ODP ODP Corporation

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statement for the Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act Of 1995

This document, including the following discussion and analysis, contains statements that constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended. All statements that are not statements of historical fact are forward-looking statements. Without limitation, when we use the words “believe,” “estimate,” “plan,” “expect,” “intend,” “anticipate,” “continue,” “may,” “project,” “probably,” “should,” “could,” “will” and similar expressions in this Quarterly Report on Form 10-Q, we are identifying forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). These statements appear in a number of places in this discussion and analysis and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things, trends affecting the Company’s financial condition or results of operations and the outcome of contingencies such as litigation and investigations. Readers are cautioned that any forward-looking statements are not guarantees of future performance and involve risks and uncertainties. More information regarding these risks, uncertainties and other important factors that could cause actual results to differ materially from those in the forward-looking statements is set forth in our discussion of Risk Factors, found in Item 1A of our 2015 Form 10-K, and Forward-Looking Statements, found in Part I of our 2015 Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 23, 2016 (the “2015 Form 10-K”).

Staples Acquisition

On February 4, 2015, Staples, Inc. (“Staples”) and the Company announced that the companies entered into a definitive merger agreement (the “Staples Merger Agreement”), under which Staples would acquire all of the outstanding shares of Office Depot and the Company would become a wholly owned subsidiary of Staples (the “Staples Acquisition”).

On December 7, 2015, the United States Federal Trade Commission (the “FTC”) informed Office Depot and Staples that it intended to block the Staples Acquisition. On the same date, Office Depot and Staples announced their intent to contest the FTC’s decision to challenge the transaction. On May 10, 2016, the U.S. District Court for the District of Columbia granted the FTC’s request for a preliminary injunction against the proposed acquisition, and as a result, the companies terminated the Staples Merger Agreement on May 16, 2016. Per the terms of the termination agreement, Staples paid Office Depot a fee of $250 million in cash on May 19, 2016 (“Termination Fee”).

Refer to Note 3 of the Condensed Consolidated Financial Statements for expenses incurred related to the Staples Acquisition.

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RESULTS OF OPERATIONS

OVERVIEW

Office Depot, Inc., together with its subsidiaries (“Office Depot” or the “Company”), is a global supplier of office products and services to consumers and businesses of all sizes. We sell to customers throughout North America, Europe, and the Asia/Pacific region through three reportable segments (or “Divisions”): North American Retail Division, North American Business Solutions Division and International Division. The North American Retail Division includes our retail stores in the United States, including Puerto Rico and the U.S. Virgin Islands, which offer office supplies, technology products and solutions, business machines and related supplies, facilities products, and office furniture. Most stores also have a copy and print center offering printing, reproduction, mailing and shipping services. The North American Business Solutions Division sells office supply products and services in Canada and the United States, including Puerto Rico and the U.S. Virgin Islands. North American Business Solutions Division customers are served through dedicated sales forces, catalogs, telesales, and electronically through our Internet sites. Our International Division sells office products and services through direct mail catalogs, contract sales forces, Internet sites, and retail stores in Europe and Asia/Pacific.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide information to assist readers in better understanding and evaluating our financial condition and results of operations. We recommend reading this MD&A in conjunction with our Condensed Consolidated Financial Statements and the Notes to those statements included in Item 1 of this Quarterly Report on Form 10-Q, as well as our 2015 Form 10-K.

A summary of certain factors impacting results for the 13-week and 26-week periods ended June 25, 2016 (also referred to as “the second quarter of 2016” and “the first half of 2016”) and June 27, 2015 (also referred to as “the second quarter of 2015” and “the first half of 2015”) is provided below. Additional discussion of the 2016 second quarter and first half results is provided in the narrative that follows this overview.

Sales reported in the second quarter and first half of 2016 compared to prior year were significantly affected by store closures. Additionally, sales in North American Business Solutions and International Divisions were negatively impacted by the prolonged Staples Acquisition attempt.

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U.S. Retail Optimization – Over the next three years, the Company plans to close approximately 300 additional retail stores, following completion during the second quarter of 2016 of the 400 store closures that were part of the 2014 Real Estate Strategy.

Cost Savings Program – The Company is launching a number of initiatives across key business areas to capture savings including the implementation of a more effective customer coverage model, a reduction in indirect procurement costs and lower overall general and administrative costs as well as realize the benefits from the U.S. retail store optimization program. In total, these initiatives are expected to deliver over $250 million in annual benefits by the end of 2018.

Growing Adjacent Markets – The Company plans to add products, leverage its supply chain capabilities and increase selling efforts to grow contract channel sales into adjacent categories, particularly in facilities offerings.

Optimizing Capital Structure – The Company plans to call the outstanding 9.75% senior secured notes due 2019 for redemption on September 15, 2016. The notes are currently callable at a price equal to 104.875% of the principal amount for a total anticipated consideration of $262 million. The extinguishment of this debt is expected to reduce cash interest costs by $24 million on an annual basis.

Additionally, the Board of Directors authorized increasing the current share repurchase program from $100 million to $250 million and initiated a quarterly dividend of $0.025 per share payable on September 15, 2016 to shareholders of record at the close of business August 25, 2016.

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OPERATING RESULTS

Discussion of additional income and expense items, including material charges and credits and changes in interest and income taxes follows our review of segment results.

Sales in our North American Retail Division decreased 7% in the second quarter of 2016 compared to the same period in the prior year. The decrease resulted primarily from store closures associated with the Company’s real estate strategy (“Real Estate Strategy”), which started in 2014, and a decline in comparable store sales.

Comparable store sales in the second quarter of 2016 decreased 1%. The second quarter 2016 decline in comparable store sales reflects lower transaction counts, partially offset by higher average order value. Sales increased in furniture, copy and print services, supplies, and cleaning and breakroom and declined in computer and related technology products. The increase in average order values reflects, primarily, the increase in furniture products sale. Additionally, in the second quarter of 2016, the North American Retail Division continues to benefit from the increase in online sales picked up by customers in stores.

Our comparable store sales relate to stores that have been open for at least one year. Stores are removed from the comparable sales calculation one month prior to closing, as sales during that period are largely non-comparable clearance activity, and during periods of store remodeling and if significantly downsized. Our measure of comparable store sales has been applied consistently across periods, but may differ from measures used by other companies.

Current period comparable store sales calculations continue to be positively affected from customers transferring from closed to nearby stores which remain open, though the impact declines after the one year anniversary of the store closure. The average sales transfer rate achieved to date under the Real Estate Strategy is estimated to be in excess of 30%.

The North American Retail Division reported operating income of $30 million in the second quarter of 2016, compared to $42 million in the second quarter of 2015. Division operating income declined due to favorable legal settlements relating to certain product manufacturers’ pricing practices totaling $15 million recorded in the second quarter of 2015, which were partially offset by lower occupancy and payroll expenses in the second quarter of 2016 primarily resulting from a smaller base of stores.

The factors discussed above affecting the second quarter of 2016 are also reflective of those impacting the first half of 2016 compared to the same period of 2015. Division operating income increased due to lower occupancy expenses resulting primarily from planned store closures which more than offset the impact of favorable legal settlements in the first half of 2015. Store closures also contributed to declines in payroll and other store operating costs.

During the second quarter and first half of 2016, the North American Retail Division closed 42 and 51 stores, respectively, ending the period with a store count of 1,513.

As of the end of the second quarter of 2016, the Company completed the store closures associated with the Real Estate Strategy, bringing the total closures to 400 stores since its announcement in 2014. Charges associated with these store closures are reported, as appropriate, in Asset impairments and Merger, restructuring and other operating (income) expenses, net in the Condensed Consolidated Statements of Operations. These charges are reflected in Corporate reporting, and not included in the determination of the North American Retail Division income.

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Sales in our North American Business Solutions Division in U.S. dollars and constant currency decreased 7% in the second quarter of 2016 compared to the same period in the prior year. Sales decreased in both the contract and direct channels.

The decline in the contract channel sales reflects customer attrition and fewer customer additions during the period of business disruption related to the prolonged Staples Acquisition attempt. Termination of the Staples Acquisition and additions of new business following enhancements to the sales model are anticipated to reduce the rate of sales declines during the second half of 2016. In the direct channel, online sales through officedepot.com decreased during 2016 driven by lower sales of supplies and technology products. Sales decline also reflects customer attrition from the decommissioning of legacy OfficeMax e-commerce sites and lower catalog and call center sales. We anticipate that catalog and call center ordering will continue to decline with some customers shifting to online shopping. Additionally, sales placed online but picked up in stores continue to increase in 2016. These sales are fulfilled with store inventory and by store personnel and therefore are reported as sales in the North American Retail Division. On a product category basis for the North American Business Solutions Division, sales increased in cleaning and breakroom and decreased across the other categories.

Division operating income was $63 million in the second quarter 2016 and 2015. As a percentage of sales, division operating income increased, primarily, as a result of lower payroll and advertising expenses, which more than offset the negative impact of the sales decline on recovery of fixed operating expenses (the “flow through impact”).

The factors discussed above affecting the second quarter of 2016 are also reflective of those impacting the first half of 2016 compared to the same period of 2015.

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Sales in our International Division in U.S. dollars decreased 4% in the second quarter of 2016 compared to sales in the same period of the prior year. On a constant currency basis, sales decreased 2%. Constant currency sales were lower in the contract and direct channels and higher in the retail channel. The contract channel sales decline reflects ongoing competitive market pressures that contributed to the loss of certain customers, reduced spending from existing customers, exit of unprofitable business in Asia, as well as the disruption from the prolonged Staples Acquisition attempt and the related European divestiture process. These declines were partially offset by sales increases in smaller European markets during the second quarter of 2016 and spend from certain customer contracts entered into during 2015. The sales decline in the direct channel reflects the continued competitive market pressures and the continued decline in catalog and call center sales. Retail sales in constant currencies reflect higher sales in Sweden, Korea, and France.

Division operating loss totaled $10 million in the second quarter of 2016 compared to Division operating income of $2 million in the second quarter of 2015. The decline in the International Division operating results reflects the negative flow through impact of lower sales, as well as lower gross margins, reflecting competitive pressures, and certain lower margin new business. These factors were partially offset by lower payroll and supply chain expenses. In the second quarter of 2016, supply chain expenses decreased due to efficiencies associated with the consolidation of certain supply chain facilities.

As a result of the Company’s common stock price change following termination of the Staples Merger Agreement, the Company analyzed whether such an event indicated it was likely that the fair values of reporting units were below their carrying values. Additionally, in 2016, results in Australia decreased from customer attrition and adverse foreign currency transaction impacts. The Australia and New Zealand reporting unit has $15 million of goodwill and as of the 2015 annual impairment test date had an estimated fair value above it carrying value. As of the end of the second quarter 2016, the Company concluded that no interim test for goodwill impairment was necessary. The Company’s annual goodwill test is as of the first day of the third quarter.

The factors discussed above affecting the second quarter of 2016 are also reflective of those impacting the first half of 2016 compared to the same period of 2015. In addition, sales in first half of 2016 were impacted by disruptions associated with the channel realignment resulting from restructuring activities.

For U.S. reporting, the International Division’s sales are translated into U.S. dollars at average exchange rates experienced during the period. The Division’s reported sales were negatively affected by $10 million and $44 million from changes in foreign currency exchange rates in the second quarter and first half of 2016, respectively. However, the translation effects from changes in foreign currency exchange rates did not have a significant impact on Division operating income. We analyze our international operations in terms of local currency performance to allow focus on operating trends and results.

Office Depot is exploring strategic alternatives regarding its European business and has a process underway to determine if a sale of this business could be executed on terms acceptable to the Company.

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In addition to these charges and credits, certain Selling, general and administrative expenses are not allocated to the Divisions and are managed at the Corporate level. Those expenses are addressed in the section “Unallocated Costs” below.

Asset Impairments, Merger, Restructuring, Other Charges and Credits

Asset Impairments

The Company recognized store asset impairment charges of $4 million and $9 million in the second quarter and first half of 2015, respectively. The 2015 charges relate to impairments of store operating assets, as well as impairment of certain favorable lease assets following identification of closing locations where future intangible asset recovery was considered unlikely.

Merger, restructuring and other operating (income) expenses, net

The table below summarizes the major components of Merger, restructuring and other operating (income) expenses, net.

Merger related expenses

Severance, retention, and relocation reflect expenses incurred for the integration of staff functions and includes termination benefits for certain retail and supply chain closures. Such benefits are being accrued through the anticipated facility closure date. Severance calculations consider factors such as the expected timing of store closures, terms of existing severance plans, expected employee turnover and attrition.

Transaction and integration expenses include integration-related professional fees, incremental temporary contract labor, salary and benefits for employees dedicated to the Merger activity, travel costs, non-capitalizable software integration costs, and other direct costs to combine the companies. Such costs are being recognized as incurred.

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Facility closure, contract termination and other costs primarily relate to facility closure accruals, contract termination cost, gains and losses on asset dispositions, and accelerated depreciation. Facility closure expenses include amounts incurred by the Company to close retail stores in the United States as part of the Real Estate Strategy, as well as supply chain facilities. The Company closed 51 retail stores in the first half of 2016, completing the 400 store closures announced in 2014. During the second quarter of 2016 and first quarter of 2015, the Company recognized gains of $1 million and $19 million, respectively, from the sale of warehouse facilities that had been classified as assets held for sale. The gains are included in Merger, restructuring and other operating (income) expenses, net, as the dispositions were part of the supply chain integration associated with the Merger.

International restructuring and certain other expenses

Expenses include charges related to restructuring activities, including severance and retention, professional integration fees, facility closure and other restructuring costs.

Staples Acquisition (income) expenses

Expenses include retention accruals, and transaction costs, including costs associated with regulatory filings and professional fees, offset by the Termination Fee income (refer to Note 2 for further information). The prior period accruals for retention were paid in the first quarter of 2016. Current period retention accruals will be paid in the third quarter of 2016.

Refer to Notes 2 and 3 of the Notes to the Condensed Consolidated Financial Statements for additional information.

Unallocated Expenses

The Company allocates to the Divisions functional support costs that are considered to be directly or closely related to segment activity. Those allocated costs are included in the measurement of Division operating income. Other companies may charge more or less of functional support costs to their segments, and our results therefore may not be comparable to similarly titled measures used by other companies. The unallocated costs primarily consist of the buildings used for the Company’s corporate headquarters and personnel not directly supporting the Divisions, including certain executive, finance, audit and similar functions. Unallocated costs also include certain pension expense or credit related to the frozen OfficeMax pension and other benefit plans.

Unallocated costs were $17 million and $34 million in the second quarter of 2016 and 2015, respectively, and $40 million and $55 million in the first half of 2016 and 2015, respectively. The decrease in the second quarter and first half of 2016 compared to the same periods in 2015 primarily resulted from synergies achieved at the corporate functional level following the Merger, including the integration of the corporate headquarters.

Other income, net includes gains and losses related to foreign exchange transactions, and investment results from deferred compensation plans.

Income Taxes

For the second quarter and first half of 2016, the effective tax rate was primarily impacted by valuation allowances. Valuation allowances limited the recognition of deferred tax expense associated with the utilization of deferred tax assets, as well as deferred tax benefits for the generation of pretax losses, in certain tax jurisdictions. The effective tax rate was also impacted by nondeductible foreign interest and other nondeductible expenses. The tax impact of the Termination Fee was mitigated by the deductibility of certain formerly non-deductible expenses and the utilization of tax credits. The effective tax rate for the second quarter and first half of 2015 was primarily impacted by valuation allowances limiting the recognition of deferred tax benefits for the generation of pretax losses in certain tax jurisdictions, as well as a change in the mix of pretax earnings among jurisdictions.

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Following the recognition of significant valuation allowances in the U.S. and certain foreign jurisdictions in 2009, we have regularly experienced substantial volatility in our effective tax rate in interim periods and across years. Because deferred income tax expense and benefits cannot be recognized in several jurisdictions, changes in the amount, mix, and timing of pretax earnings among jurisdictions can have a significant impact on the overall effective tax rate. This interim and full-year volatility is likely to continue in future periods until the valuation allowances can be released.

We have significant deferred tax assets in the U.S. and in certain foreign jurisdictions against which valuation allowances have been established to reduce such deferred tax assets to the amount that is more likely than not to be realized. As of the second quarter of 2016, valuation allowances remain in the U.S. and certain foreign jurisdictions where we believe it is necessary to see further positive evidence, such as sustained achievement of cumulative profits, before these valuation allowances can be released. Given the current earnings trend in the U.S., sufficient positive evidence may become available for the Company to release all or a portion of the U.S. valuation allowance in a future period. Of the $493 million U.S. valuation allowance recorded as of year-end 2015, it is reasonably possible that approximately $400 million may be released during 2016. A substantial portion of such release would result in a discrete non-cash income tax benefit as early as the third quarter of 2016, with the remainder being recognized throughout the year as part of the estimated annual effective tax rate applied to ordinary income. In addition, if positive evidence develops, the Company may also release valuation allowances in certain foreign jurisdictions as early as the third quarter of 2016, which would result in an income tax benefit of $3 million in the period of release. However, the exact timing and amount of the valuation allowance releases are subject to change based on the level of profitability actually achieved in future periods.

It is reasonably possible that certain tax positions will be resolved within the next 12 months, which would decrease the Company’s balance of unrecognized tax benefits by $5 million. This decrease would either have no impact on or would decrease the effective tax rate, depending on whether existing valuation allowances are released prior to resolution. Additionally, we anticipate that it is reasonably possible that new issues will be raised or resolved by tax authorities that may require changes to the balance of unrecognized tax benefits; however, an estimate of such changes cannot be reasonably made.

NEW ACCOUNTING STANDARDS

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued an accounting standards update that supersedes most current revenue recognition guidance and modifies the accounting for certain costs associated with revenue generation. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a number of steps to apply to achieve that principle and requires additional disclosures. The standard was originally to be effective for the Company’s first quarter of 2017. In July 2015, the FASB approved a one year extension to the required implementation date but also permitted companies to adopt the standard at the original effective date of 2017. Adoption before the original effective date of 2017 is not permitted. The new standard may be applied retrospectively to each prior period presented or retrospectively with a cumulative effect recognized as of the date of adoption. The Company is assessing what impact this new standard will have on its Consolidated Financial Statements.

In February 2016, the FASB issued an accounting standards update which will require lessees to recognize most leases on their balance sheets related to the rights and obligations created by those leases. The accounting treatment for lessors will remain relatively unchanged. The accounting standards update also requires additional qualitative and quantitative disclosures related to the nature, timing and uncertainty of cash flows arising from leases. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Lessees and lessors are required to use a modified retrospective transition method for existing leases and accordingly, apply the new accounting model for the earliest year presented in the financial statements. The Company is currently evaluating the impact the adoption of this new standard will have on its Consolidated Financial Statements but anticipates it will result in a significant right of use asset and related liability associated with our operating leases.

In March 2016, the FASB issued an accounting standards update as part of its simplification initiative. The new standard will modify several aspects of the accounting and reporting for employee share-based payments and related tax accounting impacts, including the presentation in the statements of operations and cash flows of certain tax benefits or deficiencies and employee tax withholdings, as well as the accounting for award forfeitures over the vesting period. Other provisions of the new standard relate to nonpublic entities and eliminate guidance that had not become effective. The new standard is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this new standard will have on the Consolidated Financial Statements.

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LIQUIDITY AND CAPITAL RESOURCES

At June 25, 2016, we had $1.1 billion in cash and equivalents and another $1.1 billion available under the Amended Credit Agreement (as defined in Note 4 of the Condensed Consolidated Financial Statements) based on the June borrowing base certificate, for a total liquidity of approximately $2.2 billion. We currently believe that our cash on hand, availability of funds under the Amended Credit Agreement, and full year cash flows generated from operations will be sufficient to fund our working capital, capital expenditure, debt repayment, common stock repurchases for treasury, and Merger integration expenses for at least the next twelve months.

At June 25, 2016, no amounts were drawn under the Amended Credit Agreement. There were letters of credit outstanding under the Amended Credit Agreement at the end of the second quarter 2016 totaling $91 million.

We also had short-term borrowings of $6 million at June 26, 2016, under a local currency credit facility for our international subsidiaries that had an effective interest rate at the end of the second quarter of approximately 5%. The maximum month end amount occurred in June at approximately $6 million and the maximum monthly average amount occurred in May at approximately $6 million. These short-term borrowings represent outstanding balances on uncommitted lines of credit, which do not contain financial covenants.

The Company was in compliance with all applicable financial covenants at June 25, 2016.

Since the Merger date, we have incurred significant expenses associated with the Merger and integration actions, including costs associated with the Real Estate Strategy. Approximately $100 million of additional net Merger integration costs are anticipated, with $70 million in 2016 and the remainder in 2017.

For the full year 2016, the Company expects capital expenditures to be between $175 million to $200 million.

On May 16, 2016, Staples and Office Depot terminated the Staples Merger Agreement. Per the terms of the termination agreement, Staples paid Office Depot a fee of $250 million in cash on May 19, 2016.

In May 2016, the Company’s Board of Directors authorized a stock repurchase program of up to $100 million of its outstanding common stock. The stock repurchase authorization permits the Company to repurchase stock from time-to-time through a combination of open market repurchases, privately negotiated transactions, 10b5-1 trading plans, accelerated stock repurchase transactions and/or other derivative transactions. The program, which extends for a period of 12 months, may be suspended or discontinued at any time. The exact number and timing of share repurchases will depend on market conditions and other factors, and will be funded through existing liquidity.

Under the $100 million stock repurchase program, the Company purchased approximately 7 million shares at a cost of $26 million in the second quarter of 2016.

On August 3, 2016, the Company announced elements of its Comprehensive Business Review and Strategy that included the following items.

Optimizing Capital Structure – The Company plans to tender for the outstanding 9.75% senior secured notes due 2019. The notes are currently callable at a price equal to 104.875% of the principal amount for a total anticipated consideration of $262 million. The extinguishment of this debt is expected to reduce cash interest costs by $24 million on an annual basis.

Additionally, the Board of Directors authorized increasing the current share repurchase program from $100 million to $250 million and initiated a quarterly dividend of $0.025 per share payable on September 15, 2016 to shareholders of record at the close of business August 25, 2016.

Additional cost savings were also announced. The Company’s initial expectation is to incur approximately $125 million in one-time costs to achieve the savings under these initiatives.

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Operating Activities

During the first half of 2016, cash provided by operating activities was $148 million, compared to a use of $135 million during the same period last year. Operating activities reflect outflows related to Merger, restructuring, integration, and Staples Acquisition activities in 2016 and 2015, as well as the receipt of the $250 million Termination Fee.

Changes in net working capital and other operating activities in the first half of 2016 resulted in a $254 million use of cash compared to a use of $311 million in the first half of 2015. The 2016 use of cash in operating activities included the payment of the 2016 accrued incentives and $75 million of retention awards associated with the Staples Acquisition attempt. Additionally, the second quarter of 2016 is impacted by a difference in the timing of changes in accounts payable when compared to the second quarter of 2015. The 2015 use of cash in operating activities included $77 million payment of a legal settlement and certain related fees. Working capital is influenced by a number of factors including period end sales, the flow of goods, credit terms, timing of promotions, vendor production planning, new product introductions and working capital management. For our accounting policy on cash management, refer to Note 1 of the Condensed Consolidated Financial Statements.

The Company expects total Company sales in 2016 to be lower than 2015, primarily due to its decision to close certain stores, negative impact of currency translation, business disruption from prolonged Staples Acquisition attempt, and continued challenging market conditions.

Investing Activities

Cash used in investing activities was $37 million in the first half of 2016, compared to $39 million in the first half of 2015. During the first half of 2016, $49 million was used for capital expenditures. During the first half of 2015, $71 million was used for capital expenditures, and $10 million for acquisition of an interior furniture business. These outflows in the first half of 2016 and 2015 were partially offset by $12 million and $42 million of proceeds from the disposition of assets and other, respectively.

Financing Activities

Cash used in financing activities was $63 million in the first half of 2016, compared to $9 million in the first half of 2015. In the first half of 2016, the Company used $26 million to repurchase its common stock for treasury and used $6 million in debt acquisition costs to amend and restate the Amended Credit Agreement. During the first half of 2016, net payments on long- and short-term borrowings were $32 million compared to net payments of $12 million in the first half of 2015. The payments on long- and short-term borrowings in the first half of 2016 include the redemption at maturity of the 7.35% debentures totaling $18 million.

CRITICAL ACCOUNTING POLICIES

Our Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our 2015 Form 10-K, in Note 1 of the Notes to the Consolidated Financial Statements and the Critical Accounting Policies and Estimates section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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