The ODP (ODP) - 2023 Q1 - Quarterly Report

Part I - Financial Information This section presents the unaudited condensed consolidated financial statements and their accompanying notes for the reporting period Financial Statements The unaudited condensed consolidated financial statements for the 13-week period ended April 1, 2023, show a decrease in sales but an increase in operating and net income compared to the same period in 2022. Total assets decreased slightly from year-end 2022, while total liabilities saw a minor increase. The company generated significantly more cash from operations year-over-year, which was primarily used for substantial stock repurchases Condensed Consolidated Statements of Operations For the first quarter of 2023, The ODP Corporation reported sales of $2.108 billion, a decrease from $2.178 billion in the prior-year period. Despite lower sales, operating income increased to $95 million from $76 million, and net income rose to $72 million from $55 million year-over-year. Diluted earnings per share from continuing operations increased significantly to $1.71 from $1.09 Q1 2023 vs Q1 2022 Statement of Operations (in millions, except per share) | Metric | 13 Weeks Ended April 1, 2023 | 13 Weeks Ended March 26, 2022 | | :--- | :--- | :--- | | Sales | $2,108 | $2,178 | | Gross Profit | $481 | $484 | | Operating Income | $95 | $76 | | Net Income | $72 | $55 | | Diluted EPS (Continuing Operations) | $1.71 | $1.09 | Condensed Consolidated Balance Sheets As of April 1, 2023, total assets were $4.041 billion, a slight decrease from $4.149 billion at year-end 2022, primarily due to a reduction in cash and cash equivalents. Total liabilities increased marginally to $2.893 billion from $2.862 billion. Total stockholders' equity decreased to $1.148 billion from $1.287 billion, largely driven by treasury stock repurchases Balance Sheet Summary (in millions) | Account | April 1, 2023 (Unaudited) | December 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $1,813 | $1,910 | | Total Assets | $4,041 | $4,149 | | Total Current Liabilities | $1,845 | $1,859 | | Total Liabilities | $2,893 | $2,862 | | Total Stockholders' Equity | $1,148 | $1,287 | Condensed Consolidated Statements of Cash Flows For the first quarter of 2023, net cash provided by operating activities was $157 million, a significant improvement from $30 million in the same period of 2022. Net cash used in investing activities was $36 million, while net cash used in financing activities increased to $185 million, primarily due to $201 million in common stock repurchases. This resulted in a net decrease in cash of $59 million Cash Flow Summary (in millions) | Cash Flow Activity | 13 Weeks Ended April 1, 2023 | 13 Weeks Ended March 26, 2022 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $157 | $30 | | Net Cash from (used in) Investing Activities | ($36) | ($14) | | Net Cash used in Financing Activities | ($185) | ($64) | | Net (Decrease) Increase in Cash | ($59) | $20 | - The company repurchased $201 million of common stock for treasury in Q1 2023, a significant financing activity not present in Q1 2022[17] Notes to Condensed Consolidated Financial Statements The notes detail the company's structure of four reportable segments: ODP Business Solutions, Office Depot, Veyer, and Varis. Key activities in Q1 2023 include a small acquisition in the ODP Business Solutions division, ongoing restructuring under the 'Maximize B2B' plan, and significant stock repurchases. The company also completed the sale of its corporate headquarters subsequent to the quarter's end - The company operates through four reportable segments: ODP Business Solutions Division, Office Depot Division, Veyer Division, and Varis Division[25] - In January 2023, the company acquired a small independent regional office supply distribution business, which is included in the ODP Business Solutions Division[34] - Under the Maximize B2B Restructuring Plan, the company closed 20 retail stores in Q1 2023, with total expected restructuring costs up to $95 million[42][43] - The company's corporate headquarters in Boca Raton, classified as held for sale for $104 million, was sold on April 6, 2023[85] Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, operating results by division, and liquidity and capital resources Overview The ODP Corporation operates through four divisions: ODP Business Solutions, Office Depot, Veyer, and Varis. In Q1 2023, consolidated sales decreased by 3% to $2.108 billion, driven by an 8% decline in the Office Depot Division, partially offset by a 3% increase in the ODP Business Solutions Division. Despite lower sales, gross profit was nearly flat, and operating income improved due to lower SG&A expenses, particularly from store closures and cost-saving initiatives External Sales by Division (in millions) | Division | Q1 2023 | Q1 2022 | Change | | :--- | :--- | :--- | :--- | | ODP Business Solutions | $1,005 | $978 | 3% | | Office Depot | $1,094 | $1,194 | (8)% | | Veyer | $7 | $4 | 75% | | Varis | $2 | $2 | 0% | | Total | $2,108 | $2,178 | (3)% | - Total selling, general and administrative (SG&A) expenses decreased by $14 million in Q1 2023 compared to Q1 2022, mainly due to a $22 million decrease in the Office Depot Division from store closures and strategic initiatives[111] Operating Results by Division In Q1 2023, the ODP Business Solutions Division saw a 3% sales increase and a 105% rise in operating income, driven by strong demand in core categories. The Office Depot Division's sales fell 8% due to store closures and lower demand, with operating income down 11%. The Veyer Division's operating income grew to $15 million from $8 million due to favorable product costing. The Varis Division's operating loss widened to $17 million from $15 million due to continued investment in its technology platform ODP Business Solutions Division The ODP Business Solutions Division reported a 3% increase in total sales for Q1 2023. This growth was driven by higher sales in core categories like paper, furniture, and technology, partially offset by a $57 million decline in personal protective equipment. Operating income more than doubled to $39 million from $19 million in the prior year, a 105% increase, due to the flow-through impact of higher sales and improved gross profit ODP Business Solutions Division Performance (in millions) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Total Sales | $1,009 | $984 | | % Change | 3% | N/A | | Division Operating Income | $39 | $19 | | % of Total Sales | 4% | 2% | Office Depot Division The Office Depot Division's sales decreased by 8% in Q1 2023, attributed to planned store closures and lower demand for products like technology and furniture. Comparable store sales declined by 3%. Despite the sales drop, operating income as a percentage of sales remained flat at 8%, although absolute operating income fell 11% to $85 million from $96 million in Q1 2022. The number of retail stores decreased from 1,032 to 959 year-over-year - Comparable store sales decreased by 3% in Q1 2023, reflecting lower store traffic and average order value[121][124] - The number of retail stores decreased to 959 at the end of Q1 2023, down from 1,032 at the end of Q1 2022[126] - eCommerce platform sales represented 29% of the Office Depot Division's total sales in Q1 2023[123] Veyer Division The Veyer Division, the company's supply chain and sourcing operation, reported a 7% decrease in total sales, primarily due to lower internal sales to the Office Depot and ODP Business Solutions divisions. However, operating income nearly doubled to $15 million in Q1 2023 from $8 million in Q1 2022, driven by a favorable impact from product costing on its gross profit - Internal sales, which represent the majority of the division's revenue, decreased due to lower demand from the Office Depot and ODP Business Solutions divisions[128][130] - Division operating income increased to $15 million from $8 million year-over-year, attributed to higher favorable impact from product costing[131] Varis Division The Varis Division, a tech-enabled B2B procurement marketplace, reported flat sales of $2 million in Q1 2023 compared to the prior year. The division's operating loss increased by 13% to $17 million from $15 million, reflecting continued investments in expanding and scaling its technology platform and product offerings, particularly amortization of internally developed software - The division's operating loss widened to $17 million in Q1 2023 from $15 million in Q1 2022, driven by investments to scale the technology platform[133] Liquidity and Capital Resources As of April 1, 2023, The ODP Corporation had total liquidity of approximately $1.1 billion, consisting of $343 million in cash and $803 million available under its credit facility. The company generated $157 million in cash from operations in Q1 2023. A significant use of cash was the repurchase of 4 million shares for $202 million. The company estimates total capital expenditures for 2023 to be up to $100 million - Total liquidity was approximately $1.1 billion at the end of Q1 2023, comprising $343 million in cash and $803 million in available credit[148] - The company repurchased 4 million shares for $202 million in Q1 2023, with $646 million remaining available under the current $1 billion stock repurchase program[152] - Cash provided by operating activities increased significantly to $157 million in Q1 2023 from $30 million in Q1 2022, primarily due to improved working capital management[157][158] Part II - Other Information This section addresses key risk factors, particularly related to IT systems, and details the company's equity security repurchases Risk Factors The company supplemented its risk factors to highlight the potential adverse effects of a breach of its information technology systems. This includes risks associated with collecting and storing personally identifiable information, the secure transmission of data, and increased cyber risks from the integration of generative artificial intelligence (AI). A security breach could damage reputation, lead to substantial costs, and negatively impact customer relationships - A new disclosure was added to supplement risk factors, focusing on the adverse effects of a breach of information technology systems[171] - The company acknowledges increased cyber risks associated with the integration of generative artificial intelligence (AI) into its business processes[172] Unregistered Sales of Equity Securities and Use of Proceeds In the first quarter of 2023, the company repurchased a total of 4.263 million shares of its common stock at an average price of $47.47 per share, for a total cost of approximately $202 million. As of April 1, 2023, $646 million remained available for future repurchases under the company's $1 billion stock repurchase program, which is authorized through December 31, 2025 Share Repurchases in Q1 2023 | Period | Total Shares Purchased (thousands) | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 1 - Jan 28, 2023 | 1,579 | $49.40 | | Jan 29 - Feb 25, 2023 | 481 | $51.82 | | Feb 26 - Apr 1, 2023 | 2,203 | $45.14 | | Total | 4,263 | $47.47 | - As of April 1, 2023, $646 million remained available for repurchases under the current stock repurchase program[179]