Staples 2015 Annual Report Download - page 105

APPENDIX B
STAPLES B-2
STAPLES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)
PROPOSED ACQUISITION OF OFFICE DEPOT
On February 4, 2015, we announced that Staples had signed a
definitive agreement to acquire Office Depot, a global supplier
of office products, services and solutions for the workplace.
Under the terms of the agreement, Office Depot shareholders
will receive, for each Office Depot share, $7.25 in cash and
0.2188 of a share in Staples stock at the closing. We expect to
generate at least $1 billion of annualized cost synergies by the
third full fiscal year post-closing, and estimate that we would
incur one-time costs of approximately $1 billion to achieve the
synergy target.
On December 7, 2015, the U.S. Federal Trade Commission
(“FTC”) and Canadian Commissioner of Competition each
filed lawsuits against us and Office Depot, seeking to block
the proposed merger and prevent the acquisition from closing.
We intend to vigorously defend against the lawsuits, and a
decision in the U.S. federal court case is expected by May 10,
2016. On February 2, 2016, both we and Office Depot agreed
to waive, until May 16, 2016, our rights to terminate the
definitive agreement due to a failure to complete the merger
by February 4, 2016 or a legal restraint under antitrust laws.
We would be required to pay Office Depot a termination
fee of $250 million under certain circumstances, including
if the definitive agreement is terminated as a result of the
antitrust closing conditions not being satisfied on or before
May 16, 2016.
See Note R - Proposed Acquisition of Office Depot in the
Notes to the Consolidated Financial Statements for additional
information related to the proposed merger, including
information related to sources of financing we have secured.
NON-GAAP MEASURES
In our analysis of the results of operations and in our outlook,
we have referred to certain non-GAAP financial measures for
gross profit rate, net income, earnings per share, effective tax
rate, and free cash flow (which we define as net cash provided
by operating activities less capital expenditures and, in the
case of our guidance, payments associated with financing for
our proposed acquisition of Office Depot). The presentation
of these results should be considered in addition to, and
should not be considered superior to, or as a substitute for,
the presentation of results determined in accordance with
GAAP. We believe that these non-GAAP financial measures
help management and investors to understand and analyze
our performance by providing meaningful information that
facilitates the comparability of underlying business results from
period to period. We use these non-GAAP financial measures
to evaluate the operating results of our business against
prior year results and our operating plan, and to forecast and
analyze future periods. We recognize there are limitations
associated with the use of non-GAAP financial measures as
they may reduce comparability with other companies that use
different methods to calculate similar non-GAAP measures.
We generally compensate for these limitations by considering
GAAP as well as non-GAAP results. In addition, management
provides a reconciliation to the most comparable GAAP
financial measure. With respect to our earnings per share and
free cash flow guidance, we have not provided guidance on a
GAAP basis given that our current estimates for charges to be
incurred related to our planned acquisition of Office Depot and
the closure of North American retail stores, and the potential
related impact on cash flow, cannot be reasonably estimated.
For the non-GAAP measures related to results of operations, reconciliations to the most directly comparable GAAP measures are
shown below (amounts in millions, except per share data):
52 Weeks Ended
January 30, 2016
GAAP
Inventory
write-downs
related to
restructuring
activities Restructuring charges
Impairment
of long-lived
assets &
accelerated
depreciation
Loss
on sale of
businesses
and assets,
net
Merger-
related
costs
PNI data
security
incident
costs Non-GAAP
Gross profit $5,514 $1 $— $— $— $— $— $5,515
Gross profit rate 26.2% 26.2%
Operating income 641 1 151 55 5 53 18 924
Interest and other expense, net 149 94 55
Income before income taxes 492 869
Income tax expense 113 113
Adjustments — 178
Adjusted income tax expense 113 291
Net income $379 $578
Effective tax rate 23.0% 33.5%
Diluted earnings per common share $0.59 $0.89