Published on

Published in: Economy & Finance, Business
  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide


  1. 1. United Stationers Inc. 2001 WAS A YEAR OF CHALLENGES, CHANGE AND D E T E R M I N AT I O N Annual Report 2001
  2. 2. You’ll Note the Changes I n the middle of a changing marketplace, United Stationers is changing, too. But we continue to focus on what has made us the largest wholesale distributor of business products in North America: • The industry’s broadest product line—more than 40,000 items, including traditional office products, computer consumables, office furniture, business machines and presentation products, and janitorial and sanitation supplies from 500 manufacturers; • Same-day pick, pack and ship capabilities; • An integrated network of 65 distribution centers; • A wide range of value-added services; and • Relationships with 20,000 reseller customers, including office products dealers, mega-dealers, contract stationers, office products superstores, computer products resellers, mass merchandisers, mail order companies, sanitary supply distributors, and e-commerce merchants. In 2001, we also embarked on a plan to improve United’s cost and organizational structure to provide a sustainable competitive advantage: • We dramatically cut costs; • We generated operating cash flow of approximately $200 million; • We developed a new organizational structure that brings decision-making closer to our customers; • We strengthened company leadership; and • We are consolidating our computer consumables and traditional business products platforms to better serve customers and promote synergies and cost savings. T a b l e o f C o n t e n t s Lower Sales, Earnings Pressure in 2001 2 Strengthening Our Balance Sheet 3 Stock Repurchase Plan Activity 3 Restructuring as a Springboard 4 Improving the Efficiency of Our Distribution Network 6 Restructuring The Order People for Growth 6 Building on Our Strengths 8 Recognition of Our Strengths 11 Returning to Record Results 12 Management’s Discussion and Analysis 13 Selected Consolidated Financial Data 22 Quarterly Financial and Stock Price Data 24 Report of Management / Report of Independent Auditors 25 Consolidated Financial Statements 26 Notes to Consolidated Financial Statements 32 Directors/Officers Stockholder Information Inside Back Cover
  3. 3. Financial Highlights (dollars in thousands, except per share data) United Stationers Inc. and Subsidiaries Income Statement Data for the Years Ended Dec. 31, 2001 Dec. 31, 2000 Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,925,936 $ 3,944,862 Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,055 202,546 Income before income taxes and extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,641 164,116 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,978 92,167 Net income per share—assuming dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.68 2.65 Operating Results Before Restructuring1 and Extraordinary 2 Charges Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 169,658 1 $ 202,546 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,9211 98,6432 Net income per share — assuming dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.531 2.842 Balance Sheet Data at Year End Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 412,7663 $ 495,4563 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,339,5873 1,447,0273 Long-term debt (including current maturities) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271,705 271,705 409,867 409,867 Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 538,681 538,681 478,439 478,439 NET SALES OPERATING INCOME NET INCOME PER SHARE (Dollars in Billions) (Dollars in Millions) (Dollars per Share) $203 $2.84 2 $3.9 $3.9 $2.53 1 $2.37 $3.4 $182 $3.1 $2.00 2, 4 $169 4 $170 1 $2.6 $1.47 2, 4 $135 4 97 98 99 00 01 97 98 99 00 01 97 98 99 00 01 In the face of a challenging economic Operating income in 2001 was negatively affect- While net income per share fell below our environment, we were able to hold sales ed by an operating loss at The Order People. expectations, cost control measures prevented steady in 2001, achieving a 12.9% four-year a further decline, and the savings from our compound annual growth rate. restructuring should help boost earnings in 2002. 1 Excluding a pre-tax restructuring charge of $47.6 million. (See Note 3 to the Consolidated Financial Statements.) 2 Excluding the extraordinary charge. (See Note 7 to the Consolidated Financial Statements and Notes 10 and 11 to the Selected Consolidated Financial Data.) 3 Excluding trade accounts receivable sold under a receivable securitization program. (See Note 5 to the Consolidated Financial Statements.) 4 Excluding non-recurring charges. (See Notes 10 and 11 to the Selected Consolidated Financial Data.) United Stationers Annual Report 1
  4. 4. A Sharper Focus To Our Stockholders 2001 was one of the toughest periods in United Stationers’ Lower Sales, 80-year history. First, we faced a number of negative macro- Earnings Pressure in 2001 economic factors. The U.S. entered an economic downturn The factors mentioned earlier, plus the sale of our non-core in March 2001, which was made worse by the terrorist attacks Positive ID bar code scanning business and a portion of TOP’s on September 11th. This led to an unemployment rate of CallCenter Services, reduced annual sales by approximately 5.8% by year end—the highest level since 1994 — and a $30 million. However, the determination and efforts of our 7% increase in the number of companies that went out of associates allowed United to nearly offset this sales shortfall. business compared with 2000. So revenues of $3.9 billion were essentially flat with the prior Second, with the benefit of hindsight, we now recognize year. On a product category basis, the hardest hit areas were that United built an infrastructure to support a business that traditional office products (down 7%) and furniture (down did not materialize as expected. We also had not foreseen the 6%). Sales of computer consumables rose 5%. In addition, collapse in e-commerce that would lengthen the selling cycles sales of janitorial and sanitation products were strong, grow- for The Order People (TOP)— our third-party non-office ing 31% during the year. This increase was the result of products fulfillment business. This meant we had staffed up and acquiring Peerless Paper in January 2001 and an organic developed an infrastructure that was out of balance with our growth rate in the high single digits. ability to ramp up revenues. In addition, U.S. Office Products We also saw mixed performance on a business channel (USOP) was acquired in May 2001 by Buhrmann N.V., the basis. Our larger customers who serve “Fortune 500” firms parent company of Corporate Express, Inc. As a result, USOP were negatively affected as these companies laid off employ- was integrated into Corporate Express’ business model, which ees and pulled back on spending. However, our independent is based on buying a higher percentage of products directly dealer customers— who contribute the majority of our sales— from manufacturers. This resulted in a loss of more than $100 managed to avoid the steep decline in business experienced million of sales volume in 2001. by other types of resellers. The combination of these internal and external issues put 2001 Revenues by Product Line an end to four straight years of record performance. However, United’s business model is sound and its financial condition remains strong. Just as important, the challenges we faced also gave us the determination to change United into a more Traditional Computer competitive company with an even greater focus on customer Consumables Office Products service, distribution excellence, employee advancement and 35% 32% return on invested capital. Business Machines & Office Presentation Furniture Products Janitorial & Sanitation 13% 9% Supplies 11% Both traditional office products and computer consumables continue to account for about a third of our business. 2 United Stationers Annual Report
  5. 5. TOTAL DEBT 1 TO EBITDA (Dollars in Millions) 3.3 x 2 2.4 x 2 2.4 x Flat sales put pressure 2.3 x in 2000. In 2002, we expect capital expenditures will reach on our gross margin, which about $35 million, which includes $17 million in restructuring- 1.9 x 3 ended the year at 15.8% related costs. compared with 16.3% for As the sales rate slowed, we focused on the prudent use of 2000. Operating expenses our working capital. Incentives for our management team and as a percent of sales grew to sales force now include specific EPS and working capital goals, 12.7% (including the restruc- because we believe what you measure and reward gets managed. turing charge) in 2001 versus With this focus, we improved the balance sheet by reducing 11.2% in 2000. This led to inventory levels by $107 million, lowered accounts receivable by operating income of $122.1 $44 million (which includes $125 million and $150 million of 97 98 99 00 01 million or 3.1% of sales in receivables sold under the asset-backed securitization in 2001 2001, compared with $202.5 The combination of high levels of cash and 2000, respectively), and decreased accounts payable by $56 million or 5.1% in 2001. flow and lower debt reduced this ratio to million. This allowed us to reduce core elements of working Excluding the restructuring the lowest level since 1995. capital by $95 million, compared with an increase of $92 million charge, operating expenses 1 Total debt includes the accounts receivable sold in 2000. under the asset-backed securitization. (See Note in 2001 were 11.5% of 5 to the Consolidated Financial Statements.) sales, which led to operating 2 Excluding non-recurring charges. In addition, we elected to sell only $125 million of receivables (See Notes 10 and 11 to the Selected under our asset-backed securitization— a fairly standard, third- income of $169.7 million, Consolidated Financial Data.) or 4.3% of sales (including a 3 Excluding restructuring charge. (See Note 3 party program used to provide funding at very low interest rates. $21.7 million loss before to the Consolidated Financial Statements.) This was $25 million lower than in 2000. As a result, we reduced interest and taxes in The Order People). our debt (including the asset-backed securitization) during the year by $163.2 million, which improved our debt to total book In the third quarter, we recorded a $47.6 million pre-tax capitalization to 42.4% from 53.9% a year ago. Earnings before restructuring charge, which included a $31.7 million cash charge interest, taxes, depreciation and amortization (EBITDA) com- and a $15.9 million non-cash charge. In addition, we incurred bined with lower debt improved our total debt to EBITDA ratio about $2.2 million of implementation costs related to the restruc- to 1.9x (including the $125.0 million of sold receivables), its turing in 2001. During 2002, we expect to record an additional lowest level in the last five years. $4.5 million of restructuring-related implementation costs. As a result, we reported net income of $57.0 million, or $1.68 Stock Repurchase per share in 2001, compared with $92.2 million, or $2.65 per Plan Activity share in 2000. Excluding the restructuring charge, net income was $85.9 million, or $2.53 per share, compared with 2000’s Strong free cash flow allowed us to continue repurchasing United $98.6 million, or $2.84 per share, which excludes the $6.5 mil- stock. During 2001, we bought 467,500 shares, at an average lion extraordinary charge related to the early retirement of debt price of $26.50, under an existing $50 million authorization. We taken in that year. still have $15 million of the original authorization for purchases. Strengthening Our Balance Sheet We kept capital expenditures under control during the year. Spending totaled $28.6 million compared with $39.3 million United Stationers Annual Report 3
  6. 6. Organizing Our Operations Restructuring Creating a New as a Springboard Organizational Structure We expect our restructuring to produce cost savings of $25 As we reduced our headcount, we also reorganized United to million in 2002. Beginning in 2003— the first full year after do a better job of capitalizing on opportunities. Our specific it is completed— the restructuring should save approximately goals for the reorganization— in addition to cost savings— $40 million and significantly improve our return on invested included driving decision-making closer to customers, speed- capital. However, we view the restructuring as more than a ing implementation of best practices, improving overall way to cut costs. It’s part of a fundamental change at United: effectiveness, encouraging new ideas, and strengthening our removing barriers to serving our customers, while increasing leadership team. efficiencies in our operations. As the President and CEO, I am charged with ensuring that United has a long-term growth strategy and the resources to meet its goals. The following Senior Vice Presidents report Cutting Costs directly to me: Chief Financial Officer, Chief Information United had a compound annual revenue growth rate of 12.9% Officer, General Counsel, and the head of Human Resources. between 1997 and 2001. We obviously needed to increase our In addition, we have created a new position— Chief Operating staff and build an infrastructure to accommodate this expan- Officer— which we hope to fill within the next few months. sion. As growth slowed in 2001, however, we had excess This person also will report to me and will supervise United’s capacity and overhead. day-to-day operations. A number of people will report This meant we had to rationalize our facilities and reduce directly to the COO: the heads of Sales and Customer our staff to be in-line with lower revenue expectations. We Support Services, Field Sales and Operations, Marketing significantly trimmed our headcount through a voluntary and Field Support Services, Merchandising, Inventory separation program, and then through a layoff. Both programs Management and Strategic Facilities Support, and the were implemented at every level of the company. President of Lagasse. I believe this structure will give us Selling part of our call center business and a more efficient chain of command and a more restructuring our operations led to an effective distribution of authority and responsibility. additional reduction. By early summer I also am very excited about the caliber of people we 2002, we will have lowered our have filling each position. In addition to Ergin Uskup, employee base 20% from August who has held the CIO position for eight years, 2001. While we sincerely regret we welcomed the following to United’s senior the impact on the associates leadership ranks: who were affected, this was a necessary action to strengthen our position for the future. Managing Our Working Capital Playing lead roles in the company’s drive for working capital efficiency, Senior Vice Presidents Jim Fahey (left) and Ron Berg are directing merchandising and inventory management efforts. 4 United Stationers Annual Report
  7. 7. Champions of Change The goals for restructuring our organization include driving decision-making closer to customers, improving overall effectiveness, reducing costs, encour- aging new ideas, and accelerating implementation of best practices. These executives will take a leading role in this process (from left to right): Joe Templet, Senior VP of Field Sales and Operations; Kathy Dvorak, Senior VP and CFO; Mark Hampton, Senior VP of Marketing and Field Support Services; and Jeff Howard, Senior VP of Sales and Customer Support Services. • John Sloan, our new Senior VP of Human Resources joined us in January 2002 from Sears, Roebuck and Co., where he served as the Executive VP of Human Resources. John led all aspects of this function, including compensa- tion, benefits, labor relations, recruitment, and training and development. He also established a nationally recognized diversity program. We implemented another important organizational change within our Supply Division. Instead of having four independent regions— each with its own infrastructure— we now have seven zones: West, Northwest, Southwest, Midwest, Great Lakes, East, and Southeast. The leaders of these zones focus exclusively on selling and operations. Our goal is to give the people who work directly with customers more responsibility and authority to get things done quickly and correctly, so we can provide better service. To operate more efficiently and to support zone efforts, we • Kathy Dvorak was promoted to Senior VP and CFO. formed the Shared Services Group. Many of the people in this Her 20 years of experience with various aspects of United’s group came from former region support staffs. They now are help- financial management and investor relations made her the ing local teams to cross geographic and organizational boundaries ideal candidate for this position. and implement best practices throughout the company. • Deidra Gold, our new Senior VP and General Counsel, has a strong background in mergers and acquisitions, financing transactions, compensation and benefits, and corporate law. Before joining United, Deidra was an officer of Ameritech State-of-the-Art Facilities Corporation and then eLoyalty Corporation, where she was involved in financing, strategic planning and M &A activi- Our new 300,000 square foot Denver distribu- ties and provided legal guidance to management and the tion center opened in May 2001. Designed for board of directors. optimum efficiency, this facility can warehouse almost $20 million in inventory and ship over 20,000 order lines per night. Automated conveyor systems use bar code intelligence to guide orders through the warehouse in the most efficient manner— from picking zones to packing stations— and then on to the appropriate shipping lanes where they can be loaded onto trucks for delivery. United Stationers Annual Report 5
  8. 8. Integrating Our Operations Improving the Efficiency Capitalizing of Our Distribution Network on Opportunities None of our competitors can match United’s ability to get its We saw other opportunities to expand in several areas last broad product offering into the hands of end-consumers in year. This included replacing old warehouses with two new every major metropolitan area in North America within 300,000 square foot distribution centers in Denver and 12 hours of order placement. We are committed to maintain- Charlotte, and expanding a furniture annex to 214,000 square ing this ability. feet in Los Angeles. In addition, we broke ground on a new 600,000 square foot state-of-the-art distribution center in Atlanta that will replace an older facility there. Integrating Systems We also are looking at ways to modernize and reduce the and Processes number of distribution centers without affecting our enviable We are reviewing our entire operation, looking for ways to customer service record. For example, plans are underway effectively consolidate our business platforms. One opportunity to strengthen the Sacramento operations by consolidating we identified is to have a single operating platform for com- two facilities into a single distribution center with a new puter consumables and traditional office products. To achieve furniture annex. Two existing centers in Memphis are being this, we are putting the Supply Division and Azerty on the consolidated. In addition, we closed our Cincinnati facility in same system during the second quarter of 2002. November and are successfully serving those customers from This integration has major benefits to our customers and our Indianapolis and Columbus distribution centers. Our goal United. Our office products customers no longer will have to is to continue leveraging the distribution network to better go through a separate Azerty operation to order a full line of serve our customers and generate more profit as we grow. computer consumables. They now will have the ability to receive computer consumables and office products in a single box. We will benefit from incorporating Azerty’s product Restructuring offering into our Supply Division facilities, and by closing The Order People for Growth four dedicated computer consumables distribution centers and A year ago, I wrote about the opportunities we saw for growth consolidating some administrative and support staff functions. at The Order People (TOP). This year we restructured the We are confident that this will produce efficiencies and operation. What happened? economies of scale for both United and its customers. TOP was formed during the period of explosive growth in We also completed the integration of Peerless Paper e-commerce. Internal projections, reviewed and supported into Lagasse last November. This wholesale distributor of by third-party professionals, convinced us that we could janitorial and sanitation, paper, and food service products, build on our pick, pack, ship and track core competencies was acquired in January 2001. By the first quarter of 2002, to become a significant player in third-party fulfillment. we had a fully integrated product offering from the combined operations— increasing Lagasse’s number of stockkeeping units (SKUs) from 6,000 to 7,000. 6 United Stationers Annual Report
  9. 9. State-of-the-Art Distribution Systems More than 40 miles of conveyors keep product moving in our state-of-the-art distribution centers. This equipment facilitates the high volume throughput required to pick, pack and ship over 525,000 order lines per night, so our customers can make their business products deliveries the next day. A sophisticated warehouse management system integrates our inventory and logistics capabilities, so we can track each carton and its contents as they move through our distribution center and onto the truck for delivery. We focused on both traditional and businesses, with The Power of an Integrated Network the latter providing a quick ramp-up. The idea was to invest United’s customers can make next-day deliveries to over 90% of the U.S. quickly and fully in our business model to develop a sustain- population and in major metropolitan areas of Canada and Mexico. They can able competitive advantage. do this because our integrated network of distribution centers allows us to However, with a longer-than-expected selling cycle send shipments to customers within 12 hours of receiving the order. Our and the collapse of the universe, TOP had sizable Supply Division has 37 regional distribution facilities with a mix of traditional expenses and investments and little revenue. office products, computer consumables, business machines and presentation Rather than wait for the tide to turn, we took a number products, furniture, and janitorial and sanitation products. This includes a of steps to trim the cost structure in 2001. mega-center that also supports the Azerty, Lagasse and The Order People businesses. These facilities also can provide fulfillment services for non-office • The Reno and Harrisburg facilities were closed. product items. We have 24 dedicated janitorial and sanitation distribution • Part of CallCenter Services was sold. centers, two distribution centers that provide computer consumables and traditional office automation products in Canada, and two more facilities in • Staffing and expenses were dramatically reduced. Mexico that offer computer consumables. • The Memphis distribution center, originally devoted to TOP customers, now also is being used to help us better serve Supply Division, Lagasse and Azerty customers. • Instead of being freestanding, TOP now is a priority initiative within the Supply Division. This means we are keeping a dedicated staff for sales, marketing and client integration, while leveraging Supply Division resources for all other areas. As a result of these actions, we expect that TOP should begin making a contribution to earnings in the second half of 2002. United Stationers Annual Report 7
  10. 10. Finding Solutions Over the longer term, we still believe in the concept Frequent Contact with Potential Customers Our manu- of offering order fulfillment to third parties. It addresses a facturers’ products are featured in an unmatched array of supply chain need: companies in non-office products areas print and online catalogs. During 2001, United distributed want to outsource their product procurement and fulfillment. 30 million catalogs and promotional flyers. This includes our We believe that providing a source for these activities — a General Line Catalog, the biggest and most widely distributed core competency of United— offers an opportunity for office products catalog in North America. Our electronic significant growth. catalog database also was syndicated to more than 2,000 reseller Web sites by year end. To further improve the sales process, in 2001 we developed™. Building on This Web site offers more details on manufacturers’ products Our Strengths than is feasible in print and online catalogs. As a result, The restructuring will make us a more focused organization end-consumers can get quick answers to their questions and and allow us to build on the competitive advantages that ensure they are buying the right products to meet their needs. made United strong in the first place. This will improve our Deeper Product Line Exposure By stocking more than position as a critical link in the supply chain for manufacturers 40,000 products, United can feature items that most resellers and resellers. do not keep in stock. This allows end-consumers to see more of a manufacturer’s product line— and also helps manufactur- ers more cost-effectively launch new products and create A Critical Link demand for them. for Manufacturers Easy, Efficient Ordering Process In an effort to improve We give our 500 manufacturers an edge in the marketplace quality while saving time and costs, we send more than 90% that they could not cost-effectively achieve on their own. of our orders electronically to manufacturers. This eliminates Reach a Wider Audience Our distribution network helps the redundant data entry (associated with traditional paper vendors reach more than 20,000 customers: office products purchase orders), ensures high quality data, timely turnaround dealers, mega-dealers, contract stationers, office products of orders, and administrative cost savings. In addition, superstores, computer products resellers, mass merchandisers, because United handles fulfillment for so many resellers, it mail order companies, sanitary supply distributors, and generates large orders that can be efficiently handled by the e-commerce merchants. In addition, our infrastructure manufacturers. Then United breaks down orders into “one- allows us to deliver vendors’ products to resellers in every eaches” that resellers and end-consumers want. As a result, major North American market within 12 hours of order manufacturers do not have to pick, pack and ship small placement— meeting resellers’ demands for quick delivery. volume orders, which saves them from the costs of building elaborate distribution systems. 8 United Stationers Annual Report
  11. 11. Handle Backroom Operations Resellers want to increase Find All the Details in the efficiency of their assets while reducing investments in inventory, warehouses and delivery vehicles. They turn to The Web site and CD-ROM are extensions of the General Line United for a number of reasons: Catalog, providing more detailed information on the 27,000 products in the traditional print catalog. Both also provide easy access to aid customer searches. • Our substantial investment in a broad range of inventory gives resellers access to the products their end-consumers For example, the “Resource” section includes interactive tools to help select the want— even items that would not be cost-effective for right products, such as chairs and desks, and a cost containment calculator that resellers to carry. shows customers the benefits of using one supplier rather than several. • Our state-of-the-art order processing capabilities allowed us to handle an average of 525,000 order lines per day last A Critical Link year. United receives orders from its customers by phone, for Resellers fax, e-mail or the Internet. Then our integrated systems As resellers look for ways to reduce their costs without help us to locate products at warehouses across the country, compromising product offerings and service to end-consumers, consolidate the items, and then provide a single on-time United becomes their natural choice. delivery of the entire order. Broadest Product Line Without investing in inventory • Our state-of-the-art distribution infrastructure includes and warehouses, resellers capitalize on United’s capabilities as 65 regional distribution centers in 40 major cities in 29 North America’s: states and provinces in the U.S., Canada and Mexico. In the past three years, we invested nearly $50 million in new • Largest wholesale distributor of traditional office supplies. distribution centers and in warehouse technology — some- • Largest wholesale distributor of computer consumables. thing our competition has not done. • Largest wholesale distributor of office furniture. • Our fleet of more than 400 trucks delivers orders as soon as they have been picked. In addition, our relationships • Largest wholesale distributor of janitorial and with third-party express and package carriers help us ensure sanitation supplies. next-day delivery to resellers or end-consumers across • Leading wholesale distributor of business machines North America. and presentation products. This operating system is backed by a corporate culture focused United’s 2002 General Line Catalog has 27,000 items and on providing superior service and fulfillment excellence. As a the most new products ever introduced in one year: 1,700 on result, we have maintained the highest service levels in the indus- 96 more pages than in 2001. try: a 98% order fill rate, a 99.5% order accuracy rate, and a 99% on-time delivery rate. United Stationers Annual Report 9
  12. 12. Delivering Fulfillment Excellence Unmatched Value-Added Programs United has a number • End-consumer research. United sponsors end-consumer of programs designed to help resellers sell more products research each year, then presents the results and recom- and better serve their customers. Some of our more popular mendations to our resellers on how to capitalize on ones include: them. For example, purchasers of business products say a “big catalog” is the single most important item they • A wide range of sales generating materials. These want to see from a prospective supplier — so United’s include print and online catalogs that are informative, General Line Catalog is a competitive advantage. Last easy to use — and feature the reseller’s name. Promotional year, thousands of resellers turned to United for a better flyers remind end-consumers that resellers are price- understanding of end-consumers and how to reach them. competitive on commodity items. • Premier Performance Shows. In 2001, resellers and • Customized packaging programs. This includes our end-consumers attended six shows across the country, Wrap and Label Program. United packages the items sponsored by United, to preview new products and ordered by each end-consumer, attaches an address label receive in-depth product information from approximately with the reseller’s name, then delivers the order to the 60 manufacturers. These shows are more than informa- reseller or facilitates delivery to the end-consumer at the tive. They also help strengthen relationships between reseller’s direction. Resellers value this program because the thousands of dealers and end-consumers who attend. it means they do not need to break down bulk shipments from manufacturers and repackage them for end-consumers. As a result, they can reduce handling delays, lower their Pursuing costs and increase their financial returns. Operational Excellence • Customized delivery programs. Our relationships Over 90% of the orders we fill each day represent orders that with a network of small package carriers and other serv- our resellers received earlier that same day. We truly provide ice providers allow us to offer the Nationwide Express just-in-time delivery to resellers so they can offer same- or Delivery Program. Products ordered through United next-day delivery to their customers. We essentially serve as reach 98% of business consumers in the U.S. on a same- a warehouse for our resellers — for many of them we are their day, next-day or second-day basis. This means that local, warehouse. Our services are critical to resellers, so we continue regional and virtual resellers can serve end-consumers to look for ways to strengthen them. Here are some of the across the country. enhancements made in 2001: • Customer training programs. United provides profes- • We now pick orders based on the times when trucks sional, affordable training on business-related subjects must leave to deliver them. This improves our ability that otherwise would not be available to many resellers. to meet shipping cut-off times for our own truck fleet In 2001, this translated into 90 courses attended by and third-party carriers. 1,200 resellers — from “Exceptional Customer Service” to “Growing Market Share and Margin.” • Packing lists now are laser-printed with a shipping label and the picking document on the same form. We also provide a peel-off label on the packing list to make the return process easier. In addition, resellers and end-consumers have the option of choosing a separate packing list for each box of the order rather than a single packing list for the entire order. 10 United Stationers Annual Report
  13. 13. • We now have a carton-sizing standardization program. • Information Week Magazine ranked United 104th in It uses a formula that looks at the “cube” requirement of its “Information Week 500,” which tracks the largest an order to ensure it is put in the appropriate-sized box for and most innovative IT organizations based in the U.S. shipping. This leads to improved handling, reduced shipping Companies included in this annual listing had at least damage and lower packaging costs. $1 billion in annual revenue and exhibited “a pattern of technological, procedural, and organizational innovation.” • United also placed #21 in Computerworld Magazine’s “100 Recognition of Best Places to Work in IT.” The judging criteria included Our Strengths company benefits, training and development, average salary In a year when we could not post strong near-term financial increases, and staff advancement and turnover. results, it was particularly gratifying to receive recognition for the approach we take to our business. • United was again listed as a “Fortune 500” company. • In 2002, Fortune Magazine included United as one of “America’s Most Admired Companies.” The survey identified the 10 largest companies (by revenue), in 58 industries. Then 10,000 executives, directors and securities analysts rated the companies on eight criteria. United ranked #6 in the “Stores and Distributors” category, under “Wholesalers: Electronics and Office Equipment.” • United was named to Forbes Magazine’s “Platinum 400” list of best performing companies. The list includes “the best big companies in America”— those “that are better than their competitors, with outstanding profitability and growth.” The companies are selected based on 23 broad industry sectors. United posted the highest earnings-per-share growth rate in the “Business Supplies” sector. Delivering Fulfillment Excellence Products offered by United Stationers and Azerty now are available through one integrated system. This means one order, one shipment and one invoice from United, the leading wholesale distributor of business products for office supplies and computer consumables. United Stationers Annual Report 11
  14. 14. Working for a Brighter Future Returning to • We are driving down our cost base, so we can reach Record Results acceptable profitability at a lower level of revenue. We are committed to returning to our long-term growth • We have reorganized our operation to better share and goals: 6-9% annual revenue expansion, 12-15% increases implement best practices and capitalize on opportunities in earnings, a 300 basis point improvement in return on that come our way. invested capital, and free cash flow in excess of $100 million. We face some significant challenges in reaching these goals: • We are strengthening our leadership team and are providing them with the tools needed to succeed. • Economists currently expect a slower first half of the year, followed by a stronger second half— of course, • We are using incentives to reward employees for achiev- they did forecast the same scenario a year ago. ing cost reductions and working capital efficiency goals. • We also will have to overcome some macroeconomic • We have proven that United can continue to offer and industry-related trends. Economic conditions and fulfillment excellence to its customers — in tough times widespread layoffs mean there is a smaller employee as well as good. population in need of our products, as well as budget On behalf of the board of directors and management team, constraints on the amount of dollars spent per employee I want to extend my thanks to all of our associates for their on office supplies. In addition, there is an excess supply hard work during this difficult year. I also want to thank the of Grade “A” furniture due to the shareholders who supported us in 2001 and renew our pledge demise of and other companies. to create even more value for them in the coming years. As a result, the office products industry is expected to experience only nominal growth during this year. What makes us expect that United can do better than the market? The first reason is history: we have grown faster than the market for most of the last 20 Randall W. Larrimore years. Secondly, we believe the steps we President and Chief Executive Officer are taking should position us well for the changing industry conditions. March 15, 2002 “United Stationers has a tradition of meeting challenges with change, determination and just as importantly — enthusiasm. Randall W. Larrimore This has made us the industry leader and we believe will create opportunities for continued growth and profitability.” 12 United Stationers Annual Report
  15. 15. Management’s Discussion and Analysis of Financial Condition and Results of Operations United Stationers Inc. and Subsidiaries The following Management’s Discussion and Analysis and a national distribution network to more than 20,000 resellers, other parts of this Annual Report contain “forward-looking who in turn sell directly to end-users. These products are statements,” within the meaning of Section 27A of the Securities distributed through a computer-based network of 36 USSC Act and Section 21E of the Exchange Act, that are based on regional distribution centers, 24 dedicated Lagasse, Inc. current management expectations, forecasts and assumptions. (“Lagasse”) distribution centers that serve the janitorial and These include, without limitation, statements using forward- sanitation industry, four Azerty Incorporated (“Azerty”) looking terminology such as “may,” “will,” “future,” “expect,” distribution centers that serve the U.S. and two in Mexico that “intend,” “anticipate,” “believe,” “estimate,” “project,” “forecast” serve computer supply resellers, two distribution centers that serve or “continue” or the negative thereof or other variations thereon the Canadian marketplace and a mega-center that supports or comparable terminology. All statements other than statements USSC, Azerty, Lagasse, and The Order People. During the of historical fact included in this Annual Report, including those second quarter of 2002, Azerty’s computer systems and product regarding the Company’s financial position, business strategy, offering will be integrated into USSC and the Company intends projected costs and plans and objectives of management for future to close the four Azerty distribution centers. Following the operations are forward-looking statements. Certain risks and integration the Company intends to continue to market uncertainties could cause actual results to differ materially from computer consumables using the Azerty name. those in such forward-looking statements. Such risks and During 2000, the Company established The Order People uncertainties include, but are not limited to, uncertainties (“TOP”) to operate as its third-party fulfillment provider for relating to: the Company’s restructuring plan, including its ability product categories beyond office products. To become a full to realize expected cost savings from facility rationalization, service provider, the Company acquired CallCenter Services, Inc. systems integration and other initiatives and the timing of those which was a customer relationship management outsourcing savings; the Company’s ability to streamline its organization and service company with inbound call centers in Wilkes-Barre, operation, successfully integrate Azerty and implement general Pennsylvania, and Salisbury, Maryland. In 2001, the Company did cost-reduction initiatives; the Company’s reliance on key not achieve the estimated revenue to support TOP’s cost structure. suppliers and the impact of fluctuations in their pricing and As a result, the Company began to significantly reduce the variability in vendor allowances based on sales volume; the operating expenses of TOP. Therefore, in November 2001, the Company’s ability to anticipate and respond to changes in end- Wilkes-Barre portion of CallCenter Services, Inc. was sold to user demand; competitive activity and the resulting impact on Customer Satisfaction First and the Salisbury portion was sold to pricing and product offerings and mix; reliance on key 1-800-BARNONE, a Financial Corporation, Inc., in January 2002. management personnel; and economic conditions and changes However, the Company remains committed to building the third- affecting the business products industry and the general economic party fulfillment business and to providing outstanding customer conditions. A description of these factors, as well as other service to current and future clients. To accomplish this, TOP’s factors, which could affect the Company’s business, can be found clients will be serviced utilizing the resources within the Company’s in certain filings by the Company with the Securities and Supply Division. TOP will use the Memphis distribution center as Exchange Commission. its lead distribution point with USSC’s facilities providing support Readers are cautioned not to place undue reliance on forward- where necessary. looking statements contained in this Annual Report. The The Company is focused on leveraging its infrastructure across Company undertakes no obligation to release the results of any all business units to lower its operating expenses and increase cash updates or revisions to these forward-looking statements that may flow. In addition, the Company’s entire distribution network is be made to reflect any future events or circumstances. continuously under review to improve productivity and efficiency, The following discussion should be read in conjunction with including the ability to reduce working capital requirements. the Company’s Consolidated Financial Statements and related Restructuring Charge. In the third quarter of 2001, the notes appearing elsewhere in this Annual Report. Company’s Board of Directors approved a restructuring plan that includes: Overview • An organizational restructuring aimed at eliminating certain United Stationers Inc. through its wholly owned operating layers of management to achieve a lower cost structure and subsidiary United Stationers Supply Co. (“USSC”), and USSC’s provide better customer service; subsidiaries (collectively, the “Company”) is the largest general line business products wholesaler in the United States, with 2001 • The consolidation of certain distribution facilities and call net sales of $3.9 billion. The Company sells its products through center operations; United Stationers Annual Report 13
  16. 16. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) • An information technology platform consolidation; include training, stay bonuses, consulting fees, costs to relocate • Divestiture of The Order People’s call center operations and inventory, and accelerated depreciation. Implementation costs certain other assets; and incurred through December 31, 2001, were $2.2 million. • A significant reduction to The Order People’s cost structure. As of December 31, 2001, the Company completed the closure of three distribution centers and one USSC call center, The restructuring plan calls for a workforce reduction of 1,375. eliminated one administrative office, divested a portion of the call These positions are related primarily to The Order People and center operations dedicated to serving The Order People’s clients call center operations. The associate groups that will be affected and began the implementation of its organizational restructuring by the restructuring plan include management personnel, inside and workforce reduction. As a result, the Company reduced its and outside sales representatives, call center associates, workforce by 580 associates through its voluntary and involuntary distribution workers, and hourly administrative staff. The termination programs. The remaining 795 associates will be restructuring plan is designed to have all initiatives completed terminated throughout the implementation period of within approximately one year from the commitment date. approximately one year. During the third quarter 2001, the Company recorded a pre- Common Stock Repurchase. On October 23, 2000, the tax restructuring charge of $47.6 million, or $0.85 per share (on Company’s Board of Directors authorized the repurchase of up to an after-tax basis). This charge includes a pre-tax cash charge of $50.0 million of its common stock. Under this authorization, the $31.7 million and a $15.9 million non-cash charge. The major Company purchased 467,500 and 857,100 shares of its common components of the restructuring charge and the remaining accrual stock at a cost of approximately $12.4 million and $22.4 million, balance as of December 31, 2001, are as follows: during 2001 and 2000, respectively. Acquired shares are included Employment in the issued shares of the Company, but are not included in Non-Cash Termination Asset and Accrued Total average shares outstanding when calculating earnings per share Write- Severance Exit Restructuring data. During 2001 and 2000, the Company reissued 621,453 and (dollars in thousands) Downs Costs Costs Charge 309,674 shares of treasury stock, respectively, to fulfill its Restructuring Charge . . . . . . . $15,925 $19,189 $12,489 $47,603 Amounts Utilized – as of obligations under its management equity plan. December 31, 2001 . . . . . . . (15,925) (3,023) (1,226) (20,174) Accrued Restructuring Costs – Critical Accounting Policies as of December 31, 2001 . . . . $ — $16,166 $11,263 $27,429 The Company’s accounting policies are more fully described in Note 2 to the Consolidated Financial Statements. As disclosed The non-cash asset write-downs of $15.9 million were primarily the result of facility closures and business divestitures, including in Note 2, the preparation of financial statements in conformity $8.8 million related to property, plant and equipment and $7.1 with generally accepted accounting principles requires million related to goodwill. Asset write-downs are based on management to make estimates and assumptions about future management’s estimate of net realizable value. events that affect the amounts reported in the financial Employment termination and severance costs are related to statements and accompanying notes. Future events and their voluntary and involuntary terminations and reflect cash effects cannot be determined with absolute certainty. Therefore, termination payments to be paid to associates affected by the the determination of estimates requires the exercise of judgment. restructuring plan. Healthcare benefits and career transition Actual results inevitably will differ from those estimates, and such services are included in the termination and severance costs. differences may be material to the financial statements. The most The restructuring plan allows associates to continue their significant accounting estimates inherent in the preparation of participation in the Company’s healthcare plan during the term the Company’s financial statements include the following: of their severance. • Revenue Recognition Accrued exit costs are primarily contractual lease obligations Revenue is recognized when a service is rendered or when a that existed prior to September 30, 2001, for buildings that the product is shipped and title has transferred to the customer. Company has closed or will be closing in the near future. Implementation costs will be recognized as incurred and consist • Valuation of Accounts Receivable of incremental costs directly related to the realization of the The Company makes judgments as to the collectibility of restructuring plan. The Company estimates that the total cost accounts receivable based on historical trends and future of implementation will be approximately $6.7 million incurred expectations. Management estimates an allowance for sales ratably through approximately September 30, 2002. These costs returns and doubtful accounts, which represents the collectibility 14 United Stationers Annual Report
  17. 17. United Stationers Inc. and Subsidiaries of trade accounts receivable. These allowances adjust gross trade Results for the Years Ended accounts receivable down to net realizable value. To determine December 31, 2001, 2000, and 1999 the allowance for sales returns, management uses historical trends The following table presents the Consolidated Statements of to estimate future period product returns. To determine the Income as a percentage of net sales: allowance for doubtful accounts, management reviews specific customers and the Company’s accounts receivable aging. 2001 2000 1999 • Customer Rebates Net sales . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% Cost of goods sold . . . . . . . . . . . . . . . . . . 84.2 83.7 83.6 Customer rebates and discounts are common practice in the Gross margin . . . . . . . . . . . . . . . . . . . . . . 15.8 16.3 16.4 business products industry. Customer rebates consist of volume Operating expenses: rebates, sales growth incentives, participation in promotions and Warehouse, marketing and other miscellaneous discount programs. These rebates are administrative expenses . . . . . . . . . . . . 11.5 11.2 11.1 Restructuring charge . . . . . . . . . . . . . . . 1.2 — — recorded as a reduction to gross sales. Customer rebates are Total operating expenses . . . . . . . . . . . . . 12.7 11.2 11.1 estimated based on customer participation and are recorded as Income from operations . . . . . . . . . . . . . . 3.1 5.1 5.3 revenue is recognized. These estimates are adjusted, if necessary, Interest expense . . . . . . . . . . . . . . . . . . . . (0.7) (0.8) (0.8) as new information becomes available. Interest income . . . . . . . . . . . . . . . . . . . . . 0.1 0.1 — • Manufacturers’ Allowances Other expense, net . . . . . . . . . . . . . . . . . (0.1) (0.3) (0.3) Manufacturers’ allowances and promotional incentives are Income before income taxes and extraordinary item . . . . . . . . . . . . . . . . . 2.4 4.1 4.2 common practice in the business products industry and contribute Income taxes . . . . . . . . . . . . . . . . . . . . . . 0.9 1.7 1.8 significantly to the Company’s gross margin. Manufacturers’ Income before extraordinary item . . . . . . 1.5 2.4 2.4 allowances are recorded at the time of sale based upon the Extraordinary item – loss on early Company’s inventory purchase volume estimates. Promotional retirement of debt, net of tax benefit . . . — (0.1) — incentives are based on vendor participation in the Company’s Net income . . . . . . . . . . . . . . . . . . . . . . . 1.5% 2.3% 2.4% various advertising programs. These programs are recorded as a reduction to cost of goods sold to reflect the net inventory Comparison of Results for the Years purchase cost and the net advertising cost. Ended December 31, 2001 and 2000 • Inventory Net Sales. Net sales were flat at $3.9 billion for 2001 and 2000. Inventories constituting approximately 77% of total The lower sales in the categories of traditional office products and inventories at December 31, 2001, have been valued under the furniture were offset by growth in janitorial and sanitation products last-in, first-out (“LIFO”) method. The remaining inventories are and computer consumables, both of which were supported by valued under the first-in, first-out (“FIFO”) method. Inventory acquisitions in 2001 and 2000. There were several factors that valued under the FIFO and LIFO accounting methods is recorded contributed to flat sales. First, sales volume to Corporate Express at the lower of cost or market. Inventory reserves are recorded for Inc. and US Office Products (“USOP”) declined by approximately shrinkage, obsolete, damaged, defective, and slow-moving $100 million. This primarily is due to the integration of USOP inventory. These reserve estimates are determined using into the Corporate Express business model, which is designed to historical trends and are adjusted, if necessary, as new information buy more products directly from the manufacturer. Second, at the becomes available. end of July 2001, the Company completed the sale of the Positive ID business unit. This sale reduced sales growth for the year by Various assumptions and other factors underlie the approximately 1%. Finally, a worsening macroeconomic determination of significant accounting estimates. The process of environment negatively impacted all product categories. determining significant estimates is fact specific and takes into Office furniture sales declined by mid-single-digits, compared account factors such as historical experience, current and with the prior year. These results continue to reflect slowing expected economic conditions, product mix, and in some cases, consumer demand and weak macroeconomic conditions. While actuarial techniques. The Company periodically reevaluates these the current economic environment presents challenges, the significant factors and makes adjustments where facts and Company sees an opportunity for sales growth as dealers shift their circumstances dictate. Historically, actual results have not inventory investment to wholesalers to limit their working capital significantly deviated from those determined using the estimates requirements. Furthermore, in a weak economy consumers tend to described above. shift their demand toward the mid-priced furniture lines offered by United Stationers Annual Report 15
  18. 18. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) the Company. However, the Company is challenged by the $202.5 million, or 5.1% of net sales in 2000. Excluding the excess supply of premium grade furniture available in the investments in The Order People and the restructuring charge, marketplace due to the failure of Internet and other companies. income from operations decreased 9.1% to $191.4 million or Typical purchasers of mid-grade furniture are purchasing used 4.9% of net sales in 2001, compared with an increase of 15.5% to premium grade furniture at extremely attractive prices. $210.5 million or 5.4% of net sales in 2000. The janitorial and sanitation product category, primarily Interest Expense. Interest expense for 2001 was $25.9 million, distributed through the Lagasse operating unit, achieved a 31% or 0.7% of net sales, compared with $30.2 million, or 0.8% of net growth rate, compared with the prior year. This growth primarily sales, in 2000. This reduction reflected the interest expense reflected Lagasse’s January 5, 2001, acquisition of Peerless Paper savings related to the redemption of the 12.75% Notes (as Mills, Inc. (“Peerless”) as well as a growth rate in the high single- defined) as well as lower interest rates on variable rate debt. digits with Lagasse’s existing customer base. Peerless was a Interest Income. Interest income for 2001 was $2.1 million, or wholesale distributor of janitorial/sanitation, paper, and food 0.1% of net sales, compared with $2.9 million, or 0.1% of net service products. This acquisition enabled the Company to sales, in 2000. expand the Lagasse product line, enhance scale and infrastructure, Other Expense. Other expense for 2001 was $4.6 million, or and add experienced management to the Lagasse operation. 0.1% of net sales, compared with $11.2 million, or 0.3% of net Sales of traditional office products experienced a decline of 7% versus the prior year. Uncertainty surrounding the sales in 2000. This expense primarily represented the costs economy and workforce reductions slowed consumption of office associated with the sale of certain trade accounts receivable products within the commercial sector, particularly in medium-to- through the Receivables Securitization Program (as defined) large companies. partially offset by a gain on the sale of fixed assets of $2.4 million. Gross Margin. Gross margin in 2001 was $619.8 million, or Income Taxes. Income tax expense as a percent of net sales 15.8% of net sales, compared with $643.8 million, or 16.3% of was 0.9% in 2001 and 1.7% in 2000. The effective tax rate net sales, in 2000. The rate decline is due to lower pricing margin declined to 39.2% in 2001 from 39.9% in 2000. This was due to due to a shift in product mix toward computer consumables, a change in the mix of pre-tax earnings between states. partially offset by incremental vendor allowances, lower inventory Net Income. Net income for 2001 decreased 38.2% to $57.0 shrinkage and lower distressed inventory losses. Approximately million, or 1.5% of net sales, from $92.2 million, or 2.3% of net 55% of the Company’s vendor rebates are variable and are directly sales, in 2000. Excluding the restructuring charge, net income linked to achieving certain purchase volume hurdles. During for 2001 was $85.9 million, compared with $98.6 million in 2000, 2001, inventory purchase levels declined significantly as excluding the extraordinary item. evidenced by the Company’s lower working capital requirements. Fourth Quarter Results. Certain expense and cost of sale Manufacturers’ allowances as a percentage of net sales increased estimates are recorded throughout the year, including inventory by approximately 0.5% resulting from a change in product mix shrinkage and obsolescence, required LIFO reserve, and the impact of new vendor agreements. manufacturers’ allowances, advertising costs and various expense Operating Expenses. Operating expenses for 2001 were up items. During the fourth quarter of 2001, the Company 12.8% to $497.7 million and were 12.7% of net sales, compared recorded a favorable net income adjustment of approximately with $441.3 million, or 11.2% of net sales, in the prior year. The $5.8 million related to the refinement of estimates recorded in increase in operating expenses was partially due to the $47.6 the prior three quarters. million restructuring charge (see Note 3 to the Consolidated Financial Statements), which resulted in a 1.2% increase to the Comparison of Results for the Years operating expense ratio. The increase was also a result of Ended December 31, 2000 and 1999 investments in The Order People, the Company’s third-party Net Sales. Net sales increased 14.6% to $3.9 billion for 2000, fulfillment business. Operating expenses related to TOP for 2001, compared with $3.4 billion for 1999. This increase reflected excluding the TOP portion of the restructuring charge, and 2000, growth in the Company’s core business, incremental sales from totaled $18.2 million and $9.0 million, respectively, resulting in a acquisitions completed in 2000, and increases in freight revenue. 0.5% and a 0.2% increase in the operating expense ratio. The Company’s sales growth within its core business was broad Income from Operations. Income from operations decreased based, with strength in all geographic regions, across all product 39.7% to $122.1 million, or 3.1% of net sales, compared with categories and customer channels. Specifically, the janitorial 16 United Stationers Annual Report
  19. 19. United Stationers Inc. and Subsidiaries and sanitation products, computer consumables and office Income Taxes. Income tax expense as a percent of net sales was furniture categories experienced strong sales growth. Sales 1.7% in 2000 compared to 1.8% in 1999. The effective tax rate growth for the year ended December 31, 2000, excluding the declined to 39.9% in 2000 from 41.9% in 1999. This was due to a acquisitions of Azerty Canada and CallCenter Services, Inc., change in the mix of pre-tax earnings between states and higher increased 12.2%. pre-tax earnings with relatively constant nondeductible expenses, Gross Margin. Gross margin in 2000 reached $643.8 million, such as goodwill. up 14.1% from last year and was 16.3% of net sales, compared Net Income. Net income for 2000 increased 10.6% to $92.2 with $564.2 million, or 16.4% of net sales, in 1999. The 0.1% million, or 2.3% of net sales, from $83.4 million, or 2.4% of net rate decline was due to lower pricing margin partially offset by sales, in 1999. Net income for 2000, excluding the impact of the incremental vendor allowances earned as a result of higher extraordinary item, increased 18.2% to $98.6 million, or 2.4% of sales volume. net sales. Operating Expenses. Operating expenses for 2000 were up Fourth Quarter Results. Certain expense and cost of sale 15.5% to $441.3 million and were 11.2% of net sales, compared estimates are recorded throughout the year, including inventory with $382.0 million, or 11.1% of net sales, in the prior year. The shrinkage and obsolescence, required LIFO reserve, manufacturers’ increase in the operating expense rate was attributable to allowances, advertising costs and various expense items. During investments in The Order People, the Company’s third-party the fourth quarter of 2000, the Company recorded a favorable net fulfillment business. Operating expenses for 2000 related to The income adjustment of approximately $5.9 million related to the Order People totaled $9.0 million resulting in a 0.2% increase in refinement of estimates recorded in the prior three quarters. the operating expense ratio. Income from Operations. Income from operations increased Liquidity and Capital Resources 11.1% to $202.5 million, or 5.1% of net sales, compared with United is a holding company and, as a result, its primary source $182.2 million, or 5.3% of net sales, in 1999. Excluding the of funds is cash generated from operating activities of its operating investments in The Order People, income from operations subsidiary, USSC, and bank borrowings by USSC. The Credit increased 15.5% to $210.5 million or 5.4% of net sales. Agreement and the indentures governing the Notes contain Interest Expense. Interest expense for 2000 was $30.2 million, restrictions on the ability of USSC to transfer cash to United. or 0.8% of net sales, compared with $30.0 million, or 0.8% of net The Company’s outstanding debt and liquidity sources(1) sales, in 1999. This reduction reflected the Company’s continued consisted of the following amounts (dollars in thousands): leveraging of interest costs against higher sales, and the interest As of December 31, expense savings related to the redemption of the 12.75% Notes 2001 2000 (as defined) partially offset by slightly higher interest rates on Revolver – $250.0 million less letter of variable rate debt. credit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 98,000 Interest Income. Interest income for 2000 was $2.9 million, Tranche A term loan, due in installments until March 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . 32,331 44,325 or 0.1% of net sales, compared with $0.8 million in 1999. This Tranche A-1 term loan due in installments until increase was primarily due to an increase in interest earned on June 30, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109,375 137,500 notes receivable. 8.375% Senior Subordinated Notes, due Other Expense. Other expense for 2000 reached $11.2 April 15, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 100,000 million, or 0.3% of net sales, compared with $9.4 million, or 0.3% Industrial development bonds, at market interest rates, maturing at various dates through 2011 . . . . . . 14,300 14,300 of net sales, in 1999. This expense primarily represents the costs Industrial development bonds, at 66% to 78% of associated with the sale of certain trade accounts receivable prime, maturing at various dates through 2004 . . . . 15,500 15,500 through the Receivables Securitization Program (as defined). Other long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 199 242 These costs vary on a monthly basis and generally are related to Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271,705 409,867 Receivables Securitization (liquidity sources)(1) . . . . . 125,000 150,000 certain short-term interest rates. Total outstanding debt and liquidity sources(1) . . . . . . $396,705 $559,867 Income Before Income Taxes and Extraordinary Item. Income before income taxes and extraordinary item was $164.1 million, (1) See discussion under Receivables Securitization Program. or 4.1% of net sales, compared with $143.6 million, or 4.2% of net sales, in 1999. United Stationers Annual Report 17