UNITED STATIONERS INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with both the information at the end of Item 6 of this Annual Report on Form 10-K appearing under the caption, "Forward Looking Information", and the Company's Consolidated Financial Statements and related notes contained in Item 8 of this Annual Report.

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

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

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

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

• The Company continues to show progress in many areas, continuing to outperform certain segments in the markets in which it competes, improving margins, lowering costs in certain areas while continuing to invest in growth areas of the business, generating solid cash flow, and returning capital to shareholders. The Company's recent acquisition of O.K.I. Supply Co. (OKI) is expected to increase the Company's industrial 15 -------------------------------------------------------------------------------- Table of Contents platform to about 12% of total annual consolidated revenue and demonstrates the Company's strategic focus to expand the role of wholesale distribution services into areas where they are currently underpenetrated.

More information related to this acquisition is noted below.

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

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

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

• Diluted earnings per share for 2012 were $2.73 compared to $2.42 in 2011.

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

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

• Operating expenses in 2012 totaled $573.7 million or 11.3% of sales. Adjusted operating expenses in 2012 were $567.4 million or 11.2% of sales, excluding the previously reported $6.2 million pre-tax charge for the distribution network optimization and targeted cost reduction program.

Adjusted operating expenses in 2011 were $536.4 million or 10.7% of sales, which excluded $0.7 million for a partial reversal of a workforce realignment charge, a $4.4 million equity compensation charge related to a transition agreement with the Company's former chief executive officer, as well as a $1.6 million asset impairment charge related to an equity investment. Higher employee-related expenses and increased depreciation/amortization were partially offset by lower bad debt expense and savings from WOW initiatives.

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

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

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

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

• During the fourth quarter of 2012, the Company acquired 100% of the outstanding shares of OKI for an all cash purchase price of $90 million.

OKI has consolidated annual revenues of approximately $150 million across its domestic U.S. platform and its operations in Canada and Dubai, UAE.

The Company's net cash outflow as a result of this transaction was $75.3 million as $4.5 million was reserved for as payable upon completion of a two year indemnification period. There was also approximately $10 million in cash on the balance sheet of OKI upon acquisition.

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

Critical Accounting Policies, Judgments and Estimates The Company's significant accounting policies are more fully described in Note 2 of the Consolidated Financial Statements. As described in Note 2, the preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty.

Therefore, the determination of estimates requires the exercise of judgment.

Actual results may differ from those estimates. The Company believes that such differences would have to vary significantly from historical trends to have a material impact on the Company's financial results.

The Company's critical accounting policies are most significant to the Company's financial condition and results of operations and require especially difficult, subjective or complex judgments or estimates by management. In most cases, critical accounting policies require management to make estimates on matters that are uncertain at the time the estimate is made. The basis for the estimates is historical experience, terms of existing contracts, observance of industry trends, information provided by customers or vendors, and information available from other outside sources, as appropriate. These critical accounting policies include the following: Supplier Allowances Supplier allowances (fixed or variable) are common practice in the business products industry and have a significant impact on the Company's overall gross margin. Gross margin is determined by, among other items, file margin (determined by reference to invoiced price), as reduced by customer discounts and rebates as discussed below, and increased by supplier allowances and promotional incentives. Receivables related to supplier allowances totaled $96.9 million and $81.3 million as of December 31, 2012 and 2011, respectively. These receivables are included in "Accounts receivable" in the Consolidated Balance Sheets.

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

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

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

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

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

Shipping and handling costs billed to customers are treated as revenues and recognized at the time title to the product has transferred to the customer.

Freight costs are included in the Company's Consolidated Financial Statements as a component of cost of goods sold and not netted against shipping and handling revenues. Net sales do not include sales tax charged to customers.

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

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

Goodwill and Intangible Assets During the quarter ended September 30, 2011, the Company voluntarily changed the date of its annual goodwill and indefinite-lived intangible asset impairment test from the last day of the fourth quarter (December 31) to the first day of the fourth quarter (October 1). This change is preferable under the circumstances as it (1) results in better alignment with the Company's annual strategic planning and forecasting process and (2) provides the Company with additional time in a given fiscal reporting period to accurately assess the recoverability of goodwill and indefinite-lived intangible assets and to measure any indicated impairment. The Company believes that the change in accounting principle related to the annual testing date will not delay, accelerate, or avoid an impairment charge. In accordance with Accounting Standards Codification ("ASC") Topic 350 "Intangibles-Goodwill and other", if 18-------------------------------------------------------------------------------- Table of Contents indicators of impairment are deemed to be present, the Company would perform an interim impairment test and any resulting impairment loss would be charged to expense in the period identified. This change is not applied retrospectively as it is impracticable to do so because retrospective application would require the application of significant estimates and assumptions with the use of hindsight.

Accordingly, the change was applied prospectively.

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

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

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

Inventories Approximately 77% and 78% of total inventory as of December 31, 2012 and 2011, respectively has been valued under the last-in, first-out ("LIFO") accounting method. LIFO results in a better matching of costs and revenues. The remaining inventory is valued under the first-in, first-out ("FIFO") accounting method.

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

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

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

All derivatives are recognized on the balance sheet date at their fair value.

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

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

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

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

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

20 -------------------------------------------------------------------------------- Table of Contents The following tables summarize the Company's actuarial assumptions for discount rates, expected long-term rates of return on plan assets, and rates of increase in compensation for the years ended December 31, 2012, 2011 and 2010: 2012 2011 2010 Pension plan assumptions: Assumed discount rate, general 4.30 % 5.00 % 5.75 % Assumed discount rate, union 4.45 % 5.00 % 5.75 % Rate of compensation increase - - - Expected long-term rate of return on plan assets 7.75 % 7.75 % 7.75 % Postretirement health benefits assumptions: Assumed average healthcare cost trend n/a n/a 3.00 % Assumed discount rate n/a n/a 5.75 % On April 15, 2010, the Company notified the participants that it would terminate its post-retirement health care benefit plan ("Retiree Medical Plan") effective December 31, 2010. The termination eliminated any future obligation of the Company to provide cost sharing benefits to current or future retirees. During the twelve month period ended December 31, 2010, the company recorded a reduction of operating expense (pre-tax) of $8.8 million for the reversal of actuarially-based liabilities resulting from the termination of the Retiree Medical Plan.

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

Results for the Years Ended December 31, 2012, 2011 and 2010 The following table presents the Consolidated Statements of Income as a percentage of net sales: Years Ended December 31, 2012 2011 2010 Net sales 100.00 % 100.00 % 100.00 % Cost of goods sold 84.76 85.22 84.88 Gross margin 15.24 14.78 15.12 Operating expenses: Warehousing, marketing and administrative expenses 11.28 10.82 10.78 Operating income 3.96 3.96 4.34 Interest expense, net 0.46 0.55 0.54 Other (income) expense, net - (0.04 ) 0.01 Income from continuing operations before income taxes 3.50 3.45 3.79 Income tax expense 1.30 1.27 1.46 Net income 2.20 % 2.18 % 2.33 % The above table includes all items that are separately itemized in the tables below for 2012 and 2011.

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

For the Years Ended December 31, 2012 2011 % to % to Amount Net Sales Amount Net Sales Sales $ 5,080,106 100.00 % $ 5,005,501 100.00 % Gross profit $ 774,604 15.24 % $ 740,079 14.78 % Operating expenses $ 573,693 11.28 % $ 541,752 10.82 % Early retirement/workforce realignment - - 723 0.01 % Equity compensation charge - - (4,409 ) (0.09 )% Facility closures and severance charge 6,247 (0.12 )% - - Asset impairment charge - - (1,635 ) (0.03 )% Adjusted operating expenses $ 567,446 11.16 % $ 536,431 10.71 % Operating income $ 200,911 3.96 % $ 198,327 3.96 % Operating expense items noted above 6,247 0.12 % 5,321 0.11 % Adjusted operating income $ 207,158 4.08 % $ 203,648 4.07 % Net Income $ 111,830 $ 108,996 Operating expense items noted above, net of tax 3,873 3,920 Adjusted net income $ 115,703 $ 112,916 Net income per share-diluted $ 2.73 $ 2.42 Per share operating expense items noted above 0.09 0.09 Adjusted net income per share-diluted $ 2.82 $ 2.51 Adjusted net income per diluted share-growth rate over the prior year period 12 % Weighted average number of common shares-diluted 40,991 45,014 22 -------------------------------------------------------------------------------- Table of Contents Comparison of Results for the Years Ended December 31, 2012 and 2011 Net Sales. Net sales for the year ended December 31, 2012 were approximately $5.1 billion, up 1.9%, workday adjusted, compared with $5.0 billion in 2011. The following table shows net sales by product category for 2012 and 2011 (in thousands): Years Ended December 31, 2012(1) 2011(1) Technology products $ 1,563,481 $ 1,625,842Traditional office products (including cut-sheet paper) 1,366,604 1,360,855 Janitorial and breakroom supplies 1,282,379 1,222,225 Industrial supplies 409,266 349,370 Office furniture 324,698 325,009 Freight revenue 99,319 88,893 Other 34,359 33,307 Total net sales $ 5,080,106 $ 5,005,501 (1) Certain prior period amounts have been reclassified to conform to the current presentation. Such reclassifications include changes between several product categories due to several specific products being reclassified to different categories. These changes did not impact the Consolidated Statements of Income.

Sales in the technology products category decreased 3.5%, workday adjusted, in 2012 compared to 2011. This category represented the largest percentage of the Company's consolidated net sales in 2012, accounting for 30.8% of sales.

Technology sales declined mainly due to the loss of some business from a key national account customer.

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

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

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

Office furniture sales in 2012 were up 0.3%, workday adjusted, compared to 2011.

Office furniture accounted for approximately 6.4% of the Company's 2012 consolidated net sales. These flat year-over-year sales continued to be negatively impacted by a challenging transactional market and a sourcing shift in some national account business.

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

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

23-------------------------------------------------------------------------------- Table of Contents Operating Expenses. Operating expenses in 2012 were $573.7 million or 11.3% as a percent of sales for the year, compared to $541.8 million or 10.8% in 2011.

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

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

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

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

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

2012 was also favorably impacted by a $1.2 million or $0.03 per share benefit and 2011 was favorably impacted by a $1.4 million or $0.03 per share benefit related to reduction in income tax valuation allowances on deferred tax assets.

Prior year diluted earnings per share were also positively impacted by the renegotiation of acquisition related earn-out.

Comparison of Results for the Years Ended December 31, 2011 and 2010 Net Sales. Net sales for the year ended December 31, 2011 were approximately $5.0 billion, up 3.2%, workday adjusted, compared with $4.8 billion in 2010. The following table shows net sales by product category for 2011 and 2010 (in thousands): Years Ended December 31, 2011(1) 2010(1) Technology products $ 1,625,842 $ 1,654,960Traditional office products (including cut-sheet paper) 1,360,855 1,333,490 Janitorial and breakroom supplies 1,222,225 1,105,349 Industrial supplies 349,370 282,305 Office furniture 325,009 346,649 Freight revenue 88,893 83,798 Other 33,307 25,686 Total net sales $ 5,005,501 $ 4,832,237 (1) Certain prior period amounts have been reclassified to conform to the current presentation. Such reclassifications include changes between several product categories due to several specific products being reclassified to different categories. These changes did not impact the Consolidated Statements of Income.

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

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

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

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

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

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

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

Operating Expenses.Operating expenses in 2011 were $541.8 million or 10.8% as a percent of sales for the year compared to $520.8 million or 10.8% in 2010.

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

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

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

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

Net Income. Net income for 2011 was $109.0 million and diluted earnings per share were $2.42 compared to 2010 net income of $112.8 million and diluted earnings per share of $2.34. Included in the 2011 results are a favorable $0.7 million (pre-tax) reversal of a charge taken in the fourth quarter of 2010 related to a voluntary early retirement and workforce realignment program, a $4.4 million (pre-tax) compensation charge related to a transition agreement with the Company's former Chief Executive Officer, and a $1.6 million asset impairment charge related to an equity investment. Excluding these non-operating items, adjusted net income for 2011 was $112.9 million and adjusted diluted earnings per share were $2.51. Included in the 2010 results are a favorable $11.9 million (non-cash/pre-tax) 25-------------------------------------------------------------------------------- Table of Contents adjustment to reverse vacation pay liabilities, a charge of $9.1 million (pre-tax) related to an early retirement/workforce realignment program, and an $8.8 million (non-cash/pre-tax) liability reversal for the termination of the Retiree Medical Plan. Excluding these non-operating items, adjusted net income for 2010 was $105.6 million and adjusted diluted earnings per share were $2.19.

Record adjusted diluted earnings per share in 2011 of $2.51 were up 15% versus the adjusted 2010 amount. Earnings per share growth was driven by: the impact of 2011 share repurchases, which contributed approximately $0.06 per share; a reduction in other (income) expense, which included a $1.9 million or $0.04 per share benefit from the negotiation of a lower liability for certain earn-outs and deferred payments involved in a 2010 acquisition; and a $1.4 million or $0.03 per share benefit related to a reduction in income tax valuation allowances on deferred tax assets.

Liquidity and Capital Resources Debt The Company's outstanding debt consisted of the following amounts (in millions): As of As of December 31, December 31, 2012 2011 2011 Credit Agreement $ 238.1 $ 361.8 2007 Master Note Purchase Agreement (Private Placement) 135.0 135.0 Receivables Securitization Program 150.0 - Mortgage & Capital Lease 1.3 - Debt 524.4 496.8 Stockholders' equity 738.1 704.7 Total capitalization $ 1,262.5 $ 1,201.5 Adjusted debt-to-total capitalization ratio 41.5 % 41.3 % Operating cash requirements and capital expenditures are funded from operating cash flow and available financing. Financing available from debt and the sale of accounts receivable as of December 31, 2012, is summarized below (in millions): Availability Maximum financing available under: 2011 Credit Agreement $ 700.0 2007 Master Note Purchase Agreement 135.0 Receivables Securitization Program (1) 150.0 Maximum financing available $ 985.0 Amounts utilized: 2011 Credit Agreement 238.1 2007 Master Note Purchase Agreement 135.0 Receivables Securitization Program (1) 150.0 Outstanding letters of credit 9.4 Mortgage & Other 1.6 Total financing utilized 534.1 Available financing, before restrictions 450.9 Restrictive covenant limitation 46.7 Available financing as of December 31, 2012 $ 404.2 (1) Prior to January 18, 2013, the Receivables Securitization Program provided for maximum funding available of the lesser of $150 million or the total amount of eligible receivables less excess concentrations and applicable reserves. As of January 18, 2013 the maximum amount available under this program was increased to the lesser of $200 million or the total amount of eligible receivables less excess concentrations and applicable reserves.

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

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

Disclosures About Contractual Obligations The following table aggregates all contractual obligations that affect financial condition and liquidity as of December 31, 2012 (in millions): Payment due by period 2014 & 2016 & Contractual obligations 2013 2015 2017 Thereafter Total Debt $ - $ 136.3 $ 388.1 $ - $ 524.4 Fixed interest payments on long-term debt (1) 1.5 5.1 5.4 - 12.0 Operating leases 50.2 81.0 47.9 30.0 209.1 Purchase obligations 3.6 3.7 - - 7.3 Total contractual cash obligations $ 55.3 $ 226.1 $ 441.4 $ 30.0 $ 752.8 (1) The Company has entered into several interest rate swap transactions on a portion of its long-term debt. The fixed interest payments noted in the table are based on the notional amounts and fixed rates inherent in the swap transactions and related debt instruments. For more detail see Note 19, "Derivative Financial Instruments", in the Notes to the Consolidated Financial Statements.

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

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

Credit Agreement and Other Debt On October 15, 2007, USI and USSC entered into a Master Note Purchase Agreement (the "2007 Note Purchase Agreement") with several purchasers. The 2007 Note Purchase Agreement allows USSC to issue up to $1 billion of senior secured notes, subject to the debt restrictions contained in the Credit Agreement.

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

On September 21, 2011, USI and USSC entered into a Third Amended and Restated Five-Year Revolving Credit Agreement (the "2011 Credit Agreement") with U.S.

Bank National Association and Wells Fargo Bank, National Association as Syndication Agents; Bank of America, N.A. and PNC Bank, National Association, as Documentation Agents; JPMorgan Chase Bank, National Association, as Administrative Agent, and the lenders identified therein.

27-------------------------------------------------------------------------------- Table of Contents The 2011 Credit Agreement is a revolving credit facility with an aggregate committed principal amount of $700 million. The 2011 Credit Agreement also provides a sublimit for the issuance of letters of credit in an aggregate amount not to exceed $100 million at any one time and provides a sublimit for swing line loans in an aggregate outstanding principal amount not to exceed $50 million at any one time. These amounts, as sublimits, do not increase the maximum aggregate principal amount, and any undrawn issued letters of credit and all outstanding swing line loans under the facility reduce the remaining availability under the 2011 Credit Agreement. The Company had outstanding letters of credit under the 2011 Credit Agreement of $9.4 million and $10.3 million as of December 31, 2012 and December 31, 2011, respectively.

Subject to the terms and conditions of the 2011 Credit Agreement, USSC may seek additional commitments to increase the aggregate committed principal amount to a total amount of $1 billion. The 2011 Credit Agreement expires on September 21, 2016.

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

On January 18, 2013, the Company's accounts receivable securitization program (as amended to date, the "Receivables Securitization Program" or the "Program") was amended and restated to increase the maximum amount of financing from $150 million to $200 million and to extend the term of the Program through January 18, 2016. The parties to the Program are USI, USSC, United Stationers Financial Services ("USFS"), United Stationers Receivables, LLC ("USR"), and PNC Bank, National Association (the "Investor"). The Program is governed by the following agreements: • The Transfer and Administration Agreement among USSC, USFS, USR, and the Investor; • The Receivables Sale Agreement between USSC and USFS; • The Receivables Purchase Agreement between USFS and USR; and • The Performance Guaranty executed by USI in favor of USR.

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

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

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

The 2011 Credit Agreement, the 2007 Note Purchase Agreement, and the Transfer and Administration Agreement each • prohibit the Company from exceeding a Leverage Ratio of 3.50 to 1.00, • contain additional representations and warranties, covenants and events of default that are customary for such facilities, 28 -------------------------------------------------------------------------------- Table of Contents • contain cross-default provisions under which, if a termination event occurs under any of those agreements, the lenders under all of the agreements may cease to make additional loans, accelerate any loans then outstanding and/or terminate the agreements to which they are party.

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

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

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

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

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

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

Cash Flows Cash flows for the Company for the years ended December 31, 2012, 2011 and 2010 are summarized below (in thousands): Years Ended December 31, 2012 2011 2010 Net cash provided by operating activities $ 189,814 $ 130,363 $ 114,823 Net cash used in investing activities (107,266 ) (27,918 ) (42,745 ) Net cash used in financing activities (63,457 ) (111,929 ) (69,355 ) 29 -------------------------------------------------------------------------------- Table of Contents Cash Flows From Operations Net cash provided by operating activities for 2012 totaled $189.8 million versus $130.4 million in 2011. The improvement in operating cash flows was mainly due to stronger earnings and lower working capital needs.

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

Cash Flows From Investing Activities Net cash used in investing activities for the years ended December 31, 2012, 2011 and 2010 was $107.3 million, $27.9 million, and $42.7 million, respectively. Gross capital spending for 2012, 2011 and 2010 was $32.8 million, $28.0 million and $27.3 million, respectively, which was used for various investments in fleet equipment, information technology systems, technology hardware, and distribution center equipment including several facility projects.

Additionally, 2012 cash flows included the net cash outflow of $75.3 million for the acquisition of OKI. Included in 2010 cash flows was $15.5 million related to the acquisition of MBS Dev and an investment in a managed print services and technology solution business. The Company expects gross capital spending (before the impact of any sales proceeds) for 2013 to be approximately $35 million.

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

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

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

Inflation/Deflation and Changing Prices The Company maintains substantial inventories to accommodate the prompt service and delivery requirements of its customers. Accordingly, the Company purchases its products on a regular basis in an effort to maintain its inventory at levels that it believes are sufficient to satisfy the anticipated needs of its customers, based upon historical buying practices and market conditions.

Although the Company historically has been able to pass through manufacturers' price increases to its customers on a timely basis, competitive conditions will influence how much of future price increases can be passed on to the Company's customers. Conversely, when manufacturers' prices decline, lower sales prices could result in lower margins as the Company sells existing inventory. As a result, changes in the prices paid by the Company for its products could have a material effect on the Company's net sales, gross margins and net income. See the information under the heading "Comparison of Results for the Years Ended December 31, 2012 and 2011" in Part I, Item 7 of this Annual Report on Form 10-K for further analysis on these changes in prices in 2012.

New Accounting Pronouncements In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-04. The amendments in this ASU generally represent clarifications of fair value measurement, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information 30 -------------------------------------------------------------------------------- Table of Contents about fair value measurements has changed. This ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements. On January 1, 2012, the Company adopted these amendments on a prospective basis and there was no impact on its financial position or results of operations.

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

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

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