<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ----------------------
Commission file number 1-10948
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OFFICE DEPOT, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 59-2663954
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2200 Old Germantown Road, Delray Beach, Florida 33445
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(Address of principal executive offices) (Zip Code)
(407) 278-4800
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(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirement for the past 90 days.
Yes X No
--- ---
The registrant had 155,256,051 shares of common stock outstanding as of October
27, 1995.
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OFFICE DEPOT, INC.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Earnings for the
13 and 39 Weeks Ended September 30, 1995
and September 24, 1994 3
Consolidated Balance Sheets as of
September 30, 1995 and December 31, 1994 4
Consolidated Statements of Cash Flows for the
39 Weeks Ended September 30, 1995
and September 24, 1994 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 - 10
Part II. OTHER INFORMATION 10
SIGNATURE 11
INDEX TO EXHIBITS 12
</TABLE>
2
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OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks 13 Weeks 39 Weeks 39 Weeks
Ended Ended Ended Ended
September 30, September 24, September 30, September 24,
1995 1994 1995 1994
-------- -------- -------- ------
<S> <C> <C> <C> <C>
Sales $1,337,108 $1,044,815 $3,888,730 $3,010,887
Cost of goods sold and occupancy costs 1,029,618 801,277 3,004,607 2,314,812
---------- ---------- ---------- ----------
Gross profit 307,490 243,538 884,123 696,075
Store and warehouse operating
and selling expenses 197,838 156,115 580,243 458,775
Pre-opening expenses 4,244 3,582 10,408 6,814
General and administrative expenses 37,357 32,156 110,621 92,955
Amortization of goodwill 1,290 1,266 3,882 3,803
---------- ---------- ---------- ----------
240,729 193,119 705,154 562,347
---------- ---------- ---------- ----------
Operating Profit 66,761 50,419 178,969 133,728
Interest expense (income), net 5,151 3,224 16,782 10,458
---------- ---------- ---------- ----------
Earnings before income taxes 61,610 47,195 162,187 123,270
Income taxes 24,768 19,784 65,453 50,504
---------- ---------- ---------- ----------
Net earnings $ 36,842 $ 27,411 $ 96,734 $ 72,766
========== ========== ========== ==========
Earnings per common and
common equivalent share:
Primary $ 0.24 $ 0.18 $ 0.63 $ 0.48
Fully diluted $ 0.23 $ 0.18 $ 0.61 $ 0.47
Average common and common
equivalent shares:
Primary 156,640 152,443 154,576 152,400
Fully diluted 173,248 169,244 171,309 169,093
</TABLE>
3
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OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
----------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 63,131 $ 32,406
Receivables, net of allowances 326,871 266,629
Merchandise inventories 973,390 936,048
Deferred income taxes 28,553 32,093
Prepaid expenses 12,329 7,046
---------- ----------
Total current assets 1,404,274 1,274,222
Property and Equipment 677,561 524,350
Less accumulated depreciation and amortization 168,096 127,121
---------- ----------
509,465 397,229
Goodwill, net of amortization 196,652 200,449
Other Assets 40,765 32,083
---------- ----------
$2,151,156 $1,903,983
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 606,250 $ 609,914
Accrued expenses 160,657 154,894
Income taxes 20,768 18,051
Current maturities of long-term debt 515 4,030
---------- ----------
Total current liabilities 788,190 786,889
Long-Term Debt, less current maturities 12,664 27,460
Deferred Taxes and Other Credits 14,230 8,023
Zero Coupon, Convertible, Subordinated Notes 378,234 366,340
Common Stockholders' Equity
Common stock - authorized 400,000,000 shares of
$.01 par value; issued 157,370,924 in 1995 and
151,536,781 in 1994 1,574 1,515
Additional paid-in capital 596,583 453,117
Foreign currency translation adjustment (987) (3,295)
Retained earnings 362,418 265,684
Less: 2,163,447 shares of treasury stock (1,750) (1,750)
---------- ----------
957,838 715,271
---------- ----------
$2,151,156 $1,903,983
========== ==========
</TABLE>
4
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OFFICE DEPOT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
39 Weeks Ended 39 Weeks Ended
September 30, September 24,
1995 1994
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<S> <C> <C>
Cash flows from operating activities
Cash received from customers $ 3,831,442 $ 2,951,341
Cash paid for inventory (2,932,694) (2,273,214)
Cash paid for store and warehouse operating,
selling and general and administrative expenses (775,339) (601,078)
Interest received 696 3,588
Interest paid (5,189) (2,067)
Taxes paid (55,207) (46,596)
----------- -----------
Net cash provided by operating activities 63,709 31,974
----------- -----------
Cash flows from investing activities
Capital expenditures-net (154,373) (114,754)
----------- -----------
Net cash used by investing activities (154,373) (114,754)
----------- -----------
Cash flows from financing activities
Proceeds from exercise of stock options 15,369 11,161
Proceeds from stock offering 122,023 -
Foreign currency translation adjustment 2,308 (1,865)
Proceeds from long- and short-term borrowings 176,430 29,067
Payments on long- and short-term borrowings (194,741) (30,357)
Distributions to shareholders - (4,956)
----------- -----------
Net cash provided by financing activities 121,389 3,050
----------- -----------
Net increase (decrease) in cash and cash
equivalents 30,725 (79,730)
Cash and equivalents at beginning of period 32,406 142,471
----------- -----------
Cash and equivalents at end of period $ 63,131 $ 62,741
=========== ===========
Reconciliation of net earnings to net cash
provided (used) by operating activities
Net earnings $ 96,734 $ 72,766
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities
Depreciation and amortization 47,252 35,660
Contributions of common stock to employee
benefit plans 2,349 1,895
Changes in assets and liabilities
Increase in receivables (60,242) (68,424)
Increase in inventories (37,342) (74,752)
Increase in prepaid expenses and other assets (11,743) (15,371)
Increase in accounts payable
and other liabilities 26,701 80,200
----------- -----------
Total adjustments (33,025) (40,792)
----------- -----------
Net cash provided by operating activities $ 63,709 $ 31,974
=========== ===========
</TABLE>
5
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OFFICE DEPOT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The interim financial statements as of September 30, 1995 and for the
13 and 39 week periods ended September 30, 1995 and September 24, 1994
are unaudited; however, such interim statements reflect all
adjustments (consisting only of normal recurring accruals) necessary
for a fair presentation of the financial position and the results of
operations for the interim periods presented. The results of
operations for the interim periods presented are not necessarily
indicative of the results to be expected for the full year. The
interim financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 1994.
2. Average common and common equivalent shares utilized in computing
third quarter primary earnings per share include approximately
4,232,000 and 4,092,000 shares in 1995 and 1994, respectively, as a
result of applying the treasury stock method to outstanding stock
options. Earnings per common share, assuming full dilution, were
determined on the assumption that the convertible notes were converted
as of the beginning of the period. The number of shares utilized in
the calculation of fully diluted earnings per share for conversion of
the convertible notes in the third quarter were approximately
16,573,000 and 16,580,000 shares in 1995 and 1994, respectively. For
purposes of this calculation, net earnings were adjusted for the
interest on the convertible notes net of the tax effect.
3. In August 1995, the Company issued 4,325,000 shares of common stock in
a public offering, raising net proceeds of approximately $122 million.
4. The Consolidated Statements of Cash Flows for the 39 weeks ended
September 30, 1995 and September 24, 1994 do not include noncash
financing transactions of approximately $12,127,000 and $11,743,000,
respectively, associated with accreted interest on convertible,
subordinated notes and approximately $233,000 and $0, respectively,
relating to common stock issued upon conversion of convertible notes.
6
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Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales increased 28% to $1,337,108,000 in the third quarter of 1995 from
$1,044,815,000 in the third quarter of 1994; and to $3,888,730,000 for the
first nine months of 1995 from $3,010,887,000 for the first nine months of
1994, an increase of 29%. Comparable sales for stores and delivery facilities
increased 17% for the third quarter and 18% for the first nine months of 1995,
respectively. The balance of the sales increase was attributable to the 78 new
stores (net of one store closure) opened subsequent to the third quarter of
1994. The Company opened 13 stores in the third quarter of 1995, bringing the
total number of stores open at the end of the third quarter to 461 compared
with 384 stores at the end of the third quarter of 1994. The Company also
operated 24 contract stationer and delivery warehouses (customer service
centers) at the end of both the third quarter of 1995 and 1994. Several of
these are new, larger facilities which replaced existing facilities of several
contract stationers acquired in 1993 and 1994. Comparable sales in the future
may be affected by competition from other stores and contract stationers, the
opening of additional Office Depot stores or the expansion of the Company's
contract stationer business in its existing markets, and general market
conditions.
Gross profit as a percentage of sales was 23.0% during the third quarter of
1995, as compared with 23.3% during the comparable quarter in 1994, and 22.7%
for the first nine months of 1995, as compared with 23.1% for the first nine
months of 1994. The decrease was primarily a result of an increase in sales of
lower margin business machines and computers and an increase associated with
higher occupancy costs on new and converted customer service centers. These
decreases were partially offset by purchasing efficiencies gained through
vendor volume discount programs which increased as purchasing levels continued
to increase, and by leveraging the Company's store occupancy costs through
higher average sales per store. Gross margins are slightly higher in the
contract stationer portion of the business due to a lower percentage of
business machine and computer sales. Gross margins may fluctuate in both the
retail and contract stationer business as a result of competitive pricing in
more market areas, continued change in sales product mix and increased
occupancy costs in certain new markets and for new warehouses.
Store and warehouse operating and selling expenses as a percentage of sales
were 14.8% and 14.9% in the third quarter and first nine months of 1995,
respectively, compared with 14.9% and 15.2% in the comparable periods in 1994,
respectively. Store and warehouse operating and selling expenses consist
primarily of payroll and advertising expenses. Although the majority of these
expenses vary proportionately with sales, there is a fixed cost component to
these expenses such that, as sales increase within a given market area, store
and warehouse operating and selling expenses should decrease as a percentage of
sales. This benefit may not be fully realized, however, during periods when a
large number of new stores and customer service centers are being opened, as
new facilities typically generate lower sales than the average mature location,
resulting in higher operating and selling expenses as a
7
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percentage of sales for such new facilities. This percentage is also affected
when the Company enters large metropolitan market areas where the advertising
costs for the full market must be absorbed by the small number of stores
initially opened. As additional stores in these large markets are opened,
advertising costs, which are essentially a fixed expense for a market area,
typically decrease overall as a percentage of sales. The Company has also
continued a strategy of opening additional stores in existing markets.
Although increasing the number of stores increases operating income in absolute
dollars, this may have the effect of increasing overall expenses as a
percentage of sales, since the sales of certain existing stores in the market
may initially be adversely affected. Warehouse expenses in the first nine
months of 1995 were adversely affected by the additional costs incurred in the
systems conversion and integration of the contract stationer warehouses. The
integration is expected to be substantially completed by early 1996.
Pre-opening expenses increased to $4,244,000 in the third quarter of 1995 from
$3,582,000 in the comparable period in 1994, and to $10,408,000 in the nine
month period ended September 30, 1995 from $6,814,000 in the comparable 1994
period. Pre-opening expenses in 1995 include the costs associated with
replacing seven existing customer service centers with larger, more functional
facilities. Additionally, the Company added 42 stores in the first nine months
of 1995, as compared with 33 stores in the comparable 1994 period. Pre-opening
expenses currently are approximately $140,000 per store and $500,000 for a
customer service center, and are predominately incurred during a six-week
period prior to the opening of the store or a twelve-week period prior to the
opening of a customer service center. Pre-opening expenses may vary based on
geographical area and customer base being serviced. These expenses consist
principally of amounts paid for salaries, occupancy costs and supplies. Since
the Company's policy is to expense these items during the period in which they
occur, the amount of pre-opening expenses in each quarter is generally
proportional to the number of new stores or customer service centers opened or
in the process of being opened during the period.
General and administrative expenses have decreased as a percentage of sales to
2.8% in the third quarter of 1995 from 3.1% in the comparable period in 1994,
and to 2.8% in the first nine months of 1995 from 3.1% in the comparable 1994
period. General and administrative expenses have decreased as a percentage of
sales, primarily as a result of the Company's ability to increase sales without
a proportionate increase in corporate expenditures. The Company's continued
investment in its information systems should allow the Company to further
reduce general and administrative expenses as a percentage of sales.
The Company incurred net interest expense of $5,151,000 and $16,782,000 in the
third quarter and first nine months of 1995, respectively, as compared with
$3,224,000 and $10,458,000 in the comparable periods in 1994. This increase in
interest expense is primarily due to funds borrowed under the Company's
revolving credit agreement.
8
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LIQUIDITY AND CAPITAL RESOURCES
Since the Company's store sales are substantially on a cash and carry basis,
cash flow generated from operating stores provides a source of liquidity to the
Company. Working capital requirements are reduced by vendor credit terms,
which allow the Company to finance a portion of its inventory. The Company
utilizes private label credit card programs administered and financed by
financial service companies; this allows the Company to expand its retail sales
without the burden of additional receivables.
Sales made through the customer service centers are generally made under
regular commercial credit terms, where the Company carries its own receivables.
As the Company expands into servicing additional large companies in the
delivery portion of its business, it is expected that the Company will carry a
greater amount of receivables.
In the third quarter of 1995, the Company added 13 stores, compared with 16
stores added in the comparable 1994 period. The Company also replaced one of
its existing customer service centers with a larger, more efficient facility.
As stores mature and become more profitable, and as the number of new stores
opened in a year becomes a smaller percentage of the existing store base, cash
generated from operations will provide a greater portion of funds required for
new store fixed assets, inventories and other working capital requirements.
Cash generated from operations will be affected by an increase in receivables
carried without outside financing, and an increase in inventory at the stores
and customer service centers as the Company continues to expand its sales in
computers and business machines. Net cash provided by operating activities was
$63,709,000 and $31,974,000 in the first nine months of 1995 and 1994,
respectively. Capital expenditures are also affected by the number of stores
and customer service centers opened, converted or acquired each year and the
increase in computer and other equipment at the corporate office required to
support such expansion. Cash utilized for capital expenditures was
$154,373,000 and $114,754,000 in the first nine months of 1995 and 1994,
respectively.
During the 39 weeks ended September 30, 1995, the Company's cash balance
increased approximately $30,725,000 and long- and short-term debt decreased by
approximately $18,311,000. The increase in cash was primarily attributable to
proceeds of approximately $122 million received from a public offering of
common stock. Proceeds were used to pay down amounts outstanding under the
Company's revolving credit facility as well as other working capital needs.
The Company plans to open a total of approximately 35-40 additional stores,
replace three existing customer service centers, close three customer service
centers, and add two new customer service centers during the remainder of 1995.
Management estimates that the Company's cash requirements, exclusive of
pre-opening expenses, will be approximately $1,700,000 and $5,300,000 for each
additional store and customer service center, respectively.
The Company has a credit agreement with its principal bank and a syndicate of
commercial banks to provide for a working capital line of $300,000,000. The
credit agreement provides that funds borrowed will bear interest, at the
Company's option, at .3125% over the LIBOR rate, 1.75% over the Fed Funds
rate, at a base rate linked to
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the prime rate or at a competitive bid rate. The Company also pays a fee of
.1875% per annum on the total credit facility. The credit facility expires in
June 2000. As of September 30, 1995 the Company had no borrowings under the
credit facility. In addition to the credit facility, the bank has provided a
lease facility to the Company under which the bank has agreed to purchase up to
$25,000,000 of equipment from the Company and lease such equipment to the
Company. As of September 30, 1995, the Company had approximately $5,600,000
outstanding under this lease facility.
The Company's management continually reviews its financing options. It is
currently anticipated that the Company has the ability to finance its planned
expansion through 1995 from cash on hand, funds generated from operations,
equipment leased under the Company's lease facility, and funds borrowed under
the Company's credit facility. The Company is considering and will continue to
consider alternative financing opportunities including the issuance of equity,
debt or convertible debt, if market conditions make such alternatives
financially attractive methods of funding the Company's short-term or
long-term expansion. The Company's financing requirements in the future will
be affected by the number of new stores and customer service centers opened,
converted or acquired and additional receivables carried by the Company.
PART II. OTHER INFORMATION
Items 1-5 Not applicable.
Item 6 Exhibits and Reports on Form 8-K
a. 27.1 Financial Data Schedule (for SEC use only)
b. No reports on Form 8-K were filed during the quarter ended
September 30, 1995.
10
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OFFICE DEPOT, INC.
------------------
(Registrant)
Date: October 31, 1995 By:/s/ Barry J. Goldstein
-----------------------------
Barry J. Goldstein
Executive Vice President-Finance
and Chief Financial Officer
11
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INDEX TO EXHIBITS
27.1 Financial Data Schedule (for SEC use only)
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF OFFICE DEPOT FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-30-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<CASH> 63,131
<SECURITIES> 0
<RECEIVABLES> 329,640
<ALLOWANCES> 2,769
<INVENTORY> 973,390
<CURRENT-ASSETS> 1,404,274
<PP&E> 677,561
<DEPRECIATION> 168,096
<TOTAL-ASSETS> 2,151,156
<CURRENT-LIABILITIES> 788,190
<BONDS> 390,898
<COMMON> 1,574
0
0
<OTHER-SE> 956,264
<TOTAL-LIABILITY-AND-EQUITY> 2,151,156
<SALES> 3,888,730
<TOTAL-REVENUES> 3,888,730
<CGS> 3,004,607
<TOTAL-COSTS> 3,595,258
<OTHER-EXPENSES> 114,503
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,782
<INCOME-PRETAX> 162,187
<INCOME-TAX> 65,453
<INCOME-CONTINUING> 96,734
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 96,734
<EPS-PRIMARY> .63
<EPS-DILUTED> .61
</TABLE>
