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. The Company also assumed certain restructuring liabilities previously recorded by OfficeMax. 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. Also in 2014, the European restructuring plan was approved by the Company to realign the organization from a geographic-focus to a business channel-focus (the “European restructuring plan”). In 2015, the Staples Acquisition was announced. Significant expenses have been recognized associated with these activities, as discussed below.

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.


	Third Quarter				Year-to-Date
(In millions)	2015		2014		2015		2014
Merger related expenses
Severance, retention, and relocation	$	4	$	17	$	15	$	136
Transaction and integration		16		33		69		92
Facility closure, contract termination and other costs, net		18		5		32		14

Total Merger related expenses		38		55		116		242

International restructuring and certain other expenses
Severance and retention		20		10		45		20
Integration		1		2		5		7
Other related expenses		6		5		13		7

Total International restructuring and certain other expenses		27		17		63		34

Staples Acquisition expenses		46		—		95		—

Total Merger, restructuring and other operating expenses, net	$	111	$	72	$	274	$	276

Merger related expenses – 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. Such benefits are being accrued through the anticipated facility closure 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.

Facility closure, contract termination and other costs, net primarily relate to facility closure accruals, contract termination cost, 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, as well as supply chain facilities. The Company expects to close approximately 180 retail stores in 2015 and more than 50 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 third quarter and year-to-date 2015, the Company recognized gains of $6 million and $25 million, respectively, from the sale of warehouse facilities that had been classified as assets held for sale. The gains are included in Merger, restructuring and other operating expenses, net, as the dispositions were part of the supply chain integration associated with the Merger.

International restructuring and certain other expenses – Expenses in 2015 include charges related to the European restructuring plan, including severance and retention, professional integration fees, facility closure and other restructuring costs. 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. The remaining $18 million of severance related to the European restructuring plan (at current exchange rates) is expected to be accrued over the remainder of 2015.

Staples Acquisition expenses – Expenses recognized in the third quarter and year-to-date 2015 include retention accruals of $29 million and $64 million, respectively, and transaction costs and costs associated with regulatory filings of $17 million and $31 million, respectively. The retention amounts will be paid regardless of whether the transaction is approved.

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

Merger and restructuring accruals

Of the total $274 million Merger, restructuring and other expenses recognized in the year-to-date 2015 Condensed Consolidated Statements of Operations, $189 million relates to Merger and restructuring balance sheet accruals and are included as Charges incurred in the table below. The remaining $85 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	$	16	$	(28	)	$	(1	)	$	18
European restructuring plan		26		37		(25	)		(2	)		36
Other restructuring accruals		8		6		(12	)		(1	)		1

		65		59		(65	)		(4	)		55

Lease and contract obligations, accruals for facilities closures and other costs
Merger related accruals		71		51		(49	)		(2	)		71
European restructuring plan		—		9		(2	)		—			7
Other restructuring accruals		35		5		(13	)		3			30
Acquired entity accruals		36		1		(12	)		2			27
Staples Acquisition related accruals		—		64		—			—			64

		142		130		(76	)		3			199

Total	$	207	$	189	$	(141	)	$	(1	)	$	254

The $85 million not included in the balance sheet accrual table is comprised of $69 million Merger transaction and integration expenses, $31 million Staples Acquisition transaction expenses, $6 million International restructuring integration expenses, and $4 million primarily related to fixed assets and rent expenses, partially offset by the $25 million gain on the disposition in the first and third quarters of 2015 of the warehouse facilities associated with the supply chain integration.