swap agreements contain no ineffectiveness; therefore, all gains or losses on these derivative instruments are reported as a component of other comprehensive income ("OCI") and reclassified into earnings as "interest expense" in the same period or periods during which the hedged transaction affects earnings. The following table depicts the effect of these derivative instruments on the statement of income for the year ended December 31, 2010.
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
20. Derivative Financial Instruments (Continued)
21. Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including interest rate swap liabilities related to interest rate swap derivatives based on the mark-to-market position of the Company's interest rate swap positions and other observable interest rates (see Note 20, "Derivative Financial Instruments", for more information on these interest rate swaps).
FASB accounting guidance on fair value establishes a hierarchy for those instruments measured at fair value which distinguishes between assumptions based on market data (observable inputs) and the Company's own assumptions (unobservable inputs). The hierarchy consists of three levels:
•Level 1-Quoted market prices in active markets for identical assets or liabilities;
•Level 2-Inputs other than Level 1 inputs that are either directly or indirectly observable; and
•Level 3-Unobservable inputs developed using estimates and assumptions developed by the Company which reflect those that a market participant would use.
Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. The following table summarizes the financial instruments measured at fair value in the accompanying Consolidated Balance Sheets as of December 31, 2010 and 2009 (in thousands):
UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
21. Fair Value Measurements (Continued)
The carrying amount of accounts receivable at December 31, 2010 and 2009, including $405.5 million and $445.3 million, respectively, of receivables sold under the Current Receivables Securitization Program, approximates fair value because of the short-term nature of this item.
FASB accounting guidance on fair value measurements requires separate disclosure of assets and liabilities measured at fair value on a recurring basis, as noted above, from those measured at fair value on a nonrecurring basis. As of December 31, 2010, no assets or liabilities are measured at fair value on a nonrecurring basis.
22. Quarterly Financial Data-Unaudited
(1)As a result of changes in the number of common and common equivalent shares during the year, the sum of quarterly earnings per share will not necessarily equal earnings per share for the total year.
(2)2010 results were impacted by the following items: (1) a $9.1 million or $0.23 per diluted share charge for early retirement/workforce realignment in the fourth quarter (2) an $11.9 million or $0.30 per diluted share reversal for vacation pay policy change in the fourth quarter and (3) an $8.8 million, or $0.23 per diluted share reversal for Retiree Medical Plan termination in the second, third, and fourth quarters.
(3)2009 results were impacted by the following items: (1) a $14.0 million, or $0.37 per diluted share negotiated settlement with a service supplier in the fourth quarter and (2) a $3.4 million, or $0.09 per diluted share severance charge from the first quarter of 2009.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
The Registrant had no disagreements on accounting and financial disclosure of the type referred to in Item 304 of Regulation S-K.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Attached as exhibits to this Annual Report are certifications of the Company's Chief Executive Officer ("CEO") and Senior Vice President and Chief Financial Officer ("CFO"), which are required in accordance with Rule 13a-14 under the Exchange Act. This "Controls and Procedures" section includes information concerning the controls and controls evaluation referred to in such certifications. It should be read in conjunction with the reports of the Company's management on the Company's internal control over financial reporting and the report thereon of Ernst & Young LLP referred to below.
Inherent Limitations on Effectiveness of Controls
The Company's management, including the CEO and CFO, does not expect that the Company's Disclosure Controls or its internal control over financial reporting will prevent or detect all error or all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. The design of a control system must reflect the existence of resource constraints. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the fact that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by managerial override. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and no design is likely to succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks, including that controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Disclosure Controls and Procedures
At the end of the period covered by this Annual Report on Form 10-K the Company's management performed an evaluation, under the supervision and with the participation of the Company's CEO and CFO, of the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Such disclosure controls and procedures ("Disclosure Controls") are controls and other procedures designed to provide reasonable assurance that information required to be disclosed in USI's reports filed under the Exchange Act, such as this Annual Report, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Management's quarterly evaluation of Disclosure Controls includes an evaluation of some components of the Company's internal control over financial reporting, and internal control over financial reporting is also separately evaluated on an annual basis.
Based on this evaluation, the Company's management (including its CEO and CFO) concluded that, as of December 31, 2010, the Company's Disclosure Controls were effective, subject to the inherent limitations noted above in this Item 9A.
Management's Report on Internal Control over Financial Reporting and Related Report of Independent Registered Public Accounting Firm
Management's report on internal control over financial reporting and the report of Ernst & Young LLP, the Company's independent registered public accounting firm, regarding its audit of the Company's internal control over financial reporting are included in Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes to the Company's internal control over financial reporting that occurred during the last quarter of 2010 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
For information about the Company's executive officers, see "Executive Officers of the Registrant" included as Item 4A of this Annual Report on Form 10-K. In addition, the information contained under the captions "Proposal 1: Election of Directors" and "Voting Securities and Principal Holders-Section 16(a) Beneficial Ownership Reporting Compliance" in USI's Proxy Statement for its 2011 Annual Meeting of Stockholders ("2011 Proxy Statement") is incorporated herein by reference.
The information required by Item 10 regarding the Audit Committee's composition and the presence of an "audit committee financial expert" is incorporated herein by reference to the information under the captions "Governance and Board Matters-Board Committees-General" and "-Audit Committee" in USI's 2011 Proxy Statement. In addition, information regarding delinquent filers pursuant to Item 405 of Regulation S-K is incorporated by reference to the information under the captions "Section 16(a) Beneficial Ownership Reporting Compliance" in USI's 2011 Proxy Statement.
The Company has adopted a code of ethics (its "Code of Business Conduct") that applies to all directors, officers and associates, including the Company's CEO, CFO and Controller, and other executive officers identified pursuant to this Item 10. A copy of this Code of Business Conduct is available on the Company's Web site at www.unitedstationers.com. The Company intends to disclose any significant amendments to and waivers of its Code of Conduct by posting the required information at this Web site within the required time periods.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information required to be furnished pursuant to this Item is incorporated herein by reference to the information under the captions "Director Compensation", "Executive Compensation" and "Compensation Committee Interlocks and Insider Participation" in USI's 2011 Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The beneficial ownership information required to be furnished pursuant to this Item is incorporated herein by reference to the information under the captions "Voting Securities and Principal Holders-Security Ownership of Certain Beneficial Owners" and "Voting Securities and Principal Holders-Security Ownership of Management" in USI's 2011 Proxy Statement. Information relating to securities authorized for issuance under United's equity plans is incorporated herein by reference to the information under the caption "Equity Compensation Plan Information" in USI's 2011 Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required to be furnished pursuant to this Item is incorporated herein by reference to the information under the caption "Certain Relationships and Related Transactions" in USI's 2011 Proxy Statement.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required to be furnished pursuant to this Item is incorporated herein by reference to the information under the captions "Proposal 2: Ratification of Selection of Independent Registered Public Accountants-Fee Information" and "-Audit Committee Pre-Approval Policy" in USI's 2011 Proxy Statement.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a)The following financial statements, schedules and exhibits are filed as part of this report:
The Company is including as exhibits to this Annual Report certain documents that it has previously filed with the SEC as exhibits, and it is incorporating such documents as exhibits herein by reference from the respective filings identified in parentheses at the end of the exhibit descriptions. Except where otherwise indicated, the identified SEC filings from which such exhibits are incorporated by reference were made by the Company (under USI's file number of 0-10653). The management contracts and compensatory plans or arrangements required to be included as exhibits to this Annual Report pursuant to Item 15(b) are listed below as Exhibits 10.10 through 10.16, Exhibits 10.18 through 10.19, Exhibits 10.25 through 10.34, and Exhibits 10.39 through 10.40, inclusive, and each of them is marked with a double asterisk at the end of the related exhibit description.
*Filed herewith.
**Represents a management contract or compensatory plan or arrangement.
Confidential treatment has been requested for a portion of this document. Confidential portions have been omitted and filed separately with the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNITED STATIONERS INC.
BY:
/s/ RICHARD W. GOCHNAUER
Richard W. Gochnauer
Chief Executive Officer
(Principal Executive Officer)
Dated: February 25, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SCHEDULE II
UNITED STATIONERS INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2010, 2009 and 2008
(1)-net of any recoveries
(2)-represents allowance for doubtful accounts related to the retained interest in receivables sold and accounts receivable, net.