NOTE 14. EMPLOYEE BENEFIT PLANS

Pension and Other Postretirement Benefit Plans

Pension and Other Postretirement Benefit Plans — North America

The Company has retirement obligations under OfficeMax’s U.S. pension plans (the “U.S. Plans”). The Company sponsors these noncontributory defined benefit pension plans covering certain terminated employees, terminated vested employees, retirees and some active employees, primarily in the North American Business Solutions Division. In 2004 or earlier, OfficeMax’s qualified pension plans were closed to new entrants and the benefits of eligible participants were frozen. Under the terms of these qualified plans, the pension benefit for employees was based primarily on the employees’ years of service and benefit plan formulas that varied by plan. The Company’s general funding policy is to make contributions to the plans in amounts that are within the limits of deductibility under current tax regulations, and not less than the minimum contribution required by law.

Additionally, under previous OfficeMax arrangements, the Company has responsibility for sponsoring retiree medical benefit and life insurance plans including plans related to operations in Canada (referred to as “Other Benefits” in the tables below). The type of retiree benefits and the extent of coverage vary based on employee classification, date of retirement, location, and other factors. All of these postretirement medical plans are unfunded. The Company explicitly reserves the right to amend or terminate its retiree medical and life insurance plans at any time, subject only to constraints, if any, imposed by the terms of collective bargaining agreements. Amendment or termination may significantly affect the amount of expense incurred.

The impact of these assumed plans is included in the consolidated financial statements from the date of the Merger with OfficeMax.

Obligations and Funded Status

The following table provides a reconciliation of changes in the projected benefit obligation and the fair value of plan assets, as well as the funded status of the plan to amounts recognized on the Company’s Consolidated Balance Sheet. The 2013 amounts relate to the period between the Merger date and year-end.


	Pension Benefits						Other Benefits
(In millions)	2014			2013			2014			2013
Changes in projected benefit obligation:
Obligation at beginning of period	$	1,122		$	1,135		$	17		$	17
Service cost		3			—			—			—
Interest cost		52			7			1			—
Actuarial (gain) loss		138			(12	)		1			—
Currency exchange rate change		—			—			(1	)		—
Benefits paid		(97	)		(8	)		(1	)		—

Obligation at end of period	$	1,218		$	1,122		$	17		$	17

Change in plan assets:
Fair value of plan assets at beginning of period	$	986		$	972		$	—		$	—
Actual return on plan assets		107			22			—			—
Employer contribution		43			—			1			—
Benefits paid		(97	)		(8	)		(1	)		—

Fair value of plan assets at end of period		1,039			986			—			—

Net liability recognized at end of period	$	(179	)	$	(136	)	$	(17	)	$	(17	)

The following table shows the amounts recognized in the Consolidated Balance Sheets related to the Company’s North America defined benefit pension and other postretirement benefit plans as of year-ends:


	Pension Benefits						Other Benefits
(In millions)	2014			2013			2014			2013
Noncurrent assets	$	—		$	10		$	—		$	—
Current liabilities		(3	)		(3	)		(1	)		(1	)
Noncurrent liabilities		(176	)		(143	)		(16	)		(16	)

Net amount recognized	$	(179	)	$	(136	)	$	(17	)	$	(17	)

Amounts recognized in accumulated other comprehensive loss (income) consist of:


	Pension Benefits					Other Benefits
(In millions)	2014		2013			2014		2013
Net loss (gain)	$	67	$	(26	)	$	1	$	—
Prior service cost (credit)		—		—			—		—

Total	$	67	$	(26	)	$	1	$	—

Information for pension plans with benefit obligations and accumulated benefit obligations in excess of plan assets is as follows:


	Pension Benefits
(In millions)	2014			2013
Projected benefit obligation	$	(1,218	)	$	(785	)
Accumulated benefit obligation		(1,218	)		(785	)
Fair value of plan assets	$	1,039		$	639

Components of Net Periodic Cost (Benefit)

The components of net periodic cost (benefit) are as follows:


	Pension Benefits						Other Benefits
(In millions)	2014			2013			2014		2013
Service cost	$	3		$	—		$	—	$	—
Interest cost		52			7			1		—
Expected return on plan assets		(62	)	$	(8	)		—		—

Net periodic cost (benefit)	$	(7	)	$	(1	)	$	1	$	—

Other changes in plan assets and benefit obligations recognized in other comprehensive loss (income) are as follows:


	Pension Benefits						Other Benefits
(In millions)	2014			2013			2014		2013
Accumulated other comprehensive loss (income) at beginning of year	$	(26	)	$	—		$	—	$	—
Net loss (gain)		93			(26	)		1		—

Accumulated other comprehensive loss (income) at end of year	$	67		$	(26	)	$	1	$	—

No accumulated other comprehensive loss is expected to be recognized as components of net periodic cost during 2015.

Assumptions

The assumptions used in accounting for the Company’s plans are estimates of factors including, among other things, the amount and timing of future benefit payments. The following table presents the key weighted average assumptions used in the measurement of the Company’s benefit obligations as of year-ends:

Other Benefits

Pension Benefits

United States

Canada

2014

2013

2014

2013

2014

2013

Discount rate

3.91%

4.84%

3.40%

4.00%

4.80%

The following table presents the weighted average assumptions used in the measurement of net periodic benefit:


					Other Benefits
	Pension Benefits				United States				Canada
	2014		2013		2014		2013		2014		2013
Discount rate		4.84%		4.76%		4.00%		3.80%		4.80%		4.60%
Expected long-term rate of return on plan assets		6.50%		6.60%		—%		—%		—%		—%

For pension benefits, the selected discount rate (which is required to be the rate at which the projected benefit obligation could be effectively settled as of the measurement date) is based on the rates of return for a theoretical portfolio of high-grade corporate bonds (rated AA or better) with cash flows that generally match expected benefit payments in future years. In selecting bonds for this theoretical portfolio, the Company focuses on bonds that match cash flows to benefit payments and limit the concentration of bonds by issuer. To the extent scheduled bond proceeds exceed the estimated benefit payments in a given period, the yield calculation assumes those excess proceeds are reinvested at an assumed forward rate. The implied forward rate used in the bond model is based on the Citigroup Pension Discount Curve as of the last day of the year. The selected discount rate for other benefits is from a discount rate curve matched to the assumed payout of related obligations.

The expected long-term rate of return on plan assets assumption is based on the weighted average of expected returns for the major asset classes in which the plans’ assets are held. Asset-class expected returns are based on long-term historical returns, inflation expectations, forecasted gross domestic product and earnings growth, as well as other economic factors. The weights assigned to each asset class are based on the Company’s investment strategy. The weighted average expected return on plan assets used in the calculation of net periodic pension cost for 2015 is 5.85%.

Obligation and costs related to the Canadian retiree health plan are impacted by changes in trend rates.

The following table presents the assumed healthcare cost trend rates used in measuring the Company’s postretirement benefit obligations at year-ends:


	2014			2013
Weighted average assumptions as of year-end:
Healthcare cost trend rate assumed for next year		6.40	%		6.70	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)		4.50	%		4.50	%
Year that the rate reaches the ultimate trend rate		2022			2022

A 1% change in the assumed healthcare cost trend rates would impact operating income by less than $1 million.

The Company reassessed the mortality assumptions to measure the North American pension and other postretirement benefit plan obligations at year end 2014, adopting the most applicable mortality tables based on the tables released in 2014 by The Society of Actuaries’ Retirement Plan Experience Committee. As a result of this assumption change, pension and other postretirement benefit plan obligations increased by $36 million and $1 million, respectively.

Plan Assets

The allocation of pension plan assets by category at year-ends is as follows:


	2014		2013
Money market funds		2%		3%
Equity securities		8%		8%
Fixed-income securities		64%		53%
Equity mutual funds		25%		36%
Other		1%		—

		100%		100%

A retirement funds investment committee is responsible for establishing and overseeing the implementation of the investment policy for the Company’s pension plans. The investment policy is structured to optimize growth of the pension plan trust assets, while minimizing the risk of significant losses, in order to enable the plans to satisfy their benefit payment obligations over time. The Company uses benefit payments and Company contributions as its primary rebalancing mechanisms to maintain the asset class exposures within the guideline ranges established under the investment policy.

The current asset allocation guidelines set forth an U.S. equity range of 9% to 19%, an international equity range of 6% to 16%, a global equity range of 4% to 14% and a fixed-income range of 61% to 71%. Asset-class positions within the ranges are continually evaluated and adjusted based on expectations for future returns, the funded position of the plans and market risks. Occasionally, the Company may utilize futures or other financial instruments to alter the pension trust’s exposure to various asset classes in a lower-cost manner than trading securities in the underlying portfolios.

Generally, quoted market prices are used to value pension plan assets. Equities, some fixed-income securities, publicly traded investment funds, and U.S. government obligations are valued by reference to published market prices. Investments in certain restricted stocks are valued at the quoted market price of the issuer’s unrestricted common stock less an appropriate discount. If a quoted market price for unrestricted common stock of the issuer is not available, restricted common stocks are valued at a multiple of current earnings less an appropriate discount. The multiple chosen is consistent with multiples of similar companies based on current market prices.

The following table presents the pension plan assets by level within the fair value hierarchy at year-ends.


(In millions)			Fair Value Measurements at December 27, 2014
Asset Category	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market funds	$	18	$	—	$	18	$	—

Equity securities
U.S. large-cap		24		24		—		—
U.S. small and mid-cap		4		4		—		—
International		58		58		—		—

Total equity securities		86		86		—		—

Fixed-income securities
Corporate bonds		612		—		612		—
Government securities		19		—		19		—
Other fixed-income		39		—		39		—

Total fixed-income securities		670		—		670		—

Other
Equity mutual funds		255		—		255		—
Other, including plan receivables and payables		10		10		—		—

	$	1,039	$	96	$	943	$	—


(In millions)			Fair Value Measurements at December 28, 2013
Asset Category	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market funds	$	25	$	25	$	—	$	—

Equity securities
U.S. large-cap		18		18		—		—
U.S. small and mid-cap		4		4		—		—
International		56		56		—		—

Total equity securities		78		78		—		—

Fixed-income securities
Corporate bonds		459		—		459		—
Government securities		18		—		18		—
Other fixed-income		41		—		41		—

Total fixed-income securities		518		—		518		—

Other
Equity mutual funds		353		—		353		—
Other, including plan receivables and payables		12		12		—		—

	$	986	$	115	$	871	$	—

Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date.

Cash Flows

Pension plan contributions include required statutory minimum amounts and, in some years, additional discretionary amounts. In 2014, the Company contributed $43 million to these pension plans. Pension contributions for a full year of 2015 are estimated to be $9 million. The Company may elect at any time to make additional voluntary contributions.

Qualified pension benefit payments are paid from the assets held in the plan trust, while nonqualified pension and other benefit payments are paid by the Company. Anticipated benefit payments by year are as follows:


(In millions)	Pension Benefits		Other Benefits
2015	$	94	$	1
2016		91		1
2017		89		1
2018		87		1
2019		85		1
Next five years		393		4

Pension Plan — Europe

The Company has a defined benefit pension plan which is associated with a 2003 European acquisition and covers a limited number of employees in Europe. During 2008, curtailment of that plan was approved by the trustees and future service benefits ceased for the remaining employees.

The sale and purchase agreement (“SPA”) associated with the 2003 European acquisition included a provision whereby the seller was required to pay an amount to the Company if the acquired pension plan was determined to be underfunded based on 2008 plan data. The unfunded obligation amount calculated by the plan’s actuary based on that data was disputed by the seller. In accordance with the SPA, the parties entered into arbitration to resolve this matter and, in March 2011, the arbitrator found in favor of the Company. The seller pursued an annulment of the award in French court. In November 2011, the seller paid GBP 5.5 million ($8.8 million, measured at then-current exchange rates) to the Company to allow for future monthly payments to the pension plan, pending a court ruling on their cancellation request. That money was placed in an escrow account with the pension plan acting as trustee. On January 6, 2012, the Company and the seller entered into a settlement agreement that settled all claims by either party for this and any other matter under the original SPA. The seller paid an additional GBP 32 million (approximately $50 million, measured at then-current exchange rates) to the Company in February 2012. Following this cash receipt in February 2012, the Company contributed the GBP 38 million (approximately $58 million at then-current exchange rates) to the pension plan, resulting in the plan changing to a net asset position since December 29, 2012. There are no additional funding requirements while the plan is in a surplus position.

This pension provision of the SPA was disclosed in 2003 and subsequent periods as a matter that would reduce goodwill when the plan was remeasured and cash received. However, all goodwill associated with this transaction was impaired in 2008, and because the remeasurement process had not yet begun, no estimate of the potential payment to the Company could be made at that time. Consistent with disclosures subsequent to the 2008 goodwill impairment, resolution of this matter in the first quarter of 2012 was reflected as a credit to operating expense. The cash received from the seller, reversal of an accrued liability as a result of the settlement agreement, fees incurred in 2012, and fee reimbursement from the seller have been reported in Recovery of purchase price in the Consolidated Statement of Operations for 2012, totaling $68 million. An additional expense of $5 million of costs incurred in prior periods related to this arrangement is included in Merger, restructuring and other operating expenses, net, in the Consolidated Statement of Operations, resulting in a net increase in operating profit for 2012 of $63 million. Similar to the presentation of goodwill impairment in 2008, this recovery and related charge is reported at the corporate level, not part of International Division operating income.

The cash payment from the seller was received by a subsidiary of the Company with the Euro as its functional currency and the pension plan funding was made by a subsidiary with Pound Sterling as its functional currency, resulting in certain translation differences between amounts reflected in the Consolidated Statement of Operations and the Consolidated Statement of Cash Flows for 2012. The receipt of cash from the seller is presented as a source of cash in investing activities. The contribution of cash to the pension plan is presented as a use of cash in operating activities.

Obligations and Funded Status

The following table provides a reconciliation of changes in the projected benefit obligation, the fair value of plan assets and the funded status of the plan to amounts recognized on the Company’s Consolidated Balance Sheets.


(In millions)	December 28, 2014			December 29, 2013
Changes in projected benefit obligation:
Obligation at beginning of period	$	224		$	208
Service cost		—			—
Interest cost		10			9
Benefits paid		(6	)		(4	)
Actuarial loss		25			6
Currency translation		(14	)		5

Obligation at end of period		239			224

Changes in plan assets:
Fair value of plan assets at beginning of period		232			216
Actual return on plan assets		47			14
Benefits paid		(6	)		(4	)
Currency translation		(16	)		6

Fair value of plan assets at end of period		257			232

Net asset recognized at end of period	$	18		$	8

In the Consolidated Balance Sheets, the net funded amounts are classified as a non-current asset in the caption Other assets.

Components of Net Periodic Benefit

The components of net periodic benefit are presented below:


(In millions)	2014			2013			2012
Service cost	$	—		$	—		$	—
Interest cost		10			9			9
Expected return on plan assets		(14	)		(13	)		(11	)

Net periodic pension benefit	$	(4	)	$	(4	)	$	(2	)

Included in Accumulated other comprehensive income were deferred losses of $1 million and $8 million at December 27, 2014 and December 28, 2013, respectively. The deferred loss is not expected to be amortized into income during 2015.

Assumptions

Assumptions used in calculating the funded status included:


	2014		2013		2012
Expected long-term rate of return on plan assets		5.55%		6.33%		6.00%
Discount rate		3.80%		4.60%		4.40%
Inflation		3.10%		3.40%		3.00%

The long-term rate of return on assets assumption has been derived based on long-term UK government fixed income yields, having regard to the proportion of assets in each asset class. The funds invested in equities have been assumed to return 4.0% above the return on UK government securities of appropriate duration. Funds invested in corporate bonds are assumed to return equal to a 15 year AA bond index. Allowance is made for expenses of 0.5% of assets.

Plan Assets

The allocation of Plan assets is as follows:


	2014		2013
Cash		1%		1%
Equity securities		53%		54%
Fixed-income securities		46%		45%

Total		100%		100%

A committee, comprised of representatives of the Company and of this plan, is responsible for establishing and overseeing the implementation of the investment policy for this plan. The plan’s investment policy and strategy are to ensure assets are available to meet the obligations to the beneficiaries and to adjust plan contributions accordingly. The plan trustees are also committed to reducing the level of risk in the plan over the long term, while retaining a return above that of the growth of liabilities. The investment strategy is based on plan funding levels, which determine the asset target allocation into matching or growth investments. Matching investments are intended to provide a return similar to the increase in the plan liabilities. Growth investments are assets intended to provide a return in excess of the increase in liabilities. At December 27, 2014, the asset target allocation was in accordance with the investment strategy. Asset-class allocations within the ranges are continually evaluated and adjusted based on expectations for future returns, the funded position of the plan and market risks.

The following table presents the pension plan assets by level within the fair value hierarchy.


(In millions)			Fair Value Measurements at December 27, 2014
Asset Category	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash	$	1	$	1	$	—	$	—

Equity securities
Developed market equity funds		81		81		—		—
Emerging market equity funds		27		27		—		—
Mutual funds real estate		7		—		—		7
Mutual funds		17		—		17		—

Total equity securities		132		108		17		7

Fixed-income securities
UK debt funds		21		—		21		—
Liability term matching debt funds		80		—		80		—
Emerging market debt fund		9		—		9		—
High yield debt		14		—		14		—

Total fixed-income securities		124		—		124		—

Total	$	257	$	109	$	141	$	7


(In millions)			Fair Value Measurements at December 28, 2013
Asset Category	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash	$	1	$	1	$	—	$	—

Equity securities
Developed market equity funds		77		69		8		—
Emerging market equity funds		16		14		2		—
Mutual funds real estate		8		—		1		7
Mutual funds		22		—		22		—

Total equity securities		123		83		33		7

Fixed-income securities
UK debt funds		19		—		19		—
Liability term matching debt funds		73		—		73		—
Emerging market debt fund		9		—		9		—
High yield debt		7		—		7		—

Total fixed-income securities		108		—		108		—

Total	$	232	$	84	$	141	$	7

The following is a reconciliation of the change in fair value of the pension plan assets calculated based on Level 3 inputs; during 2014, there was no change in the fair value of the pension plan assets or transfers of assets valued based on Level 3 inputs.


(In millions)	Total
Balance at December 29, 2012	$	—
Purchases, sales, and settlements		7

Balance at December 28, 2013	$	7

Cash Flows

Anticipated benefit payments for the European pension plan, at December 27, 2014 exchange rates, are as follows:


(In millions)	Benefit Payments
2015	$	6
2016		6
2017		6
2018		6
2019		6
Next five years	$	34

Retirement Savings Plans

The Company also sponsors defined contribution plans for most of its employees. Eligible Company employees may participate in the Office Depot, Inc. Retirement Savings Plan. In connection with the Merger, certain employees still participate in one of two contributory defined contribution savings plans that OfficeMax had in place for most of its salaried and hourly employees: a plan for U.S. employees and a plan for Puerto Rico employees. All of the Company’s existing and assumed OfficeMax defined contribution plans (the “401(k) Plans”) allow eligible employees to contribute a percentage of their salary, commissions and bonuses in accordance with plan limitations and provisions of Section 401(k) of the Internal Revenue Code and the Company makes matching contributions to each plan subject to the limits of the respective 401(k) Plans. Matching contributions are invested in the same manner as the participants’ pre-tax contributions. The 401(k) Plans also allow for a discretionary matching contribution in addition to the normal match contributions if approved by the Board of Directors.

Office Depot and OfficeMax previously sponsored non-qualified deferred compensation plans that allowed certain employees, who were limited in the amount they could contribute to their respective 401(k) plans, to defer a portion of their earnings and receive a Company matching amount. Both plans are closed to new contributions.

During 2014, 2013, and 2012, $16 million, $9 million, and $7 million, respectively, were recorded as compensation expense for the Company’s contributions to these programs and certain international retirement savings plans. Additionally, nonparticipating annuity premiums were paid for benefits in certain European countries totaling $4 million, $4 million, and $5 million in 2014, 2013, and 2012, respectively.