NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business:
Office Depot, Inc. (Office Depot or the
Company) is a global supplier of office products and services. The Companys common stock is traded on the New York Stock Exchange (NYSE) under the ticker symbol ODP. On November 5, 2013, the Company merged with
OfficeMax Incorporated (OfficeMax); refer to Note 2 for additional discussion of this merger (the Merger). The merged Company currently operates under the Office Depot
®
and OfficeMax
®
brands and
utilizes other proprietary company and product brand names. As of December 28, 2013, the Company sold to customers throughout North America, Europe, Asia/Pacific, and Latin America through three reportable segments (or Divisions):
North American Retail Division, North American Business Solutions Division and International Division. Following the date of the Merger: (i) the former OfficeMax U.S. Retail business is included in the North American Retail Division;
(ii) the former OfficeMax United States and Canada Contract business is included in the North American Business Solutions Division; and (iii) the former OfficeMax businesses in Australia, New Zealand and Mexico are included in the
International Division.
Office Depot operates wholly-owned entities, majority-owned entities and participates in other
ventures and alliances. The Companys corporate headquarters is located in Boca Raton, FL, and the Companys primary websites are www.officedepot.com and www.officemax.com.
Basis of Presentation:
The consolidated financial statements of Office Depot include the accounts of all wholly owned and
financially controlled subsidiaries. Also, variable interest entities formed by OfficeMax in prior periods solely related to the Timber Notes and Non-recourse debt are consolidated because the Company is the primary beneficiary. Refer to Note 7 for
additional information. All material intercompany transactions have been eliminated in consolidation.
Noncontrolling
interests related to the Companys investment in Grupo OfficeMax S. de R.L. de C.V. (Grupo OfficeMax) is presented outside of permanent equity in the Consolidated Balance Sheets because redemption features are not within the
Companys control. Another noncontrolling interest is presented as a component of Total stockholders equity. Results attributable to noncontrolling interests were insignificant for all periods.
The equity method of accounting is used for investments in which the Company does not control but either shares control equally or has
significant influence; the cost method is used when the Company neither shares control nor has significant influence. At December 28, 2013, there were no significant equity method investments.
During the fourth quarter of 2013, the Company modified its measure of business segment operating results for management reporting
purposes to exclude from the determination of Division operating income (loss) the impacts of asset impairments, restructuring-related activities, and certain other charges and credits. These activities now are being managed at the Corporate level.
To facilitate this change, $56 million for each of the years of 2012 and 2011 has been reclassified from Selling, general and administrative expenses to the line item Merger, restructuring and other operating expenses, net in the Consolidated
Statements of Operations. Prior period Division operating income (loss) has been recast accordingly. Refer to Note 19 for additional segment information. Also, to be consistent with how the business is managed, starting in the fourth quarter of
2013, the Company is presenting in Selling, general and administrative expenses amounts previously reported in Operating and selling expenses and General and administrative expenses. Neither the change in Division operating income (loss) nor
Statement of Operations presentation had an impact on Consolidated Operating income (loss), Net income (loss), or Earnings (loss) per share for the prior periods presented.
64
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Year:
Fiscal years are based on a 52- or 53-week period ending on the last
Saturday in December. Certain international locations operate on a calendar year basis; however, the reporting difference is not considered significant. Fiscal 2011 financial statements consisted of 53 weeks, with the additional week occurring in
the fourth quarter; all other periods presented in the Consolidated Financial Statements consisted of 52 weeks.
Estimates
and Assumptions:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Foreign Currency:
International operations primarily use local currencies as their functional currency. Assets and
liabilities are translated into U.S. dollars using the exchange rate at the balance sheet date. Revenues, expenses and cash flows are translated at average monthly exchange rates, or rates on the date of the transaction for certain significant
items. Translation adjustments resulting from this process are recorded in Stockholders equity as a component of Accumulated other comprehensive income (AOCI).
Foreign currency transaction gains or losses are recorded in Other income (expense), net in the Consolidated Statements of Operations.
Cash and Cash Equivalents:
All short-term highly liquid investments with original maturities of three months or less
from the date of acquisition are classified as cash equivalents. Amounts in transit from banks for customer credit card and debit card transactions are classified as cash. The banks process the majority of these amounts within two business days.
Amounts not yet presented for payment to zero balance disbursement accounts of $118 million and $53 million at
December 28, 2013 and December 29, 2012, respectively, are presented in Trade accounts payable and Accrued expenses and other current liabilities.
Approximately $353 million of Cash and cash equivalents was held outside the United States at December 28, 2013.
Receivables:
Trade receivables, net, totaled $855 million and $521 million at December 28, 2013 and December 29, 2012, respectively. An allowance for doubtful accounts has been recorded
to reduce receivables to an amount expected to be collectible from customers. The allowance at December 28, 2013 and December 29, 2012 was $26 million and $23 million, respectively.
Exposure to credit risk associated with trade receivables is limited by having a large customer base that extends across many different
industries and geographic regions. However, receivables may be adversely affected by an economic slowdown in the United States or internationally. No single customer accounted for more than 10% of total sales or receivables in 2013, 2012 or 2011.
Other receivables are $478 million and $283 million at December 28, 2013 and December 29, 2012, respectively, of
which $319 million and $159 million, respectively, are amounts due from vendors under purchase rebate, cooperative advertising and various other marketing programs.
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 Statements of Cash Flows. The financial institution
65
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 2013 and 2012, the Company withdrew
$443 million and $53 million, respectively, under the facility. Receivables sold for which the Company did not obtain cash directly from the financial institution are included in Receivables and amount to $10 million and $51 million as of
December 28, 2013 and December 29, 2012, respectively. A retention guarantee of $13 million is included in Prepaid expenses and other current assets as of December 28, 2013 and December 29, 2012.
Inventories
: Inventories are stated at the lower of cost or market value and are reduced for inventory losses based on estimated
obsolescence and the results of physical counts. In-bound freight is included as a cost of inventories. Also, cash discounts and certain vendor allowances that are related to inventory purchases are recorded as a product cost reduction. The weighted
average method is used to determine the cost of inventory and the first-in-first-out method is used for inventory held within the European countries where the Company has operations.
Prepaid Expenses and Other Current Assets:
At December 28, 2013 and December 29, 2012, Prepaid expenses and other
current assets on the Consolidated Balance Sheets included prepaid expenses of $163 million and $116 million, respectively, relating to short-term advance payments on rent, marketing, services and other matters. Also, refer to Note 9 for information
on deferred taxes included in this financial statement caption.
Income Taxes
: Income taxes are accounted for under the
asset and liability method. This approach requires the recognition of deferred tax assets and liabilities attributable to differences between the carrying amounts and the tax basis of assets and liabilities and operating loss and tax credit
carryforwards. Valuation allowances are recorded to reduce deferred tax assets to the amount believed to be more likely than not to be realized. The Company recognizes tax benefits from uncertain tax positions when it is more likely than not that
the position will be sustained upon examination. Interest related to income tax exposures is included in interest expense in the Consolidated Statements of Operations. Refer to Note 9 for additional information on income taxes.
Property and Equipment
: Property and equipment additions are recorded at cost. Depreciation and amortization is recognized over
their estimated useful lives using the straight-line method. The useful lives of depreciable assets are estimated to be 15-30 years for buildings and 3-10 years for furniture, fixtures and equipment. Computer software is amortized over three years
for common office applications, five years for larger business applications and seven years for certain enterprise-wide systems. Leasehold improvements are amortized over the shorter of the estimated economic lives of the improvements or the terms
of the underlying leases, including renewal options considered reasonably assured. The Company capitalizes certain costs related to internal use software that is expected to benefit future periods. These costs are amortized using the straight-line
method over the 37 year expected life of the software. Major repairs that extend useful lives of assets are capitalized and amortized over the estimated use period. Routine maintenance costs are expensed as incurred.
Goodwill and Other Intangible Assets:
Goodwill is the excess of the cost of an acquisition over the fair value assigned to net
tangible and identifiable intangible assets of the business acquired. The Company reviews goodwill for impairment annually or sooner if indications of possible impairment are identified. The review period for the goodwill associated with the Merger
is the first day of the third quarter. The Company assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit with goodwill is less than its carrying value. If that condition exists, a
quantitative test of possible goodwill impairment is prepared. For this test, the Company estimates the reporting units fair value using discounted cash flow analysis and market information when available. An impairment charge is recognized to
the extent that the
66
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
carrying amount of goodwill exceeds the implied fair value. This method of estimating fair value requires assumptions, judgments and estimates of future performance.
Unless conditions warrant earlier action, intangible assets with indefinite lives also are assessed annually for impairment. The Company
uses a relief from royalty method to test for possible impairment of indefinite-lived trade names. Amortizable intangible assets are periodically reviewed to determine whether events and circumstances warrant a revision to the remaining period of
amortization.
Impairment of Long-Lived Assets:
Long-lived assets with identifiable cash flows are reviewed for
possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Because of recent operating results, retail store long-lived assets are reviewed or tested quarterly. Impairment
is assessed at the individual store level which is the lowest level of identifiable cash flows, and considers the estimated undiscounted cash flows over the assets remaining life. If estimated undiscounted cash flows are insufficient to
recover the investment, an impairment loss is recognized equal to the estimated fair value of the asset less its carrying value and any costs of disposition, net of salvage value
.
The fair value estimate is generally the discounted amount of
estimated store-specific cash flows. Store asset impairment charges of $26 million, $124 million, and $11 million were reported in 2013, 2012 and 2011, respectively, and included in the Asset impairments line in the Consolidated Statements of
Operations.
Facility Closure and Severance Costs:
Store performance is regularly reviewed against expectations and
stores not meeting performance requirements may be closed. Costs associated with facility closures, principally accrued lease costs, are recognized when the facility is no longer used in an operating capacity or when a liability has been incurred.
Store assets are also reviewed for possible impairment, or reduction of estimated useful lives.
Accruals for facility closure
costs are based on the future commitments under contracts, adjusted for assumed sublease benefits and discounted at the Companys credit-adjusted risk-free rate at the time of closing. Accretion expense is recognized over the life of the
contractual payments. Additionally, the Company recognizes charges to terminate existing commitments and charges or credits to adjust remaining closed facility accruals to reflect current expectations. Accretion expense and adjustment to facility
closure costs are presented in Selling, general and administrative expenses if the related facility was closed as part of ongoing operations or in Merger, restructuring and other operating expenses, net, if the related facility was closed as part of
Merger or restructuring activities. Refer to Note 3 for additional information on accrued expenses relating to closed facilities. The short-term and long-term components of this liability are included in Accrued expenses and other current
liabilities and Deferred income taxes and other long-term liabilities, respectively, on the Consolidated Balance Sheets.
The
Company recognizes one-time employee benefit costs when the key terms of a severance arrangement have been communicated to affected employees. Amounts are recognized when communicated or over the remaining service period, as appropriate.
Accrued Expenses:
Included in Accrued expenses and other current liabilities in the Consolidated Balance Sheets are accrued
payroll-related amounts of $319 million and $204 million at December 28, 2013 and December 29, 2012, respectively.
67
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Value of Financial Instruments:
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:
|
|
|
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 own estimates and assumptions or those expected to be used by market participants.
|
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. Refer to Note 16 for further fair value information.
Revenue Recognition:
Revenue is recognized at the point of sale for retail transactions and at the time of successful delivery for contract, catalog and Internet sales. Shipping and handling fees
are included in Sales with the related costs included in Cost of goods sold and occupancy costs. Service revenue is recognized in Sales as the services are rendered. The Company recognizes sales on a gross basis when considered the primary obligor
in the transaction and on a net basis when considered to act as an agent. Sales taxes collected are not included in reported Sales. The Company uses judgment in estimating sales returns, considering numerous factors including historical sales return
rates. The Company also records reductions to revenue for customer programs and incentive offerings including special pricing agreements, certain promotions and other volume-based incentives.
A liability for future performance is recognized when gift cards are sold and the related revenue is recognized when gift cards are
redeemed as payment for products or when the likelihood of gift card redemption is considered remote. Gift cards do not have an expiration date. During 2013, the Company modified its method of recognizing the estimated portion of the gift card
program liability that will not be redeemed, or the breakage amount. Based on the developed history of these programs, the Company now recognizes breakage in proportion to usage, rather than at the end of a fixed period of time. The change resulted
in an increase in sales of $10 million in 2013.
Franchise fees, royalty income and the sales of products to franchisees and
licensees, which currently are not significant, are included in Sales, while product costs are included in Cost of goods sold and occupancy costs in the Consolidated Statements of Operations.
Cost of Goods Sold and Occupancy Costs:
Cost of goods sold and occupancy costs include:
|
-
|
inventory costs (as discussed above);
|
|
-
|
employee and non-employee receiving, distribution, and occupancy costs (rent), including real estate taxes and common area costs, of
inventory-holding and selling locations; and
|
|
-
|
identifiable employee-related costs associated with services provided to customers.
|
68
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Selling, General and Administrative Expenses:
Selling, general and administrative
expenses include amounts incurred related to expenses of operating and support functions, including:
|
-
|
employee payroll and benefits, including variable pay arrangements;
|
|
-
|
store and field support;
|
|
-
|
executive management and various staff functions, such as information technology, human resources functions, finance, legal, internal audit, and
certain merchandising and product development functions;
|
|
-
|
other operating costs incurred relating to selling activities; and
|
|
-
|
closed defined benefit pension and post retirement plans.
|
Selling, general and administrative expenses are included in determination of Division operating income to the extent those costs are
considered to be directly or closely related to segment activity and through allocation of support costs.
Merger,
restructuring, and other operating expenses, net:
Merger, restructuring, and other operating expenses, net includes amounts related to the Merger, including transaction and professional fees and employee-related expenses such as employee
severance and retention and payroll and benefits for employees dedicated to integration activities. This presentation reflects costs incurred by the Company prior to the Merger and costs incurred by the combined entity following the Merger. The
impacts of future integration activities such as facility closures, contract terminations, and additional employee-related costs will be reported in this financial statement line item.
Also, the current and prior period amounts include restructuring-related charges not associated with the Merger. Such expenses include
facility closure and functional re-alignment costs, gains and losses associated with business and assets dispositions, and expenses related to certain shareholder matters and process improvement activities. Changes in estimates and accruals related
to these restructuring activities are also reflected on this line. As discussed in the Basis of Presentation above, these restructuring-related amounts for prior periods are not included in the measure of Division operating income (loss). See Note 2
and Note 3 for additional information.
Advertising:
Advertising costs are charged either to Selling, general and
administrative expenses when incurred or, in the case of direct marketing advertising, capitalized and amortized in proportion to the related revenues over the estimated life of the materials, which range from several months to up to one year.
Advertising expense recognized was $378 million in 2013, $402 million in 2012 and $435 million in 2011. Prepaid advertising
costs were $26 million as of December 28, 2013 and $27 million as of December 29, 2012.
Share-Based
Compensation:
Compensation expense for all share-based awards expected to vest is measured at fair value on the date of grant and recognized on a straight-line basis over the related service period. The Black-Scholes valuation model is used to
determine the fair value of stock options. The fair value of restricted stock and restricted stock units is determined based on the Companys stock price on the date of grant. The Merger-date value of former OfficeMax share-based awards was
valued using the Black-Scholes model and apportioned between Merger consideration and unearned compensation to be recognized in expense as earned in future periods based on remaining service periods.
Self-insurance:
Office Depot is primarily self-insured for workers compensation, auto and general liability and employee
medical insurance programs. The Company has stop-loss coverage to limit the exposure arising from
69
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
these claims. Self-insurance liabilities are based on claims filed and estimates of claims incurred but not reported. These liabilities are not discounted.
Vendor Arrangements:
The Company enters into arrangements with substantially all significant vendors that provide for some form of
consideration to be received from the vendors. Arrangements vary, but some specify volume rebate thresholds, advertising support levels, as well as terms for payment and other administrative matters. The volume-based rebates, supported by a vendor
agreement, are estimated throughout the year and reduce the cost of inventory and cost of goods sold during the year. This estimate is regularly monitored and adjusted for current or anticipated changes in purchase levels and for sales activity.
Other promotional consideration received is event-based or represents general support and is recognized as a reduction of Cost of goods sold and occupancy costs or Inventories, as appropriate based on the type of promotion and the agreement with the
vendor. Certain arrangements meet the specific, incremental, identifiable criteria that allow for direct operating expense offset, but such arrangements are not significant.
Pension and Other Postretirement Benefits:
The Company sponsors certain closed U.S. and international defined benefit pension plans, certain closed U.S. retiree medical benefit and life insurance
plans, as well as a Canadian retiree medical benefit plan open to certain employees.
The Company recognizes the funded status
of its defined benefit pension, retiree medical benefit and life insurance plans in the Consolidated Balance Sheets, with changes in the funded status recognized through accumulated other comprehensive income (loss), net of tax, in the year in which
the changes occur. Actuarially-determined liabilities related to pension and postretirement benefits are recorded based on estimates and assumptions. Factors used in developing estimates of these liabilities include assumptions related to discount
rates, rates of return on investments, healthcare cost trends, benefit payment patterns and other factors. The Company also updates annually its assumptions about employee retirement factors, mortality, and turnover. Refer to Note 14 for additional
details.
Environmental and Asbestos Matters:
Environmental and asbestos liabilities relate to acquired legacy paper
and forest products businesses and timberland assets. The Company accrues for losses associated with these obligations when probable and reasonably estimable. These liabilities are not discounted. A receivable for insurance recoveries is recorded
when probable.
Acquisitions:
The Company applies the acquisition method of accounting for acquisitions, including
mergers where the Company is considered the accounting acquirer. As such, the total consideration is allocated to the fair value of assets acquired and liabilities assumed at the point the Company obtains control of the entity. See Note 2 for
additional information.
Leasing Arrangements:
The Company conducts a substantial portion of its business in leased
properties. Some of the Companys leases contain escalation clauses and renewal options. The Company recognizes rental expense for leases that contain predetermined fixed escalation clauses on a straight-line basis over the expected term of the
lease. The difference between the amounts charged to expense and the contractual minimum lease payment is accrued for.
The
expected term of a lease is calculated from the date the Company first takes possession of the facility, including any periods of free rent and any option or renewal periods management believes are probable of exercise. This expected term is used in
the determination of whether a lease is capital or operating and in the calculation of straight-line rent expense. Rent abatements and escalations are considered in the calculation of minimum lease payments in the Companys capital lease tests
and in determining straight-line rent expense for operating leases. Straight-line rent expense is also adjusted to reflect any allowances or reimbursements provided
70
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
by the lessor. When required under lease agreements, estimated costs to return facilities to original condition are accrued over the lease period.
Derivative Instruments and Hedging Activities:
The Company records all derivative instruments on the balance sheet at fair value.
Changes in the fair value of derivative instruments are recorded in current income or deferred in accumulated other comprehensive income, depending on whether a derivative is designated as, and is effective as, a hedge and on the type of hedging
transaction. Changes in fair value of derivatives that are designated as cash flow hedges are deferred in accumulated other comprehensive income until the underlying hedged transactions are recognized in earnings, at which time any deferred hedging
gains or losses are also recorded in earnings. If a derivative instrument is designated as a fair value hedge, changes in the fair value of the instrument are reported in current earnings and offset the change in fair value of the hedged assets,
liabilities or firm commitments. The Company has no material outstanding derivative instruments at December 28, 2013 and did not have any material hedge transactions in 2013, 2012 or 2011.
New Accounting Standards:
Effective for the Company beginning in fiscal year 2014, 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 2. MERGER, ACQUISITION AND DISPOSITION
Merger
On November 5, 2013, the Company, together with its wholly-owned subsidiaries Dogwood Merger Sub Inc. and Dogwood Merger Sub LLC, completed its previously announced merger of equals transaction with
OfficeMax and its subsidiaries Mapleby Holdings Merger Corporation and Mapleby Merger Corporation. In connection with the Merger, each former share of OfficeMax common stock, par value $2.50 per share, issued and outstanding immediately prior to the
effective time of the Merger was converted to 2.69 shares of Office Depot common stock. The Company issued approximately 240 million shares of Office Depot, Inc. common stock to former holders of OfficeMax common stock, representing the
approximately 45% of the approximately 530 million total shares of Company common stock outstanding on the Merger date. Additionally, OfficeMax employee based stock options and restricted stock were converted into mirror awards exercisable or
earned in Office Depot, Inc. common stock. The value of these awards was apportioned between total Merger consideration and unearned compensation to be recognized over the remaining original vesting periods of the awards.
Office Depot was determined to be the accounting acquirer. In this all-stock transaction, only Office Depot common stock was transferred,
the Office Depot shareholders received approximately 55% of the voting interest of the combined company and other factors either were equally shared between the two former companies, including representation on the combined entity Board of
Directors, or were further indicators of the Company being the accounting acquirer.
The Companys common stock continues
to trade on the NYSE under the symbol ODP. Following completion of the Merger, the OfficeMax common stock ceased trading on, and was delisted from, the NYSE.
Like Office Depot, OfficeMax is a leader in both business-to-business and retail office products distribution. OfficeMax has operations in the U.S., Canada, Mexico, Australia, New Zealand, the U.S. Virgin
Islands and Puerto Rico. The Merger is intended to create a more efficient global provider of these products and services that
71
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
is better able to compete in a changing office supply industry. OfficeMaxs results from the Merger date through December 28, 2013 are included in the Consolidated Statement of
Operations. The merged business contributed sales of $939 million and a Net loss of $39 million in 2013.
The following
unaudited consolidated pro forma summary has been prepared by adjusting the Companys historical data to give effect to the Merger as if it had occurred on January 1, 2012:
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Unaudited
|
|
(In millions, except per share amounts)
|
|
Year Ended
December 28, 2013
|
|
|
Year Ended
December 29, 2012
|
|
Sales
|
|
$
|
16,879
|
|
|
$
|
17,640
|
|
Net income
|
|
$
|
33
|
|
|
$
|
262
|
|
Net income attributable to common stockholders
|
|
$
|
31
|
|
|
$
|
258
|
|
Earnings per share available to common stockholders
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.06
|
|
|
$
|
0.50
|
|
Diluted
|
|
$
|
0.06
|
|
|
$
|
0.49
|
|
The unaudited consolidated pro forma financial information was prepared in accordance with the
acquisition method of accounting under existing standards and is not necessarily indicative of the results of operations that would have occurred if the Merger had been completed on the date indicated, nor is it indicative of the future operating
results of the Company.
The unaudited pro forma results have been adjusted with respect to certain aspects of the Merger to
reflect:
|
|
|
additional depreciation and amortization expenses that would have been recognized assuming fair value adjustments to the existing OfficeMax assets
acquired and liabilities assumed, including property and equipment, favorable and unfavorable lease values, the Timber Notes and Non-recourse debt, and share-based compensation awards;
|
|
|
|
valuation allowances on U.S. deferred tax assets limited deferred tax benefit recognition;
|
|
|
|
elimination of the OfficeMax recognition of deferred gain in 2013 of $138 million from the disposition of a portion of its investment in Boise
Cascade Holdings and elimination of the OfficeMax recognition of pension settlement charges in 2012 of $56 million as the related deferred values were removed in purchase accounting; and
|
|
|
|
inclusion in the pro forma year 2012 of $79 million Merger transaction costs incurred by both companies through year end 2013.
|
The unaudited pro forma results do not reflect future events that either have occurred or may occur after
the Merger, including, but not limited to, the anticipated realization of ongoing savings from operating synergies in subsequent periods. They also do not give effect to certain charges that the Company expects to incur in connection with the
Merger, including, but not limited to, additional professional fees, employee integration, retention and severance costs, facility closure costs, potential asset impairments, accelerated depreciation and amortization or product rationalization
charges.
72
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Merger was an all-stock transaction. The following table summarizes the consideration transferred.
|
|
|
|
|
(In millions, except for share exchange ratio and price)
|
|
|
|
OfficeMax common shares outstanding as of November 5, 2013
|
|
|
88
|
|
OfficeMax share-based awards exchanged
|
|
|
3
|
|
OfficeMax Series D preferred shares, as converted
|
|
|
1
|
|
|
|
|
|
|
OfficeMax common shares exchanged
|
|
|
92
|
|
Exchange ratio
|
|
|
2.69
|
|
|
|
|
|
|
Office Depot common stock issued for consideration
|
|
|
246.9
|
|
Office Depot common stock per share price on November 5, 2013
|
|
$
|
5.65
|
|
|
|
|
|
|
Total fair value of consideration transferred
|
|
$
|
1,395
|
|
|
|
|
|
|
The consideration is distributed to the following assets and liabilities. The allocation of consideration
is not yet complete and the amounts below may change in future periods.
|
|
|
|
|
(In millions)
|
|
Cash and cash equivalents
|
|
$
|
460
|
|
Receivables
|
|
|
521
|
|
Inventories
|
|
|
766
|
|
Prepaid expenses and other current assets
|
|
|
106
|
|
Property and equipment
|
|
|
537
|
|
Favorable leases
|
|
|
44
|
|
Definite-lived intangible assets, primarily customer relationships and tradenames
|
|
|
57
|
|
Investment in Boise Cascade Holdings
|
|
|
80
|
|
Timber notes receivable
|
|
|
948
|
|
Other noncurrent assets
|
|
|
51
|
|
Accounts payable
|
|
|
(527
|
)
|
Other current liabilities (a)
|
|
|
(470
|
)
|
Unfavorable leases
|
|
|
(54
|
)
|
Non-recourse debt
|
|
|
(863
|
)
|
Recourse debt
|
|
|
(228
|
)
|
Pension and other post-employment obligations
|
|
|
(180
|
)
|
Deferred income taxes and other long-term liabilities and Noncontrolling interest
|
|
|
(230
|
)
|
|
|
|
|
|
Total identifiable net assets
|
|
|
1,018
|
|
Goodwill
|
|
|
377
|
|
|
|
|
|
|
Total
|
|
$
|
1,395
|
|
|
|
|
|
|
(a)
|
Includes accrued expenses and other current liabilities and income taxes payable
|
Receivables are recorded at fair value which represents amount expected to be collected. Contractual amounts are higher by $14 million.
Receivables include trade receivables of approximately $343 million and vendor and other receivables of $178 million.
The
fair value of assets acquired and liabilities assumed was based upon a preliminary valuation and the estimates and assumptions are subject to change within the measurement period as additional information is obtained. The goodwill attributable to
the Merger will not be amortizable or deductible for tax purposes. Goodwill is considered to represent the value associated with the workforce and synergies the two companies anticipate realizing as a combined company. Because the purchase price
allocation is preliminary, the Company
73
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
has not yet allocated goodwill related to the Merger to the reporting units. Noncontrolling interest relating to the joint venture in Mexico is valued at approximately $54 million, using the same
fair value measurement methodologies applied to all assets acquired and liabilities assumed in the Merger and a fair value estimate based on market multiples. The valuation of the noncontrolling interest may change as the purchase price allocation
is completed and goodwill is allocated to the reporting units.
Under the guidance on accounting for business combinations,
merger and integration costs are not included as components of consideration transferred but are accounted for as expenses in the period in which the costs are incurred. Transaction-related expenses are included in the Merger, restructuring, and
other operating expenses, net line in the Consolidated Statements of Operations. See Note 3 for additional information about the costs incurred during 2013. See Note 9 for discussion of income tax impacts of the Merger.
Disposition
In the
third quarter of 2013, the Company sold its 50 percent investment in Office Depot de Mexico, S.A. de C.V. (Office Depot de Mexico) to Grupo Gigante, S.A.B. de C.V. (Grupo Gigante). The transaction generated cash proceeds of
the Mexican Peso amount of 8,777 million in cash (approximately $680 million at then-current exchange rates). A pretax gain of $382 million was recognized in 2013 as Gain on the disposition of joint venture in Other income (expense) in the
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 following the disposition. The investment in this joint venture was accounted for under the equity method of accounting; accordingly, the disposition is not reflected as discontinued operations. Refer to Note 6 for
additional information on this former joint venture. The disposition of this asset from the International Division and return of sale proceeds to the companys U.S. parent resulted in the fair value of the related reporting unit falling below
its carrying value. Refer to Note 5 for further information on the goodwill impairment recorded in 2013. Refer to Note 9 for income tax impacts of the sale.
Acquisition
On February 25, 2011, the Company acquired all of the
shares of Svanströms Gruppen (Frans Svanströms & Co AB), a supplier of office products and services headquartered in Stockholm, Sweden to complement the Companys existing business in that region. As part of this all-cash
transaction, the Company recognized approximately $46 million of non-deductible goodwill, primarily attributable to anticipated synergies, $20 million of definite-lived intangible assets for customer relationships and proprietary names, as well as
net working capital and property and equipment. The definite-lived intangible assets had a weighted average life of 6.9 years at the acquisition date. Operations have been included in the International Division results since the date of acquisition.
Refer to Notes 5 and 16, for further details on the intangible assets impairment and fair value measurements.
NOTE 3. MERGER, RESTRUCTURING AND OTHER ACCRUALS
In recent years, the Company has taken actions to adapt to changing and competitive conditions. These actions include
closing facilities, consolidating functional activities, disposing of businesses and assets, and taking actions to improve process efficiencies. Additionally, the Merger was approved in 2013 and integration activities began. In connection with the
Merger, the Company assumed exit liabilities previously recorded by OfficeMax.
Starting in the fourth quarter of 2013, the
Company began presenting Merger, restructuring and other operating expenses, net on a separate line in the Consolidated Statements of Operations to identify these activities apart from the expenses incurred to sell to and service its customers.
During 2013, these expenses totaled $201 million,
74
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
with $180 million of Merger and certain other expenses and $21 million of net restructuring expenses. As noted in the Basis of Presentation above, these expenses are not reported in Division
operating income.
Merger-related expenses include (i) $80 million related to transaction and integration activities
primarily investment banking, legal, accounting, integration; (ii) $92 million of employee related expenses for cash termination benefits, acceleration of share-based compensation for departing employees and certain incentives to retain and
motivate employees, and (iii) $8 million of certain shareholder-related expenses. Total Merger expenses reflect amounts incurred by Office Depot before receiving approval of the Merger, as well as costs incurred by the combined entity following
the Merger approval. Refer to Note 2 for additional information on the Merger.
Restructuring expenses primarily relate to
activities in Europe. These costs include $23 million of termination benefits and facility closure costs, partially offset by a credit from the reversal of cumulative translation account balances upon subsidiary liquidation.
Of the $201 million Merger, restructuring and other expenses, net recognized in 2013, certain amounts are considered exit costs and
included as charges incurred in the table below. Transaction, integration, certain shareholder-related and other expenses are not considered exit costs. The share-based compensation that was recognized against additional paid-in capital is also not
presented in the exit cost table. The table includes $94 million of employee compensation expenses from the Merger and restructuring activities, presented as termination benefits and other costs. Charges incurred in the table below also include $4
million of expenses related to facilities closed as part of ongoing operations, which are included in Selling, general and administrative expenses in the Consolidated Statement of Operations. In addition, the table presents accretion on previously
closed facilities which is included in Selling, general and administrative expenses in the Consolidated Statement of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Beginning
Balance
|
|
|
Charges
Incurred
|
|
|
OfficeMax
Merger
Additions
|
|
|
Cash
Payments
|
|
|
Lease
Accretion
|
|
|
Currency
and Other
Adjustments
|
|
|
Ending
Balance
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger-related accruals
|
|
$
|
|
|
|
$
|
29
|
|
|
$
|
|
|
|
$
|
(6
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
23
|
|
Other restructuring accruals
|
|
|
6
|
|
|
|
23
|
|
|
|
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Acquired entity accruals
|
|
|
|
|
|
|
1
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
53
|
|
|
|
4
|
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
Lease and contract obligations, accruals for facilities closures and other costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger-related accruals
|
|
|
|
|
|
|
42
|
|
|
|
22
|
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
25
|
|
Other restructuring accruals
|
|
|
87
|
|
|
|
1
|
|
|
|
|
|
|
|
(34
|
)
|
|
|
8
|
|
|
|
|
|
|
|
62
|
|
Acquired entity accruals
|
|
|
|
|
|
|
2
|
|
|
|
63
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
87
|
|
|
|
45
|
|
|
|
85
|
|
|
|
(79
|
)
|
|
|
8
|
|
|
|
|
|
|
|
146
|
|
|
|
|
|
|
Total
|
|
$
|
93
|
|
|
$
|
98
|
|
|
$
|
89
|
|
|
$
|
(110
|
)
|
|
$
|
8
|
|
|
$
|
|
|
|
$
|
178
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination benefits
|
|
$
|
12
|
|
|
$
|
26
|
|
|
$
|
|
|
|
$
|
(33
|
)
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
6
|
|
Lease and contract obligations, accruals for facilities closures and other costs
|
|
|
109
|
|
|
|
21
|
|
|
|
|
|
|
|
(56
|
)
|
|
|
12
|
|
|
|
1
|
|
|
|
87
|
|
|
|
|
|
|
Total
|
|
$
|
121
|
|
|
$
|
47
|
|
|
$
|
|
|
|
$
|
(89
|
)
|
|
$
|
12
|
|
|
$
|
2
|
|
|
$
|
93
|
|
|
|
|
|
|
75
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
December 28,
2013
|
|
|
December 29,
2012
|
|
Land
|
|
$
|
101
|
|
|
$
|
31
|
|
Buildings
|
|
|
469
|
|
|
|
290
|
|
Leasehold improvements
|
|
|
780
|
|
|
|
747
|
|
Furniture, fixtures and equipment
|
|
|
1,605
|
|
|
|
1,338
|
|
|
|
|
|
|
|
|
|
2,955
|
|
|
|
2,406
|
|
Less accumulated depreciation
|
|
|
(1,646
|
)
|
|
|
(1,550
|
)
|
|
|
|
|
|
Total
|
|
$
|
1,309
|
|
|
$
|
856
|
|
|
|
|
|
|
The above table of property and equipment includes assets held under capital leases as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
December 28,
2013
|
|
|
December 29,
2012
|
|
Buildings
|
|
$
|
228
|
|
|
$
|
228
|
|
Furniture, fixtures and equipment
|
|
|
65
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
293
|
|
|
|
286
|
|
Less accumulated depreciation
|
|
|
(127
|
)
|
|
|
(107
|
)
|
|
|
|
|
|
Total
|
|
$
|
166
|
|
|
$
|
179
|
|
|
|
|
|
|
Depreciation expense was $149 million in 2013, $152 million in 2012, and $161 million in 2011. Refer to
Note 16 for additional information on asset impairment charges.
Included in furniture, fixtures and equipment above are
capitalized software costs of $531 million and $398 million at December 28, 2013 and December 29, 2012, respectively. The unamortized amounts of the capitalized software costs are $236 million and $166 million at
December 28, 2013 and December 29, 2012, respectively. Amortization of capitalized software costs totaled $56 million, $46 million and $45 million in 2013, 2012 and 2011, respectively. Software development costs that do not
meet the criteria for capitalization are expensed as incurred.
Estimated future amortization expense related to capitalized
software at December 28, 2013 is as follows:
|
|
|
|
|
(In millions)
|
|
2014
|
|
$
|
79
|
|
2015
|
|
|
75
|
|
2016
|
|
|
45
|
|
2017
|
|
|
19
|
|
2018
|
|
|
12
|
|
Thereafter
|
|
|
6
|
|
The weighted average amortization period for capitalized software is 3 years.
76
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The components of goodwill by segment are provided in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
North
American
Retail
Division
|
|
|
North
American
Business
Solutions
Division
|
|
|
International
Division
|
|
|
Corporate
|
|
|
Total
|
|
Goodwill
|
|
|
2
|
|
|
|
368
|
|
|
|
863
|
|
|
|
|
|
|
|
1,233
|
|
Accumulated impairment losses
|
|
|
(2
|
)
|
|
|
(349
|
)
|
|
|
(863
|
)
|
|
|
|
|
|
|
(1,214
|
)
|
Goodwill acquired during the year
|
|
|
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
46
|
|
Foreign currency rate impact
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
Balance as of December 31, 2011
|
|
|
|
|
|
|
19
|
|
|
|
43
|
|
|
|
|
|
|
|
62
|
|
Foreign currency rate impact
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
Balance as of December 29, 2012
|
|
$
|
|
|
|
$
|
19
|
|
|
$
|
45
|
|
|
|
|
|
|
$
|
64
|
|
|
|
|
|
|
Impairment loss
|
|
|
|
|
|
|
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
(44
|
)
|
Additions
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
377
|
|
|
|
379
|
|
Foreign currency rate impact
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
Balance as of December 28, 2013
|
|
$
|
|
|
|
$
|
21
|
|
|
$
|
|
|
|
|
377
|
|
|
$
|
398
|
|
|
|
|
|
|
As a result of the disposition of its investment in Office Depot de Mexico and the associated return of
cash to the U.S. parent, in the third quarter of 2013, the carrying value of the related reporting unit exceeded its fair value. Because the investment was accounted for under the equity method, no goodwill was allocated to the gain on disposition
of joint venture calculation. However, concurrent with the sale and gain recognition, a goodwill impairment charge of $44 million was recognized and is reported on the Asset impairments line in the Consolidated Statements of Operations. Refer to
Note 16 for additional discussion of 2013 goodwill valuation considerations.
Because the allocation of consideration related
to the Merger is incomplete, the goodwill associated with the transaction has not yet been allocated to the reporting units. The purchase price allocation and the allocation of goodwill on a relative fair value basis is expected to be complete
within the measurement period that will not exceed one year from the transaction date. Refer to Note 2 for additional information on the goodwill addition during 2013.
77
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Indefinite-Lived Intangible Assets
The carrying value of an indefinite-lived intangible asset related to an acquired trade name was $6 million, at December 28, 2013
and December 29, 2012. Indefinite-lived intangible assets are included in Other intangible assets in the Consolidated Balance Sheets. Indefinite-lived intangibles are not subject to amortization, but are assessed for impairment at least
annually.
Definite-Lived Intangible Assets
In 2013, the Company recorded definite-lived intangible assets totaling $101 million associated with the Merger, consisting of $44 million of favorable leases, $47 million of customer relationships and
$10 million of tradenames. The weighted average amortization periods for favorable leases, customer relationships and tradenames are approximately 13, 7, and 2 years, respectively. Refer to Note 2 for details on the Merger purchase price allocation
and Note 10 for details on deferred credit related to unfavorable leases.
Definite-lived intangible assets are reviewed
periodically to determine whether events and circumstances warrant a revision to the remaining period of amortization. In the third quarter of 2012, the Company re-evaluated the remaining balances of certain amortizing intangible assets associated
with a 2011 acquisition in Sweden. An impairment charge of $14 million was recognized and is presented in Asset impairment in the Consolidated Statements of Operations. Refer to Note 16 for additional information on fair value measurement.
Definite-lived intangible assets, which are included in Other intangible assets in the Consolidated Balance Sheets, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2013
|
|
(In millions)
|
|
Gross
Carrying Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying Value
|
|
Customer relationships
|
|
$
|
74
|
|
|
$
|
(20
|
)
|
|
$
|
54
|
|
Favorable lease
|
|
|
44
|
|
|
|
|
|
|
|
44
|
|
Trade name
|
|
|
10
|
|
|
|
(1
|
)
|
|
|
9
|
|
|
|
|
|
|
Total
|
|
$
|
128
|
|
|
$
|
(21
|
)
|
|
$
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2012
|
|
(In millions)
|
|
Gross
Carrying Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying Value
|
|
Customer relationships
|
|
$
|
28
|
|
|
$
|
(17
|
)
|
|
$
|
11
|
|
Definite-lived intangible assets are amortized using the straight-line method. Favorable leases are
amortized using the straight-line method over the lives of the individual leases. The remaining weighted average amortization period for these assets is 8.8 years.
Amortization of intangible assets was $4 million in 2013, $5 million in 2012, and $5 million in 2011 (at average foreign currency exchange rates). Intangible assets amortization expenses are included in
the Consolidated Statement of Operations in Selling, general and administrative expenses. Amortization of favorable leases is included in rent expense. Refer to Note 10 for further detail.
78
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Estimated future amortization expense for the intangible assets is as follows:
|
|
|
|
|
(In millions)
|
|
|
|
2014
|
|
$
|
21
|
|
2015
|
|
|
19
|
|
2016
|
|
|
13
|
|
2017
|
|
|
11
|
|
2018
|
|
|
9
|
|
Thereafter
|
|
|
34
|
|
|
|
|
|
|
Total
|
|
$
|
107
|
|
|
|
|
|
|
NOTE 6. INVESTMENTS
Unconsolidated Joint Ventures
From 1994 through the third quarter of 2013, the Company participated in a joint venture that sells office products and services in Mexico and Central and South America and accounted for this investment
under the equity method. In the third quarter of 2013, the Company sold its 50 percent investment in Office Depot de Mexico to Grupo Gigante, the joint venture partner. Refer to Note 2 for further details on the disposition. The Companys
proportionate share of Office Depot de Mexicos net income is presented in Other income (expense), net in the Consolidated Statements of Operations and totaled $13 million through the date of sale in 2013, $32 million in 2012, and $34 million
in 2011. The investment balance at year end 2013 and 2012 was $0 and $242 million, respectively, and is included in Other assets in the Consolidated Balance Sheets. The Company received dividends of $25 million from this joint venture in 2011. The
dividend is included as an operating activity in the Consolidated Statements of Cash Flows.
Boise Cascade Holdings, LLC
The Company directly owns approximately 20% of the voting equity securities (Common Units) of Boise Cascade Holdings, L.L.C.,
a building products company that originated in connection with the OfficeMax sale of its paper, forest products and timberland assets in 2004. As of December 28, 2013, Boise Cascade Holdings, L.L.C. owned stock of Boise Cascade Company, a
publicly traded entity, which gave the Company the indirect ownership interest of approximately 4% of the shares of Boise Cascade Company. The investment is accounted for under the cost method because the Company does not have the ability to
significantly influence the entitys operating and financial policies. The investment was recorded at fair value on the date of the Merger. At December 28, 2013, the investment of $46 million is included in Other assets in the Consolidated
Balance Sheets. See Note 16 for additional information.
In November 2013, the Company received a $35 million cash
distribution as part of a distribution that Boise Cascade Holdings, L.L.C. made to the holders of its Common Units following an offering of common shares of Boise Cascade Company. This distribution is considered return of investment and is presented
as an investing activity in the Consolidated Statements of Cash Flows.
79
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. TIMBER NOTES/NON-RECOURSE DEBT
As part of the Merger, the Company has also acquired credit-enhanced timber installment notes with an original
principal balance of $818 million (the Installment Notes) that were part of the consideration received in exchange for OfficeMaxs sale of timberland assets in October 2004. The Installment Notes were issued by a single-member
limited liability company formed by affiliates of Boise Cascade, L.L.C. (the Note Issuers). The Installment Notes are non-amortizing obligations bearing interest at 4.98% and maturing in 2020. In order to support the issuance of the
Installment Notes, the Note Issuers transferred a total of $818 million in cash to Wells Fargo & Company (Wells Fargo) (which at the time was Wachovia Corporation). Wells Fargo issued a collateral note (the Collateral
Note) to the Note Issuers. Concurrently with the issuance of the Installment Notes and the Collateral Note, Wells Fargo guaranteed the respective Installment Notes and the Note Issuers pledged the Collateral Note as security for the
performance of the obligations under the Installment Notes. As all amounts due on the Installment Notes are current and the Company has no reason to believe that the Company will not be able to collect all amounts due according to the contractual
terms of the Installment Notes, the Installment Notes are reported as Timber Notes in the Consolidated Balance Sheet in the amount of $945 million, which represents the original principal amount of $818 million plus a fair value adjustment recorded
through purchase accounting in connection with the Merger. The premium will be amortized as a component of interest expense through the maturity date.
Also as part of the Merger, the Company acquired non-recourse debt that OfficeMax issued under the structure of the timber note transactions. In December 2004, the interests in the Installment Notes and
related guarantee were transferred to wholly-owned bankruptcy remote subsidiaries in a securitization transaction. The subsidiaries pledged the Installment Notes and related guarantee and issued for cash securitized notes (the Securitization
Notes) in the amount of $735 million supported by the Wells Fargo guaranty. Recourse on the Securitization Notes is limited to the proceeds of the applicable pledged Installment Notes and underlying Wells Fargo guaranty, and therefore
there is no recourse against the Company. The Securitization Notes are non-amortizing and pay interest of 5.42% through maturity in 2019. The Securitization Notes are reported as Non-recourse debt in the Companys Consolidated Balance Sheets in
the amount of $859 million, which represents the original principal amount of $735 million plus a fair value adjustment recorded through purchase accounting in connection with the Merger. The premium will be amortized as a component of interest
income through the maturity date. Refer to Note 8 for additional information.
The Installment Notes and related
Securitization Notes are scheduled to mature in 2020 and 2019, respectively. The Securitization Notes have an initial term that is approximately three months shorter than the Installment Notes.
The sale of the timberlands in 2004 generated a tax gain for OfficeMax and a related deferred tax liability was recognized. The timber
installment notes structure allowed the deferral of the resulting tax liability until 2020, the maturity date for the Installment Notes. At December 28, 2013, there is a deferred tax liability of $258 million related to the Installment
Notes that will be recognized upon maturity.
80
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8. DEBT
Debt consists of the following:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
December 28,
2013
|
|
|
December 29,
2012
|
|
Recourse debt:
|
|
|
|
|
|
|
|
|
Short-term borrowings and current maturities of long-term debt:
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
3
|
|
|
$
|
2
|
|
Capital lease obligations
|
|
|
23
|
|
|
|
20
|
|
Other current maturities of long-term debt
|
|
|
3
|
|
|
|
152
|
|
|
|
|
|
|
Total
|
|
$
|
29
|
|
|
$
|
174
|
|
Long-term debt, net of current maturities:
|
|
|
|
|
|
|
|
|
Senior Secured Notes, due 2019
|
|
$
|
250
|
|
|
$
|
250
|
|
7.35% debentures, due 2016
|
|
|
18
|
|
|
|
|
|
Revenue bonds, due in varying amounts periodically through 2029
|
|
|
186
|
|
|
|
|
|
American & Foreign Power Company, Inc. 5% debentures, due 2030
|
|
|
13
|
|
|
|
|
|
Grupo OfficeMax loans
|
|
|
4
|
|
|
|
|
|
Capital lease obligations
|
|
|
207
|
|
|
|
218
|
|
Other
|
|
|
18
|
|
|
|
17
|
|
|
|
|
|
|
Total
|
|
$
|
696
|
|
|
$
|
485
|
|
|
|
|
|
|
Non-recourse debt:
|
|
|
|
|
|
|
|
|
5.42% Securitization Notes, due 2019 See Note 7
|
|
$
|
735
|
|
|
$
|
|
|
Unamortized premium
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
859
|
|
|
$
|
|
|
|
|
|
|
|
The Company was in compliance with all applicable financial covenants of existing loan agreements at December 28,
2013.
Amended Credit Agreement
On May 25, 2011, the Company entered into an Amended and Restated Credit Agreement with a group of lenders. Additional amendments to the Amended and Restated Credit Agreement have been entered into
and were effective February 2012 and November 2013 (the Amended and Restated Credit Agreement including all amendments is referred to as the Amended Credit Agreement). The Amended Credit Agreement provides for an asset based,
multi-currency revolving credit facility of up to $1.25 billion (the Facility). The Amended Credit Agreement also provides that the Facility may be increased by up to $250 million, subject to certain terms and conditions, including
obtaining increased commitments from existing or new lenders. The amount that can be drawn on the Facility at any given time is determined based on percentages of certain accounts receivable, inventory and credit card receivables (the
Borrowing Base). The Facility includes a sub-facility of up to $200 million which is available to certain of the Companys European and Canadian subsidiaries (the European Borrowers). Certain of the Companys
domestic subsidiaries guaranty the obligations under the Facility (the Domestic Guarantors). The Amended Credit Agreement also provides for a letter of credit sub-facility of up to $400 million, as well as a swingline loan sub-facility
of up to $125 million to the Company and an additional swingline loan sub-facility of up to $25 million to the European Borrowers. All loans borrowed under the Agreement may be borrowed, repaid and reborrowed from time to time until the maturity
date of May 25, 2016.
81
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All amounts borrowed under the Facility, as well as the obligations of the Domestic
Guarantors, are secured by a first priority lien on the Companys and such Domestic Guarantors accounts receivables, inventory, cash, cash equivalents and deposit accounts and a second priority lien on substantially all of the
Companys and the Domestic Guarantors other assets. All amounts borrowed by the European Borrowers under the Facility are secured by a lien on such European Borrowers accounts receivable, inventory, cash, cash equivalents and
deposit accounts, as well as certain other assets. At the Companys option, borrowings made pursuant to the Facility bear interest at either, (i) the alternate base rate (defined as the higher of the Prime Rate (as announced by the Agent),
the Federal Funds Rate plus 1/2 of 1% and the one month Adjusted LIBO Rate (defined below) and 1%) or (ii) the Adjusted LIBO Rate (defined as the LIBO Rate as adjusted for statutory revenues) plus, in either case, a certain margin based on the
aggregate average availability under the Facility.
The Amended Credit Agreement also contains representations, warranties,
affirmative and negative covenants, and default provisions which are conditions precedent to borrowing. The most significant of these covenants and default provisions include limitations in certain circumstances on acquisitions, dispositions, share
repurchases and the payment of cash dividends. The Company has never paid a cash dividend on its common stock.
The Facility
also includes provisions whereby if the global availability is less than $150 million, or the European availability is below $25 million, the Companys cash collections go first to the agent to satisfy outstanding borrowings. Further, if total
availability falls below $125 million, a fixed charge coverage ratio test is required. Any event of default that is not cured within the permitted period, including non-payment of amounts when due, any debt in excess of $25 million becoming due
before the scheduled maturity date, or the acquisition of more than 40% of the ownership of the Company by any person or group, within the meaning of the Securities and Exchange Act of 1934, could result in a termination of the Facility and all
amounts outstanding becoming immediately due and payable.
The amendment entered into by the Company which is effective
November 5, 2013 (the Amendment) increased the Facility from $1.0 billion to $1.25 billion, allowed for the Merger, recognized OfficeMax debt and assets, expanded amounts permitted for indebtedness, liens, investments and asset
sales and increased restricted payments and capital expenditure limits, among other changes. In addition, an aggregate undrawn amount of $38 million of letters of credit previously issued under a credit agreement of OfficeMax and certain of its
subsidiaries, which credit facility was terminated in connection with and immediately prior to the consummation of the Merger, are deemed as having been issued and being outstanding under the Amended Credit Agreement.
At December 28, 2013, the Company had approximately $1.1 billion of available credit under the Facility based on the December
Borrowing Base certificate. At December 28, 2013, no amounts were outstanding under the Facility. Letters of credit outstanding under the Facility totaled $110 million. There were no borrowings under the Facility during 2013.
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 (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 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
82
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 was capitalized associated with the issuance of the 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 Facility 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 currently active 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 redemption option 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.
In connection with
the sale of the Companys ownership in Office Depot de Mexico, the Company was required to offer to repurchase the $250 million Senior Secured Notes at 100% of par plus accrued and unpaid interest. No Senior Secured Notes were tendered for
repurchase during the offer period.
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 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 stockholders of Office Depot ceasing to constitute a majority of the Office Depot Board of Directors.
83
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Senior Notes
In August 2003, the Company issued $400 million, 6.25% senior notes (Senior Notes) that, because of amortization of a terminated treasury rate lock, had an effective interest rate of
5.86%.
On March 15, 2012, the Company repurchased $250 million aggregate principal amount of its outstanding Senior
Notes under a cash tender offer. The total consideration for each $1,000.00 note surrendered was $1,050.00. 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 million extinguishment loss reported in the Consolidated Statements of Operations for 2012. The cash amounts of the premium paid and tender fees are reflected as financing activities in the Consolidated Statements of Cash Flows. Accrued
interest was paid through the extinguishment date. The remaining $150 million was repaid at par, upon maturity in August 2013.
Other
Long-Term Debt
As a result of the Merger, the Company assumed the liability for the amounts in the table above related to
the (i) 7.35% debentures, due 2016, (ii) Revenue bonds, due in varying amounts periodically through 2029, and (iii) American & Foreign Power Company, Inc. 5% debentures, due 2030.
OfficeMax is the borrower under several conduit tax-exempt bond financings, also referred to as revenue bonds, pursuant to which it is
obligated to provide copies of its Annual Report on Form 10-K as filed with the SEC and the annual report to shareholders, including its annual financial statements, to the bond trustees and to file such financial information disclosure with EMMA,
the electronic information database of the Municipal Securities Rulemaking Board. Following the Merger with Office Depot, OfficeMax is no longer a reporting company and will no longer prepare audited financial statements because its financial
statements are consolidated with those of its parent company, Office Depot. In light of the Merger, the Company determined to issue a guaranty of the bonds. The Company has launched a process to obtain the requisite consents to substitute the Annual
Report and audited consolidated financial statements of Office Depot, as guarantor of the bonds, for those of OfficeMax. Failure to provide the OfficeMax annual financial statements within 120 days of the Companys fiscal 2013 year-end,
along with any applicable cure periods, could give rise to a technical default under the loan agreements in which case bondholders could exercise remedies, including acceleration of amounts due under the bond documents.
In the event that the Company is not able to obtain the requisite consents for one or more series of bonds, the Company has the ability to redeem the bonds at par.
Capital Lease Obligations
Capital lease obligations primarily relate to
buildings and equipment.
Short-Term Borrowings
The Company had short-term borrowings of $3 million at December 28, 2013 under various local currency credit facilities for international subsidiaries that had an effective interest rate at the end
of the year of approximately 6%. The maximum month end amount occurred in November 2013 at approximately $5 million and the maximum monthly average amount occurred in December 2013 at approximately $4 million. The majority of these short-term
borrowings represent outstanding balances on uncommitted lines of credit, which do not contain financial covenants.
Grupo OfficeMax loans
At the end of fiscal year 2013, Grupo OfficeMax, the majority-owned joint-venture in Mexico acquired in connection with
the Merger, had total outstanding borrowings of $7 million. This included amounts outstanding under two 48 month installment notes due in the fourth quarter of 2017 and two short term notes due in the first quarter of 2014. Payments on the
installment loans are made monthly. Recourse on the Grupo OfficeMax loans is limited to Grupo OfficeMax.
84
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Refer to Note 7 for further information on non-recourse debt.
Schedule of Debt Maturities
Aggregate annual maturities of recourse debt and capital lease obligations are as follows:
|
|
|
|
|
(In millions)
|
|
|
|
2014
|
|
$
|
46
|
|
2015
|
|
|
43
|
|
2016
|
|
|
56
|
|
2017
|
|
|
33
|
|
2018
|
|
|
31
|
|
Thereafter
|
|
|
613
|
|
|
|
|
|
|
Total
|
|
|
822
|
|
Less amount representing interest on capital leases
|
|
|
(97
|
)
|
|
|
|
|
|
Total
|
|
|
725
|
|
Less current portion
|
|
|
(29
|
)
|
|
|
|
|
|
Total long-term debt
|
|
$
|
696
|
|
|
|
|
|
|
NOTE 9. INCOME TAXES
The components of income (loss) before income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
United States
|
|
$
|
(230
|
)
|
|
$
|
(129
|
)
|
|
$
|
(4
|
)
|
Foreign
|
|
|
357
|
|
|
|
54
|
|
|
|
37
|
|
|
|
|
|
|
Total income (loss) before income taxes
|
|
$
|
127
|
|
|
$
|
(75
|
)
|
|
$
|
33
|
|
|
|
|
|
|
The income tax expense (benefit) related to income (loss) from operations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
15
|
|
|
$
|
(14
|
)
|
|
$
|
(59
|
)
|
State
|
|
|
5
|
|
|
|
1
|
|
|
|
(4
|
)
|
Foreign
|
|
|
125
|
|
|
|
14
|
|
|
|
15
|
|
Deferred :
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(4
|
)
|
|
|
(5
|
)
|
|
|
|
|
State
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
7
|
|
|
|
6
|
|
|
|
(15
|
)
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
147
|
|
|
$
|
2
|
|
|
$
|
(63
|
)
|
|
|
|
|
|
85
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following is a reconciliation of income taxes at the U.S. Federal statutory rate to
the provision (benefit) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Federal tax computed at the statutory rate
|
|
$
|
44
|
|
|
$
|
(26
|
)
|
|
$
|
11
|
|
State taxes, net of Federal benefit
|
|
|
3
|
|
|
|
1
|
|
|
|
1
|
|
Foreign income taxed at rates other than Federal
|
|
|
(28
|
)
|
|
|
(15
|
)
|
|
|
(22
|
)
|
Increase (decrease) in valuation allowance
|
|
|
8
|
|
|
|
(9
|
)
|
|
|
(8
|
)
|
Non-deductible goodwill impairment
|
|
|
15
|
|
|
|
0
|
|
|
|
0
|
|
Non-deductible Merger expenses
|
|
|
13
|
|
|
|
0
|
|
|
|
0
|
|
Non-deductible foreign interest
|
|
|
8
|
|
|
|
10
|
|
|
|
12
|
|
Change in unrecognized tax benefits
|
|
|
|
|
|
|
1
|
|
|
|
(77
|
)
|
Tax expense from intercompany transactions
|
|
|
2
|
|
|
|
2
|
|
|
|
5
|
|
Subpart F and dividend income, net of foreign tax credits
|
|
|
75
|
|
|
|
|
|
|
|
10
|
|
Change in tax rate
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
Non-taxable return of purchase price
|
|
|
|
|
|
|
(22
|
)
|
|
|
|
|
Deferred taxes on undistributed foreign earnings
|
|
|
5
|
|
|
|
68
|
|
|
|
|
|
Tax accounting method change ruling
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
Other items, net
|
|
|
|
|
|
|
6
|
|
|
|
3
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
147
|
|
|
$
|
2
|
|
|
$
|
(63
|
)
|
|
|
|
|
|
The increase in income tax expense and the effective tax rate from 2012 to 2013 is primarily attributable
to the sale of the Companys investment in Office Depot de Mexico, which is discussed in Note 2. The Company paid $117 million of Mexican income tax upon the sale and incurred additional U.S. income tax expense of $23 million due to
dividend income and Subpart F income in 2013 as a result of the sale, for total income tax expense of $140 million. In addition, the Company incurred charges related to goodwill impairment (discussed in Note 5) and certain Merger expenses that are
not deductible for tax purposes, which increased the effective tax rate for 2013. The 2012 effective tax rate 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 2012 effective tax rate also includes the benefit from the recovery of purchase price that is treated as a purchase price adjustment for tax purposes. As discussed in Note 14, this recovery would have
been a reduction of related goodwill for financial reporting purposes, but the related goodwill was impaired in 2008. The 2011 effective tax rate includes the tax benefit associated with the decrease in unrecognized tax benefits due to the lapse of
statute of limitations and settlements reached with certain taxing authorities.
Upon the sale of Office Depot de Mexico, $5
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 had been recorded in the cumulative translation account, which is a component of accumulated other comprehensive income, due to intraperiod allocations required in 2012 when the Company removed its
indefinite reinvestment assertion with respect to certain foreign earnings accumulated at Office Depot de Mexico.
As a result
of the Company incurring a pre-tax loss in the U.S. and recognizing a current year gain in other comprehensive income attributable to its pension plan assets and benefit obligations, the Company recorded a net deferred tax benefit of $10 million
from the release of valuation allowance.
The significant tax jurisdictions related to the line item foreign income taxed at
rates other than Federal include Mexico, the UK, the Netherlands, Germany, and France.
86
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
No income tax benefit was initially recognized in the Consolidated Statement of
Operations related to stock-based compensation for 2011, 2012, and 2013 due to valuation allowances against the Companys deferred tax assets. However, due to the sale of Office Depot de Mexico in 2013, the Company realized an income tax
benefit of $5 million for the utilization of net operating loss carryforwards that had resulted from excess stock-based compensation deductions for which no benefit was previously recorded. In addition, the Company realized an income tax benefit of
$3 million for excess stock-based compensation deductions resulting from the exercise and vesting of equity awards during 2013. These income tax benefits were recorded as increases to additional paid-in capital in 2013.
The components of deferred income tax assets and liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
December 28,
2013
|
|
|
December 29,
2012
|
|
U.S. and foreign net operating loss carryforwards
|
|
$
|
314
|
|
|
$
|
367
|
|
Deferred rent credit
|
|
|
97
|
|
|
|
95
|
|
Pension and other accrued compensation
|
|
|
170
|
|
|
|
61
|
|
Accruals for facility closings
|
|
|
38
|
|
|
|
21
|
|
Inventory
|
|
|
25
|
|
|
|
14
|
|
Self-insurance accruals
|
|
|
33
|
|
|
|
19
|
|
Deferred revenue
|
|
|
34
|
|
|
|
7
|
|
U.S. and foreign income tax credit carryforwards
|
|
|
234
|
|
|
|
8
|
|
Allowance for bad debts
|
|
|
8
|
|
|
|
3
|
|
Accrued expenses
|
|
|
60
|
|
|
|
24
|
|
Basis difference in fixed assets
|
|
|
15
|
|
|
|
40
|
|
Other items, net
|
|
|
6
|
|
|
|
41
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
1,034
|
|
|
|
700
|
|
Valuation allowance
|
|
|
(683
|
)
|
|
|
(583
|
)
|
|
|
|
|
|
Deferred tax assets
|
|
|
351
|
|
|
|
117
|
|
|
|
|
|
|
Internal software
|
|
|
22
|
|
|
|
3
|
|
Installment gain on sale of timberlands
|
|
|
258
|
|
|
|
|
|
Deferred Subpart F income
|
|
|
23
|
|
|
|
11
|
|
Undistributed foreign earnings
|
|
|
12
|
|
|
|
72
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
315
|
|
|
|
86
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
36
|
|
|
$
|
31
|
|
|
|
|
|
|
For financial reporting purposes, a jurisdictional netting process is applied to deferred tax assets and
deferred tax liabilities, resulting in the balance sheet classification shown below.
|
|
|
|
|
|
|
|
|
(In millions)
|
|
December 28,
2013
|
|
|
December 29,
2012
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Included in Prepaid and other current assets
|
|
$
|
114
|
|
|
$
|
37
|
|
Deferred income taxes noncurrent
|
|
|
35
|
|
|
|
33
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Included in Accrued expenses and other current liabilities
|
|
|
3
|
|
|
|
5
|
|
Included in Deferred income taxes and other long-term liabilities
|
|
|
110
|
|
|
|
34
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
36
|
|
|
$
|
31
|
|
|
|
|
|
|
87
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 28, 2013, the Company has utilized all of its U.S. Federal net
operating loss (NOL) carryforwards as a consequence of the disposition of Office Depot de Mexico. The Company has $858 million of foreign and $1.6 billion of state NOL carryforwards. Of the foreign NOL carryforwards, $666 million can be
carried forward indefinitely, $11 million will expire in 2014, and the remaining balance will expire between 2015 and 2033. Of the state NOL carryforwards, $34 million will expire in 2014, and the remaining balance will expire between 2015 and 2033.
The Company also has $107 million of U.S. Federal alternative minimum tax credit carryforwards, which can be used to reduce future regular federal income tax, if any, over an indefinite period. Additionally, the Company has $114 million of U.S.
Federal foreign tax credit carryforwards, which expire between 2015 and 2023, and $13 million of state and foreign tax credit carryforwards, which expire between 2023 and 2027.
As a result of the Merger, the Company triggered an ownership change as defined in Internal Revenue Code Section 382 and
related provisions. Sections 382 and 383 place a limitation on the amount of taxable income which can be offset by carryforward tax attributes, such as net operating losses or tax credits, after a change in control. Generally, after a change in
control, a loss corporation cannot deduct carryforward tax attributes in excess of the limitation prescribed by Section 382 and 383. Therefore, certain of the Companys carryforward tax attributes may be subject to an annual limitation
regarding their utilization against taxable income in future periods. The Company estimates that at least $15 million of deferred tax assets related to carryforward tax attributes will not be realized because of Section 382 and related
provisions. Accordingly, the Company has reduced the impacted deferred tax assets by this amount, which was fully offset by a corresponding change in the valuation allowance.
U.S. deferred income taxes have not been provided on certain undistributed earnings of foreign subsidiaries, which were approximately $472 million as of December 28, 2013. The determination of the
amount of the related unrecognized deferred tax liability is not practicable because of the complexities associated with the hypothetical calculations. The Company has historically reinvested such earnings overseas in foreign operations indefinitely
and expects that future earnings will also be reinvested overseas indefinitely except as follows. The Company does not consider the earnings of certain foreign subsidiaries acquired as a result of the Merger to be permanently reinvested. The Company
has recorded the associated deferred tax liabilities accordingly.
The following summarizes the activity related to valuation
allowances for deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Beginning balance
|
|
$
|
583
|
|
|
$
|
622
|
|
|
$
|
649
|
|
Additions, charged to expense
|
|
|
26
|
|
|
|
|
|
|
|
|
|
Additions, due to the Merger
|
|
|
84
|
|
|
|
|
|
|
|
|
|
Deductions
|
|
|
(10
|
)
|
|
|
(39
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
Ending balance
|
|
$
|
683
|
|
|
$
|
583
|
|
|
$
|
622
|
|
|
|
|
|
|
The Company has significant deferred tax assets in the U.S. and in foreign jurisdictions against which
valuation allowances have been established to reduce such deferred tax assets to an amount that is more likely than not to be realized. The establishment of valuation allowances requires significant judgment and is impacted by various estimates.
Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. An accumulation of recent pre-tax losses
is considered strong negative evidence in that evaluation. While the Company believes positive evidence exists with regard to the realizability of these deferred tax assets, it is not considered sufficient to outweigh the objectively verifiable
negative evidence, including the cumulative 36-month pre-tax loss history. In 2012, valuation allowances were established in certain foreign jurisdictions because the realizability of the related deferred tax assets was no longer more likely than
not. Valuation allowances in certain other foreign
88
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
jurisdictions were removed in 2011 because sufficient positive evidence existed, resulting in a tax benefit of $10 million. As of 2013, valuation allowances remain in certain foreign
jurisdictions where the Company believes it is necessary to see further positive evidence, such as sustained achievement of cumulative profits, before these valuation allowances can be released. If such positive evidence develops in 2014, the
Company may release all or a portion of the remaining valuation allowances in these jurisdictions as early as the first half of 2014. The Company will continue to assess the realizability of its deferred tax assets.
The following table summarizes the activity related to unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Beginning balance
|
|
$
|
5
|
|
|
$
|
7
|
|
|
$
|
111
|
|
Increase related to current year tax positions
|
|
|
4
|
|
|
|
|
|
|
|
|
|
Increase related to prior year tax positions
|
|
|
|
|
|
|
3
|
|
|
|
471
|
|
Decrease related to prior year tax positions
|
|
|
|
|
|
|
(1
|
)
|
|
|
(40
|
)
|
Decrease related to lapse of statute of limitations
|
|
|
|
|
|
|
|
|
|
|
(60
|
)
|
Decrease related to settlements with taxing authorities
|
|
|
|
|
|
|
(4
|
)
|
|
|
(475
|
)
|
Increase related to the Merger
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
15
|
|
|
$
|
5
|
|
|
$
|
7
|
|
|
|
|
|
|
Included in the balance of $15 million at December 28, 2013, are $9 million of unrecognized tax
benefits that, if recognized, would affect the effective tax rate. The difference of $6 million primarily results from tax positions which if sustained would be offset by carryforward tax attributes and changes in valuation allowance.
The Company recognizes interest related to unrecognized tax benefits in interest expense and penalties in the provision for income taxes.
Accordingly, such amounts are not included in the table above. The Company recognized interest and penalty expense of $1 million and $2 million in 2013 and 2012, respectively. The Company recognized a net interest benefit of $30 million and a net
penalty benefit of $9 million in 2011 due to the lapse of statute of limitations and settlements reached with certain taxing authorities. The Company had approximately $10 million accrued for the payment of interest and penalties as of
December 28, 2013.
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 2010. 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 in 2013. The 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 in 2013, from a previously approved carryback of a tax accounting method change. In 2013, the
Company also received final resolution of the IRS deemed royalty assessment relating to 2011 foreign operations, which resulted in no change to the Companys 2011 U.S. federal income tax return. The U.S. federal income tax return for 2012 is
under concurrent year review. The acquired OfficeMax U.S. consolidated group is no longer subject to U.S. federal and state income tax examinations for years before 2010 and 2006, respectively.
Generally, the Company is subject to routine examination for years 2006 and forward in its international tax 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 unrecognized tax benefits. 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.
89
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 generally effective beginning with the 2014 tax year and may be adopted in earlier years. The Company has decided to early adopt the tax treatment
of certain asset dispositions as of January 1, 2013. The resulting tax impacts have been reflected in the consolidated balance sheet and income statement as of December 28, 2013. The Company will be making additional tax accounting method
changes required by these regulations as of January 1, 2014, but does not expect them to have a material impact on the Companys consolidated financial statements.
NOTE 10. LEASES
The Company leases retail stores and other facilities, vehicles, and equipment under operating lease agreements.
Facility leases typically are for a fixed non-cancellable term with one or more renewal options. In addition to minimum rentals, the Company is required to pay certain executory costs such as real estate taxes, insurance and common area maintenance
on most of the facility leases. Many lease agreements contain tenant improvement allowances, rent holidays, and/or rent escalation clauses. For purposes of recognizing incentives and minimum rental expenses on a straight-line basis over the terms of
the leases, the Company uses the date of initial possession to begin amortization. Certain leases contain provisions for additional rent to be paid if sales exceed a specified amount, though such payments have been immaterial during the years
presented.
Deferred rent liability for tenant improvement allowances and rent holidays are recognized and amortized over the
terms of the related leases as a reduction of rent expense. For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date other than the date of initial occupancy, the Company records minimum rental
expenses on a straight-line basis over the terms of the leases. Rent related accruals totaled approximately $324 million and $263 million at December 28, 2013 and December 29, 2012, respectively. 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 Consolidated Balance Sheets.
Rent expense, including equipment rental, was $458 million, $429 million and $447 million in 2013, 2012, and 2011, respectively. Rent
expense was reduced by sublease income of $4 million in 2013, $5 million in 2012, and $3 million in 2011.
Future minimum
lease payments due under the non-cancelable portions of leases as of December 28, 2013 include facility leases that were accrued as store closure costs and are as follows.
|
|
|
|
|
(In millions)
|
|
|
|
2014
|
|
$
|
726
|
|
2015
|
|
|
600
|
|
2016
|
|
|
470
|
|
2017
|
|
|
341
|
|
2018
|
|
|
194
|
|
Thereafter
|
|
|
547
|
|
|
|
|
|
|
|
|
|
2,878
|
|
Less sublease income
|
|
|
56
|
|
|
|
|
|
|
Total
|
|
$
|
2,822
|
|
|
|
|
|
|
These minimum lease payments do not include contingent rental payments that may be due based on a
percentage of sales in excess of stipulated amounts.
90
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As a result of purchase accounting from the Merger, the Company recorded a $44 million
favorable lease intangible asset relating to store leases with terms below market value and a $54 million unfavorable lease deferred credit for store leases with terms above market value. The favorable leases and unfavorable leases are included in
Other intangible assets and Deferred income taxes and other long-term liabilities in the Consolidated Balance Sheets, respectively. The asset and liability are amortized on a straight-line basis over the lives of the leases. In 2013, the net
amortization of these items reduced rent expense by approximately $1 million. Refer to Note 5 for further details on favorable leases amortization. Unfavorable leases estimated future amortization is as follows:
|
|
|
|
|
(In millions)
|
|
|
|
2014
|
|
$
|
16
|
|
2015
|
|
|
13
|
|
2016
|
|
|
10
|
|
2017
|
|
|
7
|
|
2018
|
|
|
4
|
|
Thereafter
|
|
|
2
|
|
|
|
|
|
|
Total
|
|
$
|
52
|
|
|
|
|
|
|
The Company has capital lease obligations primarily related to buildings and equipment. Refer to Note 8
for further details on amounts due related to capital lease obligations.
NOTE 11. REDEEMABLE PREFERRED STOCK
In 2009, Office Depot issued an aggregate of 350,000 shares of 10.00% Series A Redeemable Convertible Participating
Perpetual Preferred Stock, par value $0.01 per share and 10.00% Series B Redeemable Conditional Convertible Participating Perpetual Preferred Stock, par value $0.01 per share, for $350 million (collectively, the Redeemable Preferred
Stock). The Redeemable Preferred Stock was initially convertible into 70 million shares of Company common stock and classified outside of permanent equity on the Consolidated Balance Sheets because certain redemption conditions were not
solely within the control of Office Depot.
Dividends on the Redeemable Preferred Stock were declared quarterly and paid in
cash or in-kind as approved by the Board of Directors. For accounting purposes, dividends paid-in-kind were measured at fair value. Refer to Note 16 for additional fair value measurement information. Reported dividends calculated on a per share
basis were $221.50, $94.10, and $102.01 for 2013, 2012 and 2011, respectively.
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, in both July and November 2013, the Company redeemed 50 percent of the preferred stock
outstanding. A total of $431 million in cash was paid for the full redemption of the preferred stock in 2013, included the liquidation preference of $407 million and redemption premium of $24 million measured at 6% of the liquidation
preference.
Preferred stock dividends included in the Consolidated Statement of Operations for 2013 were $73 million,
including $28 million of contractual dividends and $45 million related to the redemptions. The $45 million is comprised of a $24 million redemption premium and $21 million representing 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 prior period paid-in-kind dividends recorded for accounting purposes at fair value. The $63 million indicated as Dividends on
redeemable preferred stock on the Consolidated Statement of Cash flows is derived from the $73 million of 2013 dividends per the Consolidated Statement of Operations, reduced by the $21 million non-cash difference between liquidation preference and
carrying value, plus the payment of dividends accrued at the end of 2012.
91
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. STOCKHOLDERS EQUITY
Preferred Stock
As of December 28, 2013, there were 1,000,000 shares of $0.01 par value preferred stock authorized.
Treasury Stock
At December 28, 2013, there were 5,915,268 shares
held in treasury. The Companys Senior Secured Notes and the Facility include restrictions on additional common stock repurchases, based on the Companys liquidity and borrowing availability.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income activity, net of tax, where applicable, is provided in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Foreign
Currency
Translation
Adjustments
(b)
|
|
|
Change in
Deferred
Pension
|
|
|
Change in
Deferred
Cash Flow
Hedge
(c)
|
|
|
Total
|
|
Balance at December 29, 2012
|
|
$
|
217
|
|
|
$
|
(4
|
)
|
|
$
|
|
|
|
$
|
213
|
|
Other comprehensive income (loss) activity before reclassifications
|
|
|
11
|
|
|
|
22
|
|
|
|
2
|
|
|
|
35
|
|
Amounts reclassified from Accumulated other comprehensive income to Net earnings (loss)
(a)
|
|
|
36
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
34
|
|
|
|
|
|
|
Tax impact
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
Net year-to-date other comprehensive income
|
|
|
47
|
|
|
|
12
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
Balance at December 28, 2013
|
|
$
|
264
|
|
|
$
|
8
|
|
|
$
|
|
|
|
$
|
272
|
|
|
|
|
|
|
(a)
|
Amounts in
parentheses indicate an increase to earnings.
|
(b)
|
Includes $3
million gain included in Merger, restructuring and other operating expenses, net and $39 million loss, which is a component of Gain on disposition of joint venture.
|
(c)
|
Included in the
$(2) million are $(1) million recorded in Cost of goods sold and occupancy costs and $(1) million included in Other income (expense), net, respectively.
|
Because of valuation allowances in U.S. and several international taxing jurisdictions, items other than deferred pension amounts generally have little or no tax impact. The component balances are net of
immaterial tax impacts, where applicable.
92
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13. STOCK-BASED COMPENSATION
Long-Term Incentive Plans
During 2007, the Companys Board of Directors adopted, and the shareholders approved, the Office Depot, Inc. 2007 Long-Term Incentive Plan (the Plan). The Plan permits the issuance of
stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based, and other equity-based incentive awards. Employee share-based awards are generally issued in the first quarter of the year.
In addition, the Company assumed the share issuance plan formerly related to OfficeMax employee grants, the 2003 OfficeMax Incentive and
Performance Plan (the 2003 Plan). Eight types of awards may be granted under the 2003 Plan, including stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares, annual
incentive awards and stock bonus awards. Future share awards under this plan will be of Office Depot, Inc. common stock.
As
provided for in the Merger agreements, each option to purchase OfficeMax common stock outstanding immediately prior to the effective time of the Merger was converted into an option to purchase Office Depot common stock, on the same terms and
conditions adjusted by the 2.69 exchange ratio. The fair value of those options was measured using an option pricing model with the following assumptions: risk-free rate 0.42%; expected life 2.34; dividend yield of zero; expected volatility 52.18%
and forfeiture rate of 5%.
Similarly, each previously-existing OfficeMax restricted stock and restricted stock unit
outstanding immediately prior to the effective time of the Merger was converted into an Office Depot restricted stock or restricted stock unit, as appropriate, at the 2.69 exchange ratio. The fair value of these awards was allocated to consideration
and unearned compensation, based on the past and future service conditions. The assumed awards related to the Merger have been identified, as applicable, in the tables that follow.
Stock Options
The Companys stock option exercise price for each
grant of a stock option shall not be less than 100% of the fair market value of a share of common stock on the date the option is granted. Options granted under the Plan and the 2003 Plan have vesting periods ranging from one to five years and from
one to three years after the date of grant, respectively, provided that the individual is continuously employed with the Company. Following the date of grant, all options granted under the Plan and the 2003 Plan expire no more than ten years and
seven years, respectively.
A summary of the activity in the stock option plans for the last three years is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at beginning of year
|
|
|
12,578,071
|
|
|
$
|
5.25
|
|
|
|
19,059,176
|
|
|
$
|
6.90
|
|
|
|
20,021,044
|
|
|
$
|
7.49
|
|
Granted
|
|
|
2,003,000
|
|
|
|
5.24
|
|
|
|
82,000
|
|
|
|
3.22
|
|
|
|
3,680,850
|
|
|
|
4.53
|
|
Assumed Merger
|
|
|
13,142,351
|
|
|
|
3.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(2,072,560
|
)
|
|
|
8.83
|
|
|
|
(4,512,372
|
)
|
|
|
14.51
|
|
|
|
(3,567,513
|
)
|
|
|
9.46
|
|
Exercised
|
|
|
(2,948,328
|
)
|
|
|
1.40
|
|
|
|
(2,050,733
|
)
|
|
|
0.88
|
|
|
|
(1,075,205
|
)
|
|
|
0.86
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
22,702,534
|
|
|
$
|
4.48
|
|
|
|
12,578,071
|
|
|
$
|
5.25
|
|
|
|
19,059,176
|
|
|
$
|
6.90
|
|
|
|
|
|
|
93
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The weighted-average grant date fair values of options granted during 2013, 2012, and
2011 were $3.00, $1.86, and $2.25, respectively, using the following weighted average assumptions for grants:
|
|
|
Risk-free interest rates of 1.69% for 2013, 0.94% for 2012, and 1.97% for 2011
|
|
|
|
Expected lives of six years for 2013 and 4.5 years for 2012 and 2011
|
|
|
|
A dividend yield of zero for all three years
|
|
|
|
Expected volatility ranging from 61% to 69% for 2013, 72% to 74% for 2012, and 67% to 77% for 2011
|
|
|
|
Forfeitures are anticipated at 5% and are adjusted for actual experience over the vesting period
|
The following table summarizes information about options outstanding and exercisable at December 28, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of
Exercise Prices
|
|
Number
Outstanding
|
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
|
|
Weighted
Average
Exercise
Price
|
|
$0.83 $5.12
|
|
|
11,957,410
|
|
|
|
2.85
|
|
|
$
|
2.41
|
|
|
|
8,627,640
|
|
|
|
2.48
|
|
|
$
|
2.45
|
|
5.13 (option exchange)
|
|
|
460,016
|
|
|
|
2.91
|
|
|
|
5.13
|
|
|
|
458,240
|
|
|
|
2.91
|
|
|
|
5.13
|
|
5.14 10.00
|
|
|
9,736,550
|
|
|
|
3.45
|
|
|
|
6.25
|
|
|
|
7,292,093
|
|
|
|
1.64
|
|
|
|
6.57
|
|
10.01 15.00
|
|
|
350,065
|
|
|
|
1.15
|
|
|
|
11.30
|
|
|
|
350,065
|
|
|
|
1.15
|
|
|
|
11.30
|
|
15.01 25.00
|
|
|
25,834
|
|
|
|
0.14
|
|
|
|
17.55
|
|
|
|
25,834
|
|
|
|
0.14
|
|
|
|
17.55
|
|
25.01 33.61
|
|
|
172,659
|
|
|
|
0.43
|
|
|
|
30.44
|
|
|
|
172,659
|
|
|
|
0.43
|
|
|
|
30.44
|
|
|
|
|
|
|
$0.83 $33.61
|
|
|
22,702,534
|
|
|
|
3.06
|
|
|
$
|
4.48
|
|
|
|
16,926,531
|
|
|
|
2.08
|
|
|
$
|
4.79
|
|
|
|
|
|
|
The intrinsic value of options exercised in 2013, 2012 and 2011, was $10 million, $4 million, and $4 million,
respectively. The aggregate intrinsic value of options outstanding and exercisable at December 28, 2013 were $33 million and $24 million, respectively.
As of December 28, 2013, there was approximately $11 million of total stock-based compensation expense that has not yet been recognized relating to non-vested awards granted under option plans. This
expense, net of forfeitures, is expected to be recognized over a weighted-average period of approximately 2.0 years. Of the 5.8 million unvested options, the Company estimates that 4.7 million options will vest. The number of exercisable
options was 16.9 million shares of common stock at December 28, 2013 and 9.5 million shares of common stock at December 29, 2012.
94
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restricted Stock and Restricted Stock Units
Restricted stock grants typically vest annually over a three-year service period.
In 2013, the Company granted 4.5 million shares of restricted stock and restricted stock units to eligible employees. In addition,
0.4 million shares were granted to the Board of Directors as part of their annual compensation and vested within one year from the grant date. A summary of the status of the Companys nonvested shares and changes during 2013, 2012 and 2011
is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
Shares
|
|
|
Weighted
Average
Grant-Date
Price
|
|
|
Shares
|
|
|
Weighted
Average
Grant-Date
Price
|
|
|
Shares
|
|
|
Weighted
Average
Grant-Date
Price
|
|
Outstanding at beginning of year
|
|
|
5,459,900
|
|
|
$
|
3.52
|
|
|
|
2,612,876
|
|
|
$
|
3.96
|
|
|
|
496,059
|
|
|
$
|
10.39
|
|
Granted
|
|
|
4,884,848
|
|
|
|
4.54
|
|
|
|
4,018,253
|
|
|
|
3.26
|
|
|
|
2,890,943
|
|
|
|
3.96
|
|
Assumed Merger
|
|
|
6,426,968
|
|
|
|
3.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(5,788,992
|
)
|
|
|
4.49
|
|
|
|
(695,751
|
)
|
|
|
3.45
|
|
|
|
(594,876
|
)
|
|
|
9.00
|
|
Forfeited
|
|
|
(775,178
|
)
|
|
|
4.01
|
|
|
|
(475,478
|
)
|
|
|
3.79
|
|
|
|
(179,250
|
)
|
|
|
4.97
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
10,207,546
|
|
|
$
|
4.76
|
|
|
|
5,459,900
|
|
|
$
|
3.52
|
|
|
|
2,612,876
|
|
|
$
|
3.96
|
|
|
|
|
|
|
As of December 28, 2013, there was approximately $25 million of total unrecognized compensation cost
related to nonvested restricted stock. This expense, net of forfeitures, is expected to be recognized over a weighted-average period of approximately 2.2 years. Of the 8.3 million unvested shares at year end, the Company estimates that
7.4 million shares will vest. The total grant date fair value of shares vested during 2013 was approximately $26 million.
Performance-Based Incentive Program
The Company has a performance-based long-term incentive program consisting of performance stock units and performance cash. Payouts under this program are based on achievement of certain financial targets
set by the Board of Directors, and are subject to additional service vesting requirements, generally of three years from the grant date.
A
summary of the activity in the performance-based long-term incentive program since inception is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Shares
|
|
|
Weighted
Average
Grant-Date
Price
|
|
|
Shares
|
|
|
Weighted
Average
Grant-Date
Price
|
|
Outstanding at beginning of the period
|
|
|
1,030,753
|
|
|
$
|
3.25
|
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
4,317,314
|
|
|
|
4.55
|
|
|
|
2,073,628
|
|
|
|
3.25
|
|
Vested
|
|
|
(261,095
|
)
|
|
|
3.63
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(2,010,680
|
)
|
|
|
4.15
|
|
|
|
(1,042,875
|
)
|
|
|
3.32
|
|
|
|
|
|
|
Outstanding at end of the period
|
|
|
3,076,292
|
|
|
$
|
4.45
|
|
|
|
1,030,753
|
|
|
$
|
3.25
|
|
|
|
|
|
|
As of December 28, 2013, there was approximately $9 million of total unrecognized compensation
expense related to the performance-based long-term incentive program. This expense, net of forfeitures, is expected to be recognized over a weighted-average period of approximately 2.7 years. Of the 3.1 million unvested shares at year end,
the Company estimates that 3.0 million shares will vest. The total grant date fair value of shares vested during 2013 was approximately $3.9 million.
95
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14. EMPLOYEE BENEFIT PLANS
Pension and Other Postemployment Benefit Plans
Pension and Other Postemployment Benefit Plans North America
In connection with the Merger, the Company assumed the obligations under OfficeMaxs U.S. pension plans (the U.S.
Plans). The Company sponsors these noncontributory defined benefit pension plans covering certain terminated employees, vested employees, retirees and some active employees, primarily in the North American Business Solutions Division. In 2004
or earlier, OfficeMaxs qualified pension plans were closed to new entrants and the benefits of eligible participants were frozen. Under the terms of these qualified plans, the pension benefit for employees was based primarily on the
employees years of service and benefit plan formulas that varied by plan. The Companys general funding policy is to make contributions to the plans in amounts that are within the limits of deductibility under current tax regulations, and
not less than the minimum contribution required by law.
Also in connection with the Merger, the Company assumed
responsibility for sponsoring various retiree medical benefit and life insurance plans including plans related to operations in Canada. The type of retiree benefits and the extent of coverage vary based on employee classification, date of
retirement, location, and other factors. All of these postretirement medical plans are unfunded. The Company explicitly reserves the right to amend or terminate its retiree medical and life insurance plans at any time, subject only to constraints,
if any, imposed by the terms of collective bargaining agreements. Amendment or termination may significantly affect the amount of expense incurred.
The impact of these assumed plans is included in the financial statements from the date of the Merger with OfficeMax.
Obligations and Funded Status
The following table provides a
reconciliation of changes in the projected benefit obligation and the fair value of plan assets from the Merger date through year-end, as well as the funded status of the plan to amounts recognized on the Companys Consolidated Balance
Sheet:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
Changes in projected benefit obligation:
|
|
|
|
|
|
|
|
|
Obligation at beginning of period
|
|
$
|
1,135
|
|
|
$
|
17
|
|
Service cost
|
|
|
|
|
|
|
|
|
Interest cost
|
|
|
7
|
|
|
|
|
|
Actuarial gain
|
|
|
(12
|
)
|
|
|
|
|
Benefits paid
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation at end of period
|
|
$
|
1,122
|
|
|
$
|
17
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
|
$
|
972
|
|
|
$
|
|
|
Actual return on plan assets
|
|
|
22
|
|
|
|
|
|
Benefits paid
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of period
|
|
|
986
|
|
|
|
|
|
|
|
|
|
|
Net liability recognized at end of period
|
|
$
|
(136
|
)
|
|
$
|
(17
|
)
|
|
|
|
|
|
96
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table shows the amounts recognized in the Consolidated Balance Sheets
related to the Companys North America defined benefit pension and other postretirement benefit plans as of year-end:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
Noncurrent assets
|
|
$
|
10
|
|
|
$
|
|
|
Current liabilities
|
|
|
(3
|
)
|
|
|
(1
|
)
|
Noncurrent liabilities
|
|
|
(143
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(136
|
)
|
|
$
|
(17
|
)
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive gain consist of:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
Net gain
|
|
$
|
(26
|
)
|
|
$
|
|
|
Prior service cost (credit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(26
|
)
|
|
$
|
|
|
|
|
|
|
|
Information for pension plans with an accumulated benefit obligation in excess of plan assets is as
follows:
|
|
|
|
|
(In millions)
|
|
2013
|
|
Projected benefit obligation
|
|
$
|
(785)
|
|
Accumulated benefit obligation
|
|
|
(785
|
)
|
Fair value of plan assets
|
|
|
639
|
|
Components of Net Periodic Benefit
The components of net periodic benefit are as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
Interest cost
|
|
|
7
|
|
|
|
|
|
Expected return on plan assets
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
Net periodic benefit
|
|
$
|
(1
|
)
|
|
$
|
|
|
|
|
|
|
|
Other changes in plan assets and benefit obligations recognized in other comprehensive income are as
follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
Accumulated other comprehensive gain at beginning of the period
|
|
$
|
|
|
|
$
|
|
|
Net gain
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive gain at end of the period
|
|
$
|
(26
|
)
|
|
$
|
|
|
|
|
|
|
|
For the defined benefit pension plans, no accumulated other comprehensive gain is expected to be
amortized into income during 2014.
97
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Assumptions
The assumptions used in accounting for the Companys plans are estimates of factors including, among other things, the amount and timing of future benefit payments. The following table presents the
key weighted average assumptions used in the measurement of the Companys benefit obligations as of year-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Benefits
|
|
|
|
Pension
Benefits
|
|
|
United
States
|
|
|
Canada
|
|
Discount rate
|
|
|
4.84
|
%
|
|
|
4.00
|
%
|
|
|
4.80
|
%
|
The following table presents the weighted average assumptions used in the measurement of net periodic
benefit for the period from Merger date through year-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Benefits
|
|
|
|
Pension
Benefits
|
|
|
United
States
|
|
|
Canada
|
|
Discount rate
|
|
|
4.76
|
%
|
|
|
3.80
|
%
|
|
|
4.60
|
%
|
Expected long-term rate of return on plan assets
|
|
|
6.60
|
%
|
|
|
|
%
|
|
|
|
%
|
The assumed discount rate (which is required to be the rate at which the projected benefit obligation
could be effectively settled as of the measurement date) is based on the rates of return for a theoretical portfolio of high-grade corporate bonds (rated AA or better) with cash flows that generally match expected benefit payments in future years.
In selecting bonds for this theoretical portfolio, the Company focuses on bonds that match cash flows to benefit payments and limit the concentration of bonds by issuer. To the extent scheduled bond proceeds exceed the estimated benefit payments in
a given period, the yield calculation assumes those excess proceeds are reinvested at an assumed forward rate. The implied forward rate used in the bond model is based on the Citigroup Pension Discount Curve as of the last day of the year.
The expected long-term rate of return on plan assets assumption is based on the weighted average of expected returns for the
major asset classes in which the plans assets are held. Asset-class expected returns are based on long-term historical returns, inflation expectations, forecasted gross domestic product and earnings growth, as well as other economic factors.
The weights assigned to each asset class are based on the Companys investment strategy. The weighted average expected return on plan assets used in the calculation of net periodic pension cost for 2014 is 6.5%.
Obligation and costs related to the Canadian retiree health plan are impacted by changes in trend rates.
The following table presents the assumed healthcare cost trend rates used in measuring the Companys postretirement benefit
obligations at year-end:
|
|
|
|
|
|
|
2013
|
|
Weighted average assumptions as of year-end:
|
|
|
|
|
Healthcare cost trend rate assumed for next year
|
|
|
6.70
|
%
|
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
|
|
|
4.50
|
%
|
Year that the rate reaches the ultimate trend rate
|
|
|
2022
|
|
A 1% change in the assumed healthcare cost trend rates would impact operating income by less than $1
million.
98
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Plan Assets
The allocation of pension plan assets by category at year-end is as follows:
|
|
|
|
|
|
|
2013
|
|
Money market funds
|
|
|
3
|
%
|
Equity securities
|
|
|
8
|
%
|
Fixed-income securities
|
|
|
53
|
%
|
Equity mutual funds
|
|
|
36
|
%
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
A retirement funds investment committee is responsible for establishing and overseeing the implementation
of the investment policy for the Companys pension plans. The investment policy is structured to optimize growth of the pension plan trust assets, while minimizing the risk of significant losses, in order to enable the plans to satisfy their
benefit payment obligations over time. The Company uses benefit payments and Company contributions as its primary rebalancing mechanisms to maintain the asset class exposures within the guideline ranges established under the investment policy.
The current asset allocation guidelines set forth an U.S. equity range of 17% to 27%, an international equity range of 5% to
15%, a global equity range of 3% to 13% and a fixed-income range of 55% to 65%. Asset-class positions within the ranges are continually evaluated and adjusted based on expectations for future returns, the funded position of the plans and market
risks. Occasionally, the Company may utilize futures or other financial instruments to alter the pension trusts exposure to various asset classes in a lower-cost manner than trading securities in the underlying portfolios.
Generally, quoted market prices are used to value pension plan assets. Equities, some fixed-income securities, publicly traded investment
funds, and U.S. government obligations are valued by reference to published market prices. Investments in certain restricted stocks are valued at the quoted market price of the issuers unrestricted common stock less an appropriate discount. If
a quoted market price for unrestricted common stock of the issuer is not available, restricted common stocks are valued at a multiple of current earnings less an appropriate discount. The multiple chosen is consistent with multiples of similar
companies based on current market prices.
99
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the pension plan assets by level within the fair value
hierarchy at year-end.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
Fair Value Measurements
at December 28, 2013
|
|
Asset Category
|
|
Total
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Money market funds
|
|
$
|
25
|
|
|
$
|
25
|
|
|
$
|
|
|
|
$
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. large-cap
|
|
|
18
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
U.S. small and mid-cap
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
International
|
|
|
56
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
78
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
459
|
|
|
|
|
|
|
|
459
|
|
|
|
|
|
Government securities
|
|
|
18
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
Other fixed-income
|
|
|
41
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
Total fixed-income securities
|
|
|
518
|
|
|
|
|
|
|
|
518
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity mutual funds
|
|
|
353
|
|
|
|
|
|
|
|
353
|
|
|
|
|
|
Other, including plan receivables and payables
|
|
|
12
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
986
|
|
|
$
|
115
|
|
|
$
|
871
|
|
|
$
|
|
|
|
|
|
|
|
Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the
accrual basis. Dividends are recorded on the ex-dividend date.
Cash Flows
Pension plan contributions include required statutory minimum amounts and, in some years, additional discretionary amounts. Since the
effective date of the Merger, the Company contributed $483 thousand to these pension plans, which was the remaining 2013 minimum funding requirement. Pension contributions for a full year of 2014 are estimated to be $50 million. The Company may
elect at any time to make additional voluntary contributions.
Qualified pension benefit payments are paid from the assets
held in the plan trust, while nonqualified pension and other benefit payments are paid by the Company. Anticipated benefit payments by year are as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
2014
|
|
$
|
95
|
|
|
$
|
1
|
|
2015
|
|
|
93
|
|
|
|
1
|
|
2016
|
|
|
91
|
|
|
|
1
|
|
2017
|
|
|
88
|
|
|
|
1
|
|
2018
|
|
|
86
|
|
|
|
1
|
|
Next five years
|
|
$
|
398
|
|
|
$
|
5
|
|
100
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pension Plan Europe
The Company has a defined benefit pension plan which is associated with a 2003 European acquisition and covers a limited number of
employees in Europe. During 2008, curtailment of that plan was approved by the trustees and future service benefits ceased for the remaining employees.
The sale and purchase agreement (SPA) associated with the 2003 European acquisition included a provision whereby the seller was required to pay an amount to the Company if the 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 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 38 million (approximately $58 million at then-current exchange rates) to the pension plan, resulting
in the plan changing to a net asset position at December 29, 2012. There are no additional funding requirements while the plan is in a surplus position.
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 Consolidated Statements of Operations for 2012, totaling $68 million. An additional expense of $5 million of costs incurred in prior periods related to this
arrangement is included in Merger, restructuring and other operating expenses, net, resulting in a net increase in operating profit for 2012 of $63 million. Similar to the presentation of goodwill impairment in 2008, this recovery and related charge
is reported at the corporate level, not 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 Consolidated Statements of Operations and the Consolidated Statements of Cash Flows for 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.
101
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Obligations and Funded Status
The following table provides a reconciliation of changes in the projected benefit obligation, the fair value of plan assets and the
funded status of the plan to amounts recognized on the Companys Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
(In millions)
|
|
December 28, 2013
|
|
|
December 29, 2012
|
|
Changes in projected benefit obligation:
|
|
|
|
|
|
|
|
|
Obligation at beginning of period
|
|
$
|
208
|
|
|
$
|
182
|
|
Service cost
|
|
|
|
|
|
|
|
|
Interest cost
|
|
|
9
|
|
|
|
9
|
|
Benefits paid
|
|
|
(4
|
)
|
|
|
(5
|
)
|
Actuarial loss
|
|
|
6
|
|
|
|
14
|
|
Currency translation
|
|
|
5
|
|
|
|
8
|
|
|
|
|
|
|
Obligation at end of period
|
|
|
224
|
|
|
|
208
|
|
|
|
|
Changes in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
|
|
216
|
|
|
|
133
|
|
Actual return on plan assets
|
|
|
14
|
|
|
|
22
|
|
Company contributions
|
|
|
|
|
|
|
59
|
|
Benefits paid
|
|
|
(4
|
)
|
|
|
(5
|
)
|
Currency translation
|
|
|
6
|
|
|
|
7
|
|
|
|
|
|
|
Fair value of plan assets at end of period
|
|
|
232
|
|
|
|
216
|
|
|
|
|
|
|
Net asset recognized at end of period
|
|
$
|
8
|
|
|
$
|
8
|
|
|
|
|
|
|
In the Consolidated Balance Sheets, the net funded amounts are classified as a non-current asset in the
caption Other assets.
Components of Net Periodic Cost (Benefit)
The components of net periodic cost (benefit) are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Interest cost
|
|
|
9
|
|
|
|
9
|
|
|
|
10
|
|
Expected return on plan assets
|
|
|
(13
|
)
|
|
|
(11
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
Net periodic pension cost (benefit)
|
|
$
|
(4
|
)
|
|
$
|
(2
|
)
|
|
$
|
1
|
|
|
|
|
|
|
Included in AOCI were deferred losses of $8 million and $4 million at December 28, 2013 and
December 29, 2012, respectively. The deferred loss is not expected to be amortized into income during 2014.
Assumptions
Assumptions used in calculating the funded status included:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Expected long-term rate of return on plan assets
|
|
|
6.33
|
%
|
|
|
6.00
|
%
|
|
|
6.00%
|
|
Discount rate
|
|
|
4.60
|
%
|
|
|
4.40
|
%
|
|
|
4.70%
|
|
Salary increases
|
|
|
|
|
|
|
|
|
|
|
|
|
Inflation
|
|
|
3.40
|
%
|
|
|
3.00
|
%
|
|
|
3.00%
|
|
102
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The long-term rate of return on assets assumption has been derived based on long-term UK
government fixed income yields, having regard to the proportion of assets in each asset class. The funds invested in equities have been assumed to return 4.0% above the return on UK government securities of appropriate duration. Funds invested in
corporate bonds are assumed to return equal to a 15 year AA bond index. Allowance is made for expenses of 0.5% of assets.
Plan Assets
The allocation of Plan assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Cash
|
|
|
1
|
%
|
|
|
|
|
Equity securities
|
|
|
54
|
%
|
|
|
64%
|
|
Fixed-income securities
|
|
|
45
|
%
|
|
|
36%
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100%
|
|
|
|
|
|
|
A committee, comprised of representatives of the Company and of this plan, is responsible for
establishing and overseeing the implementation of the investment policy for this plan. The plans investment policy and strategy are to ensure assets are available to meet the obligations to the beneficiaries and to adjust plan contributions
accordingly. The plan trustees are also committed to reducing the level of risk in the plan over the long term, while retaining a return above that of the growth of liabilities. The investment strategy is based on plan funding levels, which
determine the asset target allocation into matching or growth investments. Matching investments are intended to provide a return similar to the increase in the plan liabilities. Growth investments are assets intended to provide a return in excess of
the increase in liabilities. At December 28, 2013, the asset target allocation was in accordance with the investment strategy. Asset-class allocations within the ranges are continually evaluated and adjusted based on expectations for future
returns, the funded position of the plan and market risks.
The fair value of plan assets by asset category is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
Fair Value Measurements
at December 28, 2013
|
|
Asset Category
|
|
Total
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed market equity funds
|
|
|
77
|
|
|
|
69
|
|
|
|
8
|
|
|
|
|
|
Emerging market equity funds
|
|
|
16
|
|
|
|
14
|
|
|
|
2
|
|
|
|
|
|
Mutual funds real estate
|
|
|
8
|
|
|
|
|
|
|
|
1
|
|
|
|
7
|
|
Mutual funds
|
|
|
22
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
123
|
|
|
|
83
|
|
|
|
33
|
|
|
|
7
|
|
|
|
|
|
|
Fixed-income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UK debt funds
|
|
|
19
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
Liability term matching debt funds
|
|
|
73
|
|
|
|
|
|
|
|
73
|
|
|
|
|
|
Emerging market debt fund
|
|
|
9
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
High yield debt
|
|
|
7
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Total fixed-income securities
|
|
|
108
|
|
|
|
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
232
|
|
|
$
|
84
|
|
|
$
|
141
|
|
|
$
|
7
|
|
|
|
|
|
|
103
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
Fair Value Measurements
at December 29, 2012
|
|
Asset Category
|
|
Total
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed market equity funds
|
|
$
|
72
|
|
|
$
|
72
|
|
|
$
|
|
|
|
$
|
|
|
Emerging market equity funds
|
|
|
67
|
|
|
|
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
139
|
|
|
|
72
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UK debt funds
|
|
|
12
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
Liability term matching debt funds
|
|
|
65
|
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
77
|
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
216
|
|
|
$
|
72
|
|
|
$
|
144
|
|
|
$
|
|
|
|
|
|
|
|
The following is a reconciliation of the change in fair value of the pension plan assets calculated based
on Level 3 inputs; there were no transfers out of assets valued based on Level 3 inputs:
|
|
|
|
|
(In millions)
|
|
Total
|
|
Balance at December 29, 2012
|
|
$
|
|
|
Purchases, sales, and settlements
|
|
|
7
|
|
|
|
|
|
|
Balance at December 28, 2013
|
|
$
|
7
|
|
|
|
|
|
|
Cash Flows
Anticipated benefit payments for the European pension plan, at December 28, 2013 exchange rates, are as follows:
|
|
|
|
|
(In millions)
|
|
Benefit
Payments
|
|
2014
|
|
$
|
5
|
|
2015
|
|
|
5
|
|
2016
|
|
|
5
|
|
2017
|
|
|
5
|
|
2018
|
|
|
5
|
|
Next five years
|
|
$
|
28
|
|
Retirement Savings Plans
The Company also sponsors defined contribution plans for most of its employees. Eligible Company employees may participate in the Office Depot, Inc. Retirement Savings Plan. In connection with the Merger,
certain employees still participate in one of two contributory defined contribution savings plans that OfficeMax had in place for most of its salaried and hourly employees: a plan for U.S. employees and a plan for Puerto Rico employees. All of the
Companys existing and assumed OfficeMax defined contribution plans (the 401(k) Plans) allow eligible employees to contribute a percentage of their salary, commissions and bonuses in accordance with plan limitations and provisions
of Section 401(k) of the Internal Revenue Code and the
104
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Company makes matching contributions to each plan subject to the limits of the respective 401(k) Plans. Matching contributions are invested in the same manner as the participants pre-tax
contributions. The 401(k) Plans also allow for a discretionary matching contribution in addition to the normal match contributions if approved by the Board of Directors.
Office Depot also sponsors the Office Depot, Inc. Non-Qualified Deferred Compensation Plan that, until December 2009, permitted eligible highly compensated employees, who were limited in the amount they
could contribute to the 401(k) Plan, to alternatively defer a portion of their salary, commissions and bonuses up to maximums and under restrictive conditions specified in this plan and to participate in Company matching provisions. The matching
contributions to the deferred compensation plan were allocated to hypothetical investment alternatives selected by the participants. The compensation and benefits committee of the Board of Directors amended the plan to eliminate the predetermined
matching contributions effective with the first payroll period beginning in 2009. In October 2009, the plan was amended to no longer accept new deferrals.
In connection with the Merger, the Company assumed responsibility for sponsoring the Executive Savings Deferral Plan (ESDP). The ESDP permits the eligible individuals who were limited in the
amount they could contribute to the 401(k) Plan to defer a percentage of their salary and short-term incentive award and participate in Company matching contributions, pursuant to Section 409A of the Internal Revenue Code and limitations
described in the ESDP. Contributions are allocated to various investment funds as determined by participants.
During 2013,
2012, and 2011, $9 million, $7 million, and $7 million, respectively, were recorded as compensation expense for the Companys contributions to these programs and certain international retirement savings plans. Additionally, nonparticipating
annuity premiums were paid for benefits in certain European countries totaling $4 million, $5 million, and $5 million in 2013, 2012, and 2011, respectively.
NOTE 15. EARNINGS PER SHARE
The following table presents the calculation of net earnings (loss) per common share basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts)
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Basic Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(93
|
)
|
|
$
|
(110
|
)
|
|
$
|
60
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
|
318
|
|
|
|
280
|
|
|
|
278
|
|
Basic earnings (loss) per share
|
|
$
|
(0.29
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
0.22
|
|
Diluted Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(20
|
)
|
|
$
|
(77
|
)
|
|
$
|
96
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
|
318
|
|
|
|
280
|
|
|
|
278
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock
|
|
|
7
|
|
|
|
5
|
|
|
|
5
|
|
Redeemable preferred stock
|
|
|
56
|
|
|
|
78
|
|
|
|
74
|
|
|
|
|
|
|
Diluted weighted-average shares outstanding
|
|
|
381
|
|
|
|
363
|
|
|
|
357
|
|
Diluted earnings (loss) per share
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
The weighted average share calculation for 2013 includes the 239 million shares issued related to
the Merger from closing date to December 28, 2013.
105
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Awards of options and nonvested shares representing an additional 6 million,
15 million and 14 million shares of common stock were outstanding for the years ended December 28, 2013, December 29, 2012, and December 31, 2011, respectively, but were not included in the computation of diluted
weighted-average shares outstanding because their effect would have been antidilutive. For the three years presented, no tax benefits have been assumed in the weighted average share calculation in jurisdictions with valuation allowances. The diluted
share amounts for 2013, 2012 and 2011 are provided for informational purposes, as the level of income (loss) for the periods causes basic earnings per share to be the most dilutive.
Shares of the redeemable preferred stock were fully redeemed in 2013. Following the July 2013 shareholder approval of the transactions
contemplated by the Merger Agreement, 50 percent of the outstanding preferred stock was redeemed and the remaining 50 percent was redeemed in November 2013 in connection with the Merger closing. In periods in which the redeemable preferred stock
were outstanding, basic earnings (loss) per share (EPS) was computed after consideration of preferred stock dividends. The redeemable preferred stock had equal dividend participation rights with common stock that required 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 first quarter of 2012 and third quarter of 2013, but was not applicable to the full year 2012 or full year 2013 because it would have been antidilutive. The preferred stockholders were not required to fund losses. Refer to Note 11 for further
redemption details.
NOTE 16. DERIVATIVE INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Derivative Instruments and Hedging Activities
As a global supplier of office products and services the Company is exposed to risks associated with changes in foreign currency exchange rates, fuel and other commodity prices and interest rates.
Depending on the exposure, settlement timeframe and other factors, the Company may enter into derivative transactions to mitigate those risks. The Company may designate and account for such qualifying arrangements as hedges. Historically, the
Company has not entered into transactions to hedge its net investment in foreign operations but may in future periods.
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
December 28, 2013 or December 29, 2012. The existing designated hedge contracts are highly effective and the ineffective portion is considered immaterial. As of December 28, 2013, the foreign exchange contracts extend through February
2014. Losses currently deferred in OCI are expected to be recognized in income within the next twelve months.
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.
106
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financial Instruments
The following table presents information about financial instruments at the balance sheet dates indicated. The Senior Notes matured in 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
(In millions)
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timber notes receivables
|
|
$
|
945
|
|
|
$
|
933
|
|
|
$
|
|
|
|
$
|
|
|
Boise investment
|
|
$
|
46
|
|
|
$
|
47
|
|
|
$
|
|
|
|
$
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recourse debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.25% Senior Notes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
150
|
|
|
$
|
154
|
|
9.75% Senior Secured Notes
|
|
|
250
|
|
|
|
290
|
|
|
|
250
|
|
|
|
266
|
|
7.35% debentures, due 2016
|
|
|
18
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
Revenue bonds, due in varying amounts periodically through 2029
|
|
|
186
|
|
|
|
186
|
|
|
|
|
|
|
|
|
|
American & Foreign Power Company, Inc. 5% debentures, due 2030
|
|
|
13
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
Non-recourse debt
|
|
$
|
859
|
|
|
$
|
851
|
|
|
$
|
|
|
|
$
|
|
|
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 inputs).
|
|
|
|
Boise Investment:
Fair value is calculated as the sum of the market value of the Companys indirect investment in Boise Cascade Company,
the primary investment of Boise Cascade Holdings, LLC, plus the Companys portion of any cash held by Boise Cascade Holdings, LLC as of the balance sheet date (together, Level 2 inputs). The Companys indirect investment in Boise Cascade
Company is calculated using the number of shares the Company indirectly holds in Boise Cascade Company multiplied by its closing stock price as of the last trading day prior to the balance sheet date.
|
|
|
|
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 inputs).
|
|
|
|
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 inputs).
|
107
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Value Estimates Used in Impairment Analyses
Retail Stores
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 $26 million, $124 million and $11 million in 2013, 2012 and 2011, respectively.
A review of the North American Retail portfolio during 2012 concluded with a plan for each location to maintain its current configuration, downsize to either small or mid-size format, relocate, remodel,
renew or close at the end of the base lease term. The asset impairment analysis previously had assumed at least one optional lease renewal. Additionally, projected sales trends included in the impairment calculation model in prior periods were
reduced. These changes, and continued store performance, served as a basis for the Companys asset impairment review for 2012.
In February 2013, the Company announced its intent to merge with OfficeMax. The prospect of combining the two companies impacted the pace of implementing the plan developed in 2012, but did not alter the
overall view that future size and locations were likely to be modified. The store impairment analysis for 2013 continued to project sales declines for several years, then stabilizing. Currently the analysis assumes a sales decline next year similar
to recent experience, with negative but improving trends for later years. Gross margin assumptions have been held constant at current actual levels and operating costs have been assumed to be consistent with recent actual results and planned
activities. For the 2013 impairment analysis, 53 locations were reduced to estimated fair value of $10 million based on their projected cash flows, discounted at 13% and 222 locations were reduced to estimated salvage value of $7 million. A 100
basis point decrease in next year sales used in these estimates would have increased impairment by approximately $2 million. Independent of the sensitivity on sales assumptions, a 50 basis point decrease in next year gross margin would have
increased the impairment by approximately $1 million. The interrelationship of having both of those inputs change as indicated would have resulted in impairment approximately equal to the sum of the two individual inputs. Further, a 100 basis point
decrease in sales for all future periods would increase the impairment by approximately $4 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 2013, the impairment analysis reflects the Companys best estimate of future performance.
Intangible Assets
Indefinite-lived intangible assets
As
noted in prior years, Goodwill of $45 million (at then-current exchange rates) was included in the International Division in a reporting unit comprised of wholly-owned operating subsidiaries in Europe and ownership of the joint venture operating in
Mexico. The total estimated fair value of the reporting unit exceeded its carrying value by approximately 30%, however, a substantial majority of that excess value was associated with the joint venture. When the reporting unit sold its investment in
the joint
108
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
venture and distributed essentially all of the after tax proceeds to its U.S. parent, the fair value fell below its carrying value. Because the investment was accounted for under the equity
method, no goodwill was allocated to the gain on disposition of joint venture calculation. However, concurrent with the sale and gain recognition, a goodwill impairment charge of $44 million was recognized and is reported on the Asset impairments
line in the Consolidated Statements of Operations. The assessment of fair value of the operating subsidiaries was primarily based on a discounted cash flow analysis, including an estimated residual value. The analysis is prepared by the
Companys finance and accounting personnel that organizationally report to the Chief Financial Officer. The cash flows were projected to decrease, level and then trend positive, with an ending year growth rate of 1.5%. These amounts were
discounted at 13%. Market data was used to corroborate this estimated value.
Goodwill associated with the Merger was
established based on the preliminary allocation of consideration to the fair value of assets acquired and liabilities assumed at the transaction date of November 5, 2013. The purchase price allocation is not yet complete and the goodwill has
not yet been allocated to the reporting units. The Company expects to adopt an annual testing period of the first day of the third quarter for this Merger-related goodwill. Nothing has come to the Companys attention since the acquisition date
that would cause the Company to test at an earlier period.
The estimated value of the indefinite lived tradename included in
the International Division was based on an estimated royalty rate of 0.5% applied to projected sales and discounted at 13%. No indication of impairment was identified. As the Company assesses its global brand strategy during 2014 in connection with
integration of the Merger, the appropriateness of indefinite life for this tradename may change.
Definite-lived intangible
assets
During 2011, the Company acquired an office supply company in Sweden to supplement the existing business in that market. As a result of slowing economic conditions in Sweden after the acquisition, difficulties in the consolidation
of multiple distribution centers and the adoption of new warehousing systems which impacted customer service and delayed or undermined planned marketing activities, the Company re-evaluated remaining balances of acquisition-related intangible assets
of customer relationships and short-lived tradename values. The acquisition-date intangible asset valuation anticipated customer attrition of approximately 11% to 13% per year through 2013. The cash flow analysis consistent with the original
valuation of the definite-lived intangible assets was updated by accounting and finance department personnel to reflect the decline experienced in 2012, as well as projected sales declines of 8% for acquisition-date retail customer
relationships and 2% for acquisition-date contract relationships in 2013 and costs necessary to successfully complete the warehouse integration and re-launch the marketing initiatives. Cash flows related to these acquired customer relationships with
the updated Level 3 inputs were projected to be negative, then recovering, but were insufficient to recover the intangible assets remaining carrying values. Accordingly, an impairment charge of approximately $14 million was recognized during
the third quarter of 2012 and is presented in Asset impairments in the Consolidated Statements of Operations.
Fair Value Estimates Used
for Paid-in-Kind Dividends
Prior to redemption of the Companys Redeemable Preferred Stock in 2013, any dividends
paid-in-kind were measured at fair value, using Level 3 inputs. The Company used a binomial simulation to capture the call, conversion, and interest rate reset features as well the optionality of paying the dividend in-kind or in cash. Dividends
were paid in kind for the fourth quarter of 2011 and the first three quarters of 2012.
For the 2011 dividends paid-in-kind,
the simulation was based on stock price volatility of 70%, a risk free rate of 1.49%, and a risk adjusted rate of 14.6%. The fair value calculation of $7.7 million was approximately $1.6 million below the amount added to the liquidation
preference. For dividends paid-in-kind for the three quarters of 2012, the average stock price volatility was 63%, the risk free rate was 3.0% and the risk adjusted rate was
109
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14.5%. The aggregate fair value calculated for these three quarters was $22.8 million, $6.3 million below the amount added to the liquidation preference. For the dividend paid-in-kind 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 $1.7 million or increased the estimate by $1.1 million, respectively. Assuming that 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 had
no significant impact. See Note 11for additional information.
There were no significant differences between the carrying
values and fair values of the Companys financial instruments as of December 28, 2013 and December 29, 2012, except as disclosed above.
NOTE 17. COMMITMENTS AND CONTINGENCIES
Commitments
On June 25, 2011, OfficeMax, with which the Company merged in November 2013, entered into a paper supply contract with Boise White Paper, L.L.C. (Boise Paper), under which OfficeMax
agreed to purchase office papers from Boise Paper, and Boise Paper has agreed to supply office papers to OfficeMax, subject to the terms and conditions of the paper supply contract. The paper supply contract replaced the previous supply contract
executed in 2004 with Boise Paper. The Company assumed the commitment under a paper supply contract to buy OfficeMaxs North American requirements for office paper, subject to certain conditions. The paper supply contract provides the Company
some flexibility to purchase paper from paper producers other than Boise Paper. The paper supply contracts term will expire on December 31, 2017, followed by a gradual reduction of the Companys purchase requirements over a two year
period thereafter. However, if certain circumstances occur, the agreement may be terminated earlier. If terminated, it will be followed by a gradual reduction of the Companys purchase requirements over a two year period. Purchases under the
agreement were $87 million since the Merger date.
In accordance with an amended and restated joint venture agreement, the
minority owner of Grupo OfficeMax, the Companys joint-venture in Mexico acquired through the Merger in 2013, can elect to require the Company to purchase the minority owners 49% interest in the joint venture if certain earnings targets
are achieved. Earnings targets are calculated quarterly on a rolling four-quarter basis. Accordingly, the targets may be achieved in one quarter but not in the next. If the earnings targets are achieved and the minority owner elects to require the
Company to purchase the minority owners interest, the purchase price is based on the joint ventures earnings and the current market multiples of similar companies. At the end of 2013, Grupo OfficeMax has not met the earnings targets and
the noncontrolling interest is recorded at its carrying value, which represents the fair value paid at the Merger date, adjusted for the losses of Grupo OfficeMax since the Merger date.
Indemnifications
Indemnification obligations may arise from the Asset
Purchase Agreement between OfficeMax Incorporated, OfficeMax Southern Company, Minidoka Paper Company, Forest Products Holdings, L.L.C. and Boise Land & Timber Corp. The Company has agreed to provide indemnification with respect to a
variety of obligations. These indemnification obligations are subject, in some cases, to survival periods, deductibles and caps. At December 28, 2013, the Company is not aware of any material liabilities arising from these indemnifications.
110
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 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 Superior Court of the State of California for
the County of Los Angeles after a remand order entered by the judge on January 29, 2014 in the United States District Court for the Central District of California. The Company believes 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, the Company is unable to reasonably determine the full effect of the potential
liability in the matter. Office Depot intends to vigorously defend itself in this lawsuit. Additionally, during the first quarter of 2011, the Company was notified that the United States Department of Justice (DOJ) commenced an
investigation into certain pricing practices related to the Purchasing Agreement. The Company has 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 (Court) 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. A Stipulation of Settlement was entered into on November 6, 2013, and filed with the Court on November 7, 2013. The Court
granted preliminary approval of the settlement on November 11, 2013, and final settlement approval was entered by the Court on January 21, 2014. The amount paid in this settlement was not material to the Companys financial
statements.
111
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In addition to the foregoing, Heitzenrater v. OfficeMax North America, Inc., et al. was
filed in the United States District Court for the Western District of New York in September 2012 as a putative class action alleging violations of the Fair Labor Standards Act and New York Labor Law. The complaint alleges that OfficeMax
misclassified its assistant store managers as exempt employees. The Company believes that adequate provisions have been made for probable losses and such amounts are not material. However, in light of the early stage of the case and the inherent
uncertainty of litigation, the Company is unable to reasonably determine the full effect of the potential liability in the matter. OfficeMax intends to vigorously defend itself in this lawsuit. Further, Kyle Rivet v. Office Depot, Inc., is pending
in the United States District Court for the District of New Jersey. The complaint similarly alleges that Office Depot misclassified its assistant store managers as exempt employees. The Company believes in this case as well that adequate provisions
have been made for probable losses and such amounts are not material. However, in light of the early stage of the case and the inherent uncertainty of litigation, the Company is unable to reasonably determine the full effect of the potential
liability in these matters. Office Depot intends to vigorously defend itself in these lawsuits.
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 does not believe any of these OfficeMax retained proceedings are material to the Companys business.
NOTE 18. SUPPLEMENTAL INFORMATION ON OPERATING, INVESTING AND FINANCING ACTIVITIES
Additional supplemental information related to the Consolidated Statements of Cash Flows is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Cash interest paid, net of amounts capitalized
|
|
$
|
65
|
|
|
$
|
57
|
|
|
$
|
55
|
|
Cash taxes paid (refunded)
|
|
|
139
|
|
|
|
10
|
|
|
|
(3
|
)
|
Non-cash asset additions under capital leases
|
|
|
10
|
|
|
|
9
|
|
|
|
10
|
|
Non-cash paid-in-kind dividends (refer to Note 11)
|
|
|
|
|
|
|
23
|
|
|
|
8
|
|
Issuance of common stock associated with the Merger (refer to Note 2)
|
|
$
|
1,395
|
|
|
$
|
|
|
|
$
|
|
|
NOTE 19. SEGMENT INFORMATION
As a result of the Merger, the Company is in a period of transition as it relates to organizational alignment and management reporting which could impact segment reporting in future periods. However at
December 28, 2013, the Company had the following three reportable segments: North American Retail Division, North American Business Solutions Division, and International Division. Following the date of the Merger, the former OfficeMax U.S.
Retail business is included in the North American Retail Division. The former OfficeMax United States and Canada Contract business is included in the North American Business Solutions Division. The former OfficeMax businesses in Australia, New
Zealand and Mexico are included in the International Division. The office supply products and services offered across all operating segments are similar. Certain operating segments are aggregated into the way the business is managed and evaluated.
The accounting policies for each segment are the same as those described in Note 1. 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 expenses considered directly or closely related to their operations and allocates 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.
112
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the fourth quarter of 2013, the Company modified its measure of business segment
operating income for management reporting purposes to exclude from the determination of segment operating results the impact related to asset impairments, Merger and integration, restructuring and other charges and credits. Oversight of these
activities starting in fourth quarter of 2013 was provided at the Corporate level. Prior period operating expenses have been recast to conform to the current period presentation for the change in measurement of Division operating results. Asset
impairment of $11 million recorded in 2011 remained in the determination of North America Retail Division operating results.
A summary of significant accounts and balances by segment, reconciled to consolidated totals follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
North
American
Retail
|
|
|
North
American
Business
Solutions
|
|
|
International
|
|
|
Corporate,
Eliminations
and Other*
|
|
|
Consolidated
Total
|
|
Sales
|
|
|
2013
|
|
|
$
|
4,614
|
|
|
$
|
3,580
|
|
|
$
|
3,048
|
|
|
$
|
|
|
|
$
|
11,242
|
|
|
|
|
2012
|
|
|
$
|
4,458
|
|
|
$
|
3,215
|
|
|
$
|
3,023
|
|
|
$
|
|
|
|
$
|
10,696
|
|
|
|
|
2011
|
|
|
$
|
4,870
|
|
|
$
|
3,262
|
|
|
$
|
3,357
|
|
|
$
|
|
|
|
$
|
11,489
|
|
Division operating income
|
|
|
2013
|
|
|
$
|
8
|
|
|
$
|
113
|
|
|
$
|
34
|
|
|
$
|
|
|
|
$
|
155
|
|
|
|
|
2012
|
|
|
$
|
24
|
|
|
$
|
110
|
|
|
$
|
36
|
|
|
$
|
|
|
|
$
|
170
|
|
|
|
|
2011
|
|
|
$
|
42
|
|
|
$
|
78
|
|
|
$
|
66
|
|
|
$
|
|
|
|
$
|
186
|
|
Capital expenditures
|
|
|
2013
|
|
|
$
|
63
|
|
|
$
|
24
|
|
|
$
|
39
|
|
|
$
|
11
|
|
|
$
|
137
|
|
|
|
|
2012
|
|
|
$
|
61
|
|
|
$
|
31
|
|
|
$
|
25
|
|
|
$
|
3
|
|
|
$
|
120
|
|
|
|
|
2011
|
|
|
$
|
71
|
|
|
$
|
32
|
|
|
$
|
26
|
|
|
$
|
1
|
|
|
$
|
130
|
|
Depreciation and amortization
|
|
|
2013
|
|
|
$
|
105
|
|
|
$
|
51
|
|
|
$
|
30
|
|
|
$
|
23
|
|
|
$
|
209
|
|
|
|
|
2012
|
|
|
$
|
103
|
|
|
$
|
43
|
|
|
$
|
34
|
|
|
$
|
23
|
|
|
$
|
203
|
|
|
|
|
2011
|
|
|
$
|
109
|
|
|
$
|
42
|
|
|
$
|
37
|
|
|
$
|
23
|
|
|
$
|
211
|
|
Charges for losses on receivables and inventories
|
|
|
2013
|
|
|
$
|
38
|
|
|
$
|
9
|
|
|
$
|
12
|
|
|
$
|
|
|
|
$
|
59
|
|
|
|
2012
|
|
|
$
|
40
|
|
|
$
|
6
|
|
|
$
|
19
|
|
|
$
|
|
|
|
$
|
65
|
|
|
|
2011
|
|
|
$
|
31
|
|
|
$
|
7
|
|
|
$
|
18
|
|
|
$
|
|
|
|
$
|
56
|
|
Net earnings from equity method investments
|
|
|
2013
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
14
|
|
|
$
|
|
|
|
$
|
14
|
|
|
|
2012
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
30
|
|
|
$
|
|
|
|
$
|
30
|
|
|
|
2011
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
31
|
|
|
$
|
|
|
|
$
|
31
|
|
Assets
|
|
|
2013
|
|
|
$
|
1,847
|
|
|
$
|
1,573
|
|
|
$
|
1,327
|
|
|
$
|
2,730
|
|
|
$
|
7,477
|
|
|
|
|
2012
|
|
|
$
|
1,189
|
|
|
$
|
670
|
|
|
$
|
1,312
|
|
|
$
|
840
|
|
|
$
|
4,011
|
|
*
|
Amounts included in Eliminations and Other consist of assets (including all cash and cash equivalents) and depreciation related to
corporate activities. Also, the December 28, 2013 Assets balance in Corporate, Eliminations and Other includes $377 million of goodwill that will be allocated to reporting units when the purchase price allocation process is complete.
|
113
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the measure of Division operating income to Income (loss) before
income taxes follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Division operating income
|
|
$
|
155
|
|
|
$
|
170
|
|
|
$
|
186
|
|
Add/(subtract):
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery of purchase price
|
|
|
|
|
|
|
68
|
|
|
|
|
|
Asset impairments
|
|
|
(70
|
)
|
|
|
(139
|
)
|
|
|
|
|
Merger, restructuring, and other operating expenses, net
|
|
|
(201
|
)
|
|
|
(56
|
)
|
|
|
(56
|
)
|
Unallocated expenses
|
|
|
(89
|
)
|
|
|
(74
|
)
|
|
|
(96
|
)
|
Interest income
|
|
|
5
|
|
|
|
2
|
|
|
|
1
|
|
Interest expense
|
|
|
(69
|
)
|
|
|
(69
|
)
|
|
|
(33
|
)
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
Gain on disposition of joint venture
|
|
|
382
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
14
|
|
|
|
35
|
|
|
|
31
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
127
|
|
|
$
|
(75
|
)
|
|
$
|
33
|
|
|
|
|
|
|
As of December 28, 2013, the Company sold to customers throughout North America, Europe,
Asia/Pacific and Latin America. The Company operates through wholly-owned and majority-owned entities and participates in other ventures and alliances. There is no single country outside of the United States or single customer that accounts for 10%
or more of the Companys total sales. Geographic financial information relating to the Companys business is as follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
Property and Equipment, Net
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
United States
|
|
$
|
8,119
|
|
|
$
|
7,671
|
|
|
$
|
8,108
|
|
|
|
|
$
|
977
|
|
|
$
|
707
|
|
|
$
|
902
|
|
International
|
|
|
3,123
|
|
|
|
3,025
|
|
|
|
3,381
|
|
|
|
|
|
332
|
|
|
|
149
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,242
|
|
|
$
|
10,696
|
|
|
$
|
11,489
|
|
|
|
|
$
|
1,309
|
|
|
$
|
856
|
|
|
$
|
1,067
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company classifies products into three categories: (1) supplies, (2) technology, and
(3) furniture and other. The supplies category includes products such as paper, binders, writing instruments, and school supplies. The technology category includes products such as desktop and laptop computers, monitors, tablets, printers, ink
and toner, cables, software, digital cameras, telephones, and wireless communications products. The furniture and other category includes products such as desks, chairs, luggage, sales in the copy and print centers, and other miscellaneous items.
Total Company sales by product group were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Supplies
|
|
|
46.6%
|
|
|
|
45.8%
|
|
|
|
44.6%
|
|
Technology
|
|
|
40.6%
|
|
|
|
41.8%
|
|
|
|
43.5%
|
|
Furniture and other
|
|
|
12.8%
|
|
|
|
12.4%
|
|
|
|
11.9%
|
|
|
|
|
|
|
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
|
|
|
114
OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 20. QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts)
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
(2)
|
|
|
Fourth
Quarter
(3)
|
|
Fiscal Year Ended December 28, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,718
|
|
|
$
|
2,419
|
|
|
$
|
2,619
|
|
|
$
|
3,486
|
|
Gross profit
|
|
|
660
|
|
|
|
546
|
|
|
|
633
|
|
|
|
787
|
|
Net income (loss)
(1)
|
|
|
(7
|
)
|
|
|
(54
|
)
|
|
|
161
|
|
|
|
(121
|
)
|
Net income (loss) attributable to Office Depot, Inc.
(1)
|
|
|
(7
|
)
|
|
|
(54
|
)
|
|
|
161
|
|
|
|
(121
|
)
|
Net income (loss) available to common stockholders
(1)
|
|
|
(17
|
)
|
|
|
(64
|
)
|
|
|
133
|
|
|
|
(144
|
)
|
Net earnings (loss) per share*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.06
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
0.42
|
|
|
$
|
(0.34
|
)
|
Diluted
|
|
$
|
(0.06
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
0.41
|
|
|
$
|
(0.34
|
)
|
*
|
Due to rounding, the sum of the quarterly earnings per share amounts may not equal the reported earnings per share for the year.
|
(1)
|
In the first, second, third and fourth quarters of 2013, captions include pre-tax Merger, restructuring, and other operating expenses amounting to
$19 million, $26 million, $44 million and $111 million, respectively and asset impairments of $5 million, $4 million, $49 million and $12 million, respectively.
|
(2)
|
Net income available to common stockholders includes an after-tax gain of approximately $235 million resulting from the sale of Office Depot de
Mexico and preferred stock dividends of $22 million associated to redemption in July 2013.
|
(3)
|
Net income available to common stockholders includes (i) impact of the Merger of $939 million in Sales and $(39) million in Net income (loss); and
(ii) preferred stock dividends of $23 million associated to redemption in November 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts)
|
|
First Quarter
(1)
|
|
|
Second Quarter
(2)
|
|
|
Third Quarter
(3)
|
|
|
Fourth Quarter
(4)
|
|
Fiscal Year Ended December 29, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,873
|
|
|
$
|
2,507
|
|
|
$
|
2,693
|
|
|
$
|
2,623
|
|
Gross profit
|
|
|
694
|
|
|
|
572
|
|
|
|
663
|
|
|
|
607
|
|
Net income (loss)
|
|
|
49
|
|
|
|
(57
|
)
|
|
|
(62
|
)
|
|
|
(7
|
)
|
Net income (loss) attributable to Office Depot, Inc.
|
|
|
49
|
|
|
|
(57
|
)
|
|
|
(62
|
)
|
|
|
(7
|
)
|
Net income (loss) available to common stockholders
|
|
|
41
|
|
|
|
(64
|
)
|
|
|
(70
|
)
|
|
|
(17
|
)
|
Net earnings (loss) per share*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.14
|
|
|
$
|
(0.23
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.06
|
)
|
Diluted
|
|
$
|
0.14
|
|
|
$
|
(0.23
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.06
|
)
|
*
|
Due to rounding, the sum of the quarterly earnings per share amounts may not equal the reported earnings per share for the year.
|
(1)
|
Net income includes approximately $68 million of pre-tax recovery of purchase price income from previous acquisition associated with pension plan
and approximately $12 million pre-tax loss on extinguishment of debt.
|
(2)
|
Net income includes approximately $24 million pre-tax fixed asset impairment.
|
(3)
|
Net income includes approximately $88 million pre-tax asset impairments.
|
(4)
|
Net income includes approximately $9 million pre-tax fixed asset impairment.
|
115