UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 29, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from _______________ to ________________
Commission file number 1-10948
OFFICE DEPOT, INC.
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(Exact name of registrant as specified in its charter)
Delaware 59-2663954
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2200 Old Germantown Road; Delray Beach, Florida 33445
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(Address of principal executive offices) (Zip Code)
(561) 438-4800
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(Registrant's telephone number, including area code)
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(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 [X] No [ ]
The registrant had 306,976,507 shares of common stock outstanding as of October
26, 2001.
PART I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
OFFICE DEPOT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
As of As of
September 29, December 30,
2001 2000
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 539,876 $ 151,482
Receivables, net 821,527 896,333
Merchandise inventories, net 1,100,398 1,420,825
Deferred income taxes and other current assets 174,812 230,449
----------- -----------
Total current assets 2,636,613 2,699,089
Property and equipment, net 1,098,578 1,119,306
Goodwill and other assets, net 446,674 377,939
----------- -----------
$ 4,181,865 $ 4,196,334
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,028,719 $ 1,136,994
Accrued expenses and other current liabilities 589,717 580,966
Income taxes payable 73,803 37,118
Current maturities of long-term debt 92,741 153,259
----------- -----------
Total current liabilities 1,784,980 1,908,337
Deferred income taxes and other credits 66,335 88,247
Long-term debt, net of current maturities 318,755 374,061
Zero coupon, convertible subordinated notes 232,878 224,438
Commitments and contingencies
Stockholders' equity:
Common stock - authorized 800,000,000 shares
of $.01 par value; issued 381,903,126 in
2001 and 378,688,359 in 2000 3,819 3,787
Additional paid-in capital 967,227 939,214
Unamortized value of long-term incentive stock grants (2,547) (2,793)
Accumulated other comprehensive loss (64,894) (53,490)
Retained earnings 1,677,454 1,516,691
Treasury stock, at cost - 82,189,049 shares in 2001
and 82,190,548 in 2000 (802,142) (802,158)
----------- -----------
1,778,917 1,601,251
----------- -----------
$ 4,181,865 $ 4,196,334
=========== ===========
The accompanying notes are an integral part of these statements.
2
OFFICE DEPOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
13 Weeks Ended 39 Weeks Ended
----------------------------------- -----------------------------------
September 29, September 23, September 29, September 23,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Sales $ 2,782,493 $ 2,822,991 $ 8,353,910 $ 8,521,498
Cost of goods sold and occupancy costs 1,973,965 2,087,769 5,999,813 6,197,117
----------- ----------- ----------- -----------
Gross profit 808,528 735,222 2,354,097 2,324,381
Store and warehouse operating
and selling expenses 569,507 549,200 1,708,291 1,654,940
General and administrative expenses 133,052 137,243 361,957 358,645
Other operating expenses (income), net 4,444 (354) 4,893 9,834
----------- ----------- ----------- -----------
Operating profit 101,525 49,133 278,956 300,962
Other income (expense):
Interest income 4,155 2,666 7,979 9,551
Interest expense (12,153) (9,318) (30,949) (23,584)
Miscellaneous income (expense), net 2,565 39,310 (3,861) 59,899
----------- ----------- ----------- -----------
Earnings before income taxes 96,092 81,791 252,125 346,828
Income taxes 33,632 31,169 91,362 129,233
----------- ----------- ----------- -----------
Net earnings $ 62,460 $ 50,622 $ 160,763 $ 217,595
=========== =========== =========== ===========
Earnings per common share:
Basic $ 0.21 $ 0.17 $ 0.54 $ 0.69
Diluted 0.20 0.16 0.53 0.67
The accompanying notes are an integral part of these statements.
3
OFFICE DEPOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
39 Weeks Ended
---------------------------------
September 29, September 23,
2001 2000
------------- -------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings $ 160,763 $ 217,595
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 146,879 144,634
Provision for losses on inventories and receivables 88,815 75,850
Changes in working capital 210,300 28,731
Loss (gain) on investment securities 8,500 (57,950)
Write-down of impaired assets 26,079 --
Other operating activities, net 27,797 26,369
--------- ---------
Net cash provided by operating activities 669,133 435,229
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities or sales of investment securities -- 54,006
Purchases of investments and other assets (52,481) (24,612)
Capital expenditures (143,927) (185,473)
Proceeds from sale of property and equipment 22,837 4,270
--------- ---------
Net cash used in investing activities (173,571) (151,809)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and sale
of stock under stock purchase plans 20,681 9,713
Acquisition of treasury stock -- (280,378)
Proceeds from issuance of long-term debt 255,094 --
Payments on long- and short-term borrowings (373,700) --
Other financing activities, net -- 6,688
--------- ---------
Net cash used in financing activities (97,925) (263,977)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS (9,243) (12,544)
--------- ---------
Net increase in cash and cash equivalents 388,394 6,899
Cash and cash equivalents at beginning of period 151,482 218,784
--------- ---------
Cash and cash equivalents at end of period $ 539,876 $ 225,683
========= =========
SUPPLEMENTAL DISCLOSURE OF OTHER CASH FLOW ACTIVITIES:
Interest received $ 6,822 $ 9,112
Interest paid (20,322) (7,015)
Income taxes paid (20,969) (116,464)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Additional paid-in capital related to income tax
benefits on stock options exercised $ 3,128 $ 482
Assets acquired under capital leases 6,041 12,569
Reversal of unrealized gain on investment securities,
net of income taxes -- 62,128
The accompanying notes are an integral part of these statements.
4
OFFICE DEPOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in thousands)
NOTE A - BASIS OF PRESENTATION
Office Depot, Inc. (the Company or Office Depot) is the world's largest seller
of office products and services. The condensed consolidated financial statements
include the accounts of Office Depot and its subsidiaries after elimination of
intercompany accounts and transactions. The Company operates on a 52- or 53-week
fiscal year ending on the last Saturday of December. The balance sheet at
December 30, 2000 has been derived from audited financial statements at that
date. The condensed interim financial statements as of September 29, 2001 and
for the 13- and 39-week periods ending September 29, 2001 (also referred to as
"the third quarter of 2001" and "year-to-date 2001," respectively) and September
23, 2000 (also referred to as "the third quarter of 2000" and "year-to-date
2000," respectively) 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. Also, we have made certain
reclassifications to our historical financial statements to conform to the
current year's presentation.
These interim results are not necessarily indicative of the results you should
expect for the full year. For a better understanding of the Company and our
financial statements, we recommend that you read these condensed interim
financial statements in conjunction with our audited financial statements for
the year ended December 30, 2000, which are included in our 2000 Annual Report
on Form 10-K, filed on March 27, 2001.
NOTE B - COMPREHENSIVE INCOME
Comprehensive income represents all non-owner changes in stockholders' equity
and consists of the following:
Third Quarter Year-to-Date
---------------------------- -----------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net earnings $ 62,460 $ 50,622 $ 160,763 $ 217,595
Other comprehensive income, net of tax:
Foreign currency translation adjustments 17,483 (9,850) (11,404) (25,692)
Reversals of unrealized loss on
investment securities -- (16,446) -- (62,128)
--------- --------- --------- ---------
Total comprehensive income $ 79,943 $ 24,326 $ 149,359 $ 129,775
========= ========= ========= =========
NOTE C - INVESTMENT TRANSACTIONS
We have investments in companies that provide business-to-business e-commerce
solutions for small- and medium-sized businesses. The carrying value of these
investments as of September 29, 2001 and December 30, 2000 totaled $21.4 million
and $29.9 million, respectively. The decline in carrying value resulted from
other than temporary impairments of $8.5 million ($5.4 million net of tax)
recorded in the second quarter of 2001.
5
NOTE D - LONG-TERM DEBT
In May 2001, we renewed our 364-day credit agreement with a syndicate of banks.
This agreement provides us with a working capital line of credit of $255
million. Our five-year credit agreement entered into in February 1998 provides a
$300 million line of credit. Both credit agreements contain similar restrictive
covenants. As of September 29, 2001, we had no outstanding borrowings under
these agreements. Outstanding letters of credit at September 29, 2001 totaled
$49.4 million.
In July 1999, we entered into term loan and revolving credit agreements with
several Japanese banks (the "yen facilities") to provide financing for our
operating and expansion activities in Japan. As of September 29, 2001, the
equivalent of $67.4 million was outstanding and classified as a current
liability. We entered into a yen interest rate swap (for a notional amount
equivalent to $19.0 million as of September 29, 2001) in order to hedge against
the volatility of the interest payments on a portion of our yen borrowings. The
swap will mature in July 2002.
In July 2001, the Company issued $250 million of seven year, non-callable,
Senior Subordinated Notes due on July 15, 2008. The Notes contain provisions
that, in certain circumstances, place financial restrictions or limitations on
the Company. The Notes have a coupon interest rate of 10.00% and are payable
semi-annually on January 15 and July 15. In August 2001, the Company entered
into LIBOR-based variable rate swap agreements with notional amounts aggregating
$250 million that qualify for shortcut hedge accounting.
NOTE E - EARNINGS PER SHARE ("EPS")
The information required to compute basic and diluted EPS is as follows:
Third Quarter Year-to-Date
------------------------ ------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Basic:
Weighted average number of
common shares outstanding 298,375 304,111 297,185 313,804
======== ======== ======== ========
Diluted:
Net earnings $ 62,460 $ 50,622 $160,763 $217,595
Interest expense related to
convertible notes, net of income taxes 1,855 3,238 5,374 9,594
-------- -------- -------- --------
Adjusted net earnings $ 64,315 $ 53,860 $166,137 $227,189
======== ======== ======== ========
Weighted average number of
common shares outstanding 298,375 304,111 297,185 313,804
Shares issued upon assumed
conversion of convertible notes 13,845 24,741 13,845 24,741
Shares issued upon assumed
exercise of dilutive stock options 5,374 1,363 3,508 2,164
-------- -------- -------- --------
Shares used in computing diluted EPS 317,594 330,215 314,538 340,709
======== ======== ======== ========
Options to purchase 15.6 million shares of common stock were not included in our
computation of diluted earnings per share for the third quarter of 2001, because
their weighted average effect would have been antidilutive.
6
NOTE F - SEGMENT INFORMATION
The following is a summary of our significant accounts and balances by segment,
reconciled to consolidated totals.
Sales
-----------------------------------------------------------------------------
Third Quarter Year-to-Date
--------------------------------- ---------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
North American Retail Division $ 1,469,460 $ 1,587,093 $ 4,364,926 $ 4,798,846
Business Services Group 947,171 899,187 2,841,929 2,653,829
International Division 366,658 337,553 1,149,327 1,071,622
----------- ----------- ----------- -----------
Total reportable segments 2,783,289 2,823,833 8,356,182 8,524,297
Eliminations (796) (842) (2,272) (2,799)
----------- ----------- ----------- -----------
Total $ 2,782,493 $ 2,822,991 $ 8,353,910 $ 8,521,498
=========== =========== =========== ===========
Earnings Before Income Taxes
---------------------------------------------------------------------
Third Quarter Year-to-Date
----------------------------- -----------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
North American Retail Division $ 84,957 $ 83,230 $ 242,215 $ 337,469
Business Services Group 90,439 54,023 222,209 182,087
International Division 61,807 46,387 179,118 143,375
--------- --------- --------- ---------
Total reportable segments 237,203 183,640 643,542 662,931
Eliminations and other (141,111) (101,849) (391,417) (316,103)
--------- --------- --------- ---------
Total $ 96,092 $ 81,791 $ 252,125 $ 346,828
========= ========= ========= =========
Assets
------------------------------------------
September 29, December 30,
2001 2000
------------- ------------
North American Retail Division $1,690,446 $2,184,976
Business Services Group 1,190,334 1,105,936
International Division 851,251 736,229
---------- ----------
Total reportable segments 3,732,031 4,027,141
Other 449,834 169,193
---------- ----------
Total $4,181,865 $4,196,334
========== ==========
A reconciliation of our earnings before income taxes from our reportable
segments to earnings before income taxes in our condensed consolidated financial
statements is as follows:
Third Quarter Year-to-Date
----------------------------- -----------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Total from reportable segments $ 237,203 $ 183,640 $ 643,542 $ 662,931
General and administrative expenses (133,052) (137,243) (361,957) (358,645)
Gain (loss) on investment securities -- 38,990 (8,500) 57,950
Interest (expense) income, net (7,998) (6,652) (22,970) (14,033)
Other (expense) income, net 119 3,177 2,270 (1,204)
Inter-segment transactions (180) (121) (260) (171)
--------- --------- --------- ---------
Total $ 96,092 $ 81,791 $ 252,125 $ 346,828
========= ========= ========= =========
7
NOTE G - NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 141, ACCOUNTING FOR BUSINESS COMBINATIONS, and Statement No. 142, GOODWILL
AND OTHER INTANGIBLE ASSETS. These Statements modify accounting for business
combinations after June 30, 2001 and will affect the Company's treatment of
goodwill and other intangible assets at the start of fiscal year 2002. The
Statements require that goodwill existing at the date of adoption be reviewed
for possible impairment and that impairment tests be periodically repeated, with
impaired assets written-down to fair value. Additionally, existing goodwill and
intangible assets must be assessed and classified consistent with the
Statements' criteria. Intangible assets with estimated useful lives will
continue to be amortized over those periods. Amortization of goodwill and
intangible assets with indeterminate lives will cease. At this time, the Company
has not determined the complete impact of these Statements. However, for the
nine months ended September 29, 2001, the Company has recognized $5.4 million of
goodwill amortization.
In July 2001, the FASB issued Statement No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS. This Statement requires capitalizing any retirement costs as part
of the total cost of the related long-lived asset and subsequently allocating
the total expense to future periods using a systematic and rational method.
Adoption of this Statement is required for fiscal years beginning after June 15,
2002. The Company has not yet completed its evaluation of the impact of the
adoption of this Statement.
In October 2001, the FASB issued Statement No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. This Statement supersedes Statement
No. 121 but retains many of its fundamental provisions. Additionally, this
Statement expands the scope of discontinued operations to include more disposal
transactions. The provisions of this Statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
Company has not yet completed its evaluation of the impact this Statement will
have when adopted.
8
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Office Depot, Inc. is the largest seller of office products and services in the
world. Sales to consumers and businesses of all sizes are conducted through our
three business segments: North American Retail Division, Business Services Group
("BSG") and International Division.
Management's Discussion and Analysis ("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 in Item 1 of this Quarterly
Report on Form 10-Q, as well as our 2000 Annual Report on Form 10-K. This MD&A
contains significant amounts of forward-looking information. Without limitation,
when we use the words "believe," "estimate," "plan," "expect," "intend,"
"anticipate," "continue," "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 the MD&A in our 2000 Annual Report on Form
10-K, apply to these forward-looking statements.
In the following discussion, all comparisons are with the corresponding items in
the prior year unless stated otherwise.
RESULTS OF OPERATIONS
Third quarter net earnings of $62.5 million were 23% higher than the prior year,
while year-to-date net earnings of $160.8 million were 26% lower than last year.
Net earnings for the quarter increased, despite a soft U.S. economy and the
slowdown that followed the events of September 11. Gross profit margins improved
across the Company, as sales shifted away from lower-margin technology products.
Additionally, management continued its focus on controllable operating and
selling expenses.
Results for the third quarter and nine months of 2001 included a $10.2 million
pre-tax gain on the sale of certain warehouse property and charges of $37.9
million for the quarter and $38.3 million for the nine months, primarily related
to asset impairments and the resolution of certain non-recurring employee
claims. Included in 2000 results were charges of $24.4 million for the third
quarter and $33.7 million for the nine months, primarily for severance costs
associated with a number of changes in the Company's senior management and gains
of $39.0 million for the quarter and $58.0 million for the nine months relating
to the sale of certain Internet investments.
9
OVERALL
-------
(in millions)
Third Quarter Year-to-Date
------------------------------------------- -------------------------------------------
2001 2000 2001 2000
------------------- ------------------- ------------------- -------------------
Sales $ 2,782.5 100.0% $ 2,823.0 100.0% $ 8,353.9 100.0% $ 8,521.5 100.0%
Cost of goods sold
and occupancy costs 1,974.0 71.0% 2,087.8 74.0% 5,999.8 71.8% 6,197.1 72.7%
--------- --------- --------- ---------
Gross profit 808.5 29.0% 735.2 26.0% 2,354.1 28.2% 2,324.4 27.3%
Operating and
selling expenses 569.5 20.4% 549.2 19.4% 1,708.3 20.5% 1,655.0 19.4%
--------- --------- --------- ---------
Store and warehouse
operating profit $ 239.0 8.6% $ 186.0 6.6% $ 645.8 7.7% $ 669.4 7.9%
========= ========= ========= =========
Both overall sales and comparable sales in facilities open for more than one
year decreased 1% in the third quarter and 2% on a year-to-date basis. Sales
have been adversely affected by the slowing U.S. economy throughout 2001.
Additionally, the Company estimates that the economic uncertainties following
September 11 further reduced sales by $58 million.
While overall Company sales decreased, sales through our e-commerce channels
increased significantly. Worldwide e-commerce sales grew 60% to $402.0 million
during the quarter and 69% to $1.1 billion for the first nine months of 2001.
These e-commerce sales are comprised of all online sales for the Company's
worldwide operations, including those from our domestic public Web sites -
WWW.OFFICEDEPOT.COM and WWW.VIKINGOP.COM - and Office Depot's contract
business-to-business sites, as well as the Company's international Web sites.
For business segment reporting purposes, these sales are captured within the
appropriate business segment.
NORTH AMERICAN RETAIL DIVISION
------------------------------
(in millions)
Third Quarter Year-to-Date
------------------------------------------- -------------------------------------------
2001 2000 2001 2000
------------------- ------------------- ------------------- -------------------
Sales $ 1,469.5 100.0% $ 1,587.1 100.0% $ 4,364.9 100.0% $ 4,798.8 100.0%
Cost of goods sold
and occupancy costs 1,110.6 75.6% 1,257.3 79.2% 3,359.9 77.0% 3,729.3 77.7%
--------- --------- --------- ---------
Gross profit 358.9 24.4% 329.8 20.8% 1,005.0 23.0% 1,069.5 22.3%
Operating and
selling expenses 270.8 18.4% 244.0 15.4% 757.4 17.4% 723.9 15.1%
--------- --------- --------- ---------
Store and warehouse
operating profit $ 88.1 6.0% $ 85.8 5.4% $ 247.6 5.6% $ 345.6 7.2%
========= ========= ========= =========
10
Total North American Retail Division sales, as well as comparable sales in the
792 stores that have been open for more than one year, declined 7% in the third
quarter of 2001 and 9% in the first nine months of 2001. The Company estimates
that the events following September 11 negatively impacted third quarter retail
sales by approximately $35 million. In addition, the slowing of the U.S. economy
has had an adverse effect on our year-to-date sales and could continue to affect
sales during the fourth quarter. Sales of technology hardware and software
products, collectively, were down 25% in both the third quarter and first nine
months of 2001.
While sales have declined, third quarter gross profit as a percent of sales
increased to 24.4%, as our product mix continued the shift away from lower
margin technology products and we experienced improved margins on Back-to-School
products. In addition, quarter-over-quarter comparisons were easier because of
last year's paper, ink and toner price reductions. Gross margins for the
year-to-date period increased as a percentage of sales, but were adversely
affected by promotional pricing used during the first quarter of 2001 to
complete targeted product line reductions.
Operating costs as a percentage of sales increased for the third quarter,
reflecting the loss of leverage from negative retail sales growth and from costs
totaling $26.1 million ($17.0 million after tax benefits) primarily related to
the write-down of assets in certain stores. These costs were related to asset
impairments in 23 stores, a majority of which did not have sufficient operating
performance at the time we completed our comprehensive business review in the
latter months of 2000 to warrant action.
During the third quarter, we opened 17 new retail stores, net of closures, in 10
states and one Canadian Province. At the end of the quarter, Office Depot
operated a total of 846 retail stores throughout the United States and Canada.
During the first nine months of 2001, a chain-wide re-merchandising program was
completed. This program included a reduction in slow-moving products and
improved product adjacencies; more informative signage; increased availability
of private label merchandise; and the addition of customer-friendly reference
charts on technology products.
BSG
---
(in millions)
Third Quarter Year-to-Date
------------------------------------------- -------------------------------------------
2001 2000 2001 2000
------------------- ------------------- ------------------- -------------------
Sales $ 947.1 100.0% $ 899.2 100.0% $ 2,841.9 100.0% $ 2,653.8 100.0%
Cost of goods sold
and occupancy costs 643.7 68.0% 627.4 69.8% 1,951.0 68.7% 1,823.5 68.7%
------- -------- --------- ---------
Gross profit 303.4 32.0% 271.8 30.2% 890.9 31.3% 830.3 31.3%
Operating and selling
Expenses 211.7 22.3% 216.5 24.1% 664.8 23.4% 644.3 24.3%
------- -------- --------- ---------
Store and warehouse
operating profit $ 91.7 9.7% $ 55.3 6.1% $ 226.1 7.9% $ 186.0 7.0%
======= ======== ========= =========
BSG sales increased 5% in the third quarter of 2001 and 7% in the first nine
months of 2001. Included in our third quarter sales for the first time were the
sales of 4Sure.com, our newly acquired Internet-based technology business.
Excluding sales from 4Sure.com, BSG third quarter sales increased 3%. Contract
and Commercial sales for the third quarter have shown some declines,
11
particularly in regions affected by the slowing U.S. economy, and this trend
could continue into the fourth quarter. Although BSG experienced some declines
for the quarter and year-to-date in furniture and technology product sales,
these declines were more than offset by increases in office supplies, paper and
business machines. We believe that the events following September 11 negatively
impacted BSG sales for the remainder of the third quarter by approximately $15
million.
Gross profit as a percent of sales increased to 32.0% for the quarter, bringing
the year-to-date percentage in line with the prior year. This increase was
partly attributed to our adherence to volume-dependent pricing programs.
Operating and selling expenses as a percent of sales improved on a
year-over-year and sequential basis as a result of our focus on productivity and
efficiency, and tighter controls over discretionary spending. Several
initiatives in our warehouses allowed us to better control costs while improving
customer service through increased order-fill rates and better on-time delivery
performance. The combined impact of the above improvements produced a
year-to-date operating profit increase of 22%.
INTERNATIONAL DIVISION
----------------------
(in millions)
Third Quarter Year-to-Date
------------------------------------------- -------------------------------------------
2001 2000 2001 2000
------------------- ------------------- ------------------- -------------------
Sales $ 366.7 100.0% $ 337.6 100.0% $ 1,149.3 100.0% $ 1,071.6 100.0%
Cost of goods sold
and occupancy costs 219.9 60.0% 203.6 60.3% 690.1 60.0% 645.9 60.3%
-------- ------- --------- --------
Gross profit 146.8 40.0% 134.0 39.7% 459.2 40.0% 425.7 39.7%
Operating and selling
expenses 87.4 23.8% 89.0 26.4% 286.9 25.0% 287.7 26.8%
-------- ------- --------- --------
Store and warehouse
operating profit $ 59.4 16.2% $ 45.0 13.3% $ 172.3 15.0% $ 138.0 12.9%
======= ======= ======== ========
Sales in the International Division increased 9% (12% in local currency) in the
third quarter of 2001 and 7% (15% in local currency) in the first nine months of
2001, with all countries reporting increased sales in local currencies for both
the quarter and year-to-date. Unfavorable exchange rates impacted third quarter
sales by approximately $12.5 million and year-to-date sales by $81.1 million
compared to unfavorable impacts of $36.2 million and $89.9 million,
respectively, for the corresponding prior year periods. The events which
followed the tragedies of September 11 affected sales in our larger European
countries, resulting in an estimated $8 million reduction for the quarter.
Gross profit as a percent of sales increased for both the third quarter and
first nine months as a result of shifts in product mix away from lower margin
technology products, as well as from certain pricing initiatives, primarily in
the catalog business, implemented during the first half of the year. These gross
profit improvements were partially offset by the introduction of our lower
margin contract sales in the U.K., Ireland and The Netherlands.
Operating profit in the International Division increased 32% (35% in local
currency) for the third quarter and 25% (33% in local currency) for the first
nine months of 2001. Improvements in cost control and sales increases were
slightly offset on a year-to-date basis by the start-up costs for our contract
business in the U.K., Ireland and The Netherlands,
12
and the integration of an acquired contract business in Australia. Included in
the third quarter operating profit was a gain of $10.2 million ($6.7 million
after tax) related to the sale of our London warehouse. In August, these
operations were relocated to a new 320,000 square foot facility designed to
better serve the U.K.'s growing multi-channel business. Excluding this gain,
third quarter operating profit was $49.2 million or 13% of sales. Operating
profits were negatively impacted by unfavorable exchange rates totaling $0.9
million in the third quarter and $10.2 million in the first nine months of 2001,
compared to $5.7 million and $14.2 million in the third quarter and first nine
months of 2000, respectively.
CORPORATE AND OTHER
Income and expenses not allocated to the store and warehouse operating profit of
our business segments consist of pre-opening expenses, general and
administrative expenses, our share of the earnings (losses) of our joint
ventures, amortization of goodwill, interest income and expense, income taxes
and inter-segment transactions.
INTEREST INCOME AND EXPENSE: Interest income reflects higher cash balances in
the third quarter and, for the nine months, lower earnings rates. Interest
expense reflects increased borrowings on our bank credit facility during the
beginning of the year as well as the $250 million in Notes issued in July 2001.
MISCELLANEOUS INCOME (EXPENSE): Miscellaneous income, net, for the third quarter
and nine months of 2000 primarily reflect gains on the sale of Internet
investments.
INCOME TAXES: The effective rate for the third quarter declined to 35% and
reflects the Company's anticipated domestic and foreign tax expense, given
existing tax planning strategies.
LIQUIDITY AND CAPITAL RESOURCES
Operating cash flows for the first nine months of 2001 were $233.9, or 54%,
higher than the same period in 2000. A net reduction in working capital more
than offset the reduction in net income for the period. Total inventory levels
decreased $256.8 million, reflecting increased inventory turnover and our SKU
reduction program. Additionally, improved collections led to a decrease in
accounts receivable.
During the first nine months of 2001, capital expenditures decreased $41.5
million or 22%, primarily from fewer store openings and closely scrutinizing
capital expenditures with an emphasis on improving our return on assets. We
opened 28 stores during the first nine months of 2001, compared to 48 during the
same period of 2000. We anticipate higher capital expenditures in the fourth
quarter of 2001 compared to the first nine months. We currently project opening
approximately 45 stores during 2001.
During the first nine months of 2001, we made payments of $373.7 million on our
short- and long-term domestic bank borrowings. As a result, total borrowings as
of September 29, 2001 consisted solely of the equivalent of $67.4 million under
our term loan and revolving credit agreements with several Japanese banks. (See
Note D of the Notes to the Condensed Consolidated Financial Statements for more
information regarding our credit facilities.) During the first nine months of
2000, we repurchased $280 million of our stock under a stock repurchase program
authorized by our Board of Directors. This stock repurchase program was
completed in the latter half of 2000.
In July 2001, the Company completed the issuance of $250 million of senior
subordinated Notes, due July 15, 2008. (See Note D of the Notes to the Condensed
Consolidated Financial Statements for more information regarding these Notes.)
In October 2001, the Board of Directors authorized the Company to repurchase up
to $50 million of its common stock annually. The repurchased shares will be
added to the Company's Treasury Shares and will be used to meet the Company's
near term requirements for its stock option and other benefit plans.
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NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 141, ACCOUNTING FOR BUSINESS COMBINATIONS, and Statement No. 142, GOODWILL
AND OTHER INTANGIBLE ASSETS. These Statements modify accounting for business
combinations after June 30, 2001 and will affect the Company's treatment of
goodwill and other intangible assets at the start of fiscal year 2002. The
Statements require that goodwill existing at the date of adoption be reviewed
for possible impairment and that impairment tests be periodically repeated, with
impaired assets written-down to fair value. Additionally, existing goodwill and
intangible assets must be assessed and classified consistent with the
Statements' criteria. Intangible assets with estimated useful lives will
continue to be amortized over those periods. Amortization of goodwill and
intangible assets with indeterminate lives will cease. At this time, the Company
has not determined the complete impact of these Statements. However, for the
nine months ended September 29, 2001, the Company has recognized $5.4 million of
goodwill amortization.
In July 2001, the FASB issued Statement No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS. This Statement requires capitalizing any retirement costs as part
of the total cost of the related long-lived asset and subsequently allocating
the total expense to future periods using a systematic and rational method.
Adoption of this Statement is required for fiscal years beginning after June 15,
2002. The Company has not yet completed its evaluation of the impact of the
adoption of this Statement.
In October 2001, the FASB issued Statement No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. This Statement supersedes Statement
No. 121 but retains many of its fundamental provisions. Additionally, this
Statement expands the scope of discontinued operations to include more disposal
transactions. The provisions of this Statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
Company has not yet completed its evaluation of the impact this Statement will
have when adopted.
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 limitation, when we use the words "believe," "estimate,"
"plan," "expect," "intend," "anticipate," "continue," "project," "probably,"
"should" and similar expressions, we intend to clearly express that the
information deals with possible future events and is forward-looking in nature.
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Forward-looking information involves risks and uncertainties, including certain
matters that we discuss in more detail below and in our 2000 Annual Report on
Form 10-K. This information is based on various factors and 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 substantially from
those we have discussed in the forward-looking statements in this Quarterly
Report. In particular, the factors we discuss below and in our 2000 Annual
Report on Form 10-K could affect our actual results and could cause our actual
results during the remainder of 2001 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 2000
Annual Report on Form 10-K are incorporated herein by this reference to them;
and, in addition, we urge you to also consider the following cautionary
statements:
ECONOMIC DOWNTURN
In the past decade, the favorable United States economy has contributed to the
expansion and growth of retailers. Since the third quarter of 2000, the U.S.
economy has shown signs of a downturn, and the events of September 11 have
further exacerbated the situation. The retail industry, in general, is
displaying signs of a slowdown, both in and outside our industry segment, with
many companies reporting earnings shortfalls compared to market expectations
over the last several months. This general economic slowdown negatively impacted
our results during the second half of 2000 and the first nine months of 2001,
and may continue to adversely impact our business and the results of our
operations.
COMPETITION
We compete with a variety of retailers, dealers and distributors in a highly
competitive marketplace that includes high-volume office supply chains,
warehouse clubs, computer stores, contract stationers, Internet-based
merchandisers and well-established mass merchant retailers. To achieve
and maintain expected profitability levels, we must continue to grow our
business while maintaining the service levels and aggressive pricing necessary
to retain existing customers in each of our business segments. Our failure to
adequately address these challenges could put us at a competitive disadvantage
relative to our competitors.
INTERNATIONAL ACTIVITY
We operate in a number of international markets and intend to continue entering
other international markets as attractive opportunities arise. In addition to
the risks described above, we face such international risks as: foreign currency
fluctuations; unstable political, economic, financial and market conditions;
compromised operating control in some of our foreign operations that are not
wholly owned; system changes and harmonization of prices to accommodate the
adoption of the euro; and lack of adequate management resources. These risks
could have a material adverse effect on our business and operating results.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISKS
See the disclosure in our 2000 Annual Report on Form 10-K. We do not believe
that the risk we face related to interest rate changes is materially different
than it was at the date of such Report.
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FOREIGN EXCHANGE RATE RISKS
See the disclosure in our 2000 Annual Report on Form 10-K. While we realize that
foreign currency exchange rates have fluctuated during the last nine months, we
do not believe that the risk we face related to foreign currencies is materially
different than it was at the date of such Report.
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
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.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
a. 3.1 Amended and Restated By-laws of Office Depot, Inc.
b. 1. A Current Report on Form 8-K was filed on
August 23, 2001 regarding a third quarter 2001
mid-quarter performance update.
2. A Current Report on Form 8-K was filed on September
5, 2001 regarding certain management remarks made at
analyst conferences.
3. A Current Report on Form 8-K was filed on October
2, 2001 regarding an update to investors on the
Company's sales performance for the third quarter of
2001.
4. A Current Report on Form 8-K was filed on October 17,
2001 regarding a press release issued to announce our
third quarter 2001 results, and a second press
release to announce certain management changes.
5. A Current Report on Form 8-K was filed on October
26, 2001 regarding a press release announcing the
extension of offer to exchange Senior Subordinated
Notes for Registered Senior Subordinated Notes, and
a second press release announcing a new stock
repurchase program.
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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.
OFFICE DEPOT, INC.
------------------
(Registrant)
Date: November 2, 2001 By: /s/ Charles E. Brown
-------------------------------------
Charles E. Brown
Executive Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)
Date: November 2, 2001 By: /s/ James A. Walker
--------------------------------------
James A. Walker
Senior Vice President, Finance
and Controller
(Principal Accounting Officer)
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INDEX TO EXHIBITS
Exhibit No. Description
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3.1 Amended and Restated Bylaws of Office Depot, Inc.
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