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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

For the transition period from ____________ to _____________

Commission file number    1-10948   

OFFICE DEPOT, INC.
(Exact name of registrant as specified in its charter)

(561) 438-4800
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes x No o

The registrant had 313,140,476 shares of common stock outstanding as of October 20, 2003.

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PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

OFFICE DEPOT, INC.

The accompanying notes are an integral part of these statements.

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OFFICE DEPOT, INC.

The accompanying notes are an integral part of these statements.

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OFFICE DEPOT, INC.

The accompanying notes are an integral part of these statements.

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OFFICE DEPOT, INC.

Note A – Basis of Presentation

Office Depot, Inc., including consolidated subsidiaries (the “Company”), is a global supplier of office products and services. Fiscal years are based on a 52- or 53-week period ending on the last Saturday in December. The condensed consolidated balance sheet at December 28, 2002 has been derived from audited financial statements at that date. The condensed interim financial statements as of September 27, 2003 and for the 13- and 39-week periods ending September 27, 2003 (also referred to as “the third quarter of 2003” and “year-to-date 2003”) and September 28, 2002 (also referred to as “the third quarter of 2002” and “year-to-date 2002”) are unaudited. However, in our opinion, these financial statements reflect all adjustments (consisting only of normal, recurring items) necessary to provide a fair presentation of our financial position, results of operations and cash flows for the periods presented. Certain prior year amounts have been reclassified to conform to the current year’s presentation.

These interim results are not necessarily indicative of the results that should be expected for the full year. For a better understanding of the Company and its financial statements, we recommend reading these condensed interim financial statements in conjunction with the Company’s audited financial statements for the year ended December 28, 2002, which are included in our 2002 Annual Report on Form 10-K, filed on March 13, 2003.

Note B – Cumulative Effect of Accounting Change

At the beginning of our 2003 fiscal year, we adopted Emerging Issues Task Force (“EITF”) Issue No. 02-16, Accounting by a Reseller for Cash Consideration Received from a Vendor. This guidance primarily affects our accounting for cooperative advertising arrangements. Previously, these arrangements were accounted for as a reduction of advertising expense. After adoption, amounts received from vendors under these arrangements are considered a reduction of product cost, reducing both inventory values and cost of goods sold. This treatment is similar to our accounting for vendor rebate arrangements. The amounts deferred for both arrangements are reviewed quarterly. Changes in the deferral rates and changes in inventory balances may impact quarterly or annual earnings.

To record the initial amount of cooperative advertising deferred in inventory at the beginning of the year, we recorded an after-tax cumulative effect adjustment of $25.9 million, or $0.08 per share. Prior periods have not been restated. Excluding the charge to record the cumulative effect of adoption, the impacts of applying this method in 2003, and the estimated pro forma impacts for 2002 are summarized as follows:

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(in millions, except per share amounts)
Increase (decrease)

Note C – Accounting for Stock-Based Compensation

The Company accounts for its stock-based compensation plans under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees. The pro forma information below is based on provisions of Statement of Financial Accounting Standard (“FAS”) No. 123, Accounting for Stock-Based Compensation, as amended by FAS 148, Accounting for Stock-Based Compensation – Transition and Disclosure, issued in December 2002.

(In thousands, except per share amounts)

Note D – Acquisition

On June 2, 2003, the Company acquired all of the common shares of Guilbert S.A. (“Guilbert”) from Pinault-Printemps-Redoute S.A. Guilbert is the French parent company of a corporate group that constitutes one of the largest contract stationers in Europe. The results of Guilbert’s operations have been included in the consolidated financial statements since the date of acquisition.

The cash purchase price of euro 788.0 million was paid in two installments; euro 523.0 million was paid on June 2, 2003 and the additional euro 265.0 million was paid on June 30, 2003. Subsequent to the June 30 payment, the Company received a refund of approximately euro 8.0 million as a result of a working capital adjustment. The U.S. dollar value of the acquisition, net of the working capital adjustment and including transaction costs, totaled $942.3 million, based on the euro to U.S. dollar exchange rate on the purchase date. The price is subject to an upward

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adjustment of euro 40 million in cash or the Company’s common stock if the price per share of Office Depot common stock closes at or above $20 per share for any five consecutive trading days during the 18-month period following June 2, 2003. This contingent consideration was not included in the cost initially allocated to assets and liabilities acquired because of the uncertainty of payment; but if paid, it would increase the amount of goodwill recorded. Additionally, the seller is required to pay the value of any unfunded pension liability as determined by a future independent valuation. The current estimated unfunded pension liability has been recorded as part of the fair value assigned to liabilities assumed, with a corresponding receivable recorded as due from the seller. This unfunded value and the related receivable from the seller have been classified in long-term liabilities and other assets, respectively, in the accompanying condensed consolidated balance sheet and will change with future plan valuations until settled.

The Company is in the process of assessing and formulating a plan of integration for the operations of Guilbert. The integration plan, once completed, will likely include the cost of exiting certain activities or operations and terminating or relocating certain personnel. Those costs associated with Guilbert operations or personnel will be recorded as an adjustment to the value of goodwill in the period in which the Company finalizes and commits to the integration plan. No estimate of integration-related activity has been included in the initial purchase price allocation. Exit costs associated with Office Depot operations or personnel will be charged to operations as incurred in accordance with FAS 146, Accounting for Costs Associated with Exit or Disposal Activities.

All assets and liabilities of Guilbert, including goodwill of $589.2 million and intangibles assets of $181.5 million, have been allocated to the International Division. Intangible assets include $117.1 million for tradenames, currently estimated to have indefinite lives. The remaining $64.4 million has been assigned to customer-related intangibles that will be amortized on an accelerated basis over five years. The valuation of tradenames and other intangible assets, along with the related estimated lives, is in the preliminary stage and may change, possibly significantly. Intangible and other assets are included in other assets in Office Depot’s condensed consolidated balance sheet.

Unaudited pro forma information giving effect to the acquisition of Guilbert as if it had been acquired at the beginning of 2002 is shown below. This information relates to the acquired contract business of Guilbert. Based on our review, Guilbert’s results of operations have been modified from amounts originally prepared under French accounting principles to conform to accounting principles generally accepted in the United States of America. One such adjustment is the recognition in the first half of 2002 of a cumulative effect of an accounting change in the amount of $20.9 million, or $0.07 per diluted share, for the assumed adoption of FAS 142, Goodwill and Other Intangible Assets.

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Pro forma information
(In thousands, except per share amounts)

Note E – Discontinued Operations

The Company completed the sale of its Australian operations in January 2003, recognizing an after-tax gain of $1.2 million. The results for Australia, including the gain on sale in 2003, are reported as a discontinued operation. Accordingly, the accompanying Condensed Consolidated Statements of Earnings for the third quarter and year-to-date 2002 were restated to reflect such classification. Additionally, Australia’s assets and liabilities were classified as held for sale and are included in prepaid expenses and other current assets and in accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheet as of December 28, 2002.

Australia’s revenues were $20.6 million and $61.4 million for the third quarter of 2002 and year-to-date 2002, with pretax income of $1.5 million and $1.7 million, respectively. Diluted net earnings per share from discontinued operations were $0.01 in both periods.

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Note F – Comprehensive Income

Comprehensive income represents all non-owner changes in stockholders’ equity and consists of the following:

(In thousands)

Note G – Long-Term Debt

In August 2003, the Company completed an offering of $400 million senior notes due August 2013 (the “Notes”). The Notes are not callable and bear interest at the rate of 6.250% per year, to be paid on February 15 and August 15 of each year. The Notes contain provisions that, in certain circumstances, place financial restrictions or limitations on the Company. Simultaneous with completing the offering, the Company liquidated a treasury rate lock, the proceeds of which have been recorded in “accumulated other comprehensive income” on the accompanying Condensed Consolidated Balance Sheet as of September 27, 2003. The proceeds on the treasury rate lock will be amortized over the term of the notes, reducing the effective interest rate to the Company on the Notes to 5.870%.

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Note H – Earnings Per Share (“EPS”)

The information required to compute basic and diluted EPS is as follows:

(In thousands, except share amounts)

Options to purchase approximately 16.3 million shares of common stock were not included in our computation of diluted earnings per share for the third quarter of 2003 because their weighted average effect would have been anti-dilutive.

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Note I – Segment Information

The following is a summary of our significant accounts and balances by segment, reconciled to consolidated totals:

(In thousands)

A reconciliation of the measure of segment operating profit to consolidated earnings from continuing operations before income taxes and cumulative effect of accounting change is as follows: