Office Depot 2003 Annual Report Download - page 23

2002, personnel, facility-related, advertising, and delivery
expenses increased in total dollars because of the expansion of
our business in Europe. However, in 2003 operating and sell-
ing expenses as a percentage of sales decreased, primarily as a
result of the purchase of Guilbert’s large account customer
base, which requires less marketing and related costs. Also
favorably impacting operating and selling expenses was the
continued leverage of certain fixed operating expenses. As our
operations grow in a particular market, fixed operating
expenses decline relative to sales. For example, advertising
costs in the form of prospecting and delivery costs, which are
affected by the density of the delivery areas, decline as a per-
centage of sales as the market grows. Fiscal 2001 includes a
gain of $10.2 million from the sale of a warehouse in London.
As noted above, sales in local currencies have substantially
increased in recent years. For U.S. reporting, these sales are
translated into U.S. dollars at average exchange rates experi-
enced during the year. International Division sales were posi-
tively impacted by foreign exchange rates in 2003 by $253.2
million and $67.0 million in 2002. International Division seg-
ment operating profit also benefited from foreign exchange
rates by $32.7 million during 2003 and $9.0 million in 2002.
Future volatility in exchange rates could affect translated sales
and operating profit of our International operations.
In January 2003, we sold our operations in Australia with
no significant impact on earnings. The Australian operations
have been accounted for as discontinued operations and all
periods presented have been restated. In addition to Europe,
we continue to operate in Japan. We have focused our
Japanese business on a single brand offering and streamlined
operations; however, sales trends in Japan have been negative
for each of the periods presented.
Corporate and Other
Other Operating Expenses
Other operating expenses primarily reflect pre-opening
expenses and, in 2003, costs related to the integration of
Guilbert.
Pre-opening expenses consist of personnel, property and
advertising expenses incurred in opening or relocating stores
and CSCs. We typically incur pre-opening expenses during a
six-week period prior to a store opening. Because we expense
these items as they are incurred, the amount of pre-opening
expenses each year is generally proportional to the number of
new stores and CSCs opened during the period. Total
Company store openings and relocations were 64 in 2003, 42
in 2002 and 55 in 2001. We opened 3 CSCs in 2002 and 4 in
2001. For 2003, our pre-opening expenses were approximately
$150,000 per domestic office supply store and $75,000 per
international office supply store. Our cost to open a new CSC
varies significantly with the size and location of the facility.
Although no CSCs were opened in 2003, we estimate costs to
open a domestic or international CSC to be approximately
$1.0 million per facility.
In 2003, we incurred approximately $17.7 million of non-
capitalizable integration costs in connection with our acquisi-
tion of Guilbert in June 2003. These costs primarily relate to
professional consulting fees for assistance with integration,
management, internal communications plans, and human
resource aspects of the acquisition.
General and Administrative Expenses
(Dollars in thousands) 2003 2002 2001
General and
administrative
expenses . . . . . . . . . . $578,840 $486,279 $445,538
Percentage of sales . . . . 4.7% 4.3% 4.0%
Our general and administrative expenses consist prima-
rily of personnel-related costs associated with support func-
tions. Because these functions typically support all segments
of our business, we have historically not considered these
costs in determining our segment profitability. However, with
the growth in our e-commerce and the acquisition of Guilbert,
our general and administrative costs have increased substan-
tially in recent years. Therefore, beginning in 2004, we plan to
reclassify certain amounts previously classified as general and
administrative expenses into operating and selling expenses.
We also plan to begin allocating costs where appropriate to
determine segment profitability.
The increase in 2003 reflects the inclusion of Guilbert
since its acquisition in June, the impact of exchange rates
on other international expenses, and costs relating to
finance, human resources and merchandising software appli-
cations. Employee-related costs declined in 2003 from lower
performance-based compensation, partially offset by higher
costs for healthcare and other employee benefits. The increase
in 2002 was attributable to additional professional fees to sup-
port operational process improvements, additional benefits
costs, and costs incurred to support expansion activities that
were not chargeable to segment operations.
The comments above and in the Overall section of MD&A
describe how our management has historically determined our
general and administrative expenses. Other companies may
charge more or less of their general and administrative costs to
their segments, and their results may not be comparable to ours.
Other Income and Expense
(Dollars in thousands) 2003 2002 2001
Interest income . . . . . . . $ 14,196 $ 18,509 $ 12,980
Interest expense . . . . . . (54,805) (46,195) (43,339)
Miscellaneous income
(expense), net . . . . . . 15,392 7,183 (9,057)
Average cash balances decreased slightly during 2003 after
a substantial increase in 2002; however, interest rates earned on
cash investments declined during the same time periods.
In August 2003 we issued $400 million of senior notes
that mature in 2013. The increase in interest expense in 2003
reflects the impact of a partial year of interest relating to this
21 Office Depot 2003 / Form 10-K