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May 4, 2022, 4:08 p.m. EDT

10-Q: ODP CORP

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(EDGAR Online via COMTEX) -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

This document, including the following discussion and analysis, contains statements that constitute "forward-looking statements" within the meaning of

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide information to assist readers in better understanding and evaluating our financial condition and results of operations. We recommend reading this MD&A in conjunction with our Condensed Consolidated Financial Statements and the Notes to those statements included in the "Financial Statements" section of this Quarterly Report on Form 10-Q, as well as our 2021 Form 10-K.

OVERVIEW

THE COMPANY

We are a leading provider of business services and supplies, products and digital workplace technology solutions to small, medium-sized and enterprise businesses. We operate through our direct and indirect subsidiaries and maintain a fully integrated business-to-business ("B2B") distribution platform of thousands of dedicated sales and technology service professionals, online presence and 1,032 retail stores. Through our banner brands Office Depot(R), OfficeMax(R) and Grand & Toy(R), as well as others, we offer our customers the tools and resources they need to focus on starting, growing and running their business.

As of March 26, 2022, our operations are organized into two reportable segments (or "Divisions"): Business Solutions Division and Retail Division. We sold our CompuCom Division through a single disposal group on December 31, 2021. Accordingly, that business is presented as discontinued operations.

The Business Solutions Division, or BSD, is the largest component of our integrated B2B distribution platform in terms of both revenue and customers, and provides our customers with nationally branded as well as our private branded office supply products and services. Additionally, BSD provides adjacency products and services including cleaning and breakroom supplies, personal protective equipment, technology services, copy and print services, and office furniture products and services in the United States, Puerto Rico, the U.S. Virgin Islands, and Canada through a dedicated sales force, catalogs, telesales, and electronically through our Internet websites. BSD includes the regional office supply distribution businesses we have acquired as part of our strategic transformation described in the section below.

The Retail Division includes our chain of retail stores in the United States, Puerto Rico and the U.S. Virgin Islands where we sell office supplies, technology products and solutions, business machines and related supplies, print, cleaning, breakroom supplies and facilities products, and furniture. In addition, our Retail Division offers a range of business-related services targeted to small businesses, technology support services as well as printing, copying, mailing and shipping services.

STRATEGIC TRANSFORMATION

We have been undergoing a strategic business transformation to pivot our Company into an integrated B2B distribution platform, with the objective of expanding our product offerings to include value-added services for our customers and capture greater market share. Using the flexibility afforded by our holding company restructuring that was previously completed, we are in the process of separating many of the operational components of our business in order to improve the alignment of the assets that support our B2B and consumer businesses.

In May 2021, our Board of Directors had unanimously approved a plan to pursue a separation of the Company into two independent, publicly traded companies, representing our B2B and consumer businesses, which was planned to be achieved through a spin-off of our consumer business. On January 14, 2022, we announced that our Board of Directors determined to delay the previously announced public company separation to evaluate a potential sale of our consumer business and that we had received a non-binding proposal from another third party, in addition to that previously received from USR Parent, Inc., to acquire our consumer business. Our Board of Directors is carefully reviewing both proposals with the assistance of its financial and legal advisors to determine the course of action that it believes is in the best interests of the Company and its shareholders. While we have previously been focusing on completing the public company separation during the first half of 2022, we have determined to delay further work on the spin-off while we focus on a potential sale of our consumer business. There can be no assurance that a sale of the consumer business will take place and the terms of any such sale.

As part of our transformation, we are evolving our B2B business and developing our new digital platform technology business, Varis. We aim to transform the B2B procurement and sourcing industry by filling the growing demand for a modern, trusted, digital B2B platform. In connection with our development efforts in this area, we had acquired BuyerQuest Holdings, Inc. in 2021, a business services software company with an eProcurement platform. BuyerQuest's operating results are included in our Varis Division. We continue to invest in the capabilities of our Varis Division and its platform, and grow our customer and supplier relationships, in order to position us to drive future value in the large and growing business commerce market.

Our strategy continues to include expanding our reach and distribution network through acquisitions of profitable regional office supply distribution businesses, serving small and mid-market customers. Many of these customers are in geographic areas that were previously underserved by our network. These acquisitions have allowed for an effective and accretive means to expand our distribution reach, target new business customers and grow our offerings beyond traditional office supplies. During the first quarter of 2022, we did not have any acquisitions. In addition, we continue to invest in our supply chain, distribution, procurement and global sourcing operations supporting our businesses, as well as the logistics needs for other third parties.

Finally, we sold our CompuCom Division on December 31, 2021, which allows us to enhance our focus on our core capabilities and strategies discussed above. Refer to the "Dispositions" section below for more information on this sale.

DISPOSITIONS

The sale of CompuCom, which represented our former CompuCom Division, was completed on December 31, 2021. The transaction was structured and accounted for as an equity sale. The related Securities Purchase Agreement ("SPA") provides for consideration consisting of a cash purchase price equal to $125 million (subject to customary adjustments, including for cash, debt and working capital), an interest-bearing promissory note in the amount of $55 million, and a holding fee ("earn-out") provision providing for payments of up to $125 million in certain circumstances. The promissory note accrues interest at six percent per annum, payable on a quarterly basis in cash or in-kind, and is due in full on June 30, 2027. Under the earn-out provision, if the purchaser receives dividends or sale proceeds from the CompuCom business equal to (i) three (3) times its initial capital investment in the CompuCom business plus

The sale of CompuCom represented a strategic shift that will have a major impact on our operations and financial results. Accordingly, the operating results and cash flows are classified as discontinued operations for all periods presented. Refer to Note 12. "Discontinued Operations" in Notes to Condensed Consolidated Financial Statements for additional information.

COVID-19 UPDATE

For a discussion of the impacts to our business from COVID-19, refer to "COVID-19 Update" included in Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations, certain risk factors included in Item 1A Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 25, 2021 and the information presented below within Operating Results by Division.

RECENT GLOBAL EVENTS

We are closely monitoring the unfolding events due to the Russia-Ukraine conflict and its regional and global ramifications. We do not have operations in Ukraine or Russia, and our supply chain has not been impacted. While we do have certain vendors that are based in Ukraine, we have not experienced an impact as a result of the conflict. Other impacts due to this rapidly evolving situation are currently unknown and the broader economic impacts could potentially subject our business to materially adverse consequences should the situation escalate beyond its current scope.

CONSOLIDATED RESULTS OF CONTINUING OPERATIONS AND LIQUIDITY

The following summarizes the more significant factors impacting our operating results for the 13-week period ended March 26, 2022 (also referred to as the "first quarter of 2022") and March 27, 2021 (also referred to as the "first quarter of 2021").

Our consolidated sales were flat in the first quarter of 2022 compared to the same period of the prior year. Sales in our Business Solutions Division increased $104 million, or 9%. This increase was driven by higher sales of $129 million to our business-to-business customers, which was partially offset by lower sales in our eCommerce platform. The increase in sales in our Business Solutions Division were mainly in product categories of cleaning, personal protective equipment, breakroom, office supplies, and furniture. Sales in our Retail Division decreased $96 million, or 9%, mainly as a result of planned store closures. Our Retail Division also had lower demand in certain product categories that had higher sales in the prior year comparable quarter driven by the needs of our customers to help address their challenges derived from the COVID-19 pandemic, such as facilitating the continued remote work and virtual learning environments.







        Sales                                  First Quarter
        (In millions)                  2022        2021        Change
        Business Solutions Division   $ 1,231     $ 1,127            9 %
        Retail Division                   943       1,039           (9 )%
        Other                               4           8          (50 )%
        Total                         $ 2,178     $ 2,174            0 %
        


OTHER SIGNIFICANT FACTORS IMPACTING TOTAL COMPANY RESULTS AND LIQUIDITY

Total gross profit decreased by $11 million or 2% in the first quarter of 2022 when compared to the same period in 2021. Our Business Solutions Division had $14 million higher gross profit resulting from higher sales, which was more than offset by $24 million decrease in gross profit of our Retail Division. The decrease in the Retail Division gross profit is due to the flow through impact of lower sales, partially offset by lower operating lease costs due to store closures and improved product margin.

Total gross margin for the first quarter of 2022 was 22%, which was consistent with the gross margins in the comparative prior year period. While we incurred incremental costs related to trade tariffs on inventory we purchase from suppliers in China, certain actions, including changes to our contracting model, alternative sourcing strategies, and selective price increase pass-through efforts mitigated much of the impact of such trade tariffs to our results of operations.

Total selling, general and administrative expenses decreased by $5 million in the first quarter of 2022 when compared to the same period in 2021. The decrease was primarily due to a reduction in payroll and incentives and cost saving initiatives described below. Selling, general and administrative expenses as a percentage of total sales was flat in the first quarter of 2022 as compared to the prior period.

We recorded $2 million of asset impairment charges in the first quarter of 2022 primarily related to the impairment of operating lease ROU assets associated with our retail store locations. Refer to Note 10. "Fair Value Measurements" in Notes to Condensed Consolidated Financial Statements for additional information.

We recorded $10 million of merger, restructuring and other operating expenses, net in the first quarter of 2022. Merger, restructuring and other operating expenses in the first quarter of 2022 included $9 million of third-party professional fees associated with the planned separation of our consumer business, and $1 million of expenses associated with restructuring activities in the first quarter of 2022. We did not record any transaction and integration costs in the first quarter of 2022. Refer to Note 2. "Merger, Restructuring and Other Activity" in Notes to Condensed Consolidated Financial Statements for additional information.

In the first quarter of 2022, we recognized a tax benefit associated with stock-based compensation awards. This along with the impact of state taxes and the mix of income and losses across U.S. and non-U.S. jurisdictions, caused our effective tax rate of 26% to differ from the statutory rate of 21%. Our effective tax rate in the prior period was primarily impacted by the recognition of a large tax benefit associated with stock-based compensation awards and recognition of tax benefits due to an agreement reached with the IRS, state taxes, and the mix of income and losses across U.S. and non-U.S. jurisdictions. Refer to Note 5. "Income Taxes" in Notes to Condensed Consolidated Financial Statements for additional information.

Diluted earnings per share from continuing operations was $1.09 in the first quarter of 2022 compared to $1.12 in the first quarter of 2021.

There was no diluted earnings per share from discontinued operations in the first quarter of 2022 compared to diluted loss per share of $(0.17) in the first quarter of 2021.

Net diluted earnings per share was $1.09 in the first quarter of 2022 compared to $0.95 in the first quarter of 2021.

Our Board of Directors reviewed the existing capital allocation programs in connection with the sale of CompuCom, and on December 31, 2021, authorized an additional $200 million for share repurchases under the existing stock repurchase program, for a total authorization of $650 million. On November 16, 2021, the Company entered into an accelerated share repurchase agreement ("ASR") to repurchase shares of the Company's common stock in exchange for an up-front payment $150 million. The repurchase period runs through June 9, 2022. The Company did not purchase any shares of its common stock in the first quarter of 2022. As of March 26, 2022, $342 million remains available for additional repurchases under the current stock repurchase program.

In May 2020, in order to preserve liquidity during the COVID-19 pandemic and in light of the uncertainties as to its duration and economic impact, our Board of Directors suspended our quarterly cash dividend. There was no quarterly cash dividend declared and paid in the first quarter of 2022. Our quarterly cash dividend continues to be suspended.

At March 26, 2022, we had $557 million in cash and cash equivalents and $874 million of available credit under the Third Amended Credit Agreement, for a total liquidity of approximately $1.4 billion. Cash provided by operating activities of continuing operations was $30 million for the first quarter of 2022 compared to $103 million in the comparable prior year period. Refer to the "Liquidity and Capital Resources" section for further information on cash flows.

OPERATING RESULTS BY DIVISION

Discussion of additional income and expense items, including material charges and credits and changes in interest and income taxes follows our review of segment results.







        BUSINESS SOLUTIONS DIVISION
                                       First Quarter
        (In millions)                2022        2021
        Sales                       $ 1,231     $ 1,127
        % change                          9 %       (16 )%
        Division operating income   $    33     $    17
        % of sales                        3 %         2 %
        


Sales in our Business Solutions Division increased 9% in the first quarter of 2022 compared to the corresponding quarter in 2021. During the first quarter of 2022, our Business Solutions Division experienced higher demand across the majority of our product categories which was driven by the continued recovery of our business-to-business customers, including those in the education sector, from the disruptions to their operations as a result of the impacts of the COVID-19 pandemic. The increase in demand resulted in $125 million higher sales across a majority of our offerings, including paper, toner, furniture, breakroom, school and office supplies, copy and print services, as well as personal protective equipment and cleaning supplies, which contributed $54 million to this increase. The higher demand from our business-to-business customers, was partially offset by $21 million lower sales in our eCommerce platform, as compared to 2021. The impact of acquisitions, while positive, was not material to the first quarter of 2022.

Our sales could be impacted in the near term related to numerous factors, among others, a weaker U.S. economy and higher unemployment and inflation that materially impact consumer spending, the demand for our products and services and the availability of supply. Specifically, we experienced supply constraints in some of our larger product categories such as ink and technology products, and we may continue to face delays or difficulty sourcing these products.

The impacts of the COVID-19 outbreak in 2022 and the magnitude by which sales of our Business Solutions Division will be affected will depend heavily on the duration of the pandemic through new variants, impact and speed of vaccination distributions, as well as the substance and pace of macroeconomic recovery. However, as discussed above, the impact has been material to the results of the Business Solutions Division in the first quarter of 2022 and could continue into the second quarter of 2022 and beyond. In addition, changes in work environments, such as a prolonged or permanent shift to hybrid or continued remote work arrangements could also have a material impact to the future results of the Business Solutions Division.

Our Business Solutions Division operating income was $33 million in the first quarter of 2022 compared to $17 million in the first quarter of 2021, an increase of 94%. As a percentage of sales, operating income increased approximately 120 basis points. Although we experienced increases in third-party transportation costs due to the impacts of COVID-19, which reduced our gross margin by approximately 10 basis points, this was more than offset by lower selling, general and administrative expenses as a percentage of our sales. The improvement in our selling, general and administrative expenses is attributable to cost saving initiatives of our Maximize B2B restructuring program, which reduced costs in payroll, advertising and other operating expenses.







        RETAIL DIVISION
                                      First Quarter
        (In millions)               2022        2021
        Sales                       $ 943      $ 1,039
        % change                       (9 )%       (10 )%
        Division operating income   $  89      $   100
        % of sales                      9 %         10 %
        


Sales in our Retail Division decreased 9% in the first quarter of 2022 compared to the corresponding period in 2021. As vaccination rates have increased since early in 2021 and the effects of the COVID-19 pandemic have begun to recede, more of our customers are transitioning into on-site work and in-person learning. As a result of this recovery, we experienced $7 million of increased sales in copy and print services. This was more than offset by fewer transactions in product categories such as technology products, furniture, office supplies, cleaning supplies and personal protective equipment, which were primarily impacted by planned store closures. In addition, these categories had experienced higher demand in the prior year, which was driven by the needs of our customers to help address their challenges derived from the COVID-19 pandemic, and included facilitating the continued remote work and virtual learning environments. Our sales could be impacted in the near term related to numerous factors, among others, a weaker U.S. economy and higher unemployment that materially impact consumer spending, the demand for our products and services and the availability of supply. Specifically, we experienced supply constraints in some of our larger product categories such as ink and technology products, and we may continue to face delays or difficulty sourcing these products.

Buy online pick up in store ("BOPIS") transactions are included in our Retail Division results because they are fulfilled with retail store inventory and serviced by our retail store associates. Our BOPIS sales were $86 million in the first quarter of 2022 as compared to $89 million in the first quarter of 2021. We had a significant increase in BOPIS sales in the first quarter of 2021 due to an increase in online orders from the impact of the pandemic in the prior year.

Our business is considered to be essential by most local jurisdictions, and as a result, the substantial majority of our retail locations have remained open and operational with the appropriate safety measures in place during the COVID-19 pandemic, including a curbside pickup option. Since late in the first quarter of 2020, we have reduced our retail location hours by one to two hours daily, which continues to be in effect at the majority of our retail locations. We believe sales in our Retail Division may continue to be adversely impacted in the first quarter of 2022 and potentially longer. As there is uncertainty in the extent and duration of the impacts of the pandemic, we are unable to estimate the full impact at this time.

We have historically reported our comparable store sales, which relate to stores that have been open for at least one year. Stores are removed from the comparable sales calculation one month prior to closing, as sales during that period are mostly related to clearance activity. Stores are also removed from the comparable sales calculation during periods of store remodeling, store closures due to hurricanes, natural disasters or epidemics/pandemics, or if significantly downsized. Our measure of comparable store sales has been applied consistently across periods, but may differ from measures used by other companies. Due to the reduction in our retail location hours due to COVID-19 during late in the first quarter of 2020, and the variability in COVID-19 related restrictions imposed by state and local governments such as occupancy levels and business regulations that can affect demand for our in-store products and services, comparable store sales is not a meaningful metric for the first quarter of 2022, and therefore is not provided.

The Retail Division operating income was $89 million in the first quarter of 2022 compared to $100 million in in the first quarter of 2021, a decrease of 11% year-over-year. As a percentage of sales, operating income reduced by 1%. The comparative decrease in operating income in the first quarter of 2022 was mostly attributable to the flow-through impact of lower sales as compared to the first quarter of 2021, which more than offset lower selling, general and administrative expenses resulting from continuous efforts to optimize costs, lower operating lease costs recognized as a result of store closures, and improved product margin.

As of March 26, 2022, the Retail Division operated 1,032 retail stores in the United States, Puerto Rico and the U.S. Virgin Islands compared to 1,146 stores at the end of the first quarter of 2021. Charges associated with store closures as part of a restructuring plan are reported as appropriate in Asset impairments and Merger, restructuring and other operating expenses, net in the Condensed Consolidated Statements of Operations. In addition, as part of our periodic recoverability assessment of owned retail stores and distribution center assets, and operating lease ROU assets, we recognize impairment charges in the Asset impairments line item of our Condensed Consolidated Statements of Operations. These charges are reflected in Corporate reporting and are not included in the determination of Division operating income. Refer to the "Corporate" section below for additional information of expenses incurred to date.

OTHER

. . .

May 04, 2022

COMTEX_406699243/2041/2022-05-04T16:07:38

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