NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
Office Depot, Inc., including consolidated subsidiaries (Office Depot or the
Company), is a global supplier of office products and services. The Company currently operates under several banners, including Office Depot
®
and OfficeMax
®
and utilizes proprietary company and product brand names. The Companys common stock is traded on the NASDAQ Global Select Market under the ticker symbol ODP. As of
September 24, 2016, the Company sold to customers throughout North America, Europe, and the Asia/Pacific region. The businesses in North America operate through two reportable segments (or Divisions): North American Retail Division
and North American Business Solutions Division. The businesses in Europe and the Asia/Pacific region operate through what previously was reported as the International Division.
In September 2016, the Companys Board of Directors committed to a plan to sell substantially all of the International Division operations (the
International Operations). Accordingly, the Company has presented the International Operations as discontinued operations beginning in the third quarter 2016. The Company has reclassified the financial results of the International
Operations to Discontinued operations, net of tax in the Condensed Consolidated Statements of Operations for all periods presented. The Company also reclassified the related assets and liabilities as current and non-current assets and liabilities of
discontinued operations on the accompanying Condensed Consolidated Balance Sheets as of September 24, 2016 and December 26, 2015. Cash flows from the Companys discontinued operations are presented in the Condensed Consolidated Statements of
Cash Flows for all periods. Certain portions of the International Division assets and operations are being retained or did not meet the held for sale criteria at September 24, 2016 and therefore remain in continuing operations, with prior periods
adjusted, where appropriate. Additional information on the planned dispositions is provided in Note 3. Refer to Note 11 for additional Division information.
The Condensed Consolidated Financial Statements as of September 24, 2016 and for the 13-week and 39-week periods ended September 24, 2016 (also
referred to as the third quarter of 2016 and the year-to-date 2016) and September 26, 2015 (also referred to as the third quarter of 2015 and the year-to-date 2015) are unaudited. However, in
managements opinion, these condensed consolidated financial statements reflect all adjustments of a normal recurring nature necessary to provide a fair presentation of the Companys financial position, results of operations and cash flows
for the periods presented.
The Company has prepared the Condensed Consolidated Financial Statements included herein pursuant to the rules and regulations
of the Securities and Exchange Commission (the SEC). Some information and note disclosures, which would normally be included in comprehensive annual financial statements prepared in accordance with accounting principles generally
accepted in the United States, have been condensed or omitted pursuant to those SEC rules and regulations. For a better understanding of the Company and its Condensed Consolidated Financial Statements, we recommend reading these Condensed
Consolidated Financial Statements in conjunction with the audited financial statements which are included in the 2015 Form 10-K. These interim results are not necessarily indicative of the results that should be expected for the full year.
Cash Management:
The cash management process generally utilizes zero balance accounts which provide for the settlement of the related disbursement and
cash concentration accounts on a daily basis. Trade accounts payable and Accrued expenses and other current liabilities as of September 24, 2016 and December 26, 2015 included $18 million and $32 million, respectively, of amounts not yet
presented for payment drawn in excess of disbursement account book balances, after considering offset provisions.
At September 24, 2016, cash and
cash equivalents from continuing operations but held outside the United States amounted to $50 million. Additionally, $142 million of cash held outside the United States was included in current assets of discontinued operations.
7
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
New Accounting Standards:
In May 2014, the Financial Accounting Standards Board (the FASB)
issued an accounting standards update that supersedes most current revenue recognition guidance and modifies the accounting for certain costs associated with revenue generation. The core principle of this guidance is that an entity should recognize
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a number of steps to
apply to achieve that principle and requires additional disclosures. The standard was originally to be effective for the Companys first quarter of 2017. In July 2015, the FASB approved a one year extension to the required implementation date
but also permitted companies to adopt the standard at the original effective date of 2017. Adoption before the original effective date of 2017 is not permitted. The new standard may be applied retrospectively to each prior period presented or
retrospectively with a cumulative effect recognized as of the date of adoption.
The Company continues to assess the impact this new standard will have on
its Consolidated Financial Statements and has not yet decided on which adoption alternative to apply. However, based on this ongoing assessment, the Company expects that the new standard will require the impacts of its loyalty programs to be
presented as a reduction of revenue, rather than as cost accruals as is permitted under existing accounting rules. Also, costs associated with catalogs will be expensed as incurred, rather than capitalized and amortized over the anticipated benefit
period. Additionally, the timing of revenue recognition will be accelerated for items where the Companys performance obligation is complete, such as certain commission arrangements, and delayed where performance obligations remain, such as
certain coupons and incentives offered from time-to-time. The Company has not yet quantified these expected impacts.
In February 2016, the FASB issued an
accounting standards update which will require lessees to recognize most leases on their balance sheets related to the rights and obligations created by those leases. The accounting treatment for lessors will remain relatively unchanged. The
accounting standards update also requires additional qualitative and quantitative disclosures related to the nature, timing and uncertainty of cash flows arising from leases. The guidance is effective for fiscal years beginning after December 15,
2018, and interim periods within those fiscal years. Early adoption is permitted. Lessees and lessors are required to use a modified retrospective transition method for existing leases and accordingly, apply the new accounting model for the
earliest year presented in the financial statements. The Company is currently evaluating the impact the adoption of this new standard will have on its Consolidated Financial Statements but anticipates it will result in significant right of use
assets and related liabilities associated with our operating leases. Substantially all of the Companys retail store locations and supply chain facilities are subject to operating lease arrangements. The Company has not yet decided on the
period of adoption.
In March 2016, the FASB issued an accounting standards update as part of its simplification initiative. The new standard will modify
several aspects of the accounting and reporting for employee share-based payments and related tax accounting impacts, including the presentation in the statements of operations and cash flows of certain tax benefits or deficiencies and employee tax
withholdings, as well as the accounting for award forfeitures over the vesting period. Other provisions of the new standard relate to nonpublic entities and eliminate guidance that had not become effective. The new standard is effective for fiscal
years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this new standard will have on its Consolidated Financial Statements.
NOTE 2. ACQUISITION, MERGER AND RESTRUCTURING
Merger and Restructuring
In recent years, the Company has
taken actions to adapt to changing and competitive conditions. These actions include closing facilities, consolidating functional activities, eliminating redundant positions, disposing of businesses and assets, and taking actions to improve process
efficiencies. In 2013, the OfficeMax merger (the Merger) was completed and integration activities similar to the actions described above began. The Company also assumed certain restructuring liabilities previously recorded by OfficeMax.
In mid-2014, the Companys real estate strategy (the Real Estate Strategy) identified 400 retail stores for closure and integration of the supply chain. During the second quarter of 2016, the Company completed the retail store
closures under this program. The changes to the supply chain are anticipated to be complete in 2017.
Staples Acquisition and Merger Agreement
Termination
On February 4, 2015, Staples, Inc. (Staples) and the Company announced that the companies entered into a definitive merger
agreement (the Staples Merger Agreement), under which Staples would acquire all of the outstanding shares of Office Depot and the Company would become a wholly owned subsidiary of Staples (the Staples Acquisition).
8
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
On December 7, 2015, the United States Federal Trade Commission (the FTC) informed Office Depot
and Staples that it intended to block the Staples Acquisition. On the same date, Office Depot and Staples announced their intent to contest the FTCs decision to challenge the transaction. On May 10, 2016, the U.S. District Court for the
District of Columbia granted the FTCs request for a preliminary injunction against the proposed acquisition, and as a result, the companies terminated the Staples Merger Agreement on May 16, 2016. Per the terms of the termination agreement,
Staples paid Office Depot a fee of $250 million in cash on May 19, 2016 (Termination Fee), which is included in Merger, restructuring and other operating (income) expenses, net in the Condensed Consolidated Statements of Operations and
in Net cash provided by operating activities of continuing operations in the Condensed Consolidated Statements of Cash Flows.
Comprehensive Business
Review
During August 2016, the Company announced the results of a comprehensive business review and strategy (the Comprehensive Business
Review), which, among other things, includes a plan to close approximately 300 additional retail stores in North America over the next three years, and to lower operating and general and administrative expenses through efficiencies and
organizational optimization. The significant components of the cost saving programs activities are discussed below. Additionally, the Company indicated that as part of this process, it would continue exploration of strategic alternatives regarding
the European business that had been initiated by Staples as part of their attempt to get European Union regulatory approval of the Staples Acquisition.
Merger, restructuring, and other operating (income) expenses, net
The Company presents Merger, restructuring and other operating (income) expenses, net on a separate line in the Condensed Consolidated Statements of Operations
to identify these activities apart from the activities to sell to and service its customers. These expenses and income are not included in the determination of Division operating income. The table below and narrative that follows provides the major
components of Merger, restructuring and other operating (income) expenses, net.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Year-to-Date
|
|
(In millions)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Merger related expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance, retention, and relocation
|
|
$
|
|
|
|
$
|
4
|
|
|
$
|
|
|
|
$
|
15
|
|
Transaction and integration
|
|
|
8
|
|
|
|
16
|
|
|
|
30
|
|
|
|
69
|
|
Facility closure, contract termination, and other costs, net
|
|
|
4
|
|
|
|
18
|
|
|
|
21
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Merger related expenses
|
|
|
12
|
|
|
|
38
|
|
|
|
51
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Staples Acquisition (income) expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retention
|
|
|
|
|
|
|
26
|
|
|
|
15
|
|
|
|
58
|
|
Transaction
|
|
|
4
|
|
|
|
15
|
|
|
|
43
|
|
|
|
30
|
|
Termination Fee
|
|
|
|
|
|
|
|
|
|
|
(250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Staples Acquisition (income) expenses
|
|
|
4
|
|
|
|
41
|
|
|
|
(192
|
)
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Business Review expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
9
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
Other related expenses
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Business Review expenses
|
|
|
15
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Merger, restructuring and other operating (income) expenses, net
|
|
$
|
31
|
|
|
$
|
79
|
|
|
$
|
(122
|
)
|
|
$
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Merger related expenses
Severance, retention, and relocation reflect expenses incurred for the integration of staff functions and include termination benefits for certain retail and
supply chain closures. Such benefits are being accrued through the anticipated facility closure date. Severance calculations consider factors such as the expected timing of store closures, terms of existing severance plans, expected employee
turnover and attrition.
Transaction and integration expenses include integration-related professional fees, incremental temporary contract labor, salary
and benefits for employees dedicated to the Merger activity, travel costs, non-capitalizable software integration costs, and other direct costs to combine the companies. Such costs are being recognized as incurred.
Facility closure, contract termination, and other costs, net primarily relate to facility closure accruals, contract termination cost, gains and losses on
asset dispositions, and accelerated depreciation. Facility closure expenses include amounts incurred by the Company to close retail stores in the United States as part of the Real Estate Strategy, as well as supply chain facilities. During
year-to-date 2016 the Company recognized gains of $1 million from the sale of warehouse facilities that had been classified as assets held for sale. During the third quarter and year-to-date 2015, the Company recognized gains of $6 million and $25
million, respectively, from the sale of warehouse facilities that had been classified as assets held for sale. The gains are included in Merger, restructuring and other operating (income) expenses, net, as the dispositions were part of the supply
chain integration associated with the Merger.
Staples Acquisition (income) expenses
Expenses include retention accruals and transaction costs, including costs associated with regulatory filings and professional fees, offset by the Termination
Fee income.
Comprehensive Business Review expenses
Expenses include severance, facility closure costs, contract termination and accelerated depreciation associated with the announced closure of approximately
300 retail store locations through 2018, as well as severance and reorganization costs associated with reductions in staff functions. Severance costs are being accrued through the anticipated facility closure or termination date and consider timing,
terms of existing severance plans, expected employee turnover and attrition.
Asset impairments related to the restructuring initiatives are not included
in the table above. Refer to Note 9 for further information.
10
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Merger and Restructuring Accruals
The activity in the merger and restructuring accruals is presented in the table below. The total $122 million income presented in Merger, restructuring and
other operating (income) expenses, net in the year-to-date 2016 Condensed Consolidated Statement of Operations, includes the $250 million Termination Fee. Excluding the Termination Fee, expenses of $128 million were incurred in the year-to-date
2016, of which $41 million relate to Merger and restructuring liabilities and are included as Charges incurred in the table below. The remaining $87 million expense is comprised of $43 million Staples Acquisition transaction expenses, $30 million
Merger transaction and integration expenses and $14 million in other expenses. These amounts are excluded from the table below because they are recorded as incurred or earned, non-cash, or otherwise not associated with Merger and restructuring
balance sheet accounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-Date 2016
|
|
|
|
|
(In millions)
|
|
December
26, 2015
|
|
|
Charges
Incurred
|
|
|
Cash
Payments
|
|
|
Lease
Accretion
and Other
Adjustments
|
|
|
September
24, 2016
|
|
Termination benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger related accruals
|
|
$
|
16
|
|
|
$
|
|
|
|
$
|
(6
|
)
|
|
$
|
(2
|
)
|
|
$
|
8
|
|
Comprehensive Business Review
|
|
|
|
|
|
|
13
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
8
|
|
Lease and contract obligations, accruals for facilities closures and other costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger related accruals
|
|
|
77
|
|
|
|
16
|
|
|
|
(51
|
)
|
|
|
3
|
|
|
|
45
|
|
Other restructuring accruals
|
|
|
14
|
|
|
|
(1
|
)
|
|
|
(7
|
)
|
|
|
1
|
|
|
|
7
|
|
Acquired entity accruals
|
|
|
25
|
|
|
|
(2
|
)
|
|
|
(6
|
)
|
|
|
3
|
|
|
|
20
|
|
Staples Acquisition related accruals
|
|
|
64
|
|
|
|
15
|
|
|
|
(79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
196
|
|
|
$
|
41
|
|
|
$
|
(154
|
)
|
|
$
|
5
|
|
|
$
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The short-term and long-term components of these liabilities are included in Accrued expenses and other current liabilities
and Deferred income taxes and other long-term liabilities, respectively, on the Condensed Consolidated Balance Sheets.
Assets held for sale
Certain facilities identified for closure through integration and other activities have been accounted for as assets held for sale. Assets held for sale
primarily consist of supply chain facilities, and are presented in Prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets. The assets held for sale activity in the year-to-date 2016 is presented in the table below.
|
|
|
|
|
(In millions)
|
|
|
|
Balance as of December 26, 2015
|
|
$
|
30
|
|
Additions
|
|
|
6
|
|
Dispositions
|
|
|
(7
|
)
|
|
|
|
|
|
Balance as of September 24, 2016
|
|
$
|
29
|
|
|
|
|
|
|
Gains on dispositions associated with Merger or restructuring activities will be recognized at the Corporate level and
included when realized in Merger, restructuring and other operating (income) expenses, net in the Condensed Consolidated Statements of Operations. Losses, if any, are recognized when classified as held for sale. Gains or losses associated with
dispositions of properties not associated with Merger or restructuring activities will be presented as a component of operations when the related accounting criteria are met.
11
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
NOTE 3. DISCONTINUED OPERATIONS
In the second quarter of 2016, following termination of the Staples Agreement, the Company disclosed its intention to explore strategic alternatives regarding
its European business of the International Division.
On September 23, 2016, the Company announced that it had received an irrevocable offer from Aurelius
Rho Invest DS GmbH, a subsidiary of The AURELIUS Group (the Purchaser) to acquire the Companys European business operations (the European Business). The transaction is structured as an equity sale, for nominal
consideration, with the Purchaser acquiring the European Business with its operating assets and liabilities.
The Purchaser offered to purchase the
European Business on the terms and conditions set out in a form of sale and purchase agreement. Upon completion of the consultation with central works council in France, the Company will have an option to enter into a definitive sale and purchase
agreement (the SPA). If the Company does not exercise the option within the prescribed time period, the Company will be required to pay a EUR 5 million fee to the Purchaser. The transaction is subject to receipt of antitrust clearance
(or expiration of the relevant waiting period) of the European Commission and contains certain indemnities from the Company. The SPA contains certain warranties of the Company and the Purchaser, with the Companys warranties limited to an
aggregate of EUR 10 million. The Company is optimistic that the transaction can close by the end of 2016. The Company will retain responsibility for the European defined benefit pension plan which is frozen and covers a limited number of employees
in the United Kingdom.
The offer to purchase includes a required maintenance of working capital components up to the time of closing. Any deficiency at
closing would result in an increase to the estimated loss on classification as discontinued operations that was recognized in the third quarter of 2016. The Company will provide various transition services to the Purchaser for six to 24 months under
a separate agreement.
In addition to approving the sale of the European Business in the third quarter of 2016, the Companys Board of Directors
approved a plan to sell substantially all of the remaining operations of the International Division. The Company is actively marketing for sale the businesses in South Korea, mainland China, Australia and New Zealand and expects to complete the
dispositions within 12 months. As such, the assets and liabilities of the entities expected to be sold were classified as held for sale. Collectively, the International Division dispositions represent a strategic shift that has a major impact on the
Companys operations and financial results. Accordingly, the operations of the International Division businesses classified as held for sale also have been reported as discontinued operations, beginning in the third quarter 2016. The retained
sourcing and trading operations of the former International Division are presented as Other in Note 11, Division Information.
The contract price for the
European business was below the entitys carrying value, resulting in an incremental impairment charge to reduce the carrying value of European long-lived assets, with the remainder considered a valuation allowance against the remaining assets.
The loss on classification as discontinued operations relating to the remaining entities was measured at the lower of carrying value or estimated fair value less costs to sell and is included in the valuation allowance in the balance sheet as shown
below. Completion of the sale of the European Business and sales of the remaining international operations may be for amounts different from the third quarter 2016 estimates and will be evaluated each reporting period until the dispositions are
complete. Additionally, cumulative translation adjustments currently presented in Accumulated other comprehensive income will be recognized as part of the loss as dispositions are finalized. Substantially all of the foreign currency translation
adjustments reported in Note 6 relate to entities in the former International Division.
In accordance with the Companys annual goodwill impairment
test as of the first day of the third quarter, the $15 million of goodwill in the Australia/New Zealand reporting unit was considered impaired based on a decrease in the long-term projected cash flows and related estimated terminal value of that
business.
Restructuring charges incurred by the International Division that previously have been presented as part of Corporate costs have been included
in the measurement and presentation of discontinued operations.
12
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
The major components of Discontinued operations, net of tax presented in the Condensed Consolidated
Statements of Operations include the following.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Year-to-Date
|
|
(In millions)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Sales
|
|
$
|
583
|
|
|
$
|
644
|
|
|
$
|
1,886
|
|
|
$
|
2,046
|
|
Cost of goods sold and occupancy costs
|
|
|
462
|
|
|
|
495
|
|
|
|
1,489
|
|
|
|
1,565
|
|
Operating expenses
|
|
|
139
|
|
|
|
147
|
|
|
|
435
|
|
|
|
464
|
|
Asset impairments
|
|
|
90
|
|
|
|
|
|
|
|
90
|
|
|
|
|
|
Restructuring charges
|
|
|
|
|
|
|
31
|
|
|
|
10
|
|
|
|
70
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
(2
|
)
|
Other income (expense), net
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
1
|
|
Loss on classification as discontinued operations
|
|
|
(304
|
)
|
|
|
|
|
|
|
(304
|
)
|
|
|
|
|
Income tax expense (benefit)
|
|
|
(126
|
)
|
|
|
6
|
|
|
|
(123
|
)
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of tax
|
|
$
|
(286
|
)
|
|
$
|
(36
|
)
|
|
$
|
(324
|
)
|
|
$
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities of discontinued operations presented in the Condensed Consolidated Balance Sheets as of September 24,
2016, and December 26, 2015 include the following.
|
|
|
|
|
|
|
|
|
(In millions)
|
|
September 24,
2016
|
|
|
December 26,
2015
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
142
|
|
|
$
|
209
|
|
Receivables, net
|
|
|
375
|
|
|
|
420
|
|
Inventories
|
|
|
259
|
|
|
|
292
|
|
Prepaid expenses and other current assets
|
|
|
47
|
|
|
|
35
|
|
Property and equipment, net
|
|
|
33
|
|
|
|
|
|
Other assets
|
|
|
21
|
|
|
|
|
|
Valuation allowance
|
|
|
(297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets of discontinued operations
|
|
$
|
580
|
|
|
$
|
956
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
|
119
|
|
Goodwill
|
|
|
|
|
|
|
15
|
|
Other assets
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
Non-current assets of discontinued operations
|
|
$
|
|
|
|
$
|
173
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
235
|
|
|
$
|
331
|
|
Accrued expenses and other current liabilities
|
|
|
228
|
|
|
|
282
|
|
Income taxes payable
|
|
|
6
|
|
|
|
4
|
|
Short-term borrowings and current maturities of long-term debt
|
|
|
10
|
|
|
|
5
|
|
Deferred income taxes and other long-term liabilities
|
|
|
35
|
|
|
|
|
|
Long-term debt, net of current maturities
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities of discontinued operations
|
|
$
|
519
|
|
|
$
|
622
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes and other long-term liabilities
|
|
|
|
|
|
|
40
|
|
Long-term debt, net of current maturities
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities of discontinued operations
|
|
$
|
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued operations for the year-to-date periods ended September 24, 2016 and September 26, 2015 include
the following.
|
|
|
|
|
|
|
|
|
|
|
Year-to-Date
|
|
(In millions)
|
|
September 24,
2016
|
|
|
September 26,
2015
|
|
Depreciation and amortization
|
|
$
|
19
|
|
|
$
|
23
|
|
Capital expenditures
|
|
$
|
6
|
|
|
$
|
15
|
|
13
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Factoring Agreement
The sale of selected accounts receivables on a non-recourse basis to an unrelated financial institution under a factoring agreement in France remains in place.
Amounts related to those sales are included in the components of discontinued operations.
NOTE 4. DEBT
Amended Credit Agreement
Based on the September borrowing
base certificate, at September 24, 2016, the Company had approximately $1.1 billion of available credit under the Second Amended and Restated Credit Agreement. In May 2011, Office Depot entered into an amended and restated agreement, which was
further amended and restated in May 2016 for an additional five years (the Amended Credit Agreement). The $1.2 billion facility will mature on May 13, 2021. The Amended Credit Agreement reduces the overall fees and applicable
spread on borrowing and modifies certain covenants to provide additional flexibility for incremental indebtedness, acquisitions, asset sales and restricted payments. In connection with the May 2016 amendment, the Company recorded $6 million in debt
acquisition costs, which are included in Other assets in the Condensed Consolidated Balance Sheet and will be amortized ratably through May 2021. Upon completion of the sale of the European Business, the European entities and associated collateral
will be removed from the Amended Credit Agreement.
As of September 24, 2016, letters of credit outstanding under the Amended Credit Agreement
totaled $90 million. There were no borrowings under the Amended Credit Agreement in the third quarter of 2016.
Senior Secured Notes
On September 15, 2016, the Company redeemed its outstanding 9.75% Senior Secured Notes due 2019 (the Senior Secured Notes) which had an aggregate
principal outstanding of $250 million. The Notes were redeemed for cash at the outstanding principal plus a $12 million premium calculated as 4.875% of the principal amount. The total payment amounted to $262 million, plus accrued interest. The
premium and recognition of the remaining deferred debt issue costs totaled $15 million and are presented as Loss on extinguishment of debt in the Condensed Consolidated Statements of Operations for third quarter and year-to-date 2016. The cash
amounts of the premium paid are reflected as financing activities in the Condensed Consolidated Statements of Cash Flows.
Other
The Company was in compliance with all applicable financial covenants at September 24, 2016.
NOTE 5. INCOME TAXES
The effective tax rates for the
third quarter and year-to-date 2016 continued to be primarily impacted by the Companys U.S. federal and state valuation allowance. Year-to-date, the Company has experienced a lower than expected effective rate due to the utilization of certain
deferred tax assets during the year whose benefits were limited in prior periods due to the valuation allowance. In the third quarter, the Company recognized a discrete non-cash income tax benefit for the reversal of the majority of the remaining
U.S. federal and state valuation allowance. The effective tax rate in the third quarter was also impacted by other nondeductible expenses and the deductibility of certain formerly non-deductible expenses. Due to the Companys valuation
allowances and related reversals, interim income tax reporting is likely to result in significant variability of the effective tax rate throughout the remainder of the year. Changes in pretax income projections and the mix of income across
jurisdictions could also impact the effective tax rate each quarter.
As of the third quarter of 2016, the Company concluded that it was more likely than
not that a benefit from a substantial portion of its U.S. federal and state deferred tax assets would be realized. This conclusion was based on a detailed evaluation of all available positive and negative evidence and the weight of such
evidence, the current financial position and results of operations for the current and preceding years, and the expectation of continued earnings. The Company determined that approximately $400 million of its U.S. federal and state valuation
allowance should be reversed in 2016, with approximately $240 million in the third quarter as a discrete non-cash income tax benefit in the third quarter and the remainder as an adjustment to the estimated annual effective tax rate.
After the 2016 reversal, the Company will have a U.S. valuation allowance for certain U.S. federal credits and state tax attributes. The remaining
valuation allowances relate to deferred tax assets that require certain types of income or for income to be earned in certain jurisdictions in order to be realized. The Company will continue to assess the realizability of its deferred tax
assets in the U.S. and remaining foreign jurisdictions in future periods.
14
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
The Company files a U.S. federal income tax return and other income tax returns in various states and foreign
jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state and local income tax examinations for years before 2015 and 2009, respectively. The acquired OfficeMax U.S. consolidated group is no longer subject to
U.S. federal and state and local income tax examinations for years before 2013 and 2006, respectively. The U.S. federal income tax return for 2015 is currently under review. Generally, the Company is subject to routine examination for years 2008 and
forward in its international tax jurisdictions.
It is not reasonably possible that certain tax positions will be resolved within the next 12
months. Additionally, the Company anticipates that it is reasonably possible that new issues will be raised or resolved by tax authorities that may require changes to the balance of unrecognized tax benefits; however, an estimate of such
changes cannot be reasonably made.
NOTE 6. STOCKHOLDERS EQUITY
The following table reflects the changes in stockholders equity.
|
|
|
|
|
(In millions)
|
|
|
|
Stockholders equity at December 26, 2015
|
|
$
|
1,603
|
|
Net income
|
|
|
300
|
|
Repurchase of common stock for treasury
|
|
|
(81
|
)
|
Dividends paid on common stock
|
|
|
(13
|
)
|
Other comprehensive income
|
|
|
13
|
|
Amortization of long-term incentive stock grants
|
|
|
27
|
|
|
|
|
|
|
Stockholders equity at September 24, 2016
|
|
$
|
1,849
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) activity, net of tax, where applicable, is provided in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Change in
Deferred
Pension and
Other
|
|
|
Total
|
|
Balance at December 26, 2015
|
|
$
|
108
|
|
|
$
|
(78
|
)
|
|
$
|
30
|
|
Other comprehensive income (loss) activity before reclassifications
|
|
|
14
|
|
|
|
(1
|
)
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income (loss)
|
|
|
14
|
|
|
|
(1
|
)
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 24, 2016
|
|
$
|
122
|
|
|
$
|
(79
|
)
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock
In May
2016, the Companys Board of Directors authorized a stock repurchase program of up to $100 million of its outstanding common stock. In August 2016, the Board of Directors authorized increasing the share repurchase program to $250 million. The
stock repurchase authorization permits the Company to repurchase stock from time-to-time through a combination of open market repurchases, privately negotiated transactions, 10b5-1 trading plans, accelerated stock repurchase transactions and/or
other derivative transactions. The authorization extends to the end of 2018 and may be suspended or discontinued at any time. The exact number and timing of share repurchases will depend on market conditions and other factors, and will be funded
through existing liquidity.
Under the stock repurchase program, in the third quarter 2016, the Company purchased approximately 16 million shares at a
cost of $55 million. In year-to-date 2016, the Company purchased approximately 23 million shares at a cost of $81 million. As of September 24, 2016, $169 million remains available for repurchase under the current authorization. Refer to Item 2
Unregistered Sales of Equity Securities and Use of Proceeds for more information.
15
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Dividends on Common Stock
In August 2016, the Board of Directors declared a cash dividend of $0.025 per share on its common stock. The total per share dividend of $0.025 was paid in
September 2016 to shareholders of record at the close of business on August 25, 2016, resulting in a total cash payment of $13 million. Dividends have been recorded as a reduction to additional paid-in capital as the Company is in an accumulated
deficit position.
NOTE 7. EARNINGS PER SHARE
The
following table represents the calculation of net earnings (loss) per common share basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Year-to-Date
|
|
(In millions, except per share amounts)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Basic Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
330
|
|
|
$
|
42
|
|
|
$
|
624
|
|
|
$
|
60
|
|
Loss from discontinued operations, net of tax
|
|
|
(286
|
)
|
|
|
(36
|
)
|
|
|
(324
|
)
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
44
|
|
|
$
|
6
|
|
|
$
|
300
|
|
|
$
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
|
535
|
|
|
|
548
|
|
|
|
545
|
|
|
|
546
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.62
|
|
|
$
|
0.08
|
|
|
$
|
1.15
|
|
|
$
|
0.11
|
|
Discontinued operations
|
|
|
(0.54
|
)
|
|
|
(0.07
|
)
|
|
|
(0.60
|
)
|
|
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
0.08
|
|
|
$
|
0.01
|
|
|
$
|
0.55
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
330
|
|
|
$
|
42
|
|
|
$
|
624
|
|
|
$
|
60
|
|
Loss from discontinued operations, net of tax
|
|
|
(286
|
)
|
|
|
(36
|
)
|
|
|
(324
|
)
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
44
|
|
|
$
|
6
|
|
|
$
|
300
|
|
|
$
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
|
535
|
|
|
|
548
|
|
|
|
545
|
|
|
|
546
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock
|
|
|
10
|
|
|
|
8
|
|
|
|
8
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average shares outstanding
|
|
|
545
|
|
|
|
556
|
|
|
|
553
|
|
|
|
555
|
|
Diluted earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.61
|
|
|
$
|
0.08
|
|
|
$
|
1.13
|
|
|
$
|
0.11
|
|
Discontinued operations
|
|
|
(0.54
|
)
|
|
|
(0.07
|
)
|
|
|
(0.60
|
)
|
|
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
0.08
|
|
|
$
|
0.01
|
|
|
$
|
0.54
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards of stock options and nonvested shares representing approximately 6 million and 7 million additional shares of common
stock were outstanding for the third quarter and year-to-date 2016, respectively, and 3 million and less than 1 million for the third quarter and year-to-date 2015, respectively, but were not included in the computation of diluted weighted-average
shares outstanding because their effect would have been antidilutive. Additionally, the Stock options and restricted stock amounts are not included in the Diluted Earnings Per Share amounts of the Loss from discontinued operations, net of tax and
the year-to-date 2015 Net earnings (loss) as the impacts would have been antidilutive.
16
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
NOTE 8. EMPLOYEE BENEFIT PLANS
Pension and Other Postretirement Benefit Plans North America
The components of net periodic pension benefit for the Companys North American pension plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Year-to-Date
|
|
(In millions)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Service cost
|
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
5
|
|
|
$
|
3
|
|
Interest cost
|
|
|
11
|
|
|
|
11
|
|
|
|
34
|
|
|
|
34
|
|
Expected return on plan assets
|
|
|
(14
|
)
|
|
|
(14
|
)
|
|
|
(41
|
)
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension (benefit) expense
|
|
$
|
(1
|
)
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
|
$
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the year-to-date 2016, $2 million of cash contributions were made to the North American pension plans. The Company
expects to make additional cash contributions of $1 million to the North American pension plans in the remainder of 2016.
Pension Plan Europe
The components of net periodic pension benefit for the Companys European pension plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Year-to-Date
|
|
(In millions)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Interest cost
|
|
|
2
|
|
|
|
2
|
|
|
|
6
|
|
|
|
6
|
|
Expected return on plan assets
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
(9
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension (benefit) expense
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
|
$
|
(3
|
)
|
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As part of the agreement to sell the European Business, the Company retained the European defined benefit pension plan and
agreed to contribute GBP 20 million to the plan prior to closing the transaction, which is expected before the end of 2016.
Net periodic pension benefits
for the North American and European pension and other postretirement benefit plans are recorded in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
NOTE 9. 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. 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 by the Companys policies. The Company may designate and account for such qualifying arrangements as hedges or reflect current mark-to-market
impacts of non-qualifying economic hedge arrangements currently in earnings. As of September 24, 2016, the foreign exchange and fuel contracts extended through December 2016 and January 2017, respectively.
The fair values of the Companys foreign currency contracts and fuel contracts are the amounts receivable or payable to terminate the agreements at the
reporting date, taking into account current interest rates, exchange rates and commodity prices. The values are based on market-based inputs or unobservable inputs that are corroborated by market data. Amounts associated with derivative financial
instruments were not significant for the reported periods. The Companys foreign currency risk will be substantially reduced upon completion of the sale of the discontinued operations.
17
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
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 under current market conditions. In developing its fair value estimates, the Company uses the following hierarchy:
|
|
|
Level 1:
|
|
Quoted prices in active markets for identical assets or liabilities.
|
|
|
Level 2:
|
|
Observable market based inputs or unobservable inputs that are corroborated by market data.
|
|
|
Level 3:
|
|
Significant unobservable inputs that are not corroborated by market data. Generally, these fair value measures are model-based valuation techniques such as discounted cash flows or option pricing models using the Companys
own estimates and assumptions or those expected to be used by market participants.
|
The fair values of cash and cash equivalents, receivables, trade accounts payable and accrued expenses and other current
liabilities approximate their carrying values because of their short-term nature.
The following table presents information about financial instruments at
the balance sheet dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 24, 2016
|
|
|
December 26, 2015
|
|
(In millions)
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timber notes receivable
|
|
$
|
890
|
|
|
$
|
910
|
|
|
$
|
905
|
|
|
$
|
909
|
|
Company-owned life insurance
|
|
|
87
|
|
|
|
87
|
|
|
|
88
|
|
|
|
88
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recourse debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.75% senior secured notes, due 2019
|
|
|
|
|
|
|
|
|
|
|
250
|
|
|
|
265
|
|
7.35% debentures, due 2016
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
18
|
|
Revenue bonds, due in varying amounts periodically through 2029
|
|
|
186
|
|
|
|
186
|
|
|
|
186
|
|
|
|
186
|
|
American & Foreign Power Company, Inc. 5% debentures, due 2030
|
|
|
14
|
|
|
|
11
|
|
|
|
14
|
|
|
|
13
|
|
Non-recourse debt
|
|
|
803
|
|
|
|
822
|
|
|
|
819
|
|
|
|
825
|
|
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
|
|
|
Timber notes receivable:
Fair value is determined as the present value of expected future cash flows discounted at the current interest rate for loans of similar terms with comparable credit risk (Level 2
measure).
|
|
|
|
Company-owned life insurance:
In connection with the Merger, the Company acquired company owned life insurance policies on certain former employees. The fair value of the company-owned life insurance policies is
derived using determinable net cash surrender value (Level 2 measure).
|
|
|
|
Recourse debt:
Recourse debt for which there were no transactions on the measurement date was valued based on quoted market prices near the measurement date when available or by discounting the future cash flows
of each instrument using rates based on the most recently observable trade or using rates currently offered to the Company for similar debt instruments of comparable maturities (Level 2 measure).
|
|
|
|
Non-recourse debt:
Fair value is estimated by discounting the future cash flows of the instrument at rates currently available to the Company for similar instruments of comparable maturities (Level 2
measure).
|
18
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Fair Value Estimates Used in Impairment Analyses
North American Retail Division
The Company
recognized $9 million of asset impairment charges associated with continuing operations in the third quarter and year-to-date 2016 and $1 million and $10 million in the third quarter and year-to-date 2015, respectively. The third quarter 2016
impairment charge includes $5 million related to impairment of favorable lease intangible assets and $4 million related to operating retail store assets. The impairment of store assets reflects the impact of shortening the anticipated use periods of
certain retail store locations in accordance with the Comprehensive Business Review. The analysis of future cash flows included a projection of declining sales, constant gross margins and operating expenses consistent with recent performance. A 100
basis point decrease in anticipated sales for all periods in the forecast horizon would have increased the impairment charge $4 million. A 50 basis point decrease in anticipated gross margins for all periods would have increased the impairment
charge $1 million. Additionally, the planned early closure of certain locations and assessment of likely termination of lease renewal options resulted in impairment of favorable lease intangible assets remaining from the Merger. The year-to-date
2015 charges include approximately $1 million impairment of favorable lease intangible asset values following the identification of closing locations where future intangible asset recovery was considered unlikely.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company is involved in litigation arising in the normal course of business. While, from time to time, claims are asserted that make demands for a
large sum of money (including, from time to time, actions which are asserted to be maintainable as class action suits), the Company does not believe that contingent liabilities related to these matters (including the matters discussed below), either
individually or in the aggregate, will materially affect the Companys financial position, results of operations or cash flows.
In addition, in the
ordinary course of business, sales to and transactions with government customers may be subject to lawsuits, investigations, audits and reviews 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.
OfficeMax is named a
defendant in a number of lawsuits, claims, and proceedings arising out of the operation of certain paper and forest products assets prior to those assets being sold in 2004, for which OfficeMax agreed to retain responsibility. Also, as part of that
sale, OfficeMax agreed to retain responsibility for all pending or threatened proceedings and future proceedings alleging asbestos-related injuries arising out of the operation of the paper and forest products assets prior to the closing of the
sale. The Company has made provision for losses with respect to the pending proceedings. Additionally, as of September 24, 2016, the Company has made provision for environmental liabilities with respect to certain sites where hazardous substances or
other contaminants are or may be located. For these environmental liabilities, our estimated range of reasonably possible losses was approximately $10 million to $25 million. The Company regularly monitors its estimated exposure to these
liabilities. As additional information becomes known, these estimates may change, however, the Company does not believe any of these OfficeMax retained proceedings are material to the Companys financial position, results of operations or cash
flows.
19
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
NOTE 11. DIVISION INFORMATION
Following the decision to sell the European Business and substantially all of the remaining operations that previously were presented as the International
Division, and their presentation as discontinued operations, the Company has two operating segments which are also the reportable segments: North American Retail Division and North American Business Solutions Division. The North American Retail
Division includes retail stores in the United States, including Puerto Rico and the U.S. Virgin Islands, which offer office supplies, technology products and solutions, business machines and related supplies, facilities products, and office
furniture. Most stores also have a copy and print center offering printing, reproduction, mailing and shipping services. The North American Business Solutions Division sells office supply products and services in Canada and the United States,
including Puerto Rico and the U.S. Virgin Islands. North American Business Solutions Division customers are served through dedicated sales forces, through catalogs, telesales, and electronically through its Internet sites.
The retained operations previously included in the International Division are not significant at September 24, 2016 and have been presented as Other.
The office supply products and services offered across the segments are similar. Division operating income is determined based on the measure of performance
reported internally to manage the business and for resource allocation. This measure charges to the respective Divisions those expenses considered directly or closely related to their operations and allocates support costs. Certain operating
expenses and credits are not allocated to the Divisions including Asset impairments and Merger, restructuring and other operating (income) expenses, net, as well as expenses and credits retained at the Corporate level, including certain management
costs and legacy pension and environmental matters. Other companies may charge more or less of these items to their segments and results may not be comparable to similarly titled measures used by other entities.
The following is a summary of Sales and Division operating income by each of the Divisions, reconciled to consolidated totals, after the elimination of the
discontinued operations for all periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
Third Quarter
|
|
|
Year-to-Date
|
|
(In millions)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
North American Retail Division
|
|
$
|
1,482
|
|
|
$
|
1,604
|
|
|
$
|
4,237
|
|
|
$
|
4,599
|
|
North American Business Solutions Division
|
|
|
1,348
|
|
|
|
1,438
|
|
|
|
4,046
|
|
|
|
4,348
|
|
Other
|
|
|
6
|
|
|
|
4
|
|
|
|
12
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,836
|
|
|
$
|
3,046
|
|
|
$
|
8,295
|
|
|
$
|
8,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Division Operating Income
|
|
|
|
Third Quarter
|
|
|
Year-to-Date
|
|
(In millions)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
North American Retail Division
|
|
$
|
105
|
|
|
$
|
120
|
|
|
$
|
237
|
|
|
$
|
248
|
|
North American Business Solutions Division
|
|
|
81
|
|
|
|
66
|
|
|
|
190
|
|
|
|
186
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
186
|
|
|
$
|
186
|
|
|
$
|
428
|
|
|
$
|
436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
A reconciliation of the measure of Division operating income to Consolidated income from continuing
operations before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Year-to-Date
|
|
(In millions)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Total Division operating income
|
|
$
|
186
|
|
|
$
|
186
|
|
|
$
|
428
|
|
|
$
|
436
|
|
Add/(subtract):
|
|
|
|
|
|
|
|
|
Asset impairments
|
|
|
(9
|
)
|
|
|
(1
|
)
|
|
|
(9
|
)
|
|
|
(10
|
)
|
Merger, restructuring and other operating income (expenses), net
|
|
|
(31
|
)
|
|
|
(79
|
)
|
|
|
122
|
|
|
|
(204
|
)
|
Unallocated expenses
|
|
|
(29
|
)
|
|
|
(25
|
)
|
|
|
(68
|
)
|
|
|
(81
|
)
|
Interest income
|
|
|
6
|
|
|
|
5
|
|
|
|
17
|
|
|
|
16
|
|
Interest expense
|
|
|
(19
|
)
|
|
|
(22
|
)
|
|
|
(63
|
)
|
|
|
(69
|
)
|
Loss on extinguishment of debt
|
|
|
(15
|
)
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
Other income (expense), net
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
$
|
90
|
|
|
$
|
63
|
|
|
$
|
413
|
|
|
$
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 24, 2016, goodwill totaled $363 million, of which $78 million was recorded in the North American Retail
Division and $285 million in the North American Business Solutions Division.
As a result of the Companys annual goodwill impairment analysis, $15
million of goodwill relating to the Australia/New Zealand reporting unit was considered impaired and included in Discontinued operations, net of tax in the Condensed Consolidated Statements of Operations.
21