Office Depot Inc. Director NIGEL TRAVIS bought 35,587 shares on 15-11-2013 at $ 5.64
Office Depot, Inc. (‚ÄúOffice Depot‚ÄĚ) is a global supplier of office products and services. Office Depot was incorporated in Delaware in 1986 with the opening of its first retail store in Fort Lauderdale, Florida. In fiscal year 2012, Office Depot sold $10.7 billion of products and services to consumers and businesses of all sizes through three business segments (or ‚ÄúDivisions‚ÄĚ): North American Retail Division, North American Business Solutions Division and International Division. Sales are processed through multiple channels, consisting of office supply stores, a contract sales force, an outbound telephone account management sales force, Internet sites, direct marketing catalogs and call centers, all supported by a network of supply chain facilities and delivery operations.
In this Annual Report on Form 10-K (‚ÄúAnnual Report‚ÄĚ), unless the context otherwise requires, the ‚ÄúCompany‚ÄĚ, ‚ÄúOffice Depot‚ÄĚ, ‚Äúwe‚ÄĚ, ‚Äúus‚ÄĚ, and ‚Äúour‚ÄĚ refer to Office Depot, Inc. and subsidiaries.
Additional information regarding our Divisions is presented below in Part II‚ÄĒItem 7. ‚ÄúManagement‚Äôs Discussion and Analysis of Financial Condition and Results of Operations‚ÄĚ (‚ÄúMD&A‚ÄĚ) and in Note O of the Consolidated Financial Statements located in Part IV‚ÄĒItem 15. ‚ÄúExhibits and Financial Statement Schedules‚ÄĚ of this Annual Report. We are currently evaluating changes to the measurement of Division operating income in our management reporting. Under this consideration, which may be implemented in 2013, a significant amount of costs currently managed at the corporate level could be allocated to the Divisions and certain allocation methodologies updated. When the analysis is compete, prior period reported information may be recast for comparison, using updated allocations to prior periods where appropriate. For financial information regarding operations in geographic areas, refer to Note O in the Consolidated Financial Statements located in Part IV‚ÄĒItem 15. ‚ÄúExhibits and Financial Statement Schedules‚ÄĚ of this Annual Report.
North American Retail Division
The North American Retail Division sells a broad assortment of merchandise through our chain of office supply stores throughout the United States. We currently offer general office supplies, computer supplies, business machines and related supplies, and office furniture from national brands as well as our own brands. Our stores also contain a Copy & Print Depot TM offering printing, reproduction, mailing, shipping, and other services and we maintain nationwide availability of personal computer (‚ÄúPC‚ÄĚ) support and network installation service that provides our customers with in-home, in-office and in-store support for their technology needs. Refer to the Merchandising section below for additional product information.
Our retail stores are designed to provide a positive shopping experience for the customer. We strive to optimize visual presentation, product placement, shelf capacity and in-stock positions. Our goal is to maintain sufficient inventory in the stores to satisfy current and near-term customer needs, while controlling the overall working capital invested in inventory.
The majority of our retail stores are located in leased facilities that currently average over 20,000 square feet. During 2012, we committed to significant changes to our store portfolio. Over the next five years, we expect to downsize approximately 500 stores to either small (averaging 5,900 sales square feet) or mid-size format (averaging 14,800 sales square feet). Approximately 50 stores will be closed at the end of their lease terms. These plans may change based on market conditions. As of December 29, 2012, we had 79 locations in the small (31) and mid-size (48) store formats. Refer to Part II ‚ÄĒ Item 7. ‚ÄúMD&A‚ÄĚ for additional information on the North American Retail Division retail strategy.
At the end of 2012, the North American Retail Division operated 1,112 office supply stores throughout the United States. We have a broad representation across North America with the largest concentration of our retail stores in Texas, Florida and California. The count of open stores may include locations temporarily closed for remodels or other factors.
In recent years, we consolidated our supply chain network to utilize existing distribution centers (‚ÄúDCs‚ÄĚ) to meet the needs of both our retail stores and North American Business Solutions customers. Refer to the North American supply chain discussion below for additional information.
Sales and marketing efforts are integral to understanding the Divisions‚Äô processes and management. These efforts are addressed after the Divisions discussions.
North American Business Solutions Division
The North American Business Solutions Division sells nationally branded and our own brands office supplies, technology products, cleaning and breakroom supplies, furniture, certain services, and other solutions. Office Depot customers are served by a dedicated sales force, through catalogs and electronically through our Internet sites. We strive to ensure that our customers‚Äô needs are satisfied through various channel offerings. Refer to the Merchandising section below for additional product information.
Our contract sales channel employs a dedicated sales force that services the office supply needs of predominantly medium-sized to large customers. We believe sales representatives contribute to customer loyalty by building relationships with customers and providing information, business tools and problem-solving solutions to them. We offer contract customers the convenience of shopping our dedicated web sites and retail locations, while honoring their contract pricing in lieu of retail pricing. We also use an inside sales organization that is staffed by Office Depot employees who support selected existing and new small business customers who prefer or require a more personalized experience, primarily by telephone. This function, previously outsourced, was brought back in house at our new inside sales office in Austin, Texas in 2012. Part of our contract business is with various schools, local, state and national governmental agencies. We also enter into agreements with consortiums to sell to governmental and non-profit entities for non-exclusive buying arrangements. Sales to our contract customers that are fulfilled at retail locations are included in the results of our North American Retail Division.
Our direct sales channel is tailored to serve small- to medium-sized customers. Direct customers can order products from our catalogs, by phone or through our public web sites (www.officedepot.com), including our public web site devoted to technology products (www.techdepot.com).
We use catalogs and the internet to market directly to both existing and prospective customers. Large catalogs with our full listing of products are typically distributed annually and supplemented periodically with focused offerings. Prospecting catalogs with special offers designed to attract new customers are also mailed at certain intervals. In addition, specialty and promotional catalogs may be delivered more frequently to selected customers based on their past or potential future purchases. We also produce a Green Book ¬ģ catalog, which features products that are recyclable, energy efficient, or otherwise have a reduced impact on the environment. We continually evaluate our catalog offerings for efficiency and effectiveness at generating incremental revenues. Products purchased through our catalogs and over the Internet are primarily fulfilled through our North American supply chain from DCs throughout the U.S. and occasionally through wholesalers.
North American Supply Chain
The Company operates a network of DCs, crossdock, and combination facilities across the United States. In prior years, retail stores were largely replenished through our crossdock flow-through facilities where bulk merchandise was sorted for distribution and shipped to the requesting stores about three times per week. Based on our supply chain consolidation, we closed three crossdock facilities in 2010 and one in 2011. The crossdock function in the markets where crossdocks were closed has been transitioned to the existing DCs within the same markets. These combination facilities, which share real estate, technology, labor costs and inventory, satisfy the needs of both retail stores and delivery customers. Costs are allocated to the North American Retail Division and North American Business Solutions Division based on the relative services provided. Benefits of this consolidation include improved inventory management and greater operational efficiency, as well as improved service.
Inventory is held in our DCs at levels we believe sufficient to meet current and anticipated customer needs. We utilize processes to evaluate the appropriate timing and quantity of reordering with the objective of controlling investment in inventory, while at the same time ensuring customer satisfaction. Certain purchases are sent directly from the manufacturer to our customers. Some supply chain facilities and some retail locations also house sales offices and administrative offices supporting our contract business.
Out-bound delivery and inbound direct import operations are currently provided by third-party carriers.
As of December 29, 2012, Office Depot sold to customers in 57 countries throughout Europe, Asia, Latin America, and Australia. Outside of North America, the Company operates wholly-owned entities, majority-owned entities or participates in other ventures covering 37 countries and has alliances in an additional 20 countries. Refer to the Merchandising section below for additional product information.
The International Division sells office products and services through direct mail catalogs, contract sales forces, Internet sites and retail stores, using a mix of Company-owned operations, joint ventures, licensing and franchise agreements, alliances and other arrangements. The Company maintains DCs and call centers throughout Europe and Asia to support these operations. Currently, we have catalog offerings in 15 countries outside of North America and operate more than 40 separate public web sites in the International Division. As of December 29, 2012, the International Division operated, through wholly-owned or majority-owned entities, 123 retail stores in France, South Korea and Sweden. In addition, we participate under licensing and merchandise arrangements in South Korea, Israel, Japan, Dominican Republic and the Middle East. During 2010, we sold the operating entity in Japan as well as the operating entity in Israel and entered into Office Depot licensing agreements with the respective buyers for continued presence in those markets. During 2011, we acquired additional operations in Sweden, adding customers to both the contract and retail distribution channels.
Since 1994, we have participated in a joint venture selling office products and services in Mexico and Central and South America. In recent years, this venture, Office Depot de Mexico, has grown in size and scope and now includes 248 retail locations in Mexico, Colombia, Costa Rica, El Salvador, Guatemala, Honduras, and Panama, as well as call centers and DCs to support the delivery business in certain areas. Since we participate equally in this business with a partner, we account for the activity under the equity method and venture sales of approximately $1.1 billion in 2012 are neither reflected in our revenues nor in our consolidated retail comparable store statistics. Our portion of joint venture results is included in Miscellaneous income, net in the Consolidated Statements of Operations.
During 2010, we entered into an amended shareholders‚Äô agreement related to our venture in India such that control and ownership became equally shared. Accordingly, we deconsolidated the assets and liabilities of this entity from the 2010 year end balance sheet and account for this investment under the equity method.
The International Division has separate regional headquarters for Europe in The Netherlands and for Asia in Hong Kong.
Our merchandising strategy is to meet our customers‚Äô needs by offering a broad selection of nationally branded office products, as well as our own brands products and services. Our selection of own brand products has increased in breadth and level of sophistication over time. We currently offer general office supplies, computer supplies, business machines and related supplies, and office furniture under various labels, including Office Depot ¬ģ , Viking Office Products ¬ģ , Foray ¬ģ , and Ativa ¬ģ .
We classify our products into three categories: (1) supplies, (2) technology, and (3) furniture and other. The supplies category includes products such as paper, binders, writing instruments, school supplies, and ink and toner. The technology category includes products such as desktop and laptop computers, monitors, tablets, printers, cables, software, digital cameras, telephones, and wireless communications products. The furniture and other category includes products such as desks, chairs, and luggage, sales in our copy and print centers, and other miscellaneous items.
We buy substantially all of our merchandise directly from manufacturers and other primary suppliers, including direct sourcing of our own brands products from domestic and offshore sources. We also enter into arrangements with vendors that can lower our unit product costs if certain volume thresholds or other criteria are met. For additional discussion regarding these arrangements, refer to ‚ÄúCritical Accounting Policies‚ÄĚ in Part II‚ÄĒItem 7. MD&A.
We operate separate merchandising functions in North America, Europe and Asia as well as in our joint ventures. Each group is responsible for selecting, purchasing and pricing merchandise as well as managing the product life cycle of our inventory. In recent years, we have increasingly used global offerings across all regions to further reduce our product cost while maintaining product quality.
We operate global sourcing offices in Shenzhen and Hangzhou, China, which allow us to better manage our product sourcing, logistics and quality assurance. These offices consolidate our purchasing power with Asian factories and, in turn, help us to increase the scope of our own brands offerings.
Sales and Marketing
Our marketing programs are designed to attract new customers and to drive frequency of customer visits to our stores and web sites. We regularly advertise in major newspapers in most of our North American markets. We also advertise through local and national radio, network and cable television advertising campaigns, and direct marketing efforts, such as the Internet and social networking.
We offer customer loyalty programs that provide customers with rewards that can be applied against future Office Depot purchases or other incentives. These programs have provided us with valuable information enabling us to market more effectively to our customers. These programs may change in popularity in the future, and we may make alterations to them from time to time.
We perform periodic competitive pricing analyses to monitor each market, and prices are adjusted as necessary to adhere to our pricing philosophy and further our competitive positioning. We generally expect that our everyday pricing is competitive with other resellers of office products.
We acquire new customers by selectively mailing specially designed catalogs and by making on-premises sales calls to prospective customers. We also make outbound sales calls using dedicated agents through our telephone account management program. We obtain the names of prospective customers in new and existing markets through the purchase of selected lists from outside marketing information services and other sources as well as through the use of a proprietary mailing list system. We also acquire customers through e-mail marketing campaigns and online affiliates. No single customer in any of our Divisions accounts for more than 10% of our total sales or accounts receivable.
Our business is somewhat seasonal, with sales generally trending lower in the second quarter, following the ‚Äúback-to-business‚ÄĚ sales cycle in the first quarter and preceding the ‚Äúback-to-school‚ÄĚ sales cycle in the third quarter and the holiday sales cycle in the fourth quarter. Certain working capital components may build and recede during the year reflecting established selling cycles. Business cycles can and have impacted our operations and financial position when compared to other periods.
Copy and Print
Our North American retail stores contain a Copy & Print Depot TM offering printing, reproduction, mailing, shipping, and other services. This includes Xerox TM Certified Print Specialist associates to assist with digital imaging and printing and shipping services through UPS and the U.S. Postal Service. In addition to the in-store locations, we operate nine regional print facilities, which support copy and print orders taken in our North American Retail and North American Business Solutions Divisions. We also offer copy and print services to our customers in Europe through our e-commerce business and certain retail locations.
We hold trademark registrations domestically and worldwide and have numerous other applications pending worldwide for the names ‚ÄúOffice Depot‚ÄĚ, ‚ÄúViking‚ÄĚ, ‚ÄúAtiva‚ÄĚ, ‚ÄúForay‚ÄĚ, ‚ÄúRealspace‚ÄĚ, and others. We consider the trademark for the Office Depot name the most significant trademark held by us because of its impact on market awareness across all of our businesses and on customers‚Äô identification with us. As with all domestic trademarks, our trademark registrations in the United States are for a ten year period and are renewable every ten years, prior to their respective expirations, as long as the trademarks are used in the regular course of trade.
Industry and Competition
We operate in a highly competitive environment in all three Divisions. We believe that we compete favorably on the basis of price, service, relationships and selection. We compete with office supply stores, wholesale clubs, discount stores, mass merchandisers, Internet-based companies, food and drug stores, computer and electronics superstores and direct marketing companies. These companies, in varying degrees, compete with us in substantially all of our current markets.
Other office supply retail companies market similarly to us in terms of store format, pricing strategy, product selection and product availability in the markets where we operate, primarily those in the United States. We anticipate that in the future we will continue to face increased competition from these companies.
Internationally, we compete on a similar basis to North America. Outside of the United States, we sell through contract and catalog channels in 16 countries and operate retail stores, and in three of these countries we also sell through wholly-owned or majority-owned entities. Additionally, our International Division provides office products and services in 41 countries through joint ventures, licensing and franchise agreements, cross-border transactions, alliances and other arrangements.
As of January 26, 2013, we had approximately 38,000 employees worldwide. Our workforce is largely non-union and our labor relations are generally good. In certain international locations, changes in staffing or work arrangements may need approval of local works councils or other bodies.
As both a significant user and seller of paper products, we have developed environmental practices that are values-based and market-driven. Our environmental initiatives center on three guiding principles: (1) recycling and pollution reduction; (2) sustainable forest management; and (3) issue awareness and market development for environmentally preferable products. We offer thousands of different products containing recycled content, including from 35% to 100% post-consumer waste content paper and technology recycling services in our retail stores.
Office Depot continues to implement environmental programs in line with our stated environmental vision to ‚Äúincreasingly buy green, be green and sell green‚ÄĚ ‚Äď including environmental sensitivity in our packaging, operations and sales offerings. Our ‚ÄėGreen‚Äô retail store prototype design is based on our Austin, Texas store, which received a Leadership in Energy and Environmental Design (LEED) Gold Certification from the United States Green Building Council in December 2008. In 2010, the United States Green Building Council awarded our global headquarters in Boca Raton, Florida a LEED Gold Certification under the Operations and Maintenance rating system and we were the first office supplies retailer with a headquarters building certified under any of the LEED rating systems. Additional information on our green product offerings can be found at www.officedepot.com/buygreen .
We maintain a web site at www.officedepot.com. We make available, free of charge, on the ‚ÄúInvestor Relations‚ÄĚ section of our web site, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the ‚ÄúExchange Act‚ÄĚ), as soon as reasonably practicable after we electronically file or furnish such materials to the United States Securities and Exchange Commission (‚ÄúSEC‚ÄĚ). In addition, the public may read and copy any of the materials we file with the SEC at the SEC‚Äôs Public Reference Room at 100 F Street, NE, Washington DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers, such as the company, that file electronically with the SEC. The address of that website is www.sec.gov.
Additionally, our corporate governance materials, including corporate governance guidelines; charters of the Audit, Compensation, Finance, and Corporate Governance and Nominating Committees; and code of ethical behavior may also be found under the ‚ÄúInvestor Relations‚ÄĚ section of our web site at www.officedepot.com.
Nominees for Directors of Office Depot
The Board proposes the following ten (10) nominees for election of Directors at the 2012 Annual Meeting. The Directors will hold office from the election until the next Annual Meeting, or until their successors have been elected and qualified. The ten (10) nominees for election at the 2012 Annual Meeting are all currently Directors of the Company. The Company‚Äôs Board of Directors has determined that nine (9) nominees satisfy the New York Stock Exchange‚Äôs (the ‚ÄúNYSE‚ÄĚ) definition of independent Director. We do not know of any reason why any nominee would be unable to serve as a Director. If any nominee is unable to serve, the shares represented by all valid proxies will be voted for the election of such other person as the Board may nominate.
Should any of the nominees become unable to serve, our Corporate Governance and Nominating Committee may propose a substitute nominee. If a substitute nominee is named, all proxies voting FOR the nominee who is unable to serve will be voted for the substitute nominee so named. If a substitute nominee is not named, all proxies will be voted for the election of the remaining nominees (or as directed on your proxy). In no event will more than ten (10) Directors be elected at our 2012 Annual Meeting. Each person nominated for election has agreed to serve if elected and management has no reason to believe that any nominee will be unable to serve.
BIOGRAPHICAL INFORMATION ON THE NOMINEES
NEIL R. AUSTRIAN
Mr. Austrian has served as a Director on our Board since 1998. Mr. Austrian has served as Chair and Chief Executive Officer (‚ÄúChair and CEO‚ÄĚ) of the Company since May 2011, prior to which he was Interim Chair and CEO since November 2010. He also served in the Interim role from October 2004 through March 2005. Mr. Austrian has in-depth insights into the Company‚Äôs operations and its management which uniquely qualifies him for serving on our Company‚Äôs Board. In addition, Mr. Austrian‚Äôs experience as President and Chief Operating Officer of the National Football League from April 1991 until December 1999, makes him well suited to understand and oversee the complex managerial, strategic and financial considerations necessary to serve on the board of a corporation such as Office Depot. His experience at Dillon Reed & Co. Inc. as Managing Director from October 1987 until March 1991 provided him with a sound footing in finance, investment banking and deal negotiation. In addition, Mr. Austrian served as the Chief Financial Officer of Doyle Berbach Advertising, a public advertising agency, from 1974 until 1978, which enhanced his finance, marketing, and strategic experience. Mr. Austrian‚Äôs knowledge of all aspects of the direct sales business gained while serving as a director of Viking Office Products from 1988 until August 1998 when it merged with Office Depot, further strengthens his knowledge of our industry. Mr. Austrian also serves as a director of the DirecTV Group.
Mr. Bateman has served as a Director on our Board since June 2009. He is a senior Partner with BC Partners, the U.S. investment arm of which he co-established in early 2008, and is based in the firm‚Äôs New York office. Mr. Bateman initially joined BC Partners‚Äô London office in 2000 from PricewaterhouseCoopers, where he spent three years in Transaction Services working on due diligence projects for both financial investors and corporate clients. In 2002 he left BC Partners to complete his MBA at INSEAD before rejoining the BC Partners London office. Over the years Mr. Bateman has participated in or been a board member of General Healthcare Group, Baxi Holdings, Ltd. and Regency Entertainment. He is currently a director of Intelsat S.A., the leading international provider of fixed satellite services. Mr. Bateman was appointed as a Director of the Company pursuant to the terms of the Investor Rights Agreement in connection with the Company‚Äôs private equity investment transaction with BC Partners. Mr. Bateman serves as a non-voting observer on the Audit Committee and his experience as a chartered accountant and understanding of accounting issues is helpful in fulfilling the committee‚Äôs oversight responsibilities. Mr. Bateman‚Äôs analysis of and participation in the oversight of BC Partners portfolio companies provides him with the skills he needs to assist the Company with its strategic planning process. Mr. Bateman‚Äôs education and experience in business and finance allows him to provide the Board significant managerial, strategic, financial and compliance-based expertise.
THOMAS J. COLLIGAN
Mr. Colligan has served as a Director on our Board since January 2010. He served as Vice Dean of The Wharton School‚Äôs Aresty Institute of Executive Education from 2007 to June 2010 where he was responsible for the non-degree executive education programs. From 2004 to 2007, Mr. Colligan served as a managing director at Duke Corporate Education, a corporation that provides custom executive education and is affiliated with Duke University‚Äôs Fuqua School of Business. Prior to joining Duke Corporate Education, he was Vice Chairman of PricewaterhouseCoopers LLP from 2001 to 2004 and served there in other capacities from 1969 to 2004, including as a partner. Mr. Colligan also has advised Fortune 500 companies in various industries, including technology, telecommunications, pharmaceuticals and consumer products. Mr. Colligan is currently a director of CNH Global, N.V., and Targus Group International, Inc., a non-public company and leading global supplier of notebook carrying cases and accessories. He previously served as a director of Schering-Plough Corporation, Anesiva, Inc. and Educational Management Corporation. Mr. Colligan‚Äôs experience as a former audit partner and Vice Chairman of PricewaterhouseCoopers qualifies him to serve on the Board of Directors and to provide guidance to the Company‚Äôs internal audit function. In addition, Mr. Colligan‚Äôs former position as Vice Dean of The Wharton School‚Äôs Aresty Institute of Executive Education and his previous position as Managing Director at Duke Corporate Education have provided him a broad based understanding of new and developing business strategies that are helpful to our Board.
MARSHA J. EVANS
Ms. Evans has served as a Director on our Board since 2006. Ms. Evans was acting Commissioner of the Ladies Professional Golf Association from July 2009 to January 2010, President and Chief Executive Officer of the American Red Cross from 2002 to 2005, and National Executive Director of The Girl Scouts of the USA from 1998 to 2002. Ms. Evans retired from the U.S. Navy in 1998 with the rank of Rear Admiral. From 1995 to 1998 Ms. Evans served as superintendent of the Naval Postgraduate School in Monterey, California and from 1993 to 1995 she led the Navy‚Äôs worldwide recruitment organization, during which time she developed extensive human resources experience. Ms. Evans also served as a director of Huntsman Corporation from 2005 to 2011. Currently, she is also a Director of Weight Watchers International, the North Highland Company and The Estate of Lehman Brothers Holdings. Ms. Evans brings significant leadership experience to our Board of Directors and the Board relies on her perspectives on human resources and governance issues.
BRENDA J. GAINES
Ms. Gaines has been a Director on our Board since 2002. Ms. Gaines retired in 2004 from her position as President and Chief Executive Officer of Diners Club North America, a Division of Citigroup, a position she held since 2002. She served as President of Diners Club North America from 1999 until 2002 and from 1994 until 1999, she served as Executive Vice President, Corporate Card Sales. Prior to that she served in various positions of increasing responsibility within Citigroup or its predecessor corporations since 1988. From 1985 until 1987, Ms. Gaines was Deputy Chief of Staff for the Mayor of the City of Chicago. She is currently a director of AGL Resources, the Federal National Mortgage Association (Fannie Mae) and Tenet Healthcare Corporation, and is on the National Board of the Smithsonian Institution. Ms. Gaines also served as a director of CNA Financial Corp. from 2004 to 2007 and NICOR, Inc. from 2006 to 2011 and has served as a board member of the non-profit organization March of Dimes. Ms. Gaines has significant experience in financial services, including the credit card and payment industry. As Chief Executive Officer of Diners Club North America, she managed a company with three distinct customer groups, that included retail consumers, small businesses and large multinational corporations. While working as the Deputy Chief of Staff for the Mayor of the City of Chicago, Ms. Gaines developed valuable experience working with public agencies, which represent one of the Company‚Äôs larger customer segments. This experience enables her to provide insights into the Company‚Äôs core customers as well as the Company‚Äôs products and services. Ms. Gaines has held a number of executive and board leadership positions in a number of public companies. Ms. Gaines‚Äô service on other public company boards allows her to provide the Board of Directors with a variety of perspectives on corporate governance issues.
W. SCOTT HEDRICK
Mr. Hedrick has been a Director on our Board since 1991. From November 1986 until April 1991, he was a Director of The Office Club, Inc., which was acquired by Office Depot in 1991. Mr. Hedrick was appointed Lead Director in February 2011. He was a founder and has been a general partner of InterWest Partners, a venture capital fund, since 1979. Mr. Hedrick is also a director of Hot Topic, Inc. and a cluster of mutual funds managed by Capital Research and Management Company. As one of our longest-serving non-executive Directors, Mr. Hedrick brings an important institutional knowledge to our Board. His work with InterWest provides him with a solid basis for his analysis of our financial strategies. Mr. Hedrick‚Äôs service on the board of Hot Topic, Inc. gives him another view of the issues affecting retailers, which is useful to our Board of Directors.
Ms. Mason has served as a Director on our Board since 2006. She currently serves as President and Chief Executive Officer of Tuesday Morning Corporation and has served in that position since July 2000. From July 1999 to November 1999, Ms. Mason served as President of Filene‚Äôs Basement, a department store chain. From January 1997 to June 1999, Ms. Mason was President of HomeGoods, an off-price home fashion store and a subsidiary of TJX Companies. Ms. Mason was Chair and Chief Executive Officer of Cherry & Webb, a women‚Äôs specialty store, from February 1987 to December 1996. Prior to those dates, she held management positions at Kaufmann‚Äôs Division of the May Company, Mervyn‚Äôs Division of Target, Inc. and the Limited. She is currently a director of Genesco, Inc. and previously served as a director of The Men‚Äôs Warehouse, Inc., and of Hot Topic, Inc. Ms. Mason‚Äôs senior executive positions at various large national retail companies gives her the experience to critically review the various business considerations necessary to run a successful consumer-driven business such as our North American Retail Division. Ms. Mason‚Äôs broad exposure to numerous retailers provides our Board with relevant comparisons and her extensive retail knowledge gives her an insight into a number of issues facing Office Depot. As a sitting chief executive officer of a public retail company, Ms. Mason is able to offer our Board of Directors sound business and financial strategies to address evolving complex audit issues.
JAMES S. RUBIN
Mr. Rubin has served as a Director on our Board since June 2009. He is a Senior Partner of BC Partners, which he joined in May 2008 from One Equity Partners, where he was a founding partner since its inception in 2001. Mr. Rubin originated and executed transactions in a variety of industries with a particular focus on healthcare and business services and was also responsible for building One Equity‚Äôs practice in India. Prior to forming One Equity, Mr. Rubin was a Vice President with Allen & Company Incorporated, a New York merchant bank specializing in media and entertainment transactions and advisory work. From 1996 to 1998, he held a number of senior policy positions with the Federal Communications Commission. Mr. Rubin is currently a board member of ATI Enterprises, a private post-secondary education company, and MultiPlan, one of the largest independent preferred provider organizations in the U.S. He is a member of the board of trustees of the Brookings Institute and the New York City non-profit Common Ground Communities, and serves on the board of The Dalton School. Mr. Rubin was appointed as a Director pursuant to the terms of the Investor Rights Agreement in connection with the Company‚Äôs private equity investment transaction with BC Partners. Mr. Rubin‚Äôs extensive background in the financial services industry allows him to provide proven financial advice to our Board. Mr. Rubin brings significant business and finance experience to our Board of Directors and provides new strategies and solutions to address an increasingly complex business environment.
Mr. Svider has served as a Director on our Board since June 2009. He has been co-Chairman of BC Partners since December 2008 and has been a Managing Partner of the firm since 2003. Mr. Svider joined BC Partners in 1992 in Paris before moving to London in 2000 to lead its investments in the technology and telecoms industries. Over the years, Mr. Svider has participated in or led a variety of investments including Tubesca, Nutreco, UTL, Neopost, Polyconcept, Neuf Telecom, Unity Media/Tele Columbus, and Intelsat S.A. He is currently Chairman of the board, the audit and compensation committees of Intelsat S.A., and a member of the board of ATI Enterprises, a private post-secondary education company, and MultiPlan, one of the largest independent preferred provider organizations in the U.S. Prior to joining BC Partners, Mr. Svider worked in investment banking at Wasserstein Perella in New York and Paris, and at the Boston Consulting Group in Chicago. Mr. Svider was appointed as a Director on our Board pursuant to the terms of the Investor Rights Agreement in connection with the Company‚Äôs private equity investment transaction with BC Partners. As a Managing Partner of BC Partners since 2003, Mr. Svider has demonstrated significant leadership abilities and extensive knowledge of complex financial and operational issues facing large organizations. He brings an expertise in international operations and financial strategy to our Board of Directors. In addition, through his oversight of BC Partners portfolio companies, Mr. Svider has significant experience in developing various strategies to motivate and compensate executives.
Mr. Travis has served as a Director on our Board since March 2012. He has been Chief Executive Officer of Dunkin‚Äô Brands Group Inc. since January 2009 and serves as President of Dunkin‚Äô Donuts since October 2009. From 2005 through 2008 Mr. Travis served as President and Chief Executive Officer of Papa John‚Äôs International, Inc. From 1994 to 2005 he had executive roles in Europe, International and Retail divisions of Blockbuster, Inc., culminating with the role of President and Chief Operating Officer from 2001 ‚Äď 2005. Mr. Travis also held human resources and international roles for Burger King Holdings, Inc. from 1989 ‚Äď 1994, prior to which he worked for Grand Metropolitan PLC since 1985. Mr. Travis currently serves on the Board of Dunkin‚Äô Brands Group and Lorillard, Inc. Previous board service includes Papa John‚Äôs International, Inc. from 2005 ‚Äď 2008, Bombay Company from 2000 ‚Äď 2007, and Limelight Group from 1996 ‚Äď 2000. Mr. Travis brings significant international, retail, human resources and operations experience to our Board.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE ‚ÄúFOR‚ÄĚ THE ELECTION OF EACH OF THE NOMINEES LISTED IN ITEM 1 ON YOUR PROXY CARD.
MANAGEMENT DISCUSSION FROM LATEST 10K
RESULTS OF OPERATIONS
Our business is comprised of three segments. The North American Retail Division includes our retail stores in the U.S. which offer office supplies and services, computers and business machines and related supplies, and office furniture. Most stores also have a copy and print center offering printing, reproduction, mailing and shipping. The North American Business Solutions Division sells office supply products and services in the U.S. and Canada directly to businesses through catalogs, Internet web sites and a dedicated sales force. Our International Division sells office products and services through catalogs, Internet web sites, a dedicated sales force and retail stores in Europe and Asia.
Our fiscal year results are based on a 52- or 53-week retail calendar ending on the last Saturday in December. Fiscal year 2011 is based on 53 weeks, with a 14-week fourth quarter. Fiscal years 2012 and 2010 include 52 weeks. Our comparable store sales relate to stores that have been open for at least one year. Stores are removed from the comparable sales calculation during remodeling and if significantly downsized. A summary of factors important to understanding our results for 2012 is provided below. The comparisons to prior years are discussed in the narrative that follows this overview.
Total Company sales were $10.7 billion in 2012, down 7% compared to 2011. The 53 rd week added approximately $140 million of sales in 2011. Total Company sales decreased 1% in 2011 compared to 2010.
Sales for 2012 compared to 2011 declined 8% in the North American Retail Division and 1% in the North American Business Solutions Division. Comparable store sales in the North American Retail Division decreased 5% in 2012. International Division sales decreased 10% in U.S. dollars and 5% in constant currencies.
Gross margin for 2012 improved approximately 50 basis points compared to 2011, following a 100 basis point increase from 2010. The increase in 2012 primarily reflects improvement from reduced promotional activity, lower property costs and changes in the mix of sales channels and products sold.
We recognized charges of approximately $56 million in 2012, primarily related to restructuring-related activity in the International Division and restructuring and process improvement actions at the corporate level. Charges recognized in 2011 and 2010 totaled approximately $58 million and $87 million, respectively.
Non-cash asset impairment charges of $139 million were recorded in 2012, with $123 million recognized in the North American Retail Division and $15 million recognized in the International Division. Refer to the Retail Strategy discussion below for additional information.
We also settled a dispute related to a 2003 acquisition which resulted in a gain of $68 million being recognized in 2012 as Recovery of purchase price. A related expense of $5 million was reported in General and administrative expenses. Cash received from this settlement was contributed to the acquired pension plan, resulting in the plan being in a net funded position of approximately $8 million at December 29, 2012.
The effective tax rate for 2012 was negative 2%, reflecting the impact of valuation allowances in the U.S. and certain international jurisdictions, as well as the non-taxable recovery of purchase price and a benefit recognized from an approved tax loss carryback. Tax and related interest benefits of approximately $123 million were recognized in 2011 from the reversal of uncertain tax position accruals and the release of valuation allowances. Because of the valuation allowances, the Company continues to experience significant effective tax rate volatility within the year and across years.
At the end of 2012, we had $670.8 million in cash and cash equivalents and $699.4 million available on our asset based credit facility. Cash flow from operating activities was $179.3 million for 2012.
Discussion of additional income and expense items, including material charges and credits and changes in interest and taxes follows our review of segment results.
We are currently evaluating changes to the measurement of Division operating income in our management reporting. Under this consideration, which may be implemented in 2013, a significant amount of costs currently managed at the corporate level could be allocated to the Divisions and certain allocation methodologies updated. When the analysis is compete, prior period reported information may be recast for comparison, using updated allocations to prior periods where appropriate.
NORTH AMERICAN RETAIL DIVISION
Sales in our North American Retail Division decreased 8% in 2012, 2% in 2011 and 3% in 2010. Fiscal year 2011 included a 53 rd week based on our retail calendar, compared to 52 weeks in 2012 and 2010. This additional week added approximately $78 million of sales in fiscal year 2011. The decline in total sales in 2012 and 2011 reflects the closing of 23 and 25 stores, respectively. Comparable store sales in 2012 from the 1,079 stores that were open for more than one year decreased 5%. Comparable store sales in 2011 from the 1,107 stores that were open for more than one year decreased 2%, with the fourth quarter down 5% compared to the prior year. Transaction counts were lower in both 2012 and 2011, consistent with the comparable store sales declines. Sales in Copy and Print Depot increased in both 2012 and 2011, while sales of technology products, technology peripheral items, furniture and some office supplies declined in both periods. Our decision to reduce promotions in select categories contributed to lower sales in both 2012 and 2011.
The North American Retail Division reported operating income of approximately $12 million in 2012, $135 million in 2011 and $128 million in 2010. Division operating income in 2012 included approximately $123 million of asset impairment charges, compared to $11 million in 2011 and $2 million in 2010. Additional information on the 2012 impairment charge is provided in the Retail Strategy discussion below. Division operating income for 2012 included approximately $2 million of severance and other charges, while 2011 included approximately $12 million of charges associated with the closure of stores in Canada. Gross margins increased in both 2012 and 2011 from lower promotional activity and a change in the mix of sales away from technology products, as well as continuing benefits from lower occupancy costs. Operating expenses in 2012 included lower supply chain costs and lower payroll and variable pay. Operating expenses in 2011 included severance and other costs associated with the store closures in Canada, higher variable based pay and incremental costs incurred to drive increased customer focused selling activities. These costs were offset by a positive contribution from the 53 rd week in 2011, decreased advertising expenses and other favorable items including benefits recognized from changes to our private label credit card program. Division operating income in all periods was negatively affected by the impact our sales volume decline had on gross margin and operating expenses (the ‚Äúflow through‚ÄĚ impact).
At the end of 2012, we operated 1,112 retail stores in the U.S. We opened 4 new stores during 2012 and 9 stores during 2011. We closed 23 stores in North America during 2012. We closed 25 stores in North America during 2011, including the 12 stores in Canada.
As consumers have shifted their buying patterns, we have been developing new store formats to satisfy changing customer needs and shopping behavior. We now have almost 80 stores in small- to mid-sized store formats. The inventory selections in these stores are the higher-volume items that customers seek and the stores provide for an expanded services offering. At the stores, customers also have the ability to order our inventory products from our web site. We continue to make modifications to these prototypes.
During 2012, the North American Retail Division conducted a review of each store location and developed a revised retail strategy (the ‚ÄúNA Retail Strategy‚ÄĚ). Approximately 40% of the stores in our portfolio have leases that will be at an optional renewal period within the next three years and 65% within the next five years. Each location was reviewed for a decision to retain as currently configured and located, downsize to either small or mid-size format, relocate, remodel, or close at the end of the base lease term.
The result of this analysis is a plan to downsize approximately 275 locations to small-format stores at the end of their current lease term over the next three years and an additional 165 locations over the following two years. Approximately 60 locations will be down-sized or relocated to the mid-sized format over three years and another 25 over the following two years. We anticipate closing approximately 50 stores as their base lease period ends. The remaining stores in the portfolio are anticipated to remain as configured, be remodeled or have base lease periods more than five years in the future. Future market conditions may impact any of the decisions used in this analysis. Downsizing and closing stores likely will result in lower reported sales in future periods. Downsized locations will be removed from the comparable store sales calculation until the one year comparable period is reached at the new store size. The NA Retail Strategy includes anticipated capital expenditures of approximately $60 million per year for the next five years.
These decisions to modify the store portfolio have impacted our store impairment analysis which is prepared at an individual store level. The cash flow time horizon for stores expected to be closed, relocated or downsized has been reduced to the base lease period, eliminating renewal option periods from the calculation, where applicable. The current outlook on sales is a decline of 4% in the first year. The projected sales continue to be negative for the second year, but are on an improving trend. This trend reflects our view that a portion of the sales previously made in our retail locations may be migrating to our online and other channels, but because those sales are not fulfilled out of the retail store, they are not considered cash flow sources in this impairment analysis. Gross margin assumptions have been held constant at our current actual levels and we have assumed operating costs consistent with recent actual results and planned activities.
In addition to the impact of our real estate strategy on asset impairments, certain remaining assets will now be depreciated over a shorter period of time. We anticipate incremental accelerated depreciation of approximately $8 million and $4 million in 2013 and 2014, respectively. Because the NA Retail Strategy is based on taking actions at the end of the location‚Äôs lease term, we do not expect significant closed store lease accruals. However, we do anticipate volatility in results in future periods as certain accounting criteria are met. For example, certain locations with some level of impairment are facilities accounted for as capital leases. We no longer expect to stay in the location beyond the base lease period but accounting rules limit the reconsideration of the capital lease term in periods prior to a formal lease modification. This current period impairment charge related to these leased assets will be followed by a credit to income in a future period from release of the accrued capital lease obligations when the option periods are not exercised and the leases are terminated. Additionally, operating leases with scheduled rent increases result in higher expense and establishment of a deferred rent credit in early years that is reversed in later years, resulting in a straight-line rent expense. If a location closes or relocates at the end of the base lease term, this credit will be released to income at that time. Deferred rent credits for renegotiated lease arrangements with the existing landlord will be amortized over the new lease period.
To the extent that forward-looking sales and operating assumptions in the current portfolio are not achieved and are subsequently reduced, or more stores are closed, additional impairment charges may result. Of the 380 stores with some level of impairment recognized in 2012, approximately 130 have remaining asset values of approximately $35 million that will be depreciated over their shortened estimated useful lives. These and other lower-performing locations are particularly sensitive to changes in projected cash flows over this period and additional impairment is possible in future periods if results are below projections. Store performance lower than current projections may also result in additional 2013 quarterly asset impairment charges. However, at the end of 2012, the impairment analysis reflects the company‚Äôs best estimate of future performance, including the intended future use of the company‚Äôs retail stores.
NORTH AMERICAN BUSINESS SOLUTIONS DIVISION
Sales in our North American Business Solutions Division decreased 1% in 2012, 1% in 2011 and 6% in 2010. The 53 rd week added approximately $34 million of sales to the Division in 2011. Total sales in both the direct and contract channels decreased slightly in 2012 after considering the 53 rd week in 2011. Direct channel sales increased in 2011, while contract sales were lower compared to 2010. Sales to large and global accounts increased in both 2012 and 2011. However, sales to state and local government accounts decreased in both periods reflecting continuation of budgetary pressures. Sales to small-to medium-sized businesses decreased in 2012 and increased in 2011, reflecting the 53 rd week of sales in 2011. During 2011, through alternative non-exclusive purchasing arrangements, the Division retained approximately 87% of the revenue from customers formerly associated with a legacy public sector purchasing cooperative. This retention rate is inclusive of declines due to public sector spending and budget constraints, which impacted these customers as well as our other public sector customers. Sales in the contract channel, other than to customers buying under these purchasing arrangements, were positive for 2011. On a product category basis, in 2012, copy and print, cleaning and breakroom comparable sales increased, while sales in the supplies category decreased. Furniture sales decreased slightly. For 2011, sales of cleaning and break room products and certain office supplies increased while ink and toner, furniture, paper and other office supply categories decreased.
Division operating income totaled $193 million in 2012, $145 million in 2011, and $97 million in 2010. The 2012 increase in Division operating income reflects gross margin benefits from reduced promotions and margin improvement initiatives, as well as lower supply chain, advertising and other costs, partially offset by certain severance and process improvement costs. The increase in 2011 reflects the impact of a change in the mix of product sales to the direct channel, lower operating expenses, a change of mix of customers in the contract channel, and positive impacts from our margin improvement initiatives. Lower selling, distribution and advertising expenses were incurred in 2011 compared to 2010. Many of these operating expense reductions reflect initiatives put in place in prior periods to improve efficiency and productivity. Also, fiscal year 2011 included benefits discrete to the period from removing recourse provisions and changing terms and conditions in the Office Depot private label credit card program and adjustments relating to customer incentives. The impact of the 53 rd week was relatively neutral to the Division‚Äôs overall operating income for 2011.
Sales in our International Division in U.S. dollars decreased 10% in 2012, 1% in 2011 and 5% in 2010. Constant currency sales decreased 5% in 2012, 5% in 2011 and 2% in 2010. The 53 rd week added approximately $28 million to total Division sales in 2011. The comparison of sales in 2011 to 2010 is also impacted by the sale and deconsolidation of operations in Israel and Japan in the fourth quarter of 2010 and the acquisition of operations in Sweden in the first quarter of 2011. Contract channel sales in constant currencies decreased 2% in 2012 and increased 3% in 2011. The 2012 decrease reflects competitive pressures and soft economic conditions in Europe. The 2011 increase reflects growth in field sales as a result of added staff, as well an acquisition in Sweden. Constant currency sales in the direct channel declined 10% in 2012 and 6% in 2011. Addressing this trend in the direct channel sales has been a point of focus throughout 2012 and improvements have been seen in both the third and fourth quarters of the year. We will continue to dedicate resources to improving sales in this channel.
Division operating income totaled approximately $49 million in 2012, $93 million in 2011, and $111 million in 2010. Division operating income for 2012 and 2011 includes charges of approximately $49 million and $31 million, respectively. The 2012 charges relate to restructuring-related activities, as well as $14 million of asset impairments. As a result of slowing economic conditions in Sweden and certain integration difficulties, in the third quarter of 2012, we re-evaluated remaining balances of acquisition-related intangible assets. Based on this analysis, which included a decline in projected sales and profitability for this acquired business, we concluded that cash flows would be insufficient to recover the assets over their expected use period. The 2011 charges primarily related to severance and other costs associated with facility closures and streamlining processes.
The decreases in Division operating income in 2012, 2011 and 2010 were impacted by the flow through impact of lower sales levels. Gross profit as a percent of sales decreased in 2012 and increased in 2011. The decrease in 2012 primarily reflects a shift in the mix of sales away from the direct channel. The increase in 2011 results from acquisition and disposition activity and a change in the mix of direct and contract sales, product costs not passed along to customers, partially offset by lower occupancy costs. Operating expenses decreased across the Division in both 2012 and 2011, reflecting benefits from restructuring activities initiated in prior periods.
For U.S. reporting, the International Division‚Äôs sales are translated into U.S. dollars at average exchange rates experienced during the year. The Division‚Äôs reported sales were negatively impacted by approximately $160 million in 2012 and positively impacted by $147 million in 2011 from changes in foreign currency exchange rates. Internally, we analyze our international operations in terms of local currency performance to allow focus on operating trends and results.
CORPORATE AND OTHER
Asset Impairments, Severance, Other Charges and Credits
In recent years, we have taken actions to adapt to changing and increasingly competitive conditions experienced in the markets in which the Company serves. These actions include closing stores and distribution centers (‚ÄúDCs‚ÄĚ), consolidating functional activities, disposing of businesses and assets, and taking actions to improve process efficiencies. Additionally, during 2012, we recognized significant asset impairment charges in the North American Retail Division and International Division and recognized a gain from the resolution of a dispute related to a 2003 acquisition.
The 2012 charges and credits relate to $68.3 million recovery of purchase price, $138.5 million asset impairments, restructuring-related activity, store closures, and process improvement actions at the corporate level. Non-cash asset impairment charges of $138.5 million includes $123.4 million in the North American Retail Division related to the NA Retail Strategy and under-performing stores and $15.1 million recognized in the International Division, as discussed above. Refer to Note I of the Consolidated Financial Statements for additional information.
Recovery of Purchase Price
The sale and purchase agreement (‚ÄúSPA‚ÄĚ) associated with a 2003 European acquisition included a provision whereby the seller was required to pay an amount to the company if a specified acquired pension plan was calculated to be underfunded based on 2008 plan data. The amount calculated by the plan‚Äôs actuary was disputed by the seller but upheld by an independent arbitrator. The seller continued to dispute the award until both parties reached a settlement agreement in January 2012 and the seller paid approximately GBP 37.7 million to the company, including GBP 5.5 million placed in escrow in 2011. Under the terms of the SPA, and in agreement with the pension plan trustees, the company contributed the cash received, net of certain fees, to the pension plan. This contribution caused the plan to go from a net liability position at the end of 2011 to a net asset position of approximately $8 million at December 29, 2012. Because goodwill associated with this transaction was fully impaired in 2008, this recovery is recognized in the 2012 statement of operations. Also, consistent with the presentation in 2008, this recovery is reported at the corporate level and not included in the determination of International Division operating income.
The $68.3 million Recovery of purchase price includes recognition of the cash received from the seller, certain fees incurred and reimbursed, as well as the release of an accrued liability as the settlement agreement releases any and all claims under the SPA. An additional expense of approximately $5.2 million related to this arrangement is included in General and administrative expenses, resulting in a net increase in operating income for 2012 of $63.1 million. The transaction is treated as a non-taxable return of purchase price for tax purposes.
The cash payment from the seller was received by a subsidiary of the company with the Euro as its functional currency and the pension plan funding was made by a subsidiary with Pound Sterling as its functional currency, resulting in certain translation differences between amounts reflected in the Consolidated Statements of Operations and the Consolidated Statements of Cash Flows for 2012. The receipt of cash from the seller is presented as a source of cash in investing activities. The contribution of cash to the pension plan is presented as a use of cash in operating activities. Refer to Note H of the Consolidated Financial Statements for additional information.
Charges in 2011 and 2010
The 2011 charges primarily relate to the consolidation and elimination of functions in Europe, the closure of stores in Canada and Company-wide process improvement initiatives. In the Consolidated Statements of Operations, for comparability to the 2012 presentation, we have reclassified $11.4 million related to 2011 store level impairment to Asset impairments line, which was previously reported in Store and warehouse operating and selling expenses in the Consolidated Statements of Operations.
The charges in 2010 include $51 million for the abandonment of a certain software application, $23 million for losses on the disposal of operating entities in Israel and Japan, as well as $13 million of compensation-related costs following the departure of the Company‚Äôs former CEO.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Office Depot, Inc., together with our subsidiaries (‚ÄúOffice Depot‚ÄĚ or the ‚ÄúCompany‚ÄĚ), is a global supplier of office products and services. We sell to consumers and businesses of all sizes through our three segments (or ‚ÄúDivisions‚ÄĚ): North American Retail Division, North American Business Solutions Division, and International Division. Our North American Retail Division sells a broad assortment of merchandise through our chain of office supply stores. Our North American Business Solutions Division sells nationally branded and our own brand office supplies, technology products, furniture and services by means of a dedicated sales force, through catalogs and electronically through our Internet sites. Our International Division sells office products and services outside of the United States through direct mail catalogs, contract sales forces, Internet sites and retail stores, using a mix of Company-owned operations, joint ventures, and to a lesser extent, licensing and franchise agreements, alliances and other arrangements.
During the first quarter of 2013, the Company modified its measure of business segment operating income for management reporting purposes to allocate to the Divisions additional General and administrative (‚ÄúG&A‚ÄĚ) and other expenses, as well as additional assets, capital expenditures, and related depreciation expense. No changes have been made to the composition of the Divisions. Additionally, the Company changed its accounting principle of presenting shipping and handling expenses in Operating and selling expenses (previously Store and warehouse operating and selling expenses) to a preferable accounting principle of presenting such expenses in Costs of goods sold and occupancy costs. The Company considers this presentation preferable because it includes costs associated with revenues in the calculation of gross profit and provides better comparability to industry peers. Prior period results have been reclassified to conform to the current period presentation for both the change in accounting principle and the change in measurement of Division operating income (loss). These changes result in the decrease in Gross profit in the Condensed Consolidated Statements of Operations and revised measure of Division operating income (loss). Refer to Note I in Notes to the Condensed Consolidated Financial Statements for additional Division information. Neither the change in accounting principle, nor the change in Division operating income (loss) impacted Consolidated Operating income (loss), Net earnings (loss), or Earnings (loss) per share for the respective periods.
Management‚Äôs Discussion and Analysis of Financial Condition and Results of Operations (‚ÄúMD&A‚ÄĚ) is intended to provide information to assist readers in better understanding and evaluating our financial condition and results of operations. We recommend reading 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 2012 Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (the ‚ÄúSEC‚ÄĚ) on February 20, 2013, as amended on April 26, 2013 and as further updated with subsequent current reports in 2013 (the ‚Äú2012 Form 10-K‚ÄĚ), including the Form 8-K filed on April 30, 2013 that retrospectively applied these accounting changes to each of the three fiscal years in the period ended December 29, 2012.
This MD&A contains significant amounts of forward-looking information. Without limitation, when we use the words ‚Äúbelieve,‚ÄĚ ‚Äúestimate,‚ÄĚ ‚Äúplan,‚ÄĚ ‚Äúexpect,‚ÄĚ ‚Äúintend,‚ÄĚ ‚Äúanticipate,‚ÄĚ ‚Äúcontinue,‚ÄĚ ‚Äúmay,‚ÄĚ ‚Äúproject,‚ÄĚ ‚Äúprobably,‚ÄĚ ‚Äúshould,‚ÄĚ ‚Äúcould,‚ÄĚ ‚Äúwill‚ÄĚ and similar expressions in this Quarterly Report on Form 10-Q, we are identifying forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). Our discussion of Risk Factors, found in Item 1A of our 2012 Form 10-K, and Forward-Looking Statements, found immediately following the MD&A in our 2012 Form 10-K, apply to these forward-looking statements.
RESULTS OF OPERATIONS
A summary of certain factors impacting results for the 13-week and 39-week periods ended September 28, 2013 (also referred to as ‚Äúthe third quarter of 2013‚ÄĚ and ‚Äúyear-to-date 2013‚ÄĚ, respectively) compared to the 13-week and 39-week periods ended and September 29, 2012 (also referred to as ‚Äúthe third quarter of 2012‚ÄĚ and ‚Äúyear-to-date 2012‚ÄĚ, respectively) is provided below. Additional discussion of the 2013 third quarter and year-to-date results is provided in the narrative that follows.
On February 20, 2013, the Company entered into a merger agreement with OfficeMax Incorporated (‚ÄúOfficeMax‚ÄĚ), pursuant to which the Company and OfficeMax would combine in an all-stock merger transaction (the ‚ÄúMerger Agreement‚ÄĚ). At the effective time of the merger, the Company would issue 2.69 new shares of common stock for each outstanding share of OfficeMax common stock. Currently, the Company is considered the accounting acquirer, which determination will be confirmed at the effective time of the merger. On July 10, 2013, shareholders of each company approved the transactions contemplated by the Merger Agreement. The merger will not be final until the receipt of certain regulatory approvals and completion of other customary closing conditions.
The Company has recognized $40 million and $72 million of Merger and certain shareholder-related expenses during the third quarter and year-to-date 2013. The merger expenses are expected to continue throughout the year and into future periods.
Sales in the third quarter of 2013 decreased 3% compared to the third quarter of 2012.
Sales in the North American Retail Division decreased 4%; comparable store sales decreased 2%.
Sales in the North American Business Solutions Division decreased 2%.
International Division sales decreased 2% in U.S. dollars and 4% in constant currency.
Total Company gross profit margin decreased 45 basis points in the third quarter of 2013, with decreases in North American Retail and International Divisions and an increase in North American Business Solutions Division.
The North American Retail Division recognized non-cash asset impairment charges of $5 million and $14 million during the third quarter and year-to-date 2013, respectively. Similar asset impairment charges were $73 million and $115 million for the third quarter and year-to-date 2012, respectively. Additionally, $15 million of intangible asset impairment charges were recognized in the third quarter of 2012 related to decreased performance in Sweden.
Pre-tax restructuring charges of $4 million and $18 million were recognized in the third quarter and year-to-date 2013, respectively. During the third quarter and year-to-date 2012, pre-tax restructuring and other charges of $8 million and a net credit of $11 million were recognized, respectively. The $11 million net credit in the year-to-date 2012 period included a net gain on purchase price recovery of $63 million, partially offset by restructuring and other charges of $40 million and $12 million of loss on extinguishment of debt.
After considering the merger and certain shareholder-related expenses, asset impairment and restructuring charges, total Company operating expenses were lower in the third quarter and year-to-date 2013 compared to 2012, with reductions in each of the Divisions.
On July 9, 2013, the Company completed the sale of its investment in Office Depot de Mexico, S.A. de C.V. (‚ÄúOffice Depot de Mexico‚ÄĚ) to Grupo Gigante, S.A.B. de C.V. A gain on disposition of joint venture of $381 million was recognized in the third quarter of 2013. The disposition of this joint venture triggered recognition of $44 million of goodwill impairment in the third quarter of 2013.
On July 11, 2013, the Company redeemed 50 percent of the redeemable preferred stock with a cash payment of $216 million. Associated with this redemption, a $22 million dividend was recognized consisting of a $12 million redemption premium and $10 million of preferred stock liquidation preference greater than carrying value.
Income tax expense for the third quarter and year-to-date 2013 includes $146 million tax on the gain from the sale of Office Depot de Mexico. Additionally, tax expense for all periods reflect the impact of limitations on recognizing deferred tax benefits as a result of valuation allowances recorded in several tax jurisdictions. The year-to-date 2012 amount included a $16 million tax benefit from an approved tax loss carryback.
The most dilutive earnings per share was $0.41 in the third quarter of 2013 compared to a loss per share of $0.25 for the third quarter of 2012. The 2013 EPS was positively impacted by the gain on joint venture sale and negatively impacted by goodwill and other asset impairments, merger expenses and restructuring charges.
North American Retail Division
Third quarter sales in the North American Retail Division were $1.1 billion, a decrease of 4% compared to the third quarter of 2012. Comparable store sales in the 1,063 stores that have been open for more than one year decreased 2% for the third quarter of 2013. Sales of ink and toner were lower in the third quarter of 2013 compared to the same period in 2012, partially impacted by vendor promotions in the prior year. Sales of paper and printers were lower and were impacted by lower average selling prices compared to the prior year. Furniture sales declined, reflecting additional clearance activity in 2013. Certain technology and related categories were lower this quarter; however, sales of tablets and mobility devices increased. Sales in Copy and Print Depot, as well as sales of school supplies increased. Average order value declined approximately 1% and customer transaction counts declined approximately 2% compared to the same period last year.
The North American Retail Division reported operating income of $10 million in the third quarter of 2013, compared to an operating loss of $52 million in the same period of 2012. Division operating income (loss) included charges of $5 million and $74 million for the third quarters of 2013 and 2012, respectively, primarily related to non-cash asset impairments of $5 million and $73 million, respectively, and restructuring-related costs. Asset impairment charges have been recognized each quarter since the third quarter of 2011 and may continue in future periods.
After considering the impairment and other charges, the third quarter 2013 operating income compared to the same period in 2012 decreased. Gross profit margin decreased 58 basis points, reflecting the pressures addressed above. Division operating income was also impacted by the negative flow through of lower sales, partially offset from lower professional fees, payroll and general and administrative expenses.
During the third quarter of 2013, the North American Retail Division closed seven stores and opened two, ending the period with a store count of 1,104.
Sales in the year-to-date 2013 period decreased 5% and comparable store sales decreased 4%, compared to the year-to-date 2012. The timing of the new year holidays negatively impacted sales in first quarter of 2013. Sales in the year-to-date 2013 compared to the same period in 2012 reflect lower sales of technology products, furniture and supplies. Sales in Copy and Print Depot and sales of cleaning and breakroom products increased. Division operating loss included asset impairment and other charges of $14 million and $115 million for the year-to-date 2013 and 2012, respectively. After considering these charges, the decrease in Division operating income in 2013 reflects the negative flow-through impact of lower sales, partially offset by lower advertising, general and administrative and other expenses.
North American Business Solutions Division
Third quarter sales in the North American Business Solutions Division were $811 million, a 2% decrease compared to the third quarter of 2012. Third quarter 2013 sales in the contract channel decreased low-single digits compared to the same period in 2012, reflecting both the restructuring and relocation of our technology selling effort that began in the first quarter of 2013 as well as continued customer budgetary pressures on sales to the federal government. These two factors explain the contract channel sales decline for the third quarter of 2013. The technology restructuring may continue to negatively impact sales through the first quarter of 2014; however, the sales declines are expected to be offset by operating efficiencies and gross margin improvement. Sales to education and state and local accounts increased, while sales to large and enterprise-level accounts decreased. Sales in the direct channel were flat. Growth in online sales was offset by lower purchases from customers who shop using catalogs and order through our inbound call centers. This shift in customer shopping channel preference has been visible in recent quarters and is expected to continue. In addition to the technology impacts discussed above, sales at the Division level of supplies, including paper, ink and toner, were lower, partially offset by increases in sales in Copy and Print Depot, furniture, cleaning and breakroom categories.
The North American Business Solutions Division reported operating income of $39 million in the third quarter of 2013, compared to $30 million in the same period of the prior year. Division operating income includes charges of $2 million in the third quarter of 2012, primarily related to severance and other restructuring activity. The increase in Division operating income reflects a 13 basis point increase in gross margin, lower payroll, advertising and general and administrative expenses.
Sales in the year-to-date 2013 decreased 2% compared to the year-to-date 2012. The timing of the new year holidays negatively impacted sales in first quarter of 2013. The factors discussed above impacting the comparison of the third quarter of 2013 to the same period in 2012 largely apply to the comparison of the year-to-date 2013 to the year-to-date 2012.
The International Division reported third quarter 2013 sales of $681 million, a decrease of 2% in U.S. dollars and 4% in constant currency compared to the third quarter of 2012. The slowing economic conditions in Europe continue to impact sales. European sales in the contract channel decreased mid-single digits compared to the third quarter of 2012. Decisions to terminate certain unprofitable accounts partially contributed to this decline. Third quarter 2013 sales in the direct channel were lower across the Division; however, the rate of decline continued to improve. To adjust to market conditions, prices of ink and toner were lowered in several European markets. The retail channel sales compared to the third quarter of 2012 decreased, reflecting store closures in Sweden, partially offset by increased sales in stores in France.
The International Division operating income for the third quarter of 2013 was $3 million, compared to an operating loss of $15 million in the same period of 2012. Included in this measure of Division operating income (loss) is approximately $3 million of severance and restructuring charges in the third quarter of 2013 and $19 million of charges in the same period of 2012. The third quarter of 2012 charges includes $15 million of intangible asset impairment charges resulting from decreased performance in Sweden. After considering these charges in both periods, Division operating results increased, reflecting operational improvements, lower advertising, payroll and general and administrative expenses, including benefits from lower employee and real estate accruals. These benefits were partially offset by an 81 basis point reduction in gross margin from the pricing initiatives mentioned above and a shift in the mix of sales, as well as the negative impact of the flow through of lower sales.
Sales in the year-to-date 2013 decreased 4% in U.S. dollars and 6% in constant currency compared to the year-to-date of 2012. The timing of the new year holidays negatively impacted sales in first quarter of 2013. Sales in both the contract and direct channels decreased, largely reflecting the factors discussed for the third quarter of 2013. Severance and restructuring charges of $12 million and $46 million were recognized in the year-to-date of 2013 and 2012, respectively. As noted above, the 2012 charges also include $15 million of intangible asset impairment charges. After considering these charges, the decrease in Division operating income for the year-to-date of 2013 compared to 2012 reflects the negative flow-through impact of lower sales, partially offset by operational improvements and lower advertising, payroll and general and administrative expenses.
CORPORATE AND OTHER
As previously disclosed, a reporting unit of the International Division included operating subsidiaries in Europe and ownership of Office Depot de Mexico. A substantial majority of the estimated fair value of the reporting unit over its carrying value related to the joint venture and we disclosed that if the joint venture were to be removed from the reporting unit, all of the goodwill in that reporting unit likely would be impaired. Following the July 2013 sale of the Company‚Äôs interest in Office Depot de Mexico and return of cash proceeds to the U.S. parent company, the fair value of the reporting unit with goodwill decreased below its carrying value and goodwill was fully impaired. The impairment charge of $44 million is included in Asset impairments in the Condensed Consolidated Statement of Operations for the third quarter and year-to-date 2013.
Merger and certain shareholder-related expenses
On February 20, 2013, the Company entered into a merger agreement with OfficeMax, pursuant to which the Company and OfficeMax would combine in an all-stock merger transaction. On July 10, 2013, the shareholders of each company approved the transaction. However, the merger will not be final until the receipt of certain regulatory approvals and completion of other customary closing conditions. The Company has recognized $40 million and $72 million of Merger and certain shareholder-related expenses during the third quarter and year-to-date 2013 and will continue to recognize related expenses as incurred. The merger expenses include investment banking, legal, accounting, and other third party costs associated with the transaction, including regulatory filings and shareholder approvals. Merger expenses also include direct incremental travel and dedicated personnel costs, as well as accruals for retention of key employees. Certain fees are contingent on the transaction closing and are not yet recognized. It is anticipated that merger expenses will continue throughout 2013 and into future periods. Such future amounts could be material. The certain shareholder-related expenses include third party costs incurred to provide shareholders with information relating to the composition of the Board of Directors. The current Board of Directors was elected at the Annual Stockholders Meeting on August 21, 2013.
Recovery of purchase price
The sale and purchase agreement (‚ÄúSPA‚ÄĚ) associated with a 2003 European acquisition included a provision whereby the seller was required to pay an amount to the Company if a specified acquired pension plan was calculated to be underfunded based on 2008 plan data. The amount calculated by the plan‚Äôs actuary was disputed by the seller but upheld by an independent arbitrator. The seller continued to dispute the award until both parties reached a settlement agreement in January 2012 and the seller paid approximately GBP 37.7 million to the Company, including GBP 5.5 million placed in escrow in 2011. Under the terms of the SPA, and in agreement with the pension plan trustees, the Company contributed the cash received, net of certain fees, to the pension plan. This contribution caused the plan to go from a net liability position at the end of 2011 to a net asset position of approximately $8.8 million at March 31, 2012. Because the goodwill associated with this transaction was fully impaired in 2008, this recovery is recognized in the first quarter of 2012 statement of operations. Also, consistent with the presentation in 2008, this recovery is reported at the corporate level and not included in the determination of International Division operating loss.
The $68.3 million Recovery of purchase price includes recognition of the cash received from the seller, certain fees incurred and reimbursed, as well as the release of an accrued liability as the settlement agreement releases any and all claims under the SPA. An additional expense of approximately $5.2 million related to this arrangement is included in G&A expenses, resulting in a net increase in operating income for the first quarter of 2012 of $63.1 million. The transaction is treated as a non-taxable return of purchase price for tax purposes.
The cash payment from the seller was received by a subsidiary of the Company with the Euro as its functional currency and the pension plan funding was made by a subsidiary with Pound Sterling as its functional currency, resulting in certain translation differences between amounts reflected in the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Cash Flows for the first half of 2012. The receipt of cash from the seller is presented as a source of cash in investing activities. The contribution of cash to the pension plan is presented as a use of cash in operating activities. Refer to Note E of the Notes to Condensed Consolidated Financial Statements.
General & Administrative (‚ÄúG&A‚ÄĚ) Expenses
G&A expenses are charged to business segments in determination of Division operating income (loss) to the extent those costs are considered to be directly or closely related to segment activity and through an allocation of corporate support costs. Other companies may charge more or less G&A expenses and other costs to their segments, and our results therefore may not be comparable to similarly titled measures used by other companies. Our measure of Division operating income (loss) should not be considered as an alternative to operating income or net earnings determined in accordance with accounting principles generally accepted in the United States of America.
Total G&A expenses include restructuring and business process improvement charges of approximately $1 million and $6 million for the third quarters of 2013 and 2012, respectively. All of the third quarter 2013 charges and $5 million of the third quarter 2012 charges were recognized in Division G&A expenses.
Restructuring and business process improvement charges of $8 million and $29 million were recognized during the year-to-date periods of 2013 and 2012, respectively. All of the year-to-date 2013 charges and $22 million of the year-to-date 2012 charges were recognized in Division G&A expenses.
After considering these charges, Division G&A expenses decreased in each Division, reflecting benefits from prior restructuring activities, cost control and certain functional alignment changes.
Of the $7 million of charges included in Corporate G&A for the year-to-date 2012 period, $5 million related to the gain on recovery of purchase price discussed above.
After considering these charges, Corporate G&A expenses increased in the third quarter and year-to-date 2013 compared to the same periods in 2012. The changes reflect lower payroll, outside services and professional fees in 2013, offsetting a greater reduction in variable pay in 2012 compared to 2013.
Possible Management Reporting Changes
As the Company prepares for the merger with OfficeMax, internal management reporting conventions are being reconsidered. The Company currently anticipates retaining its three reportable segments, but is considering modification to the measurement of Division operating income (loss), primarily to exclude asset impairment and restructuring charges. Oversight of restructuring activities may be at the Corporate level. However, this analysis is not yet complete and reports used to allocate resources and evaluate performance have not yet been modified. Should these changes be implemented, prior period information will be recast for purposes of comparability.
Other Income (Expense)
The decrease in interest expense for the third quarter and year-to-date 2013 compared to the same periods of 2012 reflects the maturity in August 2013 of $150 million of Senior Notes.
On March 15, 2012, the Company completed the settlement of its cash tender offer to purchase up to $250 million aggregate principal amount of its outstanding 6.25% senior notes due 2013. The total consideration for each $1,000.00 note surrendered was $1,050.00. Additionally, tender fees and a proportionate amount of deferred debt issue costs and a deferred cash flow hedge gain were included in the measurement of the $12.1 million extinguishment costs reported in the Condensed Consolidated Statements of Operations for the first quarter of 2012.
On July 9, 2013, the Company completed the sale of its investment in Office Depot de Mexico to Grupo Gigante, S.A.B. de C.V. for the Mexican Peso amount of 8,777 million in cash ($680 million at then-current exchange rates). A pretax gain of $381 million was recognized in the third quarter of 2013 ($382 million for the year-to-date period). The gain is net of third party fees, as well as recognition of $39 million of cumulative translation loss released from other comprehensive income because the subsidiary holding the investment was substantially liquidated.
The sale of this investment had a significant impact on the comparison of Miscellaneous income, net to the prior year. The Company‚Äôs portion of the joint venture results for the year-to-date 2013 was $13 million. The Company‚Äôs portion of joint venture results for the third quarter and year-to-date 2012 were $11 million and $23 million, respectively. In addition, Miscellaneous income, net includes gains and losses on our deferred compensation plan and foreign currency transactions.
The effective tax rate for the third quarter and year-to-date 2013 was 49.0% and 61.7%, respectively, compared to -5.9% and -0.5%, respectively, for the same periods of 2012. The increase in income tax expense and effective tax rate from the third quarter of 2012 is primarily attributable to the sale of the Company‚Äôs investment in Office Depot de Mexico, which is discussed in Note N. The Company paid $117.3 million of Mexican income tax upon the sale and estimates to incur additional U.S. income tax expense of $32.7 million due to dividend income and Subpart F income in 2013 as a result of the sale, for total estimated income tax expense of $150 million. After application of interim period tax accounting, $145.6 million of the total estimated income tax expense was recognized in the third quarter of 2013, with the remainder to be recognized in the fourth quarter of 2013. In addition, the effective tax rate for year-to-date 2012 includes the accrued benefit related to the favorable settlement of the U.S. Internal Revenue Service (‚ÄúIRS‚ÄĚ) examination of the 2009 and 2010 tax years, as discussed below. The year-to-date 2012 effective tax rate was also impacted by the recovery of purchase price that was treated as a purchase price adjustment for tax purposes. As discussed in Note E, this recovery would have been a reduction of related goodwill for financial reporting purposes, but the related goodwill was impaired in 2008. Additionally, the loss on extinguishment of debt in the United States during the first quarter of 2012 did not generate a financial statement tax benefit because of existing valuation allowances.
The effective tax rates for all presented periods reflect the recognition of tax expense in tax jurisdictions with pretax earnings and the absence of deferred tax benefits on pretax losses of certain tax jurisdictions with valuation allowances. Accordingly, interim income tax accounting is likely to result in significant variability of the effective tax rate throughout the course of the year. Changes in income projections and the mix of income across jurisdictions could also impact the effective tax rate each quarter.
Upon the sale of Office Depot de Mexico in the third quarter of 2013, $4.7 million of income tax expense was reclassified from accumulated other comprehensive income to the Consolidated Statement of Operations to remove the residual income tax effects associated with currency translation on the Company‚Äôs investment in Office Depot de Mexico. Such income tax effects were recorded in the cumulative translation account, which is a component of Accumulated other comprehensive income, due to intraperiod allocations required in the fourth quarter of 2012 when the Company removed its indefinite reinvestment assertion with respect to certain foreign earnings accumulated at Office Depot de Mexico.
Also as a result of the sale, the Company realized an income tax benefit of $5.2M for equity compensation deductions for which no benefit was previously recorded. The income tax benefit was recorded as additional paid-in capital in the third quarter of 2013. The Company expects to utilize all of its U.S. federal net operating loss (‚ÄúNOL‚ÄĚ) carryfowards in 2013 as a consequence of the disposition of Office Depot de Mexico.
The Company has reached a settlement with the IRS Appeals Division to close the previously-disclosed IRS deemed royalty assessment relating to 2009 and 2010 foreign operations. The settlement was subject to the Congressional Joint Committee on Taxation approval, which was received during the second quarter of 2013. The resolution of this matter has closed all known disputes with the IRS relating to tax years 2009 and 2010 and resulted in a refund of approximately $14 million, which was received during the third quarter of 2013, from a previously approved carryback of a tax accounting method change. For the 2011 year, final resolution of this matter was received in October 2013 with no change to the Company‚Äôs tax return.
The Company has significant deferred tax assets in the U.S. and in foreign jurisdictions against which valuation allowances have been established and will continue to assess the realizability of these deferred tax assets. There are certain foreign jurisdictions where the Company believes it is necessary to see further positive evidence, such as sustained achievement of cumulative profits before any valuation allowances can be released with respect to these operations. If positive evidence develops in 2013, the Company may release all or a portion of the remaining valuation allowances in these jurisdictions as early as the fourth quarter of 2013. Such release would have a positive impact on our income tax expense in the period of release.
On September 13, 2013, the IRS and U.S. Treasury Department issued final regulations addressing the deduction and capitalization of tangible property expenditures, which are effective beginning with the 2014 tax year. The Company is currently evaluating the changes required by these regulations but does not expect them to have a material impact on the Company‚Äôs consolidated financial statements.
Preferred Stock Dividends
In accordance with certain merger-related agreements which the Company entered into with the holders of the Company preferred stock concurrently with the execution of the Merger Agreement and following shareholder approval of the merger, on July 11, 2013, the Company redeemed 50 percent of the preferred stock. The cash payment of $216.2 million included the liquidation preference of $203.4 million, a redemption premium of $12.2 million, measured at 6% of the liquidation preference, and regular dividends through the redemption date of $0.6 million. Preferred stock dividends for the third quarter and year-to-date 2013 include $22.4 million related to this redemption, comprised of the $12.2 million redemption premium and $10.2 million representing 50 percent of the difference between liquidation preference and carrying value of the preferred stock. The liquidation preference exceeded the carrying value because of initial issuance costs and paid-in-kind dividends recorded for accounting purposes at fair value.
In connection with the merger closing, the remaining 50 percent of the preferred stock either will be redeemed by the Company or, at the election of the preferred stockholders, will be converted into Company common stock and sold. If redeemed by the Company, an additional cash payment and incremental dividend similar to that discussed above will be recognized. If converted by the preferred stockholders into Company common stock but not sold by the time of closing, the Company has committed to purchase the amount of Company common stock held by the preferred stockholders such that the preferred stockholders would not own more than 5% of the aggregate Company common stock at the closing of the merger. Should the preferred stockholders convert any allowable portion of the preferred stock to common stock, the net carrying value of this portion of preferred stock will be reclassified into common stock and additional paid-in capital. Any purchase by the Company of the Company‚Äôs common stock held by the preferred stockholders will be at the preceding trading day‚Äôs closing price as listed on the New York Stock Exchange and will be presented in the Consolidated Financial Statements as additional purchases of treasury stock.
On November 5, 2013, in connection with the merger closing, the remaining 50 percent of the preferred stock was redeemed by the Company. Redemption payment included regular dividends incurred through the redemption date.
New Accounting Pronouncements
Effective for years beginning after December 15, 2013, transactions or events that result in companies losing a controlling interest in a foreign entity will cause the release of the related cumulative translation adjustment (‚ÄúCTA‚ÄĚ) amounts. Under current accounting rules, release of CTA only follows complete or substantially complete liquidation of a foreign entity. While there are no actions in process that would be impacted by this change in accounting, the Company continues to evaluate its foreign entities‚Äô operations and future periods could be affected.
Thank you, and good morning. Joining me today are Neil Austrian, Chairman and Chief Executive Officer; Mike Newman, Chief Financial Officer; and Steve Schmidt, President of International. We also have our North American business leaders, Juan Guerrero, Senior Vice President for Retail; Steve Calkins, Senior Vice President for Contract; and Mike Kirschner, Senior Vice President for Direct.
Before we begin, I'd like to remind you that our discussion this morning includes forward-looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the company's current expectations concerning future events and are subject to a number of factors and uncertainties that can cause actual results to differ materially. A detailed discussion of these factors and uncertainties is contained in the company's filings with the SEC. The SEC filings, as well as a reconciliation of the non-GAAP financial measures discussed on the call to the most directly comparable GAAP financial measures, along with the webcast slides for today's call, are all available on our website at investor.officedepot.com.
Before we discuss the results, I want to remind you of the financial reporting changes we made last quarter, namely modifying divisional operating income by allocating additional general, administrative and other expenses, as well as the reclassification of shipping and handling expense out of operating and selling expenses and into cost of goods sold. Full descriptions of these reporting changes, along with recast historical financial results were included in the press release and in the 8-K filed with our first quarter results on April 30, 2013.
I'll now turn the call over to Neil Austrian.
Neil R. Austrian - Chairman and Chief Executive Officer
Thank you, Rich, and good morning, everyone. Before I review the second quarter financial results, I wanted to mention 2 important milestones in the company's history that occurred earlier this month. First, on July 9, we closed on the sale of our 50% Mexican joint venture to Grupo Gigante. They've been wonderful partners dating back to when Office Depot de Mexico was first founded in 1994, and I'm confident they will continue to be excellent stewards of the brand going forward in Latin America. I'm also very pleased with the valuation that we received on the Mexican JV sale. The management and the board initiated a thoughtful strategy starting in late 2011 to begin illuminating the value of this business to our shareholders. It started by providing additional disclosure on the performance of the JV during our quarterly conference calls. It developed into what could have been an interesting but somewhat longer-term potential public offering for the business and it culminated in Grupo Gigante purchasing the business for approximately $680 million. The roughly $550 million of after-tax proceeds will significantly enhance our liquidity and financial flexibility as we continue to progress toward the proposed merger with OfficeMax.