NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Office Depot, Inc., including consolidated subsidiaries (Office Depot or the Company), is a supplier of office products and services.
The Company currently operates under several banners, including Office Depot
®
and OfficeMax
®
and utilizes proprietary company and
product brand names. The Companys common stock is traded on the NASDAQ Global Select Market under the ticker symbol ODP. As of April 1, 2017, the Company sold to customers through two reportable segments (or
Divisions): North American Retail Division and North American Business Solutions Division.
In September 2016, the Companys Board of
Directors committed to a plan to sell substantially all of the International Division operations (the International Operations). Accordingly, the Company has presented the International Operations as discontinued operations beginning in
the third quarter 2016. The Company has reclassified the financial results of the International Operations to Discontinued operations, net of tax in the Condensed Consolidated Statements of Operations for all periods presented. The Company also
classified the related assets and liabilities as current assets and liabilities of discontinued operations on the accompanying Condensed Consolidated Balance Sheets as of April 1, 2017 and December 31, 2016. Cash flows from the
Companys discontinued operations are presented in the Condensed Consolidated Statements of Cash Flows for all periods. Certain portions of the International Division assets and operations are being retained or did not meet the held for sale
criteria and therefore remain in continuing operations, with prior periods adjusted, where appropriate. Additional information on the planned dispositions is provided in Note 3 and Note 12.
The Condensed Consolidated Financial Statements as of April 1, 2017 and for the 13-week periods ended April 1, 2017 (also referred to as the
first quarter of 2017) and March 26, 2016 (also referred to as the first quarter of 2016) are unaudited. However, in managements opinion, these condensed consolidated financial statements reflect all adjustments of a
normal recurring nature necessary to provide a fair presentation of the Companys financial position, results of operations and cash flows for the periods presented.
The Company has prepared the Condensed Consolidated Financial Statements included herein pursuant to the rules and regulations of the Securities and Exchange
Commission (the SEC). Some information and note disclosures, which would normally be included in comprehensive annual financial statements prepared in accordance with accounting principles generally accepted in the United States, have
been condensed or omitted pursuant to those SEC rules and regulations. For a better understanding of the Company and its Condensed Consolidated Financial Statements, we recommend reading these Condensed Consolidated Financial Statements in
conjunction with the audited financial statements which are included in the 2016 Form 10-K. These interim results are not necessarily indicative of the results that should be expected for the full year.
Cash Management
The cash management process generally
utilizes zero balance accounts which provide for the settlement of the related disbursement and cash concentration accounts on a daily basis. Trade accounts payable and Accrued expenses and other current liabilities as of April 1, 2017 and
December 31, 2016 included $51 million and $58 million, respectively, of amounts not yet presented for payment drawn in excess of disbursement account book balances, after considering offset provisions.
At April 1, 2017, cash and cash equivalents from continuing operations but held outside the United States amounted to $89 million. Additionally, $58
million of cash held outside the United States was included in current assets of discontinued operations.
7
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
New Accounting Standards
Standards that are not yet adopted
In May 2014, the
Financial Accounting Standards Board (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 Companys 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. The new revenue standard may be applied retrospectively to each prior period presented or
modified retrospectively with the cumulative effect recognized as of the date of adoption.
The Company continues to assess the impact this new standard
will have on its Consolidated Financial Statements and has not yet decided on which adoption alternative to apply upon adoption in the first quarter of 2018. However, based on this ongoing assessment, the Company expects that the new standard will
require the impacts of its loyalty programs to be presented as a reduction of revenue, rather than as cost accruals as is permitted under existing accounting rules. Also, costs associated with catalogs will be expensed as incurred, rather than
capitalized and amortized over the anticipated benefit period. Additionally, the timing of revenue recognition will be accelerated for items where the Companys performance obligation is complete, such as certain commission arrangements, and
delayed where performance obligations remain, such as certain coupons and incentives offered from time-to-time.
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 significant
right of use assets and related liabilities associated with its operating leases. Substantially all of the Companys retail store locations and supply chain facilities are subject to operating lease arrangements. The Company will adopt the
standard in the first quarter of 2019.
In March 2017, the FASB issued an accounting standards update which changes the income statement presentation of
defined benefit plan expense by requiring that an employer report the service cost component of pension costs in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The
other components of net benefit pension cost will be presented in the income statement separately from the service cost component and outside a subtotal of operating income. Employers will have to disclose the line(s) used to present the other
components of net periodic benefit cost, if the components are not presented separately in the income statement
.
The guidance is effective for fiscal years after December 15, 2017 and interim periods within those fiscal years. Early
adoption is permitted. The Company expects the adoption of this accounting standard update to reduce operating income but have no impact on net income.
Standards that were adopted
During the first quarter of
2017, the Company adopted the new accounting standard which modifies 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. Starting this quarter, stock-based compensation excess tax benefits or deficiencies are
reflected in the Consolidated Statements of Operations as a component of the provision for income taxes, whereas they previously were recognized in equity. Additionally, the Consolidated Statements of Cash Flows now present excess tax benefits
as an operating activity, which was applied prospectively in accordance with the standard and therefore prior periods have not been adjusted. Finally, the Company has elected to account for forfeitures as they occur rather than estimate
expected forfeitures, which was applied on a modified retrospective basis resulting in a cumulative effect reduction to retained earnings of approximately $1 million as of January 1, 2017.
8
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
NOTE 2. MERGER, ACQUISITION TERMINATION, AND RESTRUCTURING ACTIVITY
Merger and Restructuring
In recent years, the Company has
taken actions to adapt to changing and competitive conditions. These actions include closing facilities, consolidating functional activities, eliminating redundant positions, disposing of businesses and assets, and taking actions to improve process
efficiencies. In 2013, the OfficeMax merger (the Merger) was completed and integration activities similar to the actions described above began. The Company also assumed certain restructuring liabilities previously recorded by OfficeMax.
In mid-2014, the Companys real estate strategy (the Real Estate Strategy) identified 400 retail stores for closure and integration of the supply chain. During the second quarter of 2016, the Company completed the retail store
closures under this program. The changes to the supply chain related to the Merger are anticipated to be complete in 2017.
Staples Acquisition and
Merger Agreement Termination
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 FTCs decision to challenge the transaction. On May 10, 2016, the U.S. District Court for the District of Columbia
granted the FTCs request for a preliminary injunction against the proposed acquisition, and as a result, the companies terminated the Staples Merger Agreement on May 16, 2016.
Comprehensive Business Review
During August 2016, the
Company announced the results of a comprehensive business review of its strategy (the Comprehensive Business Review), which, among other things, includes a plan to close approximately 300 additional retail stores in North America over
the next three years, and to lower operating and general and administrative expenses through efficiencies and organizational optimization. The significant components of expenses relating to the cost saving programs activities are discussed below.
9
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Merger, restructuring, and other operating expenses, net
The Company presents Merger, restructuring and other operating expenses, net on a separate line in the Condensed Consolidated Statements of Operations to
identify these activities apart from the activities to sell to and service its customers. These expenses are not included in the determination of Division operating income. The table below and narrative that follows provides the major components of
Merger, restructuring and other operating expenses, net.
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
(In millions)
|
|
2017
|
|
|
2016
|
|
Merger related expenses
|
|
|
|
|
|
|
|
|
Severance, retention, and relocation
|
|
$
|
|
|
|
$
|
1
|
|
Transaction and integration
|
|
|
6
|
|
|
|
11
|
|
Facility closure, contract termination and other expenses, net
|
|
|
4
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total Merger related expenses
|
|
|
10
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Staples Acquisition expenses
|
|
|
|
|
|
|
|
|
Retention
|
|
|
|
|
|
|
2
|
|
Transaction
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
Total Staples Acquisition expenses
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Business Review and Other Restructuring expenses
|
|
|
|
|
|
|
|
|
Severance
|
|
|
9
|
|
|
|
3
|
|
Facility closure, contract termination, professional fees and other expenses, net
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Business Review and Other Restructuring expenses
|
|
|
10
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Total Merger, restructuring and other operating expenses, net
|
|
$
|
20
|
|
|
$
|
39
|
|
|
|
|
|
|
|
|
|
|
Merger related expenses
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.
Facility closure, contract termination, and other costs, net 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. During the first
quarter of 2017, the Company recognized a gain of $1 million from the sale of a warehouse facility that had been classified as assets held for sale. The gain is included in Merger, restructuring and other operating expenses, net, as the disposition
was part of the supply chain integration associated with the Merger.
Staples Acquisition expenses
Expenses include retention accruals and transaction costs, including costs associated with regulatory filings and professional fees. The Staples Merger
Agreement was terminated on May 16, 2016 and no further expenses are expected.
Comprehensive Business Review and Other Restructuring expenses
Expenses include severance, facility closure costs, contract termination and accelerated depreciation associated with the announced closure of
approximately 300 retail store locations through 2018, as well as severance and reorganization costs associated with reductions in staff functions. Severance costs are being accrued through the anticipated facility closure or termination date and
consider timing, terms of existing severance plans, expected employee turnover and attrition.
In the first quarter of 2016, the Company incurred $3
million of severance expense associated with the restructuring of certain selling activities in advance of the Comprehensive Business Review.
10
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Merger and Restructuring Accruals
The activity in the merger and restructuring accruals is presented in the table below. Of the total $20 million Merger, restructuring and other operating
expenses, net incurred in the first quarter of 2017 Condensed Consolidated Statement of Operations, $11 million relates to Merger and restructuring liabilities and are included as Charges incurred in the table below. The remaining $9 million expense
is comprised of $6 million in Merger transaction and integration expenses and $4 million in property expenses, professional fees, non-cash items and other expenses, partially offset by a $1 million gain on the disposition of a
warehouse facility which was part of the supply chain integration associated with the Merger. These remaining amounts are excluded from the table below because they are charges that are recorded as incurred, non-cash, or otherwise not associated
with Merger and restructuring balance sheet accounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Balance
as of
December 31,
2016
|
|
|
Charges
Incurred
|
|
|
Cash
Payments
|
|
|
Lease
Accretion
and Other
Adjustments
|
|
|
Balance
as of
April 1,
2017
|
|
Termination benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger-related accruals
|
|
$
|
5
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
|
|
|
$
|
4
|
|
Comprehensive Business Review
|
|
|
8
|
|
|
|
9
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
5
|
|
Lease and contract obligations, accruals for facilities closures and other costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger-related accruals
|
|
|
40
|
|
|
|
3
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
32
|
|
Comprehensive Business Review
|
|
|
13
|
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
8
|
|
Other restructuring accruals
|
|
|
5
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
4
|
|
Acquired entity accruals
|
|
|
18
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
89
|
|
|
$
|
11
|
|
|
$
|
(31
|
)
|
|
$
|
1
|
|
|
$
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The short-term and long-term components of these liabilities are included in Accrued expenses and other current liabilities
and Deferred income taxes and other long-term liabilities, respectively, on the Condensed Consolidated Balance Sheets.
Assets held for sale
Certain facilities identified for closure through integration and other activities have been accounted for as assets held for sale. Assets held for sale
primarily consist of supply chain facilities, and are presented in Prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets. The assets held for sale activity for the first quarter 2017 is presented in the table below.
|
|
|
|
|
(In millions)
|
|
|
|
Balance as of December 31, 2016
|
|
$
|
23
|
|
Disposition
|
|
|
(3
|
)
|
|
|
|
|
|
Balance as of April 1, 2017
|
|
$
|
20
|
|
|
|
|
|
|
Gains on dispositions associated with Merger or restructuring activities are recognized at the Corporate level and included
when realized in Merger, restructuring and other operating expenses, net in the Condensed Consolidated Statements of Operations. Losses, if any, are recognized when classified as held for sale. Gains or losses associated with dispositions of
properties not associated with Merger or restructuring activities are presented as a component of operations when the related accounting criteria are met.
11
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
NOTE 3. DISCONTINUED OPERATIONS
In the second quarter of 2016, following termination of the Staples Merger Agreement, the Company disclosed its intention to explore strategic alternatives
regarding its European business of the International Division.
On September 23, 2016, the Company announced that it had received an irrevocable
offer from Aurelius Rho Invest DS GmbH, a subsidiary of The AURELIUS Group (the Purchaser) to acquire the Companys European business operations (the OD European Business). The transaction was structured as an equity
sale with the Purchaser acquiring the OD European Business with its operating assets and liabilities.
In addition to approving the sale of the OD
European Business in the third quarter of 2016, the Companys Board of Directors approved a plan to sell substantially all of the remaining operations of the International Division. Collectively, the OD European Business sale and other planned
dispositions represent a strategic shift that has a major impact on the Companys operations and financial results and has been accounted for as discontinued operations. On December 31, 2016, the Company closed the sale of the OD European
Business contemplated by the Sale and Purchase Agreement dated November 22, 2016, as amended (the SPA). Approximately $70 million was accrued at December 31, 2016 under a working capital adjustment provision, of which $35
million was paid during the first quarter of 2017. The Purchaser has disagreed with certain items related to the draft working capital adjustment payment schedule. As provided for in the SPA, the parties have engaged an independent accountant to
finalize the working capital payment amount. The remaining working capital adjustment will be paid to the Purchaser once the independent accountant completes their review, which is currently expected to be in July 2017. The Company currently does
not believe that the resolution of the items under disagreement will result in a material adjustment.
In April 2017, the Company announced that it had
entered into definitive agreements to sell its businesses in Australia and New Zealand. The transaction to sell the businesses in Australia and New Zealand is subject to regulatory approval and the sale is expected to be completed later in 2017. The
sale of the Companys business in South Korea was completed on April 26, 2017. Refer to Note 12 Subsequent Events for further discussion. The Company is also actively marketing for sale its business in mainland China and expects to
complete the disposition within the one year period associated with held for sale assets.
The Company has presented the operating results of the OD
European Business within discontinued operations, net of tax in 2016. In addition, the Companys businesses in Australia, New Zealand, South Korea and mainland China are presented within discontinued operations, net of tax in the Consolidated
Statements of Operations for all periods presented. The related assets and liabilities of the disposal groups are presented as current assets and liabilities of discontinued operations in the Condensed Consolidated Balance Sheets as of April 1,
2017 and December 31, 2016. Cash flows from the Companys discontinued operations are presented in the Condensed Consolidated Statements of Cash Flows for all periods. Certain portions of the former International Division assets and
operations are being retained or did not meet the held for sale criteria at April 1, 2017 and, therefore, remain in continuing operations. These assets and operations are presented as Other in Note 11, Division Information.
The Company recorded an adjustment in the first quarter of 2017 to its carrying amount of the remaining entities that are held for sale based on its updated
estimate of fair value less cost to sell. The adjustment resulted in a reduction in the related valuation allowance and is included in the net reduction of loss on discontinued operations in the table below. The adjusted carrying amount does not
exceed the carrying amount of the entities at the time they were initially classified as held for sale. Completion of the sale of the remaining international operations may be for amounts different from the current estimates and will be evaluated
each reporting period until the dispositions are complete.
Restructuring charges incurred by the International Division that previously had been
presented as part of Corporate costs have been included in the measurement and presentation of discontinued operations in all periods presented.
With
respect to the sale of the OD European Business, the SPA contains customary warranties of the Company and the Purchaser, with the Companys warranties limited to an aggregate of EUR 10 million. The Company monitors its estimated exposure
to liabilities under the warranties under the SPA. As of April 1, 2017, the Company believes it has made adequate provisions for its potential exposures related to these warranties. The Company will continue to provide various transition and
product sourcing services to the Purchaser for a period of six to 24 months under a separate agreement. The proceeds and related costs from these services are presented in Other income, net in the Condensed Consolidated Statements of Operations.
Also, as part of the disposition, the Company retained responsibility for the frozen defined benefits pension plan in the United Kingdom, which has been classified in continuing operations.
12
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
The Company retains guarantees in place as of September 23, 2016 with respect to the liabilities or
obligations of the OD European Business and remains contingently liable for these obligations. As part of the OD European Business sale transaction, the Purchaser must indemnify and hold the Company harmless for any losses in connection with these
guarantees and must obtain an unconditional and irrevocable release of a guarantee in certain circumstances. The Company currently does not believe it is probable it would be required to perform under any of these guarantees or any of the underlying
obligations.
The major components of Discontinued operations, net of tax presented in the Condensed Consolidated Statements of Operations for the first
quarter of 2017 and 2016 include the following.
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
(In millions)
|
|
2017
|
|
|
2016
|
|
Sales
|
|
$
|
168
|
|
|
$
|
668
|
|
Cost of goods sold and occupancy costs
|
|
|
136
|
|
|
|
527
|
|
Operating expenses
|
|
|
27
|
|
|
|
150
|
|
Restructuring charges
|
|
|
1
|
|
|
|
5
|
|
Other income, net
|
|
|
1
|
|
|
|
|
|
Net reduction of loss on discontinued operations
|
|
|
38
|
|
|
|
|
|
Income tax expense
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of tax
|
|
$
|
42
|
|
|
$
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
Assets and liabilities of discontinued operations presented in the Condensed Consolidated Balance Sheets as of April 1,
2017 and December 31, 2016 are included in the following table. As the sale of the OD European Business was completed before year end 2016, the assets and liabilities of that business are not included in either period presented below.
|
|
|
|
|
|
|
|
|
(In millions)
|
|
April 1,
2017
|
|
|
December 31,
2016
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
58
|
|
|
$
|
44
|
|
Receivables, net
|
|
|
88
|
|
|
|
88
|
|
Inventories
|
|
|
63
|
|
|
|
82
|
|
Prepaid expenses and other current assets
|
|
|
2
|
|
|
|
4
|
|
Property and equipment, net
|
|
|
32
|
|
|
|
31
|
|
Other assets
|
|
|
7
|
|
|
|
6
|
|
Valuation allowance
|
|
|
(67
|
)
|
|
|
(113
|
)
|
|
|
|
|
|
|
|
|
|
Current assets of discontinued operations
|
|
$
|
183
|
|
|
$
|
142
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
49
|
|
|
$
|
60
|
|
Accrued expenses and other current liabilities
|
|
|
28
|
|
|
|
27
|
|
Income taxes payable
|
|
|
1
|
|
|
|
2
|
|
Short-term borrowings and current maturities of long-term debt
|
|
|
9
|
|
|
|
9
|
|
Deferred income taxes and other long-term liabilities
|
|
|
5
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Current liabilities of discontinued operations
|
|
$
|
92
|
|
|
$
|
104
|
|
|
|
|
|
|
|
|
|
|
13
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
NOTE 4. DEBT
Amended Credit Agreement
Based on the March borrowing
base certificate, at April 1, 2017, the Company had approximately $1.0 billion of available credit under the Second Amended and Restated Credit Agreement. In May 2011, Office Depot entered into an amended and restated agreement, which was
amended and restated in May 2016 for an additional five years, and was further amended in December 2016 (the Amended Credit Agreement). The $1.2 billion facility will mature on May 13, 2021. The Amended Credit Agreement reduces
the overall fees and applicable spread on borrowing and modifies certain covenants to provide additional flexibility for incremental indebtedness, acquisitions, asset sales and restricted payments. In connection with the May 2016 amendment, the
Company recorded $6 million in debt acquisition costs, which are included in Other assets in the Condensed Consolidated Balance Sheet and will be amortized ratably through May 2021.
As of April 1, 2017, letters of credit outstanding under the Amended Credit Agreement totaled $82 million. There were no borrowings under the Amended
Credit Agreement in the first quarter of 2017.
Other
The Company was in compliance with all applicable financial covenants at April 1, 2017.
NOTE 5. INCOME TAXES
The effective tax rate for the
first quarter of 2017 was 39% compared to 10% for the first quarter of 2016. The effective tax rate for the first quarter of 2017 was primarily impacted by the effect of state taxes and nondeductible expenses while the effective tax rate for the
first quarter of 2016 was primarily impacted by the valuation allowances on the U.S. deferred tax assets. The impact of the valuation allowance for the first quarter of 2016 was to reduce the amount of U.S. tax expense recognized, reducing the
overall effective tax rate. Changes in pretax income projections and the mix of income across jurisdictions could impact the effective tax rate each quarter.
During 2016, the Company concluded that it was more likely than not that a benefit from a substantial portion of its U.S. federal and state deferred tax
assets would be realized. This conclusion was based on a detailed evaluation of all available positive and negative evidence and the weight of such evidence, the current financial position and results of operations for the current and preceding
years, and the expectation of continued earnings. The Company determined that approximately $400 million of its U.S. federal and state valuation allowance should be reversed in 2016, with approximately $240 million in the third quarter as a discrete
non-cash income tax benefit and the remainder as an adjustment to the estimated annual effective tax rate.
After the 2016 valuation allowance reversal,
the Company continues to have a U.S. valuation allowance for certain U.S. federal credits and state tax attributes. The remaining valuation allowances relate to deferred tax assets that require certain types of income or for income to be earned
in certain jurisdictions in order to be realized. It is reasonably possible that the Company will realize a portion of the remaining valuation allowance in the future based upon continued profitability. The Company will continue to
assess the realizability of its deferred tax assets in the U.S. and remaining foreign jurisdictions in future periods.
The Company files a U.S. federal
income tax return and other income tax returns in various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state and local income tax examinations for years before 2016 and 2009,
respectively. The acquired OfficeMax U.S. consolidated group is no longer subject to U.S. federal and state and local income tax examinations for years before 2013 and 2006, respectively. The U.S. federal income tax return for 2016 is currently
under review. Generally, the Company is subject to routine examination for years 2008 and forward in its international tax jurisdictions.
It is not
reasonably possible that certain tax positions will be resolved within the next 12 months. Additionally, the Company anticipates 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.
14
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
NOTE 6. STOCKHOLDERS EQUITY
The following table reflects the changes in stockholders equity.
|
|
|
|
|
(In millions)
|
|
|
|
Stockholders equity at December 31, 2016
|
|
$
|
1,852
|
|
Net income
|
|
|
116
|
|
Repurchase of common stock for treasury
|
|
|
(10
|
)
|
Dividends paid on common stock
|
|
|
(13
|
)
|
Share transactions under employee-related plan
|
|
|
(9
|
)
|
Other comprehensive income
|
|
|
6
|
|
Amortization of long-term incentive stock grants
|
|
|
12
|
|
|
|
|
|
|
Stockholders equity at April 1, 2017
|
|
$
|
1,954
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) activity, net of tax, where applicable, is provided in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Change in
Deferred
Pension and
Other
|
|
|
Total
|
|
Balance at December 31, 2016
|
|
$
|
(67
|
)
|
|
$
|
(62
|
)
|
|
$
|
(129
|
)
|
Other comprehensive income (loss) activity before reclassifications
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 1, 2017
|
|
$
|
(61
|
)
|
|
$
|
(62
|
)
|
|
$
|
(123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock
In May
2016, the Companys Board of Directors authorized a stock repurchase program of up to $100 million of its outstanding common stock. In August 2016, the Board of Directors authorized increasing the share repurchase program to $250 million. 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 authorization extends to the end of 2018 and 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 stock repurchase program, in the first quarter 2017, the Company purchased approximately 2 million shares at a
cost of $10 million. As of April 1, 2017, $108 million remains available for repurchase under the current authorization. Refer to Item 2 Unregistered Sales of Equity Securities and Use of Proceeds for more information.
Dividends on Common Stock
In February 2017, the Board of
Directors declared a cash dividend of $0.025 per share on its common stock. The total per share dividend of $0.025 was paid on March 15, 2017 to shareholders of record at the close of business on March 3, 2017, resulting in a total cash
payment of $13 million. Dividends have been recorded as a reduction to additional paid-in capital as the Company is in an accumulated deficit position. Additionally, payment of dividends is permitted under our existing credit facilities provided
that the Company has the required minimum liquidity or fixed charge ratio but may be limited if the Company does not meet the necessary requirements.
15
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
NOTE 7. EARNINGS PER SHARE
The following table represents the calculation of net earnings (loss) per common share basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
(In millions, except per share amounts)
|
|
2017
|
|
|
2016
|
|
Basic Earnings Per Share
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
74
|
|
|
$
|
62
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
42
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
116
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
|
515
|
|
|
|
549
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.14
|
|
|
$
|
0.11
|
|
Discontinued operations
|
|
|
0.08
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Net earnings per share
|
|
$
|
0.22
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
74
|
|
|
$
|
62
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
42
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
116
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
|
515
|
|
|
|
549
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options and restricted stock
|
|
|
17
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average shares outstanding
|
|
|
532
|
|
|
|
555
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.14
|
|
|
$
|
0.11
|
|
Discontinued operations
|
|
|
0.08
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Net diluted earnings per share
|
|
$
|
0.22
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
Awards of stock options and nonvested shares representing approximately 4 million and 6 million additional shares of
common stock were outstanding for the first quarters of 2017 and 2016, respectively, but were not included in the computation of diluted weighted-average shares outstanding because their effect would have been antidilutive.
16
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
NOTE 8. EMPLOYEE BENEFIT PLANS
Pension and Other Postretirement Benefit Plans North America
The components of net periodic pension benefit for the Companys North American pension plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
(In millions)
|
|
2017
|
|
|
2016
|
|
Service cost
|
|
$
|
2
|
|
|
$
|
2
|
|
Interest cost
|
|
|
10
|
|
|
|
11
|
|
Expected return on plan assets
|
|
|
(12
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
Net periodic pension benefit
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
In the first quarter of 2017, cash contributions to the North American pension plans were not significant. The Company
expects to make additional cash contributions of $2 million to the North American pension plans the remainder of 2017.
Pension Plan UK
The components of net periodic pension benefit for the Companys UK pension plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
(In millions)
|
|
2017
|
|
|
2016
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
Interest cost
|
|
|
2
|
|
|
|
2
|
|
Expected return on plan assets
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
Net periodic pension benefit
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
As part of the OD European Business sale, the Company retained the United Kingdom defined benefit pension plan. The United
Kingdom pension plan is in a net asset position. In the first quarter of 2017, cash contributions of $1 million were made to the UK pension plan. The Company expects to make additional cash contributions of $1 million to the UK pension plan the
remainder of 2017.
Net periodic pension benefits for the North American and UK pension and other postretirement benefit plans are recorded in Selling,
general and administrative expenses at the Corporate level in the Condensed Consolidated Statements of Operations.
NOTE 9. FAIR VALUE MEASUREMENTS
The Company measures fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date under current market conditions. In developing its fair value estimates, the Company uses the following hierarchy:
|
|
|
Level 1:
|
|
Quoted prices in active markets for identical assets or liabilities.
|
|
|
Level 2:
|
|
Observable market based inputs or unobservable inputs that are corroborated by market data.
|
|
|
Level 3:
|
|
Significant unobservable inputs that are not corroborated by market data. Generally, these fair value measures are model-based valuation techniques such as discounted cash flows or option pricing models using the Companys
own estimates and assumptions or those expected to be used by market participants.
|
17
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Recurring Fair Value Measurements
In accordance with accounting principles generally accepted in the United States, certain assets and liabilities are required to be recorded at fair value on a
recurring basis. The Companys assets and liabilities that are adjusted to fair value on a recurring basis are money market funds that qualify as cash equivalents, and derivative financial instruments.
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
(In millions)
|
|
April 1,
2017
|
|
|
December 31,
2016
|
|
Money market funds
|
|
$
|
135
|
|
|
$
|
135
|
|
The fair values of the Companys foreign currency contracts and fuel contracts are the amounts receivable or payable to
terminate the agreements at the reporting date, taking into account current interest rates, exchange rates and commodity prices. The values are based on market-based inputs or unobservable inputs that are corroborated by market data. Amounts
associated with derivative financial instruments are considered Level 1 measurements but were not significant for the reported periods. At April 1, 2017 and December 31, 2016, Accrued expenses and other liabilities in the Condensed
Consolidated Balance Sheets included less than $1 million related to derivative fuel contracts.
Nonrecurring Fair Value Measurements
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company records certain assets and liabilities at fair value on
a nonrecurring basis as required by accounting principles generally accepted in the United States. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. The Company did not recognize asset impairment
charges associated with continuing operations for the first quarters of 2017 and 2016.
Other Fair Value Disclosures
The fair values of cash and cash equivalents, receivables, trade accounts payable and accrued expenses and other current liabilities approximate their carrying
values because of their short-term nature.
The following table presents information about financial instruments at the balance sheet dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1, 2017
|
|
|
December 31, 2016
|
|
(In millions)
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timber notes receivable
|
|
$
|
879
|
|
|
$
|
886
|
|
|
$
|
885
|
|
|
$
|
884
|
|
Company-owned life insurance
|
|
|
86
|
|
|
|
86
|
|
|
|
89
|
|
|
|
89
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recourse debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue bonds, due in varying amounts periodically through 2029
|
|
|
186
|
|
|
|
184
|
|
|
|
186
|
|
|
|
181
|
|
American & Foreign Power Company, Inc. 5% debentures, due 2030
|
|
|
14
|
|
|
|
12
|
|
|
|
14
|
|
|
|
12
|
|
Non-recourse debt
|
|
|
792
|
|
|
|
798
|
|
|
|
798
|
|
|
|
800
|
|
18
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
The following methods and assumptions were used to estimate the fair value of each class of financial
instruments:
|
|
|
Timber notes receivable:
Fair value is determined as the present value of expected future cash flows discounted at the current interest rate for loans of similar terms with comparable credit risk (Level 2
measure).
|
|
|
|
Company-owned life insurance:
In connection with the Merger, the Company acquired company owned life insurance policies on certain former employees. The fair value of the company-owned life insurance policies is
derived using determinable net cash surrender value (Level 2 measure).
|
|
|
|
Recourse debt:
Recourse debt for which there were no transactions on the measurement date was valued based on quoted market prices near the measurement date when available or by discounting the future cash flows
of each instrument using rates based on the most recently observable trade or using rates currently offered to the Company for similar debt instruments of comparable maturities (Level 2 measure).
|
|
|
|
Non-recourse debt:
Fair value is estimated by discounting the future cash flows of the instrument at rates currently available to the Company for similar instruments of comparable maturities (Level 2
measure).
|
NOTE 10. COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company is involved in litigation
arising in the normal course of business. While, from time to time, claims are asserted that make demands for a large sum of money (including, from time to time, actions which are asserted to be maintainable as class action suits), the Company does
not believe that contingent liabilities related to these matters (including the matters discussed below), either individually or in the aggregate, will materially affect the Companys financial position, results of operations or cash flows.
In addition, in the ordinary course of business, sales to and transactions with government customers may be subject to lawsuits, investigations, audits
and review by governmental authorities and regulatory agencies, with which the Company cooperates. Many of these lawsuits, investigations, audits and reviews are resolved without material impact to the Company. While claims in these matters may at
times assert large demands, the Company does not believe that contingent liabilities related to these matters, either individually or in the aggregate, will materially affect its financial position, results of operations or cash flows.
In addition to the foregoing, OfficeMax is named a defendant in a number of lawsuits, claims, and proceedings arising out of the operation of certain paper
and forest products assets prior to those assets being sold in 2004, for which OfficeMax agreed to retain responsibility. Also, as part of that sale, OfficeMax agreed to retain responsibility for all pending or threatened proceedings and future
proceedings alleging asbestos-related injuries arising out of the operation of the paper and forest products assets prior to the closing of the sale. The Company has made provision for losses with respect to the pending proceedings. Additionally, as
of April 1, 2017, the Company has made provision for environmental liabilities with respect to certain sites where hazardous substances or other contaminants are or may be located. For these environmental liabilities, our estimated range of
reasonably possible losses was approximately $10 million to $25 million. The Company regularly monitors its estimated exposure to these liabilities. As additional information becomes known, these estimates may change, however, the Company
does not believe any of these OfficeMax retained proceedings are material to the Companys financial position, results of operations or cash flows.
19
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
NOTE 11. DIVISION INFORMATION
Following the decision to sell the OD European Business and substantially all of the remaining operations that previously were presented as the International
Division, and their presentation as discontinued operations, the Company has two operating segments which are also the reportable segments: North American Retail Division and North American Business Solutions Division. The North American Retail
Division includes 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 the United States, including Puerto
Rico and the U.S. Virgin Islands and Canada. North American Business Solutions Division customers are served through dedicated sales forces, through catalogs, telesales, and electronically through its Internet sites.
The retained operations previously included in the International Division are not significant at April 1, 2017 and have been presented as Other.
The office supply products and services offered across the segments are similar. Division operating income is determined based on the measure of performance
reported internally to manage the business and for resource allocation. This measure charges to the respective Divisions those expenses considered directly or closely related to their operations and allocates support costs. Certain operating
expenses and credits are not allocated to the Divisions including Merger, restructuring and other operating expenses, net, as well as expenses and credits retained at the Corporate level, including certain management costs and legacy pension and
environmental matters. Other companies may charge more or less of these items to their segments and results may not be comparable to similarly titled measures used by other entities.
The following is a summary of Sales and Division operating income (loss) by each of the Divisions, reconciled to consolidated totals, after the elimination of
the discontinued operations for all periods.
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
First Quarter
|
|
(In millions)
|
|
2017
|
|
|
2016
|
|
North American Retail Division
|
|
$
|
1,358
|
|
|
$
|
1,506
|
|
North American Business Solutions Division
|
|
|
1,315
|
|
|
|
1,368
|
|
Other
|
|
|
3
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,676
|
|
|
$
|
2,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Division Operating Income
(loss)
|
|
|
|
First Quarter
|
|
(In millions)
|
|
2017
|
|
|
2016
|
|
North American Retail Division
|
|
$
|
112
|
|
|
$
|
102
|
|
North American Business Solutions Division
|
|
|
58
|
|
|
|
46
|
|
Other
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
169
|
|
|
$
|
148
|
|
|
|
|
|
|
|
|
|
|
20
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
A reconciliation of the measure of Division operating income to Consolidated income from continuing
operations before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
(In millions)
|
|
2017
|
|
|
2016
|
|
Total Division operating income
|
|
$
|
169
|
|
|
$
|
148
|
|
Add/(subtract):
|
|
|
|
|
Merger, restructuring, and other operating expenses, net
|
|
|
(20
|
)
|
|
|
(39
|
)
|
Unallocated expenses
|
|
|
(22
|
)
|
|
|
(24
|
)
|
Interest income
|
|
|
6
|
|
|
|
6
|
|
Interest expense
|
|
|
(13
|
)
|
|
|
(22
|
)
|
Other income, net
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
$
|
121
|
|
|
$
|
69
|
|
|
|
|
|
|
|
|
|
|
As of April 1, 2017, goodwill totaled $363 million, of which $78 million was recorded in the North American Retail
Division and $285 million in the North American Business Solutions Division.
NOTE 12. SUBSEQUENT EVENTS
On April 18, 2017, the Company entered into a definitive sale and purchase agreement to sell the Companys Australian and New Zealand business
operations. The transaction is structured as an equity sale, with the purchaser acquiring the Australian and New Zealand businesses with its assets and liabilities, and is expected to close within the next several months, subject to the purchaser
obtaining necessary regulatory approval. Until the closing date, the Company has agreed to operate the Australian and New Zealand businesses in the ordinary course.
On April 7, 2017, the Company entered into a definitive sale and purchase agreement to sell the Companys Korean business operations. The
transaction was structured as an equity sale, with the purchaser acquiring the Korean business with its assets and liabilities. The transaction closed on April 26, 2017.
The Company may provide certain transitional services to the purchasers for a limited period of time following the closing.
21