BOCA RATON, Fla.--(BUSINESS WIRE)--Aug 7, 2018--Office Depot, Inc. (“Office Depot,” or the “Company”) (NASDAQ: ODP), a leading omni-channel provider of business services and supplies, products and technology solutions, today announced results for the second quarter ended June 30, 2018.

(1) Both Operating Cash Flow and Free Cash Flow are for continuing operations.

(2) Adjusted results represent non-GAAP measures and exclude charges or credits not indicative of core operations and the tax effect of these items, which may include but not be limited to merger integration, restructuring, acquisition costs, asset impairments and executive transition costs. Reconciliations from GAAP to non-GAAP financial measures can be found in this release as well as on the Investor Relations website at investor.officedepot.com.

(3) As used throughout this release, Free Cash Flow is defined as cash flows from operating activities of continuing operations less capital expenditures. Free cash flow is a non-GAAP measure.

“I am extremely pleased with our performance in the second quarter as the execution of our strategy is driving improved sales trends across all three of our operating divisions,” said Gerry Smith, chief executive officer of Office Depot. “Sales in the Business Solutions Division were up an impressive 4% in the quarter driven by our acquisition strategy and growth in the adjacency categories beyond office products. I’m also encouraged by the early success of our initiatives to increase services, which now represent 16% of total sales. In addition to the sales performance, our efficiency and cost control initiatives allowed us to deliver an increase in year-over-year operating income and cash flow for the Company in the quarter. I’m confident that we have the right strategy in place to grow the business long term and we have assembled a talented and dedicated team that is focused on driving continued execution across the enterprise.”

Consolidated Results

Reported (GAAP) Results

Total reported sales for the second quarter of 2018 were $2.6 billion compared to $2.4 billion in the second quarter of 2017, an increase of 11%. Product sales in the second quarter were up 1%, while service revenues grew 120%, driven primarily by the revenues contributed by the CompuCom acquisition. On a consolidated basis, services represent approximately 16% of total Company sales. Service revenue excluding CompuCom grew 8% in the second quarter, due to the Company’s strategic efforts to grow overall business services revenue.

In the second quarter of 2018, Office Depot reported operating income of $48 million and net income from continuing operations was $19 million, or $0.03 per share, compared to operating income of $41 million, net income from continuing operations of $21 million and $0.04 per share in the second quarter of 2017.

For the first half of 2018, Office Depot reported operating income of $125 million compared to an operating income of $165 million in the first half of 2017. Net income from continuing operations for the first half of 2018 was $52 million, or $0.09 per share, compared to net income from continuing operations of $95 million, or $0.18 per share, in the first half of 2017. The year-over-year decrease was due to lower gross margins from store and supply chain cost deleverage, as well as higher selling, general and administrative expenses experienced primarily in the first quarter of 2018.

Adjusted (non-GAAP) Results(2)

Adjusted results for the second quarter of 2018 exclude charges and credits totaling $15 million, which were comprised of $12 million in merger, acquisition and integration-related expenses and $3 million in restructuring and other charges, as well as the after-tax impact of these items.

Second quarter 2018 adjusted operating income was $63 million compared to an adjusted operating income of $63 million in the second quarter of 2017. These amounts include a negative impact for the recent change in pension accounting standards of $2 million in the second quarter of 2018 and $5 million in the second quarter of 2017. Second quarter 2018 adjusted net income from continuing operations was $30 million, or $0.05 per diluted share, compared to an adjusted net income from continuing operations of $34 million, or $0.06 per diluted share, in the second quarter of 2017.

For the first half of 2018, adjusted operating income was $156 million compared to an adjusted operating income of $212 million in the first half of 2017. Adjusted net income from continuing operations for the first half of 2018 was $75 million, or $0.13 per share, compared to adjusted net income from continuing operations of $122 million, or $0.23 per share, in the first half of 2017. The year-over-year decrease was due to lower gross margins from store and supply chain cost deleverage, as well as higher selling, general and administrative expenses experienced primarily in the first quarter of 2018.

(2) Adjusted results represent non-GAAP measures and exclude charges or credits not indicative of core operations and the tax effect of these items, which may include but not be limited to merger integration, restructuring, acquisition costs, asset impairments and executive transition costs. Reconciliations from GAAP to non-GAAP financial measures can be found in this release as well as on the Investor Relations website at investor.officedepot.com.

Second Quarter Division Results

Business Solutions Division

Business Solutions Division reported sales were $1.3 billion in the second quarter of 2018, up 4% compared to the second quarter of 2017. The year-over-year increase reflects the impact of acquisitions and eCommerce growth. Without the impact of acquisitions, sales were approximately flat with the prior year. This is a sequential quarterly improvement of approximately 300 basis points compared to the first quarter of 2018. The sequential improvement was primarily driven by growth in core supplies and services. Product sales in the second quarter increased 3%, while services revenue increased 15% compared to the prior year period.

Business Solutions Division operating income was $67 million in the second quarter of 2018 compared to $64 million in the second quarter of 2017. The increase in operating income versus the prior year was primarily driven by higher sales volumes as well as the benefit of cost reduction initiatives.

Retail Division

Retail Division reported sales were $1.1 billion in the second quarter of 2018, down 5% versus the prior year period. Planned store closures and an approximately $10 million negative impact to revenue resulting from the adoption of the new revenue recognition standard contributed to the decline. Product sales in the second quarter declined 7%, while services revenue increased 12% compared to the prior year period, excluding the revenue recognition impact. Comparable sales declined 2% versus the prior year, primarily driven by fewer transactions and lower average order values. This is a sequential quarterly improvement of approximately 200 basis points compared to the first quarter of 2018.

Retail Division operating income was $22 million in the second quarter of 2018, compared to $20 million in the second quarter of 2017. The increase in operating income versus the prior year was primarily due to the positive impact of ongoing efficiency and cost reduction initiatives.

During the second quarter of 2018, the Company closed 2 stores and ended the quarter with a total of 1,374 stores in the Retail Division.

CompuCom Division

CompuCom Division results are only included in total Company results for the second quarter of 2018, as this business was not part of Office Depot in the prior year period. However, unaudited adjusted historical results for the second quarter of 2017 have been presented for reference. Accordingly, CompuCom Division reported sales were $277 million in the second quarter of 2018, up 3% versus sales of $269 million in the prior year historical period, with increases in both product and services revenue.

CompuCom Division operating income was $6 million in the second quarter of 2018 versus historical operating income of $16 million in the second quarter of 2017. Operating income was down versus the prior year primarily due to a lower gross margin on product sales mix, expenses associated with new account acquisition, investment expenses to support growth initiatives, and incremental depreciation, amortization and acquisition-related expenses, partially offset by cost reductions and efficiencies.

(4) The CompuCom unaudited adjusted historical results for the second quarter of 2017 reflect information prepared prior to our acquisition and have not been subject to audit or the Company’s internal control processes. Results have been adjusted for historical restructuring and acquisition costs and have been presented for reference purposes only. The results for 2017 may not be comparable to current year results nor indicative of the results of future operations of the CompuCom Division or the results that would have been attained had the acquisition been completed on January 1, 2017.

Corporate and Other

Corporate includes support staff services and certain other expenses that are not allocated to the Company’s operating divisions. Unallocated expenses increased to $33 million in the second quarter of 2018 compared to $21 million in the second quarter of 2017 primarily due to costs associated with growth initiatives and compensation expenses.

The Company’s “Other” segment, which contains the retained sourcing and trading operations in Asia and the elimination of intersegment revenues, had no material contribution to sales or operating income in the second quarter of 2018.

As previously announced, during the second quarter Office Depot successfully completed the sale of its business in New Zealand on May 4, 2018. Sale of the combined Australia and New Zealand businesses provided approximately $115 million of incremental cash into continuing operations in fiscal 2018.

Balance Sheet and Cash Flow

As of June 30, 2018, Office Depot had total available liquidity of $1.7 billion consisting of $0.7 billion in cash and cash equivalents and $1.0 billion available under the Amended and Restated Credit Agreement. Total debt was $1.0 billion, excluding $765 million of non-recourse debt related to the credit-enhanced timber installment notes.

For the second quarter of 2018, cash provided by operating activities of continuing operations was $44 million, including the impact of $7 million in OfficeMax merger–related costs, $5 million in acquisition and integration-related costs and $3 million in restructuring costs, compared to $27 million in the second quarter of the prior year. Capital expenditures in the quarter were $37 million. Accordingly, Free Cash Flow of continuing operations was $7 million in the second quarter of 2018. For the first half of 2018, cash provided by operating activities was $251 million with $74 million of capital expenditures for Free Cash Flow of continuing operations of $177 million.

During the second quarter of 2018, the Company paid a quarterly cash dividend of $0.025 per share on June 15, 2018 for approximately $14 million and made a $19 million scheduled debt repayment on the 2022 Term Loan. In addition, Office Depot repurchased approximately 3 million shares at a total cost of $8 million in the second quarter of 2018.

Outlook(5)

“I am encouraged by the momentum we are seeing across all of our businesses and the success we are realizing in generating working capital improvements. Our strategic growth initiatives continue to gain traction, which underlies my confidence in achieving our most recent full-year outlook, which we provided last quarter,” said Gerry Smith.

(5) The Company’s outlook for 2018 included in this release is for continuing operations only and includes non-GAAP measures, such as adjusted operating income, which excludes charges or credits not indicative of core operations, which may include but not be limited to merger integration expenses, restructuring charges, acquisition-related costs, executive transition costs, asset impairments and other significant items that currently cannot be predicted. The exact amount of these charges or credits are not currently determinable, but may be significant. Accordingly, the Company is unable to provide equivalent reconciliations from GAAP to non-GAAP for these financial measures.

About Office Depot, Inc.

Office Depot, Inc. (NASDAQ:ODP) is a leading provider of business services and supplies, products and technology solutions through its fully integrated omni-channel platform of approximately 1,400 stores, online presence, and dedicated sales professionals and technicians to small, medium and enterprise businesses. Through its banner brands Office Depot®, OfficeMax®, CompuCom® and Grand&Toy®, the Company offers its customers the tools and resources they need to focus on their passion of starting, growing and running their business. For more information, visit news.officedepot.com and follow @officedepot on Facebook, Twitter and Instagram.

Office Depot is a trademark of The Office Club, Inc. OfficeMax is a trademark of OMX, Inc. CompuCom is a trademark of CompuCom Systems, Inc. Grand&Toy is a trademark of Grand & Toy, LLC in Canada. ©2018 Office Depot, Inc. All rights reserved. Any other product or company names mentioned herein are the trademarks of their respective owners.

FORWARD LOOKING STATEMENTS

This communication may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements or disclosures may discuss goals, intentions and expectations as to future trends, plans, events, results of operations, cash flow or financial condition, or state other information relating to, among other things, Office Depot, based on current beliefs and assumptions made by, and information currently available to, management. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “plan,” “could,” “estimate,” “expect,” “forecast,” “guidance,” “outlook,” “intend,” “may,” “possible,” “potential,” “predict,” “project,” “propose” or other similar words, phrases or expressions, or other variations of such words. These forward-looking statements are subject to various risks and uncertainties, many of which are outside of Office Depot’s control. There can be no assurances that Office Depot will realize these expectations or that these beliefs will prove correct, and therefore investors and stockholders should not place undue reliance on such statements.

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