<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
Exchange Act of 1934
For the quarterly period ended June 24, 2000
-----------------------------
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.
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(Exact name of registrant as specified in its charter)
Delaware 59-2663954
---------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2200 Old Germantown Road; Delray Beach, Florida 33445
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(Address of principal executive offices) (Zip Code)
(561) 438-4800
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The registrant had 305,672,455 shares of common stock outstanding as of July 21,
2000.
<PAGE> 2
ITEM 1 FINANCIAL STATEMENTS
OFFICE DEPOT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 24, DECEMBER 25,
2000 1999
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 213,123 $ 218,784
Receivables, net 773,089 849,478
Merchandise inventories, net 1,294,401 1,436,879
Deferred income taxes and other current assets 121,786 125,911
----------- -----------
Total current assets 2,402,399 2,631,052
Property and equipment, net 1,178,182 1,145,628
Goodwill and other assets, net 445,084 499,503
----------- -----------
$ 4,025,665 $ 4,276,183
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,079,646 $ 1,239,301
Accrued expenses and other current liabilities 382,056 414,690
Income taxes payable 71,391 39,588
Current maturities of long-term debt 256,685 250,466
----------- -----------
Total current liabilities 1,789,778 1,944,045
Deferred income taxes and other credits 70,198 103,319
Long-term debt, net of current maturities 341,628 321,099
Commitments and contingencies
Stockholders' equity:
Common stock - authorized 800,000,000 shares
of $.01 par value; issued 377,414,345 in
2000 and 376,212,439 in 1999 3,774 3,762
Additional paid-in capital 937,146 926,295
Unamortized value of long-term incentive stock grants (3,579) (4,065)
Accumulated other comprehensive income (45,794) 15,730
Retained earnings 1,634,332 1,467,359
Treasury stock, at cost - 67,082,119 shares in 2000
and 46,770,272 shares in 1999 (701,818) (501,361)
----------- -----------
1,824,061 1,907,720
----------- -----------
$ 4,025,665 $ 4,276,183
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
2
<PAGE> 3
OFFICE DEPOT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED 26 WEEKS ENDED
------------------------------------ ------------------------------------
JUNE 24, JUNE 26, JUNE 24, JUNE 26,
2000 1999 2000 1999
----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Sales $ 2,630,848 $ 2,343,036 $ 5,694,101 $ 4,965,887
Cost of goods sold and occupancy costs 1,881,337 1,664,801 4,109,348 3,558,804
----------- ----------- ----------- -----------
Gross profit 749,511 678,235 1,584,753 1,407,083
Store and warehouse operating
and selling expenses 531,953 453,210 1,101,334 924,879
Pre-opening expenses 3,157 5,239 5,807 11,702
General and administrative expenses 115,053 89,707 221,402 179,430
Merger and restructuring costs 3,352 12,718 4,381 15,479
----------- ----------- ----------- -----------
653,515 560,874 1,332,924 1,131,490
Operating profit 95,996 117,361 251,829 275,593
Other income (expense):
Interest income 3,521 8,710 6,885 18,422
Interest expense (7,070) (6,700) (14,266) (13,051)
Miscellaneous (expense) income, net (483) (1,807) 20,589 (3,645)
----------- ----------- ----------- -----------
Earnings before income taxes 91,964 117,564 265,037 277,319
Income taxes 34,027 43,448 98,064 102,627
----------- ----------- ----------- -----------
Net earnings $ 57,937 $ 74,116 $ 166,973 $ 174,692
=========== =========== =========== ===========
Earnings per common share:
Basic $ 0.18 $ 0.20 $ 0.52 $ 0.47
Diluted 0.18 0.19 0.50 0.44
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
3
<PAGE> 4
OFFICE DEPOT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
26 WEEKS ENDED
----------------------------
JUNE 24, JUNE 26,
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings $ 166,973 $ 174,692
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 96,179 78,460
Provision for losses on inventories and receivables 47,630 44,102
Changes in assets and liabilities 18,585 (133,525)
Other operating activities, net (10,201) 18,680
--------- ---------
Net cash provided by operating activities 319,166 182,409
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities (21,612) (102,452)
Proceeds from maturities or sales of
investment securities 18,960 5,045
Capital expenditures, net of proceeds from sales (126,370) (186,728)
Other investing activities -- (21,629)
--------- ---------
Net cash used in investing activities (129,022) (305,764)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and sale
of stock under employee stock purchase plans 7,431 45,752
Acquisition of treasury stock (200,457) --
Other financing activities, net 5,100 (2,652)
--------- ---------
Net cash (used in) provided by financing activities (187,926) 43,100
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS (7,879) (2,134)
--------- ---------
Net decrease in cash and cash equivalents (5,661) (82,389)
Cash and cash equivalents at beginning of period 218,784 704,541
--------- ---------
Cash and cash equivalents at end of period $ 213,123 $ 622,152
========= =========
SUPPLEMENTAL DISCLOSURE OF OTHER CASH FLOW ACTIVITIES:
Interest received $ 6,473 $ 18,413
Interest paid 4,253 3,307
Income taxes paid 72,669 108,223
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Additional paid-in capital related to income tax
benefits on stock options exercised $ 539 $ 8,161
Assets acquired under capital leases 12,569 36,293
Decline in fair value of investment securities,
net of income taxes 45,681 --
Common stock issued upon conversion of debt -- 287
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
4
<PAGE> 5
OFFICE DEPOT, INC. AND SUBSIDIARIES
NOTES TO OUR CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands)
NOTE A - BASIS OF PRESENTATION
Office Depot, Inc., together with our subsidiaries, is the world's largest
supplier of office products and services in terms of sales volume. We operate on
a 52- or 53-week fiscal year ending on the last Saturday of December. Our
condensed interim financial statements as of June 24, 2000 and for the 13- and
26-week periods ending June 24, 2000 (also referred to as "the second quarter of
2000" and "the first half of 2000," respectively) and June 26, 1999 (also
referred to as "the second quarter of 1999" and "the first half of 1999,"
respectively) are unaudited. However, in our opinion, these financial statements
reflect all adjustments (consisting only of normal, recurring items) necessary
to provide you with a fair presentation of our financial position, results of
operations and cash flows for the periods presented. Also, we have made certain
reclassifications to our historical financial statements to conform them to the
presentation we used in the current year. These interim results are not
necessarily indicative of the results you should expect for the full year. For a
better understanding of our company and our financial statements, we recommend
that you read these condensed interim financial statements in conjunction with
our audited financial statements for the year ended December 25, 1999, which are
included in our 1999 Annual Report on Form 10-K, filed on March 22, 2000.
NOTE B - MERGER AND RESTRUCTURING TRANSACTIONS
For information on our merger and restructuring transactions and plans, see the
disclosures in our 1999 Annual Report on Form 10-K. We have not made any
significant changes to our plans since the end of 1999. We incurred $4 million
of merger and restructuring costs during the first half of 2000. These charges
were primarily personnel-related costs attributable to our 1998 merger with
Office Products, Inc. ("Viking"). During the first half of 1999, we incurred $15
million of merger and restructuring costs, including $9 million attributable to
the acquisition of our remaining joint venture interests in France and Japan, $3
million associated with the closure of our Furniture at Work(TM) and Images(TM)
stores, and $3 million in facility- and personnel-related costs arising from our
merger with Viking. As of June 24, 2000, we had remaining accruals of
approximately $17 million for merger and restructuring costs. These accruals
consist of approximately $9 million for personnel-related costs, approximately
$7 million for facility-related costs, and approximately $2 million for merger
transaction costs. Amounts expensed for asset write-offs are recorded as a
reduction of our fixed assets, while all other amounts are recorded as accrued
expenses.
5
<PAGE> 6
NOTE C - COMPREHENSIVE INCOME
Comprehensive income represents all non-owner changes in stockholders' equity
and consists of the following:
<TABLE>
<CAPTION>
SECOND QUARTER FIRST HALF
--------------------------------- ---------------------------------
2000 1999 2000 1999
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Net earnings $ 57,937 $ 74,116 $ 166,973 $ 174,692
Foreign currency translation adjustments (23,331) (3,888) (15,842) (17,586)
Decline in fair value of investment securities (58,607) -- (75,387) --
Tax on decline in fair value of investment
securities 22,594 -- 29,705 --
--------- --------- --------- ---------
Total comprehensive income $ (1,407) $ 70,228 $ 105,449 $ 157,106
========= ========= ========= =========
</TABLE>
NOTE D - STOCK REPURCHASE
During the second quarter of 2000, we completed our previously announced $700
million stock repurchase programs by acquiring an additional 7 million shares of
our common stock. As of the end of the second quarter, under the repurchase
programs authorized by our Board of Directors, we had repurchased a total of 67
million shares of our common stock.
In July 2000, our Board authorized the repurchase of an additional $100 million
of our common stock. This authorization does not have an expiration date.
NOTE E - LONG-TERM DEBT
In May 2000, we entered into a credit agreement with a syndicate of banks. This
agreement has a one-year term and provides us with a working capital line of
credit of $300 million. Furthermore, this agreement has various borrowing rate
options, including a rate based on our credit rating, which would currently
result in an interest rate of 0.4% over LIBOR. Together with our existing
five-year credit agreement, we now have a total of $600 million in available
funds. You can read about the five-year credit agreement, entered into in
February 1998, in our 1999 Annual Report on Form 10-K. Both credit agreements
contain similar restrictive covenants. As of June 24, 2000, we had no
outstanding borrowings under our domestic lines of credit, but we had
outstanding letters of credit totaling $33 million.
In July 1999, we entered into term loan and revolving credit agreements with
several Japanese banks (the "yen facilities") to provide financing for our
operating and expansion activities in Japan. As of June 24, 2000, the equivalent
of $55 million was outstanding under these yen facilities. We entered into a yen
interest rate swap (for a principal amount equivalent to $23 million as of June
24, 2000) in order to hedge against the volatility of the interest payments on a
portion of our yen borrowings. The swap will mature in July 2002. You can read
more about our yen facilities and interest rate swap in our 1999 Annual Report
on Form 10-K.
6
<PAGE> 7
NOTE F - INVESTMENTS
In September 1999, we adopted a strategy to invest in companies that provide
business-to-business electronic commerce solutions for small- and medium-sized
businesses. We invested $22 million in such companies during the first half of
2000, bringing our investments since September 1999 to $72 million. The carrying
value of our investments at June 24, 2000 was $98 million. The carrying value of
investments we held at December 25, 1999 has decreased by $75 million from $152
million. This decline in fair value has been included in other comprehensive
income, net of applicable income taxes (see Note C). The majority of these
investments are in closely held corporations, and quoted market prices are not
available. Because a reasonable estimate of fair value could not be made without
incurring excessive costs, our investments in closely held corporations are
carried at cost.
In February 2000, we exercised 250,000 warrants and simultaneously sold the
underlying shares of one of our investments on the open market for $19 million,
net of commissions. We paid the exercise price of the warrants through the
exercise of an additional 27,777 warrants, realizing a gain of $19 million on
the transaction. This gain was included in miscellaneous income in the first
half of 2000.
NOTE G - EARNINGS PER SHARE ("EPS")
The information required to compute basic and diluted EPS is as follows:
<TABLE>
<CAPTION>
SECOND QUARTER FIRST HALF
------------------------ ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic:
Weighted average number of
common shares outstanding 313,696 374,285 318,651 373,545
-------- -------- -------- --------
Diluted:
Net earnings $ 57,937 $ 74,116 $166,973 $174,692
Interest expense related to
convertible notes, net of income taxes 3,190 2,978 6,357 5,912
-------- -------- -------- --------
Adjusted net earnings $ 61,127 $ 77,094 $173,330 $180,604
======== ======== ======== ========
Weighted average number of
common shares outstanding 313,696 374,285 318,651 373,545
Shares issued upon assumed
conversion of convertible notes 24,741 24,740 24,741 24,747
Shares issued upon assumed
exercise of dilutive stock options 2,130 9,865 2,564 10,790
-------- -------- -------- --------
Shares used in computing diluted EPS 340,567 408,890 345,956 409,082
======== ======== ======== ========
</TABLE>
Options to purchase 30,442,360 shares of common stock at an average exercise
price of $16.27 per share were not included in our computation of diluted
earnings per share for the second quarter of 2000, because their effect would be
anti-dilutive.
7
<PAGE> 8
NOTE H - NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires that we
record all derivatives as assets or liabilities measured at their fair value.
Gains or losses resulting from changes in the values of those derivatives should
be accounted for according to the intended use of the derivative and whether it
qualifies for hedge accounting.
In July 1999, the FASB issued SFAS No. 137, which defers the effective date of
SFAS No. 133 until the start of fiscal years beginning after June 15, 2000. In
June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an Amendment of FASB Statement No.
133," which addresses implementation issues experienced by those companies that
adopted SFAS No. 133 early. We will adopt SFAS No. 133, as well as its
amendments and interpretations, in fiscal year 2001. We do not expect the
adoption of these statements to have a material impact on our financial position
or the results of our operations.
In March 2000, the Emerging Issues Task Force ("EITF") reached a consensus in
EITF Issue 00-02, "Accounting for Web Site Development Costs," agreeing that the
costs incurred to develop software to operate a Web site for internal use should
be accounted for in accordance with Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Under this SOP, costs incurred in the preliminary project stage
should be expensed as incurred, as should most training and data conversion
costs. External direct costs of materials and services and internal direct
payroll-related costs should be capitalized when certain criteria are met. This
consensus is effective for the first quarter beginning after June 30, 2000. We
will adopt EITF Issue 00-02 in the fourth quarter of 2000. The adoption of EITF
00-02 will not have a material impact on our financial position or the results
of our operations.
NOTE I - SEGMENT INFORMATION
During the first quarter of 2000, we redefined our operating and reporting
segments to more closely match management responsibility. Accordingly, all of
our historical segment information has been restated to reflect this change. The
following is a summary of our significant accounts and balances by segment for
the 13- and 26-week periods ended June 24, 2000 and June 26, 1999, reconciled to
our consolidated totals.
<TABLE>
<CAPTION>
SALES
-----------------------------------------------------------------------
SECOND QUARTER FIRST HALF
------------------------------- -------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Stores $ 1,416,003 $ 1,309,422 $ 3,211,650 $ 2,858,148
Business Services Group 869,730 730,729 1,752,477 1,478,479
International 346,121 303,879 731,932 631,437
----------- ----------- ----------- -----------
Total reportable segments 2,631,854 2,344,030 5,696,059 4,968,064
Eliminations (1,006) (994) (1,958) (2,177)
----------- ----------- ----------- -----------
Total $ 2,630,848 $ 2,343,036 $ 5,694,101 $ 4,965,887
=========== =========== =========== ===========
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
EARNINGS BEFORE INCOME TAXES
---------------------------------------------------------------
SECOND QUARTER FIRST HALF
--------------------------- ---------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Stores $ 100,012 $ 122,024 $ 254,239 $ 264,527
Business Services Group 70,207 61,767 128,064 120,442
International 43,722 34,259 96,988 81,982
--------- --------- --------- ---------
Total reportable segments 213,941 218,050 479,291 466,951
Eliminations and other (121,977) (100,486) (214,254) (189,632)
--------- --------- --------- ---------
Total $ 91,964 $ 117,564 $ 265,037 $ 277,319
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
ASSETS
---------------------------------
JUNE 24, DECEMBER 25,
2000 1999
------------- ------------
<S> <C> <C>
Stores $2,024,659 $2,170,928
Business Services Group 1,058,202 1,097,232
International 688,685 683,322
---------- ----------
Total reportable segments 3,771,546 3,951,482
Other 254,119 324,701
---------- ----------
Total $4,025,665 $4,276,183
========== ==========
</TABLE>
A reconciliation of our earnings before income taxes from our reportable
segments to earnings before income taxes in our condensed consolidated financial
statements is as follows:
<TABLE>
<CAPTION>
SECOND QUARTER FIRST HALF
--------------------------- ---------------------------
2000 1999 2000 1999
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Total from reportable segments $ 213,941 $ 218,050 $ 479,291 $ 466,951
General and administrative expenses (115,053) (89,707) (221,402) (179,430)
Gain on sales of investment securities 33 -- 18,993 --
Interest (expense) income, net (3,549) 2,010 (7,381) 5,371
Merger and restructuring costs (3,352) (12,718) (4,381) (15,479)
Inter-segment transactions (56) (71) (83) (94)
--------- --------- --------- ---------
Total $ 91,964 $ 117,564 $ 265,037 $ 277,319
========= ========= ========= =========
</TABLE>
9
<PAGE> 10
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Tabular amounts in thousands)
GENERAL
Office Depot, Inc., together with our subsidiaries, is the largest supplier of
office products and services in the world in terms of sales volume. We sell to
consumers and businesses of all sizes through our three business segments:
Stores, Business Services Group ("BSG") and International. During the first
quarter of 2000, we redefined our operating and reporting segments to more
closely match management responsibility. All historical financial information
for our segments has been restated to reflect this change.
Management's Discussion and Analysis ("MD&A") is intended to provide information
to assist you in better understanding and evaluating our financial condition and
results of operations. We recommend that you read this MD&A in conjunction with
our condensed consolidated financial statements in Item 1 of this Quarterly
Report on Form 10-Q, as well as our 1999 Annual Report on Form 10-K. This MD&A
contains significant amounts of forward-looking information. Without limitation,
when we use the words "believe," "estimate," "plan," "expect," "intend,"
"anticipate," "continue," "project," "probably," "should" and similar
expressions in this Quarterly Report on Form 10-Q, we are identifying
forward-looking statements. Our Cautionary Statements, which you will find
immediately following this MD&A and the MD&A in our 1999 Annual Report on Form
10-K, apply to these forward-looking statements.
RESULTS OF OPERATIONS
OVERALL
Our overall sales increased by 12% for the second quarter and 15% for the first
half of 2000. The most significant sales increases were realized in our BSG
segment. We achieved greater penetration in the contract market by expanding our
contract sales force and modifying our sales support infrastructure to better
serve our sales force. Our continued worldwide store expansion has also
contributed greatly to our overall sales increases. We have increased our
domestic and international store base by 98 and 12 stores, respectively, since
the end of the second quarter of 1999.
For the second quarter and first half of 2000, our overall gross profit
percentage was negatively impacted primarily by increased paper costs without
corresponding increases in selling prices. In our BSG, our selling prices cannot
be adjusted to changing costs as quickly as in our stores, because they are
either determined by contractual arrangements (with respect to our contract
customers) or are generally fixed for the life of a catalog (with respect to our
commercial customers). In addition, competitive pressures in our stores can
hinder the speed at which we adjust selling prices in response to rising costs.
10
<PAGE> 11
Occupancy costs have also risen significantly as a percentage of sales, driven
largely by the number of new stores opened in the last year and the
consolidation of our Japanese retail operations in our 2000 results. Our stores
typically need about four years to reach sales maturity. Until a store reaches
maturity, its fixed occupancy costs as a percentage of its sales are typically
higher than in more mature stores. Furthermore, our retail operations generally
require higher occupancy costs as a percentage of sales than our catalog
operations.
Our gross profit margins in future periods are likely to be negatively impacted
by our revised pricing strategy for paper, ink and toner cartridges. In an
effort to improve our ability to compete with non-traditional office supply
retailers, we recently lowered our prices, changed packaging and strengthened
the promotion of these high-visibility product groups that are essential to
every business. As a result, we expect to gain market share and customer loyalty
across all of our domestic sales channels, and anticipate that increased sales
volume will offset the impact of any reduced margins.
There were several factors that impacted the increase in our operating and
selling expenses as a percentage of sales during the second quarter and first
half of 2000. With comparable store sales declining 1% for the quarter and
increasing only 2% for the first half of 2000, the fixed portion of our store
expenses increased relative to sales. Also this year, we incurred higher
advertising expenses in our domestic segments for our "Taking Care of Business"
campaign, which we began during the latter half of 1999. We increased our
catalog mailings to further penetrate our commercial markets. Furthermore, we
experienced higher delivery costs in our warehouse operations as third-party
carriers increased their rates.
STORES
<TABLE>
<CAPTION>
SECOND QUARTER FIRST HALF
-------------------------------- --------------------------------
2000 1999 2000 1999
---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $1,416,003 100.0% 1,309,422 100.0% $3,211,650 100.0% $2,858,148 100.0%
Cost of goods sold
and occupancy costs 1,085,043 76.6% 987,966 75.5% 2,472,018 77.0% 2,180,453 76.3%
---------- --------- ---------- ----------
Gross profit 330,960 23.4% 321,456 24.5% 739,632 23.0% 677,695 23.7%
Store operating and
selling expenses 227,955 16.1% 194,394 14.8% 479,779 14.9% 402,418 14.1%
---------- --------- ---------- ----------
Store operating profit $ 103,005 7.3% $ 127,062 9.7% $ 259,853 8.1% $ 275,277 9.6%
========== ========= ========== ==========
</TABLE>
In our Stores Division, sales increased 8% for the second quarter and 12% for
the first half of 2000 primarily through our store expansion program, with sales
generated by non-comparable stores (those open for less than one year)
representing all of the sales increase in the second quarter and approximately
82% of the sales increase in the first half of 2000. The remaining increase for
the first half of 2000 is attributable to comparable sales growth of 2% in the
751 domestic stores that have been open for more than one year, while comparable
sales for the second quarter of 2000 declined 1% in comparison to the second
quarter of 1999. We saw a decline in our software sales for both the second
quarter and first half of 2000 as sales in the comparable 1999 periods were
higher, reflecting the introduction of the popular Microsoft Office 2000(R)
software suite and the associated increase in sales volume.
11
<PAGE> 12
For the second quarter and first half of 2000, our gross profit rate decreased
as a result of increased occupancy costs and paper costs, as discussed in the
OVERALL section above. Furthermore, gross profit for the second quarter of 1999
reflected a change in the rates at which we recognize volume rebates. This
adjustment, which resulted in the earlier recognition of rebates within the
year, was made possible by improvements in the underlying vendor program
tracking systems. This resulted in a higher gross profit margin for the second
quarter of 1999 and a more comparable gross profit margin for the first half of
1999.
Store operating and selling expenses for the second quarter and first half of
2000 increased as a percentage of sales largely because of increased advertising
expenses to promote our "Taking Care of Business" campaign. In addition,
delivery expenses allocated to our stores for retail customer deliveries
increased as a result of rising costs in our customer service centers ("CSCs"),
as more fully discussed in the BSG section below. Delivery expenses also
increased because of an increase in the number of delivered orders in our
stores. The rise in our store operating and selling expenses is greater for the
second quarter than for the first half of 2000, primarily because of the decline
in comparable sales during the second quarter of 2000 relative to the level of
fixed store costs.
BSG
<TABLE>
<CAPTION>
SECOND QUARTER FIRST HALF
------------------------------ -----------------------------------
2000 1999 2000 1999
-------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $869,730 100.0% $730,729 100.0% $1,752,477 100.0% $1,478,479 100.0%
Cost of goods sold
and occupancy costs 587,938 67.6% 495,024 67.7% 1,196,161 68.3% 1,006,874 68.1%
-------- -------- ---------- ----------
Gross profit 281,792 32.4% 235,705 32.3% 556,316 31.7% 471,605 31.9%
Warehouse operating
and selling expenses 210,287 24.2% 172,146 23.6% 425,656 24.3% 348,073 23.5%
-------- -------- ---------- ----------
Warehouse operating profit $ 71,505 8.2% $ 63,559 8.7% $ 130,660 7.4% $ 123,532 8.4%
======== ======== ========== ==========
</TABLE>
BSG's sales increased 19% for both the second quarter and first half of 2000,
largely as a result of expanding our contract sales force, along with
modification of our sales support infrastructure to better serve our sales
force. Sales generated from our public and contract Web sites in the United
States increased to $184 million in the second quarter of 2000, as compared to
$70 million in the second quarter of 1999. For the first half of 2000, domestic
Web site sales rose 195% to $355 million from $120 million in the comparable
1999 period. We believe that our Internet services attract new customers as well
as strengthen existing customer relationships. Sales of paper and furniture
increased in proportion to other items in BSG's product mix during the second
quarter and the first half of 2000. The growth in paper sales has been primarily
the result of higher average selling prices. Furniture sales increased in
response to an emphasis on promoting these items, including sales force training
and enhanced assortment offerings.
BSG's gross profit percentage increased slightly for the second quarter of 2000,
but we experienced a decrease for the first half of the year. Increased paper
costs, coupled with an increase in the volume of paper sold, put downward
pressure on our gross profit in both the first and second quarters of 2000.
Although the average selling price of paper increased, as mentioned above, we
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<PAGE> 13
were not able to adjust those prices at the same rate at which our costs
increased. Also, our selling prices cannot be adjusted quickly because they are
either determined by contractual arrangements or are generally fixed for the
life of a catalog. As a result, the impact of higher paper costs was more
significant in the first quarter than in the second quarter. The impact of
rising paper costs on our gross profit margins in the second quarter was offset
considerably by an increase in volume rebates earned from our vendors.
The increase in warehouse operating and selling expenses in the second quarter
of 2000 was primarily the result of higher delivery costs, arising from
increased rates charged by third-party carriers. During the first half of 2000,
the increase in warehouse operating and selling expenses was further driven by
personnel-related expenses associated with expanding our contract sales force
and our warehouse staff. We expanded our sales force in order to further
penetrate the contract market. The increase in our warehouse workforce was
required to handle our transition into fully integrated Office Depot/Viking
warehouses. During the latter half of 1999, we began processing both Office
Depot and Viking brand orders in certain facilities, and we expect to fully
integrate all warehouses by early 2001. At the end of June 2000, two
facilities have been integrated. During the transition into these integrated
facilities, we incurred additional expenses related to preparing for the
increased volume of deliveries in the newly integrated facility without a
corresponding decrease in the expenses of the closing facility. Three other
warehouses were in the transition phase during the first half of 2000, and were
not completed by he end of the second quarter. We currently deliver merchandise
out of 30 CSCs, including our two combined Office Depot/Viking facilities. As
we progress in the integration process, we plan to significantly reduce the
total number of warehouse facilities we operate, which should positively impact
our BSG's overall operating expenses relative to sales. See additional
discussion of the planned integration in our 1999 Annual Report on Form 10-K.
INTERNATIONAL
<TABLE>
<CAPTION>
SECOND QUARTER FIRST HALF
---------------------------- ----------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $346,121 100.0% $303,879 100.0% $731,932 100.0% $631,437 100.0%
Cost of goods sold
and occupancy costs 208,958 60.4% 182,414 60.0% 442,394 60.4% 372,790 59.0%
-------- -------- -------- --------
Gross profit 137,163 39.6% 121,465 40.0% 289,538 39.6% 258,647 41.0%
Store and warehouse
operating and selling
expenses 94,059 27.2% 86,990 28.6% 196,549 26.9% 175,158 27.7%
-------- -------- -------- --------
Store and warehouse
operating profit $ 43,104 12.5% $ 34,475 11.3% $ 92,989 12.7% $ 83,489 13.2%
======== ======== ======== ========
</TABLE>
Sales in our International Division increased by 14% for the second quarter and
16% for the first half of 2000 over the comparable 1999 periods. Our
international sales, reported in U.S. dollars, were negatively impacted by
unfavorable exchange rate changes. In local currencies, the increases were 22%
and 24% for the second quarter and first half of 2000, respectively, and our
comparable sales increased 23% for the second quarter and 19% for the first half
of the year. Sales increased in our International Division as a result of
maturing catalog operations in Japan, expansion of our store base, introduction
of several public Internet sites and significant comparable sales increases in
most countries in which we operate. Our Japanese operations accounted for a
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<PAGE> 14
significant portion of the increase for the second quarter and first half of
2000. We first began consolidating the results of our Japanese retail operations
in April 1999 when we purchased the remaining 50% ownership interest from our
joint venture partner. Additionally, our Japanese catalog operations began
generating revenue for the first time during the second quarter of 1999. We
added 12 stores in France and Japan since the end of June 1999, an increase in
our wholly-owned international store base of more than 50%. We also launched
four public Internet sites since the second quarter of 1999.
Gross profit percentages earned on our international retail stores are lower
than the percentages in our international catalog business, primarily as a
result of pricing and product mix differences and increased occupancy costs as a
percentage of sales. Gross profit margin in our International Division decreased
for the second quarter and first half of 2000 largely because of increased
retail sales and decreased commercial sales as a percentage of our total
international sales. This was primarily attributable to the growth of our French
and Japanese retail operations. Gross profit was also negatively impacted by
higher costs for our more popular products such as paper and laser cartridges.
Even so, gross profit margins in our Japanese retail operations have improved
over last year, since we have opened five smaller Office Depot "Express" stores
in that country. These "Express" stores enjoy higher gross profits than our
traditional retail stores because of their different sales mix. Furthermore, the
first half of 2000 includes the results of six months of our Japanese retail
operations, whereas the first half of 1999 only includes the results of three
months' beginning in April 1999 when our Japanese retail operations were
consolidated.
For the second quarter and first half of 2000, the decrease in operating and
selling expenses as a percentage of sales was achieved mainly through
efficiencies gained by growing sales. Advertising costs, in particular, grew at
a slower pace than our sales, because we have implemented more productive
advertising campaigns in certain European markets. This increased productivity
was accomplished through our improved data warehouse.
CORPORATE AND OTHER
Income and expenses not allocated to the store and warehouse operating profit of
our segments consist of pre-opening expenses, general and administrative
expenses, merger and restructuring costs, gains (losses) on sales of investment
securities, our share of the earnings (losses) of our joint ventures, interest
income and expense, income taxes, and inter-segment transactions. Our
pre-opening expenses consist principally of personnel, property and advertising
expenses incurred in opening or relocating stores in our Stores Division. They
also include, to a lesser extent, expenses incurred to open and relocate
facilities in our BSG and our International Division. We typically incur these
expenses during a six-week period prior to the store opening. Pre-opening
expenses have declined in the first half of 2000 as compared to 1999 as a result
of fewer new store openings. We opened 22 stores during the second quarter and
33 stores during the first half of 2000, as compared to 39 and 68 for the
respective comparable periods in 1999. We have made a conscious decision to
implement a more conservative approach to our retail real estate strategy this
year, and have reduced our planned store openings for the year to approximately
80 stores.
General and administrative expenses increased for both the second quarter and
first half of 2000, primarily from increased spending to support our e-commerce
and data warehouse initiatives and our international expansion. We added four
international public Web sites and have plans to launch an additional seven
sites during the second half of 2000.
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<PAGE> 15
For information on our merger and restructuring plans, see our 1999 Annual
Report on Form 10-K. We have not made any significant changes to our plans since
that time. We incurred $4 million of merger and restructuring costs during the
first half of 2000. These charges were primarily personnel-related costs
attributable to our 1998 merger with Viking. During the first half of 1999, we
incurred $15 million of merger and restructuring costs, including $9 million
attributable to the acquisition of our remaining joint venture interests in
France and Japan, $3 million associated with the closure of our Furniture at
Work(TM) and Images(TM) stores, and $3 million in facility- and
personnel-related costs arising from our merger with Viking. As of June 24,
2000, we had remaining accruals of approximately $17 million for merger and
restructuring costs. These accruals consist of approximately $9 million for
personnel-related costs, approximately $7 million for facility-related costs,
and approximately $2 million for merger transaction costs. Amounts expensed for
asset write-offs are recorded as a reduction of our fixed assets, while all
other amounts are recorded as accrued expenses.
In February 2000, we exercised 250,000 warrants and simultaneously sold the
underlying shares of one of our investments on the open market for $19 million,
net of commissions. We paid the exercise price of the warrants through the
exercise of an additional 27,777 warrants, realizing a gain of $19 million on
the transaction. This gain was recognized in miscellaneous income in the first
half of 2000.
The decrease in interest income was attributable to our lower average cash
balances following the repurchase of 67 million shares of our stock at a total
cost of $700 million, plus commissions, during the last half of 1999 and first
half of 2000 pursuant to a Board-approved stock repurchase plan. We expect a
proportional impact on our interest income in future periods.
LIQUIDITY AND CAPITAL RESOURCES
The increase in our operating cash flows is primarily attributable to decreased
store openings. On a worldwide basis in the first half of 2000, excluding joint
venture operations and licensing arrangements, we opened 33 stores, including
relocations, as compared to 68 stores during the first half of 1999. Opening a
new domestic store requires that we outlay approximately $500 thousand for the
portion of our inventories that is not financed by our vendors, as well as
approximately $155 thousand for pre-opening expenses. In the first half of 2000,
we also reduced our inventory balances by $142 million, as we sold merchandise
purchased in late 1999 to support our Y2K preparedness efforts. Furthermore, our
ongoing supply chain management efforts have decreased our average store
inventory by 9% since the end of the second quarter of 1999. Also contributing
to our increase in operating cash flows was a $76 million decrease in our
receivables. This decrease was primarily in our vendor program receivables,
resulting from improved billing and collection processes.
Our primary investing activity is the acquisition of capital assets. The number
of stores and CSCs we open or remodel each period generally drives the volume of
our capital investments. As mentioned earlier, our store openings for the first
half of 2000 have decreased as compared to the first half of 1999. This decrease
was a significant contributor to the overall reduction in our investing cash
outflows. We have reduced our planned store openings for the year from 100 to
approximately 80 stores.
We have expanded our presence in the electronic commerce marketplace by entering
into strategic business relationships with several Web-based providers of
business-to-business ("B2B") electronic commerce solutions. We made equity
15
<PAGE> 16
investments in these and other companies in late 1999 ($51 million) and in the
first half of 2000 ($22 million). In February 2000, we exercised 250,000
warrants and simultaneously sold the underlying shares of one of these
investments on the open market for $19 million, net of commissions. We paid the
exercise price of the warrants through the exercise of an additional 27,777
warrants. We realized a gain of $19 million on this transaction in the first
half of 2000. Although certain of our investments have increased in value since
our initial purchase, these and our other investments will not necessarily
generate similar appreciation in the future. Because most of these investments
are in start-up companies operating in a relatively new and volatile industry,
we consider there to be a high degree of risk associated with these investments.
They may permanently depreciate in value from the amount we originally paid.
Furthermore, the net unrealized gain we have already recorded in stockholders'
equity will not be realized until our investments are sold, and the value of all
of our appreciated investments could decrease before that gain is realized. We
plan to continue to consider opportunities to invest in companies that provide
B2B electronic commerce solutions for small- and medium-sized businesses,
primarily when we enter into strategic relationships with the companies in which
we invest.
The decline in our cash flows from financing activities during the first half of
2000, as compared to the first half of 1999, was driven primarily by our stock
repurchase program. During the first half of 2000, we purchased 21 million
shares of our stock at a total cost of $200 million plus commissions. In July
2000, our Board of Directors approved another $100 million in stock repurchases.
Although there is no expiration date for this most recent authorization, we
expect to complete it by the end of the third quarter of 2000.
On November 1, 2000, it is likely that we will be required to purchase our 1993
Liquid Yield Option Notes (LYONS(R)) from the holders of those LYONS(R). We have
the choice of paying the holders in cash, common stock or a combination of the
two. You can read more about our LYONS(R) in our 1999 Annual Report on Form
10-K.
Please see "Note E - Long-term Debt" of our condensed consolidated financial
statements in Item 1 of this Quarterly Report on Form 10-Q for information about
our credit agreements, yen facilities and internet rate swap.
NEW ACCOUNTING PRONOUNCEMENTS
For information regarding new accounting pronouncements, see "Note H - New
Accounting Pronouncements" of our condensed consolidated financial statements in
Item 1 of this Form 10-Q.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
In December 1995, the Private Securities Litigation Reform Act of 1995 (the
"Act") was enacted by the United States Congress. The Act, as amended, contains
certain amendments to the Securities Act of 1933 and the Securities Exchange Act
of 1934. These amendments provide protection from liability in private lawsuits
for "forward-looking" statements made by public companies. We want to take
advantage of the "safe harbor" provisions of the Act. In doing so, we have
disclosed these forward-looking statements by informing you in specific
cautionary statements of the circumstances which may cause the information in
these statements not to transpire as expected.
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<PAGE> 17
This Quarterly Report on Form 10-Q contains both historical information and
other information that you may use to infer future performance. Examples of
historical information include our quarterly financial statements and the
commentary on past performance contained in our MD&A. While we have specifically
identified certain information as being forward-looking in the context of its
presentation, we caution you that, with the exception of information that is
clearly historical, all the information contained in this Quarterly Report on
Form 10-Q should be considered to be "forward-looking statements" as referred to
in the Act. Without limitation, when we use the words "believe," "estimate,"
"plan," "expect," "intend," "anticipate," "continue," "project," "probably,"
"should" and similar expressions, we intend to clearly express that the
information deals with possible future events and is forward-looking in nature.
Forward-looking information involves risks and uncertainties, including certain
matters that we discussed in more detail in the Cautionary Statements contained
in our 1999 Annual Report on Form 10-K. This information is based on various
factors and assumptions about future events that may or may not actually come
true. As a result, our operations and financial results in the future could
differ substantially from those we have discussed in the forward-looking
statements in this Quarterly Report. In particular, the factors we discussed in
the Cautionary Statements of our 1999 Annual Report on Form 10-K could affect
our actual results and could cause our actual results during the remainder of
2000 and in future years to differ materially from those expressed in any
forward-looking statement made by us or on our behalf in this Quarterly Report
on Form 10-Q. Those Cautionary Statements are incorporated herein by this
reference to them.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISKS
See the disclosure in our 1999 Annual Report on Form 10-K. We do not believe
that the risk we face related to interest rate changes is materially different
than it was at the date of such Report.
FOREIGN EXCHANGE RATE RISKS
See the disclosure in our 1999 Annual Report on Form 10-K. We do not believe
that the risk we face related to foreign currencies is materially different than
it was at the date of such Report.
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
We are involved in litigation arising in the normal course of our business. We
do not believe that these matters will materially affect our financial position
or the results of our operations.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
a. 27.1 Financial Data Schedule (for SEC use only).
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<PAGE> 18
b. Current Report on Form 8-K was filed on May 26, 2000
regarding our comments in a press release as to our earnings
outlook for the second quarter of 2000.
c. A Current Report on Form 8-K was filed on July 13, 2000
regarding an announcement of our results for the second
quarter of 2000, along with our projected results for the
balance of 2000 and certain other matters.
d. A Current Report on Form 8-K was filed on July 18, 2000
regarding certain management changes.
e. A Current Report on Form 8-K was filed on July 27, 2000
regarding certain further management changes.
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<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OFFICE DEPOT, INC.
(Registrant)
Date: August 4, 2000 By: /s/ BARRY J. GOLDSTEIN
-----------------------------
Barry J. Goldstein
Executive Vice President-Finance
and Chief Financial Officer
Date: August 4, 2000 By: /s/ CHARLES E. BROWN
-----------------------------
Charles E. Brown
Senior Vice President-Finance
and Controller
(Principal Accounting Officer)
19
<PAGE> 20
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -----------
10.1 Executive Employment Agreement, dated as of January 1, 2000, by and
between Office Depot, Inc. and Bruce Nelson
10.2 Revolving Credit Agreement dated as of June 2, 2000 by and among Office
Depot, Inc. and Suntrust Bank, individually and as Administrative
Agent; Bank of America, N.A., individually and as Syndication Agent;
Bank One, NA, individually and as Documentation Agent; and Citibank,
N.A., individually and as Managing Agent. (Exhibits to the Revolving
Credit Agreement have been omitted, but a copy may be obtained free of
charge upon request to the Company)
27.1 Financial Data Schedule (for SEC use only)
20
