UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended:  July 30, 2005

 

Commission File Number:  0-17586

 

STAPLES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

 

04-2896127

(State or other jurisdiction of
Identification No.)

 

 

(I.R.S. Employer
Identification No.)

 

Five Hundred Staples Drive, Framingham, MA  01702

(Address of principal executive office and zip code)

 

508-253-5000

(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   ý         Noo

 

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

 

Yes   ý         Noo

 

The registrant had 734,863,337 shares of Staples common stock outstanding as of August 12, 2005.

 

 



 

STAPLES, INC. AND SUBSIDIARIES

FORM  10-Q
July 30, 2005
TABLE OF CONTENTS
 

Part I – Financial Information:

 

 

 

 

 

Item 1. Financial Statements (unaudited):

 

 

Consolidated Balance Sheets

 

 

Consolidated Statements of Income

 

 

Consolidated Statements of Cash Flows

 

 

Notes to Consolidated Financial Statements

 

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

 

 

 

 

Item 4. Controls and Procedures

 

 

 

 

 

Part II – Other Information

 

 

 

 

 

Signatures

 

 

 

 

 

Exhibit Index

 

 

 

2



 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

STAPLES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollar Amounts in Thousands, Except Share Data)

 

 

 

July, 30

 

January 29,

 

 

 

2005

 

2005

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

681,733

 

$

997,310

 

Short-term investments

 

511,810

 

472,231

 

Receivables, net

 

517,663

 

485,126

 

Merchandise inventories, net

 

1,729,901

 

1,602,530

 

Deferred income tax asset

 

101,297

 

86,041

 

Prepaid expenses and other current assets

 

129,561

 

138,374

 

Total current assets

 

3,671,965

 

3,781,612

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

Land and buildings

 

670,103

 

649,175

 

Leasehold improvements

 

775,950

 

762,946

 

Equipment

 

1,176,920

 

1,140,234

 

Furniture and fixtures

 

611,595

 

597,293

 

Total property and equipment

 

3,234,568

 

3,149,648

 

Less accumulated depreciation and amortization

 

1,631,906

 

1,548,774

 

Net property and equipment

 

1,602,662

 

1,600,874

 

 

 

 

 

 

 

Lease acquisition costs, net of accumulated amortization

 

36,873

 

38,400

 

Intangible assets, net of accumulated amortization

 

221,764

 

222,520

 

Goodwill

 

1,326,646

 

1,321,464

 

Other assets

 

88,467

 

106,578

 

Total assets

 

$

6,948,377

 

$

7,071,448

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

1,335,488

 

$

1,241,433

 

Accrued expenses and other current liabilities

 

804,450

 

954,184

 

Debt maturing within one year

 

2,533

 

1,244

 

Total current liabilities

 

2,142,471

 

2,196,861

 

 

 

 

 

 

 

Long-term debt

 

536,801

 

557,927

 

Deferred income tax liability

 

29,552

 

23,314

 

Other long-term obligations

 

203,497

 

178,150

 

 

 

 

 

 

 

Minority interest

 

4,439

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $.01 par value, 5,000,000 shares authorized; no shares issued

 

 

 

Common stock, $.0006 par value, 2,100,000,000 shares authorized; issued 819,333,403 shares at July 30, 2005 and 813,049,136 shares at January 29, 2005

 

492

 

488

 

Additional paid-in capital

 

2,372,319

 

2,254,947

 

Cumulative foreign currency translation adjustments

 

70,443

 

114,427

 

Retained earnings

 

3,001,363

 

2,818,163

 

Less: Treasury stock at cost - 84,703,038 shares at July 30, 2005, and 68,547,587 shares at January 29, 2005

 

(1,413,000

)

(1,072,829

)

Total stockholders’ equity

 

4,031,617

 

4,115,196

 

Total liabilities, minority interest and stockholders’ equity

 

$

6,948,377

 

$

7,071,448

 

 

See notes to consolidated financial statements.

 

3



 

STAPLES, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Dollar Amounts in Thousands, Except Per Share Data)

(Unaudited)

 

 

 

13 Weeks Ended

 

26 Weeks Ended

 

 

 

July 30,

 

July 31,

 

July 30,

 

July 31,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

3,471,964

 

$

3,089,252

 

$

7,371,016

 

$

6,541,407

 

Cost of goods sold and occupancy costs

 

2,481,891

 

2,218,567

 

5,318,411

 

4,735,097

 

Gross profit

 

990,073

 

870,685

 

2,052,605

 

1,806,310

 

 

 

 

 

 

 

 

 

 

 

Operating and other expenses:

 

 

 

 

 

 

 

 

 

Operating and selling

 

601,095

 

533,951

 

1,246,634

 

1,121,231

 

General and administrative

 

152,824

 

138,545

 

315,569

 

282,987

 

Amortization of intangibles

 

3,441

 

1,861

 

6,843

 

3,850

 

Total operating expenses

 

757,360

 

674,357

 

1,569,046

 

1,408,068

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

232,713

 

196,328

 

483,559

 

398,242

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

13,841

 

5,793

 

24,791

 

10,395

 

Interest expense

 

(15,051

)

(9,088

)

(25,039

)

(17,200

)

Miscellaneous income / (expense)

 

462

 

(173

)

(159

)

(575

)

Income before income taxes and minority interest

 

231,965

 

192,860

 

483,152

 

390,862

 

Income tax expense

 

84,667

 

70,394

 

176,350

 

142,665

 

Income before minority interest

 

147,298

 

122,466

 

306,802

 

248,197

 

Minority interest

 

120

 

 

198

 

 

Net income

 

$

147,178

 

$

122,466

 

$

306,604

 

$

248,197

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.20

 

$

0.17

 

$

0.42

 

$

0.33

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.20

 

$

0.16

 

$

0.41

 

$

0.33

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

 

$

 

$

0.17

 

$

0.13

 

 

See notes to consolidated financial statements.

 

4



 

STAPLES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)

(Unaudited)

 

 

 

26 Weeks Ended

 

 

 

July 30,

 

July 31,

 

 

 

2005

 

2004

 

Operating Activities:

 

 

 

 

 

Net income

 

$

306,604

 

$

248,197

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

149,175

 

136,400

 

Deferred tax benefit

 

(7,823

)

(1,667

)

Other

 

32,529

 

24,421

 

Changes in assets and liabilities:

 

 

 

 

 

(Increase) decrease in receivables

 

(40,077

)

6,283

 

Increase in merchandise inventories

 

(143,065

)

(128,756

)

(Increase) decrease in prepaid expenses and other assets

 

(1,428

)

15,198

 

Increase in accounts payable

 

106,895

 

65,245

 

Decrease in accrued expenses and other liabilities

 

(115,698

)

(104,308

)

Increase in other long-term obligations

 

13,776

 

5,007

 

Net cash provided by operating activities

 

300,888

 

266,020

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

Acquisition of property and equipment

 

(173,505

)

(135,586

)

Increase in investment, net of cash acquired

 

(3,872

)

 

Purchase of short-term investments

 

(3,831,936

)

(6,103,230

)

Proceeds from the sale of short-term investments

 

3,792,356

 

6,643,396

 

Net cash (used in) provided by investing activities

 

(216,957

)

404,580

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

Proceeds from the exercise of stock options and the sale of stock under employee stock purchase plans

 

72,238

 

103,102

 

Proceeds from borrowings

 

1,576

 

 

Payments on borrowings

 

(1,316

)

(3,786

)

Cash dividends paid

 

(123,405

)

(99,531

)

Purchase of treasury stock, net

 

(340,171

)

(248,166

)

Net cash used in financing activities

 

(391,078

)

(248,381

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(8,430

)

(2,944

)

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(315,577

)

419,275

 

Cash and cash equivalents at beginning of period

 

997,310

 

457,465

 

Cash and cash equivalents at end of period

 

$

681,733

 

$

876,740

 

 

See notes to consolidated financial statements.

 

5



 

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note A  - Basis of Presentation

 

The accompanying interim unaudited consolidated financial statements include the accounts of Staples, Inc. and its subsidiaries (“Staples”, “the Company”, “we”, “our” or “us”).  These financial statements are for the period covering the thirteen and twenty-six weeks ending July 30, 2005 (also referred to as the “second quarter of 2005” and the “first half of 2005”) and the period covering the thirteen and twenty-six weeks ending July 31, 2004 (also referred to as the “second quarter of 2004” and the “first half of 2004”).  All intercompany accounts and transactions are eliminated in consolidation. Certain previously reported amounts have been reclassified to conform with the current period presentation.

 

All share and per share amounts reflect, or have been restated to reflect, the three-for-two common stock split that was effected in the form of a common stock dividend distributed on April 15, 2005.

 

These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, such interim financial statements reflect all normal recurring adjustments considered necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented.  The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year.  These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended January 29, 2005.

 

New Accounting Pronouncements:     On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123 (revised 2004), “Share Based Payment” (“SFAS No. 123R”).  Under SFAS No. 123R, companies must calculate and record in the income statement the cost of equity instruments, such as stock options, awarded to employees for services received; pro forma disclosure is no longer permitted.  The cost of the equity instruments is to be measured based on fair value of the instruments on the date they are granted (with certain exceptions) and is required to be recognized over the period during which the employees are required to provide services in exchange for the equity instruments.

 

SFAS No. 123R provides two alternatives for adoption: (1) a “modified prospective” method in which compensation cost is recognized for all awards granted subsequent to the effective date of this statement as well as for the unvested portion of awards outstanding as of the effective date; or (2) a “modified retrospective” method which follows the approach in the “modified prospective” method, but also permits entities to restate prior periods to record compensation cost calculated under SFAS No. 123 for the pro forma disclosure.  The Company plans to adopt SFAS No. 123R using the modified retrospective method.  Since the Company currently accounts for stock options granted to employees and shares issued under employee stock purchase plans in accordance with the intrinsic value method permitted under APB No. 25, no compensation expense is recognized.  The adoption of SFAS No. 123R is expected to have a significant impact on our results of operations, although it will have no impact on our overall financial position.  The impact of adopting SFAS No. 123R cannot be accurately estimated at this time, as it will depend on the market value and the amount of share based awards granted in future periods.

 

On April 14, 2005, the Securities and Exchange Commission announced that it would delay the required implementation of SFAS No. 123R, allowing companies that are not small business issuers to adopt the Statement no later than the beginning of the first fiscal year beginning after June 15, 2005.  As a result of this delay, the Company plans to adopt SFAS No. 123R as of January 29, 2006.

 

Note B – Employee Benefit Plans

 

Staples accounts for its stock-based plans under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and provides pro forma disclosures of the compensation expense determined under the fair value provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” as amended by Statement of Financial Accounting Standards No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS No. 148”).

 

Pro forma information regarding net income and earnings per share is required by SFAS No. 148, which also requires reporting the information as if Staples had accounted for its employee stock options granted subsequent to January 28, 1995 under the fair value method of that Statement. For options granted prior to May 1, 2005, the fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model. For stock options granted on or after May 1, 2005, the fair value of each award is estimated on the date of grant using a binomial valuation model. The binomial model considers characteristics of

 

6



 

fair value option pricing that are not available under the Black-Scholes model. Similar to the Black-Scholes model, the binomial model takes into account variables such as volatility, dividend yield rate, and risk free interest rate. However, in addition, the binomial model considers the contractual term of the option, the probability that the option will be exercised prior to the end of its contractual life, and the probability of termination or retirement of the option holder in computing the value of the option. For these reasons, the Company believes that the binomial model provides a fair value that is more representative of actual experience and future expected experience than the value calculated using the Black-Scholes model.

 

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. For purposes of SFAS No. 148’s disclosure requirements, Staples’ employee stock purchase plans are considered compensatory plans. The expense was calculated based on the fair value of the employees’ purchase rights. Staples’ pro forma information follows (in thousands, except per share data):

 

 

 

13 Weeks Ended

 

26 Weeks Ended

 

 

 

July 30, 2005

 

July 31, 2004

 

July 30, 2005

 

July 31, 2004

 

Net income as reported

 

$

147,178

 

$

122,466

 

$

306,604

 

$

248,197

 

Add: Stock based compensation, net of related tax effects, included in reported net income

 

8,201

 

6,986

 

15,988

 

14,156

 

Deduct: Stock based compensation determined under the fair value based method for all awards, net of related tax effects

 

(20,891

)

(18,013

)

(39,392

)

(34,823

)

Pro forma net income

 

$

134,488

 

$

111,439

 

$

283,200

 

$

227,530

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

 

 

 

 

 

 

 

 

As reported

 

$

0.20

 

$

0.17

 

$

0.42

 

$

0.33

 

Pro forma

 

$

0.18

 

$

0.15

 

$

0.39

 

$

0.31

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

 

 

 

 

 

 

 

 

As reported

 

$

0.20

 

$

0.16

 

$

0.41

 

$

0.33

 

Pro forma

 

$

0.18

 

$

0.15

 

$

0.38

 

$

0.30

 

 

Note C - Comprehensive Income

 

Comprehensive income includes net income, foreign currency translation adjustments and changes in the fair value of derivatives that are designated as hedges of net investments in foreign subsidiaries (net of the related tax effects), which are reported separately in stockholders’ equity (in thousands):

 

 

 

13 Weeks Ended

 

26 Weeks Ended

 

 

 

July 30, 2005

 

July 31, 2004

 

July 30, 2005

 

July 31, 2004

 

Net income

 

$

147,178

 

$

122,466

 

$

306,604

 

$

248,197

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(25,775

)

13,965

 

(40,726

)

(8,701

)

Change in the fair value of derivatives

 

(7,952

)

(5,864

)

(5,619

)

(628

)

Tax effect of changes in the fair value of derivatives

 

3,340

 

2,463

 

2,361

 

264

 

Total comprehensive income

 

$

116,791

 

$

133,030

 

$

262,620

 

$

239,132

 

 

Note D – Stockholders’ Equity

 

On February 22, 2005, the Board approved a three-for-two dividend of Staples common stock to shareholders of record as of March 29, 2005. The dividend was distributed on April 15, 2005.  All share and per share data has been restated to reflect the effect of this three-for-two common stock dividend.

 

7



 

Note E - Computation of Earnings Per Common Share

 

The computation of basic and diluted earnings per share for the second quarter and first half of 2005 and 2004 is as follows (in thousands, except per share data):

 

 

 

13 Weeks Ended

 

26 Weeks Ended

 

 

 

July 30, 2005

 

July 31, 2004

 

July 30, 2005

 

July 31, 2004

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

 

$

147,178

 

$

122,466

 

$

306,604

 

$

248,197

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

732,325

 

741,810

 

734,742

 

742,300

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Employee stock options and restricted stock

 

15,894

 

16,205

 

15,668

 

16,551

 

Weighted-average common shares outstanding assuming dilution

 

748,219

 

758,015

 

750,410

 

758,851

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.20

 

$

0.17

 

$

0.42

 

$

0.33

 

Diluted earnings per common share

 

$

0.20

 

$

0.16

 

$

0.41

 

$

0.33

 

 

Note F - Segment Reporting

 

Staples has three reportable segments: North American Retail, North American Delivery, and International Operations, formerly referred to as European Operations.  Staples’ North American Retail segment consists of the U.S. and Canadian business units that operate office products stores.  The North American Delivery segment consists of the U.S. and Canadian business units that sell and deliver office products and services directly to customers, and includes Staples Business Delivery, Quill and Staples’ Contract operations (Staples National Advantage and Staples Business Advantage).  The International Operations segment consists of operating units that operate office products stores and that sell and deliver office products and services directly to customers in 19 countries in Europe, South America and Asia.

 

Staples evaluates performance and allocates resources based on profit or loss from operations before interest and income taxes, the impact of changes in accounting principles and non-recurring items (“business unit income”).  Intersegment sales and transfers are recorded at Staples’ cost; therefore, there is no intercompany profit or loss recognized on these transactions.

 

The following is a summary of sales and business unit income by reportable segment for the second quarter and first half of 2005 and 2004 and a reconciliation of business unit income to consolidated income before income taxes (in thousands):

 

 

 

13 Weeks Ended

 

26 Weeks Ended

 

 

 

July 30, 2005

 

July 31, 2004

 

July 30, 2005

 

July 31, 2004

 

Sales:

 

 

 

 

 

 

 

 

 

North American Retail

 

$

1,851,290

 

$

1,700,508

 

$

4,017,913

 

$

3,682,891

 

North American Delivery

 

1,148,215

 

979,538

 

2,331,531

 

1,987,454

 

International Operations

 

472,459

 

409,206

 

1,021,572

 

871,062

 

Total sales

 

$

3,471,964

 

$

3,089,252

 

$

7,371,016

 

$

6,541,407

 

 

 

 

 

 

 

 

 

 

 

Business Unit Income:

 

 

 

 

 

 

 

 

 

North American Retail

 

$

133,629

 

$

96,207

 

$

282,710

 

$

202,321

 

North American Delivery

 

111,355

 

88,281

 

209,958

 

161,386

 

International Operations

 

(12,271

)

11,840

 

(9,109

)

34,535

 

Total business unit income

 

$

232,713

 

$

196,328

 

$

483,559

 

$

398,242

 

Interest and other expense, net

 

(748

)

(3,468

)

(407

)

(7,380

)

Income before income taxes

 

$

231,965

 

$

192,860

 

$

483,152

 

$

390,862

 

 

8



 

Note G - Guarantor Subsidiaries

 

Under the terms of the Company’s 7.375% senior notes and 7.125% senior notes, certain subsidiaries guarantee repayment of the debt.  The 7.375% senior notes and 7.125% senior notes are fully and unconditionally guaranteed on an unsecured, joint and several basis by Staples the Office Superstore, LLC, Staples the Office Superstore East, Inc., Staples Contract & Commercial, Inc. and Staples the Office Superstore, Limited Partnership, all of which are wholly owned subsidiaries of Staples (the “Guarantor Subsidiaries”). The term of the guarantees is equivalent to the term of the related debt. The following condensed consolidating financial data is presented for the holders of the 7.375% senior notes and 7.125% senior notes and illustrates the composition of Staples (the “Parent Company”), the Guarantor Subsidiaries, and the non-guarantor subsidiaries for the second quarter and first half of 2005 and 2004.  The non-guarantor subsidiaries represent more than an inconsequential portion of the consolidated assets and revenues of Staples.

 

Investments in subsidiaries are accounted for by the Parent Company on the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are, therefore, reflected in the Parent Company’s investment accounts and earnings. The principal elimination entries eliminate the Parent Company’s investment in subsidiaries and intercompany balances and transactions.

 

Condensed Consolidating Balance Sheet

As of July 30, 2005

(in thousands)

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

Staples, Inc.

 

Guarantor

 

Guarantor

 

 

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

335,017

 

$

38,702

 

$

308,014

 

$

 

$

681,733

 

Short-term investments

 

511,810

 

 

 

 

511,810

 

Receivables

 

4,013

 

214,904

 

298,746

 

 

 

517,663

 

Merchandise inventories

 

 

1,090,646

 

639,255

 

 

1,729,901

 

Other current assets

 

5,097

 

100,097

 

125,664

 

 

230,858

 

Total current assets

 

855,937

 

1,444,349

 

1,371,679

 

 

3,671,965

 

Net property, equipment and other assets

 

276,534

 

945,895

 

727,337

 

 

1,949,766

 

Goodwill

 

156,270

 

52,067

 

1,118,309

 

 

1,326,646

 

Investment in affiliates and intercompany, net

 

(82,946

)

2,385,893

 

1,019,377

 

(3,322,324

)

 

Total assets

 

$

1,205,795

 

$

4,828,204

 

$

4,236,702

 

$

(3,322,324

)

$

6,948,377

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

$

(37,259

)

$

1,243,219

 

$

936,511

 

$

 

$

2,142,471

 

Total long-term liabilities

 

183,994

 

597,225

 

(11,369

)

 

769,850

 

Minority interest

 

 

 

4,439

 

 

4,439

 

Total stockholders’ equity

 

1,059,060

 

2,987,760

 

3,307,121

 

(3,322,324

)

4,031,617

 

Total liabilities, minority interest and stockholders’ equity

 

$

1,205,795

 

$

4,828,204

 

$

4,236,702

 

$

(3,322,324

)

$

6,948,377

 

 

9



 

Condensed Consolidating Balance Sheet

As of January 29, 2005

(in thousands)

 

 

 

Staples, Inc.

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

529,275

 

$

44,300

 

$

423,735

 

$

 

$

997,310

 

Short-term investments

 

472,231

 

 

 

 

472,231

 

Merchandise inventories

 

 

1,004,819

 

597,711

 

 

1,602,530

 

Other current assets

 

80,358

 

255,319

 

373,864

 

 

709,541

 

Total current assets

 

1,081,864

 

1,304,438

 

1,395,310

 

 

3,781,612

 

Net property, equipment and other assets

 

239,982

 

920,213

 

808,177

 

 

1,968,372

 

Goodwill, net of amortization

 

140,570

 

52,067

 

1,128,827

 

 

1,321,464

 

Investment in affiliates and intercompany, net

 

374,885

 

2,013,548

 

882,308

 

(3,270,741

)

 

Total assets

 

$

1,837,301

 

$

4,290,266

 

$

4,214,622

 

$

(3,270,741

)

$

7,071,448

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

$

277,470

 

$

1,045,733

 

$

873,658

 

$

 

$

2,196,861

 

Total long-term liabilities

 

26,208

 

600,554

 

132,629

 

 

759,391

 

Total stockholders’ equity

 

1,533,623

 

2,643,979

 

3,208,335

 

(3,270,741

)

4,115,196

 

Total liabilities and stockholders’ equity

 

$

1,837,301

 

$

4,290,266

 

$

4,214,622

 

$

(3,270,741

)

$

7,071,448

 

 

Condensed Consolidating Statement of Income

For the 13 weeks ended July 30, 2005

(in thousands)

 

 

 

Staples, Inc.

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Consolidated

 

Sales

 

$

 

$

2,306,082

 

$

1,165,882

 

$

3,471,964

 

Cost of goods sold and occupancy costs

 

309

 

1,654,447

 

827,135

 

2,481,891

 

Gross profit

 

(309

)

651,635

 

338,747

 

990,073

 

Operating and other expenses

 

22,453

 

472,607

 

263,048

 

758,108

 

Income (loss) before income taxes and minority interest

 

(22,762

)

179,028

 

75,699

 

231,965

 

Income tax expense

 

 

69,579

 

15,088

 

84,667

 

Income (loss) before minority interest

 

(22,762

)

109,449

 

60,611

 

147,298

 

Minority interest

 

 

 

120

 

120

 

Net income (loss)

 

$

(22,762

)

$

109,449

 

$

60,491

 

$

147,178

 

 

10



 

Condensed Consolidating Statement of Income

For the 13 weeks ended July 31, 2004

(in thousands)

 

 

 

Staples, Inc.

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Consolidated

 

Sales

 

$

 

$

2,077,176

 

$

1,012,076

 

$

3,089,252

 

Cost of goods sold and occupancy costs

 

285

 

1,510,791

 

707,491

 

2,218,567

 

Gross profit

 

(285

)

566,385

 

304,585

 

870,685

 

Operating and other expenses

 

10,819

 

447,467

 

219,539

 

677,825

 

Income (loss) before income taxes

 

(11,104

)

118,918

 

85,046

 

192,860

 

Income tax expense

 

 

50,075

 

20,319

 

70,394

 

Net income (loss)

 

$

(11,104

)

$

68,843

 

$

64,727

 

$

122,466

 

 

Condensed Consolidating Statement of Income

For the 26 weeks ended July 30, 2005

(in thousands)

 

 

 

Staples, Inc.

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Consolidated

 

Sales

 

$

 

$

4,866,255

 

$

2,504,761

 

$

7,371,016

 

Cost of goods sold and occupancy costs

 

754

 

3,546,566

 

1,771,091

 

5,318,411

 

Gross profit

 

(754

)

1,319,689

 

733,670

 

2,052,605

 

Operating and other expenses

 

48,327

 

975,874

 

545,252

 

1,569,453

 

Income (loss) before income taxes

 

(49,081

343,815

 

188,418

 

483,152

 

Income tax expense

 

 

144,924

 

31,426

 

176,350

 

Income (loss) before minority interest

 

(49.081

198,891

 

156,992

 

306,802

 

Minority interest

 

 

 

198

 

198

 

Net income (loss)

 

$

(49,081

$

198,891

 

$

156,794

 

$

306,604

 

 

Condensed Consolidating Statement of Income

For the 26 weeks ended July 31, 2004

(in thousands)

 

 

 

Staples, Inc.

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Consolidated

 

Sales

 

$

 

$

4,384,962

 

$

2,156,445

 

$

6,541,407

 

Cost of goods sold and occupancy costs

 

797

 

3,223,256

 

1,511,044

 

4,735,097

 

Gross profit

 

(797

)

1,161,706

 

645,401

 

1,806,310

 

Operating and other expenses

 

40,587

 

929,667

 

445,194

 

1,415,448

 

Income (loss) before income taxes

 

(41,384

)

232,039

 

200,207

 

390,862

 

Income tax expense

 

 

93,667

 

48,998

 

142,665

 

Net income (loss)

 

$

(41,384

)

$

138,372

 

$

151,209

 

$

248,197

 

 

11



 

Condensed Consolidating Statement of Cash Flows

For the 26 weeks ended July 30, 2005

(in thousands)

 

 

 

Staples, Inc.

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Consolidated

 

Net cash provided by (used in) operating activities

 

$

262,716

 

$

83,566

 

$

(45,394

)

$

300,888

 

Investing Activities:

 

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

(26,316

)

(89,164

)

(58,025

)

(173,505

)

Acquisition of businesses, net of cash acquired

 

 

 

(3,872

)

(3,872

)

Purchase of short-term investments

 

(3,831,936

)

 

 

(3,831,936

)

Proceeds from the sale of short-term investments

 

3,792,356

 

 

 

3,792,356

 

Cash used in investing activities

 

(65,896

)

(89,164

)

(61,897

)

(216,957

)

Financing Activities:

 

 

 

 

 

 

 

 

 

Payments on borrowings

 

(1,316

)

 

 

(1,316

)

Purchase of treasury stock

 

(340,171

)

 

 

(340,171

)

Other

 

73,814

 

 

 

73,814

 

Cash dividends paid

 

(123,405

)

 

 

(123,405

)

Cash used in financing activities

 

(391,078

)

 

 

(391,078

)

Effect of exchange rate changes on cash and cash equivalents

 

 

 

(8,430

)

(8,430

)

Net decrease in cash and cash equivalents

 

(194,258

)

(5,598

)

(115,721

)

(315,577

)

Cash and cash equivalents at beginning of period

 

529,275

 

44,300

 

423,735

 

997,310

 

Cash and cash equivalents at end of period

 

$

335,017

 

$

38,702

 

$

308,014

 

$

681,733

 

 

Condensed Consolidating Statement of Cash Flows

For the 26 weeks ended July 31, 2004

(in thousands)

 

 

 

Staples, Inc.

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Consolidated

 

Net cash provided by operating activities

 

$

158,109

 

$

52,341

 

$

55,570

 

$

266,020

 

Investing Activities:

 

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

(29,090

)

(69,002

)

(37,494

)

(135,586

)

Purchase of short-term investments

 

(6,103,230

)

 

 

(6,103,230

)

Proceeds from the sale of short-term investments

 

6,643,396

 

 

 

6,643,396

 

Cash provided by (used in) investing activities

 

511,076

 

(69,002

)

(37,494

)

404,580

 

Financing Activities:

 

 

 

 

 

 

 

 

 

Payments on borrowings

 

(3,786

)

 

 

(3,786

)

Purchase of treasury stock

 

(248,166

)

 

 

(248,166

)

Other

 

103,102

 

 

 

103,102

 

Cash dividends paid

 

(99,531

)

 

 

(99,531

)

Cash used in financing activities

 

(248,381

)

 

 

(248,381

)

Effect of exchange rate changes on cash and cash equivalents

 

 

 

(2,944

)

(2,944

)

Net increase (decrease) in cash and cash equivalents

 

420,804

 

(16,661

)

15,132

 

419,275

 

Cash and cash equivalents at beginning of period

 

111,274

 

55,507

 

290,684

 

457,465

 

Cash and cash equivalents at end of period

 

$

532,078

 

$

38,846

 

$

305,816

 

$

876,740

 

 

12



 

STAPLES, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

of Financial Condition and Results of Operations

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

Our business is comprised of three segments: North American Retail, North American Delivery and International Operations.  Our North American Retail segment consists of the U.S. and Canadian business units that operate office products stores. The North American Delivery segment consists of the U.S. and Canadian business units that sell and deliver office products and services directly to customers, and includes Staples Business Delivery, Quill, and our Contract operations (Staples National Advantage and Staples Business Advantage). The International Operations segment consists of operating units that operate office products stores and that sell and deliver office products and services directly to customers in 19 countries in Europe, South America and Asia.

 

In 2004, the Company invested a total of $29.3 million in a mail order and internet company in the People’s Republic of China (“Staples China”), which was accounted for as an equity method investment.  On March 21, 2005, the Company invested an additional $8.3 million in Staples China, increasing its investment to 59% of the entity’s outstanding voting equity interest.  As a result, the Company included the operating results of Staples China in the consolidated financial statements as of that date.  The results of Staples China are reported as part of our International Operations segment for segment reporting.

 

We acquired four businesses during 2004 (“the 2004 acquisitions”).  On August 4, 2004, we acquired the United Kingdom office products company Globus Office World plc (“Office World”). In September 2004, we acquired Pressel Versand International GmbH, a mail order company based in Austria and operating in nine European countries, and Malling Beck A/S, a mail order company operating in Denmark.  On November 29, 2004, we entered the South American market by acquiring Officenet SA, a mail order and internet business operating in Brazil and Argentina.  The results of the 2004 acquisitions have been included in the consolidated financial statements since the dates of acquisition and are reported as part of our International Operations segment for segment reporting.

 

Forward Looking Statements

 

This Quarterly Report on Form 10-Q and, in particular, this management discussion and analysis contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”).  These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management’s beliefs and assumptions. Any statements contained herein (including without limitation statements to the effect that Staples or its management “believes”, “expects”, “anticipates”, “plans” and similar expressions) that are not statements of historical fact should be considered forward-looking statements and should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included in this report.  These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. There are a number of important factors that could cause our actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth below under the heading “Cautionary Statements.” We do not intend to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

 

Results of Operations

 

We have provided below a summary of our operating results at the consolidated level, followed by an overview of our segment performance.  Our results for the second quarter and first half of 2005 reflect, and our results for the second quarter and first half of 2004 have been restated to give effect to, a three-for-two common stock dividend distributed on April 15, 2005 to shareholders of record on March 29, 2005.

 

Consolidated Performance:

 

Net income for the second quarter of 2005 was $147.2 million or $0.20 per diluted share compared to $122.5 million or $0.16 per diluted share for the second quarter of 2004, an increase in net income of 20.2%. Net income for the first half of 2005 was $306.6 million or $0.41 per diluted share compared to $248.2 million or $0.33 per diluted share for the first half of 2004.  Our results for the first half of 2005 were achieved by continuing to execute our strategy of driving profitable sales growth, improving profit margins and increasing asset productivity.  This includes delivering on our “Easy”

 

13



 

brand promise to make buying office products easy for our customers in order to differentiate us from our competitors.  Our commitment to customer service, the continued positive impact of targeting our product mix and marketing at more profitable small businesses and home offices, the continued success of our customer acquisition efforts, solid execution and expense management were key drivers of our results in the first half of 2005.  Our positive performance in the first half was slightly offset by the continued costs associated with the integration of the Office World stores in the United Kingdom and investments in our European delivery businesses.

 

Sales:  Sales for the second quarter of 2005 were $3.5 billion, an increase of 12.4% from the second quarter of 2004. Sales for the first half of 2005 were $7.4 billion, an increase of 12.7% from the first half of 2004. Comparable sales for our North American retail locations increased 3% for the second quarter and first half of 2005 and comparable sales for our International retail locations decreased 2% for the second quarter of 2005 and decreased 1% for the first half of 2005. We had 1,716 open stores as of July 30, 2005 compared to 1,585 stores as of July 31, 2004 and 1,680 stores as of January 29, 2005.  This includes 23 stores opened and 2 stores closed during the second quarter of 2005 and 43 stores opened and 7 stores closed during the first half of 2005. North American Delivery sales increased 17.2% for the second quarter of 2005 and 17.3% for the first half of 2005.  The increase in total sales also reflects a positive impact of foreign currency of $35 million for the second quarter of 2005 and $95 million for the first half of 2005.

 

Gross Profit: Gross profit as a percentage of sales was 28.5% for the second quarter of 2005 and 27.8% for the first half of 2005 compared to 28.2% and 27.6% for the corresponding periods in 2004. The increase in the gross profit rate for the second quarter and the first half of 2005 from the gross profit rate for the second quarter and the first half of 2004 is due to the continued positive impact of targeting our product mix at more profitable small business customers and home offices, strong results in our copy center businesses, our continued focus on Staples brand products and supply chain initiatives which lower the cost of moving product from our vendors to our customers.

 

Operating and Selling Expenses:   Operating and selling expenses, which consist of payroll, advertising and other operating expenses, were 17.3% of sales for the second quarter of 2005 and 16.9% for the first half of 2005 compared to 17.3% and 17.1% for the corresponding periods in 2004. The flat operating expenses as a percentage of sales for the second quarter of 2005 and the decrease in the first half of 2005 reflect our continued focus on expense management and leveraging of fixed expenses on higher sales, offset by weakness in our International Operations segment.

 

General and Administrative Expenses:  General and administrative expenses as a percentage of sales were 4.4% for the second quarter of 2005 and 4.3% for the first half of 2005 compared to 4.5% for the second quarter of 2004 and 4.3% for the first half of 2004.  The decrease for the second quarter of 2005 and flat results for the first half of 2005 primarily reflect strong expense control offset by higher general and administrative costs in our International Operations segment.

 

Amortization of Intangibles: Amortization of intangibles was $3.4 million for the second quarter of 2005 and $6.8 million for the first half of 2005 compared to $1.9 million for the second quarter of 2004 and $3.8 million for the first half of 2004, reflecting the amortization of customer-related intangible assets and noncompetition agreements associated with the acquisitions completed in the latter half of 2004 and the first quarter of 2005.

 

Interest income: Interest income was $13.8 million for the second quarter of 2005 and $24.8 million for the first half of 2005 compared to $5.8 million for the second quarter of 2004 and $10.4 million for the first half of 2004.  The increase in interest income in fiscal 2005 is primarily due to a sustained increase in interest rates, combined with a shift in our investment strategy which has led to an increase in treasury securities and a decrease in cash.

 

Interest expense: Interest expense was $15.1 million for the second quarter of 2005 and $25.0 million for the first half of 2005 compared to $9.1 million for the second quarter of 2004 and $17.2 million for the first half of 2004.  The increase in interest expense in 2005 is primarily due to an increase in interest rates, partially offset by a reduction in our outstanding borrowings. We use interest rate swap agreements to convert our fixed rate debt obligations into variable rate obligations and, as a result, have reduced interest expense for all periods presented.  Excluding the impact of our interest rate swap agreements, interest expense would have been $16.9 million for the second quarter of 2005 and $29.8 million for the first half of 2005 compared to $14.9 million for the second quarter of  2004 and $29.3 million for the first half of 2004.

 

14



 

Miscellaneous (income) expense:  Miscellaneous income was $0.5 million for the second quarter of 2005 and miscellaneous expense was $0.2 million for the first half of 2005 compared to miscellaneous expense of $0.2 million for the second quarter of 2004 and $0.6 million for the first half of 2004. These amounts primarily reflect foreign exchange gains and losses recorded in the respective periods.

 

Income Taxes: Our effective tax rate was 36.5% for both the second quarter and first half of 2005 and the second quarter and first half of 2004.

 

Segment Performance:

 

The following tables provide a summary of our sales and business unit income by reportable segment (see reconciliation of business unit income to consolidated income before income taxes in Note F to our Consolidated Financial Statements):

 

 

 

(Amounts in thousands)

 

July 30, 2005

 

July 31, 2004

 

 

 

13 Weeks Ended

 

Increase From

 

Increase From

 

 

 

July  30, 2005

 

July 31, 2004

 

Prior Year

 

Prior Year

 

Sales:

 

 

 

 

 

 

 

 

 

North American Retail

 

$

1,851,290

 

$

1,700,508

 

8.9

%

7.1

%

North American Delivery

 

1,148,215

 

979,538

 

17.2

%

10.8

%

International Operations

 

472,459

 

409,206

 

15.5

%

14.7

%

Total sales

 

$

3,471,964

 

$

3,089,252

 

12.4

%

9.2

%

 

 

 

(Amounts in thousands)
13 Weeks Ended

 

July 30, 2005

 

July 31, 2004

 

 

 

July  30, 2005

 

July 31, 2004

 

% of Sales

 

% of Sales

 

 

 

 

 

 

 

 

 

 

 

Business Unit Income:

 

 

 

 

 

 

 

 

 

North American Retail

 

$

133,629

 

$

96,207

 

7.2

%

5.7

%

North American Delivery

 

111,355

 

88,281

 

9.7

%

9.0

%

International Operations

 

(12,271

)

11,840

 

(2.6

)%

2.9

%

Total business unit income

 

$

232,713

 

$

196,328

 

6.7

%

6.4

%

 

 

 

(Amounts in thousands)

 

July 30, 2005

 

July 31, 2004

 

 

 

26 Weeks Ended

 

Increase From

 

Increase From

 

 

 

July 30, 2005

 

July 31, 2004

 

Prior Year

 

Prior Year

 

Sales:

 

 

 

 

 

 

 

 

 

North American Retail

 

$

4,017,913

 

$

3,682,891

 

9.1

%

8.8

%

North American Delivery

 

2,331,531

 

1,987,454

 

17.3

%

10.9

%

International Operations

 

1,021,572

 

871,062

 

17.3

%

17.5

%

Total sales

 

$

7,371,016

 

$

6,541,407

 

12.7

%

10.5

%

 

15



 

 

 

(Amounts in thousands)

 

 

 

 

 

 

 

26 Weeks Ended

 

July  30, 2005

 

July 31, 2004

 

 

 

July  30, 2005

 

July 31, 2004

 

% of Sales

 

% of Sales

 

 

 

 

 

 

 

 

 

 

 

Business Unit Income:

 

 

 

 

 

 

 

 

 

North American Retail

 

$

282,710

 

$

202,321

 

7.0

%

5.5

%

North American Delivery

 

209,958

 

161,386

 

9.0

%

8.1

%

International Operations

 

(9,109

)

34,535

 

(0.9

)%

4.0

%

Total business unit income

 

$

483,559

 

$

398,242

 

6.6

%

6.1

%

 

North American Retail: Sales for North American Retail increased 8.9% for the second quarter of 2005 and 9.1% for the first half of 2005 compared to the second quarter and first half of 2004.  The growth primarily reflects an increase in comparable store sales of 3% for the second quarter and the first half of 2005, as well as non-comparable store sales for stores opened in the prior year and throughout the first half of 2005.  We added a net 20 stores to the North American store base in the second quarter and 36 stores in the first half of 2005.  As of July 30, 2005, the North American store base included 1,462 open stores compared to 1,379 stores as of July 31, 2004 and 1,426 stores as of January 29, 2005. The increase in sales also reflects the positive impact of Canadian exchange rates to the U.S. dollar of $28 million for the second quarter of 2005 and $60 million for the first half of 2005. Our strong sales growth reflects solid execution in key categories, including our copy center businesses and ink and toner, as well as sales increases in high growth technology categories, including computer peripherals, portable computers and digital cameras and accessories.  Business unit income as a percentage of sales increased to 7.2% for the second quarter of 2005 and 7.0% for the first half of 2005 from 5.7% for the second quarter of 2004 and 5.5% for the first half of 2004. The increase in business unit income primarily reflects the positive impact of targeting our product mix and marketing at more profitable small business customers and home offices, strong results in our copy center businesses, our continued focus on Staples brand products and supply chain initiatives which lower the cost of moving product from our vendors to our customers.  This increase also reflects our focus on expense management and leveraging of fixed expenses on higher sales.

 

North American Delivery: Sales for North American Delivery increased 17.2% for the second quarter of 2005 and 17.3% for the first half of 2005 compared to the second quarter and first half of 2004. The sales growth for the second quarter and first half of 2005 reflects the increased productivity of our expanded contract sales force, more efficient and targeted marketing spend among our catalog, websites and retail stores, as well as the continued success of our customer acquisition and retention efforts resulting from improved service levels.  Business unit income increased to 9.7% of sales for the second quarter of 2005 and 9.0% for the first half of 2005 from 9.0% in the second quarter of 2004 and 8.1% for the first half of 2004.  The increase in business unit income primarily reflects more efficient marketing spend, continued increases in the number of orders placed electronically, fewer problem orders, productivity improvements in our supply chain and leveraging of fixed expenses on higher sales.

 

International Operations: Sales for International Operations increased 15.5% for the second quarter of 2005 and 17.3% for the first half of 2005 compared to the second quarter and first half of 2004.  Excluding the impact of our 2004 acquisitions and the consolidation of Staples China, sales increased 2.8% for the second quarter of 2005 and 4.4% for the first half of 2005.  The sales growth for the second quarter of 2005 and the first half of 2005 primarily reflects non-comparable store sales for stores opened in the prior year and the first half of 2005 as well as the positive impact of European exchange rates to the U.S. dollar of $3 million for the second quarter of 2005 and $27 million for the first half of 2005. As of July 30, 2005, the European store base included 254 open stores compared to 206 stores as of July 31, 2004 and 254 stores as of January 29, 2005.  Comparable store sales decreased 2% for the second quarter of 2005 and 1% for the first half of 2005.  Business unit income decreased to a $12.3 million loss for the second quarter of 2005 and a $9.1 million loss for the first half of 2005 from income of $11.8 million for the second quarter of 2004 and $34.5 million for the first half of 2004, reflecting the continued costs associated with the integration of the Office World stores, the integration of our two delivery businesses in the United Kingdom, increased investments in our European delivery businesses and flat sales performance in our delivery business in France.

 

16



 

Critical Accounting Policies

 

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make significant judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our 2004 Annual Report on Form 10-K, filed on February 24, 2005, in Note A of the Notes to the Consolidated Financial Statements and the Critical Accounting Policies section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Liquidity and Capital Resources

 

Cash Flows

 

Cash provided by operations was $300.9 million for the first half of 2005 compared to $266.0 million for the first half of 2004.  The increase in operating cash flow from 2004 to 2005 is primarily due to an increase in net income. 

 

Cash used in investing activities was $217.0 million for the first half of 2005 compared to cash provided by investing activities of $404.6 million for the first half of 2004. This change is primarily due to a shift in our investment strategy, which led to an increase in the amount of treasury securities we hold and a decrease in our holdings of cash equivalents, including commercial paper and money market investments.

 

Cash used in financing activities was $391.1 million for the first half of 2005 compared to $248.4 million for the first half of 2004.  The change in financing activities is primarily related to the number of shares purchased under our share repurchase program, which was announced in March 2004, and our annual cash dividend paid in the first half of 2005. In accordance with our share repurchase program, we are authorized to purchase up to $1.0 billion of Staples common stock during fiscal years 2004 and 2005. Under this program, we repurchased 15.5 million shares for $326.4 million in the first half of 2005 and 13.4 million shares for $239.1 million in the first half of 2004. In the first half of 2005, we paid our second annual cash dividend of $123.4 million on outstanding shares of our common stock. This was an increase of 25% per share above the dividend that was paid in the first half of 2004.

 

Sources of Liquidity

 

We utilize cash generated from operations, short-term investments and our main revolving credit facility to cover seasonal fluctuations in cash flows and to support our various growth initiatives.

 

We had $2.01 billion available in total credit, cash and  short-term investments at July 30, 2005, which consisted of $817.6 million of available credit and $1.19 billion of cash and cash equivalents and short-term investments.

 

A summary, as of July 30, 2005, of balances available under credit agreements and debt outstanding is presented below (amounts in thousands):

 

 

 

Available
Credit

 

Debt
Outstanding

 

Revolving Credit Facility effective through December 2009

 

$

678,995

 

$

 

Senior Notes due August 2007

 

 

200,000

 

Senior Notes due October 2012

 

 

325,000

 

Uncommitted lines of credit

 

50,000

 

 

Other lines of credit

 

88,568

 

 

Capital leases and other notes payable

 

 

11,879

 

Total

 

$

817,563

 

$

536,879

 

 

17



 

We issue letters of credit under our revolving credit facility in the ordinary course of business.  At July 30, 2005, we had $71.0 million of open letters of credit, thus reducing the available credit under our revolving credit facility from $750.0 million to $679.0 million.

 

We expect that our cash generated from operations, together with our current cash, short-term investments and funds available under our main revolving credit facility, will be sufficient to fund our planned store openings and other recurring operating cash needs for at least the next twelve months.

 

Uses of Capital

 

As a result of our strong financial position, in addition to investing in our existing businesses and pursuing strategic acquisitions, we also expect to continue to return capital to our shareholders through our stock repurchase program and an annual cash dividend.

 

We expect to open 65 new stores during the last half of 2005.  We estimate that our cash requirements, including pre-opening expenses, net inventory, leasehold improvements and fixtures, will be approximately $1.3 million for each new store. We also plan to continue to make investments in information systems and distribution centers to improve operational efficiencies and customer service.  We currently plan to spend approximately $230 million on capital expenditures during the second half of 2005.

 

Historically, we have primarily grown organically, and while we do not expect this to change, we may also use capital to engage in strategic acquisitions or joint ventures in markets where we currently have a presence and in new geographic markets that could become significant to our business in future years.  We do not rely on acquisitions to achieve our publicly announced target growth plans.  While we will consider many types of acquisitions on an opportunistic basis, we target acquisitions that are small, aligned with our existing businesses, focused on both strengthening our presence in existing markets and expanding our presence into new geographies that could become long term meaningful drivers of our business and financed from our operating cash flows. In connection with such targeted acquisitions, we plan to exercise the same discipline as we use for other investments, pursuing those that we believe will earn a return above our internal return on net assets hurdle rate within a two to four year time frame.

 

We believe that we will need to spend approximately $400 million a year on capital expenditures for the next few years to fund organic growth and ongoing operations.  With this level of capital spending and an acquisition strategy that is not projected to require significant amounts of capital, it is likely that the cash we generate from operations will exceed our investing needs, thereby strengthening our credit profile.  To use this excess cash to benefit our stockholders, we implemented in 2004 a $1 billion share repurchase program and an annual cash dividend.  Under the repurchase program, we expect to buy back approximately $500 million of common stock during fiscal 2005. We paid our second annual cash dividend of $0.17 per share of common stock (or $0.25 per share prior to adjusting for the three-for-two common stock dividend distributed on April 15, 2005) on April 14, 2005 to shareholders of record on March 28, 2005, resulting in a total dividend payment of $123.4 million. While it is our intention to pay annual cash dividends in years following 2005, any decision to pay future cash dividends will be made by our Board of Directors and will depend upon our earnings, financial condition and other factors.

 

Inflation and Seasonality

 

While neither inflation nor deflation has had, and we do not expect either to have, a material impact upon our operating results, there can be no assurance that our business will not be affected by inflation or deflation in the future.  We believe that our business is somewhat seasonal, with sales and profitability slightly lower during the first and second quarters of our fiscal year.

 

Cautionary Statements

 

This Quarterly Report on Form 10-Q includes or incorporates forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by the use of the words “believes”, “anticipates”, “plans”, “expects”, “may”, “will”, “would”, “intends”, “estimates” and other similar expressions, whether in the negative or affirmative. We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in the forward looking statements made. We have included

 

18



 

important factors in the cautionary statements below that we believe could cause actual results to differ materially from the forward-looking statements contained herein. The forward-looking statements do not reflect the potential impact of any future acquisitions, mergers or dispositions. We do not assume any obligation to update any forward-looking statements contained herein.

 

Our market is highly competitive and we may not continue to compete successfully. We compete in a highly competitive marketplace with a variety of retailers, dealers and distributors. In most of our geographic markets, we compete with other high-volume office supply chains such as Office Depot and OfficeMax that are similar in concept to us in terms of pricing strategy and product selections, as well as mass merchants such as Wal-Mart, warehouse clubs, computer and electronic superstores such as Best Buy, and other discount retailers. In addition, both our retail stores and delivery operations compete with numerous mail order firms, contract stationer businesses, electronic commerce distributors, local dealers and direct manufacturers such as Dell. Many of our competitors have increased their presence in our markets in recent years. Some of our current and potential competitors are larger than we are and have substantially greater financial resources. It is possible that increased competition or improved performance by our competitors may reduce our market share, may reduce our profit margin, and may adversely affect our business and financial performance in other ways.

 

We may be unable to continue to open new stores and enter new markets  successfully. An important part of our business plan is to increase our number of stores and enter new geographic markets. We opened 23 stores during the second quarter of 2005 and 43 stores in the first half of 2005, and currently plan to open 65 new stores in the last half of 2005. For our growth strategy to be successful, we must identify and lease or buy favorable store sites, hire and train associates and adapt management and operational systems to meet the needs of our expanded operations. These tasks may be difficult to accomplish successfully. If we are unable to open new stores as quickly as planned, our future sales and profits could be materially adversely affected. Even if we succeed in opening new stores, these new stores may not achieve the same sales or profit levels as our existing stores. Also, our expansion strategy includes opening new stores in markets where we already have a presence so we can take advantage of economies of scale in marketing, distribution and supervision costs. However, these new stores may result in the loss of sales in existing stores in nearby areas.

 

Our growth may continue to strain operations, which could adversely affect our business and financial results. Our business has grown and continues to grow through organic growth and acquisitions.  Accordingly, sales, number of stores, number of countries in which we conduct business and number of associates have grown and will likely continue to grow.  This growth places significant demands on management and operational systems.  If we are not successful in continuing to support our operational and financial systems, expanding our management team and increasing and effectively managing our associate base, this growth is likely to result in operational inefficiencies and ineffective management of the business and associates, which will in turn adversely affect our business and financial performance. In addition, as we grow, our business is subject to a wider array of complex state and federal regulations, and may be increasingly the target of private actions alleging violations of such regulations, thereby increasing the cost of doing business and the risk that our business practices could unknowingly result in liabilities that could adversely affect our business and financial performance.

 

Our operating results may be impacted by changes in the economy. Our operating results are directly impacted by the health of the North American, European, South American and Asian economies, which may adversely affect our business and our results of operations.

 

Our stock price may fluctuate based on market expectations. The public trading of our stock is based in large part on market expectations that our business will continue to grow and that we will achieve certain levels of net income. If the securities analysts that regularly follow our stock lower their ratings or lower their projections for future growth and financial performance, the market price of our stock is likely to drop significantly. In addition, if our quarterly financial performance does not meet the expectations of securities analysts, our stock price would likely decline. The decrease in the stock price may be disproportionate to the shortfall in our financial performance.

 

Our quarterly operating results are subject to significant fluctuation. Our operating results have fluctuated from quarter to quarter in the past, and we expect that they will continue to do so in the future. Our earnings may not continue to grow at rates similar to the growth rates achieved in recent years and may fall short of either a prior fiscal period or investors’ expectations. Factors that could cause these quarterly fluctuations include the following: the extent to which sales in new stores result in the loss of sales in existing stores; the mix of products sold; pricing actions of competitors; the level of advertising and promotional expenses; and seasonality, primarily because the sales and profitability of our stores are typically slightly lower in the first and second quarters of the fiscal year than in other quarters. Most of our operating

 

19



 

expenses, such as rent expense, advertising expense and employee salaries, do not vary directly with the amount of sales and are difficult to adjust in the short term. As a result, if sales in a particular quarter are below expectations for that quarter, we may not proportionately reduce operating expenses for that quarter, and therefore this sales shortfall would have a disproportionately negative effect on our net income for the quarter.

 

Our expanding international operations expose us to the unique risks inherent in foreign operations. In addition to our recently expanding operations in Europe and our new operations in South America and Asia, we have a significant presence in Canada through The Business Depot Ltd. As evidenced by our recent entry into the South American and Asian markets, we may also seek to expand further into other international markets. Our foreign operations encounter risks similar to those faced by our U.S. operations, as well as risks inherent in foreign operations, such as local customs, competitive conditions and foreign currency fluctuations. Our recent acquisitions in Europe, South America and Asia have increased our exposure to these foreign operating risks, which could have an adverse impact on our International Operations income and worldwide profitability.

 

Our debt level and operating lease commitments could impact our ability to obtain future financing and continue our growth strategy.  Our consolidated outstanding debt at July 30, 2005 was $536.9 million. Our consolidated debt, along with our operating lease obligations, may have the effect generally of restricting our flexibility in responding to changing market conditions and could make us more vulnerable in the event of a downturn in our business. In addition, our level of indebtedness may have other important consequences, including: restricting our growth; making it more difficult for us to satisfy our obligations; limiting our ability to borrow additional amounts for working capital, capital expenditures, debt service requirements, future acquisitions or other corporate purposes; and limiting our ability to use operating cash flow in other areas of our business. In such a situation, additional funds may not be available on satisfactory terms when needed, or at all, whether in the next twelve months or thereafter.

 

California wage and hour class action lawsuit. Various class action lawsuits have been brought against us for alleged violations of what is known as California’s “wage and hour” law.  The plaintiffs have alleged that we improperly classified both general and assistant store managers as exempt under the California wage and hour law, making such managers ineligible for overtime wages.  The plaintiffs are seeking to require us to pay overtime wages to the putative class for the period from October 21, 1995 to the present. The motion for class certification was heard by the court on July 15, 2005, and the matter was taken under advisement. We believe we have meritorious defenses in the litigation. Accordingly, we believe the litigation will not have a material adverse effect on us.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risks

 

At July 30, 2005, there had not been a material change in any of the market risk information disclosed by us in our Annual Report on Form 10-K for the year ended January 29, 2005.  More detailed information concerning market risk can be found under the sub-caption “Quantitative and Qualitative Disclosures about Market Risks” of the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page B-13 of our Annual Report on Form 10-K for the year ended January 29, 2005.

 

20



 

Item 4. Controls and Procedures

 

The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of July 30, 2005.  The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Security and Exchange Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Based on the evaluation of the Company’s disclosure controls and procedures as of July 30, 2005, the Company’s chief executive officer and chief financial officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

 

No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended July 30, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

21



 

STAPLES, INC. AND SUBSIDIARIES

 

PART II  —  OTHER INFORMATION

 

Item 1 – Not Applicable

 

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

 

(e) The table below presents the total number of shares repurchased during the second quarter of fiscal 2005.

 

Fiscal Period

 

Total
Number of
Shares
Purchased

 

Average
Price Paid
per Share
(1)

 

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (2)

 

Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs (2)

 

May 1, 2005 –May 28, 2005

 

2,758,089

 

$

20.51

 

2,758,089

 

$

262,143,000

 

May 29, 2005 –July 2, 2005

 

2,512,300

 

$

21.90

 

2,512,300

 

$

207,125,000

 

July 3, 2005 –July 30, 2005

 

1,611,000

 

$

22.50

 

1,611,000

 

$

170,882,000

 

Total Second Quarter of Fiscal 2005

 

6,881,389

 

$

21.48

 

6,881,389

 

$

170,882,000

 

 


(1) Average price paid per share includes commissions and is rounded to the nearest two decimal places.

 

(2) On March 4, 2004, we announced that our Board of Directors approved the repurchase of up to $1 billion of common stock through January 28, 2006.

 

Item 3 – Not Applicable

 

Item 4 – Submission of Matters to a Vote of  Security Holders

 

We held our annual meeting of stockholders on June 13, 2005, the results of which we reported in a Current Report on Form 8-K on June 17, 2005 (File No. 0-17586), which Form 8-K is incorporated by reference herein.

 

Item 5 – Not Applicable

 

Item 6 – Exhibits

 

The exhibits listed on the Exhibit Index immediately preceding such exhibits are filed as part of this Quarterly Report on Form 10-Q.

 

22



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

STAPLES, INC.

 

 

 

 

 

 

Date:

August  16, 2005

 

By:

/s/ JOHN J. MAHONEY

 

 

 

John J. Mahoney

 

 

Executive Vice President,

 

 

  Chief Administrative Officer

 

 

  and Chief Financial Officer

 

 

(Principal Financial Officer)

 

 

 

 

 

 

 

By:

/s/ CHRISTINE T. KOMOLA

 

 

 

Christine T. Komola

 

 

Senior Vice President, Corporate Controller

 

 

(Principal Accounting Officer)

 

23



 

EXHIBIT INDEX

 

Exhibit
Number

 

Description of Exhibit

 

 

 

10.1 +

 

Senior Executive Long Term Disability Supplemental Coverage Reimbursement Policy

10.2 (1)

 

Amended and Restated 2004 Stock Incentive Plan

31.1 +

 

Principal Executive Officer – Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 +

 

Principal Financial Officer – Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 +

 

Principal Executive Officer – Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 +

 

Principal Financial Officer – Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 


(1)          Incorporated by reference from the Form 8-K filed on June 17, 2005 (File No. 0-17586).

+                 Filed herewith

 

24