10-Q 1 odp-10q_20190330.htm 10-Q odp-10q_20190330.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended March 30, 2019

or

Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the transition period from                     to                    

Commission File Number 1-10948

Office Depot, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware

59-2663954

(State or Other Jurisdiction of

Incorporation or Organization)

(IRS Employer

Identification No.)

 

 

 

6600 North Military Trail, Boca Raton, Florida

33496

(Address of Principal Executive Offices)

(Zip Code)

(561) 438-4800

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

 

Trading

Symbol(s)

 

Name of Each Exchange on which Registered

Common Stock, par value $0.01 per share

 

ODP

 

NASDAQ Stock Market

The number of shares outstanding of the registrant’s common stock, as of the latest practicable date: At May 1, 2019, there were 546,277,691 outstanding shares of Office Depot, Inc. Common Stock, $0.01 par value.


TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

 

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

3

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 

4

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

 

5

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

6

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

 

7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

25

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

34

Item 4. Controls and Procedures

 

34

PART II. OTHER INFORMATION

 

35

Item 1. Legal Proceedings

 

35

Item 1A. Risk Factors

 

35

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

35

Item 6. Exhibits

 

36

SIGNATURES

 

37

EX 3.1

 

 

EX 31.1

 

 

EX 31.2

 

 

EX 32

 

 

EX 101

 

 

 

2


OFFICE DEPOT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)

(Unaudited)

 

 

 

13 Weeks Ended

 

 

 

March 30,

 

 

March 31,

 

 

 

2019

 

 

2018

 

Sales:

 

 

 

 

 

 

 

 

Products

 

$

2,361

 

 

$

2,423

 

Services

 

 

408

 

 

 

407

 

Total sales

 

 

2,769

 

 

 

2,830

 

Cost of goods and occupancy costs:

 

 

 

 

 

 

 

 

Products

 

 

1,841

 

 

 

1,891

 

Services

 

 

287

 

 

 

272

 

Total cost of goods and occupancy costs

 

 

2,128

 

 

 

2,163

 

Gross profit

 

 

641

 

 

 

667

 

Selling, general and administrative expenses

 

 

574

 

 

 

573

 

Asset impairments

 

 

29

 

 

 

 

Merger and restructuring expenses, net

 

 

14

 

 

 

17

 

Operating income

 

 

24

 

 

 

77

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

6

 

 

 

6

 

Interest expense

 

 

(23

)

 

 

(29

)

Other income, net

 

 

2

 

 

 

1

 

Income from continuing operations before income taxes

 

 

9

 

 

 

55

 

Income tax expense

 

 

1

 

 

 

22

 

Net income from continuing operations

 

 

8

 

 

 

33

 

Discontinued operations, net of tax

 

 

 

 

 

8

 

Net income

 

$

8

 

 

$

41

 

Basic earnings per common share

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.01

 

 

$

0.06

 

Discontinued operations

 

 

 

 

 

0.01

 

Net basic earnings per common share

 

$

0.01

 

 

$

0.07

 

Diluted earnings per common share

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.01

 

 

$

0.06

 

Discontinued operations

 

 

 

 

 

0.01

 

Net diluted earnings per common share

 

$

0.01

 

 

$

0.07

 

 

This report should be read in conjunction with the Notes to Condensed Consolidated Financial Statements herein and the Notes to Consolidated Financial Statements in the Office Depot, Inc. Form 10-K filed February 27, 2019 (the “2018 Form 10-K”).

3


OFFICE DEPOT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

 

 

 

13 Weeks Ended

 

 

 

March 30,

2019

 

 

March 31,

2018

 

Net income

 

$

8

 

 

$

41

 

Other comprehensive income, net of tax, where applicable:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

10

 

 

 

 

Reclassification of foreign currency translation adjustments

   realized upon disposal of business

 

 

 

 

 

14

 

Other

 

 

1

 

 

 

 

Total other comprehensive income, net of tax, where applicable

 

 

11

 

 

 

14

 

Comprehensive income

 

$

19

 

 

$

55

 

 

This report should be read in conjunction with the Notes to Condensed Consolidated Financial Statements herein and the Notes to Consolidated Financial Statements in the 2018 Form 10-K.

4


OFFICE DEPOT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share and per share amounts)

 

 

 

March 30,

 

 

December 29,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

604

 

 

$

658

 

Receivables, net

 

 

944

 

 

 

885

 

Inventories

 

 

1,034

 

 

 

1,065

 

Prepaid expenses and other current assets

 

 

84

 

 

 

75

 

Timber notes receivable, current maturities

 

 

836

 

 

 

 

Total current assets

 

 

3,502

 

 

 

2,683

 

Property and equipment, net

 

 

730

 

 

 

763

 

Operating lease right-of-use assets

 

 

1,398

 

 

 

 

Goodwill

 

 

922

 

 

 

914

 

Other intangible assets, net

 

 

409

 

 

 

422

 

Timber notes receivable

 

 

 

 

 

842

 

Deferred income taxes

 

 

244

 

 

 

284

 

Other assets

 

 

266

 

 

 

258

 

Total assets

 

$

7,471

 

 

$

6,166

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Trade accounts payable

 

$

1,098

 

 

$

1,110

 

Accrued expenses and other current liabilities

 

 

1,294

 

 

 

978

 

Income taxes payable

 

 

 

 

 

2

 

Short-term borrowings and current maturities of long-term debt

 

 

93

 

 

 

95

 

Non-recourse debt, current maturities

 

 

748

 

 

 

 

Total current liabilities

 

 

3,233

 

 

 

2,185

 

Deferred income taxes and other long-term liabilities

 

 

181

 

 

 

300

 

Pension and postretirement obligations, net

 

 

111

 

 

 

111

 

Long-term debt, net of current maturities

 

 

632

 

 

 

690

 

Operating lease liabilities

 

 

1,208

 

 

 

 

Non-recourse debt

 

 

 

 

 

754

 

Total liabilities

 

 

5,365

 

 

 

4,040

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock — authorized 800,000,000 shares of $0.01 par value; issued shares —

   620,103,134 at March 30, 2019 and 614,170,704 at December 29, 2018;

   outstanding shares — 546,192,558 at March 30, 2019 and 543,833,428 at

   December 29, 2018

 

 

6

 

 

 

6

 

Additional paid-in capital

 

 

2,664

 

 

 

2,677

 

Accumulated other comprehensive loss

 

 

(88

)

 

 

(99

)

Accumulated deficit

 

 

(180

)

 

 

(173

)

Treasury stock, at cost — 73,910,576 shares at March 30, 2019 and 70,337,276

   shares at December 29, 2018

 

 

(296

)

 

 

(285

)

Total stockholders' equity

 

 

2,106

 

 

 

2,126

 

Total liabilities and stockholders’ equity

 

$

7,471

 

 

$

6,166

 

 

This report should be read in conjunction with the Notes to Condensed Consolidated Financial Statements herein and the Notes to Consolidated Financial Statements in the 2018 Form 10-K.

5


OFFICE DEPOT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

 

 

13 Weeks Ended

 

 

 

March 30,

 

 

March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities of continuing operations:

 

 

 

 

 

 

 

 

Net income

 

$

8

 

 

$

41

 

Income from discontinued operations, net of tax

 

 

 

 

 

8

 

Net income from continuing operations

 

 

8

 

 

 

33

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

49

 

 

 

47

 

Amortization of debt discount and issuance costs

 

 

2

 

 

 

2

 

Charges for losses on receivables and inventories

 

 

14

 

 

 

14

 

Asset impairments

 

 

29

 

 

 

 

Compensation expense for share-based payments

 

 

8

 

 

 

4

 

Deferred income taxes and deferred tax asset valuation allowances

 

 

 

 

 

19

 

Contingent consideration payments in excess of acquisition-date liability

 

 

(11

)

 

 

 

Changes in working capital and other

 

 

(39

)

 

 

88

 

Net cash provided by operating activities of continuing operations

 

 

60

 

 

 

207

 

Cash flows from investing activities of continuing operations:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(46

)

 

 

(37

)

Businesses acquired, net of cash acquired

 

 

(5

)

 

 

(30

)

Other investing activities

 

 

(1

)

 

 

1

 

Net cash used in investing activities of continuing operations

 

 

(52

)

 

 

(66

)

Cash flows from financing activities of continuing operations:

 

 

 

 

 

 

 

 

Net payments on long and short-term borrowings

 

 

(24

)

 

 

(25

)

Cash dividends on common stock

 

 

(14

)

 

 

(14

)

Share purchases for taxes, net of proceeds from employee share-based transactions

 

 

(4

)

 

 

(3

)

Repurchase of common stock for treasury

 

 

(11

)

 

 

 

Contingent consideration payments up to amount of acquisition-date liability

 

 

(12

)

 

 

(2

)

Other financing activities

 

 

1

 

 

 

3

 

Net cash used in financing activities of continuing operations

 

 

(64

)

 

 

(41

)

Cash flows from discontinued operations:

 

 

 

 

 

 

 

 

Operating activities of discontinued operations

 

 

 

 

 

10

 

Investing activities of discontinued operations

 

 

 

 

 

30

 

Net cash provided by discontinued operations

 

 

 

 

 

40

 

Effect of exchange rate changes on cash and cash equivalents

 

 

2

 

 

 

(2

)

Net increase in cash and cash equivalents

 

 

(54

)

 

 

138

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

660

 

 

 

639

 

Cash, cash equivalents and restricted cash at end of period

 

 

606

 

 

 

777

 

Cash and cash equivalents of discontinued operations

 

 

 

 

 

(37

)

Cash, cash equivalents and restricted cash at end of period — continuing operations

 

$

606

 

 

$

740

 

 

This report should be read in conjunction with the Notes to Condensed Consolidated Financial Statements herein and the Notes to Consolidated Financial Statements in the 2018 Form 10-K.

6


OFFICE DEPOT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In millions, except share and per share amounts)

(Unaudited)

 

 

 

13 Weeks Ended March 30, 2019

 

 

 

Common

Stock

Shares

 

 

Common

Stock

Amount

 

 

Additional

Paid-in

Capital

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Accumulated

Deficit

 

 

Treasury

Stock

 

 

Total

Equity

 

Balance at December 29, 2018

 

 

614,170,704

 

 

$

6

 

 

$

2,677

 

 

$

(99

)

 

$

(173

)

 

$

(285

)

 

$

2,126

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8

 

 

 

 

 

 

8

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

11

 

Exercise and release of incentive stock

   (including income tax benefits and

   withholding)

 

 

5,932,430

 

 

 

 

 

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

(7

)

Amortization of long-term incentive stock

   grants

 

 

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

8

 

Dividends paid on common stock

   ($0.025 per share)

 

 

 

 

 

 

 

 

(14

)

 

 

 

 

 

 

 

 

 

 

 

(14

)

Repurchase of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11

)

 

 

(11

)

Adjustment for adoption of accounting standard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15

)

 

 

 

 

 

(15

)

Balance at March 30, 2019

 

 

620,103,134

 

 

$

6

 

 

$

2,664

 

 

$

(88

)

 

$

(180

)

 

$

(296

)

 

$

2,106

 

 

 

 

13 Weeks Ended March 31, 2018

 

 

 

Common

Stock

Shares

 

 

Common

Stock

Amount

 

 

Additional

Paid-in

Capital

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Accumulated

Deficit

 

 

Treasury

Stock

 

 

Total

Equity

 

Balance at December 30, 2017

 

 

610,353,994

 

 

$

6

 

 

$

2,711

 

 

$

(78

)

 

$

(273

)

 

$

(246

)

 

$

2,120

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

41

 

 

 

 

 

 

41

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

14

 

 

 

 

 

 

 

 

 

14

 

Exercise and release of incentive stock

   (including income tax benefits and

   withholding)

 

 

3,862,224

 

 

 

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

(3

)

Amortization of long-term incentive stock

   grants

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

3

 

Dividends paid on common stock

   ($0.025 per share)

 

 

 

 

 

 

 

 

(14

)

 

 

 

 

 

 

 

 

 

 

 

(14

)

Adjustment for adoption of accounting standard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4

)

 

 

 

 

 

(4

)

Balance at March 31, 2018

 

 

614,216,218

 

 

$

6

 

 

$

2,697

 

 

$

(64

)

 

$

(236

)

 

$

(246

)

 

$

2,157

 

 

This report should be read in conjunction with the Notes to Condensed Consolidated Financial Statements herein and the Notes to Consolidated Financial Statements in the 2018 Form 10-K.

 

 

 

7


OFFICE DEPOT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Office Depot, Inc. including its consolidated subsidiaries (“Office Depot” or the “Company”), is a leading provider of business services and supplies, products and technology solutions. Through its banner brands Office Depot®, OfficeMax®, CompuCom® and Grand&Toy®, the Company offers its customers the tools and resources they need to focus on starting, growing and running their business. The Company’s common stock is traded on the NASDAQ Global Select Market under the ticker symbol ODP. The Company’s corporate headquarters is located in Boca Raton, FL, and its primary website is www.officedepot.com.

As of March 30, 2019, the Company had three reportable segments (or “Divisions”): Business Solutions Division, Retail Division and the CompuCom Division. The CompuCom Division was formed after the acquisition of CompuCom Systems, Inc. (“CompuCom”) on November 8, 2017 and reflects the operations of that business.

The Condensed Consolidated Financial Statements as of March 30, 2019, and for the 13-week period ended March 30, 2019 (also referred to as the “first quarter of 2019”) and March 31, 2018 (also referred to as the “first quarter of 2018”) are unaudited. However, in management’s opinion, these Condensed Consolidated Financial Statements reflect all adjustments of a normal recurring nature necessary to provide a fair presentation of the Company’s financial position, results of operations and cash flows for the periods presented. Business acquisitions in 2018 and 2019 are included prospectively from the date of acquisition, thus affecting the comparability of the Company’s financial statements for all periods presented in this report on Form 10-Q.

The Company has prepared the Condensed Consolidated Financial Statements included herein pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“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 (“GAAP”), have been condensed or omitted pursuant to those SEC rules and regulations. The preparation of these Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. For a better understanding of the Company and its Condensed Consolidated Financial Statements, the Company recommends reading these Condensed Consolidated Financial Statements in conjunction with the audited financial statements, which are included in the Company’s 2018 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. As of March 30, 2019 and December 29, 2018, Trade accounts payable and Accrued expenses and other current liabilities, in the aggregate, included $32 million and $27 million, respectively, of amounts not yet presented for payment drawn in excess of disbursement account book balances, after considering offset provisions.

At March 30, 2019, cash and cash equivalents from continuing operations held outside the United States amounted to $145 million. 

Restricted Cash

Restricted cash consists primarily of short-term cash deposits having original maturity dates of twelve months or less that serve as collateral to certain of the Company’s letters of credit. Restricted cash is valued at cost, which approximates fair value. At March 30, 2019 and December 29, 2018, restricted cash amounted to $2 million and is included in Prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets.

Leasing Arrangements

The Company conducts a substantial portion of its business in leased properties. Some of the Company’s leases contain escalation clauses and renewal options. The Company recognizes rental expense for operating leases that contain predetermined fixed escalation clauses on a straight-line basis over the expected term of the lease.

Prior to the adoption of the new lease accounting standard on the first day of fiscal 2019, the expected term of a lease was calculated from the date the Company first took possession of the facility, including any periods of free rent, and extended through the non-cancellable period and any option or renewal periods management believed were reasonably assured of being exercised. Rent abatements and escalations were considered in the calculation of minimum lease payments in the Company’s lease classification assessment and in determining straight-line rent expense for operating leases. Straight-line rent expense was also adjusted to reflect any allowances or reimbursements provided by the lessor. When required under lease agreements, estimated costs to return facilities to original condition were accrued over the lease period.

8


OFFICE DEPOT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) – (Continued)

 

Subsequent to the adoption of the new lease accounting standard, the Company determines if an arrangement is a lease at inception. Operating leases are included in Operating lease right-of-use (“ROU”) assets, Accrued expenses and other current liabilities, and Operating lease liabilities on the Condensed Consolidated Balance Sheet as of March 30, 2019. Finance leases are included in Property and equipment, net, Short-term borrowings and current maturities of long-term debt, and Long-term debt, net of current maturities on the Condensed Consolidated Balance Sheet as of March 30, 2019. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of the future minimum lease payments over the lease term. As the rate implicit in the lease is not readily determinable for most of the leases, the Company has utilized its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The Company uses the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. The operating lease ROU asset also includes any lease payments made prior to commencement and excludes lease incentives and initial direct costs incurred. Certain leases include one or more options to renew, with renewal terms that can extend the lease from five to 25 years or more, which is generally at the Company’s discretion. Any option or renewal periods management believed were reasonably certain of being exercised are included in the lease term. Operating lease expense for lease payments is recognized on a straight-line basis over the lease term.

The Company has lease agreements with lease and non-lease components, for which it has made an accounting policy election to account for these as a single lease component. Refer to the “New Accounting Standards” section below for more information relating to the adoption of the new lease accounting standard.

New Accounting Standards

Standards that are not yet adopted

Cloud computing arrangements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update that provides guidance regarding the accounting for implementation costs in cloud computing arrangements. This accounting update is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the impact of this new standard and believes the adoption will not have a material impact on its Consolidated Financial Statements.

Defined benefit plan

In August 2018, the FASB issued an accounting standard update that modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This accounting update is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the impact of this new standard and believes the adoption will not have a material impact on its Consolidated Financial Statements.

Fair value measurements

In August 2018, the FASB issued an accounting standard update that adds, removes, and modifies the disclosure requirements related to fair value measurements. This accounting update is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the impact of this new standard and believes the adoption will not have a material impact on its Consolidated Financial Statements.

Standards that were adopted

Leases

In February 2016, the FASB issued an accounting standards update that requires lessees to recognize most leases on their balance sheets related to the rights and obligations created by those leases. The accounting treatment for finance leases and lessors remains 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 initial standard required a modified retrospective transition approach, with application, including disclosures, in all comparative periods presented. In July 2018, the FASB approved an amendment to the new guidance that introduced an alternative modified retrospective transition approach granting companies the option of using the effective date of the new standard as the date of initial application. The Company adopted the standard on the first day of the first quarter of 2019 using this alternative transition approach.

9


OFFICE DEPOT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) – (Continued)

 

The Company elected the transition package of practical expedients that is permitted by the standard. The package of practical expedients allows the Company to not reassess previous accounting conclusions regarding whether existing arrangements are or contain leases, the classification of existing leases, and the treatment of initial direct costs. The Company did not elect the hindsight transition practical expedient allowed for by the new standard, which allows entities to use hindsight when determining lease term and impairment of ROU assets. Additionally, the Company elected certain other practical expedients offered by the new standard which it will apply to all asset classes, including the option not to separate lease and non-lease components and instead to account for them as a single lease component and the option not to recognize ROU assets and related liabilities that arise from short-term leases (i.e., leases with terms of twelve months or less that do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise).

Substantially all of the Company’s retail store locations, supply chain facilities, certain corporate facilities and copy print equipment are subject to operating lease arrangements. As a result, the standard had material impacts on the Condensed Consolidated Balance Sheet, but did not have an impact on the Condensed Consolidated Statement of Operations and Condensed Consolidated Statement of Cash Flows. The most significant impacts of the standard on the Condensed Consolidated Balance Sheet on the date of adoption were as follows:

 

Recognition of $1.4 billion Operating lease right-of-use assets and $1.6 billion Operating lease liabilities;

 

Derecognition of approximately $41 million of Property and equipment, net and $39 million of financing obligations associated with non-owned properties that were capitalized under previously existing build-to-suit lease accounting rules;

 

Cumulative effect of $15 million adoption date adjustments to Accumulated deficit comprised of a $20 million impairment charge, net of tax effect, to the ROU assets, primarily because the fair market value of certain retail stores was lower than their carrying value prior to the adoption date; $4 million deferred gain, net of tax effect, related to transactions accounted for as sales and operating leasebacks under the previous lease standard; and a $1 million credit, net of tax effect, arising from the derecognition of assets and liabilities associated with non-owned properties that were capitalized under previously existing build-to-suit lease accounting rules.

 

As part of its adoption of the new lease accounting standard, the Company also implemented new internal controls and updated accounting policies and procedures, operational processes and documentation practices to enable the preparation of financial information on adoption. Refer to Note 8 for additional disclosures required as a result of the adoption of this new standard.

NOTE 2. ACQUISITIONS

Since 2017, the Company has been undergoing a strategic business transformation to pivot into an integrated business-to-business (“B2B”) distribution platform, with the objective of expanding its product offerings to include value-added services and capture greater market share. As part of this transformation, the Company acquired two businesses during the first quarter of 2019. These two acquisitions consist of small independent regional office supply distribution businesses that continue to expand the Company’s reach and distribution network into geographic areas that were previously underserved.

 

The aggregate total purchase consideration, including contingent consideration, for the acquisitions completed in the first quarter of 2019 was approximately $7 million, subject to certain customary post-closing adjustments. The aggregate purchase price was primarily funded with cash on hand, with the remainder consisting of contingent consideration, estimated to be less than $1 million, to be paid in the first quarter of 2020. The acquisitions were treated as purchases in accordance with ASC 805, Business Combinations (“ASC 805”) which requires allocation of the purchase price to the estimated fair values of assets and liabilities acquired in the transaction including goodwill and other intangible assets. The Company has performed a preliminary purchase price allocation of the aggregate purchase price to the estimated fair values of assets and liabilities acquired in the transactions, including $1 million of customer relationship intangible assets and $5 million of goodwill. The remaining aggregate purchase price was primarily allocated to working capital accounts. These assets and liabilities are included in the balance sheet as of March 30, 2019. As additional information is obtained about these assets and liabilities within the measurement period (not to exceed one year from the dates of acquisition), the Company will refine its estimates of fair value to allocate the purchase price. Changes in fair value of the contingent consideration may result in additional transaction related expenses. The operating results of the office supply distribution businesses are combined with the Company’s operating results subsequent to their purchase dates, and are included in the Business Solutions Division. Certain disclosures set forth under ASC 805, including supplemental pro forma financial information, are not disclosed because the operating results of the acquired businesses, individually and in the aggregate, are not material to the Company.

 

10


OFFICE DEPOT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) – (Continued)

 

During 2018, the Company recognized a contingent consideration liability of $25 million in connection with the acquisition of an enterprise IT solutions integrator and managed services provider. In the first quarter of 2019, the Company paid $23 million of the contingent consideration liability, of which $12 million was treated as a financing cash outflow because it related to the acquisition-date accrual, and $11 million was presented as a cash outflow from operating activities as it was accrued subsequent to the acquisition date based on new information obtained on the financial performance of the acquired entity. The remaining $2 million of this contingent consideration liability will be paid in the fourth quarter of 2019 and will be treated as a cash outflow from operating activities.  

Based on new information received, the preliminary purchase price allocations of the companies acquired in 2018 have been adjusted during the respective measurement periods. These adjustments were insignificant individually and in the aggregate to the Company’s Condensed Consolidated Financial Statements.

Under the guidance on accounting for business combinations, merger and integration costs are not included as components of consideration transferred, instead, they are accounted for as expenses in the period in which the costs are incurred. Transaction-related expenses are included in the Merger and restructuring expense, net line in the Condensed Consolidated Statements of Operations. Refer to Note 3 for additional information about the merger and restructuring expenses incurred during the first quarter of 2019.

NOTE 3. MERGER AND RESTRUCTURING ACTIVITY

Since 2017, the Company has taken actions to optimize its asset base and drive operational efficiencies. These actions include acquiring profitable businesses, closing underperforming retail stores and non-strategic distribution facilities, consolidating functional activities, eliminating redundant positions and disposing of non-strategic businesses and assets. The expenses and any income recognized directly associated with these actions are included in Merger and restructuring expenses, net on a separate line in the Condensed Consolidated Statements of Operations in order to identify these activities apart from the expenses incurred to sell to and service its customers. These expenses are not included in the determination of Division operating income. The table below summarizes the major components of Merger and restructuring expenses, net.

 

 

 

First Quarter

 

(In millions)

 

2019

 

 

2018

 

Merger and transaction related expenses, net

 

 

 

 

 

 

 

 

Severance and retention

 

$

1

 

 

$

2

 

Transaction and integration

 

 

7

 

 

 

7

 

Facility closure, contract termination, and other expenses, net

 

 

 

 

 

3

 

Total Merger and transaction related expenses, net

 

 

8

 

 

 

12

 

Restructuring expenses

 

 

 

 

 

 

 

 

Facility closure, contract termination, professional fees and other expenses, net

 

 

6

 

 

 

5

 

Total Restructuring expenses

 

 

6

 

 

 

5

 

Total Merger and restructuring expenses, net

 

$

14

 

 

$

17

 

 

Merger and transaction related expenses, net

Severance and retention include expenses related to the integration of staff functions in connection with business acquisitions and are expensed through the severance and retention period. Transaction and integration primarily include legal, accounting, and other third-party expenses incurred in connection with acquisitions and business integration activities. Facility closure, contract termination and other expenses, net primarily relate to facility closure accruals, contract termination costs, gains and losses on asset dispositions, and accelerated depreciation. Also included in the merger and transaction related expenses, net in the first quarter of 2018 are $3 million of integration expenses and $3 million of facility closure costs associated with the 2013 OfficeMax merger. All integration activities associated with the OfficeMax merger were completed in 2018.

Restructuring expenses

On May 8, 2019, in connection with the earnings release and conference call for the first quarter 2019 results, the Company announced that its Board of Directors approved a company-wide, multi-year, cost reduction and business improvement program to systematically drive down costs, improve operational efficiencies, and enable future growth investments. Under this program (the “Business Acceleration Program”), the Company will make several organizational realignments stemming from process improvements, increased leverage of technology and accelerated use of automation. This will result in the elimination of certain positions and a flatter organization. In connection with this program, the Company anticipates closing approximately 90 underperforming retail stores in 2020 and 2021, and 9 other facilities, consisting of distribution centers and sales offices. As a result of these changes, the Company expects to realize savings of at least $40 million in 2019, and run-rate savings of at least $100 million when fully implemented. Total estimated costs to implement the Business Acceleration Program are expected to be approximately

11


OFFICE DEPOT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) – (Continued)

 

$106 million to $116 million comprised of (1) severance and related employee costs of $38 million to $40 million, (2) recruitment and relocation costs of $2 million to $4 million, (3) retail store and facility closure costs of $25 million to $27 million, (4) third-party costs to facilitate the execution of the program of $35 million to $37 million,  and (5) other costs of approximately $6 million to $8 million. Of the aggregate costs to implement the Business Acceleration Program, $99 million to $101 million are expected to be cash expenditures through 2021. For the remainder of fiscal 2019, the Company expects to incur approximately $85 million, of which approximately $70 million will be cash, for severance and related employee costs, recruitment and relocation, and third-party costs including legal and consulting fees under the Business Acceleration Program.

 

Included in restructuring expenses in the first quarter of 2019 and 2018 are costs incurred in connection with the Comprehensive Business Review, a program the Company announced in 2016. These costs include severance, facility closure costs, contract termination, accelerated depreciation, professional fees, relocation and disposal gains and losses, as well as other costs associated with retail store closures. In the first quarter of 2019, the Company closed 2 retail stores, and expects to close approximately 57 additional stores through the end of the Comprehensive Business Review program in 2019.

Merger and Restructuring Accruals

The activity in the merger and restructuring accruals in the first quarter of 2019 is presented in the table below.

 

 

 

Balance as of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of

 

 

 

December 29,

 

 

Charges

 

 

Cash

 

 

Adjustments

 

 

March 30,

 

(In millions)

 

2018

 

 

Incurred

 

 

Payments

 

 

(a)

 

 

2019

 

Termination benefits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Merger-related accruals

 

$

3

 

 

$

1

 

 

$

(2

)

 

$

 

 

$

2

 

Comprehensive Business Review

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Lease and contract obligations, accruals for facilities

   closures and other costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Merger-related accruals

 

 

10

 

 

 

 

 

 

 

 

 

(10

)

 

 

 

Comprehensive Business Review

 

 

5

 

 

 

5

 

 

 

 

 

 

(3

)

 

 

7

 

Total

 

$

18

 

 

$

7

 

 

$

(2

)

 

$

(13

)

 

$

10

 

 

 

(a)

Represents reclassification of operating lease obligations associated with facility closures to Operating lease right-of-use assets on the Consolidated Balance Sheet in accordance with the new lease accounting standard.

 

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, in the Condensed Consolidated Balance Sheets.

12


OFFICE DEPOT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) – (Continued)

 

NOTE 4. REVENUE RECOGNITION

Products and Services Revenue

The following table provides information about disaggregated revenue by Division, and major products and services categories.

 

 

 

First Quarter of 2019

 

(In millions)

 

Business

Solutions

Division

 

 

Retail

Division

 

 

CompuCom

Division

 

 

Other

 

 

Total

 

Major products and services categories

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplies

 

$

771

 

 

$

443

 

 

$

 

 

$

3

 

 

$

1,217

 

Technology

 

 

326

 

 

 

485

 

 

 

62

 

 

 

1

 

 

 

874

 

Furniture and other

 

 

171

 

 

 

98

 

 

 

 

 

 

1

 

 

 

270

 

Services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology

 

 

 

 

 

8

 

 

 

182

 

 

 

(2

)

 

 

188

 

Copy, print, and other

 

 

76

 

 

 

141

 

 

 

3

 

 

 

 

 

 

220

 

Total

 

$

1,344

 

 

$

1,175

 

 

$

247

 

 

$

3

 

 

$

2,769

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter of 2018

 

(In millions)

 

Business

Solutions

Division

 

 

Retail

Division

 

 

CompuCom

Division

 

 

Other

 

 

Total

 

Major products and services categories

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplies

 

$

735

 

 

$

468

 

 

$

 

 

$

1

 

 

$

1,204

 

Technology

 

 

354

 

 

 

539

 

 

 

46

 

 

 

 

 

 

939

 

Furniture and other

 

 

172

 

 

 

108

 

 

 

 

 

 

 

 

 

280

 

Services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology

 

 

 

 

 

9

 

 

 

210

 

 

 

 

 

 

219

 

Copy, print, and other

 

 

67

 

 

 

120