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26
CORPORATE AND OTHER
Asset Impairments, Exit Costs and Other Charges
During the third quarter of 2005, we announced a number of material charges relating to asset impairments, exit
costs and other operating decisions. This announcement followed a wide-ranging assessment of assets and
commitments which began in the second quarter of 2005. At the end of 2005, we had recognized $282 million of
charges and estimated the total charges to be incurred through fiscal year 2008 would be approximately $406
million. We revised that estimate to approximately $454 million at the end of 2006. In part because of current
economic considerations, in 2007, we reassessed the timing of implementation of certain projects, including the
consolidation of warehouses and distribution centers in both North America and Europe and the consolidation and
outsourcing of our International call centers, and we delayed those actions. Accordingly, we currently estimate
recognizing charges of $62 million and $23 million in 2008 and 2009, respectively, bringing the program total to
approximately $470 million. The expenses associated with these future activities will be recognized as the individual
plans are implemented and the related accounting recognition criteria are met. As with any estimate, the timing and
amounts of these charges may change when projects are implemented, and changes in foreign currency exchange
rates may impact amounts reported in U.S. dollars related to our foreign activities.
A summary of the Charges and the line item presentation of these amounts in our accompanying Consolidated
Statements of Earnings is as follows.
(Dollars in millions, except per share amounts)
2007
Amounts
2006
Amounts
2005
Amounts
Cost of goods sold and occupancy costs ...................................................... $ — $ 1 $ 20
Store and warehouse operating and selling expenses................................... 25 37 109
Asset impairments........................................................................................ — 7 133
General and administrative expenses ........................................................... 15 18 20
Total pre-tax Charges ............................................................................... 40 63 282
Income tax effect.......................................................................................... (11) (21) (97)
After-tax impact........................................................................................ $ 29 $ 42 $ 185
Per share impact ........................................................................................... $ 0.11 $ 0.15 $ 0.59
Of the $282 million pre-tax charge recognized in 2005, approximately $133 million related to asset impairments,
with approximately $72 million of exit costs and approximately $77 million of costs associated with termination
agreements relating to contracts and surplus leases, accelerated amortization of software and depreciation of assets
based on changes in estimated useful lives and the write off of certain property and inventory no longer used or
useful based on this business review.
The asset impairment charge of $133 million included $83 million related to certain former Kids “R” Us (“KRU”)
retail store locations acquired in 2004 from Toys “R” Us, Inc. The performance of many of these locations did not
meet initial projections to recover the initial asset base. We also recognized a $41 million in goodwill and other
intangible asset charge related to our Tech Depot subsidiary. A change in market conditions for technology products
and a shift in that subsidiary’s emphasis from consumer to business customers resulted in lowering our projected
cash flows and goodwill was written down to estimated fair value. Also, as part of this business review and to
streamline operations, we decided to migrate customers from the Guilbert trade name to Office Depot. The existing
trade name intangible asset was tested for impairment and written down by approximately $9 million to the amount
that we estimated to be recoverable over the one-year migration plan.
In addition to these significant asset impairment charges, we also recognized significant charges related to exit and
other activities. The total exit and other charges recorded in 2005 and anticipated for future periods will be discussed
below, as well as where the Charges appear in the Consolidated Statement of Earnings.
We decided to close 25 retail stores (16 in North America and nine internationally), three warehouses (two in North
America and one internationally) and consolidate certain international call center and contract operations.
Accordingly, we recognized approximately $72 million of charges for future lease obligations, severance-related
costs, accelerated depreciation, asset write offs and inventory clearance and disposal. Of this total, approximately $8
million of inventory-related costs were recognized in cost of goods sold, approximately $61 million in store and
warehouse operating and selling expenses and approximately $3 million in general and administrative expenses.