Office Depot Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
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þ |
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Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
For
the quarterly period ended September 24, 2005
or
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o |
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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)
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Delaware |
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59-2663954 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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2200 Old Germantown Road; Delray Beach, Florida
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33445 |
(Address of principal executive offices)
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(Zip Code) |
(561) 438-4800
(Registrants 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 þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). Yes þ No o
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes o No þ
The number of shares outstanding of the registrants common stock, as of the latest practicable
date: At October 14, 2005 there were 308,853,609 outstanding shares of Office Depot, Inc. Common
Stock, $0.01 par value.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1 FINANCIAL STATEMENTS
OFFICE DEPOT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
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As of |
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As of |
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September 24, |
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December 25, |
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2005 |
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2004 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
584,701 |
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$ |
793,727 |
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Short-term investments |
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248,675 |
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161,133 |
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Receivables, net |
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1,279,362 |
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1,303,888 |
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Merchandise inventories, net |
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1,243,890 |
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1,408,778 |
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Deferred income taxes |
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148,309 |
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133,282 |
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Prepaid expenses and other current assets |
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73,352 |
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115,363 |
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Total current assets |
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3,578,289 |
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3,916,171 |
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Property and equipment, net |
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1,292,596 |
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1,463,028 |
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Goodwill |
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918,567 |
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1,049,669 |
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Other assets |
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356,958 |
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338,483 |
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Total assets |
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$ |
6,146,410 |
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$ |
6,767,351 |
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Liabilities and stockholders equity |
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Current liabilities: |
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Trade accounts payable |
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$ |
1,255,432 |
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$ |
1,569,862 |
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Accrued expenses and other current liabilities |
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1,017,823 |
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900,086 |
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Income taxes payable |
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52,560 |
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133,266 |
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Current maturities of long-term debt |
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13,093 |
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15,143 |
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Total current liabilities |
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2,338,908 |
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2,618,357 |
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Deferred income taxes and other long-term liabilities |
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307,871 |
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342,266 |
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Long-term debt, net of current maturities |
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552,558 |
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583,680 |
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Commitments and contingencies |
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Stockholders equity: |
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Common stock authorized 800,000,000 shares of $.01 par value;
outstanding shares 418,934,660 in 2005 and 404,925,515 in 2004 |
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4,189 |
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4,049 |
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Additional paid-in capital |
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1,475,947 |
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1,255,494 |
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Accumulated other comprehensive income |
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164,204 |
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339,708 |
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Retained earnings |
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2,760,801 |
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2,593,275 |
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Treasury stock, at cost 111,142,167 shares in 2005 and
92,623,768 shares in 2004 |
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(1,458,068 |
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(969,478 |
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Total stockholders equity |
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2,947,073 |
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3,223,048 |
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Total liabilities and stockholders equity |
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$ |
6,146,410 |
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$ |
6,767,351 |
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This report should be read in conjunction with the Notes to Condensed Consolidated Financial
Statements (Notes) herein and the Notes to Consolidated Financial Statements in the Office Depot,
Inc. Form 10-K filed March 10, 2005 (the 2004 Form 10-K).
2
OFFICE DEPOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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13 Weeks Ended |
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39 Weeks Ended |
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September 25, |
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September 25, |
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2004 |
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2004 |
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September 24, |
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(As Restated |
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September 24, |
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(As Restated |
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2005 |
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See Note B) |
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2005 |
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See Note B) |
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Sales |
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$ |
3,492,900 |
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$ |
3,327,804 |
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$ |
10,559,843 |
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$ |
10,095,281 |
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Cost of goods sold and occupancy costs |
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2,446,301 |
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2,286,015 |
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7,325,342 |
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6,943,514 |
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Gross profit |
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1,046,599 |
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1,041,789 |
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3,234,501 |
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3,151,767 |
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Store and warehouse operating and
selling expenses |
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836,179 |
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735,939 |
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2,394,011 |
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2,227,963 |
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Asset impairments |
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121,902 |
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121,902 |
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General and administrative expenses |
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180,168 |
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162,864 |
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492,466 |
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479,629 |
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Other operating expenses |
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5,067 |
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9,199 |
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15,387 |
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17,066 |
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Operating profit (loss) |
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(96,717 |
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133,787 |
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210,735 |
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427,109 |
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Other income (expense): |
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Interest income |
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6,302 |
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4,805 |
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17,532 |
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12,677 |
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Interest expense |
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(6,576 |
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(16,508 |
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(32,138 |
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(47,780 |
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Miscellaneous income, net |
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5,540 |
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5,400 |
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17,931 |
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13,818 |
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Earnings (loss) before income taxes |
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(91,451 |
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127,484 |
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214,060 |
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405,824 |
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Income tax (benefit) expense |
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(43,570 |
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38,202 |
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46,534 |
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122,449 |
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Net earnings (loss) |
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$ |
(47,881 |
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$ |
89,282 |
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$ |
167,526 |
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$ |
283,375 |
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Earnings (loss) per common share: |
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Basic |
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$ |
(0.15 |
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$ |
0.29 |
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$ |
0.54 |
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$ |
0.91 |
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Diluted |
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(0.15 |
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0.28 |
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0.53 |
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0.90 |
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Weighted average number of common
shares outstanding: |
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Basic |
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311,915 |
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312,598 |
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312,690 |
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311,738 |
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Diluted |
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311,915 |
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316,034 |
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317,640 |
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315,929 |
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This report should be read in conjunction with the Notes herein and the Notes to Consolidated
Financial Statements in the 2004 Form 10-K.
3
OFFICE DEPOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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39 Weeks Ended |
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September 25, |
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2004 |
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September 24, |
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(As Restated |
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2005 |
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See Note B) |
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Cash flow from operating activities: |
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Net earnings |
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$ |
167,526 |
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$ |
283,375 |
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Adjustments to reconcile net earnings to net cash
provided by operating activities: |
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Depreciation and amortization |
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205,274 |
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195,151 |
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Charges for losses on inventories and receivables |
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65,321 |
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78,335 |
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Asset impairments Third Quarter Charges |
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121,902 |
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Changes in working capital and other |
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(145,673 |
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19,936 |
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Net cash provided by operating activities |
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414,350 |
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576,797 |
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Cash flows from investing activities: |
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Capital expenditures |
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(201,217 |
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(251,639 |
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Acquisition, net of cash acquired |
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(7,900 |
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Net deposit on asset group purchase |
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(17,361 |
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Proceeds from disposition of assets and deposits received |
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46,419 |
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41,253 |
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Purchase of short-term investments |
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(1,534,215 |
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(53,475 |
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Sale of short-term investments |
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1,445,687 |
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Net cash used in investing activities |
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(243,326 |
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(289,122 |
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Cash flows from financing activities: |
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Proceeds from exercise of stock options and sale of
stock under employee stock purchase plans |
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164,863 |
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56,263 |
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Tax benefit from share-based payments |
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15,840 |
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Acquisition of treasury stock |
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(484,868 |
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(35,253 |
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Net payments on long- and short-term borrowings |
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(37,060 |
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(9,182 |
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Net cash (used in) provided by financing activities |
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(341,225 |
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11,828 |
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Effect of exchange rate changes on cash and cash equivalents |
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(38,825 |
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(3,963 |
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Net (decrease) increase in cash and cash equivalents |
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(209,026 |
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295,540 |
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Cash and cash equivalents at beginning of period |
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793,727 |
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790,889 |
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Cash and cash equivalents at end of period |
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$ |
584,701 |
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$ |
1,086,429 |
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Supplemental disclosure of other cash flow activities: |
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Interest paid |
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$ |
36,239 |
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$ |
58,811 |
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Income taxes paid |
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164,515 |
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48,367 |
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Supplemental disclosure of non-cash investing and
financing activities: |
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Assets acquired under capital leases |
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$ |
19,803 |
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$ |
14,713 |
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This report should be read in conjunction with the Notes herein and the Notes to Consolidated
Financial Statements in the 2004 Form 10-K.
4
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A Basis of Presentation
Office Depot, Inc., including consolidated subsidiaries, is a global supplier of office products
and services. Fiscal years are based on a 52- or 53-week period ending on the last Saturday in
December. Fiscal year 2005 includes a 53rd week. Accordingly, the fourth quarter will
be based on a 14-week period. The condensed consolidated balance sheet at December 25, 2004 has
been derived from audited financial statements at that date. The condensed interim financial
statements as of September 24, 2005 and for the 13-week and year-to-date periods ending September
24, 2005 (also referred to as the third quarter of 2005 and the year-to-date 2005) and
September 25, 2004 (also referred to as the third quarter of 2004 and the year-to-date 2004)
are unaudited. However, in our opinion, these financial statements reflect all adjustments
(consisting only of normal, recurring items) necessary to provide a fair presentation of our
financial position, results of operations and cash flows for the periods presented.
These interim results are not necessarily indicative of the results that should be expected for the
full year. For a better understanding of Office Depot, Inc. and its financial statements, we
recommend reading these condensed interim financial statements in conjunction with the audited
financial statements for the year ended December 25, 2004, which are included in our 2004 Annual
Report on Form 10-K, filed with the U. S. Securities and Exchange Commission (the SEC).
Note B Restatement of Financial Statements
At the end of fiscal year 2004, we reviewed our lease accounting practices and made certain
modifications to comply with generally accepted accounting principles, as clarified in a general
letter issued by the SEC in February 2005. We extended certain initial lease terms to include
periods where renewal was reasonably assured of being exercised, revised our determination of lease
inception to include an earlier period of pre-opening rent holidays, and reclassified tenant
allowances from an offset of assets and depreciation and amortization expense to a deferred credit
and a reduction of rent expense. We also restated prior periods. The restatement of third quarter
and year-to-date 2004 results reduced net earnings by $0.7 million and $2.0 million, respectively.
Store and warehouse operating and selling expenses increased by $1.2 million and $3.5 million for
the same periods, primarily from the reclassification of tenant allowance credits. Rent expense,
included as a component of gross profit, decreased $0.1 million and $0.4 million, reflecting
additional rent expense, more than offset by the tenant allowance credits. Tenant allowances of
$4.8 million for year-to-date 2004 have also been restated from a reduction of capital expenditures
to an increase in cash provided by operating activities in the Condensed Consolidated Statement of
Cash Flows for 2004.
Note C Asset Impairments, Exit Costs and Other Charges
During the third quarter of 2005, we recorded a number of material charges relating to asset
impairments, exit costs and other operating items (the Third Quarter Charges). These charges
followed a Company-wide assessment of assets and commitments. Certain current period decisions
relate to activities that will be recognized in future periods as plans are implemented, expenses
incurred and liabilities recorded. The pre-tax charge relating to current and future periods is
currently estimated to total $320.4 million, with $236.8 million of this total amount recognized in
the third quarter of 2005, $34.3 million estimated to be recognized in the fourth quarter and $49.3
million in years 2006 through 2008. Of the third quarter 2005 charges, $121.9 million relates to
asset impairments, including goodwill and other intangible assets and is
presented separately on the Condensed Consolidated Statement of Operations and Condensed Consolidated Statement of Cash Flows for the period, $48.7 million relates to exit activities and
$66.2 million relates to asset write offs, contract terminations, lease adjustments and other
costs. The components of the third quarter charges and their presentation in the Condensed
Consolidated Statement of Operations are as follows.
5
Asset impairments
In March 2004, we announced the purchase from Toys R Us, Inc. of 124 former Kids R Us (KRU)
retail store locations for $197 million plus the assumption of lease obligations. We indicated our
intention at the time this purchase was announced to open approximately 50 of these locations as
Office Depot retail stores and to dispose of the remainder of the acquired properties. Following
the purchase, we recorded all properties planned to be disposed of at their estimated fair value,
less costs to sell. Through September 2005, we have disposed of all but 16 of these properties
with no significant impact on earnings. Three additional locations have been disposed of through
October 19, 2005, leaving a balance of 13 such properties.
The purchase of the properties we intended to open was to facilitate a rapid entry into markets
where Office Depot historically has been under-represented in terms of its retail stores. We
expected that the individual properties intended to be operated as Office Depot stores could
provide positive returns on this initial investment.
We measure
cash flows at the individual store level in assessing the recoverability of store
location related assets. With new store openings, we monitor performance and cash flows and, if
early performance is falling below expectations, changes to operations are put in place in an
attempt to improve results. The early performance of many of the KRU stores indicated that some
adjustments were appropriate and we modified merchandising and marketing programs with the goal of
reaching a broader base of business customers and increasing the core office supply sales. Even
after implementing these changes, however, it became apparent in the third quarter of 2005 that
these stores would likely continue to experience operating losses and negative cash flows and were
performing well below projections. Having made this determination in the third quarter, we
calculated that an $80.7 million impairment charge was required to reduce the carrying value of
those stores to their estimated fair value. The estimated fair value was based on a discounted
cash flow model using the historical operating characteristics of each individual location and
estimates of future performance. Certain stores in the KRU purchase are meeting original
expectations and no impairment has been recorded for these stores. The impairment charge is
recorded in the North American Retail Division results for the period.
During the third quarter of 2005 we also recognized a $41.2 million impairment charge relating to
our Tech Depot subsidiary (originally acquired as 4Sure.com). This unit operates as a stand-alone
web-based complement to our offering of online technology products and services in the North
American Business Services Division. As market conditions have changed for
technology products, we have shifted the emphasis of this subsidiary away from its original
business-to-consumer focus to instead target the business-to-business customer. During 2004, Tech
Depot added sales resources and the Company provided internal incentives in an effort to direct
greater volumes of business traffic to this subsidiary. However, these initiatives have not
provided the productivity or sales increases anticipated.
We recently (in the third quarter of
2005) changed the leadership over this entity and have decided to redeploy resources to other
higher-margin parts of this Division. This decision to change the business model has resulted in
lower sales expectations for the balance of 2005 and for future periods. We historically have
selected the fourth quarter to conduct our annual tests for goodwill impairment, but this material
change in strategy indicated that a decline in fair value below Tech Depots carrying value was
more likely than not. Accordingly, the goodwill impairment test for Tech Depot was performed
during the third quarter of 2005. Revised cash flow projections indicated that the estimated fair
value of Tech Depot was less than its carrying value and, as a result, the goodwill and other
intangible
assets were written down to estimated fair value. We used a discounted cash flow model to estimate
fair value.
6
The KRU and Tech Depot impairment charges are combined in the Condensed Consolidated Statement of
Operations on the line item titled Asset impairments. While other asset impairment charges have
been recorded in the current and prior periods, we have separately disclosed the KRU and Tech Depot
amounts because of their magnitude and circumstances.
Exit costs
|
|
The North American Retail Division decided to close 16 stores. We
regularly review store performance and future prospects and close
under-performing locations. The costs of these exit-related
activities totaled approximately $29.6 million and were recognized
in the third quarter. The charges include $0.5 million of
inventory clearance, included in cost of goods sold, and the
following items included in store and warehouse operating and
selling expenses: $5.3 million of asset write offs, $0.6 million
of severance-related costs, $21.7 million to record the
liability for estimated future lease obligations, net of
anticipated sublease income, and $1.5 million for negotiated
terminations. |
|
|
|
The Business Services Division has decided to consolidate two
catalog offerings into one Office Depot catalog. In recent years,
the distinction between the Companys two separate catalog
offerings in the United States Office Depot and Viking has
become less clear to consumers. In recognition of current market
conditions and to streamline operations, the internal migration of
Viking to Office Depot catalogs has begun and is expected to be
complete by early 2006. As part of this consolidation, we will
eventually no longer separately market the Viking brand in the
United States and will dispose of Viking-unique inventory,
eliminating the need for two warehouses. To improve efficiency
and effectiveness in the Division, we are also reorganizing
certain warehouse staffing functions, consolidating certain call
centers and relocating certain sales offices to available space in
retail locations. These activities are in process and should be
complete by the second quarter of 2006. The charges associated
with exit and consolidation activities in the Business Services
Division are expected to total approximately $19.2 million, with
$11.5 million recognized in the third quarter, $3.9 million
expected in the fourth quarter of 2005 and $3.8 million expected
in 2006. Of the $11.5 million recognized in the third quarter,
$4.6 million related to inventory clearance and disposal is
reported in cost of goods sold, and the following items are reported in
store and warehouse operating and selling expenses: $2.4 million of severance,
$1.8 million for a lease termination, and
$2.3 million of accelerated depreciation and amortization and
other costs. An additional $0.4 million of severance is included
in G&A expenses. The future period charges are largely
accelerated depreciation and amortization over the assets
continued use period, severance accruals and other exit costs. It
should be noted that the Company has no plans to consolidate the
Viking and Office Depot brands in Europe where the Viking brand
enjoys a large and loyal customer following. |
|
|
|
In the International Division, we intend to close 11 retail stores
and one warehouse, relocate one warehouse, consolidate certain
call center facilities and consolidate certain contract
operations. Essentially all of the closures are expected to be
complete by the end of 2005 or in early 2006. The warehouse
relocation is currently anticipated for 2006, though the timing
may change as plans are finalized. The closures follow a review
of current performance, as well as an assessment of likely future
performance. With the intent of further integrating and
consolidating European operations, certain management and
functional positions have been eliminated or are in the process of
being restructured. The expected costs of these closure,
relocation and exit activities total approximately $32.4 million,
with $7.6 million recognized in the third quarter, $19.8 million
anticipated for the fourth quarter and $5.0 million in 2006. Of
the Third Quarter Charges the following amounts are included in
store and warehouse
operating and selling expenses: $2.3 million for asset write offs, $2.6 million for
severance and $0.8 million for lease obligations and other costs. Severance of $1.9 million is
included in G&A expenses. The anticipated charges in the fourth quarter and 2006 include additional
depreciation, recognition of lease obligations following the facilitys use
period, severance and other exit costs. The International Division will continue to identify
efficiency opportunities which may result in future charges.
|
7
A summary of exit accruals and the non-cash charges incurred related to the activities described
above were as follows for the third quarter:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge |
|
Cash |
|
Non-cash |
|
Ending |
($ in millions) |
|
incurred |
|
payments |
|
settlements |
|
Balance |
|
Cost of goods sold |
|
$ |
5.1 |
|
|
$ |
|
|
|
$ |
2.6 |
|
|
$ |
2.5 |
|
Asset write offs and
accelerated
depreciation |
|
|
9.9 |
|
|
|
|
|
|
|
9.9 |
|
|
|
|
|
One-time termination
benefits |
|
|
7.9 |
|
|
|
|
|
|
|
|
|
|
|
7.9 |
|
Contract terminations |
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
|
3.3 |
|
Lease obligations |
|
|
22.5 |
|
|
|
|
|
|
|
|
|
|
|
22.5 |
|
|
|
|
Total |
|
$ |
48.7 |
|
|
$ |
|
|
|
$ |
12.5 |
|
|
$ |
36.2 |
|
Other charges
|
|
We perform a periodic review of surplus properties which remain
from prior period exit activities. The review assesses the
current marketability and sublease income estimates of each of the
locations. During the third quarter, we reached agreement to
terminate many existing surplus property leases to allow greater
focus on the ongoing business. We will continue to identify
possible terminations at terms economic to the Company. In
addition, for some of the properties in the portfolio not
terminated, we recognized a charge to adjust estimates to current
marketability and sublease assumptions. The third quarter charge
for lease adjustments totaled $28.3 million, including $16.4
million for terminations; these charges are included in store and
warehouse operating and selling expenses. Approximately $3.0
million of similar charges were recognized in the third quarter of
2004. |
|
|
|
Other asset write downs, impairments, and accelerated depreciation
and amortization totaled approximately $33.6 million, of which $18.7
million was recorded in the third quarter; $9.3 million is
included in G&A expenses and $9.4 million in store and warehouse
operating and selling expenses. We expect $9.5 million to be
recognized in the fourth quarter and $5.4 million is expected in
2006. The current period charge primarily reflects the write off
of computer software and hardware and other assets that have been
taken out of service. The charge also included store asset
impairments of $3.3 million based on our analysis of locations
other than the KRU properties discussed above. Approximately $2.2
million of similar write off and impairment charges were
recognized in the third quarter of 2004. |
|
|
|
All other items totaled approximately $19.3 million; all but $0.3
was recognized in the third quarter. The primary impact was $12.7
million related to accelerated inventory clearance activity in
preparation of implementation of a new inventory management system
in the fourth quarter of 2005, as well as anticipated elimination
of certain inventory lines in Europe. The inventory-related
charges are included in cost of goods sold. The remainder
primarily relates to cancellation of certain long-term advertising
and other commitments; $5.2 million is included in G&A
expenses and $1.1 is included in store and warehouse operating and
selling expenses. |
8
Note D Accounting for Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment, (FAS 123R). This Statement requires
companies to expense the estimated fair value of stock options and similar equity instruments
issued to employees over the requisite service period. FAS 123R eliminates the alternative to use
the intrinsic method of accounting provided for in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), which generally resulted in no compensation
expense recorded in the financial statements related to the grant of stock options to employees if
certain conditions were met. However, APB 25 required recognition of compensation expense for other
share-based awards such as the restricted stock grant issued to our employees in 2005.
Additionally, the pro forma impact from recognition of the estimated fair value of stock options
granted to employees has been disclosed in our footnotes as required under previous accounting
rules.
Effective for the third quarter, we elected to adopt FAS 123R in advance of the mandatory adoption
in the first quarter of 2006 to better reflect the full cost of employee compensation. We adopted
FAS 123R using the modified prospective method, which requires us to record compensation expense
for all awards granted after the date of adoption, and for the unvested portion of previously
granted awards that remain outstanding at the date of adoption. Accordingly, prior period amounts
presented herein have not been restated to reflect the adoption of FAS 123R.
Prior to the adoption of FAS 123R, we reported all tax benefits resulting from the exercise of
stock options as operating cash flows in our consolidated statements of cash flows. In accordance
with FAS 123R, for the period beginning with third quarter of 2005, we revised our statement of
cash flows presentation to report the excess tax benefits from the exercise of stock options as
financing cash flows. Such benefits are presented as a component of operating cash flows for
periods prior to the third quarter of 2005.
The fair value concepts were not changed significantly in FAS 123R; however, in adopting this
Standard, companies must choose among alternative valuation models and amortization assumptions.
After assessing alternative valuation models and amortization assumptions, we will continue using
both the Black-Scholes valuation model and straight-line amortization of compensation expense over
the requisite service period of the grant. We will reconsider use of this model if additional
information becomes available in the future that indicates another model would be more appropriate
for us, or if grants issued in future periods have characteristics that cannot be reasonably
estimated using this model. We have previously estimated forfeitures in our expense calculation
for pro forma footnote disclosure and no change in that methodology was made upon adoption of FAS
123R.
In the first quarter of 2005, we changed the composition of employee grants to include more
restricted stock awards and fewer stock options. Amortization of the fair value of the restricted
stock has been included in our results since the grant date and totaled approximately $5.3 million
for the third quarter. Certain restricted stock and previously-granted stock options had features
that caused their accelerated vesting during the third quarter resulting in added expense of
approximately $7.3 million. The current period expense related to other existing stock options and
our employee stock purchase plan totaled approximately $5.0 million. Similar amounts for these
existing options are expected to be expensed in the fourth quarter and in 2006. Accordingly,
because some share-based payments have already been included in our results under previous
accounting rules and other arrangements were accelerated during the third quarter, the incremental
impact of adopting FAS 123R in the third quarter that is likely to recur can be viewed as the
impact of amortizing the existing stock options of $5.0 million, or $3.8 million after-tax, which
reduced earnings by $0.01 per diluted share. The pre-tax impact of this $5.0 million on Division
operating profit is as follows: North American Retail Division, $0.5 million,
North American Business Services, $0.4 million, International Division, $0.6 million, and general
and administrative expenses, $3.5 million.
9
The previously-disclosed pro forma effects of recognizing the estimated fair value of stock-based
compensation in the third quarter and year-to-date periods of 2004 are presented below.
|
|
|
|
|
|
|
|
|
|
|
Third |
|
|
Year-to- |
|
|
|
Quarter |
|
|
Date |
|
(In thousands, except per share amounts) |
|
2004 |
|
|
2004 |
|
|
|
|
|
|
|
|
Net earnings as reported |
|
$ |
89,282 |
|
|
$ |
283,375 |
|
Stock-based employee compensation cost
included in net earnings as reported, net
of tax |
|
|
118 |
|
|
|
349 |
|
Compensation expense under FAS 123, net of
tax |
|
|
(5,131 |
) |
|
|
(14,602 |
) |
|
|
|
|
|
|
|
Pro forma net earnings |
|
$ |
84,269 |
|
|
$ |
269,122 |
|
|
|
|
|
|
|
|
Net earnings per share Basic |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.29 |
|
|
$ |
0.91 |
|
Pro forma |
|
|
0.27 |
|
|
|
0.86 |
|
Net earnings per share Diluted |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.28 |
|
|
$ |
0.90 |
|
Pro forma |
|
|
0.27 |
|
|
|
0.85 |
|
Note E Comprehensive Income
Comprehensive income represents all non-owner changes in stockholders equity and consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
Year-to-Date |
|
(In thousands) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
(47,881 |
) |
|
$ |
89,282 |
|
|
$ |
167,526 |
|
|
$ |
283,375 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net |
|
|
(6,531 |
) |
|
|
12,268 |
|
|
|
(174,260 |
) |
|
|
(24,984 |
) |
Amortization of gain on cash flow hedge |
|
|
(415 |
) |
|
|
(415 |
) |
|
|
(1,244 |
) |
|
|
(1,244 |
) |
Unrealized losses on available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,430 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
(54,827 |
) |
|
$ |
101,135 |
|
|
$ |
(7,978 |
) |
|
$ |
255,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note F Earnings Per Share (EPS)
The information required to compute basic and diluted EPS is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
Year-to-Date |
|
(in thousands, except per share amounts) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
(47,881 |
) |
|
$ |
89,282 |
|
|
$ |
167,526 |
|
|
$ |
283,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
311,915 |
|
|
|
312,598 |
|
|
|
312,690 |
|
|
|
311,738 |
|
Effect of dilutive stock options and
restricted stock |
|
|
|
|
|
|
3,436 |
|
|
|
4,950 |
|
|
|
4,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
311,915 |
|
|
|
316,034 |
|
|
|
317,640 |
|
|
|
315,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.15 |
) |
|
$ |
0.29 |
|
|
$ |
0.54 |
|
|
$ |
0.91 |
|
Diluted |
|
|
(0.15 |
) |
|
|
0.28 |
|
|
|
0.53 |
|
|
|
0.90 |
|
The effects of 6.5 million common stock equivalents have not been included in diluted loss per
share for the third quarter of 2005 as the effect would be anti-dilutive.
10
Note G
Division Information
The following is a summary of our significant accounts and balances by reportable segment (or
Division), reconciled to consolidated totals. Division name changes below have been adopted to
conform to internal company usage; no changes have been made to the composition of operations or
balances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
|
Third Quarter |
|
|
Year-to-Date |
|
(In thousands) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Retail Division |
|
$ |
1,635,870 |
|
|
$ |
1,492,309 |
|
|
$ |
4,785,223 |
|
|
$ |
4,437,379 |
|
North American Business Services Division |
|
|
1,080,904 |
|
|
|
1,028,353 |
|
|
|
3,197,763 |
|
|
|
3,050,234 |
|
International Division |
|
|
776,898 |
|
|
|
807,686 |
|
|
|
2,579,014 |
|
|
|
2,609,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reportable segments |
|
|
3,493,672 |
|
|
|
3,328,348 |
|
|
|
10,562,000 |
|
|
|
10,096,926 |
|
Eliminations |
|
|
(772 |
) |
|
|
(544 |
) |
|
|
(2,157 |
) |
|
|
(1,645 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,492,900 |
|
|
$ |
3,327,804 |
|
|
$ |
10,559,843 |
|
|
$ |
10,095,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Division Operating Profit (Loss) |
|
|
|
Third Quarter |
|
|
Year-to-Date |
|
(In thousands) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Retail Division |
|
$ |
(29,949 |
) |
|
$ |
107,210 |
|
|
$ |
199,771 |
|
|
$ |
289,447 |
|
North American Business Services Division |
|
|
59,523 |
|
|
|
101,857 |
|
|
|
276,451 |
|
|
|
294,934 |
|
International Division |
|
|
58,972 |
|
|
|
96,832 |
|
|
|
242,471 |
|
|
|
339,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reportable segments |
|
|
88,546 |
|
|
|
305,899 |
|
|
|
718,693 |
|
|
|
924,167 |
|
Eliminations |
|
|
(28 |
) |
|
|
(49 |
) |
|
|
(105 |
) |
|
|
(363 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
88,518 |
|
|
$ |
305,850 |
|
|
$ |
718,588 |
|
|
$ |
923,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note C for discussion of Third Quarter Charges affecting Division operating profit (loss)
for the third quarter and year-to-date 2005.
A reconciliation of the measure of division operating profit to consolidated results before income
taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
Year-to-Date |
|
(In thousands) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total division operating profit |
|
$ |
88,518 |
|
|
$ |
305,850 |
|
|
$ |
718,588 |
|
|
$ |
923,804 |
|
General and administrative expenses |
|
|
(180,168 |
) |
|
|
(162,864 |
) |
|
|
(492,466 |
) |
|
|
(479,629 |
) |
Interest income |
|
|
6,302 |
|
|
|
4,805 |
|
|
|
17,532 |
|
|
|
12,677 |
|
Interest expense |
|
|
(6,576 |
) |
|
|
(16,508 |
) |
|
|
(32,138 |
) |
|
|
(47,780 |
) |
Other, net |
|
|
473 |
|
|
|
(3,799 |
) |
|
|
2,544 |
|
|
|
(3,248 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes |
|
$ |
(91,451 |
) |
|
$ |
127,484 |
|
|
$ |
214,060 |
|
|
$ |
405,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have been reviewing the composition of general and administrative (G&A) expenses and
assessing the appropriateness of additional allocations to the operating units. We may allocate G&A
and other operating expenses to the operating segments and redistribute certain other amounts based
on refined allocation methodologies. This methodology is being refined and may be used in 2006.
11
Total assets and goodwill by division are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
|
Goodwill |
|
|
|
September 24, |
|
|
December 25, |
|
|
September 24, |
|
|
December 25, |
|
(In thousands) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Retail Division |
|
$ |
1,629,539 |
|
|
$ |
1,844,632 |
|
|
$ |
1,943 |
|
|
$ |
1,831 |
|
North American Business Services Division |
|
|
964,343 |
|
|
|
1,054,216 |
|
|
|
190,532 |
|
|
|
229,950 |
|
International Division |
|
|
2,284,524 |
|
|
|
2,456,944 |
|
|
|
726,092 |
|
|
|
817,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reportable segments |
|
|
4,878,406 |
|
|
|
5,355,792 |
|
|
|
918,567 |
|
|
|
1,049,669 |
|
Other |
|
|
1,268,004 |
|
|
|
1,411,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,146,410 |
|
|
$ |
6,767,351 |
|
|
$ |
918,567 |
|
|
$ |
1,049,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note C for discussion of the goodwill impairment charge recognized in the third quarter of
2005. The changes in goodwill balances for the International Division result from changes in
exchange rates between the end of the third quarter and December 25, 2004.
Note H
Pension Disclosures
The components of net periodic pension cost for our two foreign defined benefit plans are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
Year-to-Date |
|
(In millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
1.5 |
|
|
$ |
2.2 |
|
|
$ |
5.4 |
|
|
$ |
6.5 |
|
Interest cost |
|
|
2.1 |
|
|
|
2.2 |
|
|
|
7.4 |
|
|
|
6.5 |
|
Expected return on plan assets |
|
|
(1.6 |
) |
|
|
(1.7 |
) |
|
|
(5.6 |
) |
|
|
(4.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
2.0 |
|
|
$ |
2.7 |
|
|
$ |
7.2 |
|
|
$ |
8.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year-to-date period ended September 24, 2005, we have contributed approximately $4
million to our foreign pension plans. No significant changes are currently anticipated in our 2005
annual contributions compared to 2004.
Item 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Office Depot, Inc., together with our subsidiaries, is a global supplier of office products and
services. We sell to businesses of all sizes and consumers through our three reportable segments
(or Divisions): North American Retail Division, North American Business Services Division, and
International Division. Division name changes below have been adopted to conform to internal
company usage; no changes have been made to the composition of operations or balances.
Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is
intended to provide information to assist you in better understanding and evaluating our financial
condition and results of operations. We recommend that you read this MD&A in conjunction with our
condensed consolidated financial statements and the notes to those statements included in Item 1 of
this Quarterly Report on Form 10-Q, as well as our 2004 Annual Report on Form 10-K, filed with the
U. S. Securities and Exchange Commission.
This MD&A contains significant amounts of forward-looking information. Without limiting the
generality of the preceding sentence, when we use the words believe, estimate, plan, expect, intend, likely, anticipate, continue, may, project, probably, should and
similar expressions in this Quarterly Report on Form 10-Q, we are identifying forward-looking
statements. Our Cautionary Statements, which you will find immediately following this MD&A and
following the MD&A in our 2004 Annual Report on Form 10-K, apply to these forward-looking
statements, and all forward-looking statements should be considered in light of those Cautionary
Statements.
12
RESULTS OF OPERATIONS
OVERVIEW
Consolidated results for the third quarter of 2005 include many positive performance indicators,
the adverse impact of material charges related to asset impairments, exit costs and other
activities (the Third Quarter Charges) recorded following a Company-wide review of assets and
commitments, the adoption of FAS 123R (Option Expensing) and continued softness in our
International business. Sales increased 5% across the Company and North American Retail reported a
4% increase in comp sales. However, we reported a $47.9 million loss for the period, or $(0.15)
per share, in large part as a result of the Third Quarter Charges referred to above which had a
$0.50 per share impact. There was also $0.01 per share incremental and recurring impact from
Option Expensing. That $0.15 per share loss compares to $0.28 earnings per diluted share in the
third quarter of 2004. To enhance the understanding of our performance, we will provide a detailed
discussion of the Third Quarter Charges in the sections that follow to highlight their impact on
our reported results. To gain an understanding of our results for the third quarter of 2005, we
have summarized several key impacts, all of which are addressed in greater detail in the narrative
that follows.
|
|
North American Retail Division comp sales increased 4% for the quarter and 2% year-to-date. |
|
|
|
North American Business Services Division sales increased 5% for both the quarter and nine months ended in September. |
|
|
|
Our operations in the U.S. Gulf coast states were negatively impacted by hurricanes Katrina and Rita. The disruption
of sales from temporary closures of retail stores and a distribution center, as well as increased costs experienced
through the end of the third quarter are embedded in the Division results. |
|
|
|
International Division sales decreased 4% in US dollars for the quarter and decreased 1% for the year-to-date period.
The decline is broad-based and has continued for each quarter of 2005. |
|
|
|
We concluded an analysis of Company assets and commitments that resulted in recognition of the Third Quarter Charges.
Elements of these charges will be recognized in future periods as current plans are implemented and expenses are
incurred. |
|
|
|
We early-adopted Statement of Financial Accounting Standards No. 123R (FAS 123R), Share-Based Payment, using the
modified prospective method (see footnote D for additional
discussion). |
|
|
|
The effective annual tax rate for the Company is projected to
be 32.8%. In the third quarter, we recognized tax benefits from closure of various world-wide audits, partially offset by tax expense on additional repatriation of
foreign earnings. |
The ongoing operational items will be discussed in reviews of each of the Divisions below.
13
Overall
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
|
|
|
Year-to-Date |
|
|
|
|
($ in millions) |
|
2005 |
|
|
|
|
|
2004 |
|
|
|
|
|
2005 |
|
|
|
|
|
2004 |
|
|
|
|
Sales |
|
$ |
3,492.9 |
|
|
|
100.0 |
% |
|
$ |
3,327.8 |
|
|
|
100.0 |
% |
|
$ |
10,559.8 |
|
|
|
100.0 |
% |
|
$ |
10,095.3 |
|
|
|
100.0 |
% |
Cost of goods sold and
occupancy costs |
|
|
2,446.3 |
|
|
|
70.0 |
% |
|
|
2,286.0 |
|
|
|
68.7 |
% |
|
|
7,325.3 |
|
|
|
69.4 |
% |
|
|
6,943.5 |
|
|
|
68.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,046.6 |
|
|
|
30.0 |
% |
|
|
1,041.8 |
|
|
|
31.3 |
% |
|
|
3,234.5 |
|
|
|
30.6 |
% |
|
|
3,151.8 |
|
|
|
31.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store and warehouse
operating and selling
expenses |
|
|
836.2 |
|
|
|
24.0 |
% |
|
|
735.9 |
|
|
|
22.1 |
% |
|
|
2,394.0 |
|
|
|
22.7 |
% |
|
|
2,228.0 |
|
|
|
22.0 |
% |
Asset impairments |
|
|
121.9 |
|
|
|
3.5 |
% |
|
|
|
|
|
|
|
|
|
|
121.9 |
|
|
|
1.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Division operating
profit |
|
|
88.5 |
|
|
|
2.5 |
% |
|
|
305.9 |
|
|
|
9.2 |
% |
|
|
718.6 |
|
|
|
6.8 |
% |
|
|
923.8 |
|
|
|
9.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and
administrative expenses |
|
|
180.2 |
|
|
|
5.2 |
% |
|
|
162.9 |
|
|
|
4.9 |
% |
|
|
492.5 |
|
|
|
4.7 |
% |
|
|
479.6 |
|
|
|
4.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating
expenses, net |
|
|
5.0 |
|
|
|
0.1 |
% |
|
|
9.2 |
|
|
|
0.3 |
% |
|
|
15.4 |
|
|
|
0.1 |
% |
|
|
17.1 |
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss) |
|
$ |
(96.7 |
) |
|
|
(2.8 |
)% |
|
$ |
133.8 |
|
|
|
4.0 |
% |
|
$ |
210.7 |
|
|
|
2.0 |
% |
|
$ |
427.1 |
|
|
|
4.2 |
% |
|
|
|
The Overall table above provides a subtotal for Division operating profit. Our management
uses this financial measure of performance internally to assess the operations of each business
unit, and we believe it is useful to investors because it reflects each Divisions direct activity.
Historically, we have not allocated our general and administrative (G&A) expenses to our
divisions. We have been reviewing the composition of our G&A expenses and assessing the
appropriateness of additional allocations to the operating units. We may allocate G&A and other
operating expenses to the operating segments and redistribute certain other amounts based on
refined methodologies in 2006. Other companies may charge more or less of their G&A expenses to
their divisions, and our results therefore may not be comparable to similarly titled measures used
by some other entities. Our measure of division operating profit should not be considered as an
alternative to operating income or net earnings determined in accordance with GAAP.
Adoption of FAS 123R
We adopted FAS 123R in the third quarter of 2005, using the modified prospective method. Under
this method, share-based payments granted in the third quarter and future periods will be measured
at estimated fair value and included in operating expenses over the appropriate earning period. We
have historically used the Black-Scholes model for estimating fair value of stock options granted
to employees. After a review of alternative methods, we have decided to continue to use this
model, unless additional information becomes available in the future that indicates another model
would be more appropriate for us, or if grants issued in future periods have characteristics that
cannot be reasonably estimated using this model.
In the first quarter of 2005, we changed the composition of employee grants to include more
restricted stock awards and fewer stock options. Amortization of the fair value of the restricted
stock has been included in our results since the grant date and totaled approximately $5.3 million
for the third quarter. Certain restricted stock and previously-granted stock options had features
14
that caused their accelerated vesting during the third quarter resulting in added expense of
approximately $7.3 million. The current period expense related to other existing stock options and
our employee stock purchase plan totaled approximately $5.0 million. Similar amounts for these
existing options are expected to be expensed in the fourth quarter and in 2006. Accordingly,
because some share-based payments have already been included in our results under previous
accounting rules and other arrangements were accelerated during the third quarter, the incremental
impact of adopting FAS 123R in the third quarter that is likely to recur can be viewed as the
impact of amortizing the existing stock options of $5.0 million, or $3.8 million after-tax, which
reduced earnings by $0.01 per diluted share. The pre-tax impact of this $5.0 million on Division
operating profit is a follows: North American Retail Division, $0.5 million, North American
Business Services, $0.4 million, International Division, $0.6 million, and general and
administrative expenses, $3.5 million. See footnote D for additional discussion.
Asset Impairments, Exit Costs and Other Charges
On September 12, 2005, we announced through a current report on Form 8-K a number of material
charges relating to asset impairments, exit costs and other operating items. This announcement
followed a Company-wide assessment of assets and commitments which began in the second quarter of
2005. The announced pre-tax charge relating to a multi-year period totaled $319.5 million, with
approximately $283.4 million relating to charges expected in 2005 and $36.1 million relating to
actions to optimize our domestic and international delivery networks over years 2006 through 2008.
The future delivery network decisions impact current period operations from accelerated
depreciation and similar charges; the remaining costs will be recognized as incurred.
The September 12th disclosures included estimates of activities, amounts and timing. As
actions were implemented in the remaining days of the third quarter, some actual amounts differed
somewhat from our original estimates, primarily relating to the timing of certain facility closures
and from additional negotiated lease termination agreements. However, these differences are not
material to the amounts recorded in the third quarter or the amounts expected to be recorded in
future periods.
A summary of the Third Quarter Charges and the line item presentation of these amounts in our
accompanying Condensed Consolidated Statement of Operations is as follows.
|
|
|
|
|
($ in millions) |
|
Amounts |
|
|
|
|
|
Cost of goods sold and occupancy costs |
|
$ |
17.8 |
|
Store and warehouse operating and selling expenses |
|
|
80.3 |
|
Asset impairments |
|
|
121.9 |
|
General and administrative expenses |
|
|
16.8 |
|
|
|
|
|
Total pre-tax Third Quarter Charges |
|
|
236.8 |
|
Income tax effect |
|
|
(77.7 |
) |
|
|
|
|
After-tax impact |
|
$ |
159.1 |
|
Per share impact |
|
$ |
0.50 |
|
The after-tax impact of the Third Quarter Charges was $0.50 per share, calculated based on the
weighted average number of shares for the third quarter, plus the effect of the common stock
equivalents that were excluded because the effect for the quarter was anti-dilutive; these shares
were dilutive for the year-to-date and are expected to be dilutive for the full year.
Inclusion of the Third Quarter Charges within the various line items indicated may make it
difficult to understand other aspects of our results of operations for the third quarter. We
manage the business on the activities that relate to the promotion, sale and delivery of office
supplies to our customers. From time to time, we also have asset impairments, store closures and
asset dispositions and we consider these activities to be part of normal operations.
15
The charges recorded in the third quarter of 2005 are substantially greater than amounts we have
recorded previously for similar items. For example, in the third quarter and year-to-date 2004, we
recognized approximately $5.2 million of asset impairments, lease adjustments and asset write offs.
Accordingly, we will provide below additional background and context for evaluating these charges.
In the Division discussions that follow, we present the results and, where we deem it appropriate,
we highlight the amount of these charges included therein. We assess the business with and without
these charges and believe that separately addressing these charges will enhance a readers ability
to understand the results of operations for the period. Other items that contribute to variances
in the business in both current and prior periods will be addressed in the discussion of the
performance for the period.
Of the total Third Quarter Charges, approximately $29.7 million is expected to require cash outlay
over one business cycle, approximately $38.4 million, primarily relating to longer-term lease
obligations, will require cash as these obligations are liquidated from 2007 through 2018, and
approximately $168.7 million is non-cash. Charges expected to be recognized during the fourth
quarter and later periods include costs to close facilities and related severance that cannot be
recognized currently and accelerated depreciation and amortization relating to the replacement of
assets earlier than previously expected.
Significant asset impairments
In March 2004, we announced the purchase from Toys R Us, Inc. of 124 former Kids R Us (KRU)
retail store locations for $197 million plus the assumption of lease obligations. We indicated our
intention at the time this acquisition was announced to open approximately 50 of these locations as
Office Depot retail stores and to dispose of the remainder of the acquired properties. Following
the purchase, we recorded all properties planned to be disposed of at their estimated fair value,
less costs to sell. Through September 2005, we have disposed of all but 16 of these properties
with no significant impact on earnings. Three additional locations have been disposed of through
October 19, 2005, leaving a balance of 13 such properties.
The purchase of these properties was intended to facilitate a rapid entry into markets where Office
Depot historically has been under-represented in terms of its retail stores. We expected that the
individual properties intended to be operated as Office Depot stores could provide positive returns
on this initial investment.
We measure
cash flows at the individual store level in assessing the recoverability of store
location related assets. With new store openings, we monitor performance and cash flows and, if
early performance is falling below expectations, changes to operations are put in place in an
attempt to improve results. The early performance of many of the KRU stores indicated that some
adjustments were appropriate and we modified merchandising and marketing programs with the goal of
reaching a broader base of business customers and increasing core office supply sales. Even
after implementing these changes, however, it became apparent in the third quarter of 2005 that
these stores would likely continue to experience operating losses and negative cash flows and were
performing well below projections. Having made this determination in the third quarter, we
calculated that an $80.7 million impairment charge was required to reduce the carrying value of
those stores to their estimated fair value. Certain stores in the KRU purchase are meeting
original expectations and no impairment has been recorded for these stores.
During the third quarter of 2005 we also recognized a $41.2 million impairment charge relating to
our Tech Depot subsidiary (originally acquired as 4Sure.com). This unit operates as a stand-alone
web-based complement to our offering of online technology products
and services in the North American Business Services Division. As market
conditions have changed for technology products we have shifted the emphasis of this subsidiary
away from its original business-to-consumer focus to instead target the business-to-business
customer. During 2004, Tech Depot added sales resources and the Company provided internal
16
incentives in an effort to direct greater volumes of business traffic to this subsidiary. However,
these initiatives have not provided the productivity or sales increases anticipated.
We recently (in the third quarter of 2005) changed the leadership over this entity and have decided
to redeploy resources to other higher-margin parts of the Division. This decision to change the
business model has resulted in lower sales expectations for the balance of 2005 and for future
periods. We historically have selected the fourth quarter to conduct our annual tests for goodwill
impairment, but this material change in strategy indicated that a decline in fair value below Tech
Depots carrying value was more likely than not. Accordingly, the goodwill impairment test for
Tech Depot was performed during the third quarter of 2005. Revised cash flow projections indicated
that the estimated fair value of Tech Depot was less than its carrying value and, as a result, the
goodwill and other intangible assets were written down to estimated fair value.
The KRU and Tech Depot impairment charges are combined in the Condensed Consolidated Statement of
Operations on the line item titled Asset impairments.
While other asset impairment charges have been recorded in the
current and prior periods, we have separately disclosed the KRU and
Tech Depot amounts because of their magnitude and circumstances.
In addition to these significant asset impairment charges, we also discussed in our Form 8-K filed
on September 12, 2005, exit costs totaling $82.2 million, other current period items of $79.7
million and future period actions related to warehouse optimization of $36.1 million, for an
expected total of $319.5 million over the multi-year period. While the timing and character of
some of the individual actions have changed as plans were implemented, the total expected is now
$320.4 million, but is subject to further change. The exit and other charges will be discussed
below, as well as where the charges appear in the Condensed Consolidated Statement of Operations.
Exit activities
|
|
The North American Retail Division decided to close 16 stores. We
regularly review store performance and future prospects and close
under-performing locations. The costs of these exit-related
activities totaled approximately $29.6 million and were recognized
in the third quarter. The charges include $0.5 million of
inventory clearance, included in cost of goods sold, and the
following items are included in store and warehouse operating and
selling expenses: $5.3 million of asset write offs, $0.6 million
of severance-related costs, $21.7 million to record the
liability for estimated future lease obligations, net of
anticipated sublease income, and $1.5 million for negotiated
terminations. |
|
|
|
The Business Services Division has decided to consolidate two
catalog offerings into one Office Depot catalog. In recent years,
the distinction between the Companys two separate catalog
offerings in the United States Office Depot and Viking has
become less clear to consumers. In recognition of current market
conditions and to streamline operations, the internal migration of
Viking to Office Depot catalogs has begun and is expected to be
complete by early 2006. As part of this consolidation, we will
eventually no longer separately market the Viking brand in the
United States and will dispose of Viking-unique inventory,
eliminating the need for two warehouses. To improve efficiency
and effectiveness in the Division, we are also reorganizing
certain warehouse staffing functions, consolidating certain call
centers and relocating certain sales offices to available space in
retail locations. These activities are in process and should be
complete by the second quarter of 2006. The charges associated
with exit and consolidation activities in the Business Services
Division are expected to total approximately $19.2 million, with $11.5 million
recognized in the third quarter, $3.9 million expected in the
fourth quarter and $3.8 million expected in 2006. Of the $11.5
recognized in the third quarter, $4.6 million related to inventory
clearance and disposal is reported in cost of goods sold, and the
following items are reported in store and warehouse operating and
selling expenses: $2.4 million of severance, $1.8 million for
a lease termination, and $2.3 million of accelerated depreciation
and amortization and other costs. An additional $0.4 million of
severance is included in G&A expenses. The future period charges
are largely accelerated depreciation and amortization over the
assets continued use period, severance accruals and other exit
costs. It should be noted that the Company has no plans to
consolidate the Viking and Office Depot brands in Europe where the
Viking brand enjoys a large and loyal customer following. |
17
|
|
In the International Division, we intend to close 11 retail stores
and one warehouse, relocate one warehouse, consolidate certain
call center facilities and consolidate certain contract
operations. Essentially all of the closures are expected to be
complete by the end of 2005 or in early 2006. The warehouse
relocation is currently anticipated for 2006, though the timing
may change as plans are finalized. The closures follow a review
of current performance, as well as an assessment of likely future
performance. With the intent of further integrating and
consolidating European operations, certain management and
functional positions have been eliminated or are in the process of
being restructured. The expected costs of these closure,
relocation and exit activities total approximately $32.4 million,
with $7.6 million recognized in the third quarter, $19.8 million
anticipated for the fourth quarter and $5.0 million in 2006. Of
the Third Quarter Charges, the following amounts are included in
store and warehouse operating and selling expenses: $2.3 million
for asset write offs, $2.6 million for severance and $0.8
million for lease obligations and other costs. Severance of $1.9
million is included in G&A expenses. The anticipated charges in
the fourth quarter and 2006 include additional depreciation, recognition of lease obligations following the
facilitys use period, severance and other exit costs. The
International Division will continue to identify efficiency
opportunities that could result in future charges. |
Other charges
|
|
We perform a periodic review of surplus properties which remain
from prior period exit activities. The review assesses the
current marketability and sublease income estimates of each of the
locations. During the third quarter, we reached agreement to
terminate many existing surplus property leases. We will continue
to identify possible terminations at terms economic to the
Company. In addition, for some of the properties in the portfolio
not terminated, we recognized a charge to adjust estimates to
current marketability and sublease assumptions. The third quarter
charge for lease adjustments included in store and warehouse
operating and selling expenses totaled $28.3 million, including
$16.4 million for terminations. We will continue to seek
terminations of surplus property leases on terms that are
considered beneficial. Approximately $3.0 million of similar
charges were recognized in the third quarter of 2004. |
|
|
|
Other asset write downs, impairments, and accelerated depreciation
and amortization totaled approximately $33.6 million, of which $9.3
million was recorded in the third quarter G&A expenses and $9.4
was recorded in the third quarter store and warehouse operating
and selling expense. We expect to record $9.5 million in the
fourth quarter and $5.4 million in 2006. The current period
charge primarily reflects the write off of computer software and
hardware and other assets that have been taken out of service and
store asset impairments of $3.3 million recognized based on our
analysis of locations other than the KRU properties discussed
above. Approximately $2.2 million of write off and impairment
charges were recognized in the third quarter of 2004. |
|
|
|
All other items totaled approximately $19.3 million, of which all
but $0.3 million was recognized in the third quarter. The primary
impact was $12.7 million related to accelerated inventory
clearance activity in preparation of implementation of a new
inventory management system in the fourth quarter of 2005, as well
as anticipated elimination of certain inventory lines in Europe.
The impact of clearance and valuation of this inventory is
included in cost of goods sold. The remainder primarily relates
to cancellation of certain long-term advertising and other
commitments; $5.2 million is included in G&A expenses and $1.1
million is included in store and warehouse operating and selling
expenses. |
18
Future period actions
In addition to the exit-related charges recognized in 2005, we anticipate closing or relocating
other warehouses and distribution centers in both the Business Services Division and the
International Division during fiscal years 2006 through 2008. The costs associated with these
activities will be recognized in future periods as incurred and are estimated at this time to be
approximately $36.0 million and primarily relate to accelerated depreciation from shortened use
periods, future lease obligations after the facility is no longer in use and other exit-related
costs. These will require cash in future periods for lease costs, relocation and other
exit-related activities; asset depreciation will result in non-cash charges. Additionally, the
International Division will continue to assess how to lower operating costs and improve overall
earnings prospects. These actions could result in future period charges when identified and
implemented.
A summary of charges by Division follows.
|
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|
|
Estimated |
|
|
|
|
|
|
|
|
|
|
2006 and |
|
|
|
|
Third |
|
Fourth |
|
Future |
|
Total |
($ in millions) |
|
Quarter 2005 |
|
Quarter 2005 |
|
Periods |
|
Charge |
|
North
American Retail Division |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exit costs |
|
$ |
29.6 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
29.6 |
|
KRU impairment charge |
|
|
80.7 |
|
|
|
|
|
|
|
|
|
|
|
80.7 |
|
Other charges |
|
|
44.8 |
|
|
|
4.8 |
|
|
|
1.1 |
|
|
|
50.7 |
|
|
|
|
Total Retail |
|
|
155.1 |
|
|
|
4.8 |
|
|
|
1.1 |
|
|
|
161.0 |
|
|
|
|
North
American Business Services Division |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exit costs
(excluding G&A portion) |
|
|
11.1 |
|
|
|
3.9 |
|
|
|
3.8 |
|
|
|
18.8 |
|
Tech Depot impairment charge |
|
|
41.2 |
|
|
|
|
|
|
|
|
|
|
|
41.2 |
|
Other charges |
|
|
2.7 |
|
|
|
1.0 |
|
|
|
2.9 |
|
|
|
6.6 |
|
|
|
|
Total Business Services |
|
|
55.0 |
|
|
|
4.9 |
|
|
|
6.7 |
|
|
|
66.6 |
|
|
|
|
International
Division |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exit costs
(excluding G&A portion) |
|
|
5.7 |
|
|
|
19.8 |
|
|
|
5.0 |
|
|
|
30.5 |
|
Other charges |
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
4.0 |
|
|
|
|
Total International |
|
|
9.7 |
|
|
|
19.8 |
|
|
|
5.0 |
|
|
|
34.5 |
|
|
|
|
Total G&A |
|
|
16.8 |
|
|
|
3.9 |
|
|
|
1.6 |
|
|
|
22.3 |
|
Future network optimization |
|
|
0.2 |
|
|
|
0.9 |
|
|
|
34.9 |
|
|
|
36.0 |
|
|
|
|
Total charges |
|
$ |
236.8 |
|
|
$ |
34.3 |
|
|
$ |
49.3 |
|
|
$ |
320.4 |
|
19
North American Retail Division
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
Year-to-Date |
|
($ in millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Sales |
|
$ |
1,635.9 |
|
|
$ |
1,492.3 |
|
|
$ |
4,785.2 |
|
|
$ |
4,437.4 |
|
% change |
|
|
10 |
% |
|
|
3 |
% |
|
|
8 |
% |
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Division operating
profit (loss) |
|
$ |
(29.9 |
) |
|
$ |
107.2 |
|
|
$ |
199.8 |
|
|
$ |
289.4 |
|
% of sales |
|
|
(1.8 |
)% |
|
|
7.2 |
% |
|
|
4.2 |
% |
|
|
6.5 |
% |
Division operations reported a $29.9 million loss for the third quarter and, as discussed
previously, this loss includes $155.1 million of Third Quarter
Charges, compared to an operating
profit of $107.2 million in the same period last year. Our operations in the U.S. Gulf
coast states were negatively impacted by hurricanes Katrina and Rita. The disruption of sales from
temporary closures and increased costs experienced through the end of
the third quarter are embedded
in the Division results. At various points we had 50 stores closed for some period. At the end of
the quarter, seven stores were closed and have been excluded from comparable store sales. The asset
values for affected locations, including inventory, are largely covered by insurance after
consideration of applicable deductibles. We anticipate filing claims for damage covered by
insurance and will recognize recoveries when considered probable or, if applicable, when any
contingencies related to claims have been resolved. The period of time required to realize
insurance recoveries may be substantial.
Total North American Retail Division sales increased 10% in the third quarter and 8% in the first
nine months of 2005. Comparable store sales in the 885 retail store locations in the U.S. and
Canada that have been open for more than one year increased 4% in the third quarter of 2005 and 2%
for the year-to-date period. Comparable average transaction size increased for both the quarter
and year-to-date, while comparable transaction counts decreased during both periods of 2005.
Technology sales increased in both periods of 2005 and supplies sales increased slightly in the
third quarter. In addition, we had a positive Back to School season.
Gross profit for the third quarter includes the adverse impact of certain Third Quarter
Charges. However, after considering the impact of these charges, broad-based product category
management, increased Private Brand sales, and increased vendor support positively affected gross
margin from an operating perspective.
Operating and selling expenses include $142.6 million of Third Quarter Charges. Approximately $5.2
million of similar charges are included in the third quarter of 2004 results. The impact of the
Third Quarter Charges was partially offset by improvements in operating efficiencies in the
quarter. Effective advertising and expense control delivered cost efficiencies
this quarter and more than absorbed the incremental costs associated
with the adding of new stores
during the quarter.
As part of the business review completed in the third quarter, we decided to close 16 retail stores
because they were falling below our investment return targets; 15
were closed by the end of the quarter. We opened 13 new retail stores
during the quarter, bringing to 59 the number of new retail stores opened in year-to-date 2005, and
the total stores operated throughout the U.S. and Canada to 1,009.
The North American Retail Division also
sells through non-traditional locations. The number of non-traditional locations totaled 17 for
the third quarter of 2005 and 11 at the end of the same period in 2004.
20
North American Business Services Division
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
Year-to-Date |
|
($ in millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Sales |
|
$ |
1,080.9 |
|
|
$ |
1,028.4 |
|
|
$ |
3,197.8 |
|
|
$ |
3,050.2 |
|
% change |
|
|
5 |
% |
|
|
2 |
% |
|
|
5 |
% |
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Division operating profit |
|
$ |
59.5 |
|
|
$ |
101.9 |
|
|
$ |
276.5 |
|
|
$ |
294.9 |
|
% of sales |
|
|
5.5 |
% |
|
|
9.9 |
% |
|
|
8.6 |
% |
|
|
9.7 |
% |
Division operations reported a profit of $59.5 million, and as discussed previously, includes Third
Quarter Charges of $55.1 million, which compares to $101.9 million of operating profit in the prior
year. Although negatively impacted by the effects of hurricanes Katrina and Rita, including the
closure of a distribution center for approximately one month, other improvements in operating
efficiencies more than compensated for their impact on business results for the quarter. North
American Business Services Division sales increased 5% for the third quarter and year-to-date
2005, led by increased sales in the contract channel, particularly large- and national-accounts.
We continue to see benefits from our recent investment in our sales force. Division customer
transaction counts and average order values both increased compared to the third quarter of last
year. As part of the business review completed during the third quarter, we have decided to
integrate the operations of the Office Depot and Viking catalog business, eliminating certain
private brand inventory and two previously separate warehouses. We have also refocused the Tech
Depot business on attracting and servicing business customers.
Gross profit as a percent of sales decreased in the third quarter and year-to-date 2005 compared to
the same periods in 2004, in part from the impact of inventory-related Third Quarter Charges.
Slight margin pressure was also realized from a higher mix of contract business and transportation
cost pressures, partially offset by higher vendor support.
Store and warehouse operating and selling expenses include $48.1 million of Third Quarter Charges.
An additional $3.9 million of exit-related charges are expected in the fourth quarter. The cost of
added sales staff compared to 2004 was more than offset by other salary reductions and warehouse
efficiencies. Warehouse and delivery operations continue to lower operating costs, though higher
fuel costs in the third quarter have offset some of the efficiency savings.
International Division
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
Year-to-Date |
|
($ in millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Sales |
|
$ |
776.9 |
|
|
$ |
807.7 |
|
|
$ |
2,579.0 |
|
|
$ |
2,609.3 |
|
% change |
|
|
(4 |
)% |
|
|
4 |
% |
|
|
(1 |
)% |
|
|
41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Division operating profit |
|
$ |
59.0 |
|
|
$ |
96.8 |
|
|
$ |
242.5 |
|
|
$ |
339.8 |
|
% of sales |
|
|
7.6 |
% |
|
|
12.0 |
% |
|
|
9.4 |
% |
|
|
13.0 |
% |
Division operations reported a profit of $59.0 million, and as discussed previously, includes Third
Quarter Charges of $9.8 million, which compares to an operating profit of $96.8 million in the prior
year. Sales in the International Division decreased 4% (decreased 3% in local currencies) in the
third quarter and decreased 1% (decreased 4% in local currencies) in year-to-date 2005 compared to
the same periods in 2004. The change in exchange rates from the corresponding periods of the prior
year decreased sales in the third quarter by approximately $5 million and increased sales reported in U.S. dollars by approximately $67 million for the year-to-date 2005. Sales declines
were experienced in the areas of our principal businesses in both the contract and catalog
channels. Retail sales are a relatively smaller portion of our business in the International
Division and following the third quarter business review we decided to close 11 retail locations to
focus in more successful markets. We continue to direct our activities to improve sales, though the
overall soft economic and business conditions in Europe have contributed to our sales declines.
21
The Division continues to experience gross margin erosion from pricing pressure in key product
categories and competitive activity.
Selling
and warehouse expenses for the third quarter include
$5.7 million of Third Quarter Charges.
Not all planned closures and severance arrangements were completed in the third quarter and,
accordingly, we will recognize additional charges of approximately $20 million in the fourth
quarter of 2005 or early 2006 as the plans are implemented. We estimated about $9 million of these
charges to require cash and $11 million to be non-cash. The year-to-date 2004 period included
benefits from the favorable settlement of claims related to our distribution network in Europe.
International Division operating profit was negatively impacted by approximately $1 million from
foreign exchange rates during the third quarter and positively impacted by approximately $6 million
year-to-date 2005.
Corporate and Other
Income and
expenses not allocated to our business divisions consist of other
operating expenses, general and administrative
expenses, interest income and expense, income taxes and inter-division transactions.
Other Operating Expenses: For the third quarter and year-to-date 2005, new store pre-opening
expenses totaled $4.5 million and $14.4 million. This reflects the addition of 13 new stores in
the North American Retail Division during the third quarter of 2005, compared to 24 new stores and six
relocations in the same period of 2004. Prior year results also include costs related to the
integration of the Guilbert, S.A. business for both periods.
General and Administrative Expenses: G&A expenses include $16.8 million of Third Quarter Charges.
G&A expenses also include $3.5 million of incremental and recurring expenses from the adoption of FAS
123R, as well as the completion of vesting of other awards that had acceleration features. This charge
included the impact of certain awards with accelerated vesting based
on an increased stock price;
these awards are now fully vested. The impact of Third Quarter
Charges and Option Expensing offset decreases in G&A for both
periods.
We have been reviewing the composition of general and administrative (G&A) expenses and assessing
the appropriateness of additional allocations to the operating units. We may allocate G&A and other
operating expenses to the operating segments and redistribute certain other amounts based on
refined methodologies in 2006.
Interest Expense: The decrease in interest expense for both the third quarter and year-to-date
2005 compared to the same periods of 2004 reflects the impact of the early redemption of $250
million of senior subordinated notes in December 2004.
Income Taxes: The effective 2005 annual tax rate relating to ongoing operations is projected
to be 32.8%. The rate changed from 30% in prior periods, reflecting a revision of our expected mix
of income for the year to a higher domestic percentage. Additionally, the third quarter reported
amount includes approximately $7.4 million of tax expense on additional foreign earnings
repatriation, offset by the positive impact of approximately $21.5 million from adjustments to our
accrual for uncertain tax positions based on the closure of various world-wide audits. If we
decide to repatriate additional foreign earnings during the fourth quarter of 2005, the income tax
expense will be increased accordingly.
22
LIQUIDITY AND CAPITAL RESOURCES
During year-to-date 2005, cash provided by operating activities was $414.4 million compared to
$576.8 million during the same period last year. This change primarily reflects an increase in
settlement of accounts payable during the first nine months of 2005 compared to the same period
last year. The change in payables in 2005 in part reflects certain tax payments that were deferred
by the government for businesses affected by hurricanes in 2004. Additionally, with the adoption
of FAS 123R in the third quarter, tax benefits from employee share-based payments are now
classified as financing activities instead of operating activities. Inventory declined in the
first nine months of 2005, but by less than the comparable period in the prior year. We have added
stores, built our inventory assortments and reduced out of stock positions.
Cash used in investing activities was $243.3 million in year-to-date 2005 compared to $289.1
million in the same period last year. The use of cash in 2005 reflects capital expenditures from
the opening of 59 new office supply stores and five relocations in North America and net purchase
of short-term investments. Investing activities in 2004 include capital expenditures related to
opening 28 new stores, the relocation of nine stores, preparation of 52 stores that were opened
during the fourth quarter, and the purchase of land for a corporate facility. That project was
subsequently cancelled and the land has been sold. Remaining proceeds from the sale are now
expected in June 2006.
Cash used in financing activities was $341.2 million in the year-to-date 2005 compared to cash
provided of $11.8 million during the same period in 2004. Open market purchases of our common
stock totaled $484.9 million. This completes the $500 million share repurchase program previously
approved by our board of directors. Current year payments on long-term borrowings including
capital leases totaled $37.1 million. This use of cash was partially offset by proceeds from
issuance of common stock under our employee related plans of $164.9 million. Following the third
quarter adoption of FAS 123R, excess tax benefits from share-based payments are presented as
sources of financing activity cash flows. The third quarter 2005 tax benefits totaled $15.8
million.
On September 14, 2005, we announced modification and extension of our credit facility. Definitions
in the agreement were modified to exclude certain non-cash charges and other items from coverage
tests. Additionally, fees were modified and the term extended to April 30, 2010. At September 24,
2005, we had approximately $606.2 million of available credit under our revolving credit facility
and letters of credit outstanding totaling $75.8 million.
CRITICAL ACCOUNTING POLICIES
Our condensed consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. Preparation of these statements
requires management to make judgments and estimates. Some accounting policies have a significant
impact on amounts reported in these financial statements. A summary of significant accounting
policies and a description of accounting policies that are considered critical may be found in our
2004 Annual Report on Form 10-K, filed on March 10, 2005, in the Notes to the Consolidated
Financial Statements, Note A, and the Critical Accounting Policies section.
23
CAUTIONARY STATEMENTS for Purposes of the Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995
In December 1995, the Private Securities Litigation Reform Act of 1995 (the Act) was enacted by
the United States Congress. The Act, as amended, contains certain amendments to the Securities Act
of 1933 and the Securities Exchange Act of 1934. These amendments provide protection from liability
in private lawsuits for forward-looking statements made by public companies. We want to take
advantage of the safe harbor provisions of the Act. In doing so, we have disclosed these
forward-looking statements by informing you in specific cautionary statements of the circumstances
which may cause the information in these statements not to transpire as expected.
This Quarterly Report on Form 10-Q contains both historical information and other information that
you may use to infer future performance. Examples of historical information include our quarterly
financial statements and the commentary on past performance contained in our MD&A. While we have
specifically identified certain information as being forward-looking in the context of its
presentation, we caution you that, with the exception of information that is clearly historical,
all the information contained in this Quarterly Report on Form 10-Q should be considered to be
forward-looking statements as referred to in the Act. Without limiting the generality of the
preceding sentence, any time we use the words estimate, plan, probably, should, may,
project, intend,, likely, expect, believe, anticipate, continue, and similar
expressions, we intend to clearly express that the information deals with possible future events
and is forward-looking in nature.
Forward-looking information involves risks and uncertainties, including certain matters that we
discuss in more detail below and in our 2004 Annual Report on Form 10-K filed with the Securities
and Exchange Commission. This information is based on various factors and important assumptions
about future events that may or may not actually come true. As a result, our operations and
financial results in the future could differ materially and substantially from those we have
discussed in the forward-looking statements in this Quarterly Report. In particular, the factors
we discuss in our 2004 Annual Report on Form 10-K could affect our actual results and could cause
our actual results during the remainder of 2005 and in future years to differ materially from those
expressed in any forward-looking statement made by us in this Quarterly Report on Form 10-Q. Those
Cautionary Statements contained in our 2004 Annual Report on Form 10-K are incorporated herein by
this reference to them.
In addition to those Cautionary Statements, we are providing the following supplemental Cautionary
Statement:
In our 10-Q Report for the Third Quarter of 2005, we have identified a series of actions that have
resulted in the Company taking a number of charges relating to asset impairments, exit costs and
other operating items. As described in our press release dated September 12, 2005, these steps are
designed to focus the Company on profitable growth, improve efficiency and enhance the Companys
performance in the months and years ahead. There is no assurance, however, that the steps we have
taken will, in fact, improve efficiency and enhance the Companys performance in the months and
years ahead or that they will assist the Company in achieving profitable growth. Any failure of
these actions to accomplish the objectives we have outlined could have a material, adverse affect
on future Company performance.
24
|
|
|
Item 3
|
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES |
|
|
ABOUT MARKET RISK |
Interest Rate Risks
At September 24, 2005, there had not been any material change in the interest rate risk information
disclosed in the Market Sensitive Risks and Positions subsection of the Managements Discussion
and Analysis of Financial Condition and Results of Operations set forth in Item 7 of our 2004
Annual Report on Form 10-K.
Foreign Exchange Rate Risks
At September 24, 2005, there had not been any material change in any of the foreign exchange risk
information disclosed in the Market Sensitive Risks and Positions subsection of the Managements
Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 7 of our
2004 Annual Report on Form 10-K.
|
|
|
Item 4
|
|
CONTROLS AND PROCEDURES |
|
(a) |
|
Disclosure Controls and Procedures. The companys management, with the participation of the
companys Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the companys disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act)) as of the end of the period covered by this report. Based on that evaluation, these
officers have concluded that the corporations disclosure controls and procedures are
effective for the purpose of ensuring that material information required to be in this
quarterly report is made known to them by others on a timely basis and that information
required to be disclosed by the company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the companys management, including its
principal executive and principal financial officers, as appropriate to allow timely decisions
regarding required disclosure. |
|
|
(b) |
|
Changes in Internal Controls. The company is continuously seeking to improve the efficiency
and effectiveness of its operations and of its internal controls. This results in refinements
to processes throughout the company. However, there has been no change in the companys
internal control over financial reporting that occurred during the companys most recent
fiscal quarter that has materially affected, or is reasonably likely to materially affect, the
companys internal control over financial reporting. |
PART II. OTHER INFORMATION
We are involved in litigation arising in the normal course of our business. While, from time to
time, claims are asserted that make demands for large sums of money (including, from time to time,
actions which are asserted to be maintainable as class action suits), we do not believe that any of
these matters, either individually or in the aggregate, will materially affect our financial
position or the results of our operations.
25
Item 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information with respect to company purchases made of Office Depot,
Inc. common stock during the third quarter of the 2005 fiscal year:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d)
Maximum |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares |
|
|
|
|
|
|
|
|
|
|
(c) Total Number of |
|
(or Approximate |
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
Dollar
Value) that |
|
|
|
|
|
|
|
|
|
|
Part
of Publicly |
|
May Yet Be |
|
|
(a) Total Number of |
|
(b) Average Price |
|
Announced Plans or |
|
Purchased Under the |
Period |
|
Shares Purchased |
|
Paid per Share |
|
Programs (1) |
|
Plans or Programs |
June 26, 2005
July 23, 2005
|
|
|
1,061,500 |
|
|
$ |
23.21 |
|
|
|
1,061,500 |
|
|
$ |
369,486,000 |
|
July 24, 2005
August 20, 2005
|
|
|
4,716,500 |
|
|
$ |
28.25 |
|
|
|
4,716,500 |
|
|
$ |
236,240,000 |
|
August 21, 2005
September 24, 2005
|
|
|
7,954,287 |
|
|
$ |
29.86 |
|
|
|
7,910,049 |
|
|
|
|
|
Total
|
|
|
13,732,287 |
|
|
$ |
28.79 |
|
|
|
13,688,049 |
|
|
$ |
|
|
|
|
|
(1) |
|
During the third quarter of 2005, we completed the $500 million share repurchase
program put into effect in September 2004. A $50 million repurchase program currently is
scheduled to become effective in 2007, unless earlier modified or terminated by the board of
directors. |
26
Item 6
EXHIBITS
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|
|
|
|
|
|
Exhibits |
|
|
31.1 |
|
Rule 13a-14(a)/15d-14(a) Certification of CEO |
|
|
31.2 |
|
Rule 13a-14(a)/15d-14(a) Certification of CFO |
|
|
32 |
|
Section 1350 Certification |
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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|
OFFICE DEPOT, INC. |
|
|
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(Registrant) |
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Date: October 19, 2005
|
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By: |
/s/ Steve Odland |
|
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|
|
|
|
|
|
Steve Odland |
|
|
|
Chief Executive Officer and |
|
|
|
Chairman, Board of Directors |
|
|
|
(Principal Executive Officer) |
|
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|
|
|
|
Date: October 19, 2005
|
|
By: |
/s/ Patricia A. McKay |
|
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|
|
|
|
|
|
Patricia A. McKay |
|
|
|
Executive Vice President, Finance |
|
|
|
and Chief Financial Officer |
|
|
|
(Principal Financial Officer) |
|
|
|
|
|
|
Date: October 19, 2005
|
|
By: |
/s/ Randy T. Pianin |
|
|
|
|
|
|
|
|
Randy T. Pianin |
|
|
|
Senior Vice President, Finance |
|
|
|
and Controller |
|
|
|
(Principal Accounting Officer) |
|
28