NOTE 3. MERGER, RESTRUCTURING, AND OTHER ACCRUALS

In recent years, the Company has taken actions to adapt to changing and competitive conditions. These actions include closing facilities, consolidating functional activities, eliminating redundant positions, disposing of businesses and assets, and taking actions to improve process efficiencies. In 2013, the OfficeMax merger (the “Merger”) was completed and integration activities similar to the actions described above began. In mid-2014, the Company’s real estate strategy (the “Real Estate Strategy”) identified at least 400 retail stores for closure through 2016 along with planned changes to the supply chain. The Company assumed certain restructuring liabilities previously recorded by OfficeMax.

Merger, restructuring, and other operating expenses, net

The Company presents Merger, restructuring and other operating expenses, net on a separate line in the Condensed Consolidated Statements of Operations to identify these activities apart from the expenses incurred to sell to and service its customers. These expenses are not included in the determination of Division operating income. The table below and narrative that follows summarize the major components of Merger, restructuring and other operating expenses, net.


	Second Quarter				First Half
(In millions)	2015		2014		2015		2014
Merger related expenses
Severance, retention, and relocation	$	6	$	48	$	11	$	119
Transaction and integration		29		38		53		59
Other related expenses		29		6		15		10

Total Merger related expenses		64		92		79		188
International restructuring and certain other expenses
Severance, retention, and relocation		20		7		25		10
Integration		2		4		4		5
Other related expenses		—		—		6		1

Total International restructuring and certain other expenses		22		11		35		16

Staples Acquisition expenses		34		—		49		—

Total Merger, restructuring and other operating expenses, net	$	120	$	103	$	163	$	204

Severance, retention, and relocation reflect expenses incurred for the integration of staff functions. Since the second quarter of 2014, the Real Estate Strategy has been sufficiently developed to provide a basis for estimating termination benefits for certain retail and supply chain closures that are expected to extend through 2016. Such benefits are being accrued through the anticipated employee full eligibility date. Because the specific identity of retail locations to be closed is subject to change as implementation of the Real Estate Strategy progresses, estimates are used for the store closure severance accrual. The calculation considers factors such as the expected timing of store closures, terms of existing severance plans, expected employee turnover and attrition. As the integration progresses and additional decisions about the identity and timing of closures are made, more current information will be available and assumptions used in estimating the termination benefits accrual may change.

Transaction and integration expenses include integration-related professional fees, incremental temporary contract labor, salary and benefits for employees dedicated to the Merger activity, travel costs, non-capitalizable software integration costs, and other direct costs to combine the companies. Such costs are being recognized as incurred.

Other related expenses primarily relate to facility closure accruals, gains and losses on asset dispositions, and accelerated depreciation. Facility closure expenses include amounts incurred by the Company to close retail stores in the United States as part of the Real Estate Strategy. The Company expects to close approximately 175 retail stores in 2015 and at least 60 additional stores in 2016. The specific sites to close over this period may be influenced by real estate and other market conditions and, therefore, a reasonable estimate of future facility closure accruals cannot be made at this time. During the first quarter of 2015, the Company sold a warehouse facility that was classified as an asset held for sale at December 27, 2014. The gain of $19 million is included in Merger, restructuring and other operating expenses, net, as the disposition was part of the supply chain integration associated with the Merger.

International restructuring and certain other expenses in 2015 include charges related to the European restructuring plan approved by the Company in 2014 to realign the organization from a geographic-focus to a business channel-focus (the European restructuring plan) and has now been approved by all countries’ works councils. Both the 2015 and 2014 periods also include charges related to international organizational changes and facility closures which were started prior to the European restructuring plan. Approximately $36 million of severance (at current exchange rates) is expected to be accrued over the remainder of 2015. Expenses for facility closures and restructuring activity will be recognized as the related accounting criteria are met.

Staples Acquisition expenses for the second quarter and first half of 2015 includes retention accruals, transaction costs and costs associated with regulatory filings. The retention amounts will be paid regardless of whether the transaction is approved and will continue to be accrued through the anticipated closing date which is expected to be before the end of 2015.

Asset impairments are not included in the table above. Refer to Note 10 for further information.

Merger and restructuring accruals

Of the total $163 million Merger, restructuring and other expenses recognized in the first half of 2015 Condensed Consolidated Statement of Operations, $112 million relates to Merger and restructuring balance sheet accruals and are included as Charges incurred in the table below. The remaining $51 million is excluded from the table below because these items are expensed as incurred, non-cash, or otherwise not associated with Merger and restructuring balance sheet accounts.


(In millions)	Beginning Balance		Charges Incurred		Cash Payments			Currency, Lease Accretion and Other Adjustments			Ending Balance
2015
Termination benefits
Merger-related accruals	$	31	$	13	$	(20	)	$	—		$	24
European restructuring plan		26		18		(4	)		(3	)		37
Other restructuring accruals		8		6		(8	)		(1	)		5

		65		37		(32	)		(4	)		66

Lease and contract obligations, accruals for facilities closures and other costs
Merger-related accruals		71		34		(36	)		—			69
European restructuring plan		—		2		(1	)		1			2
Other restructuring accruals		35		3		(9	)		3			32
Acquired entity accruals		36		1		(7	)		—			30
Staples Acquisition related accruals		—		35		—			—			35

		142		75		(53	)		4			168

Total	$	207	$	112	$	(85	)	$	—		$	234

The $51 million not included in the balance sheet accrual table is comprised of $53 million Merger transaction and integration expenses, $13 million Staples Acquisition transaction expenses, and $4 million International restructuring integration expenses, partially offset by the $19 million gain on the disposition of the warehouse facility associated with the supply chain integration.