The ODP (ODP) - 2023 Q3 - Quarterly Report

Financial Statements Condensed Consolidated Statements of Operations (Unaudited) Sales decreased in Q3 and YTD 2023, but operating income, net income, and EPS from continuing operations increased | Metric | 13 Weeks Ended Sep 30, 2023 (Millions) | 13 Weeks Ended Sep 24, 2022 (Millions) | 39 Weeks Ended Sep 30, 2023 (Millions) | 39 Weeks Ended Sep 24, 2022 (Millions) | | :--------------------------------------| :-------------------------------------| :-------------------------------------| :-------------------------------------| :-------------------------------------| | Sales | $2,009 | $2,172 | $6,025 | $6,385 | | Gross profit | $474 | $486 | $1,370 | $1,402 | | Operating income | $91 | $84 | $232 | $188 | | Net income from continuing operations | $70 | $67 | $176 | $142 | | Net income | $70 | $67 | $176 | $149 | | Basic EPS (Continuing operations) | $1.83 | $1.39 | $4.52 | $2.92 | | Diluted EPS (Continuing operations) | $1.79 | $1.36 | $4.38 | $2.84 | - Sales decreased by 8% for the 13-week period and 6% for the 39-week period year-over-year[7] - Operating income increased by 8.3% for the 13-week period and 23.4% for the 39-week period year-over-year[7] - Diluted EPS from continuing operations increased by 31.6% for the 13-week period and 54.2% for the 39-week period year-over-year[7] Condensed Consolidated Statements of Comprehensive Income (Unaudited) Q3 2023 comprehensive income fell to $20 million due to pension adjustments; YTD rose to $132 million | Metric | 13 Weeks Ended Sep 30, 2023 (Millions) | 13 Weeks Ended Sep 24, 2022 (Millions) | 39 Weeks Ended Sep 30, 2023 (Millions) | 39 Weeks Ended Sep 24, 2022 (Millions) | | :------------------------------------------------------------------| :-------------------------------------| :-------------------------------------| :-------------------------------------| :-------------------------------------| | Net income | $70 | $67 | $176 | $149 | | Foreign currency translation adjustments | $(7) | $(19) | $0 | $(31) | | Pension valuation adjustments | $(43) | $(3) | $(44) | $(5) | | Total other comprehensive income, net of tax | $(50) | $(22) | $(44) | $(30) | | Comprehensive income | $20 | $45 | $132 | $119 | - Pension valuation adjustments significantly impacted other comprehensive income, with a $(43) million adjustment for the 13-week period and $(44) million for the 39-week period in 2023, compared to smaller adjustments in 2022[10] Condensed Consolidated Balance Sheets (Unaudited) Total assets decreased to $3,980 million by Sep 30, 2023, driven by reduced assets held for sale; equity declined | Metric | Sep 30, 2023 (Millions) | Dec 31, 2022 (Millions) | | :----------------------------------------| :----------------------| :----------------------| | Cash and cash equivalents | $384 | $403 | | Receivables, net | $542 | $536 | | Inventories | $782 | $828 | | Current assets held for sale | $9 | $107 | | Total current assets | $1,754 | $1,910 | | Total assets | $3,980 | $4,149 | | Trade accounts payable | $818 | $821 | | Total current liabilities | $1,760 | $1,859 | | Total liabilities | $2,825 | $2,862 | | Total stockholders' equity | $1,155 | $1,287 | - Current assets held for sale decreased significantly from $107 million at December 31, 2022, to $9 million at September 30, 2023, following the sale of the corporate headquarters[13][89] - Total stockholders' equity decreased by $132 million, from $1,287 million at December 31, 2022, to $1,155 million at September 30, 2023[14] Condensed Consolidated Statements of Cash Flows (Unaudited) YTD 2023 operating cash flow rose to $261 million; investing provided cash, financing used cash for repurchases | Metric | 39 Weeks Ended Sep 30, 2023 (Millions) | 39 Weeks Ended Sep 24, 2022 (Millions) | | :------------------------------------------------------------------| :-------------------------------------| :-------------------------------------| | Net cash provided by operating activities | $261 | $79 | | Net cash provided by investing activities | $28 | $15 | | Net cash used in financing activities | $(306) | $(151) | | Net decrease in cash, cash equivalents and restricted cash | $(17) | $(63) | | Cash, cash equivalents and restricted cash at end of period | $387 | $474 | - Cash provided by operating activities of continuing operations increased by $182 million year-over-year, driven by higher cash inflows from working capital, improved net income (after non-cash adjustments), and increased usage of deferred tax assets[164] - Investing activities provided $23 million in cash from continuing operations in 2023, a significant improvement from a $59 million use in 2022, largely due to $105 million from asset dispositions, including the corporate headquarters sale[166] - Cash used in financing activities increased to $306 million in 2023 from $151 million in 2022, primarily due to $264 million in common stock repurchases[168] Condensed Consolidated Statements of Stockholders' Equity (Unaudited) Stockholders' equity decreased to $1,155 million by Sep 30, 2023, due to $266 million in repurchases and higher comprehensive loss | Metric | Balance at Dec 31, 2022 (Millions) | Balance at Sep 30, 2023 (Millions) | | :-----------------------------------------| :---------------------------------| :---------------------------------| | Common Stock Shares | 65,636,015 | 66,695,068 | | Additional Paid-in Capital | $2,742 | $2,744 | | Accumulated Other Comprehensive Loss | $(77) | $(121) | | Accumulated Deficit | $(451) | $(275) | | Treasury Stock, at cost | $(928) | $(1,194) | | Total Stockholders' Equity | $1,287 | $1,155 | - The company repurchased six million shares of common stock at a cost of $266 million year-to-date 2023[72][124] - Accumulated other comprehensive loss increased from $(77) million to $(121) million, primarily due to other comprehensive loss activity of $(44) million year-to-date 2023[71] Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ODP Corporation is a leading B2B and omni-channel provider with four segments; CompuCom was sold as discontinued operations - ODP Corporation is a leading provider of products, services, and technology solutions via an integrated B2B distribution platform and omni-channel presence[25] - The company operates through four reportable segments: ODP Business Solutions, Office Depot, Veyer, and Varis[25] - The CompuCom Division was sold on December 31, 2021, and is reported as discontinued operations[26] NOTE 2. ACQUISITIONS The company acquires regional office supply businesses; a Q1 2023 acquisition was funded by cash and added to ODP Business Solutions - The company's strategy involves acquiring profitable regional office supply distribution businesses to expand its reach and distribution network[35] - In Q1 2023, a small independent regional office supply distribution business was acquired, funded with cash on hand, adding $4 million in goodwill[35][36] - Operating results of the acquired business are combined with the ODP Business Solutions Division[36] NOTE 3. MERGER, RESTRUCTURING AND OTHER ACTIVITY Restructuring expenses of $1M (Q3) and $2M (YTD) in 2023 relate to the 'Maximize B2B Plan' and 30 store closures | Expense Category | 13 Weeks Ended Sep 30, 2023 (Millions) | 13 Weeks Ended Sep 24, 2022 (Millions) | 39 Weeks Ended Sep 30, 2023 (Millions) | 39 Weeks Ended Sep 24, 2022 (Millions) | | :------------------------------------------------------| :-------------------------------------| :-------------------------------------| :-------------------------------------| :-------------------------------------| | Total Merger and transaction related expenses | $0 | $(7) | $0 | $(7) | | Total Restructuring expenses, net | $1 | $1 | $2 | $2 | | Total Other operating expenses | $0 | $14 | $0 | $47 | | Total Merger, restructuring and other operating expenses, net | $1 | $8 | $2 | $42 | - The Maximize B2B Restructuring Plan, extended through 2024, resulted in the closure of 30 retail stores year-to-date 2023, with total restructuring expenses of $83 million since inception through year-to-date 2023[44][45] - Year-to-date 2023, cash payments for the Maximize B2B Restructuring Plan were $7 million[45] NOTE 4. SEGMENT INFORMATION ODP operates four segments; Q3 sales declined for ODP Business Solutions and Office Depot, Veyer's external sales rose - The four reportable segments are ODP Business Solutions, Office Depot, Veyer, and Varis, each with distinct business models and customer bases[51][53][54][55] | Division | 3Q 2023 External Sales (Millions) | 3Q 2022 External Sales (Millions) | YTD 2023 External Sales (Millions) | YTD 2022 External Sales (Millions) | | :----------------------------| :--------------------------------| :--------------------------------| :---------------------------------| :---------------------------------| | ODP Business Solutions | $996 | $1,030 | $3,001 | $3,004 | | Office Depot | $1,000 | $1,133 | $2,991 | $3,358 | | Veyer | $11 | $7 | $28 | $18 | | Varis | $2 | $2 | $5 | $5 | | Total | $2,009 | $2,172 | $6,025 | $6,385 | | Division | 3Q 2023 Operating Income (Millions) | 3Q 2022 Operating Income (Millions) | YTD 2023 Operating Income (Millions) | YTD 2022 Operating Income (Millions) | | :----------------------------| :----------------------------------| :----------------------------------| :-----------------------------------| :-----------------------------------| | ODP Business Solutions | $56 | $48 | $140 | $103 | | Office Depot | $66 | $83 | $186 | $228 | | Veyer | $10 | $9 | $31 | $25 | | Varis | $(17) | $(17) | $(48) | $(48) | | Total Divisions Operating Income | $115 | $123 | $309 | $308 | | Segment | Goodwill Dec 31, 2022 (Millions) | Acquisitions (Millions) | Goodwill Sep 30, 2023 (Millions) | | :----------------------------| :-------------------------------| :----------------------| :-------------------------------| | ODP Business Solutions | $142 | $4 | $146 | | Office Depot | $219 | $0 | $219 | | Veyer | $35 | $0 | $35 | | Varis | $68 | $0 | $68 | | Total | $464 | $4 | $468 | NOTE 5. INCOME TAXES The effective tax rate was 24% for Q3 and YTD 2023, down from 25%, mainly due to R&D tax credits and stock-based compensation benefits - Effective tax rates were 24% for Q3 and YTD 2023, down from 25% in Q3 and YTD 2022[65] - Key factors impacting the effective tax rate in 2023 included research and development tax credits and tax benefits from stock-based compensation awards[65] - The company maintains a U.S. valuation allowance for certain federal credits and state tax attributes[65] NOTE 6. EARNINGS PER SHARE Basic and diluted EPS from continuing operations significantly increased in Q3 and YTD 2023 due to higher net income and fewer shares | Metric | 13 Weeks Ended Sep 30, 2023 | 13 Weeks Ended Sep 24, 2022 | 39 Weeks Ended Sep 30, 2023 | 39 Weeks Ended Sep 24, 2022 | | :--------------------------------------| :--------------------------| :--------------------------| :--------------------------| :--------------------------| | Basic EPS (Continuing operations) | $1.83 | $1.39 | $4.52 | $2.92 | | Diluted EPS (Continuing operations) | $1.79 | $1.36 | $4.38 | $2.84 | | Net Basic EPS | $1.83 | $1.38 | $4.52 | $3.06 | | Net Diluted EPS | $1.79 | $1.35 | $4.38 | $2.97 | - Weighted-average shares outstanding decreased from 48 million to 38 million for the 13-week period and from 49 million to 39 million for the 39-week period, contributing to higher EPS[66] NOTE 7. DEBT ODP operates under a $1.3 billion credit agreement maturing April 2025, with $53 million in FILO loans and $771 million available credit - The Third Amended Credit Agreement provides a $1.2 billion asset-based revolving credit facility and a $100 million FILO Term Loan Facility, maturing April 2025[68] - At September 30, 2023, outstanding FILO Term Loan Facility loans were $53 million, and available credit was $771 million, with no revolving loans outstanding[69] - The company was in compliance with all applicable covenants at September 30, 2023[69] NOTE 8. STOCKHOLDERS' EQUITY Accumulated other comprehensive loss rose to $(121) million. Six million shares were repurchased for $266 million YTD 2023, with $583 million remaining | Metric | Balance at Dec 31, 2022 (Millions) | Balance at Sep 30, 2023 (Millions) | | :-----------------------------------------| :---------------------------------| :---------------------------------| | Accumulated Other Comprehensive Loss | $(77) | $(121) | - The company repurchased 659 thousand shares for $32 million in Q3 2023 and six million shares for $266 million year-to-date 2023[72] - $583 million remains available under the $1 billion stock repurchase program, which is authorized through December 31, 2025[72] - No cash dividends were declared in Q3 or YTD 2023, and none are anticipated in the foreseeable future[73] NOTE 9. EMPLOYEE BENEFIT PLANS North America net periodic pension benefit was $(2) million (Q3) and $(6) million (YTD). The UK plan's bulk annuity agreement resulted in a $44 million charge | Metric | 13 Weeks Ended Sep 30, 2023 (Millions) | 13 Weeks Ended Sep 24, 2022 (Millions) | 39 Weeks Ended Sep 30, 2023 (Millions) | 39 Weeks Ended Sep 24, 2022 (Millions) | | :-----------------------------------| :-------------------------------------| :-------------------------------------| :-------------------------------------| :-------------------------------------| | North America Net periodic pension benefit | $(2) | $(1) | $(6) | $(3) | | UK Net periodic pension benefit | $0 | $0 | $0 | $(2) | - In July 2023, the UK pension plan entered a bulk annuity purchase agreement covering 100% of members, leading to a $44 million charge to other comprehensive income[80] - The UK pension plan buyout is expected to complete by 2024 using existing plan funds, with no material cash inflows or outflows anticipated[80] NOTE 10. FAIR VALUE MEASUREMENTS Asset impairment charges were $3 million (Q3) and $13 million (YTD) for retail store ROU assets. Corporate HQ sold for $104 million with no gain/loss - Asset impairment charges were $3 million in Q3 2023 and $13 million year-to-date 2023, mainly for operating lease ROU assets of retail stores[86] - The fair value of retail store assets is determined using discounted cash flow analysis with Level 2 unobservable inputs, considering updated assumptions for store performance and closure plans[86] - The corporate headquarters in Boca Raton was sold on April 6, 2023, for $104 million, resulting in no recorded gains or losses[89] NOTE 11. COMMITMENTS AND CONTINGENCIES The company faces legal and environmental liabilities, but expects no material financial impact. Possible losses range from $15 million to $25 million - The company is involved in litigation and government reviews, but does not expect material financial impact[94][95] - Estimated reasonably possible losses for OfficeMax retained liabilities (paper/forest products, asbestos) and environmental liabilities range from $15 million to $25 million[96] NOTE 12. DISCONTINUED OPERATIONS CompuCom Division was sold in 2021 for $104 million cash, a $59 million note, and a $9 million earn-out. No Q3/YTD 2023 results - The CompuCom Division was sold on December 31, 2021, with a total cash purchase price of $104 million[98] - The consideration included an interest-bearing promissory note, amended to $59 million in February 2023, and an earn-out provision valued at $9 million[98] - No financial results from discontinued operations were reported for the third quarter or year-to-date 2023[99] Management's Discussion and Analysis (MD&A) Overview ODP is a leading B2B and omni-channel provider with four divisions. Consolidated sales decreased 8% (Q3) and 6% (YTD) due to lower demand and store closures - The company operates through ODP Business Solutions, Office Depot, Veyer, and Varis divisions, with CompuCom previously sold as discontinued operations[103][104][106][107] - Consolidated sales decreased by $163 million (8%) in Q3 2023 and $360 million (6%) year-to-date 2023 compared to prior year[114][115] - Sales decline in ODP Business Solutions was driven by lower B2B demand, particularly in technology, while Office Depot's decline was due to planned store closures, lower demand, and reduced average order values[114][115] | Division | 3Q 2023 External Sales (Millions) | 3Q 2022 External Sales (Millions) | YTD 2023 External Sales (Millions) | YTD 2022 External Sales (Millions) | | :----------------------------| :--------------------------------| :--------------------------------| :---------------------------------| :---------------------------------| | ODP Business Solutions | $996 | $1,030 | $3,001 | $3,004 | | Office Depot | $1,000 | $1,133 | $2,991 | $3,358 | | Veyer | $11 | $7 | $28 | $18 | | Varis | $2 | $2 | $5 | $5 | | Total | $2,009 | $2,172 | $6,025 | $6,385 | Operating Results by Division ODP Business Solutions saw Q3 sales decrease 3% but operating income rise 17%. Office Depot sales fell 12%, income dropped 20%. Veyer's external sales and income grew | Division | 3Q 2023 Sales (Millions) | 3Q 2022 Sales (Millions) | YTD 2023 Sales (Millions) | YTD 2022 Sales (Millions) | | :----------------------------| :-----------------------| :-----------------------| :-----------------------| :-----------------------| | ODP Business Solutions | $996 | $1,030 | $3,001 | $3,004 | | Office Depot | $1,000 | $1,133 | $2,991 | $3,358 | | Veyer (External) | $11 | $7 | $28 | $18 | | Varis | $2 | $2 | $5 | $5 | | Division | 3Q 2023 Operating Income (Millions) | 3Q 2022 Operating Income (Millions) | YTD 2023 Operating Income (Millions) | YTD 2022 Operating Income (Millions) | | :----------------------------| :----------------------------------| :----------------------------------| :-----------------------------------| :-----------------------------------| | ODP Business Solutions | $56 | $48 | $140 | $103 | | Office Depot | $66 | $83 | $186 | $228 | | Veyer | $10 | $9 | $31 | $25 | | Varis | $(17) | $(17) | $(48) | $(48) | - ODP Business Solutions operating income increased by 17% in Q3 2023 and 36% year-to-date 2023, driven by favorable product margins[131][132] - Office Depot Division's comparable store sales decreased by 6% in Q3 2023 and 5% year-to-date 2023, reflecting lower store traffic and average order value[136] - Veyer Division's external sales increased by $4 million in Q3 2023 and $10 million year-to-date 2023, contributing to higher operating income[138] - Varis Division's operating loss remained flat at $(17) million in Q3 2023 and $(48) million year-to-date 2023, as investment costs were offset by lower employee-related costs[139] Liquidity and Capital Resources Total liquidity was $1.2 billion at Sep 30, 2023, including $384M cash and $771M credit. YTD operating cash flow rose to $261M; $266M in stock was repurchased - Total liquidity was approximately $1.2 billion at September 30, 2023, including $384 million in cash and cash equivalents and $771 million in available credit[125][154] - Cash provided by operating activities of continuing operations increased to $261 million year-to-date 2023, up from $79 million in the prior year, driven by improved working capital management[125][164] - The company repurchased six million shares of common stock for $266 million year-to-date 2023, with $583 million remaining under the current $1 billion stock repurchase program[124][158] - Capital expenditures are estimated to be up to $100 million in 2023, funded by available cash and operating cash flows[157] - No cash dividends were declared in Q3 or YTD 2023, and none are anticipated in the foreseeable future[161] New Accounting Standards Refers to Note 1, 'Summary of Significant Accounting Policies,' for new applicable accounting standards Critical Accounting Policies No significant changes to critical accounting policies since Dec 31, 2022, except for updates in Note 1 - No significant changes to critical accounting policies since December 31, 2022, except for updates in Note 1[171] Other Information Quantitative and Qualitative Disclosures About Market Risk No material changes in interest rate, foreign exchange, and commodities risks since the 2022 Form 10-K - No material change in interest rate, foreign exchange, and commodities risks as of September 30, 2023[173] Controls and Procedures Disclosure controls and procedures were effective as of Sep 30, 2023, with no material changes in internal control - Disclosure controls and procedures were effective as of September 30, 2023[175] - No material changes in internal control over financial reporting during the quarter ended September 30, 2023[176] Legal Proceedings Refers to Note 11 for legal proceedings; no material changes to risk factors from 2022 Form 10-K - No material changes with respect to risk factors disclosed in the 2022 Form 10-K[177] Risk Factors No material changes to risk factors previously disclosed in the company's 2022 Form 10-K - No material changes to the risk factors disclosed in the 2022 Form 10-K[177] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 659 thousand shares for $32 million in Q3 2023; $583 million remains for repurchases under the $1 billion program | Period | Total Shares Purchased (Thousands) | Average Price Paid Per Share | Value of Shares Yet to Be Purchased (Millions) | | :------------------------------| :---------------------------------| :---------------------------| :---------------------------------------------| | July 2, 2023 — July 29, 2023 | 197 | $48.54 | $605 | | July 30, 2023 — August 26, 2023 | 210 | $49.26 | $595 | | August 27, 2023 — Sep 30, 2023 | 252 | $48.06 | $583 | | Total | 659 | $48.59 | | - As of September 30, 2023, $583 million remained available for repurchases under the $1 billion stock repurchase program, authorized through December 31, 2025[180][181] - No cash dividends were declared in Q3 or YTD 2023, and none are anticipated in the foreseeable future[183] Other Information CEO Gerry Smith is on temporary medical leave; Joseph S. Vassalluzzo is acting as Principal Executive Officer - CEO Gerry Smith is on temporary medical leave; Joseph S. Vassalluzzo is acting as Principal Executive Officer[184][197] - Mr. Smith is expected to remain on medical leave for several more weeks[184] Exhibits Lists exhibits filed with Form 10-Q, including certifications and Inline XBRL documents - Includes certifications of Principal Executive and Financial Officers (31.1, 31.2, 32)[187][188][189] - Contains various Inline XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE)[190][191][192][193] Form 10-Q Cross-Reference Index Provides a cross-reference index to the traditional SEC Form 10-Q format for item location - Provides a cross-reference index to the traditional SEC Form 10-Q format for enhanced readability[4][195] Signatures Report signed by Joseph S. Vassalluzzo (PEO), D. Anthony Scaglione (PFO), and Max W. Hood (PAO) on November 8, 2023 - Signed by Joseph S. Vassalluzzo (Principal Executive Officer), D. Anthony Scaglione (Principal Financial Officer), and Max W. Hood (Principal Accounting Officer)[197][198][199] - Date of signing: November 8, 2023[197][198][199]