UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark one)

 

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

 

For the quarterly period ended:  May 3, 2008

 

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

 

For the transition period  from               to               

 

Commission File Number:    0-17586

 

STAPLES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

04-2896127

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

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 x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o  No x

 

The registrant had 702,121,445 shares of common stock outstanding as of  May 16, 2008.

 

 



 

STAPLES, INC. AND SUBSIDIARIES

FORM  10-Q
May 3, 2008
TABLE OF CONTENTS
 

 

Page

Part I – Financial Information:

 

 

 

Item 1. Financial Statements:

 

Consolidated Balance Sheets

3

Consolidated Statements of Income

4

Consolidated Statements of Cash Flows

5

Notes to Consolidated Financial Statements

6-14

 

 

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

15-21

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

21

 

 

Item 4. Controls and Procedures

21

 

 

Part II – Other Information

23

 

 

Signatures

28

 

 

Exhibit Index

29

 

2



 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

STAPLES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollar Amounts in Thousands, Except Share Data)

(Unaudited)

 

 

 

May 3,

 

February 2,

 

 

 

2008

 

2008

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

1,204,730

 

$

1,245,448

 

Short-term investments

 

17,027

 

27,016

 

Receivables, net

 

894,652

 

822,254

 

Merchandise inventories, net

 

2,044,491

 

2,053,163

 

Deferred income tax asset

 

174,693

 

173,545

 

Prepaid expenses and other current assets

 

220,464

 

233,956

 

Total current assets

 

4,556,057

 

4,555,382

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

Land and buildings

 

874,526

 

859,751

 

Leasehold improvements

 

1,153,930

 

1,135,132

 

Equipment

 

1,855,981

 

1,819,381

 

Furniture and fixtures

 

888,801

 

871,361

 

Total property and equipment

 

4,773,238

 

4,685,625

 

Less accumulated depreciation and amortization

 

2,628,508

 

2,524,486

 

Net property and equipment

 

2,144,730

 

2,161,139

 

 

 

 

 

 

 

Lease acquisition costs, net of accumulated amortization

 

30,588

 

31,399

 

Intangible assets, net of accumulated amortization

 

227,208

 

231,310

 

Goodwill

 

1,815,265

 

1,764,928

 

Other assets

 

287,667

 

292,186

 

Total assets

 

$

9,061,515

 

$

9,036,344

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

1,638,284

 

$

1,560,728

 

Accrued expenses and other current liabilities

 

955,807

 

1,025,364

 

Debt maturing within one year

 

28,537

 

23,806

 

Total current liabilities

 

2,622,628

 

2,609,898

 

 

 

 

 

 

 

Long-term debt

 

338,380

 

342,169

 

Other long-term obligations

 

362,026

 

356,043

 

Minority interest

 

10,439

 

10,227

 

 

 

 

 

 

 

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 869,366,814 shares at May 3, 2008 and 867,366,103 shares at February 2, 2008

 

522

 

520

 

Additional paid-in capital

 

3,760,126

 

3,720,319

 

Cumulative foreign currency translation adjustments

 

532,205

 

476,399

 

Retained earnings

 

4,774,364

 

4,793,542

 

Less: Treasury stock at cost - 165,633,466 shares at May 3, 2008 and 162,728,588 shares at February 2, 2008

 

(3,339,175

)

(3,272,773

)

Total stockholders’ equity

 

5,728,042

 

5,718,007

 

Total liabilities and stockholders’ equity

 

$

9,061,515

 

$

9,036,344

 

 

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

 

 

 

May 3,

 

May 5,

 

 

 

2008

 

2007

 

 

 

 

 

 

 

Sales

 

$

4,884,554

 

$

4,589,465

 

Cost of goods sold and occupancy costs

 

3,513,632

 

3,304,526

 

Gross profit

 

1,370,922

 

1,284,939

 

 

 

 

 

 

 

Operating and other expenses:

 

 

 

 

 

Operating and selling

 

831,929

 

759,714

 

General and administrative

 

212,872

 

199,181

 

Amortization of intangibles

 

4,156

 

3,433

 

Total operating expenses

 

1,048,957

 

962,328

 

 

 

 

 

 

 

Operating income

 

321,965

 

322,611

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

11,488

 

15,551

 

Interest expense

 

(7,256

)

(11,135

)

Miscellaneous income (expense)

 

215

 

(597

)

Income before income taxes and minority interest

 

326,412

 

326,430

 

Income tax expense

 

114,244

 

117,515

 

Income before minority interests

 

212,168

 

208,915

 

Minority interest income

 

(114

)

(228

)

Net income

 

$

212,282

 

$

209,143

 

 

 

 

 

 

 

Earnings Per Share:

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.31

 

$

0.29

 

Diluted earnings per common share

 

$

0.30

 

$

0.29

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.33

 

$

0.29

 

 

See notes to consolidated financial statements.

 

4



 

STAPLES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)

(Unaudited)

 

 

 

13 Weeks Ended

 

 

 

May 3,

 

May 5,

 

 

 

2008

 

2007

 

Operating Activities:

 

 

 

 

 

Net income

 

$

212,282

 

$

209,143

 

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

 

 

 

 

 

Depreciation and amortization

 

105,287

 

93,560

 

Stock-based compensation

 

33,362

 

34,260

 

Deferred tax benefit

 

38

 

23,632

 

Excess tax benefits from stock-based compensation arrangements

 

(991

)

(12,555

)

Other

 

3,157

 

(2,587

)

Changes in assets and liabilities:

 

 

 

 

 

Increase in receivables

 

(65,186

)

(10,272

)

Decrease (increase) in merchandise inventories

 

14,199

 

(49,600

)

Decrease (increase) in prepaid expenses and other assets

 

16,651

 

(15,347

)

Increase (decrease) in accounts payable

 

69,182

 

(11,618

)

Decrease in accrued expenses and other liabilities

 

(91,433

)

(134,681

)

Increase in other long-term obligations

 

2,650

 

55,113

 

Net cash provided by operating activities

 

299,198

 

179,048

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

Acquisition of property and equipment

 

(73,894

)

(64,101

)

Acquisition of businesses and investments in joint ventures, net of cash acquired

 

 

(7,299

)

Proceeds from the sale of short-term investments

 

9,992

 

2,137,785

 

Purchase of short-term investments

 

(3

)

(2,083,962

)

Net cash used in investing activities

 

(63,905

)

(17,577

)

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

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

 

5,308

 

63,933

 

Proceeds from borrowings

 

5,996

 

14,151

 

Payments on borrowings

 

(2,262

)

(675

)

Cash dividends paid

 

(231,460

)

(207,551

)

Excess tax benefits from stock-based compensation arrangements

 

991

 

12,555

 

Purchase of treasury stock, net

 

(66,402

)

(195,602

)

Net cash used in financing activities

 

(287,829

)

(313,189

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

11,818

 

17,515

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(40,718

)

(134,203

)

Cash and cash equivalents at beginning of period

 

1,245,448

 

1,017,671

 

Cash and cash equivalents at end of period

 

$

1,204,730

 

$

883,468

 

 

See notes to consolidated financial statements.

 

5



 

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

 

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 weeks ended May 3, 2008 (also referred to as the “first quarter of 2008”) and the period covering the thirteen weeks ended  May 5, 2007 (also referred to as the “first quarter of 2007”).  All intercompany accounts and transactions are eliminated in consolidation.  Certain previously reported amounts have been reclassified to conform with the current period presentation.

 

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 accounting principles generally accepted in the United States of America 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 February 2, 2008.

 

Note B – New Accounting Pronouncements

 

In September 2006, the Financial Accounting Standards Board  (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement), then priority to quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market (Level 2 measurement), then the lowest priority to unobservable inputs (Level 3 measurement).  In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2, “Effective date of FASB Statement No. 157”, which delayed for one year the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).  Effective February 3, 2008, the Company adopted SFAS No. 157 for its financial assets.  The adoption had no impact on the Company’s financial position, results of operations or cash flows.  The Company has not yet determined the impact on its financial statements of the February 1, 2009 adoption of SFAS No. 157 as it pertains to non-financial assets and liabilities.

 

The following table shows assets and liabilities as of May 3, 2008 that are measured at fair value on a recurring basis (in thousands):

 

 

 

Quoted Prices in 
Active Markets for 
Identical Assets or 
Liabilities 
Level 1

 

Significant 
Other 
Observable 
Inputs 
Level 2

 

Unobservable 
Inputs 
Level 3

 

Treasury securities

 

$

17,027

 

 

 

Derivative assets

 

 

$

5,958

 

 

Derivative liabilities

 

 

(12,752

)

 

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115,” (“SFAS No. 159”). SFAS No. 159 permits entities to elect to measure many financial instruments and certain other items at fair value.  Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date.  SFAS No. 159 was effective for the Company on February 3, 2008. The adoption of SFAS No. 159 did not have an impact on the Company’s financial position, results of operations or cash flows.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities” (“SFAS No. 161”).  SFAS 161 enhances disclosures for derivative instruments and hedging activities, including: (i) the manner in which a company uses derivative instruments; (ii) the manner in which derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and (iii) the effect of derivative instruments and related hedged items on a company’s financial position.    SFAS No. 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years.   The Company will adopt this statement as of February 1, 2009.  As SFAS No. 161 relates specifically to disclosures, this standard will have no impact on our financial condition, results of operations or cash flows.

 

6



 

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

 

Note C – Debt and Credit Agreements

 

On April 1, 2008, Staples entered into a $3.0 billion credit agreement (the “2008 Agreement”) with Lehman Commercial Paper, Inc., as administrative agent, Bank of America, N.A. and HSBC Bank USA, National Association, as co-syndication agents, and Lehman Brothers Inc., as lead arranger and bookrunner, for a commitment period beginning on the earlier of (i) the date of the initial funding under the 2008 Agreement (which can be no later than February 17, 2009) or (ii) the initial date the Company issues commercial paper in anticipation of its proposed acquisition of the outstanding capital stock of Corporate Express N.V. (“Corporate Express”) and continuing until the date 364 days after the initial funding under the 2008 Agreement, unless earlier terminated pursuant to the terms of the 2008 Agreement.  The 2008 Agreement provides financing solely for the Company’s proposed acquisition of all of the outstanding capital stock of Corporate Express, including related transaction fees, costs and expenses, and for backup for any potential commercial paper program.    Amounts borrowed under the 2008 Agreement may be borrowed, repaid and reborrowed from time to time, with the aggregate principal amount of the loans outstanding not to exceed the maximum borrowing amount of $3.0 billion.   Borrowings made pursuant to the 2008 Agreement will bear interest at either (a) the base rate (the higher of the prime rate, as defined in the 2008 Agreement, or the federal funds rate plus 0.50%) plus an “applicable margin,” defined as a percentage spread based on Staples’ credit rating or (b) the Eurocurrency rate plus a different “applicable margin,” also defined as a percentage spread based on Staples’ credit rating.  The applicable margin for each base rate loan and Eurocurrency rate loan increases periodically, as set forth in the 2008 Agreement. The payments under the 2008 Agreement are guaranteed by the same subsidiaries of Staples that guarantee Staples’ publicly issued notes and its existing revolving credit facility.  Under the 2008 Agreement, Staples agrees to pay a commitment fee, payable quarterly, at rates that range from 0.080% to 0.175% based on Staples’ credit rating.  The 2008 Agreement contains affirmative and negative covenants that are consistent with those contained in Staples’ $750.0 million revolving credit agreement. The 2008 Agreement also contains financial covenants that require Staples to maintain a minimum fixed charge coverage ratio of 1.5:1.0 and a maximum adjusted funded debt to total capitalization ratio of 0.75:1.0.  As of May 3, 2008, no borrowings were outstanding under the 2008 Agreement.

 

On May 5, 2008, Staples entered into the first amendment (the “Amendment”) to the Amended and Restated Revolving Credit Agreement, as amended, dated as of October 13, 2006 (the “Revolving Credit Facility”).  The Amendment was entered into in connection with the proposed acquisition of Corporate Express and provides certain post-acquisition cure periods to allow the Company to cure defaults that could arise (i) as a result of change in control provisions contained in Corporate Express’ outstanding debt obligations and (ii) under Corporate Express’ and the Company’s outstanding debt obligations as a result of events or circumstances, such as litigation, liens or defaults, affecting Corporate Express. The Amendment does not alter the amount that may be borrowed under, or the terms of, the Revolving Credit Facility and confirms the obligations of the Company to the lenders and administrative agent who are parties thereto.

 

There were no instances of default in the first quarter of 2008 under any of the Company’s debt agreements.

 

Note D – Equity Based Employee Benefit Plans

 

Staples offers associates share ownership through certain employee benefit plans, including the Employees’ 401(k) Savings Plan (the “401(k) Plan”), the Amended and Restated 1998 Employee Stock Purchase Plan and the Amended and Restated International Employee Stock Purchase Plan (collectively the “Employee Stock Purchase Plans”), and the Amended and Restated 2004 Stock Incentive Plan.

 

All U.S. based associates who meet minimum age and length of service requirements are eligible to participate in the 401(k) Plan.  Company contributions to the 401(k) Plan are calculated on a matching formula applied to associates’ contributions that are made in the form of Company common stock and vest ratably over a five year period.  After five years of service, participants are fully vested in all contributions.  Under the Employee Stock Purchase Plans, U.S and International associates may purchase shares of Staples common stock at 85% of the lower of the market price of the common stock at the beginning or end of an offering period through payroll deductions in an amount not to exceed 10% of an employee’s annual base compensation.  Under the Amended and Restated 2004 Stock Incentive Plan, the Company grants nonqualified stock options and restricted stock and restricted stock units (collectively, “Restricted Shares”) to associates.  The nonqualified stock options and Restricted Shares are restricted in that they are not transferable (i.e. they may not be exercised or sold) until they vest.  Vesting of these awards occurs over different periods, depending on the terms of the individual award, but expenses relating to these awards are all recognized on a straight line basis over the applicable vesting period.

 

7



 

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

 

The following table summarizes the nonqualified stock option and Restricted Share activity in the first quarter of 2008:

 

 

 

Nonqualified Stock Options

 

Restricted Shares

 

 

 

Number
of Shares

 

Weighted 
Average 
Exercise 
Price 
per Share

 

Number
of Shares

 

Weighted 
Average 
Grant Date 
Fair Value 
per Share

 

Outstanding at February 2, 2008

 

51,374,926

 

$

17.90

 

9,857,269

 

$

24.61

 

Granted

 

183,689

 

21.58

 

938,647

 

21.82

 

Exercised / released

 

(1,478,855

)

15.31

 

(224,413

)

22.11

 

Canceled

 

(658,632

)

20.22

 

(229,719

)

24.54

 

Outstanding at May 3, 2008

 

49,421,128

 

$

17.97

 

10,341,784

 

$

24.41

 

 

Staples also grants performance share awards to certain employees, which are awards of restricted stock that only are issued and vest if the Company meets minimum performance targets (the “Performance Shares”).  If at the end of each three year period, the Company’s performance falls between the minimum and maximum targets, a percentage of the Performance Shares ranging from 90% to 200% will vest depending on the performance achieved.  If the Company does not achieve the minimum performance target, none of the Performance Shares will be issued.

 

In connection with its equity based employee benefit plans, Staples included approximately $33.4 million and $34.3 million in compensation expense for the thirteen weeks ended May 3, 2008 and May 5, 2007, respectively.  As of May 3, 2008, Staples had $230.4 million of nonqualified stock options and restricted shares to be expensed over the period through January 2012.

 

Note E - 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

 

 

 

May 3, 2008

 

May 5, 2007

 

Net income

 

$

212,282

 

$

209,143

 

Other comprehensive income:

 

 

 

 

 

Foreign currency translation adjustments, net

 

57,352

 

105,111

 

Changes in the fair value of derivatives

 

(2,666

)

(18,550

)

Tax effect of changes in the fair value of derivatives

 

1,120

 

7,791

 

Total comprehensive income

 

$

268,088

 

$

303,495

 

 

Note F - Computation of Earnings Per Common Share

 

The computation of basic and diluted earnings per share for the first quarter of 2008 and 2007 is as follows (in thousands, except per share data):

 

 

 

13 Weeks Ended

 

 

 

May 3, 2008

 

May 5, 2007

 

Net income

 

$

212,282

 

$

209,143

 

Denominator:

 

 

 

 

 

Weighted-average common shares outstanding

 

693,402

 

711,499

 

Effect of dilutive securities:

 

 

 

 

 

Employee stock options, Restricted Shares and Performance Shares

 

14,535

 

17,418

 

Weighted-average common shares outstanding assuming dilution

 

707,937

 

728,917

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.31

 

$

0.29

 

Diluted earnings per common share

 

$

0.30

 

$

0.29

 

 

8



 

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

 

Note G - Segment Reporting

 

Staples has three reportable segments: North American Retail, North American Delivery and International 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 Contract.  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 20 countries in Europe, Asia and South America.

 

Staples evaluates performance and allocates resources based on profit or loss from operations before stock-based compensation, interest and other expense, 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.

 

Staples’ North American Retail and North American Delivery segments are managed separately because the way they market products is different, the classes of customers they service may be different, and the distribution methods used to deliver products to customers is different.  The International Operations are considered a separate reportable segment because of the significant differences in the operating environment from the North American operations.

 

The following is a summary of sales and business unit income by reportable segment for the first quarter of 2008 and 2007 and a reconciliation of segment income to income before income taxes and minority interest (in thousands):

 

 

 

13 Weeks Ended

 

 

 

May 3, 2008

 

May 5, 2007

 

 

 

Sales

 

 

 

 

 

 

 

North American Retail

 

$

2,408,501

 

$

2,363,603

 

North American Delivery

 

1,720,491

 

1,593,029

 

International Operations

 

755,562

 

632,833

 

Total reportable segments

 

$

4,884,554

 

$

4,589,465

 

 

 

 

Business Unit Income

 

 

 

 

 

 

 

North American Retail

 

$

168,242

 

$

189,552

 

North American Delivery

 

163,262

 

151,830

 

International Operations

 

23,823

 

15,489

 

Business unit income

 

$

355,327

 

$

356,871

 

Stock-based compensation

 

(33,362

)

(34,260

)

Total segment income

 

321,965

 

322,611

 

Interest and other income, net

 

4,447

 

3,819

 

Income before income taxes and minority interest

 

$

326,412

 

$

326,430

 

 

Note H - Guarantor Subsidiaries

 

Under the terms of the Company’s 7.375% Senior Notes (the “Notes”), the Revolving Credit Facility and the 2008 Agreement, certain subsidiaries guarantee repayment of the debt. The 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 guarantees is equivalent to the term of the related debt. The following condensed consolidating financial data is presented for the holders of the Notes and illustrates the composition of Staples, Inc. (the “Parent Company”), the Guarantor Subsidiaries, and the non-guarantor subsidiaries as of and for the thirteen weeks ended May 3, 2008 and May 5, 2007.  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

 

9



 

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

 

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 May 3, 2008

(in thousands)

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

Staples, Inc.

 

Guarantor

 

Guarantor

 

 

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

483,051

 

$

38,690

 

$

682,989

 

$

 

$

1,204,730

 

Short-term investments

 

17,027

 

 

 

 

17,027

 

Merchandise inventories

 

 

1,250,432

 

794,059

 

 

2,044,491

 

Other current assets

 

48,491

 

701,829

 

539,489

 

 

1,289,809

 

Total current assets

 

548,569

 

1,990,951

 

2,016,537

 

 

4,556,057

 

Net property, equipment and other assets

 

343,821

 

1,309,238

 

1,037,134

 

 

2,690,193

 

Goodwill

 

290,759

 

154,527

 

1,369,979

 

 

1,815,265

 

Investment in affiliates and intercompany, net

 

(1,260,587

)

3,268,078

 

3,412,879

 

(5,420,370

)

 

Total assets

 

$

(77,438

)

$

6,722,794

 

$

7,836,529

 

$

(5,420,370

)

$

9,061,515

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

$

232,100

 

$

1,230,899

 

$

1,159,629

 

$

 

$

2,622,628

 

Total long-term liabilities

 

124,693

 

475,978

 

99,735

 

 

700,406

 

Minority interest

 

 

 

10,439

 

 

10,439

 

Total stockholders’ equity

 

(434,231

)

5,015,917

 

6,566,726

 

(5,420,370

)

5,728,042

 

Total liabilities and stockholders’ equity

 

$

(77,438

)

$

6,722,794

 

$

7,836,529

 

$

(5,420,370

)

$

9,061,515

 

 

Condensed Consolidating Balance Sheet

As of February 2, 2008

(in thousands)

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

Staples, Inc.

 

Guarantor

 

Guarantor

 

 

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

638,543

 

$

42,612

 

$

564,293

 

$

 

$

1,245,448

 

Short-term investments

 

27,016

 

 

 

 

27,016

 

Merchandise inventories

 

 

1,271,978

 

781,185

 

 

2,053,163

 

Other current assets

 

38,343

 

632,238

 

559,174

 

 

1,229,755

 

Total current assets

 

703,902

 

1,946,828

 

1,904,652

 

 

4,555,382

 

Net property, equipment and other assets

 

354,949

 

1,326,736

 

1,034,349

 

 

2,716,034

 

Goodwill, net of amortization

 

296,511

 

154,527

 

1,313,890

 

 

1,764,928

 

Investment in affiliates and intercompany, net

 

(1,055,173

)

3,069,532

 

3,070,975

 

(5,085,334

)

 

Total assets

 

$

300,189

 

$

6,497,623

 

$

7,323,866

 

$

(5,085,334

)

$

9,036,344

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

$

340,421

 

$

1,150,712

 

$

1,118,765

 

$

 

$

2,609,898

 

Total long-term liabilities

 

128,300

 

472,554

 

97,358

 

 

698,212

 

Minority interest

 

 

 

10,227

 

 

10,227

 

Total stockholders’ equity

 

(168,532

)

4,874,357

 

6,097,516

 

(5,085,334

)

5,718,007

 

Total liabilities and stockholders’ equity

 

$

300,189

 

$

6,497,623

 

$

7,323,866

 

$

(5,085,334

)

$

9,036,344

 

 

10



 

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

 

Condensed Consolidating Statement of Income

For the thirteen weeks ended May 3, 2008

(in thousands)

 

 

 

Staples, Inc.

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Consolidated

 

Sales

 

$

 

$

3,129,692

 

$

1,754,862

 

$

4,884,554

 

Cost of goods sold and occupancy costs

 

3,169

 

2,303,760

 

1,206,703

 

3,513,632

 

Gross profit

 

(3,169

)

825,932

 

548,159

 

1,370,922

 

Operating and other expenses

 

10,756

 

641,458

 

392,296

 

1,044,510

 

Income (loss) before income taxes and minority interest

 

(13,925

)

184,474

 

155,863

 

326,412

 

Income tax expense

 

 

59,358

 

54,886

 

114,244

 

Income (loss) before minority interests

 

(13,925

)

125,116

 

100,977

 

212,168

 

Minority interest income

 

 

 

(114

)

(114

)

Net income (loss)

 

$

(13,925

)

$

125,116

 

$

101,091

 

$

212,282

 

 

Condensed Consolidating Statement of Income

For the thirteen weeks ended May 5, 2007

(in thousands)

 

 

 

Staples, Inc.

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Consolidated

 

Sales

 

$

 

$

3,038,042

 

$

1,551,423

 

$

4,589,465

 

Cost of goods sold and occupancy costs

 

1,979

 

2,225,558

 

1,076,989

 

3,304,526

 

Gross profit

 

(1,979

)

812,484

 

474,434

 

1,284,939

 

Operating and other expenses

 

8,212

 

616,525

 

333,772

 

958,509

 

Income (loss) before income taxes and minority interest

 

(10,191

)

195,959

 

140,662

 

326,430

 

Income tax expense

 

 

94,541

 

22,974

 

117,515

 

Income (loss) before minority interests

 

(10,191

)

101,418

 

117,688

 

208,915

 

Minority interest income

 

 

 

(228

)

(228

)

Net income (loss)

 

$

(10,191

)

$

101,418

 

$

117,916

 

$

209,143

 

 

11



 

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

 

Condensed Consolidating Statement of Cash Flows

For the thirteen weeks ended May 3, 2008

(in thousands)

 

 

 

Staples, Inc.

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Consolidated

 

Net cash provided by operating activities

 

$

134,649

 

$

33,626

 

$

130,923

 

$

299,198

 

Investing Activities:

 

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

(11,621

)

(38,182

)

(24,091

)

(73,894

)

Purchase of short-term investments

 

(3

)

 

 

(3

)

Proceeds from the sale of short-term investments

 

9,992

 

 

 

9,992

 

Cash used in investing activities

 

(1,632

)

(38,182

)

(24,091

)

(63,905

)

Financing Activities:

 

 

 

 

 

 

 

 

 

Payments on borrowings

 

(2,262

)

 

 

(2,262

)

Purchase of treasury stock

 

(66,402

)

 

 

(66,402

)

Excess tax benefits from stock-based compensation arrangements

 

311

 

634

 

46

 

991

 

Cash dividends paid

 

(231,460

)

 

 

(231,460

)

Other

 

11,304

 

 

 

11,304

 

Cash (used in) provided by financing activities

 

(288,509

)

634

 

46

 

(287,829

)

Effect of exchange rate changes on cash and cash equivalents

 

 

 

11,818

 

11,818

 

Net (decrease) increase in cash and cash equivalents

 

(155,492

)

(3,922

)

118,696

 

(40,718

)

Cash and cash equivalents at beginning of period

 

638,543

 

42,612

 

564,293

 

1,245,448

 

Cash and cash equivalents at end of period

 

$

483,051

 

$

38,690

 

$

682,989

 

$

1,204,730

 

 

12



 

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

 

Condensed Consolidating Statement of Cash Flows

For the thirteen weeks ended May 5, 2007

(in thousands)

 

 

 

Staples, Inc.

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Consolidated

 

Net cash provided by operating activities

 

$

91,519

 

$

20,391

 

$

67,138

 

$

179,048

 

Investing Activities:

 

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

(6,796

)

(37,256

)

(20,049

)

(64,101

)

Acquisition of businesses and investment in joint ventures, net of cash acquired

 

 

 

(7,299

)

(7,299

)

Purchase of short-term investments

 

(2,083,962

)

 

 

(2,083,962

)

Proceeds from the sale of short-term investments

 

2,137,785

 

 

 

2,137,785

 

Cash provided by (used in) investing activities

 

47,027

 

(37,256

)

(27,348

)

(17,577

)

Financing Activities:

 

 

 

 

 

 

 

 

 

Payments on borrowings

 

(675

)

 

 

(675

)

Purchase of treasury stock

 

(195,602

)

 

 

(195,602

)

Excess tax benefits from stock-based compensation arrangements

 

8,091

 

4,320

 

144

 

12,555

 

Cash dividends paid

 

(207,551

)

 

 

(207,551

)

Other

 

78,084

 

 

 

78,084

 

Cash (used in) provided by financing activities

 

(317,653

)

4,320

 

144

 

(313,189

)

Effect of exchange rate changes on cash and cash equivalents

 

 

 

17,515

 

17,515

 

Net (decrease) increase in cash and cash equivalents

 

(179,107

)

(12,545

)

57,449

 

(134,203

)

Cash and cash equivalents at beginning of period

 

476,549

 

49,687

 

491,435

 

1,017,671

 

Cash and cash equivalents at end of period

 

$

297,442

 

$

37,142

 

$

548,884

 

$

883,468

 

 

Note I – Commitments and Contingencies

 

The Company is involved from time to time in litigation arising from the operation of its business that is considered routine and incidental to its business; however, the Company does not expect the results of any of these actions to have a material adverse effect on its business, results of operations, or financial condition.

 

Note J – Proposed Acquisition of Corporate Express

 

On February 19, 2008, the Company announced that it had made a proposal to Corporate Express, a Dutch office products distributor with operations in North America, Europe and Australia, to acquire all of the outstanding ordinary shares and American Depository Shares (the “ADSs”) for a cash consideration of 7.25 Euros per share.

 

On March 18, 2008, the Company confirmed its intention to make a public offer for all of the outstanding ordinary shares and ADSs of Corporate Express for a price of 7.25 Euros per share and further confirmed that preparations were well under way for the offer.  In addition, Staples confirmed its intention to make a public offer for the Corporate Express preference shares A (the “Preference Shares”) and 2% subordinated convertible bonds due 2010 issued by Corporate Express in the principal amount of 115 million Euros (the “Convertible Bonds”).

 

On April 1, 2008, the Company announced that it had entered into the 2008 Agreement to finance the proposed acquisition (see Note C).  This $3.0 billion financing, together with the Company’s cash reserves and Revolving Credit Facility, are expected to be sufficient to finance Staples’ acquisition of Corporate Express.

 

On May 13, 2008, the Company announced its intention to proceed with an offer to acquire all of the outstanding ordinary shares and ADSs of Corporate Express at an increased price of 8.00 Euros per share, following approval of the offer from the Netherlands Authority for the Financial Markets.   The Company stated that it expected the offer would extend to the Corporate Express Preference Shares and Convertible Bonds.

 

13



 

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

 

The offer would include a minimum acceptance condition of 75 percent of issued and outstanding ordinary shares, including the ordinary shares underlying the ADSs.  The Company also announced that it had received antitrust clearance for the proposed acquisition in the United States, and had initiated the required regulatory processes in Europe and Canada for the transaction.

 

On May 19, 2008, the Company announced the launch of a tender offer in the Netherlands to purchase all of the issued and outstanding ordinary shares, ADSs, Preference Shares and Convertible Bonds of Corporate Express, and the Company announced that it intends to launch tender offers shortly for the 8.25% Senior Subordinated Notes due July 1, 2014 (the “2014 Notes”) and the 7.875% Senior Subordinated Notes due March 1, 2015 (the “2015 Notes”) of Corporate Express U.S. Finance Inc. (formerly known as Buhrmann US Inc.), a wholly owned subsidiary of Corporate Express. The offer is to acquire all of the outstanding ordinary shares and ADSs of Corporate Express at a price of 8.00 Euros per share, expires, subject to extension, on June 27, 2008, and includes, among other things, a minimum acceptance condition on obtaining valid acceptance from 75 percent of the issued and outstanding ordinary shares, including the ordinary shares underlying the ADSs.

 

14



 

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

 

Forward Looking Statements

 

This Quarterly Report on Form 10-Q and, in particular, this management’s 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 (the “Exchange Act”), including statements regarding:

 

·                  projected financial performance, including future revenues and expenditures, operating income, comparable store sales, earnings and earnings per share, inventory turns, operating margin and own brand product sales;

·                  expected future cash needs and credit profile;

·                  payment of cash dividends and share repurchases;

·                  the projected number, timing and cost of new store openings;

·                  entry into new geographic markets;

·                  estimates of the potential markets for our products and services, including the anticipated drivers for future growth;

·                  sales and marketing plans;

·                  the potential growth and levels of profitability of our International Operations;

·                  assessment of the outcome and financial impact of litigation and other governmental proceedings and the potential impact of unasserted claims;

·                  assessment of market risks relating to interest rates and currency rate fluctuations;

·                  projected improvements to our infrastructure and impact of such improvements on our business and operations;

·                  assessment of competitors and potential competitors;

·                  potential mergers, acquisitions or joint ventures, including our proposal to acquire all of the outstanding capital stock of Corporate Express N.V. (“Corporate Express”); and

·                  assessment of the impact of recent tax legislation and accounting pronouncements.

 

In addition, any statements contained in or incorporated by reference into this report that are not statements of historical fact should be considered forward-looking statements.  You can identify these forward-looking statements by the use of the words “believes”, “expects”, “anticipates”, “plans”, “may”, “will”, “would”, “intends”, “estimates” and other similar expressions, whether in the negative or affirmative.  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, and should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included in this report.  We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in the forward-looking statements made.  There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by such forward-looking statements.  These risks and uncertainties include, without limitation, those set forth under the heading “Risk Factors” of this Quarterly Report on Form 10-Q.  We do not intend to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

 

Overview

 

The first quarter of 2008 produced positive results.   We reached $4.9 billion in sales, with sales growth of 6% compared to the first quarter of 2007.  We continue to execute our business strategy and make significant investments to improve our business during a time of slower economic growth.  Major contributors to the first quarter of 2008 results are summarized below and reviewed further in the Consolidated Performance and Segment Performance discussions.

 

·                  North American Delivery drove strong sales growth and achieved excellent customer service, growing sales 8.0% while maintaining its business unit income rate of 9.5%.

·                  International Operations continued to grow sales and drive profit improvement, growing sales 19.4% and raising its business unit income rate to 3.2% from 2.4%.

·                  North American Retail’s comparable store sales declined 6% and business unit income rate fell to 7.0% from 8.0% but maintained strong profitability in a challenging economic environment.

·                  We opened 35 new stores in North America and 3 new stores in Europe.   We now operate 2,076 stores worldwide.

·                  Operating cash flow increased to $299 million.

 

15



 

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.

 

Consolidated Performance:

 

Net income for the first quarter of 2008 was $212.3 million or $0.30 per diluted share compared to $209.1 million or $0.29 per diluted share for the first quarter of 2007, an increase in net income of 2%. Our results for the first quarter of 2008 were achieved by continuing to focus on our strategy of driving profitable sales growth, improving profit margins and increasing asset productivity.  This includes delivering on our “Easy” brand promise to make buying office products easy for our customers in order to differentiate us from our competitors.  Our commitment to customer service, our focus on higher margin Staples brand products, the continued success of our customer acquisition and retention efforts, and expense control were key drivers of our results in the first quarter of 2008.

 

Sales:  Sales for the first quarter of 2008 were $4.9 billion, an increase of 6.4% from the first quarter of 2007. Comparable sales for our North American Retail locations decreased 6% for the first quarter of 2008 and comparable sales for our International retail locations increased 4% for the first quarter of 2008. We had 2,076 open stores as of May 3, 2008 compared to 1,927 stores as of May 5, 2007 and 2,038 stores as of February 2, 2008.  This includes 38 stores opened during the first quarter of 2008. North American Delivery sales increased 8.0% for the first quarter of 2008.  Total International sales increased 19.4% for the first quarter of 2008.

 

Our sales growth in the first quarter of 2008 reflects increases in sales of ink and toner, core office supplies, computers and paper, as well as our continued focus on customer service, and the continued success of our customer acquisition and retention efforts in our North American Delivery business.  The increase in total sales also reflects the positive impact of foreign exchange rates of $153.8 million for the first quarter of 2008.

 

Gross Profit: Gross profit as a percentage of sales was 28.1% for the first quarter of 2008 compared to 28.0% for the first quarter of 2007. The increase in the gross profit rate for 2008 from 2007 is primarily due to an improvement in product margin rate in our North American Retail and North American Delivery segments as well as improvements in supply chain, partially offset by deleverage in fixed occupancy costs on a decrease in comparable store sales in North American Retail.

 

Operating and Selling Expenses:  Operating and selling expenses, which consist of payroll, advertising and other operating expenses, were 17.0% of sales for the first quarter of 2008 compared to 16.6% for the first quarter of 2007. The increase in operating expenses as a percentage of sales for the first quarter of 2008 primarily reflects deleverage in fixed expenses on a decrease in comparable store sales in North American Retail and investments in share of wallet initiatives and catalog marketing in North American Delivery, partially offset by our continued focus on expense control.

 

General and Administrative Expenses:  General and administrative expenses as a percentage of sales were 4.4% for the first quarter of 2008 compared to 4.3% for the first quarter of 2007.  This reflects our continued focus on expense control.

 

Amortization of Intangibles: Amortization of intangibles was $4.2 million for the first quarter of 2008 compared to $3.4 million for the first quarter of 2007, reflecting the amortization of certain trade names, customer-related intangible assets and noncompetition agreements.

 

Interest income: Interest income decreased to $11.5 million in the first quarter of 2008 from $15.6 million in the first quarter of 2007.  The decrease in interest income for the first quarter of 2008 is primarily due to a decrease in our average cash and short-term investment portfolio.

 

Interest expense: Interest expense decreased to $7.3 million for the first quarter of 2008 from $11.1 million for the first quarter of 2007.  The decrease in interest expense for the first quarter of 2008 is primarily due to the repayment of our $200.0 million 7.125% senior notes in August 2007, combined with a decrease in interest rates.  We use interest rate swap agreements to convert our fixed rate debt obligations into variable rate obligations.  As a result of fluctuations in interest

 

16



 

rates relative to the LIBOR benchmark in our swap agreements, these interest rate swap agreements had a negative impact on interest expense in 2008 and 2007.  Excluding the impact of our interest rate swap agreements, interest expense would have been $7.2 million for the first quarter of 2008 and $10.9 million for the first quarter of 2007.

 

Miscellaneous income (expense):  Miscellaneous income was $0.2 million for the first quarter of 2008 and miscellaneous expense was $0.6 million for the first quarter of 2007. These amounts primarily reflect foreign exchange gains and losses recorded in the respective periods.

 

Income Taxes: Our effective tax rate was 35.0% for the first quarter of 2008 and 36.0% for the first quarter of 2007.  The decrease in our effective tax rate in 2008 was due to geographical changes in the mix of earnings.

 

Segment Performance:

 

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 Contract. 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 20 countries in Europe, Asia and South America.

 

The following tables provide a summary of our sales and business unit income by reportable segment.   Business unit income excludes stock-based compensation, interest and other expense, income taxes, the impact of changes in accounting principles and non-recurring items (see reconciliation of total segment income to consolidated income before income taxes and minority interest in Note G to the Consolidated Financial Statements):

 

 

 

(Amounts in thousands)

 

May 3, 2008

 

May 5, 2007

 

 

 

13 Weeks Ended

 

Increase From

 

Increase From

 

 

 

May 3, 2008

 

May 5, 2007

 

Prior Year

 

Prior Year

 

Sales:

 

 

 

 

 

 

 

 

 

North American Retail

 

$

2,408,501

 

$

2,363,603

 

1.9

%

2.5

%

North American Delivery

 

1,720,491

 

1,593,029

 

8.0

%

14.8

%

International Operations

 

755,562

 

632,833

 

19.4

%

16.2

%

Total sales

 

$

4,884,554

 

$

4,589,465

 

6.4

%

8.3

%

 

 

 

(Amounts in thousands) 

 

 

 

 

 

 

 

13 Weeks Ended

 

May 3, 2008

 

May 5, 2007

 

 

 

May 3, 2008

 

May 5, 2007

 

% of Sales

 

% of Sales

 

 

 

 

 

 

 

 

 

 

 

Business Unit Income:

 

 

 

 

 

 

 

 

 

North American Retail

 

$

168,242

 

$

189,552

 

7.0

%

8.0

%

North American Delivery

 

163,262

 

151,830

 

9.5

%

9.5

%

International Operations

 

23,823

 

15,489

 

3.2

%

2.4

%

Business unit income

 

355,327

 

356,871

 

7.3

%

7.8

%

Stock-based compensation

 

(33,362

)

(34,260

)

(0.7

)%

(0.8

)%

Total segment income

 

$

321,965

 

$

322,611

 

6.6

%

7.0

%

 

North American Retail: Sales increased 1.9% for the first quarter of 2008 compared to the first quarter of 2007.  The growth primarily reflects non-comparable store sales and the positive impact of Canadian exchange rates to the U.S. dollar of $71.8 million, partially offset by a 6% decrease in comparable store sales reflecting reduced traffic and average order size.   We added 35 stores to the North American store base in the first quarter of 2008.  As of May 3, 2008, the North American store base included 1,773 open stores compared to 1,644 stores as of May 5, 2007 and 1,738 stores as of February 2, 2008. Our comparable store sales decrease in 2008 reflects negative performance in core office supplies, business machines, furniture and computer peripherals, partially offset by positive performance in ink and toner.

 

17



 

Business unit income as a percentage of sales decreased to 7.0% for the first quarter of 2008 from 8.0% for the first quarter of 2007. The decrease in business unit income primarily reflects deleverage in fixed costs resulting from a decrease in comparable store sales, partially offset by an increase in product margin rate, including increased sales in higher margin Staples brand products, improvements in supply chain, as well as our focus on expense control.

 

North American Delivery: Sales increased 8.0% for the first quarter of 2008 compared to the first quarter of 2007. The sales growth for the first quarter of 2008 reflects the continued success of our customer acquisition and retention efforts and non-comparable sales from our recent acquisitions, partially offset by lower sales to existing customers.

 

Business unit income as a percentage of sales was flat at 9.5% for the first quarter of 2008 and 2007.  This primarily reflects improvement in our supply chain and product margin rate, offset by our investments in share of wallet initiatives and catalog marketing.

 

International Operations: Sales increased 19.4% for the first quarter of 2008 compared to the first quarter of 2007.  The sales growth in 2008 primarily reflects the positive impact of foreign exchange rates of $71.9 million, growth in local currency in all of our International businesses, as well as an increase in comparable store sales of 4% in Europe.  As of May 3, 2008, the international store base included 303 open stores compared to 283 stores as of May 5, 2007 and 300 stores as of February 2, 2008.

 

Business unit income as a percentage of sales increased to 3.2% for the first quarter of 2008 from 2.4% for the first quarter of 2007.  The increase in business unit income primarily reflects supply chain improvements and leverage of fixed expenses on higher sales in our European businesses, along with improvement in product margin rates due to mix, better buying, own brand penetration in our European businesses, as well as our continued focus on expense control.

 

Stock-Based Compensation: Stock-based compensation decreased to $33.4 million in the first quarter of 2008 from $34.3 million in the first quarter of 2007. Stock-based compensation includes expenses associated with our employee stock purchase plans, the issuance of stock options, restricted shares, and performance share awards, as well as the company match in the employee 401(k) savings plan. The decrease in the first quarter of 2008 primarily reflects changes in the mix of equity awards granted.

 

Critical Accounting Policies and Significant Estimates

 

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 2007 Annual Report on Form 10-K, filed on March 4, 2008, 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.  There have been no material changes to the Accounting Policies or our application of the Accounting Policies since March 4, 2008.

 

Liquidity and Capital Resources

 

Cash Flows

 

Cash provided by operations was $299.2 million for the first quarter of 2008 compared to $179.0 million for the first quarter of 2007.  The increase in operating cash flow from 2007 to 2008 is primarily due to an improvement in working capital.

 

Cash used in investing activities was $63.9 million for the first quarter of 2008 compared to $17.6 million for the first quarter of 2007. This change is primarily due to fluctuations in our short-term investment portfolio.  While maintaining our overall investment guidelines, we shift between cash and cash equivalents, including commercial paper and money market investments, and short-term investments, including municipal bonds and Treasury securities as the risk, rates of return and attractiveness of these asset classes change.  As of May 3, 2008, our short-term investment portfolio consisted exclusively of treasury securities.

 

18



 

Cash used in financing activities was $287.8 million for the first quarter of 2008 compared to $313.2 million for the first quarter of 2007.  Cash used in financing activities primarily relates to cash used for the payment of our annual cash dividend and the purchase of shares under our share repurchase program, offset by cash received upon the exercise of employee stock options.  On April 17, 2008, we paid a cash dividend of $0.33 per outstanding common share, or $231.5 million in the aggregate, to shareholders of record on March 28, 2008.  The dividend declared and paid in 2008 represents an increase of 14% over the per share value of the cash dividend declared and paid in 2007.  Under our share repurchase program, we repurchased 2.8 million shares for $65.0 million in the first quarter of 2008 and 7.2 million shares for $187.8 million in the first quarter of 2007.   At the present time, we have suspended our share repurchase program in anticipation of the acquisition of Corporate Express.

 

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 in total cash, short-term investments and funds available through credit agreements (excluding the 2008 Agreement described below) at May 3, 2008, which consisted of $791.1 million of available credit, $1.20 billion of cash and cash equivalents and $17.0 million of short-term investments.

 

A summary, as of May 3, 2008, of balances available under credit agreements and debt outstanding (excluding the 2008 Agreement described below) is presented below (amounts in thousands):

 

 

 

Available 
Credit

 

Debt 
Outstanding

 

Revolving Credit Facility effective through October 2011

 

$

675,946

 

 

Senior Notes due October 2012

 

 

$

325,000

 

Lines of credit

 

115,173

 

681

 

Capital leases and other notes payable

 

 

35,278

 

Total

 

$

791,119

 

$

360,959

 

 

We issue letters of credit under our revolving credit facility in the ordinary course of business.  At May 3, 2008, we had $74.1 million of open letters of credit, thus reducing the available credit under our revolving credit facility from $750.0 million to $675.9 million.

 

In addition to the amounts disclosed above, on April 1, 2008, we entered into a $3.0 billion credit agreement (the “2008 Agreement”) with Lehman Commercial Paper, Inc., as administrative agent, Bank of America, N.A. and HSBC Bank USA, National Association, as co-syndication agents, and Lehman Brothers Inc, as lead arranger and bookrunner, for a commitment period beginning on the earlier of (i) the date of initial funding under the 2008 Agreement (which can be no later than February 17, 2009) or (ii) the initial date we issue commercial paper in anticipation of our proposed acquisition of the outstanding capital stock of Corporate Express and continuing until the date 364 days after the initial funding under the 2008 Agreement, unless earlier terminated pursuant to the terms of the 2008 Agreement.  The 2008 Agreement provides financing solely for our proposed acquisition of all of the outstanding capital stock of Corporate Express, including related transaction fees, costs and expenses, and for backup for any potential commercial paper program.  Amounts borrowed under the 2008 Agreement may be borrowed, repaid and reborrowed from time to time, with the aggregate principal amount of the loans outstanding not to exceed the maximum borrowing amount of $3.0 billion.  Borrowings made pursuant to the 2008 Agreement will bear interest at either (a) the base rate (the higher of the prime rate, as defined in the 2008 Agreement, or the federal funds rate plus 0.50%) plus an “applicable margin,” defined as a percentage spread based on our credit rating or (b) the Eurocurrency rate plus a different “applicable margin,” also defined as a percentage spread based on our credit rating.  The applicable margin for each base rate loan and Eurocurrency rate loan increases periodically, as set forth in the 2008 Agreement. The payments under the 2008 Agreement are guaranteed by the same subsidiaries that guarantee our publicly issued notes and our existing revolving credit facility.  Under the 2008 Agreement, we agree to pay a commitment fee, payable quarterly, at rates that range from 0.080% to 0.175% based on our credit rating.  The 2008 Agreement contains affirmative and negative covenants that are consistent with those contained in our $750.0 million revolving credit

 

19



 

agreement. The 2008 Agreement also contains financial covenants that require us to maintain a minimum fixed charge coverage ratio of 1.5:1.0 and a maximum adjusted funded debt to total capitalization ratio of 0.75:1.0. As of May 3, 2008, no borrowings were outstanding under the 2008 Agreement.

 

On May 5, 2008, we entered into the first amendment (the “Amendment”) to our Amended and Restated Revolving Credit Agreement, as amended, dated as of October 13, 2006 (the “Revolving Credit Facility”).  The Amendment was entered into in connection with our proposed acquisition of Corporate Express and provides certain post-acquisition cure periods to allow us to cure defaults that could arise (i) as a result of change in control provisions contained in Corporate Express’  outstanding debt obligations and (ii) under Corporate Express’ and our outstanding debt obligations as a result of events or circumstances, such as litigation, liens or defaults, affecting Corporate Express.  The Amendment does not alter the amount that may be borrowed under, or the terms of, the Revolving Credit Facility and confirms our obligations to the lenders and administrative agent who are parties thereto.

 

After taking into our account our proposed acquisition of Corporate Express, we expect that our cash generated from operations, together with our current cash, short-term investments and funds available under our revolving credit facilities, will be sufficient to fund our planned store openings and other 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 an annual cash dividend.  Based on our credit metrics and our liquidity position, we may also return capital to our shareholders through our share repurchase program.  At the present time, we have suspended our share repurchase program in anticipation of the acquisition of Corporate Express.

 

We currently plan to spend approximately $425 million on capital expenditures during the last three quarters of 2008 related to new store openings and continued investments in information systems and distribution centers to improve operational efficiencies and customer service.  We expect to open approximately 80 new stores in North America, Europe and Asia during the last three quarters of 2008.  We may also use additional funds to purchase lease rights from tenants occupying retail space that is suitable for a Staples store.  We estimate that our cash requirements, including pre-opening expenses, net inventory, leasehold improvements and fixtures, will be approximately $1.4 million for each new store.

 

While we have primarily grown organically, we may 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 expect to rely on acquisitions to achieve our targeted growth plans.   We consider many types of acquisitions for their strategic and other benefits, such as our proposal to acquire Corporate Express.  However, we have most recently targeted and expect to continue to 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 2005, we announced a repurchase program under which we were authorized to repurchase up to $1.5 billion of Staples common stock through February 2, 2008.  In the second quarter of 2007, we announced that our 2005 repurchase program would be replaced with a new repurchase program under which we may repurchase up to $1.5 billion of Staples common stock.  The new repurchase program went into effect during the second quarter of 2007 and has no expiration date.

 

We paid a cash dividend of $0.33 per share of common stock on April 17, 2008 to shareholders of record on March 28, 2008, resulting in a total dividend payment of $231.5 million.  In 2007, we paid a cash dividend of $0.29 per share of common stock on April 19, 2007 to shareholders of record on March 30, 2007, resulting in a total dividend payment of $207.6 million.   While it is our intention to pay annual cash dividends in years following 2008, 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.

 

20



 

Proposed Acquisition of Corporate Express

 

On February 19, 2008, we announced that we had made a proposal to Corporate Express, a Dutch office products distributor with operations in North America, Europe and Australia, to acquire all of its outstanding ordinary shares and American Depositary Shares (the “ADSs”) for a cash consideration of 7.25 Euros per share.

 

On March 18, 2008, we confirmed our intention to make a public offer for all of the outstanding ordinary shares and ADSs of Corporate Express for a price of 7.25 Euros per share and further confirmed that preparations were well under way for the offer.  In addition, we confirmed our intention to make a public offer for the Corporate Express preference shares A (the “Preference Shares”) and 2% subordinated convertible bonds due 2010 issued by Corporate Express in the principal amount of 115 million Euros (the “Convertible Bonds”).

 

On April 1, 2008, we announced that we had entered into the 2008 Agreement to finance the proposed acquisition.  This $3.0 billion financing, together with our cash reserves and Revolving Credit Facility, are expected to be sufficient to finance our acquisition of Corporate Express.

 

On May 13, 2008, we announced our intention to proceed with an offer to acquire all of the outstanding ordinary shares and ADSs of Corporate Express at an increased price of 8.00 Euros per share, following approval of the offer from the Netherlands Authority for the Financial Markets.  We expect the offer would extend to the Corporate Express Preference Shares and Convertible Bonds.  The offer would include a minimum acceptance condition of 75 percent of the issued and outstanding ordinary shares, including the ordinary shares underlying the ADSs.  We also announced that we had received antitrust clearance for the proposed acquisition in the United States, and had initiated the required regulatory processes in Europe and Canada for the transaction.

 

On May 19, 2008, we announced the launch of a tender offer in the Netherlands to purchase all of the issued and outstanding ordinary shares, ADSs, Preference Shares and Convertible Bonds of Corporate Express, and we announced that we intend to launch tender offers shortly for the 8.25% Senior Subordinated Notes due July 1, 2014 (the “2014 Notes”) and the 7.875% Senior Subordinated Notes due March 1, 2015 (the “2015 Notes”) of Corporate Express U.S. Finance Inc. (formerly known as Buhrmann US Inc.), a wholly owned subsidiary of Corporate Express.  The offer is to acquire all of the outstanding ordinary shares and ADSs of Corporate Express at a price of 8.00 Euros per share, expires, subject to extension, on June 27, 2008, and includes, among other things, a minimum acceptance condition on obtaining valid acceptance from 75 percent of the issued and outstanding ordinary shares, including the ordinary shares underlying the ADSs.

 

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.  Our business is somewhat seasonal, with sales and profitability slightly lower during the first and second quarters of our fiscal year.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risks

 

At May 3, 2008, 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 February 2, 2008.  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-10 of our Annual Report on Form 10-K filed on March 4, 2008 for the year ended February 2, 2008.

 

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 May 3, 2008.  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 Securities 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 May 3, 2008, 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.

 

21



 

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 May 3, 2008 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

22



 

STAPLES, INC. AND SUBSIDIARIES

 

PART II  –  OTHER INFORMATION

 

Item 1A. Risk Factors

 

An updated description of the risk factors associated with our business is set forth below. These risk factors have been updated from those included in our Annual Report on Form 10-K to, among other things, update the risk factor relating to our proposed acquisition of Corporate Express and the risk factor relating to our debt level and operating lease commitments.

 

Our market is highly competitive and we may not continue to compete successfully.

 

The office products market is highly competitive. We compete with a variety of local, regional, national and international retailers, dealers and distributors for customers, associates, locations, products, services, and other important aspects of our business. In most of our geographic markets, we compete with other high-volume office supply chains such as Office Depot and OfficeMax, as well as mass merchants such as Wal-Mart, warehouse clubs such as Costco, computer and electronics superstores such as Best Buy, copy and print businesses such as FedEx Kinko’s, ink cartridge specialty stores, and other discount retailers.  Our retail stores and delivery operations also compete with numerous mail order firms, contract stationer businesses, electronic commerce distributors, regional and local dealers, and direct manufacturers.

 

We strive to differentiate ourselves from our competitors in part by executing our brand promise: we make buying office products easy. This involves, among other things, offering our customers a broad selection of products, convenient store locations, and reliable and fast order delivery.  Many of our competitors, however, have increased their presence in our markets in recent years by expanding their assortment of office products and services, opening new stores near our existing stores, and offering direct delivery of office products.  Some of our current and potential competitors are larger than we are and have substantially greater financial resources that may be devoted to sourcing, promoting and selling their products.  If we fail to execute on our brand promise or are otherwise unable to differentiate ourselves from our competitors, we may be unable to attract and retain customers.

 

Economic conditions may cause a decline in business and consumer spending.

 

Our operating results are impacted by the health of the North American, European, Asian and South American economies.  Our business and financial performance may be adversely affected by current and future economic conditions that cause a decline in business and consumer spending, including a reduction in the availability of credit, increased unemployment levels, higher energy costs, rising interest rates, financial market volatility, recession, and acts of terrorism.

 

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 currently plan to open approximately 80 new stores in North America, Europe and Asia during the last three quarters of 2008.  For our growth strategy to be successful, we must identify favorable store sites, negotiate leases on acceptable terms, hire and train qualified associates and adapt management and operational systems to meet the needs of our expanded operations. These tasks may be difficult to accomplish successfully, especially as we allocate time and resources to managing the profitability of our large existing portfolio of stores and renewing our existing store leases on acceptable terms.  In addition, local zoning and other land use regulations may prevent or delay the opening of new stores in some markets.  If we are unable to open new stores as quickly as planned, our future sales and profits may be adversely affected.

 

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.  These new stores may draw customers away from existing stores in nearby areas causing customer traffic and comparable store sales performance to decline at those existing stores.  Our expansion strategy also includes opening stores in new markets where customers may not be familiar with our brand, we may not be familiar with local customer preferences or our competitors may have a large, established market presence.  Even if we succeed in opening new stores, these new stores may not achieve the same sales or profit levels as our existing stores and may reduce our overall profitability.

 

23



 

Our growth may strain our operations.

 

Our business has grown dramatically over the past several years.  While we cannot provide any assurances about our future sales or earnings, we anticipate that our business will continue to grow organically and through strategic acquisitions.  Accordingly, sales of our products and services, the number of stores that we operate, the number of countries in which we conduct business and the number of associates have grown, and we expect they will continue to grow. This growth places significant demands on management and operational systems. If we cannot effectively expand and support our operational and financial systems, increase and manage our associate base, and share critical information and best practices across different business groups and geographies, this growth is likely to result in operational inefficiencies and ineffective management of the business.  In addition, as we grow, our business is subject to a wider array of complex state, federal and international regulations, and may be increasingly the target of private actions alleging violations of such regulations. This increases the cost of doing business and the risk that our business practices could unknowingly result in liabilities that may adversely affect our business and financial performance.

 

We may not consummate our proposed acquisition of Corporate Express or realize any benefits if we do complete the acquisition.

 

On February 19, 2008, we announced that we had made a proposal to Corporate Express NV, a Dutch office products distributor with operations in North America, Europe and Australia to acquire all of its ordinary shares for total cash consideration of 7.25 Euros per ordinary share.  Corporate Express, in a public statement issued the same day, rejected our proposal.  We confirmed our intention to pursue our proposal on March 18, 2008 and on May 13, 2008 announced that we intended to proceed with the transaction at a proposed purchase price of 8.00 Euros per ordinary share following approval of the offer by the Netherlands Authority for the Financial Markets.  This proposal was also rejected by Corporate Express.  On May 19, 2008, we announced the launch of a tender offer in the Netherlands to purchase all of the outstanding capital stock of Corporate Express and the Convertible Bonds, and we expect to launch shortly a tender offer for the 2014 Notes and 2015 Notes.  We cannot provide any assurances that the proposed acquisition will be consummated.  If we are unable to complete the proposed acquisition, we may have incurred substantial expenses and diverted significant management time and resources from our ongoing business.  Even if we consummate the proposed acquisition of Corporate Express, we may not realize any of the anticipated benefits of the acquisition, and we may encounter difficulties in the integration of the operations of Corporate Express, which could adversely affect our combined business and financial performance.

 

We may be unable to attract and retain qualified associates.

 

Our retail and delivery customers value courteous and knowledgeable associates, and an important part of our “Easy” brand strategy is providing our customers with a positive customer service experience.  Accordingly, our performance is dependent on attracting and retaining a large and growing number of qualified associates.  We face intense competition for qualified associates.  We face even tighter labor markets as we expand into emerging markets such as India and China.  Many of our associates are in entry-level or part-time positions with historically high rates of turnover. Our ability to meet our labor needs generally while controlling our labor costs is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the workforce, unemployment levels, prevailing wage rates, changing demographics, health and other insurance costs and changes in employment legislation.  In addition, as our workforce expands, we are subject to greater scrutiny by private litigants regarding compliance with local and national labor regulations, which in turn increases our labor costs.   If we are unable to attract and retain a sufficient number of qualified associates or our labor costs increase significantly, our business and financial performance may be adversely affected.

 

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.  Factors that could cause these quarterly fluctuations include: the mix of products sold; pricing actions of competitors; the level of advertising and promotional expenses; the outcome of legal proceedings; seasonality, primarily because the sales and profitability of our stores are typically slightly lower in the first half of the year than in the second half of the year, which includes the back-to-school and holiday seasons; severe weather; and the other risk factors described in this section.  Most of our operating expenses, such as rent expense and associate 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 such a sales shortfall would have a disproportionate effect on our net income for the quarter.

 

Our expanding international operations expose us to the unique risks inherent in foreign operations.

 

We currently operate in 21 different countries outside the United States and may enter new international markets.  Operating in multiple countries requires that we comply with multiple foreign laws and regulations that may differ substantially from country to country and may conflict with corresponding U.S. laws and regulations.  Ensuring such compliance may require that we implement new operational systems and financial controls that may be expensive and divert

 

24



 

management’s time from implementing our growth strategies.  In addition, cultural differences and differences in the business climate in our international markets may cause customers to be less receptive to our business model than we expect.  Other factors that may also have an adverse impact on our international operations include increased local competition, foreign currency fluctuations, unfavorable foreign trade policies and unstable political and economic conditions.

 

Our business may be adversely affected by the actions of and risks associated with our third-party vendors.

 

The products we sell are sourced from a wide variety of third-party vendors. We cannot control the supply, design, function or cost of many of the products that we offer for sale and are dependent on the availability and pricing of key products, including paper, ink, toner and technology products. Disruptions in the availability of raw materials used in the production of these products may adversely affect our sales and result in customer dissatisfaction. In addition, global sourcing of many of the products we sell is an important factor in our financial performance. Our ability to find qualified vendors and access products in a timely and efficient manner is a significant challenge, especially with respect to goods sourced outside the United States. Political instability, the financial instability of suppliers, merchandise quality issues, trade restrictions, tariffs, foreign currency exchange rates, transport capacity and costs, inflation and other factors relating to foreign trade are beyond our control. These and other issues affecting our vendors could adversely affect our business and financial performance.

 

Our expanded offering of proprietary branded products may not improve our financial performance and may expose us to intellectual property and product liability claims.

 

Our product offering includes Staples, Quill and other proprietary branded products, which together represented approximately 22% of our total sales in fiscal 2007. Our proprietary branded products compete with other manufacturers’ branded items that we offer. As we continue to increase the number and types of proprietary branded products that we sell, we may adversely affect our relationships with our vendors, who may decide to reduce their product offerings through Staples and increase their product offerings through our competitors.  An increase in our proprietary branded product offerings also may increase the risk that third parties will assert infringement claims against us with respect to such products.  In addition, if any of our customers are harmed by our proprietary branded products, they may bring product liability and other claims against us. Any of these circumstances could damage our reputation and have an adverse effect on our business and financial performance.

 

Our debt level and operating lease commitments may impact our ability to obtain future financing and continue our growth strategy.

 

Our consolidated debt and 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 combined with the recent tightening of the global credit market 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. We recently entered into a new $3.0 billion credit agreement in connection with our proposed acquisition of Corporate Express, including related transaction fees, costs and expenses, which may further restrict our flexibility or result in the consequences described above.  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.

 

Our effective tax rate may fluctuate.

 

We are a multi-national, multi-channel provider of office products and services. As a result, our effective tax rate is derived from a combination of applicable tax rates in the various countries, states and other jurisdictions in which we operate. Our effective tax rate may be lower or higher than our tax rates have been in the past due to numerous factors, including the sources of our income, any agreements we may have with taxing authorities in various jurisdictions, and the tax filing positions we take in various jurisdictions. We base our estimate of an effective tax rate at any given point in time upon a calculated mix of the tax rates applicable to our company and to estimates of the amount of business likely to be done in any given jurisdiction. The loss of one or more agreements with taxing jurisdictions, a change in the mix of our business from year to year and from country to country, changes in rules related to accounting for income taxes, changes in tax laws in any of the multiple jurisdictions in which we operate, or adverse outcomes from tax audits that we may be subject to in any of the jurisdictions in which we operate, could result in an unfavorable change in our effective tax rate which could have an adverse effect on our business and results of our operations.

 

25



 

Our information security may be compromised.

 

Through our sales and marketing activities, we collect and store certain personal information that our customers provide to purchase products or services, enroll in promotional programs, register on our website, or otherwise communicate and interact with us. We also gather and retain information about our associates in the normal course of business. We may share information about such persons with vendors that assist with certain aspects of our business. Despite instituted safeguards for the protection of such information, we cannot be certain that all of our systems are entirely free from vulnerability to attack. Computer hackers may attempt to penetrate our or our vendors’ network security and, if successful, misappropriate confidential customer or business information. In addition, a Staples associate, contractor or other third party with whom we do business may attempt to circumvent our security measures in order to obtain such information or inadvertently cause a breach involving such information. Loss of customer or business information could disrupt our operations, damage our reputation, and expose us to claims from customers, financial institutions, payment card associations and other persons, any of which could have an adverse effect on our business, financial condition and results of operations.  In addition, compliance with tougher privacy and information security laws and standards may result in significant expense due to increased investment in technology and the development of new operational processes.

 

Various legal proceedings may adversely affect our business and financial performance.

 

We are involved in various legal proceedings, which include consumer, employment, intellectual property, tort and other litigation. The resolution of these legal proceedings could require us to pay substantial amounts of money or take actions that adversely affect our operations.  In addition, defending against these proceedings may involve significant time and expense.  Given the large size of our operations and workforce, the visibility of our brand and our position as an industry leader, we may regularly be involved in legal proceedings that could adversely affect our business and financial performance.

 

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

 

(c)           The following table provides information about our purchases of our common stock during the first quarter of fiscal 2008.

 

Fiscal Period

 

Total Number of 
Shares 
Purchased(1)

 

Average Price 
Paid per Share
(2)

 

Total Number of 
Shares Purchased as 
Part of Publicly
Announced Plans or 
Programs (3)

 

Approximate Dollar 
Value of Shares that May 
Yet Be Purchased Under
the Plans or Programs
(3)

 

February 3, 2008 – March 1, 2008

 

2,592,553

 

$

22.91

 

2,589,500

 

$

1,013,451,000

 

March 2, 2008 – April 5, 2008

 

303,118

 

$

22.14

 

255,000

 

$

1,007,805,000

 

April 6, 2008 – May 3, 2008

 

9,207

 

N/A

 

 

$

1,007,805,000

 

Total for the First Quarter of Fiscal 2008

 

2,904,878

 

$

22.84

 

2,844,500

 

$

1,007,805,000

 

 


(1)   Includes a total of 60,378 shares of our common stock withheld during the first quarter of our 2008 fiscal year to satisfy minimum statutory tax withholding obligations in connection with the vesting of restricted stock awards granted pursuant to our equity incentive plans.

 

(2)   Average price paid per share includes commissions paid in connection with our publicly announced share repurchase programs and is rounded to the nearest two decimal places.

 

(3)   On June 14, 2007, we announced that our Board of Directors approved the repurchase of up to $1.5 billion of common stock.  Our October 2005 share repurchase program was terminated and replaced by this June 2007 share repurchase program, effective as of the stock market opening on July 9, 2007.  The June 2007 share repurchase program has no expiration date.

 

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Item 6.  Exhibits

 

The exhibits listed on the Exhibit Index immediately preceding such exhibits, which is incorporated herein by reference,  are filed or furnished as part of this Quarterly Report on Form 10-Q.

 

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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:  May 19, 2008

By:

/s/ JOHN J. MAHONEY

 

 

 John J. Mahoney

 

 

 Vice Chairman and

 

 

 Chief Financial Officer

 

 

 (Principal Financial Officer)

 

 

 

 

 

 

 

By:

/s/ CHRISTINE T. KOMOLA

 

 

 Christine T. Komola

 

 

 Senior Vice President, Corporate Controller

 

 

 (Principal Accounting Officer)

 

28



 

EXHIBIT INDEX

 

Exhibit 
Number

 

Description of Exhibit

 

 

 

10.1 +

 

Non-Management Director Compensation Summary

10.2 +

 

Form of Non-Employee Director Stock Option Agreement under the Amended and Restated 2004 Stock Incentive Plan

10.3 +

 

Form of Non-Employee Director Restricted Stock Award Agreement under the Amended and Restated 2004 Stock Incentive Plan

10.4

 

Credit Agreement dated as of April 1, 2008 by and among Staples, Inc., the lenders named therein, Lehman Commercial Paper Inc., as administrative agent, Bank of America, N.A. and HSBC Bank USA, National Association, as co-syndication agents, and Lehman Brothers Inc., as lead arranger and bookrunner. Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 1, 2008 (File No. 000-17586) and incorporated herein by reference

10.5

 

Amendment No. 1 to the Amended and Restated Revolving Credit Agreement, dated as of October 13, 2006, by and among the Company, the lenders named therein, Bank of America, N.A., as Administrative Agent, Citibank N.A., as Syndication Agent, and HSBC Bank USA, JPMorgan Chase Bank, N.A., and Wachovia Bank, National Association, as Co-Documentation Agents, with Bank of America Securities LLC having acted as sole Lead Arranger and sole Book Manager. Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 9, 2008 (File No. 000-17586) and incorporated herein by reference

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

 


+    Filed herewith

++  Furnished herewith

 

29