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MERGER AND RESTRUCTURING ACTIVITY

9 Months Ended

Sep. 28, 2019

NOTE 3. MERGER AND RESTRUCTURING ACTIVITY

Since 2017, the Company has taken actions to optimize its asset base and drive operational efficiencies. These actions include acquiring profitable businesses, closing underperforming retail stores and non-strategic distribution facilities, consolidating functional activities, eliminating redundant positions and disposing of non-strategic businesses and assets. The expenses and any income recognized directly associated with these actions are included in Merger and restructuring expenses, net on a separate line in the Condensed Consolidated Statements of Operations in order to identify these activities apart from the expenses incurred to sell to and service its customers. These expenses are not included in the determination of Division operating income. The table below summarizes the major components of Merger and restructuring expenses, net.

	Third Quarter				Year-to-Date
(In millions)	2019		2018		2019		2018
Merger and transaction related expenses, net
Severance and retention	$	—	$	4	$	1	$	9
Transaction and integration		6		5		18		16
Facility closure, contract termination, and other expenses, net		—		2		—		10
Total Merger and transaction related expenses, net		6		11		19		35
Restructuring expenses
Severance		—		—		40		—
Professional fees		12		3		31		9
Facility closure, contract termination, and other expenses, net		4		—		15		1
Total Restructuring expenses		16		3		86		10
Total Merger and restructuring expenses, net	$	22	$	14	$	105	$	45

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Merger and transaction related expenses, net: Severance and retention include expenses related to the integration of staff functions in connection with business acquisitions and are expensed through the severance and retention period. Transaction and integration include legal, accounting, and other third-party expenses incurred in connection with acquisitions and business integration activities primarily related to CompuCom. Facility closure, contract termination, and other expenses, net relate to facility closure accruals, contract termination costs, gains and losses on asset dispositions, and accelerated depreciation. Also included in the merger and transaction related expenses, net are $5 million of integration expenses associated with the OfficeMax merger, all of which were incurred in the first half of 2018, and $2 million and $5 million of facility closure costs in the third quarter and year-to-date 2018, respectively. All integration activities associated with the OfficeMax merger were completed in 2018.

•

Restructuring expenses: In May 2019, the Company’s Board of Directors approved a company-wide, multi-year, cost reduction and business improvement program to systematically drive down costs, improve operational efficiencies, and enable future growth investments. Under this program (the “Business Acceleration Program”), the Company has made and will continue to make organizational realignments stemming from process improvements, increased leverage of technology and accelerated use of automation. This has resulted and will continue to result in the elimination of certain positions and a flatter organization. In connection with the Business Acceleration Program, the Company also anticipates closing approximately 90 underperforming retail stores in 2020 and 2021, and 9 other facilities, consisting of distribution centers and sales offices, of which 7 were closed as of the end of the third quarter of 2019. Total estimated costs to implement the Business Acceleration Program are expected to be approximately $122 million, comprised of:

(a)

severance and related employee costs of approximately $40 million

(b)

recruitment and relocation costs of approximately $2 million

(c)

retail store and facility closure costs of approximately $26 million

(d)

third-party costs to facilitate the execution of the Business Acceleration Program of approximately $46 million

(e)

other costs of approximately $8 million

Of the aggregate costs to implement the Business Acceleration Program, approximately $110 million are expected to be cash expenditures through 2021 funded primarily with cash on hand and cash from operations. In fiscal 2019, the Company expects to incur approximately $85 million, of which approximately $70 million will be cash, for severance and related employee costs, recruitment and relocation, and third-party costs including legal and consulting fees under the Business Acceleration Program. Of the $70 million cash expenditures expected in 2019, approximately $59 million has been paid through the end of the third quarter of 2019.

In the third quarter of 2019, the Company incurred $16 million in restructuring expenses associated with the Business Acceleration Program which consisted of $1 million of retail store and facility closure costs, $12 million in professional fees, and $3 million of other costs. Included in restructuring expenses in year-to-date 2019 are $40 million of severance costs, $4

million of retail store and facility closure costs, $31 million in third-party professional fees, and $4 million of other costs incurred in connection with the Business Acceleration Program.

Also included in restructuring expenses in the third quarter and year-to-date 2019 and 2018 are costs incurred in connection with the Comprehensive Business Review, a program the Company announced in 2016. These costs include severance, facility closure costs, contract termination, accelerated depreciation, relocation and disposal gains and losses, as well as other costs associated with retail store closures. In the third quarter and year-to-date 2019, the Company closed 3 and 44 retail stores, respectively, and expects to close approximately 10 additional stores through the end of the Comprehensive Business Review program in 2019.

Additionally, restructuring expenses in the third quarter and year-to-date 2018 also reflect professional fee expenses incurred in connection with the Company’s multi-year strategic transformation which began in 2017. All activities associated with the multi-year strategic transformation plan were completed in 2018.

MERGER AND RESTRUCTURING ACCRUALS

The activity in the merger and restructuring accruals in year-to-date 2019 is presented in the table below. Certain merger and restructuring charges are excluded from the table because they are paid as incurred or non-cash, such as accelerated depreciation and gains and losses on asset dispositions.

	Balance as of										Balance as of
	December 29,		Charges		Cash			Adjustments			September 28,
(In millions)	2018		Incurred		Payments			(a)			2019
Termination benefits:
Merger-related accruals	$	3	$	1	$	(3	)	$	—		$	1
Comprehensive Business Review		—		—		—			—			—
Business Acceleration Program		—		41		(25	)		—			16
Lease and contract obligations, accruals for facilities closures and other costs:
Merger-related accruals		10		—		—			(10	)		—
Comprehensive Business Review		5		5		(4	)		(3	)		3
Business Acceleration Program		—		34		(29	)		—			5
Total	$	18	$	81	$	(61	)	$	(13	)	$	25

(a)

Represents reclassification of operating lease obligations associated with facility closures to Operating lease ROU assets on the Condensed Consolidated Balance Sheet in accordance with the new lease accounting standard.

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, in the Condensed Consolidated Balance Sheets.