| ACQUISITION, MERGER AND RESTRUCTURING | NOTE 2. ACQUISITION, MERGER AND RESTRUCTURING
Merger and Restructuring
In recent years, the Company has taken actions to adapt to changing
and competitive conditions. These actions include closing
facilities, consolidating functional activities, eliminating
redundant positions, disposing of businesses and assets, and taking
actions to improve process efficiencies. In 2013, the OfficeMax
merger (the “Merger”) was completed and integration
activities similar to the actions described above began. The
Company also assumed certain restructuring liabilities previously
recorded by OfficeMax. In mid-2014, the Company’s real estate
strategy (the “Real Estate Strategy”) identified 400
retail stores for closure and integration of the supply chain.
During the second quarter of 2016, the Company completed the retail
store closures under this program. The changes to the supply chain
are anticipated to be complete in 2017.
Staples Acquisition and Merger Agreement Termination
On February 4, 2015, Staples, Inc. (“Staples”) and the
Company announced that the companies entered into a definitive
merger agreement (the “Staples Merger Agreement”),
under which Staples would acquire all of the outstanding shares of
Office Depot and the Company would become a wholly owned subsidiary
of Staples (the “Staples Acquisition”).
On December 7, 2015, the United States Federal Trade Commission
(the “FTC”) informed Office Depot and Staples that it
intended to block the Staples Acquisition. On the same date, Office
Depot and Staples announced their intent to contest the FTC’s
decision to challenge the transaction. On May 10, 2016, the U.S.
District Court for the District of Columbia granted the FTC’s
request for a preliminary injunction against the proposed
acquisition, and as a result, the companies terminated the Staples
Merger Agreement on May 16, 2016. Per the terms of the termination
agreement, Staples paid Office Depot a fee of $250 million in cash
on May 19, 2016 (“Termination Fee”), which is included
in Merger, restructuring and other operating (income) expenses, net
in the Condensed Consolidated Statements of Operations and in Net
cash provided by operating activities of continuing operations in
the Condensed Consolidated Statements of Cash Flows.
Comprehensive Business Review
During August 2016, the Company announced the results of a
comprehensive business review and strategy (the
“Comprehensive Business Review”), which, among other
things, includes a plan to close approximately 300 additional
retail stores in North America over the next three years, and to
lower operating and general and administrative expenses through
efficiencies and organizational optimization. The significant
components of the cost saving programs activities are discussed
below. Additionally, the Company indicated that as part of this
process, it would continue exploration of strategic alternatives
regarding the European business that had been initiated by Staples
as part of their attempt to get European Union regulatory approval
of the Staples Acquisition.
Merger, restructuring, and other operating (income) expenses,
net
The Company presents Merger, restructuring and other operating
(income) expenses, net on a separate line in the Condensed
Consolidated Statements of Operations to identify these activities
apart from the activities to sell to and service its customers.
These expenses and income are not included in the determination of
Division operating income. The table below and narrative that
follows provides the major components of Merger, restructuring and
other operating (income) expenses, net.
Third Quarter Year-to-Date
(In millions) 2016 2015 2016 2015
Merger related expenses
Severance, retention, and relocation $
— $ 4 $
— $ 15
Transaction and integration 8 16 30 69
Facility closure, contract termination, and other costs, net 4 18 21 32
Total Merger related expenses 12 38 51 116
Staples Acquisition (income) expenses
Retention
— 26 15 58
Transaction 4 15 43 30
Termination Fee
—
— (250 )
—
Total Staples Acquisition (income) expenses 4 41 (192 ) 88
Comprehensive Business Review expenses
Severance 9
— 13
—
Other related expenses 6
— 6
—
Total Comprehensive Business Review expenses 15
— 19
—
Total Merger, restructuring and other operating (income) expenses,
net $ 31 $ 79 $ (122 ) $ 204
Merger related expenses
Severance, retention, and relocation reflect expenses incurred for
the integration of staff functions and include termination benefits
for certain retail and supply chain closures. Such benefits are
being accrued through the anticipated facility closure date.
Severance calculations consider factors such as the expected timing
of store closures, terms of existing severance plans, expected
employee turnover and attrition.
Transaction and integration expenses include integration-related
professional fees, incremental temporary contract labor, salary and
benefits for employees dedicated to the Merger activity, travel
costs, non-capitalizable software integration costs, and other
direct costs to combine the companies. Such costs are being
recognized as incurred.
Facility closure, contract termination, and other costs, net
primarily relate to facility closure accruals, contract termination
cost, gains and losses on asset dispositions, and accelerated
depreciation. Facility closure expenses include amounts incurred by
the Company to close retail stores in the United States as part of
the Real Estate Strategy, as well as supply chain facilities.
During year-to-date 2016 the Company recognized gains of $1 million
from the sale of warehouse facilities that had been classified as
assets held for sale. During the third quarter and year-to-date
2015, the Company recognized gains of $6 million and $25 million,
respectively, from the sale of warehouse facilities that had been
classified as assets held for sale. The gains are included in
Merger, restructuring and other operating (income) expenses, net,
as the dispositions were part of the supply chain integration
associated with the Merger.
Staples Acquisition (income) expenses
Expenses include retention accruals and transaction costs,
including costs associated with regulatory filings and professional
fees, offset by the Termination Fee income.
Comprehensive Business Review expenses
Expenses include severance, facility closure costs, contract
termination and accelerated depreciation associated with the
announced closure of approximately 300 retail store locations
through 2018, as well as severance and reorganization costs
associated with reductions in staff functions. Severance costs are
being accrued through the anticipated facility closure or
termination date and consider timing, terms of existing severance
plans, expected employee turnover and attrition.
Asset impairments related to the restructuring initiatives are not
included in the table above. Refer to Note 9 for further
information.
Merger and Restructuring Accruals
The activity in the merger and restructuring accruals is presented
in the table below. The total $122 million income presented in
Merger, restructuring and other operating (income) expenses, net in
the year-to-date 2016 Condensed Consolidated Statement of
Operations, includes the $250 million Termination Fee. Excluding
the Termination Fee, expenses of $128 million were incurred in the
year-to-date 2016, of which $41 million relate to Merger and
restructuring liabilities and are included as Charges incurred in
the table below. The remaining $87 million expense is comprised of
$43 million Staples Acquisition transaction expenses, $30 million
Merger transaction and integration expenses and $14 million in
other expenses. These amounts are excluded from the table below
because they are recorded as incurred or earned, non-cash, or
otherwise not associated with Merger and restructuring balance
sheet accounts.
Year-to-Date 2016
(In millions) December 26, 2015 Charges Incurred Cash Payments Lease Accretion and Other Adjustments September
Termination benefits
Merger related accruals $ 16 $
— $ (6 ) $ (2 ) $ 8
Comprehensive Business Review
— 13 (5 )
— 8
Lease and contract obligations, accruals for facilities closures
and other costs
Merger related accruals 77 16 (51 ) 3 45
Other restructuring accruals 14 (1 ) (7 ) 1 7
Acquired entity accruals 25 (2 ) (6 ) 3 20
Staples Acquisition related accruals 64 15 (79 )
—
—
Total $ 196 $ 41 $ (154 ) $ 5 $ 88
The short-term and long-term components of these liabilities are
included in Accrued expenses and other current liabilities and
Deferred income taxes and other long-term liabilities,
respectively, on the Condensed Consolidated Balance Sheets.
Assets held for sale
Certain facilities identified for closure through integration and
other activities have been accounted for as assets held for sale.
Assets held for sale primarily consist of supply chain facilities,
and are presented in Prepaid expenses and other current assets in
the Condensed Consolidated Balance Sheets. The assets held for sale
activity in the year-to-date 2016 is presented in the table
below.
(In millions)
Balance as of December 26, 2015 $ 30
Additions 6
Dispositions (7 )
Balance as of September 24, 2016 $ 29
Gains on dispositions associated with Merger or restructuring
activities will be recognized at the Corporate level and included
when realized in Merger, restructuring and other operating (income)
expenses, net in the Condensed Consolidated Statements of
Operations. Losses, if any, are recognized when classified as held
for sale. Gains or losses associated with dispositions of
properties not associated with Merger or restructuring activities
will be presented as a component of operations when the related
accounting criteria are met. |
