Office Depot 2007 Annual Report Download - page 23

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21
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
GENERAL
Our fiscal year results are based on a 52- or 53-week retail calendar ending on the last Saturday in December. Fiscal
year 2005 is based on 53 weeks, with a 14-week fourth quarter. Our comparable store sales (or “comp” sales) relate
to stores that have been open for at least one year. For 2005, this comparison has been adjusted to a 52-week basis.
RESTATEMENT OF FINANCIAL STATEMENTS
On October 29, 2007, we announced that our Audit Committee initiated an independent review principally focused
on the accounting for certain vendor program funds. The review, which arose from a whistleblower complaint, was
conducted with the assistance of independent legal counsel and forensic accountants. The investigation revealed
errors in the timing of recognition of certain vendor program funds. The impact of these errors was to reduce
previously reported gross profit, operating profit, net earnings and earnings per share in fiscal 2006 and the first two
quarters of 2007 and defer recognition into future periods. Additionally, inventories and tax accounts were adjusted
on the consolidated balance sheet related to these deferrals.
On November 8, 2007, the Board of Directors of the company approved a decision to restate our 2006 financial
statements including corrections to amounts previously reported in the third and fourth quarters of 2006 and the
interim financial statements for the first and second quarters of 2007.
On November 20, 2007, we amended our previously filed Form 10-K for the fiscal year 2006 and our previously
filed Forms 10-Q for the first and second quarters of 2007. The financial statements and related disclosures for the
period ended September 30, 2006 were restated to reflect the impact of the errors discussed above in our Form 10-Q
for the quarter ended September 29, 2007, which was also filed on November 20, 2007. Our amended reports reflect
a reduction in diluted earnings per share of $0.02 in the quarter ended September 30, 2006, $0.03 in the quarter
ended December 30, 2006, $0.01 in the quarter ended March 31, 2007, and $0.02 in the quarter ended June 30, 2007
as compared to amounts previously reported. Because of rounding and changes in share count, the diluted EPS
impact over the period aggregates to $0.04 for fiscal year 2006 and a total of $0.07 per share over the period from
the third quarter of 2006 through the second quarter of 2007. The future impact of the deferrals related to one period
were considered in determining net deferrals in subsequent periods. The net deferral became a positive impact
beginning in the later part of 2007 and extending through the years from 2008 through 2010. The financial
restatements resulted in reductions of previously reported company gross profit of approximately $7 million in the
quarter ended September 30, 2006, $14 million in the quarter ended December 30, 2006 (an aggregate of $20
million for fiscal year 2006), $3 million in the quarter ended March 31, 2007, and $6 million in the quarter ended
June 30, 2007. Approximately $12 million of the amount deferred at the end of the third quarter of 2007 reversed in
the fourth quarter of 2007 and remaining amounts will reverse in the years through 2010.
These restatements related to non-cash items and the reduction in net earnings was offset in the consolidated
statement of cash flows by a change in working capital and other items such that net cash provided by operating
activities did not change for the periods restated. The primary impact to the balance sheet was to reduce inventories
by the amounts deferred and to increase short-term deferred tax assets for the tax impacts of the change in pre-tax
earnings.
OVERVIEW
Our business is comprised of three reportable segments. The North American Retail Division includes our retail
office supply stores in the U.S. and Canada, which offer office supplies, computers and business machines and
related supplies, and office furniture. Most stores also offer a design, print and ship center offering graphic design,
printing, reproduction, mailing and shipping. The North American Business Solutions Division sells office supply
products and services in the U.S. and Canada directly to businesses through catalogs, internet web sites and a
dedicated sales force. Our International Division sells office products and services through catalogs, internet web
sites, a dedicated sales force and retail stores.