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MERGER, ACQUISITION TERMINATION, AND RESTRUCTURING ACTIVITY | 9 Months Ended
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Sep. 30, 2017
MERGER, ACQUISITION TERMINATION, AND RESTRUCTURING ACTIVITY | NOTE 3. MERGER, ACQUISITION TERMINATION, AND RESTRUCTURING ACTIVITY In recent years, the Company has taken actions to adapt to changing and competitive market conditions. These actions include closing facilities, consolidating functional activities, eliminating redundant positions, disposing of businesses and assets, and taking actions to improve process efficiencies. Merger and Restructuring In 2013, the OfficeMax merger (the “Merger”) was completed and integration activities similar to the actions described above began. The Company also assumed certain restructuring liabilities previously recorded by OfficeMax. In mid-2014, the Company’s real estate strategy (the “Real Estate Strategy”) identified 400 retail stores for closure through 2016 along with planned changes associated with the integration of the two companies’ supply chains. During the second quarter of 2016, the Company completed the retail store closures under this program. During the third quarter of 2017, the changes to the Company’s supply chain related to the Merger were also completed. The significant components of expenses incurred by the Company relating to the Merger activities are discussed below. Staples Acquisition and Merger Agreement Termination On February 4, 2015, Staples, Inc. (“Staples”) and the Company announced that the companies had entered into a definitive merger agreement (the “Staples Merger Agreement”), under which Staples would acquire all of the outstanding shares of Office Depot and the Company would become a wholly owned subsidiary of Staples (the “Staples Acquisition”). On May 10, 2016, the U.S. District Court for the District of Columbia granted the United States Federal Trade Commission’s request for a preliminary injunction against the proposed acquisition, and as a result, the companies terminated the Staples Merger Agreement on May 16, 2016. Per the terms of the termination agreement, Staples paid Office Depot a fee of $250 million in cash (“Termination Fee”) on May 19, 2016, which, along with transactions and retention costs associated with the planned acquisition, are included in Merger, restructuring and other operating (income) expenses, net in the Condensed Consolidated Statements of Operations for the year-to-date 2016 and in Net cash provided by operating activities of continuing operations in the Condensed Consolidated Statements of Cash Flows for 2016. The significant components of expenses incurred by the Company relating to the Staples acquisition and merger agreement termination activities are discussed below. Comprehensive Business Review During August 2016, the Company announced the results of a comprehensive business review (the “Comprehensive Business Review”), which, among other things, includes a plan to close approximately 300 additional retail stores in North America over a three-year period, and to lower operating and general and administrative expenses through efficiencies and organizational optimization. The Company estimates it will incur up to approximately $125 million in costs to implement the cost savings programs, of which $90 million has been incurred in 2016 and through year-to-date 2017. The remaining costs are expected to be incurred through the end of 2017, excluding costs related to planned store closures, which will be recognized over the next two years. The significant components of expenses incurred by the Company relating to its cost saving programs activities are discussed below. Merger, restructuring, and other operating (income) expenses, net The Company presents Merger, restructuring and other operating (income) expenses, net on a separate line in the Condensed Consolidated Statements of Operations to identify these activities apart from the activities to sell to and service its customers. These expenses are not allocated to the Company’s divisions for the purpose of calculating their operating income. The table below and narrative that follow provide the major components of Merger, restructuring and other operating (income) expenses, net.
|  | Third Quarter |  |  | Year-to-Date |
(In millions) |  | 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |
Merger related expenses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Transaction and integration |  | $ | 4 |  |  | $ | 8 |  |  | $ | 15 |  |  | $ | 30 |
Facility closure, contract termination, and other expenses, net |  |  | 2 |  |  |  | 4 |  |  |  | 4 |  |  |  | 21 |
Total Merger related expenses |  |  | 6 |  |  |  | 12 |  |  |  | 19 |  |  |  | 51 |
Staples Acquisition (income) expenses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Retention |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 15 |
Transaction |  |  | — |  |  |  | 4 |  |  |  | — |  |  |  | 43 |
Termination Fee |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (250 | )
Total Staples Acquisition (income) expenses |  |  | — |  |  |  | 4 |  |  |  | — |  |  |  | (192 | )
Comprehensive Business Review and other restructuring expenses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Severance |  |  | 11 |  |  |  | 9 |  |  |  | 26 |  |  |  | 13 |
Facility closure, contract termination, professional fees and other expenses, net |  |  | 4 |  |  |  | 6 |  |  |  | 16 |  |  |  | 6 |
Total Comprehensive Business Review and other restructuring expenses |  |  | 15 |  |  |  | 15 |  |  |  | 42 |  |  |  | 19 |
Acquisition related expenses – Refer to Note 2 |  |  | 1 |  |  |  | — |  |  |  | 1 |  |  |  | — |
Total Merger, restructuring and other operating (income) expenses, net |  | $ | 22 |  |  | $ | 31 |  |  | $ | 62 |  |  | $ | (122 | )
Merger related expenses Transaction and integration expenses include integration-related professional fees, incremental temporary contract labor, salary and benefits for employees dedicated to the Merger activity, travel costs, non-capitalizable software integration costs, and other direct costs to combine the companies. Such costs are being recognized as incurred. Facility closure, contract termination, and other expenses, net primarily relate to facility closure accruals, contract termination cost, gains and losses on asset dispositions, and accelerated depreciation. Facility closure expenses include amounts incurred by the Company to close retail stores in the United States as part of the Real Estate Strategy, as well as supply chain facilities. During year-to-date 2017 and 2016, the Company recognized gains of $6 million and $1 million, respectively, from the sale of warehouse facilities that had been classified as assets held for sale. The gains are included in Merger, restructuring and other operating (income) expenses, net, as the dispositions were part of the supply chain integration associated with the Merger. Staples Acquisition (income) expenses Expenses incurred in 2016 include retention accruals and transaction costs, including costs associated with regulatory filings and professional fees, offset by the Termination Fee payment. The Staples Merger Agreement was terminated on May 16, 2016, and no further expenses are expected. Comprehensive Business Review and other restructuring expenses Expenses associated with implementing the Comprehensive Business Review include severance, facility closure costs, contract termination, accelerated depreciation, professional fees, relocation and disposal gains and losses, as well as other costs associated with the store closures. The Company has completed 109 of the planned 300 retail store closures since announcing this initiative, with the remaining stores expected to be closed over the next two years. Severance costs related to planned store closures are being accrued through the anticipated facility closure or termination date and consider timing, terms of existing severance plans, expected employee turnover and attrition. Restructuring expenses also include severance and reorganization costs associated with reductions in staff functions that continued into 2017. Merger and Restructuring Accruals The activity in the merger and restructuring accruals is presented in the table below. Of the total $62 million expense presented in Merger, restructuring and other operating (income) expenses, net incurred in the year-to-date 2017, $40 million relates to Merger and restructuring liabilities and are included as charges incurred in the table below. The remaining $22 million of expense is comprised of $16 million in Merger transaction and integration expenses, $11 million in property expenses, professional fees, non-cash items and other expenses, and $1 million in Acquisition related expenses, partially offset by a $6 million gain on the disposition of warehouse facilities which were part of the supply chain integration associated with the Merger. These charges are excluded from the table below because they are expensed as incurred, non-cash, or otherwise not associated with the merger and restructuring balance sheet accounts.
|  |  |  |  | Year-to-Date 2017 |  |  |  |
(In millions) |  | Balance as of December 31, 2016 |  |  | Charges Incurred |  |  | Cash Payments |  |  | Balance as of September 30, 2017 |
Termination benefits |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Merger related accruals |  | $ | 5 |  |  | $ | 1 |  |  | $ | (4 | ) |  | $ | 2 |
Comprehensive Business Review |  |  | 8 |  |  |  | 26 |  |  |  | (27 | ) |  |  | 7 |
Lease and contract obligations, accruals for facilities closures and other costs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Merger related accruals |  |  | 40 |  |  |  | 4 |  |  |  | (24 | ) |  |  | 20 |
Comprehensive Business Review |  |  | 13 |  |  |  | 9 |  |  |  | (13 | ) |  |  | 9 |
Total |  | $ | 66 |  |  | $ | 40 |  |  | $ | (68 | ) |  | $ | 38 |
The short-term and long-term components of these liabilities are included in Accrued expenses and other current liabilities and Deferred income taxes and other long-term liabilities, respectively, on the Condensed Consolidated Balance Sheets. Assets held for sale Certain facilities identified for closure through integration and other activities have been accounted for as assets held for sale. Assets held for sale primarily consisted of supply chain facilities, and were presented in Prepaid expenses and other current assets in the Condensed Consolidated Balance Sheet as of December 31, 2016. The assets held for sale activity for year-to-date 2017 is presented in the table below.
(In millions) |  |  |
Balance as of December 31, 2016 |  | $ | 23 |
Disposition |  |  | (23 | )
Balance as of September 30, 2017 |  | $ | — |
Gains on dispositions associated with Merger or restructuring activities are recognized at the corporate level and included when realized in Merger, restructuring and other operating (income) expenses, net in the Condensed Consolidated Statements of Operations. Losses, if any, are recognized when classified as held for sale. Gains or losses associated with dispositions of properties not associated with Merger or restructuring activities are presented in Selling general and administrative expenses in the Condensed Consolidated Statements of Operations when the related accounting criteria are met.

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- Definition The entire disclosure for business combinations, including leverage buyout transactions (as applicable), and divestitures. This may include a description of a business combination or divestiture (or series of individually immaterial business combinations or divestitures) completed during the period, including background, timing, and assets and liabilities recognized and reclassified or sold. This element does not include fixed asset sales and plant closings. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 205 -SubTopic 20 -URI http://asc.fasb.org/subtopic&trid=2122178 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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