Delivered strong operating results and cash
flow in the first quarter and during onset of global pandemic
Strong balance sheet with $1.7 Billion in
available liquidity; Highest net cash position in two years
Post quarter refinancing activity increases
credit facility size and extends maturity date to 2025; Retirement
of term loan expected to result in $90 million in annual interest
and amortization savings
Board of Directors approve holding company
reorganization
Withdrawing 2020 guidance due to COVID-19
pandemic
Temporarily suspending share buybacks and
dividend
First Quarter 2020
Highlights(1)
- Total Reported Sales of $2.7 Billion, down 2% from Prior Year
Period
- Operating Income of $80 Million, up 233% YOY; Net Income of $45
Million, up 463% YOY
- Adjusted Operating Income of $108 Million, up 61% YOY; Adjusted
EBITDA of $157 Million, up 33% YOY
- Operating Cash Flow of $188 Million and Adjusted Free Cash Flow
of $173 Million
- EPS of $0.08, up $0.07 from Prior Year Period; Adjusted EPS of
$0.12, up $0.05 from Prior Year Period
- Positive Net Cash Position; $1.7 Billion of Available Liquidity
Including $842 Million in Cash
Office Depot, Inc. (“Office Depot,” or the “Company”) (NASDAQ:
ODP), a leading provider of business services and supplies,
products and technology solutions through an integrated B2B
distribution platform, announced results for the first quarter
ended March 28, 2020.
Consolidated (in millions, except
per share amounts)
1Q20
1Q19
Selected GAAP measures:
Sales
$2,725
$2,769
Sales change from prior year period
(2)%
Operating income
$80
$24
Operating income margin
2.9%
0.9%
Net income
$45
$8
Diluted earnings per share
$0.08
$0.01
Operating Cash Flow
$188
$60
Selected Non-GAAP measures: (1)
Adjusted EBITDA
$157
$118
Adjusted operating income
$108
$67
Adjusted operating income margin
4.0%
2.4%
Adjusted net income
$66
$39
Adjusted earnings per share (most
dilutive)
$0.12
$0.07
Free Cash Flow (2)
$163
$14
Adjusted Free Cash Flow (3)
$173
$14
(1)
Adjusted results represent non-GAAP
financial measures and exclude charges or credits not indicative of
core operations and the tax effect of these items, which may
include but not be limited to merger integration, restructuring,
acquisition costs, asset impairments, and executive transition
costs. Reconciliations from GAAP to non-GAAP financial measures can
be found in this release as well as on the Investor Relations
website at investor.officedepot.com.
(2)
As used in this release, Free Cash Flow is
defined as cash flows from operating activities less capital
expenditures. Free Cash Flow is a non-GAAP financial measure and
reconciliations from GAAP financial measures can be found in this
release.
(3)
As used in this release, Adjusted Free
Cash Flow excludes cash charges associated with the Company’s
Business Acceleration Program of $10 million in the first quarter
of 2020. Adjusted Free Cash Flow is a non-GAAP financial measure
and reconciliations from GAAP financial measures can be found in
this release.
“The safety of our employees is paramount, and we simply cannot
express enough gratitude to our associates, customers, and vendors
who have worked together to help ensure the health, safety and
critical support for each other during this crucial time,” said
Gerry Smith, chief executive officer of Office Depot. “While the
global pandemic has quickly impacted the business environment, the
foundation we have created over the past few years has provided us
the flexibility to continue to serve our customers’ expanded needs,
preserve cash, and deliver necessary products and support services
to help our customers succeed through this crisis,” he added.
“Our strong Q1 performance reflects the commitment and tireless
work of our team as we supported the essential needs of businesses,
consumers, educators, students, healthcare workers, and first
responders during the global health crisis that has unfolded in our
nation. Our B2B focus is helping businesses remain operational in
the home or at the office, our facilities have largely remained
open serving customers with enhanced sanitation and safety
protocols, and our eCommerce platform and retail stores are proving
to be trusted means for customers to access the critical products
and services they need. Same store sales were up 2% over the same
period last year and sales in our eCommerce channel experienced a
significant increase in demand. Our ability to continue to serve
customers during the COVID-19 health crisis helped drive strong
operating results and generate $188 million in operating cash flow
including $173 million in adjusted free cash flow. This strong
performance resulted in our highest net cash position in over 2
years and nearly $1.7 billion in total available liquidity,” he
added.
“While significant challenges remain ahead, we are in a strong
financial position and remain focused on utilizing our B2B platform
to provide essential products and services necessary to help our
customers and the nation weather through this pandemic,” Smith
continued. “We have an extremely strong balance sheet that has been
further enhanced by refinancing our credit facility and paying off
our term loan, which preserves cash and extends our credit facility
maturity to 2025. We have a global sourcing and supply chain
network capable of delivering essential products including personal
protective equipment (PPE); we have business support capabilities
enabling enterprises and individuals to work from home and learn
from home; and we have a business model that has significant
variable cost flexibility. We expect that all of these factors
place us in a position to successfully navigate this evolving
environment,” he added.
“Additionally, I believe our opportunities are evolving as we
expand our value proposition to customers, sourcing and
distributing a broader set of in-demand products and business
support services. We are uniquely positioned to support our
customers in this challenging environment and our focus on evolving
our B2B platform and executing our pivot remains resolute. Combined
with our strong balance sheet, I am confident that we are taking
the necessary steps to navigate through the challenges posed by
this global health crisis,” he added.
Consolidated Results
Reported (GAAP) Results
Total reported sales for the first quarter of 2020 were $2.7
billion, a decrease of 2% compared to the first quarter of 2019.
The decrease in revenue over the same period last year was
primarily the result of lower sales in the Retail Division, driven
by fewer retail stores in service partially offset by higher same
store sales, combined with lower sales in the CompuCom Division and
Business Solutions Division (BSD) largely driven by impacts related
to the COVID-19 outbreak. Product sales in the first quarter were
down 1% relative to the prior year period. Service revenue was down
5% in the quarter related to lower comparable sales at CompuCom and
sales of service in our Retail Division, both of which were
negatively impacted by the COVID-19 outbreak. This decline in
service revenues was partially mitigated by a 14% year-over-year
increase in service revenue in the BSD Division. On a consolidated
basis, service revenue represented approximately 14% of total
Company sales in the first quarter of 2020.
Sales Breakdown (in millions)
1Q20
1Q19
Product sales
$2,337
$2,361
Product sales change from prior year
(1)%
Service revenues
$388
$408
Service revenues change from prior
year
(5)%
Total sales
$2,725
$2,769
Office Depot reported operating income of $80 million in the
first quarter of 2020, compared to $24 million in the prior year
period. Operating income included $16 million in merger and
restructuring costs, $8 million of which is associated with
restructuring charges related to the Business Acceleration Program
(BAP) recognized in the quarter. The Company also recognized asset
impairment charges of $12 million in the first quarter of 2020, $10
million of which was related to the impairment of operating lease
right-of-use (ROU) assets associated with the Company’s retail
store locations, with the remainder relating to the impairment of
fixed assets. These impacts were offset by higher operating results
in the quarter versus the prior year period, as the Company
delivered improved margin performance in its CompuCom and Retail
Divisions. Net income was $45 million, or $0.08 per diluted share
in the first quarter of 2020, compared to net income of $8 million,
or $0.01 per diluted share in the first quarter of 2019.
Adjusted (non-GAAP) Results (4)
Adjusted results for the first quarter of 2020 exclude charges
and credits totaling $28 million, comprised of $9 million largely
in BAP-related charges, $12 million in asset impairments, and $7
million in merger, acquisition and integration-related expenses,
and the tax impacts associated with these items.
- First quarter 2020 adjusted EBITDA was $157 million compared to
$118 million in the prior year period, an increase of 33%. This
included adjusted depreciation and amortization(5) of $49 million
and $48 million in the first quarters of 2020 and 2019,
respectively.
- First quarter 2020 adjusted operating income was $108 million
compared to adjusted operating income of $67 million in the first
quarter of 2019, an increase of 61%. The primary driver of this
improved performance was stronger operating results in the CompuCom
and Retail Divisions driven by BAP-related cost efficiency efforts
and flow through effect of increased demand from businesses and
consumers for essential products and services during the COVID-19
pandemic.
- First quarter 2020 adjusted net income was $66 million, or
$0.12 per diluted share, compared to adjusted net income of $39
million, or $0.07 per diluted share, in the first quarter of 2019.
Reduced interest expense and fewer outstanding shares contributed
to this performance.
(4)
Adjusted results represent non-GAAP
financial measures and exclude charges or credits not indicative of
core operations and the tax effect of these items, which may
include but not be limited to merger integration, restructuring,
acquisition costs, asset impairments and executive transition
costs. Reconciliations from GAAP to non-GAAP financial measures can
be found in this release as well as on the Investor Relations
website at investor.officedepot.com.
(5)
Adjusted depreciation and amortization
each represents a non-GAAP financial measure and excludes
accelerated depreciation caused by updating the salvage value and
shortening the useful life of depreciable fixed assets to coincide
with planned store closures under an approved restructuring plan,
but only if impairment is not present.
First Quarter Division Results
Business Solutions Division
BSD reported sales were $1.3 billion in the first quarter of
2020, down 1% compared to the first quarter of 2019. The
year-over-year comparable sales performance includes the positive
impact of customer acquisitions and growth in adjacency categories,
primarily cleaning and breakroom supplies and technology, which
were up 25% and 10%, respectively, as customer demand for these
products increased as a result of COVID-19 outbreak. Adjacency
categories, which include cleaning and breakroom supplies,
technology, furniture, and copy and print services, grew to 39% of
total BSD revenue for the quarter. These positive sales drivers
were more than offset by lower demand in certain product categories
due to a portion of our B2B customers having either paused
operations or temporarily transitioned into a remote work
environment as a result of restrictions imposed in March 2020 aimed
to reduce the spread of COVID-19. This effect resulted in lower
sales in our contract channel partially offset by higher sales in
our eCommerce channel, as demand increased for certain essential
products. Product sales in the first quarter of 2020 decreased 2%,
while service revenue increased 14% driven by increases in sales of
our managed print and fulfillment services, copy and print
services, and shipping services compared to the prior year
period.
The Company expects near term revenue in its BSD division to be
negatively impacted by the business conditions related to the
COVID-19 outbreak for the reasons described above. We expect these
conditions to temporarily impact trends in the second quarter of
2020, resulting in declining revenue in the Company’s contract
channel as many businesses have paused operations or have
temporarily migrated to a distributed remote workforce solution.
Partially offsetting the impact of these conditions, revenues in
the Company’s eCommerce channel are higher as demand is increasing
for essential products and services to support home office
operations. In order to help mitigate the impact of these trends,
the BSD division is implementing several strategies to leverage its
global sourcing and supply chain capabilities to procure and
deliver essential products, including personal protective equipment
(PPE) to business customers, including hospitals and first
responders, and supporting work-from-home/learn-from-home
workforces, while modifying its supply chain operations to serve
and support customers in a more distributed manner.
“Our strong financial position and focus on utilizing our B2B
platform to provide essential products and services are critical to
helping our customers manage the challenges related to this
crisis,” said Smith. While the COVID-19 pandemic has caused a
disruption in the business environment, it is also creating more
opportunities for us by expanding the nature of our value
proposition to customers,” said Smith. “With our global sourcing
and supply chain capabilities, our platform is becoming a broader
source of mission critical products and services to a wider range
of customers through our B2B network.”
Business Solutions Division (in
millions)
1Q20
1Q19
Sales
$1,334
$1,344
Sales change from prior year
(1)%
Division operating income
$40
$46
Division operating income margin
3.0%
3.4%
BSD operating income was $40 million in the first quarter of
2020, compared to $46 million in the first quarter of 2019, with
flat comparable operating margins. The decrease in operating income
versus last year was related to the flow through effect of lower
sales, product mix, and higher distribution costs related to the
COVID-19 impacts.
Retail Division
During the COVID-19 outbreak, the nature of certain products we
offer through our retail outlets are considered essential retail
commerce by most local jurisdictions, therefore a substantial
majority of our retail locations have remained open and operational
with the appropriate safety measures in place. In late March, the
Company implemented a curbside pick-up option in all locations,
including a portion of retail locations that have transferred to
curbside pick-up only, as well as temporarily reduced store hours
by 2 hours per day.
The Retail Division reported sales were $1.2 billion in the
first quarter of 2020, down 2% versus the prior year period.
Planned closures of underperforming retail stores drove the
reported decline with 64 fewer retail outlets at the end of the
first quarter of 2020 as compared to the prior year. Compared to
the prior year period, product sales in the quarter were relatively
flat, while service revenue was down 11% as copy and print services
and subscription offerings were negatively impacted by the effects
related to the COVID-19 pandemic, including the government-imposed
temporary closures of non-essential businesses.
Same store sales were up by 2% as the demand for essential
products including cleaning and breakroom supplies, technology
products, furniture, and work-from-home/learn-from-home enabling
products increased significantly since the onset of the global
health crisis caused by the COVID-19 outbreak. Higher average order
volume and sales per shopper, as well as a 26% increase in the buy
online, pick up in store (BOPIS) offering, added to this strong
performance.
The increased demand for essential products during the COVID-19
outbreak drove increased sales during the period. Presently, supply
constraints for essential cleaning and breakroom products, the
closure of a limited number of stores in accordance with social
distancing and shelter-in-place protocols, and the reduction of
store hours by two hours per day are expected to have a negative
impact to sales in the Company’s retail operations in the second
quarter of 2020.
Retail Division (in millions)
1Q20
1Q19
Sales
$1,156
$1,175
Comparable store sales change from prior
year
2%
Division operating income
$87
$67
Division operating income margin
7.5%
5.7%
Retail Division operating income was $87 million in the first
quarter of 2020, up 30% over the same period last year. As a
percentage of sales, this performance reflects an approximate 180
basis point margin improvement. The increase in operating income
versus the prior year was largely related to lower SG&A from
cost savings initiatives, improved gross margin, improvements in
distribution and inventory management costs, and lower operating
lease costs recognized as a result of the new lease accounting
standard.
During the first quarter of 2020, the Company closed 12 stores
and ended the quarter with a total of 1,295 stores in the Retail
Division.
CompuCom Division
The CompuCom Division reported sales were $235 million in the
first quarter of 2020, down 5% compared to the first quarter of
2019 and flat with the fourth quarter of 2019. The year-over-year
decrease was due to project-related customer-imposed delays and
lower services volumes as the COVID-19 health crisis impacted
business operations of certain customers. Additionally, targeted
actions to reduce certain unprofitable sales activities to improve
profitability also impacted comparable year-over-year sales. These
factors were partially offset by an increase in technology-related
product sales despite supply constraints limiting the ability to
fulfill the entirety of the demand.
CompuCom Division (in millions)
1Q20
1Q19
Sales
$235
$247
Sales change from prior year
(5)%
Division operating income (loss)
$3
$(15)
Division operating income (loss)
margin
1.3%
(6.1)%
The CompuCom Division operating income was $3 million in the
first quarter of 2020, compared to a $15 million operating loss in
the first quarter of 2019. BAP cost efficiency measures and other
cost reduction efforts helped to drive the year-over-year increase.
Operating income was down on a sequential basis as the Company
incurred costs in anticipation of supporting the implementation of
new future service contracts as well as supporting new
project-related work in the quarter that did not materialize due to
the business disruptions caused by the COVID-19 outbreak. Under its
new leadership, CompuCom continues to refine its strategy to pursue
higher growth and improve margins by refocusing efforts on its core
strengths aligned with customer needs. The Company continues to
take actions to improve future operating performance, including
increased use of automation and technology to improve service
efficiency, simplifying operational structures to improve service
velocity, and aligning sales efforts to better serve customers and
accelerate cross-selling opportunities.
“We remain encouraged by the early signs of progress and the
opportunities ahead for CompuCom,” said Gerry Smith. “During the
COVID-19 health crisis, CompuCom’s operational support was
critical, and they have built significant credibility with
customers by enabling them to remain operational during this
period, as many companies pivoted to a work-from-home environment.
Notwithstanding the near term challenges, CompuCom’s unique
capabilities to support distributed work forces with state of the
art technology, and a unique field force of over 6,500 field techs
and support personnel, have it well positioned to capitalize on
opportunities in this growing area. We continue to gain traction as
evidenced by another quarter of significant new contract wins,
including eight new major customers. CompuCom’s refocused strategy
of connecting people, technology, and the edge, places greater
emphasis on its core offerings and expands its value proposition.
Although we have much more work to accomplish, CompuCom is on the
right path to capture profitable growth in the expanding digital
workforce arena,” he added.
Corporate and Other
Corporate expenses include support staff services and certain
other expenses that are not allocated to the Company’s operating
divisions. Unallocated expenses were $22 million in the first
quarter of 2020 compared to $31 million in the first quarter of
2019. The year-over-year comparison primarily reflects lower
deferred compensation expenses to our executive function and lower
professional fees in the first quarter of 2020.
The Company’s “Other” segment, which contains the global
sourcing and trading operations in the Asia/Pacific region and the
elimination of intersegment revenues, had no material contribution
to sales or operating income in the first quarter of 2020.
Balance Sheet and Cash Flow
As of March 28, 2020, Office Depot had total available liquidity
of approximately $1.7 billion, consisting of $842 million in cash
and cash equivalents and $851 million of available credit under the
Amended and Restated Credit Agreement. Total debt was $652
million.
Subsequent to quarter end, the Company successfully refinanced
its asset-based credit facility with a new five-year agreement and
retired its Term Loan Credit Agreement due 2022 (“term loan”). The
Company’s new $1.3 billion asset-based credit facility matures in
April 2025 and replaces the Company’s previous credit facility that
was due to expire in May 2021.
Upon closing of the transaction, the Company borrowed a total of
$400 million under the new credit facility. These proceeds, along
with available cash on hand, were used to repay the remaining $388
million balance on the term loan and approximately $66 million in
other debt. By eliminating the term loan in its entirety, the
Company expects to save approximately $14 million in annual cash
interest expense and $75 million in required annual amortization
payments. The new credit facility was significantly oversubscribed
with strong lender support and provides substantial financial
flexibility to continue the Company’s transformation efforts.
For the first quarter of 2020, cash provided by operating
activities was $188 million, which included $4 million in
acquisition and integration-related costs and $10 million in
restructuring costs, compared to $60 million in the first quarter
of the prior year.
Capital expenditures in the quarter were $25 million versus $46
million in the prior year period, reflecting lower investment in
retail operations, while continuing growth investments in the
Company’s service platform, distribution network, and eCommerce
capabilities. The cash charges associated with the Company’s
Business Acceleration Program in the quarter were $10 million.
Accordingly, Adjusted Free Cash Flow was $173 million in the first
quarter of 2020. The Company also invested $18 million in the
quarter to expand its BSD distribution network and its business
customer base through acquisitions.
During the first quarter of 2020, the Company paid a quarterly
cash dividend of $0.025 per share on March 13, 2020 for $13 million
and made a $19 million scheduled debt repayment on the 2022 term
loan. In addition, Office Depot repurchased approximately 13
million shares at a total cost of $30 million in the first quarter
of 2020.
Withdrawing 2020 Guidance
Related to the global business disruption and uncertainty caused
by the COVID-19 pandemic, the Company is withdrawing its previously
issued guidance for 2020. The Company experienced strong demand for
essential products and services during the first quarter of 2020,
which helped drive strong operating results and cash flow
generation. However, considering recent supply constraints for
essential products and operational disruptions occurring in
businesses throughout North America, the Company expects to
experience lower revenue in the near term. Due to the uncertainty
of the severity and duration of the impacts of the COVID-19
outbreak, the Company is unable to estimate the magnitude by which
sales of products and services in our business will be affected in
the future quarters of 2020.
“Like many companies, we are withdrawing our 2020 guidance given
the uncertainty related to the full impact of the COVID-19
pandemic. We are implementing several strategies to address and
hopefully mitigate these challenges including utilizing our global
sourcing capabilities to secure additional sources of essential
products and supplies, including PPE, and providing technology
support, facilitating work from home and virtual learning
environments, and continuing efforts to drive a low cost business
model. Combined with our strong balance sheet and available
liquidity position, we are in a solid position to navigate the
challenges posed by this health crisis,” Smith continued.
Temporarily Suspending Share Buybacks and Dividends
Given the uncertainty regarding the severity of the COVID-19
crisis and as part of its response, the Company is proactively
adopting a more conservative approach to its capital return program
to preserve maximum liquidity and financial flexibility in the
current environment. As part of that approach, the Company is
temporarily suspending its share repurchases and quarterly
dividend. The Company does not expect to repurchase shares in the
near term under the current repurchase authorization, which has
$131 million remaining. The Company is also temporarily suspending
its cash dividend beginning with the second quarter of 2020. The
Company will re-evaluate its capital return program when
appropriate.
About Office Depot, Inc.
Office Depot, Inc. (NASDAQ:ODP) is a leading provider of
business services and supplies, products and technology solutions
to small, medium and enterprise businesses, through an integrated
B2B distribution platform of approximately 1,300 stores, online
presence, and dedicated sales professionals and technicians.
Through its banner brands Office Depot®, OfficeMax®, CompuCom® and
Grand&Toy®, as well as others, the Company offers its customers
the tools and resources they need to focus on their passion of
starting, growing and running their business. For more information,
visit news.officedepot.com and follow @officedepot on Facebook,
Twitter and Instagram.
Office Depot is a trademark of The Office Club, Inc. OfficeMax
is a trademark of OMX, Inc. CompuCom is a trademark of CompuCom
Systems, Inc. Grand&Toy is a trademark of Grand & Toy, LLC
in Canada. ©2020 Office Depot, Inc. All rights reserved. Any other
product or company names mentioned herein are the trademarks of
their respective owners.
FORWARD LOOKING STATEMENTS
This communication may contain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. These statements or disclosures may discuss goals, intentions
and expectations as to future trends, plans, events, results of
operations, cash flow or financial condition, the potential impacts
on our business due to the unknown severity and duration of the
COVID-19 outbreak, or state other information relating to, among
other things, Office Depot, based on current beliefs and
assumptions made by, and information currently available to,
management. Forward-looking statements generally will be
accompanied by words such as “anticipate,” “believe,” “plan,”
“could,” “estimate,” “expect,” “forecast,” “guidance,” “outlook,”
“intend,” “may,” “possible,” “potential,” “predict,” “project,”
“propose” or other similar words, phrases or expressions, or other
variations of such words. These forward-looking statements are
subject to various risks and uncertainties, many of which are
outside of Office Depot’s control. There can be no assurances that
Office Depot will realize these expectations or that these beliefs
will prove correct, and therefore investors and stakeholders should
not place undue reliance on such statements.
Factors that could cause actual results to differ materially
from those in the forward-looking statements include, among other
things, highly competitive office products market and failure to
differentiate Office Depot from other office supply resellers or
respond to decline in general office supplies sales or to shifting
consumer demands; competitive pressures on Office Depot’s sales and
pricing; the risk that Office Depot is unable to transform the
business into a service-driven company or that such a strategy will
not result in the benefits anticipated; the risk that Office Depot
may not be able to realize the anticipated benefits of acquisitions
due to unforeseen liabilities, future capital expenditures,
expenses, indebtedness and the unanticipated loss of key customers
or the inability to achieve expected revenues, synergies, cost
savings or financial performance; the risk that Office Depot is
unable to successfully maintain a relevant omni-channel experience
for its customers; the risk that Office Depot is unable to execute
the Business Acceleration Program successfully or that such program
will not result in the benefits anticipated; failure to effectively
manage Office Depot real estate portfolio; loss of business with
government entities, purchasing consortiums, and sole- or limited-
source distribution arrangements; failure to attract and retain
qualified personnel, including employees in stores, service
centers, distribution centers, field and corporate offices and
executive management, and the inability to keep supply of skills
and resources in balance with customer demand; failure to execute
effective advertising efforts and maintain the Office Depot
reputation and brand at a high level; disruptions in Office Depot
computer systems, including delivery of technology services; breach
of Office Depot information technology systems affecting
reputation, business partner and customer relationships and
operations and resulting in high costs; unanticipated downturns in
business relationships with customers or terms with the suppliers,
third-party vendors and business partners; disruption of global
sourcing activities, evolving foreign trade policy (including
tariffs imposed on certain foreign made goods); exclusive Office
Depot branded products are subject to additional product, supply
chain and legal risks; product safety and quality concerns of
manufacturers’ branded products and services and Office Depot
private branded products; covenants in the credit facility; a
downgrade in Office Depot credit ratings or a general disruption in
the credit markets; incurrence of significant impairment charges;
retained responsibility for liabilities of acquired companies;
fluctuation in quarterly operating results due to seasonality of
Office Depot business; changes in tax laws in jurisdictions where
Office Depot operates; increases in wage and benefit costs and
changes in labor regulations; changes in the regulatory
environment, legal compliance risks and violations of the U.S.
Foreign Corrupt Practices Act and other worldwide anti-bribery
laws; volatility in Office Depot common stock price; changes in or
the elimination of the payment of cash dividends on Office Depot
common stock; macroeconomic conditions such as future declines in
business or consumer spending; increases in fuel and other
commodity prices and the cost of material, energy and other
production costs, or unexpected costs that cannot be recouped in
product pricing; unexpected claims, charges, litigation, dispute
resolutions or settlement expenses; and catastrophic events,
including the impact of weather events on Office Depot’s business;
the discouragement of lawsuits by shareholders against Office Depot
and its directors and officers as a result of the exclusive forum
selection of the Court of Chancery, the federal district court for
the District of Delaware or other Delaware state courts by Office
Depot as the sole and exclusive forum for such lawsuits; and the
impact of the COVID-19 pandemic on our business, including on the
demand for our and our customers’ products and services, on trade
and transport restrictions and generally on our ability to
effectively manage the impacts of the COVID-19 pandemic on our
business operations. The foregoing list of factors is not
exhaustive. Investors and shareholders should carefully consider
the foregoing factors and the other risks and uncertainties
described in Office Depot’s Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, and Current Reports on Form 8-K filed with
the U.S. Securities and Exchange Commission. Office Depot does not
assume any obligation to update or revise any forward-looking
statements.
OFFICE DEPOT, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(In millions, except per share
amounts)
(Unaudited)
13 Weeks Ended
March 28,
March 30,
2020
2019
Sales:
Products
$
2,337
$
2,361
Services
388
408
Total sales
2,725
2,769
Cost of goods sold and occupancy
costs:
Products
1,828
1,841
Services
268
287
Total cost of goods sold and occupancy
costs
2,096
2,128
Gross profit
629
641
Selling, general and administrative
expenses
521
574
Asset impairments
12
29
Merger and restructuring expenses, net
16
14
Operating income
80
24
Other income (expense):
Interest income
3
6
Interest expense
(18
)
(23
)
Other income, net
1
2
Income before income taxes
66
9
Income tax expense
21
1
Net income
$
45
$
8
Earnings per share
Basic
$
0.09
$
0.01
Diluted
$
0.08
$
0.01
OFFICE DEPOT, INC.
CONDENSED CONSOLIDATED BALANCE
SHEETS
(In millions, except shares
and par value)
March 28,
December 28,
2020
2019
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
842
$
698
Receivables, net
850
823
Inventories
929
1,032
Prepaid expenses and other current
assets
79
75
Timber notes receivable
—
819
Total current assets
2,700
3,447
Property and equipment, net
651
679
Operating lease right-of-use assets
1,368
1,413
Goodwill
940
944
Other intangible assets, net
379
388
Deferred income taxes
160
183
Other assets
256
257
Total assets
$
6,454
$
7,311
LIABILITIES AND STOCKHOLDERS’
EQUITY
Current liabilities:
Trade accounts payable
$
1,006
$
1,026
Accrued expenses and other current
liabilities
1,228
1,219
Income taxes payable
7
8
Short-term borrowings and current
maturities of long-term debt
104
106
Non-recourse debt
—
735
Total current liabilities
2,345
3,094
Deferred income taxes and other long-term
liabilities
167
176
Pension and postretirement obligations,
net
82
85
Long-term debt, net of current
maturities
548
575
Operating lease liabilities
1,177
1,208
Total liabilities
4,319
5,138
Commitments and contingencies
Stockholders’ equity:
Common stock — authorized 800,000,000
shares of $0.01 par value; issued
shares — 624,690,687 at March 28, 2020 and
620,424,775 at
December 28, 2019; outstanding shares —
526,342,832 at March 28, 2020
and 535,182,317 at December 28, 2019
6
6
Additional paid-in capital
2,637
2,647
Accumulated other comprehensive loss
(108
)
(66
)
Accumulated deficit
(45
)
(89
)
Treasury stock, at cost — 98,347,855
shares at March 28, 2020 and 85,242,458
shares at December 28, 2019
(355
)
(325
)
Total stockholders’ equity
2,135
2,173
Total liabilities and stockholders’
equity
$
6,454
$
7,311
OFFICE DEPOT, INC.
CONSOLIDATED STATEMENTS OF
CASH FLOWS
(In millions)
(Unaudited)
13 Weeks Ended
March 28,
March 30,
2020
2019
Cash flows from operating
activities:
Net income
$
45
$
8
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization
49
49
Amortization of debt discount and issuance
costs
2
2
Charges for losses on receivables and
inventories
8
14
Asset impairments
12
29
Compensation expense for share-based
payments
7
8
Deferred income taxes and deferred tax
asset valuation allowances
24
—
Contingent consideration payments in
excess of acquisition-date liability
—
(11
)
Changes in working capital and other
operating activities
41
(39
)
Net cash provided by operating
activities
188
60
Cash flows from investing
activities:
Capital expenditures
(25
)
(46
)
Businesses acquired, net of cash
acquired
(18
)
(5
)
Proceeds from collection of notes
receivable
818
—
Other investing activities
1
(1
)
Net cash provided by (used in) investing
activities
776
(52
)
Cash flows from financing
activities:
Net payments on long and short-term
borrowings
(25
)
(24
)
Debt retirement
(735
)
—
Cash dividends on common stock
(13
)
(14
)
Share purchases for taxes, net of proceeds
from employee share-based
transactions
(4
)
(4
)
Repurchase of common stock for
treasury
(30
)
(11
)
Contingent consideration payments up to
amount of acquisition-date liability
(1
)
(12
)
Other financing activities
—
1
Net cash used in financing activities
(808
)
(64
)
Effect of exchange rate changes on cash
and cash equivalents
(12
)
2
Net increase in cash, cash equivalents
and restricted cash
144
(54
)
Cash, cash equivalents and restricted cash
at beginning of period
700
660
Cash, cash equivalents and restricted cash
at end of period
$
844
$
606
Supplemental information
Right-of-use assets obtained in exchange
for new finance lease liabilities
$
3
$
2
Right-of-use assets obtained in exchange
for new operating lease liabilities
54
53
OFFICE DEPOT, INC. GAAP to Non-GAAP
Reconciliations (Unaudited)
We report our results in accordance with accounting principles
generally accepted in the United States (“GAAP”). We also review
certain financial measures excluding impacts of transactions that
are not related to our core operations (“non-GAAP”). Management
believes that the presentation of these non-GAAP financial measures
enhances the ability of its investors to analyze trends in its
business and provides a means to compare periods that may be
affected by various items that might obscure trends or developments
in its business. Management uses both GAAP and non-GAAP measures to
assist in making business decisions and assessing overall
performance. Non-GAAP measures help to evaluate programs and
activities that are intended to attract and satisfy customers,
separate from expenses and credits directly associated with Merger,
restructuring, and certain similar items. Certain non-GAAP measures
are also used for short and long-term incentive programs.
Our measurement of these non-GAAP financial measures may be
different from similarly titled financial measures used by others
and therefore may not be comparable. These non-GAAP financial
measures should not be considered superior to the GAAP measures,
but only to clarify some information and assist the reader. We have
included reconciliations of this information to the most comparable
GAAP measures in the tables included within this material.
Free cash flow is a non-GAAP measure, which we define as cash
flows from operating activities less capital expenditures. We
believe that free cash flow is an important indicator that provides
additional perspective on our ability to generate cash to fund our
strategy and expand our distribution network. Adjusted Free Cash
Flow is also a non-GAAP measure, which we define as cash flows from
operating activities less cash charges associated with the
Company’s Business Acceleration Program.
(In millions, except per share amounts)
Q1 2020
Reported (GAAP)
% of Sales
Less: Charges &
Credits
Adjusted (Non-GAAP)
% of Sales
Selling, general and administrative
expenses
$
521
19.1
%
$
—
$
521
19.1
%
Assets impairments
$
12
0.4
%
$
12
$
—
—
%
Merger and restructuring expenses, net
$
16
0.6
%
$
16
$
—
—
%
Operating income
$
80
2.9
%
$
(28
)
$
108
(6)
4.0
%
Income tax expense
$
21
0.8
%
$
(7
)
$
28
(7)
1.0
%
Net income
$
45
1.7
%
$
(21
)
$
66
(8)
2.4
%
Earnings per share (most dilutive)
$
0.08
$
(0.04
)
$
0.12
(8)
Depreciation and amortization
$
49
1.8
%
$
—
$
49
(9)
1.8
%
Q1 2019
Reported (GAAP)
% of Sales
Less: Charges &
Credits
Adjusted (Non-GAAP)
% of Sales
Selling, general and administrative
expenses
$
574
20.7
%
$
—
$
574
20.7
%
Assets impairments
$
29
1.0
%
$
29
$
—
—
%
Merger and restructuring expenses, net
$
14
0.5
%
$
14
$
—
—
%
Operating income
$
24
0.9
%
$
(43
)
$
67
(6)
2.4
%
Income tax expense
$
1
0.0
%
$
(12
)
$
13
(7)
0.5
%
Net income
$
8
0.3
%
$
(31
)
$
39
(8)
1.4
%
Earnings per share (most dilutive)
$
0.01
$
(0.06
)
$
0.07
(8)
Depreciation and amortization
$
49
1.8
%
$
1
$
48
(9)
1.7
%
OFFICE DEPOT, INC.
GAAP to Non-GAAP
Reconciliations
(Unaudited)
13 Weeks Ended
March 28,
March 30,
Adjusted
EBITDA:
2020
2019
Net income
$
45
$
8
Income tax expense
21
1
Income before income taxes
66
9
Add (subtract)
Interest income
(3
)
(6
)
Interest expense
18
23
Adjusted depreciation and amortization
(9)
49
48
Charges and credits, pretax (10)
28
43
Adjusted EBITDA
$
157
$
118
Amounts may not foot due to rounding
(6)
Adjusted operating income for all periods
presented herein excludes merger and restructuring expenses, net,
asset impairments (if any) and executive transition costs (if
any).
(7)
Adjusted income tax expense for all
periods presented herein exclude the tax effect of the charges or
credits not indicative of core operations as described in the
preceding notes.
(8)
Adjusted net income and adjusted earnings
per share (most dilutive) for all periods presented exclude merger
and restructuring expenses, net, asset impairments (if any),
executive transition costs (if any), loss on modification of debt
(if any), and exclude the tax effect of the charges or credits not
indicative of core operations.
(9)
Adjusted depreciation and amortization for
all periods presented herein excludes accelerated depreciation
caused by updating the salvage value and shortening the useful life
of depreciable fixed assets to coincide with the planned store
closures under an approved restructuring plan, but only if
impairment is not present.
(10)
Charges and credits, pretax for all
periods presented include merger and restructuring expenses, net,
asset impairments (if any), and executive transition costs (if
any).
OFFICE DEPOT, INC.
GAAP to Non-GAAP
Reconciliations
(Unaudited)
13 Weeks Ended
March 28,
March 30,
Free cash
flow
2020
2019
Net cash provided by operating
activities
$
188
$
60
Capital expenditures
(25
)
(46
)
Free cash flow (11)
$
163
$
14
Amounts may not foot due to rounding
(11)
Free Cash Flow includes the impact of cash
charges associated with the Company’s Business Acceleration Program
of $10 million in the first quarter of 2020. Accordingly, excluding
this item, Adjusted Free Cash Flow was $173 million in the first
quarter of 2020.
OFFICE DEPOT, INC.
Store Statistics
(Unaudited)
Q1
Q1
2020
2019
Retail Division:
Stores opened
—
—
Stores closed
12
2
Total retail stores (U.S.)
1,295
1,359
Total square footage (in millions)
28.8
30.3
Average square footage per store (in
thousands)
22.3
22.3
View source
version on businesswire.com: https://www.businesswire.com/news/home/20200506005257/en/
Tim Perrott Investor Relations 561-438-4629
Tim.Perrott@officedepot.com
Danny Jovic Media Relations 561-438-1594
Danny.Jovic@officedepot.com
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