NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A Summary of Significant Accounting Policies
Basis of Presentation:
Office Depot, Inc., including consolidated subsidiaries (Office Depot or the
Company), is a global supplier of office products and services. The Condensed Consolidated Balance Sheet at December 29, 2012 has been derived from audited financial statements at that date. The condensed consolidated interim
financial statements as of September 28, 2013 and September 29, 2012, and for the 13-week and 39-week periods ended September 28, 2013 (also referred to as the third quarter of 2013 and year-to-date 2013) and
September 29, 2012 (also referred to as the third quarter of 2012 and year-to-date 2012) are unaudited. However, in our opinion, these 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.
During the first
quarter of 2013, the Company modified its measure of business segment operating income for management reporting purposes to allocate to the Companys three segments, North American Retail Division, North American Business Solutions Division and
International Division (the Divisions), additional General and administrative and other expenses, as well as to allocate to the Divisions additional assets, capital expenditures and related depreciation expense. No changes have been made
to the composition of these reportable segments. Additionally, the Company changed its accounting principle of presenting shipping and handling expenses in Operating and selling expenses (previously Store and warehouse operating and selling
expenses) to a preferable accounting principle of presenting such expenses in Costs of goods sold and occupancy costs. The Company considers this presentation preferable because it includes costs associated with revenues in the calculation of gross
profit and provides better comparability to industry peers. Prior period results have been reclassified to conform to the current period presentation for both the change in accounting principle and the change in measurement of Division operating
income (loss).
These changes result in the decrease in Gross profit in the Condensed Consolidated Statements of Operations and revised measure of
Division operating income (loss) in Note I. For purposes of comparability, the shipping and handling expenses for the third quarter and the year-to-date 2012 have been reclassified, resulting in an increase in Costs of goods sold and occupancy costs
of $172.0 million and $534.7 million, respectively, with a corresponding decrease in Operating and selling expenses. Division operating income (loss) for the third quarter and year-to-date 2012 have been revised to include $70.7 million and $203.4
million, respectively, of General and administrative and other expenses that previously were considered Corporate costs, and to reflect other Divisional cost allocations that have been revised to conform to allocation rates used in the current
period. Neither the change in accounting principle, nor the change in Division operating income (loss) impacted Consolidated Operating income (loss), Net loss, or Loss per share for the periods presented.
We have included the balance sheet from September 29, 2012 to assist in analyzing the Company.
These interim results are not necessarily indicative of the results that should be expected for the full year. 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 Annual Report on Form 10-K for the year ended
December 29, 2012, filed on February 20, 2013 with the U.S. Securities and Exchange Commission (SEC), as updated with subsequent current reports in 2013, including the Form 8-K filed on April 30, 2013 that retrospectively
applied the accounting changes to each of the three fiscal years in the period ended December 29, 2012.
7
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (Continued)
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. Accounts payable and accrued expenses as of September 28, 2013, December 29, 2012 and September 29, 2012 included $40
million, $53 million and $40 million, respectively, of amounts not yet presented for payment drawn in excess of disbursement account book balances, after considering offset provisions.
Cash and cash equivalents held outside the U.S. at September 28, 2013 amounted to $173 million.
Receivables under Factoring Agreement:
The Company sells selected accounts receivables on a non-recourse basis to an unrelated financial
institution under a factoring agreement in France. The Company accounts for this transaction as a sale of receivables, removes receivables sold from its financial statements, and records cash proceeds when received by the Company as cash
provided by operating activities in the Statement of Cash Flows. The financial institution makes available 80% of the face value of the receivables to the Company and retains the remaining 20% as a guarantee until the receipt of the
proceeds associated with the factored invoices. The Company activated the arrangement in the fourth quarter of 2012.
In the third quarter and
year-to-date 2013, the Company withdrew $116 million and $307 million, respectively, from amounts available under the factoring arrangement. Receivables sold for which the Company did not obtain cash directly from the financial institution are
included in Receivables and amount to $9 million and $51 million as of September 28, 2013 and December 29, 2012, respectively. A retention guarantee of $11 million and $13 million are included in Prepaid expenses and other current assets
as of September 28, 2013 and December 29, 2012, respectively.
New Accounting Pronouncements:
Effective for years beginning after
December 15, 2013, transactions or events that result in companies losing a controlling interest in a foreign entity will cause the release of the related cumulative translation adjustment (CTA) amounts. Under current accounting
rules, release of CTA only follows complete or substantially complete liquidation of a foreign entity. While there are no actions in process that would be impacted by this change in accounting, the Company continues to evaluate its foreign
entities operations and future periods could be affected.
Note B Merger Agreement
On February 20, 2013, the Company entered into a merger agreement with OfficeMax Incorporated (OfficeMax), pursuant to
which the Company and OfficeMax would combine in an all-stock merger transaction (the Merger Agreement). At the effective time of the merger, the Company would issue 2.69 shares of common stock for each outstanding share of OfficeMax
common stock. A selection committee has been formed with equal representation from the Board of Directors of the Company and OfficeMax to select a successor Chief Executive Officer for the combined company upon the completion of the merger. If no
successor CEO has been selected by the time of closing of the merger the then-current CEOs of both the Company and OfficeMax will be appointed as co-CEOs and co-Chairmen and the Board of Directors will be made up of an additional five independent
directors appointed by the Company and five independent directors appointed by OfficeMax. If a successor CEO has been selected by the time of closing, and that successor CEO is neither the current CEO of the Company nor OfficeMax, the full Board of
Directors will have 11 members, including the successor CEO and five independent directors appointed by the Company and five independent directors appointed by OfficeMax. In the event the successor CEO selected by the time of closing is either the
current CEO of the Company or OfficeMax, the full Board of Directors will have 12 members with an additional independent director appointed by the company whose CEO was not selected as the successor CEO.
Based on the facts continuing since the date of the Merger Agreement, the Company is considered to be the accounting acquirer. This determination will be
finalized at the time of closing. With the Company as the accounting acquirer, the closing date purchase consideration will be allocated to the fair value of OfficeMax assets and liabilities. Pro forma information and the allocation of merger
consideration will be provided following completion of the transaction.
8
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (Continued)
On July 10, 2013, shareholders of the Company and shareholders of OfficeMax approved the transactions
contemplated by the Merger Agreement. The merger will not be final until the receipt of certain regulatory approvals and completion of other customary closing conditions. The Merger Agreement includes certain termination rights for both the Company
and OfficeMax, including termination in the event certain antitrust approvals are not received. Additionally, a change in recommendation from the Companys or OfficeMaxs Board of Directors may require that such recommending party pay a
termination fee of $30 million to the other party.
Transaction costs associated with the merger are being expensed as incurred and are presented in the
Condensed Consolidated Statement of Operations as Merger and certain shareholder-related expenses. The merger expenses include investment banking, legal, accounting, and other third party costs associated with the transaction, including regulatory
filings and shareholder approvals. Certain fees are contingent on the transaction closing and are, therefore, not yet recognized. Merger expenses also include direct incremental travel and dedicated personnel costs, as well as accruals for retention
of key employees. The amounts for certain shareholder-related expenses include third party costs incurred to provide shareholders with information regarding the composition of the Board of Directors. These costs include $0.8 million of legal fees
the Company agreed to pay to Starboard Value LP (together with its affiliates and related parties, Starboard). The current Board of Directors was elected at the Annual Stockholders Meeting held on August 21, 2013 and includes three
members nominated by Starboard.
Note C Redeemable Preferred Stock
In accordance with certain merger-related agreements which the Company entered into with the holders of the Companys preferred stock
concurrently with the execution of the Merger Agreement and following shareholder approval of the merger, on July 11, 2013, the Company redeemed 50 percent of the preferred stock outstanding. The cash payment of $216.2 million included the
liquidation preference of $203.4 million, a redemption premium of $12.2 million, measured at 6% of the liquidation preference, and regular dividends incurred through the redemption date of $0.6 million. Preferred stock dividends for the third
quarter and year-to-date 2013 include $22.4 million related to this redemption, comprised of the $12.2 million redemption premium and $10.2 million representing 50 percent of the difference between liquidation preference and carrying value of the
preferred stock. The liquidation preference exceeded the carrying value because of initial issuance costs and paid-in-kind dividends recorded for accounting purposes at fair value.
In connection with the merger closing, the remaining 50 percent of the preferred stock either will be redeemed by the Company or, at the election of the
preferred stockholders, will be converted into Company common stock and sold. If redeemed by the Company, an additional cash payment and incremental dividend similar to that discussed above will be made. If converted by the preferred stockholders
into Company common stock but not sold by the time of closing, the Company has committed to purchase the amount of Company common stock held by the preferred stockholders such that the preferred stockholders would not own more than 5% of the
aggregate Company common stock at the closing of the merger. Should the preferred stockholders convert any allowable portion of the preferred stock to common stock, the net carrying value of such portion of preferred stock will be reclassified into
common stock and additional paid-in capital. Any purchase by the Company of the Companys common stock held by the preferred stockholders will be at the preceding trading days closing price as listed on the New York Stock Exchange and
will be presented in the Consolidated Financial Statements as additional purchases of treasury stock. Refer to Note P for subsequent redemption information.
9
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (Continued)
Note D Debt
Senior Secured Notes
On March 14,
2012, the Company issued $250 million aggregate principal amount of its 9.75% senior secured notes due March 15, 2019 (the Senior Secured Notes) with interest payable in cash semiannually in arrears on March 15 and
September 15 of each year. The Senior Secured Notes are fully and unconditionally guaranteed on a senior secured basis by each of the Companys existing and future domestic subsidiaries that guarantee the Amended and Restated Credit
Agreement (the Amended Credit Agreement). The Senior Secured Notes are secured on a first-priority basis by a lien on substantially all of the Companys domestic subsidiaries present and future assets, other than assets that
secure the Amended Credit Agreement and certain of their present and future equity interests in foreign subsidiaries. The Senior Secured Notes are secured on a second-priority basis by a lien on the Company and its domestic subsidiaries assets
that secure the Amended Credit Agreement. The Senior Secured Notes were issued pursuant to an indenture, dated as of March 14, 2012, among the Company, the domestic subsidiaries named therein and U.S. Bank National Association, as trustee (the
Indenture). Approximately $7 million of debt issuance costs were capitalized associated with these Senior Secured Notes and will be amortized through 2019.
The terms of the Indenture provide that, among other things, the Senior Secured Notes and guarantees will be senior secured obligations and will:
(i) rank senior in right of payment to any future subordinated indebtedness of the Company and the guarantors; (ii) rank equally in right of payment with all of the existing and future senior indebtedness of the Company and the guarantors;
(iii) rank effectively junior to all existing and future indebtedness under the Amended Credit Agreement to the extent of the value of certain collateral securing the Amended Credit Agreement on a first-priority basis, subject to certain
exceptions and permitted liens; (iv) rank effectively senior to all existing and future indebtedness under the Amended Credit Agreement to the extent of the value of certain collateral securing the Senior Secured Notes; and (v) be
structurally subordinated in right of payment to all existing and future indebtedness and other liabilities of the Companys non-guarantor subsidiaries (other than indebtedness and liabilities owed to the Company or one of the guarantors).
The Indenture contains affirmative and negative covenants that, among other things, limit or restrict the Companys ability to: incur additional debt or
issue stock, pay dividends, make certain investments or make other restricted payments; engage in sales of assets; and engage in consolidations, mergers and acquisitions. However, many of these covenants will cease to apply for so long as the
Company receives and maintains investment grade ratings from specified debt rating services and there is no default under the Indenture. There are no maintenance financial covenants.
The Senior Secured Notes may be redeemed by the Company, in whole or in part, at any time prior to March 15, 2016 at a price equal to 100% of the
principal amount plus a make-whole premium as of the redemption date and accrued and unpaid interest. Thereafter, the Senior Secured Notes carry optional redemption features whereby the Company has the option to redeem the Senior Secured Notes prior
to maturity at par plus a premium beginning at 104.875% at March 15, 2016 and declining ratably to par at March 15, 2018 and thereafter, plus accrued and unpaid interest.
Additionally, on or prior to March 15, 2015, the Company may redeem up to 35% of the aggregate principal amount of the Senior Secured Notes with the net
cash proceeds from certain equity offerings at a redemption price equal to 109.750% of the principal amount of the Senior Secured Notes redeemed plus accrued and unpaid interest to the redemption date; and, upon the occurrence of a change of
control, holders of the Senior Secured Notes may require the Company to repurchase all or a portion of the Senior Secured Notes in cash at a price equal to 101% of the principal amount of the Senior Secured Notes to be repurchased plus accrued and
unpaid interest to the repurchase date. Change of control, as defined in the Indenture, is a transfer of all or substantially all of the assets of Office Depot, acquisition of more than 50% of the voting power of Office Depot by a person or group,
or members of the Office Depot Board of Directors as previously approved by the shareholders of Office Depot ceasing to constitute a majority of the Office Depot Board of Directors.
10
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (Continued)
Senior Notes
On March 15, 2012, the Company repurchased $250 million aggregate principal amount of its outstanding 6.25% senior notes (the Senior Notes)
under a cash tender offer. The total consideration for each $1,000.00 note surrendered was $1,050.00. Additionally, tender fees and a proportionate amount of deferred debt issue costs and a deferred cash flow hedge gain were included in the
measurement of the $12.1 million extinguishment costs reported in the Condensed Consolidated Statements of Operations for year-to-date 2012. The cash amounts of the premium paid and tender fees are reflected as financing activities in the Condensed
Consolidated Statements of Cash Flows. Accrued interest was paid through the extinguishment date.
The remaining $150 million outstanding Senior Notes was
repaid at par, upon maturity in August 2013.
Amended Credit Agreement
On March 4, 2013, the Company entered into a Second Amendment (the Amendment) to the Amended Credit Agreement. The Amendment provides the
Company the ability to make payments to the preferred stockholders to redeem the Companys preferred stock and to repurchase certain amounts of common stock if any is held by the preferred stockholders, in each case as required pursuant to the
merger transaction contemplated by the Merger Agreement and documents related thereto. Refer to Note P for subsequent amendment information.
Note E - Recovery of Purchase Price from Previous Acquisition
The sale and purchase agreement (SPA) associated with a 2003 European acquisition included a provision whereby the seller was
required to pay an amount to the Company if a specified acquired pension plan was determined to be underfunded based on 2008 plan data. The unfunded obligation amount calculated by the plans actuary based on that data was disputed by the
seller. In accordance with the SPA, the parties entered into arbitration to resolve this matter and, in March 2011, the arbitrator found in favor of the Company. The seller pursued an annulment of the award in French court. In November 2011, the
seller paid GBP 5.5 million ($8.8 million, measured at then-current exchange rates) to the Company to allow for future monthly payments to the pension plan, pending a court ruling on their cancellation request. That money was placed in an
escrow account with the pension plan acting as trustee. On January 6, 2012, the Company and the seller entered into a settlement agreement that settled all claims by either party for this and any other matter under the original SPA. The seller
paid an additional GBP 32.2 million (approximately $50 million, measured at then-current exchange rates) to the Company in February 2012. Following this cash receipt in February 2012, the Company contributed the GBP 37.7 million
(approximately $58 million at then-current exchange rates) to the pension plan, resulting in the plan changing from an unfunded liability position to a net asset position since the first quarter of 2012. See additional pension disclosures in Note J.
This pension provision of the SPA was disclosed in 2003 and subsequent periods as a matter that would reduce goodwill when the plan was remeasured and
cash received. However, all goodwill associated with this transaction was impaired in 2008, and because the remeasurement process had not yet begun, no estimate of the potential payment to the Company could be made at that time. Consistent with
disclosures subsequent to the 2008 goodwill impairment, resolution of this matter in the first quarter of 2012 was reflected as a credit to operating expense. The cash received from the seller, reversal of an accrued liability as a result of the
settlement agreement, fees incurred in 2012, and fee reimbursement from the seller have been reported in Recovery of purchase price in the Condensed Consolidated Statements of Operations for year-to-date 2012, totaling $68.3 million. An additional
expense of $5.2 million of costs incurred in prior periods related to this arrangement is included in General and administrative expenses, resulting in a net increase in operating income for year-to-date 2012 of $63.1 million. Similar to the
presentation of goodwill impairment in 2008, this recovery and related charge is reported at the Corporate level, not as part of International Division operating income.
The cash payment from the seller was received by a subsidiary of the Company with the Euro as its functional currency and the pension plan funding was made by
a subsidiary with Pound Sterling as its functional currency, resulting in certain translation differences between amounts reflected in the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Cash Flows
for year-to-date 2012. The receipt of cash from the seller is presented as a source of cash in investing activities. The contribution of cash to the pension plan is presented as a use of cash in operating activities.
11
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (Continued)
Note F Severance and Facility Closure
In recent years, the Company has taken actions to adapt to changing and increasingly competitive conditions in the markets in which the
Company serves. These actions include closing stores and distribution centers, consolidating functional activities, disposing of businesses and assets, and taking actions to improve process efficiencies.
Severance and facility closure accruals are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Balance at
December 29,
2012
|
|
|
Charges
Incurred
|
|
|
Cash
Payments
|
|
|
Non-Cash
Settlements
and
Accretion
|
|
|
Currency
and Other
Adjustments
|
|
|
Balance at
September 28,
2013
|
|
Termination benefits
|
|
$
|
6
|
|
|
$
|
18
|
|
|
$
|
(20
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4
|
|
Lease and contract obligations, accruals for facilities closures, and other costs
|
|
|
87
|
|
|
|
3
|
|
|
|
(27
|
)
|
|
|
5
|
|
|
|
(1
|
)
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
93
|
|
|
$
|
21
|
|
|
$
|
(47
|
)
|
|
$
|
5
|
|
|
$
|
(1
|
)
|
|
$
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exit cost charges incurred during the year-to-date 2013 totaled $21 million. Of this amount, $12 million is included in
Operating and selling expenses and $9 million is included in General and administrative expenses in the Condensed Consolidated Statement of Operations. The amounts of these charges that were recognized in North American Retail, North American
Business Solutions, and International Divisions were $5 million, $2 million, and $14 million, respectively.
12
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (Continued)
Note G Stockholders Equity
The following table reflects the changes in stockholders equity attributable to both Office Depot, Inc. and noncontrolling subsidiary
interests.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Attributable to
Office Depot,
Inc.
|
|
|
Attributable to
noncontrolling
interests
|
|
|
Total
|
|
Stockholders equity at December 29, 2012
|
|
$
|
661,441
|
|
|
$
|
107
|
|
|
$
|
661,548
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
100,039
|
|
|
|
12
|
|
|
|
100,051
|
|
Other comprehensive income
|
|
|
46,900
|
|
|
|
(4
|
)
|
|
|
46,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
146,939
|
|
|
|
8
|
|
|
|
146,947
|
|
Preferred stock dividends
|
|
|
(48,378
|
)
|
|
|
|
|
|
|
(48,378
|
)
|
Share transactions under employee related plans
|
|
|
4,306
|
|
|
|
|
|
|
|
4,306
|
|
Purchase of subsidiary shares from noncontrolling interests
|
|
|
(482
|
)
|
|
|
(115
|
)
|
|
|
(597
|
)
|
Amortization of long-term incentive stock grants
|
|
|
13,407
|
|
|
|
|
|
|
|
13,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity at September 28, 2013
|
|
$
|
777,233
|
|
|
$
|
|
|
|
$
|
777,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity at December 31, 2011
|
|
$
|
739,071
|
|
|
$
|
214
|
|
|
$
|
739,285
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(69,795
|
)
|
|
|
(18
|
)
|
|
|
(69,813
|
)
|
Other comprehensive income
|
|
|
19,363
|
|
|
|
6
|
|
|
|
19,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
(50,432
|
)
|
|
|
(12
|
)
|
|
|
(50,444
|
)
|
Preferred stock dividends
|
|
|
(22,765
|
)
|
|
|
|
|
|
|
(22,765
|
)
|
Share transactions under employee related plans
|
|
|
1,128
|
|
|
|
|
|
|
|
1,128
|
|
Purchase of subsidiary shares from noncontrolling interests
|
|
|
(444
|
)
|
|
|
(107
|
)
|
|
|
(551
|
)
|
Amortization of long-term incentive stock grants
|
|
|
10,380
|
|
|
|
|
|
|
|
10,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity September 29, 2012
|
|
$
|
676,938
|
|
|
$
|
95
|
|
|
$
|
677,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Because of valuation allowances in multiple jurisdictions, the tax impact on elements of other comprehensive income is
insignificant.
Other comprehensive income activity, net of tax, where applicable, is provided in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands
)
|
|
Foreign
Currency
Translation
Adjustments (b)
|
|
|
Amortization
of Gain on
Cash Flow
Hedge (c)
|
|
|
Change in
Deferred
Pension
|
|
|
Change in
Deferred
Cash Flow
Hedge (d)
|
|
|
Total
|
|
Balance at December 29, 2012
|
|
$
|
215,931
|
|
|
$
|
390
|
|
|
$
|
(3,861
|
)
|
|
$
|
257
|
|
|
$
|
212,717
|
|
Other comprehensive income (loss) activity before reclassifications
|
|
|
11,723
|
|
|
|
|
|
|
|
4
|
|
|
|
460
|
|
|
|
12,187
|
|
Reclassifications from Accumulated other comprehensive income to net earnings (loss) (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six month period ended June 29, 2013
|
|
|
(2,991
|
)
|
|
|
(311
|
)
|
|
|
|
|
|
|
(1,440
|
)
|
|
|
(4,742
|
)
|
Three month period ended September 28, 2013
|
|
|
39,410
|
|
|
|
(79
|
)
|
|
|
|
|
|
|
124
|
|
|
|
39,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,419
|
|
|
|
(390
|
)
|
|
|
|
|
|
|
(1,316
|
)
|
|
|
34,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net year-to-date other comprehensive income
|
|
|
48,142
|
|
|
|
(390
|
)
|
|
|
4
|
|
|
|
(856
|
)
|
|
|
46,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 28, 2013
|
|
$
|
264,073
|
|
|
$
|
|
|
|
$
|
(3,857
|
)
|
|
$
|
(599
|
)
|
|
$
|
259,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Amounts in parentheses indicate an increase to earnings.
|
(b)
|
The amount recorded in the six month period ended June 29, 2013 includes a $3 million gain in Operating and selling expenses. The amount recorded in the three month period ended September 28, 2013 includes a
$39 million loss, which is a component of Gain on disposition of joint venture. Refer to Note N.
|
(c)
|
The amount reclassified to the Consolidated Statement of Operations is included in Interest expense.
|
(d)
|
Included in the $1,316 thousand are $859 thousand and $457 thousand recorded in Cost of goods sold and occupancy costs and Miscellaneous income, net, respectively.
|
13
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (Continued)
Note H Earnings Per Share
The following table represents the calculation of net earnings (loss) per common share (EPS):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Year-to-Date
|
|
(In thousands, except per share amounts)
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Basic Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) available to common shareholders
|
|
$
|
132,861
|
|
|
$
|
(69,566
|
)
|
|
$
|
51,661
|
|
|
$
|
(92,560
|
)
|
Assumed distribution to participating securities
|
|
|
(13,490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed undistributed earnings available to common stock
|
|
$
|
119,371
|
|
|
$
|
(69,566
|
)
|
|
$
|
51,661
|
|
|
$
|
(92,560
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
|
283,631
|
|
|
|
280,238
|
|
|
|
281,906
|
|
|
|
279,438
|
|
Basic earnings (loss) per share
|
|
$
|
0.42
|
|
|
$
|
(0.25
|
)
|
|
$
|
0.18
|
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to Office Depot, Inc.
|
|
$
|
160,900
|
|
|
$
|
(61,916
|
)
|
|
$
|
100,039
|
|
|
$
|
(69,795
|
)
|
Preferred stock redemption dividend
|
|
|
(22,333
|
)
|
|
|
|
|
|
|
(22,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) available for assumed distribution
|
|
$
|
138,567
|
|
|
$
|
(61,916
|
)
|
|
$
|
77,706
|
|
|
$
|
(69,795
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
|
283,631
|
|
|
|
280,238
|
|
|
|
281,906
|
|
|
|
279,438
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock
|
|
|
5,018
|
|
|
|
3,480
|
|
|
|
5,133
|
|
|
|
4,186
|
|
Redeemable preferred stock
|
|
|
45,594
|
|
|
|
79,371
|
|
|
|
69,434
|
|
|
|
77,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average shares outstanding
|
|
|
334,243
|
|
|
|
363,089
|
|
|
|
356,473
|
|
|
|
361,074
|
|
Diluted earnings (loss) per share
|
|
$
|
0.41
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of the redeemable preferred stock have equal dividend participation rights with common stock. The Company has never
paid a dividend on common stock, but the participation provisions require application of the two-class method for computing earnings per share. In periods of sufficient earnings, this method assumes an allocation of undistributed earnings to both
participating stock classes. The two-class method impacted the computation of earnings for the third quarter of 2013, but was not applicable to the year-to-date 2013 because it would have been antidilutive. For the third quarter of 2013, basic EPS
for common stock was $0.42, all undistributed. Basic EPS for redeemable preferred stock is also $0.42, composed of $0.13 distributed and $0.29 undistributed. The third quarter of 2013 diluted EPS was also impacted by the $22 million preferred stock
redemption dividend (refer to Note C). Accounting rules require that if antidilutive, the redeemed preferred stock be considered separately from other shares not redeemed of the same class. The preferred stock redemption dividend is at a rate
greater than basic EPS calculated under the two-class method and is therefore antidilutive. Using the weighted average share impact of the preferred stock, distribution to these shares would be $4.54 per share. Accordingly, the preferred stock
redemption dividend is excluded in calculating diluted EPS for the third quarter of 2013 as that produces the most dilutive calculation. Additional shares of the redeemable preferred stock may be repurchased prior to closing of the merger.
14
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (Continued)
The two-class method impacted the computation of earnings for the first quarter of 2012, but was not applicable to the third quarter or year-to-date 2012 because it would have been antidilutive.
The Preferred Stockholders are not required to fund losses.
Awards of options and nonvested shares representing approximately 4.7 million and
6.8 million additional shares of common stock were outstanding for the third quarter and year-to-date 2013, respectively, and 17.5 million and 15.6 million for the third quarter and year-to-date 2012, respectively, but were not
included in the computation of diluted weighted-average shares outstanding because their effect would have been antidilutive. For purposes of calculating weighted average shares, no tax benefits have been assumed in jurisdictions where deferred tax
valuation allowances have been recorded.
Note I Division Information
Office Depot operates in three Divisions: North American Retail Division, North American Business Solutions Division, and International
Division. Each of these Divisions is managed separately primarily because it serves a different customer group. Division operating income (loss) 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 General and administrative and other expenses considered directly or closely related to their operations and allocates corporate support costs. 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 significant accounts and balances by each of the Divisions, reconciled to consolidated totals.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
Third Quarter
|
|
|
Year-to-Date
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
North American Retail Division
|
|
$
|
1,127,755
|
|
|
$
|
1,173,653
|
|
|
$
|
3,211,063
|
|
|
$
|
3,387,087
|
|
North American Business Solutions Division
|
|
|
811,159
|
|
|
|
827,414
|
|
|
|
2,407,829
|
|
|
|
2,451,549
|
|
International Division
|
|
|
680,534
|
|
|
|
691,866
|
|
|
|
2,137,435
|
|
|
|
2,234,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,619,448
|
|
|
$
|
2,692,933
|
|
|
$
|
7,756,327
|
|
|
$
|
8,072,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Division Operating Income (Loss)
|
|
|
|
Third Quarter
|
|
|
Year-to-Date
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
North American Retail Division
|
|
$
|
10,151
|
|
|
$
|
(52,040
|
)
|
|
$
|
(2,650
|
)
|
|
$
|
(84,359
|
)
|
North American Business Solutions Division
|
|
|
38,836
|
|
|
|
30,475
|
|
|
|
94,880
|
|
|
|
71,980
|
|
International Division
|
|
|
2,636
|
|
|
|
(14,576
|
)
|
|
|
(3,823
|
)
|
|
|
(25,754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
51,623
|
|
|
$
|
(36,141
|
)
|
|
$
|
88,407
|
|
|
$
|
(38,133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (Continued)
A reconciliation of the measure of Division operating income (loss) to consolidated earnings (loss) before
income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Year-to-Date
|
|
(In thousands)
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Total Division operating income (loss)
|
|
$
|
51,623
|
|
|
$
|
(36,141
|
)
|
|
$
|
88,407
|
|
|
$
|
(38,133
|
)
|
Add/(subtract):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery of purchase price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,314
|
|
Merger and certain shareholder-related expenses
|
|
|
(39,740
|
)
|
|
|
|
|
|
|
(71,564
|
)
|
|
|
|
|
Unallocated charges
|
|
|
|
|
|
|
(710
|
)
|
|
|
(137
|
)
|
|
|
(7,494
|
)
|
Unallocated operating expenses
|
|
|
(20,046
|
)
|
|
|
(18,249
|
)
|
|
|
(60,356
|
)
|
|
|
(58,744
|
)
|
Interest income
|
|
|
1,012
|
|
|
|
482
|
|
|
|
1,422
|
|
|
|
1,804
|
|
Interest expense
|
|
|
(15,359
|
)
|
|
|
(16,947
|
)
|
|
|
(48,471
|
)
|
|
|
(49,128
|
)
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,110
|
)
|
Goodwill impairment
|
|
|
(44,160
|
)
|
|
|
|
|
|
|
(44,160
|
)
|
|
|
|
|
Gain on disposition of joint venture
|
|
|
380,813
|
|
|
|
|
|
|
|
381,541
|
|
|
|
|
|
Miscellaneous income, net
|
|
|
1,318
|
|
|
|
13,073
|
|
|
|
14,192
|
|
|
|
26,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes
|
|
$
|
315,461
|
|
|
$
|
(58,492
|
)
|
|
$
|
260,874
|
|
|
$
|
(69,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross amount of goodwill and the amount of accumulated impairment losses as of September 28, 2013 are provided in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
North
American
Retail
Division
|
|
|
North
American
Business
Solutions
Division
|
|
|
International
Division
|
|
|
Total
|
|
Goodwill
|
|
$
|
1,842
|
|
|
$
|
367,790
|
|
|
$
|
908,015
|
|
|
$
|
1,277,647
|
|
Accumulated impairment losses
|
|
|
(1,842
|
)
|
|
|
(348,359
|
)
|
|
|
(863,134
|
)
|
|
|
(1,213,335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 29, 2012
|
|
|
|
|
|
|
19,431
|
|
|
|
44,881
|
|
|
|
64,312
|
|
2013 Changes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charges
|
|
|
|
|
|
|
|
|
|
|
(44,160
|
)
|
|
|
(44,160
|
)
|
Foreign currency exchange rate changes
|
|
|
|
|
|
|
|
|
|
|
(721
|
)
|
|
|
(721
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 28, 2013
|
|
$
|
|
|
|
$
|
19,431
|
|
|
$
|
|
|
|
$
|
19,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Following the July 2013 sale of the Companys interest in Office Depot de Mexico (refer to Note N) and return of cash
proceeds to the U.S. parent company, the fair value of the reporting unit decreased below its carrying value and goodwill was fully impaired. The impairment charge of $44 million is included in Asset impairments in the Condensed Consolidated
Statement of Operations for the third quarter and year-to-date 2013.
16
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (Continued)
Note J Employee Benefit Plans
Pension Disclosures
The components of
net periodic pension benefit for the Companys foreign pension plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Year-to-Date
|
|
(In millions)
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Interest cost
|
|
|
1.9
|
|
|
|
2.5
|
|
|
|
6.2
|
|
|
|
7.2
|
|
Expected return on plan assets
|
|
|
(2.6
|
)
|
|
|
(3.1
|
)
|
|
|
(8.7
|
)
|
|
|
(8.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension benefit
|
|
$
|
(0.7
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
(2.5
|
)
|
|
$
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of 2012, the Company settled a dispute related to funding of the pension plan acquired in 2003 and
contributed the net settlement to the plan. Refer to Note E. The plan has been in a net asset position since that funding. There are no funding requirements while the plan has an asset surplus.
Note K Income Taxes
The effective tax rate for the third quarter and year-to-date 2013 was 49.0% and 61.7%, respectively, compared to -5.9% and -0.5%,
respectively, for the same periods of 2012. The increase in income tax expense and effective tax rate from the third quarter of 2012 is primarily attributable to the sale of the Companys investment in Office Depot de Mexico, which is discussed
in Note N. The Company paid $117.3 million of Mexican income tax upon the sale and estimates to incur additional U.S. income tax expense of $32.7 million due to dividend income and Subpart F income in 2013 as a result of the sale, for total
estimated income tax expense of $150 million. After application of interim period tax accounting, $145.6 million of the total estimated income tax expense was recognized in the third quarter of 2013, with the remainder to be recognized in the fourth
quarter of 2013. In addition, the effective tax rate for year-to-date 2012 includes the accrued benefit related to the favorable settlement of the U.S. Internal Revenue Service (IRS) examination of the 2009 and 2010 tax years, as
discussed below. The year-to-date 2012 effective tax rate was also impacted by the recovery of purchase price that was treated as a purchase price adjustment for tax purposes. As discussed in Note E, this recovery would have been a reduction of
related goodwill for financial reporting purposes, but the related goodwill was impaired in 2008. Additionally, the loss on extinguishment of debt in the United States during the first quarter of 2012 did not generate a financial statement tax
benefit because of existing valuation allowances.
The effective tax rates for all presented periods reflect the recognition of tax expense in tax
jurisdictions with pretax earnings and the absence of deferred tax benefits on pretax losses of certain tax jurisdictions with valuation allowances. Accordingly, interim income tax accounting is likely to result in significant variability of the
effective tax rate throughout the course of the year. Changes in income projections and the mix of income across jurisdictions could also impact the effective tax rate each quarter.
Upon the sale of Office Depot de Mexico in the third quarter of 2013, $4.7 million of income tax expense was reclassified from accumulated other comprehensive
income to the Consolidated Statement of Operations to remove the residual income tax effects associated with currency translation on the Companys investment in Office Depot de Mexico. Such income tax effects were recorded in the cumulative
translation account, which is a component of Accumulated other comprehensive income, due to intraperiod allocations required in the fourth quarter of 2012 when the Company removed its indefinite reinvestment assertion with respect to certain foreign
earnings accumulated at Office Depot de Mexico.
Also as a result of the sale, the Company realized an income tax benefit of $5.2M for equity compensation
deductions for which no benefit was previously recorded. The income tax benefit was recorded as additional paid-in capital in the third quarter of 2013. The Company expects to utilize all of its U.S. federal net operating loss (NOL)
carryfowards in 2013 as a consequence of the disposition of Office Depot de Mexico.
The Company has reached a settlement with the IRS Appeals Division to
close the previously-disclosed IRS deemed royalty assessment relating to 2009 and 2010 foreign operations. The settlement was subject to the Congressional Joint Committee on Taxation approval, which was received during the second quarter of 2013.
The
17
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (Continued)
resolution of this matter has closed all known disputes with the IRS relating to tax years 2009 and 2010 and resulted in a refund of approximately $14 million, which was received during the third
quarter of 2013, from a previously approved carryback of a tax accounting method change. For the 2011 year, final resolution of this matter was received in October 2013 with no change to the Companys tax return.
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, state and local income tax examinations for years before 2009. Additionally, the U.S. federal tax return for 2012 is under review, and it is reasonably possible that the audits for one or more of these periods
will be closed prior to the end of 2013.
Significant international tax jurisdictions include the UK, the Netherlands, France and Germany. Generally, the
Company is subject to routine examination for years 2008 and forward in these jurisdictions. It is reasonably possible that certain of these audits will close within the next 12 months, which the Company does not believe would result in a material
change in its accrued uncertain tax positions. 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 reasonably be made.
The Company has significant deferred tax assets in the U.S. and in foreign jurisdictions
against which valuation allowances have been established and will continue to assess the realizability of these deferred tax assets. There are certain foreign jurisdictions where the Company believes it is necessary to see further positive evidence,
such as sustained achievement of cumulative profits, before any valuation allowances can be released with respect to these operations. If such positive evidence develops in 2013, the Company may release all or a portion of the remaining valuation
allowances in these jurisdictions as early as the fourth quarter of 2013. Such release would have a positive impact on our income tax expense in the period of release.
On September 13, 2013, the IRS and U.S. Treasury Department issued final regulations addressing the deduction and capitalization of tangible property
expenditures, which are effective beginning with the 2014 tax year. The Company is currently evaluating the changes required by these regulations but does not expect them to have a material impact on the Companys consolidated financial
statements.
Note L 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. In developing its fair value estimates, the Company uses the following hierarchy:
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Level 1:
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Quoted prices in active markets for identical assets or liabilities.
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Level 2:
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Observable market based inputs or unobservable inputs that are corroborated by market data.
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Level 3:
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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.
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The fair values of cash and cash equivalents, receivables, accounts payable and accrued expenses and other current liabilities
approximate their carrying values because of their short-term nature.
The fair values of foreign currency contracts and fuel contracts are the amounts
receivable or payable to terminate the agreements at the reporting date, taking into account current exchange rates and commodity prices. The values are based on market-based inputs or unobservable inputs that are corroborated by market data. At the
end of the third quarter of 2013, the amounts receivable or payable under foreign currency and fuel contracts were not significant.
18
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (Continued)
The fair value of the Senior Secured Notes is considered a Level 2 fair value measurement and is based on
market trades of these securities on or about the dates below.
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September 28, 2013
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December 29, 2012
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September 29, 2012
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(In thousands)
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Carrying
Value
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Fair
Value
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Carrying
Value
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Fair
Value
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Carrying
Value
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Fair
Value
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9.75% senior secured notes
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$
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250,000
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$
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295,625
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$
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250,000
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$
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265,938
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$
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250,000
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$
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255,938
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Fair Value Estimates Used in Impairment Analyses
North American Retail Division
Because of
declining sales in recent periods, the Company has conducted a detailed quarterly store impairment analysis. The analysis uses input from retail store operations and the Companys accounting and finance personnel that organizationally report to
the Chief Financial Officer. These projections are based on managements estimates of store-level sales, gross margins, direct expenses, exercise of future lease renewal options, where applicable, and resulting cash flows and, by their nature,
include judgments about how current initiatives will impact future performance. If the anticipated cash flows of a store cannot support the carrying value of its assets, the assets are impaired and written down to estimated fair value using Level 3
inputs. The Company recognized store asset impairment charges of $5 million and $14 million, in the third quarter and year-to-date 2013, respectively, and $73 million and $115 million, in the third quarter and year-to-date 2012, respectively.
The third quarter 2013 impairment charge reflects 16 locations that were reduced to estimated fair value of $2 million based on their projected cash flows,
discounted at 13% and 109 stores reduced to estimated salvage value of $3 million. A 100 basis point decrease in sales used in these estimates would have increased the impairment charge by approximately $1 million. Independent of the sensitivity on
sales assumption, a 50 basis point decrease in gross margin would have increased the impairment charge by approximately $3 million. The interrelationship of having both of those inputs change as indicated would have increased the impairment charge
by approximately $6 million.
The Company will continue to evaluate initiatives to improve performance and lower operating costs. To the extent that
forward-looking sales and operating assumptions are not achieved and are subsequently reduced, or in certain circumstances, even if store performance is as anticipated, additional impairment charges may result. However, at the end of the third
quarter of 2013, the impairment analysis reflects the Companys best estimate of future performance, including the intended future use of the Companys retail store assets.
Fair Value Estimates Used for Paid-in-Kind Dividends
The Companys Board of Directors can elect to pay quarterly dividends on the preferred stock in cash or in-kind. Dividends paid-in-kind are measured at
fair value, using Level 3 inputs. The Company uses a binomial simulation that captures the call, conversion, and interest rate reset features as well as the optionality of paying the dividend in-kind or in cash. The Board of Directors and
Companys management consider then-current and estimated future liquidity factors in making that quarterly decision.
Dividends were paid in cash for
the first three quarters of 2013 and paid-in-kind for the first three quarters of 2012. For the third quarter of 2012, the simulation was based on a beginning stock price of $2.56, stock price volatility of 64.2%, a risk free rate of 2.8%, and
credit spread of 13.5%. The calculation resulted in a fair value estimate of approximately $7.7 million for the third quarter of 2012. A stock price volatility of 55% or 75% would have increased the estimate by $0.7 million or decreased the estimate
by $0.6 million, respectively. Using a beginning of period stock price of $1.50 or $3.50 would have decreased the estimate by $1.7million or increased the estimate by $1.1 million, respectively. Assuming all future dividends would be paid in cash
would have increased the estimate by $1.3 million. Assuming all future dividends would be paid-in-kind would have had no significant impact on the estimate.
19
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (Continued)
Goodwill Impairment
The estimated fair value of the International Divisions reporting unit that recognized a goodwill impairment charge during the third quarter of 2013 was
prepared by Company finance and accounting personnel that organizationally report to the Chief Financial Officer. The estimated value was developed using discounted cash flows and market data, where available. The cash flows were projected to
decrease, level off and turn positive and were discounted at 13%. The reporting unit carrying value exceeded the estimated fair value such that all goodwill was impaired.
Note M Derivative Instruments and Hedging Activity
As a global supplier of office products and services the Company is exposed to risks associated with changes in foreign currency exchange
rates, commodity prices, interest rates, and changing fuel prices from inbound and outbound transportation arrangements. The Company may enter into derivative transactions to mitigate such risks. Financial instruments authorized under the
Companys established risk management policy include spot trades, swaps, options, caps, collars, forwards and futures. Use of derivative financial instruments for speculative purposes is expressly prohibited. The fair value and activity of
derivative financial instruments were not material as of and for the periods ended September 28, 2013 or September 29, 2012.
Note N Gain on Sale of Investment in Unconsolidated Joint Venture
The Company participated in a joint venture in Mexico since 1994. Because control was shared equally with a partner, this investment was
accounted for using the equity method. On July 9, 2013, the Company completed the sale of its investment in Office Depot de Mexico to Grupo Gigante, S.A.B. de C.V. for the Mexican Peso amount of 8,777 million in cash (approximately $680
million at then-current exchange rates). A pretax gain of $381 million was recognized in the third quarter of 2013 ($382 million for the year-to-date period) as Gain on the disposition of joint venture in Other income (expense) in the Condensed
Consolidated Statements of Operations. The gain is net of third party fees, as well as recognition of $39 million of cumulative translation losses released from other comprehensive income because the subsidiary holding the joint venture investment
was substantially liquidated. Refer to Note I for discussion of related goodwill impairment and Note K for income tax impacts of the sale.
The investment
balance of $241.8 million and $236.3 million at December 29, 2012 and September 29, 2012, respectively, was included in Other Assets in the Condensed Consolidated Balance Sheets. The Companys proportionate share of Office Depot de
Mexicos net income prior to the sale is presented in Miscellaneous income, net in the Condensed Consolidated Statements of Operations.
The
following tables provide summarized information from the statements of income for Office Depot de Mexico for the periods presented prior to the sale of the Companys investment. Statement of income data for 2013 is presented through
June 29, 2013 which is the last date of the second quarter, as the incremental amounts for the period through the sale date are not significant:
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Through June 29,
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2012
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(In thousands)
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2013
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Third Quarter
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Year-to-Date
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Sales
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$
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562,886
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$
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316,255
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$
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860,838
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Gross profit
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169,043
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93,820
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254,343
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Net income
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28,374
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20,791
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47,141
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20
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (Continued)
Note O Commitments and Contingencies
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 our financial position, results of our operations or cash flows. In addition to the foregoing, State of California et. al. ex. rel. David Sherwin v. Office Depot was
filed in Superior Court for the State of California, Los Angeles County, and unsealed on October 19, 2012. This lawsuit relates to allegations regarding certain pricing practices in California under now expired agreements that were in place
between 2001 and 2011, pursuant to which state, local and non-profit agencies purchased office supplies (the Purchasing Agreements) from us. This action seeks as relief monetary damages. This lawsuit is now pending in the United States
District Court for the Central District of California after a Notice of Removal was filed by the Company. We believe that adequate provisions have been made for probable losses on one claim in this matter and such amounts are not material. However,
in light of the early stages of the other claims and the inherent uncertainty of litigation, we are unable to reasonably determine the full effect of the potential liability in the matter. Office Depot intends to vigorously defend itself in this
lawsuit, and filed a motion to dismiss. The Court vacated the motion to dismiss while the Court determines its jurisdiction. Additionally, during the first quarter of 2011, we were notified that the United States Department of Justice
(DOJ) commenced an investigation into certain pricing practices related to the Purchasing Agreement. We have cooperated with the DOJ on this matter.
On February 20, 2013, Office Depot and OfficeMax announced a definitive agreement under which the companies would combine in an all-stock
merger-of-equals transaction. Between February 25, 2013 and March 29, 2013, six putative class action lawsuits were filed by purported OfficeMax shareholders in the Circuit Court of the Eighteenth Judicial Circuit in DuPage County,
Illinois challenging the transaction and alleging that the defendant companies and individual members of OfficeMaxs Board of Directors violated applicable laws by breaching their fiduciary duties and/or aiding and abetting such breaches. The
plaintiffs sought, among other things, injunctive relief and rescission, as well as fees and costs. The lawsuits were consolidated as Venkata S. Donepudi v. OfficeMax Incorporated et. al. Subsequently, two similar lawsuits were filed in the United
States District Court for the Northern District of Illinois. Like the state court lawsuits, the federal actions alleged that the disclosure in the joint proxy statement/prospectus was inadequate. On June 25, 2013, the parties entered into a
Memorandum of Understanding (MOU) regarding settlement of the litigation. In consideration for the settlement and release, Office Depot and OfficeMax made certain supplemental disclosures to the joint proxy statement/prospectus. The MOU
contemplates that the parties will attempt in good faith to agree to a stipulation of settlement to be submitted to the court for approval. Office Depot does not believe that the amount paid in this settlement will be material to its financial
statements.
Note P Subsequent Events
On November 1, 2013, the Company entered into a Third Amendment to the Amended Credit Agreement. The Third Amendment is only effective upon
completion of the merger with OfficeMax. The Third Amendment expands the credit facility to $1.25 billion, allows for the merger with OfficeMax, recognizes existing OfficeMax debt and assets, expands amounts for permitted indebtedness, liens,
investments and asset sales and increases restricted payments and capital expenditure limits, among other things.
On November 1, 2013, OfficeMax and
Office Depot announced that the U.S. Federal Trade Commission has unconditionally cleared the proposed merger of equals. The transaction will be completed once all remaining closing conditions are satisfied.
On November 5, 2013, in connection with the merger closing, the remaining 50 percent of the preferred stock was redeemed by the Company. Redemption
payment included regular dividends incurred through the redemption date.
21