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: July 31, 2010
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 |
|
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04-2896127 |
Five Hundred Staples Drive, Framingham, MA 01702
(Address of principal executive office and zip code)
508-253-5000
(Registrants 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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 the 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 |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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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 730,112,192 shares of common stock outstanding as of August 17, 2010.
STAPLES, INC. AND SUBSIDIARIES
FORM 10-Q
July 31, 2010
PART I - FINANCIAL INFORMATION
STAPLES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollar Amounts in Thousands, Except Share Data)
(Unaudited)
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July 31, |
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January 30, |
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2010 |
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2010 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
871,960 |
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$ |
1,415,819 |
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Receivables, net |
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1,781,307 |
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1,811,365 |
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Merchandise inventories, net |
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2,514,009 |
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2,261,149 |
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Deferred income tax asset |
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297,145 |
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353,329 |
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Prepaid expenses and other current assets |
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402,068 |
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333,105 |
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Total current assets |
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5,866,489 |
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6,174,767 |
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Property and equipment: |
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Land and buildings |
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1,038,701 |
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1,051,391 |
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Leasehold improvements |
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1,287,118 |
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1,268,848 |
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Equipment |
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2,093,500 |
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2,035,658 |
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Furniture and fixtures |
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992,442 |
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966,783 |
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Total property and equipment |
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5,411,761 |
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5,322,680 |
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Less accumulated depreciation and amortization |
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3,329,562 |
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3,158,147 |
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Net property and equipment |
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2,082,199 |
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2,164,533 |
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Lease acquisition costs, net of accumulated amortization |
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23,572 |
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25,083 |
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Intangible assets, net of accumulated amortization |
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538,464 |
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579,923 |
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Goodwill |
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3,985,249 |
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4,084,122 |
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Other assets |
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738,031 |
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688,906 |
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Total assets |
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$ |
13,234,004 |
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$ |
13,717,334 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
2,176,746 |
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$ |
2,111,696 |
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Accrued expenses and other current liabilities |
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1,373,833 |
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1,603,354 |
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Debt maturing within one year |
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574,187 |
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67,269 |
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Total current liabilities |
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4,124,766 |
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3,782,319 |
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Long-term debt |
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2,004,843 |
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2,500,329 |
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Other long-term obligations |
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643,039 |
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579,746 |
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Stockholders equity: |
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Preferred stock, $.01 par value, 5,000,000 shares authorized; no shares issued |
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Common stock, $.0006 par value, 2,100,000,000 shares authorized; issued 905,598,383 shares at July 31, 2010 and 896,655,170 shares at January 30, 2010 |
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540 |
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538 |
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Additional paid-in capital |
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4,211,082 |
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4,379,942 |
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Accumulated other comprehensive loss |
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(301,354 |
) |
(89,337 |
) |
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Retained earnings |
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6,057,564 |
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5,869,138 |
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Less: Treasury stock at cost - 174,450,848 shares at July 31, 2010 and 167,990,178 shares at January 30, 2010 |
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(3,517,141 |
) |
(3,388,395 |
) |
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Total Staples, Inc. stockholders equity |
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6,450,691 |
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6,771,886 |
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Noncontrolling interests |
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10,665 |
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83,054 |
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Total stockholders equity |
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6,461,356 |
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6,854,940 |
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Total liabilities and stockholders equity |
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$ |
13,234,004 |
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$ |
13,717,334 |
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See notes to condensed consolidated financial statements.
STAPLES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
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13 Weeks Ended |
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26 Weeks Ended |
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July 31, |
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August 1, |
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July 31, |
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August 1, |
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2010 |
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2009 |
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2010 |
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2009 |
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Sales |
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$ |
5,534,240 |
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$ |
5,533,779 |
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$ |
11,592,035 |
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$ |
11,351,338 |
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Cost of goods sold and occupancy costs |
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4,071,532 |
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4,109,522 |
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8,510,272 |
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8,401,179 |
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Gross profit |
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1,462,708 |
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1,424,257 |
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3,081,763 |
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2,950,159 |
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Operating and other expenses: |
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Selling, general and administrative |
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1,158,025 |
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1,161,400 |
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2,378,493 |
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2,359,570 |
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Integration and restructuring costs |
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21,644 |
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29,633 |
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42,526 |
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48,630 |
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Amortization of intangibles |
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14,886 |
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26,644 |
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30,285 |
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48,515 |
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Total operating expenses |
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1,194,555 |
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1,217,677 |
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2,451,304 |
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2,456,715 |
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Operating income |
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268,153 |
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206,580 |
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630,459 |
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493,444 |
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Other income (expense): |
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Interest income |
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1,891 |
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1,329 |
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3,662 |
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3,001 |
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Interest expense |
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(53,169 |
) |
(60,933 |
) |
(108,643 |
) |
(121,430 |
) |
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Other income (expense) |
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(4,604 |
) |
1,361 |
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(5,235 |
) |
(2,282 |
) |
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Consolidated income before income taxes |
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212,271 |
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148,337 |
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520,243 |
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372,733 |
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Income tax expense |
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79,602 |
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51,176 |
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195,092 |
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128,593 |
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Consolidated net income |
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132,669 |
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97,161 |
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325,151 |
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244,140 |
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Income attributed to the noncontrolling interests |
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2,913 |
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4,750 |
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6,625 |
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8,765 |
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Net income attributed to Staples, Inc. |
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$ |
129,756 |
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$ |
92,411 |
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$ |
318,526 |
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$ |
235,375 |
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Earnings Per Share: |
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Basic earnings per common share |
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$ |
0.18 |
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$ |
0.13 |
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$ |
0.44 |
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$ |
0.33 |
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Diluted earnings per common share |
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$ |
0.18 |
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$ |
0.13 |
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$ |
0.44 |
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$ |
0.33 |
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Dividends declared per common share |
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$ |
0.09 |
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$ |
0.08 |
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$ |
0.18 |
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$ |
0.17 |
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See notes to condensed consolidated financial statements.
STAPLES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
(Unaudited)
|
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26 Weeks Ended |
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July 31, |
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August 1, |
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2010 |
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2009 |
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Operating Activities: |
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Consolidated net income, including income from the noncontrolling interests |
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$ |
325,151 |
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$ |
244,140 |
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Adjustments to reconcile net income attributed to the controlling interests to net cash provided by operating activities: |
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Depreciation and amortization |
|
247,965 |
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271,759 |
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Stock-based compensation |
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69,629 |
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90,558 |
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Deferred tax expense |
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6,209 |
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Other |
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(1,904 |
) |
15,836 |
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Changes in assets and liabilities: |
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Decrease in receivables |
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15,993 |
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125,884 |
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Increase in merchandise inventories |
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(253,211 |
) |
(20,938 |
) |
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(Increase) decrease in prepaid expenses and other assets |
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(77,651 |
) |
131,017 |
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Increase in accounts payable |
|
80,583 |
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38,257 |
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Decrease in accrued expenses and other current liabilities |
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(237,590 |
) |
(172,422 |
) |
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Increase (decrease) in other long-term obligations |
|
70,252 |
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(26,127 |
) |
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Net cash provided by operating activities |
|
245,426 |
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697,964 |
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Investing Activities: |
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Acquisition of property and equipment |
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(150,719 |
) |
(129,865 |
) |
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Acquisition of businesses, net of cash acquired |
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(39,270 |
) |
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Net cash used in investing activities |
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(189,989 |
) |
(129,865 |
) |
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Financing Activities: |
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Proceeds from the exercise of stock options and the sale of stock under employee stock purchase plans |
|
38,443 |
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45,338 |
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Repayments of commercial paper, net of proceeds from issuances |
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|
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(1,088,470 |
) |
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Proceeds from borrowings |
|
95,889 |
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1,139,820 |
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Payments on borrowings, including payment of deferred financing fees |
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(113,327 |
) |
(565,498 |
) |
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Purchase of noncontrolling interest |
|
(345,963 |
) |
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Cash dividends paid |
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(130,100 |
) |
(118,048 |
) |
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Purchase of treasury stock, net |
|
(128,745 |
) |
(24,075 |
) |
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Net cash used in financing activities |
|
(583,803 |
) |
(610,933 |
) |
||
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|
|
|
|
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Effect of exchange rate changes on cash and cash equivalents |
|
(15,493 |
) |
42,502 |
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Net decrease in cash and cash equivalents |
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(543,859 |
) |
(332 |
) |
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Cash and cash equivalents at beginning of period |
|
1,415,819 |
|
633,774 |
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Cash and cash equivalents at end of period |
|
$ |
871,960 |
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$ |
633,442 |
|
See notes to condensed consolidated financial statements.
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note A - Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements include the accounts of Staples, Inc. and its subsidiaries (Staples, the Company, we, our or us). These financial statements are for the period covering the thirteen and twenty-six weeks ended July 31, 2010 (also referred to as the second quarter of 2010 and the first half of 2010) and the period covering the thirteen and twenty-six weeks ended August 1, 2009 (also referred to as the second quarter of 2009 and the first half of 2009). 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 based upon Securities and Exchange Commission (SEC) rules that permit reduced disclosure for interim periods. For a more complete discussion of significant accounting policies and certain other information, these financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended January 30, 2010. In the opinion of management, these 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.
Note B New Accounting Pronouncements
In June 2009, a pronouncement was issued relating to information a company needs to provide regarding the sales of securitized financial assets and similar transactions, particularly if the company has continuing exposure to the risks related to transferred financial assets (Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 860). This pronouncement eliminates the concept of a qualifying special-purpose entity, changes the requirements for derecognizing financial assets and requires additional disclosures. This pronouncement is effective for fiscal years beginning after November 15, 2009. The Company adopted this pronouncement as of January 31, 2010. This pronouncement did not have any impact on the Companys consolidated financial condition, results of operations or cash flows.
In June 2009, a pronouncement was issued that clarified how a company determines whether an entity, that is insufficiently capitalized or not controlled through voting (or similar rights), should be consolidated (ASC Topic 810). This determination of whether a company is required to consolidate an entity is based on, among other things, an entitys purpose and design and a companys ability to direct the activities of the entity that most significantly impact the entitys economic performance. This pronouncement requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. This pronouncement also requires additional disclosures about a companys involvement in variable interest entities and any significant changes in risk exposure due to that involvement. This pronouncement is effective for fiscal years beginning after November 15, 2009. The Company adopted this pronouncement as of January 31, 2010. This pronouncement did not have any impact on the Companys consolidated financial condition, results of operations or cash flows.
In October 2009, a pronouncement was issued that amended the rules on revenue recognition for multiple-deliverable revenue arrangements. This amendment eliminated the residual method of allocation for multiple-deliverable revenue arrangements and requires that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method (ASC Topic 605). This pronouncement establishes a selling price hierarchy for determining the selling price of a deliverable, which includes: (1) vendor-specific objective evidence if available, (2) third-party evidence if vendor-specific objective evidence is not available, and (3) estimated selling price if neither vendor-specific nor third-party evidence is available. In addition, this pronouncement expands the disclosure requirements related to a vendors multiple-deliverable revenue arrangements. This pronouncement is effective for revenue arrangements entered into or materially modified in fiscal years beginning after June 15, 2010. The Company will adopt this pronouncement as of January 30, 2011. The Company is currently evaluating the potential impact, if any, of the adoption of this pronouncement on its consolidated financial condition, results of operations and cash flows.
Note C Business Acquisitions and Acquisition of Noncontrolling Interest
ASC Topic 805 (Business Combinations) requires that companies record acquisitions under the purchase method of accounting. Accordingly, the purchase price is allocated to the tangible assets and liabilities and intangible assets acquired, based on their estimated fair values. The excess purchase price over the fair value is recorded as goodwill. ASC Topic 350 (Goodwill and Intangible Assets) indicates that goodwill and purchased intangibles with indefinite lives are not amortized but are reviewed for impairment annually, or more frequently, if impairment indicators arise. Purchased intangibles with definite lives are amortized over their respective useful lives.
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
On July 2, 2010, the Company entered the Finnish market, acquiring Oy Lindell AB (Lindell), a Finnish office products distributor. The aggregate cash purchase price was 30 million Euros, net of cash acquired (approximately $38 million based on foreign exchange rates on the acquisition date). As a result of this acquisition, the Company recorded an additional $16.5 million of goodwill and $5.2 million of intangible assets (which are being amortized on a straight line basis over their weighted average estimated lives of 6 years).
With the acquisition of Corporate Express, the Company became a 58.6% shareholder of Corporate Express Australia Limited (Corporate Express Australia), a public company traded on the Australian Securities Exchange. On March 16, 2010, the Company announced that it had made an offer to acquire all of the noncontrolling interest in Corporate Express Australia for cash consideration of AUD $5.60 per share (the Offer).
On July 9, 2010, the Company declared the offer unconditional, resulting in the purchase of additional shares. The Company currently owns 98.5% of Corporate Express Australia. The purchase of this additional interest in Corporate Express Australia for approximately AUD $391 million (approximately $346 million based on foreign exchange rates on the purchase date), is being accounted for in accordance with ASC Topic 810, Noncontrolling Interest in Consolidated Financial Statements, as an equity transaction, by adjusting the carrying amount of the noncontrolling interest to reflect the change in the Companys ownership interest in Corporate Express Australia. The purchase of the noncontrolling interest is reflected as a financing cash outflow in the condensed consolidated statement of cash flows. The Company is now entitled to acquire the remaining 1.5% of the shares through a compulsory acquisition process that is expected to be completed by September 2010. Any additional payments will be recorded in equity in accordance with ASC Topic 810.
Note D Integration and Restructuring Costs
Integration and restructuring costs represent the costs associated with the integration of Corporate Express N.V. (Corporate Express), including Corporate Express Australia, with the Companys pre-existing business and the consolidation of certain operations of the combined Company.
Integration and restructuring costs are comprised of the following (in thousands):
|
|
13 Weeks Ended |
|
26 Weeks Ended |
|
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|
|
July 31, 2010 |
|
August 1, 2009 |
|
July 31, 2010 |
|
August 1, 2009 |
|
||||
Severance and retention |
|
$ |
1,752 |
|
$ |
20,680 |
|
$ |
8,459 |
|
$ |
22,897 |
|
Consulting and other costs |
|
15,443 |
|
8,953 |
|
24,351 |
|
14,033 |
|
||||
Facility closure costs and other asset write-downs |
|
4,449 |
|
|
|
9,716 |
|
11,700 |
|
||||
Total |
|
$ |
21,644 |
|
$ |
29,633 |
|
$ |
42,526 |
|
$ |
48,630 |
|
In connection with the Companys acquisition of Corporate Express, acquisition reserves were established. The activity related to the Companys acquisition reserve (in thousands) for fiscal 2010 is as follows:
|
|
Balance as of |
|
Utilization |
|
Foreign |
|
Balance as of |
|
||||
Transaction costs |
|
$ |
807 |
|
$ |
(31 |
) |
$ |
|
|
$ |
776 |
|
Severance |
|
28,843 |
|
(8,500 |
) |
(1,410 |
) |
18,933 |
|
||||
Facility closures |
|
28,390 |
|
(4,638 |
) |
(187 |
) |
23,565 |
|
||||
Other |
|
10,759 |
|
(616 |
) |
(196 |
) |
9,947 |
|
||||
Total |
|
$ |
68,799 |
|
$ |
(13,785 |
) |
$ |
(1,793 |
) |
$ |
53,221 |
|
The Company believes that the reserves above should be substantially utilized by the end of fiscal year 2010; however, some payments related to facility closures may be made over the remaining lease terms.
Note E Fair Value Measurements, Derivative Instruments and Hedging Activities
Fair Value Measurements: ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to 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
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
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).
The following table shows the Companys assets and liabilities as of July 31, 2010 that are measured at fair value on a recurring basis (in thousands):
|
|
Quoted Prices in |
|
Significant |
|
Unobservable |
|
|
Assets |
|
|
|
|
|
|
|
|
Derivative assets |
|
|
|
$ |
53,031 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Derivative liabilities |
|
|
|
$ |
(5,343 |
) |
|
|
(1) Based on model-based valuation techniques
The fair values of cash and cash equivalents, receivables, accounts payable, accrued expenses, other current liabilities and short-term debt with the exception of the $500 million, 7.75% notes due April 1, 2011 (the April 2011 Notes), approximate their carrying values because of their short-term nature. The Company has $1.5 billion, 9.75% notes due January 15, 2014 (the January 2014 Notes) of which $750.0 million was hedged in March 2010. The fair value of the long-term debt, with the exception of the unhedged portion of the January 2014 Notes, approximate their carrying value because of the Companys use of derivative instruments that qualify for hedge accounting. The fair value of the April 2011 Notes and unhedged portion of the January 2014 Notes was determined based on quoted market prices. The following table reflects the difference between the carrying value and fair value of these notes as of July 31, 2010 and January 30, 2010 (in thousands):
|
|
July 31, 2010 |
|
January 30, 2010 |
|
||||||||
|
|
Carrying Value |
|
Fair Value |
|
Carrying Value |
|
Fair Value |
|
||||
April 2011 Notes |
|
$ |
500,000 |
|
$ |
521,900 |
|
$ |
500,000 |
|
$ |
537,500 |
|
Unhedged portion of the January 2014 Notes ($750.0 million hedged in March 2010) |
|
$ |
750,000 |
|
$ |
922,575 |
|
N/A |
|
N/A |
|
||
January 2014 Notes |
|
N/A |
|
N/A |
|
$ |
1,500,000 |
|
$ |
1,826,250 |
|
Derivative Instruments and Hedging Activities: Staples uses interest rate swaps to turn certain fixed rate debt into variable rate debt and certain variable rate debt into fixed rate debt and currency swaps to hedge a portion of the value of Staples net investment in Canadian dollar denominated subsidiaries and to fix the value of intercompany debt denominated in a foreign currency. These derivatives qualify for hedge accounting treatment as the derivatives have been highly effective in offsetting changes in fair value of the hedged items.
All derivatives are recorded at fair value and the changes in fair value are immediately included in earnings if the derivatives do not qualify as effective hedges. If a derivative is designated as a fair value hedge, then changes in the fair value of the derivative are offset against the changes in the fair value of the underlying hedged item in earnings. If a derivative is designated as a cash flow hedge, then the effective portion of the changes in the fair value of the derivative are recognized as a component of accumulated other comprehensive income (loss) until the underlying hedged item is recognized in earnings or the forecasted transaction is no longer probable of occurring. If a derivative or a nonderivative financial instrument is designated as a hedge of the Companys net investment in a foreign subsidiary, then changes in the fair value of the financial instrument are recognized as a component of accumulated other comprehensive income (loss) to offset a portion of the change in the translated value of the net investment being hedged, until the investment is sold or liquidated. The Company formally documents all hedging relationships for all derivative and nonderivative hedges and the underlying hedged items, as well as its risk management objectives and strategies for undertaking the hedge transactions. There are no amounts excluded from the assessment of hedge effectiveness.
The Company classifies the fair value of all its derivative contracts and the fair value of its hedged firm commitments as either current or long-term assets or debt depending on whether the maturity date of the derivative contract is within or
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
beyond one year from the balance sheet date. The cash flows from derivatives treated as hedges are classified in the Companys condensed consolidated statement of cash flows in the same category as the item being hedged.
Interest Rate Swaps: On January 8, 2003, Staples entered into an interest rate swap, for an aggregate notional amount of $325 million, designed to convert Staples $325 million, 7.375% notes due October 1, 2012 (the October 2012 Notes) into a variable rate obligation. The swap agreement, scheduled to terminate on October 1, 2012, is designated as a fair value hedge of the October 2012 Notes. Under the interest rate swap agreement, Staples is entitled to receive semi-annual interest payments at a fixed rate of 7.375% and is required to make semi-annual interest payments at a floating rate equal to the 6 month LIBOR plus 3.088%. The interest rate swap agreement is being accounted for as a fair value hedge and the differential to be paid or received on the interest rate swap agreement is accrued and recognized as an adjustment to interest expense over the life of the agreement and the October 2012 Notes. At July 31, 2010, the interest rate swap agreement had a fair value gain of $27.4 million, which was included in other assets. No amounts were included in the condensed consolidated statement of income for the second quarter or first half of 2010 or the second quarter or first half of 2009 related to ineffectiveness associated with this fair value hedge.
In connection with Staples acquisition of Corporate Express, the Company assumed interest rate swaps, for a notional amount of AUD $103 million, designed to convert Corporate Express variable rate credit facilities into fixed rate obligations. AUD $30 million of these swaps matured in July 2009, AUD $8 million of these swaps matured in January 2010, and AUD $40 million of these swaps matured in July 2010, as scheduled. The Company also entered into interest rate swap agreements in August 2009, for a notional amount of AUD $35 million, designed to convert local variable rate credit facilities into fixed rate obligations. As of July 31, 2010, the total notional amount of all outstanding interest rate swaps are AUD $60 million (approximately $54.1 million based on foreign exchange rates at July 31, 2010). The remaining swap agreements are scheduled to terminate in three stages: AUD $25 million in July 2011, AUD $10 million in August 2011 and the remaining AUD $25 million in August 2012. Under the terms of the agreements, the Company is required to make monthly interest payments at a weighted average interest rate of 6.0% and is entitled to receive monthly interest payments at a floating rate equal to the average bid rate for borrowings having a term closest to the relevant period displayed on the appropriate page of the Reuters screen (BBSY). The interest rate swaps are being accounted for as a cash flow hedge and the differential to be paid or received on the interest rate swap agreements is accrued and recognized as an adjustment to interest expense over the life of the agreements. At July 31, 2010, the interest rate swap agreements had a fair value loss of $0.8 million, which was included in stockholders equity as a component of accumulated other comprehensive income (loss). No amounts were included in the condensed consolidated statement of income for the second quarter or first half of 2010 or the second quarter or first half of 2009 related to ineffectiveness associated with this cash flow hedge. The amount of estimated cash flow hedges unrealized net gains or losses expected to be reclassified to earnings in the next twelve months is not significant.
On March 16, 2010, Staples entered into an interest rate swap, for an aggregate notional amount of $750 million, designed to convert half of the aggregate principal amount of the January 2014 Notes into a variable rate obligation. The swap agreement, scheduled to terminate on January 14, 2014, is designated as a fair value hedge of half of the aggregate principal amount of the January 2014 Notes. Under the interest rate swap agreement, Staples is entitled to receive semi-annual interest payments at a fixed rate of 9.75% and is required to make semi-annual interest payments at a floating rate equal to the 3 month LIBOR plus 7.262%. The interest rate swap agreement is being accounted for as a fair value hedge and the differential to be paid or received on the interest rate swap agreement is accrued and recognized as an adjustment to interest expense over the life of the agreement and the January 2014 Notes. At July 31, 2010, the interest rate swap agreement had a fair value gain of $25.6 million, which was included in other assets. No amounts were included in the condensed consolidated statement of income for the second quarter or first half of 2010 related to ineffectiveness associated with this fair value hedge.
Foreign Currency Swaps: On August 15, 2007, the Company entered into a $300 million foreign currency swap that has been designated as a foreign currency hedge on Staples net investment in Canadian dollar denominated subsidiaries. Staples, upon maturity of the agreement in October 2012, will be entitled to receive $300 million and will be obligated to pay 316.2 million in Canadian dollars. Staples will also be entitled to receive quarterly interest payments on $300 million at a fixed rate of 5.28% and will be obligated to make quarterly interest payments on 316.2 million Canadian dollars at a fixed rate of 5.17%. At July 31, 2010, the currency swap had an aggregate fair value loss of $0.8 million, which was included in other long-term obligations. No amounts were included in the condensed consolidated statement of income for the second quarter or first half of 2010 or the second quarter or first half of 2009 related to ineffectiveness associated with this net investment hedge.
On June 30, 2010, Staples entered into a currency swap, for an aggregate notional amount of 40 million Canadian dollars. Upon maturity of the agreement in July 2011, Staples will be entitled to receive $37.8 million and will be obligated to pay 40
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
million Canadian dollars. This swap was designated as a foreign currency hedge of a short-term intercompany loan with a Canadian dollar denominated subsidiary. Gains and losses on this foreign currency hedge will be recorded to other income (expense) over the life of the agreement, which will offset the gains and losses of the underlying hedged item. At July 31, 2010, the currency swap had a fair value loss of $0.8 million, which was included in accrued expenses and other current liabilities.
Foreign currency gains (losses), net of taxes, recorded in accumulated other comprehensive income (loss) were $2.2 million and $(4.4) million for the second quarter and first half of 2010, respectively, and $13.9 million and $20.9 million for the second quarter and first half of 2009, respectively.
Note F Equity Based Employee Benefit Plans
Staples offers its associates share ownership through certain equity based employee benefit plans, including 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.
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 employees annual base compensation. Under the Amended and Restated 2004 Stock Incentive Plan, the Company grants restricted stock and restricted stock units (collectively, Restricted Shares) and nonqualified stock options to associates. The Restricted Shares are restricted in that they are not transferable (i.e. they may not be sold) until they vest. The nonqualified stock options cannot be exercised until they vest. Vesting of the Restricted Shares and nonqualified stock options 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.
The following table summarizes the nonqualified stock option and Restricted Share activity in the first half of 2010:
|
|
Nonqualified Stock Options (1) |
|
Restricted Shares (2) |
|
||||||
|
|
Number |
|
Weighted |
|
Number |
|
Weighted |
|
||
Outstanding at January 30, 2010 |
|
43,834,405 |
|
$ |
19.57 |
|
12,973,840 |
|
$ |
22.52 |
|
Granted |
|
182,044 |
|
23.13 |
|
584,047 |
|
22.96 |
|
||
Exercised / Released |
|
(1,057,956 |
) |
16.07 |
|
(361,093 |
) |
23.26 |
|
||
Canceled |
|
(196,330 |
) |
21.98 |
|
(205,590 |
) |
22.12 |
|
||
Outstanding at May 1, 2010 |
|
42,762,163 |
|
19.52 |
|
12,991,204 |
|
22.53 |
|
||
Granted |
|
4,506,287 |
|
19.30 |
|
6,376,888 |
|
19.06 |
|
||
Exercised / Released |
|
(470,270 |
) |
10.99 |
|
(3,904,767 |
) |
24.23 |
|
||
Canceled |
|
(121,070 |
) |
20.86 |
|
(273,385 |
) |
22.48 |
|
||
Outstanding at July 31, 2010 |
|
46,677,110 |
|
$ |
19.71 |
|
15,189,940 |
|
$ |
20.64 |
|
|
|
|
|
|
|
|
|
|
|
||
Exercisable at July 31, 2010 |
|
33,552,899 |
|
$ |
19.19 |
|
|
|
|
|
(1) At July 31, 2010, the aggregate intrinsic value of the outstanding nonqualified stock options was $90.1 million and the aggregate intrinsic value of the exercisable nonqualified stock options was $84.2 million.
(2) Restricted Shares do not include performance shares (Performance Shares) which Staples grants to certain employees. These are awards under which restricted stock is only issued if the Company meets minimum performance targets. If, at the end of each performance period, the Companys performance falls between minimum and maximum targets, performance shares ranging from 50% to 200% of the underlying award will be issued. The fair value of Performance Shares is based upon the market price of the underlying common stock as of the date of grant. As of July 31, 2010, Staples had 1.2 million awards of Performance Shares outstanding, which were granted during 2008 and 2010 and remain subject to satisfaction of performance targets. The shares have a weighted-average fair market value per share of $20.10. Additionally, Performance Shares granted during 2009 were issued in 2010 based on the Company meeting certain performance targets. These shares continue to be subject to vesting restrictions and will
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
fully vest in January 2013. The price of these issued Performance Shares was $20.12 per share and 0.5 million of these shares are included in the outstanding Restricted Shares as of July 31, 2010.
In connection with its equity based employee benefit plans, Staples included $35.9 million and $69.6 million in compensation expense for the second quarter and first half of 2010, respectively, and $55.2 million and $90.6 million in compensation expense for the second quarter and first half of 2009, respectively. At July 31, 2010, Staples had $298.0 million related to grants of nonqualified stock options and Restricted Shares to be expensed over the period through June 2014.
Note G Pension Plans
In connection with the acquisition of Corporate Express, Staples assumed the obligations under the defined benefit pension plans Corporate Express sponsored. The pension plans cover most Corporate Express employees in Europe and certain employees in the United States. The benefits due to U.S. plan participants are frozen. A number of the defined benefit plans outside the U.S. are funded with plan assets that have been segregated in trusts. Contributions are made to these trusts, as necessary, to meet legal and other requirements.
Net periodic pension cost recognized for the second quarter and first half of 2010 and the second quarter and first half of 2009 are based upon preliminary estimates pending the final actuarial determination of such costs for fiscal 2010 and fiscal 2009, respectively. The following tables present a summary of the total net periodic cost recorded in the condensed consolidated statement of income (in thousands):
|
|
13 Weeks Ended July 31, 2010 |
|
13 Weeks Ended August 1, 2009 |
|
|||||||||||||||
|
|
U.S. Plans |
|
International |
|
Total |
|
U.S. |
|
International |
|
Total |
|
|||||||
Service cost |
|
$ |
|
|
$ |
2,172 |
|
$ |
2,172 |
|
$ |
|
|
$ |
2,191 |
|
$ |
2,191 |
|
|
Interest cost |
|
|
463 |
|
9,045 |
|
9,508 |
|
511 |
|
11,600 |
|
12,111 |
|
||||||
Expected return on plan assets |
|
(435 |
) |
(15,174 |
) |
(15,609 |
) |
(412 |
) |
(14,050 |
) |
(14,462 |
) |
|||||||
Amortization of unrecognized losses |
|
|
|
967 |
|
967 |
|
|
|
2,278 |
|
2,278 |
|
|||||||
Net periodic pension (income) cost |
|
$ |
28 |
|
$ |
(2,990 |
) |
$ |
(2,962 |
) |
$ |
99 |
|
$ |
2,019 |
|
$ |
2,118 |
|
|
|
|
26 Weeks Ended July 31, 2010 |
|
26 Weeks Ended August 1, 2009 |
|
|||||||||||||||
|
|
U.S. Plans |
|
International Plans |
|
Total |
|
U.S. Plans |
|
International Plans |
|
Total |
|
|||||||
Service cost |
|
$ |
|
|
$ |
4,344 |
|
$ |
4,344 |
|
$ |
|
|
$ |
4,242 |
|
$ |
4,242 |
|
|
Interest cost |
|
|
926 |
|
18,090 |
|
19,016 |
|
989 |
|
22,461 |
|
23,450 |
|
||||||
Expected return on plan assets |
|
(870 |
) |
(30,348 |
) |
(31,218 |
) |
(798 |
) |
(27,205 |
) |
(28,003 |
) |
|||||||
Amortization of unrecognized losses |
|
|
|
1,934 |
|
1,934 |
|
|
|
4,411 |
|
4,411 |
|
|||||||
Net periodic pension (income) cost |
|
$ |
56 |
|
$ |
(5,980 |
) |
$ |
(5,924 |
) |
$ |
191 |
|
$ |
3,909 |
|
$ |
4,100 |
|
|
Cash contributions made to Corporate Express pension plans for the second quarter and first half of 2010 and 2009 are as follows (in thousands):
|
|
13 Weeks Ended |
|
26 Weeks Ended |
|
||||||||
|
|
July 31, 2010 |
|
August 1, 2009 |
|
July 31, 2010 |
|
August 1, 2009 |
|
||||
U.S. Plans |
|
$ |
224 |
|
$ |
166 |
|
$ |
524 |
|
$ |
332 |
|
International Plans |
|
3,225 |
|
2,920 |
|
5,179 |
|
4,661 |
|
||||
Total |
|
$ |
3,449 |
|
$ |
3,086 |
|
$ |
5,703 |
|
$ |
4,993 |
|
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
The Company expects to make additional cash contributions of $0.5 million and $5.2 million to the U.S. Plans and International Plans, respectively, during the remainder of fiscal 2010.
Note H Stockholders Equity and Comprehensive Income
The following table reflects for the first half of 2010 and 2009 the changes in stockholders equity and comprehensive income attributable to Staples, Inc. and its noncontrolling interests (in thousands). The noncontrolling interest primarily reflects the remaining 1.5% of noncontrolling interest in Corporate Express Australia (see Note C).
|
|
Attributable to |
|
Attributable to |
|
Total |
|
|||
Stockholders equity at January 30, 2010 |
|
$ |
6,771,886 |
|
$ |
83,054 |
|
$ |
6,854,940 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|||
Net income |
|
318,526 |
|
6,625 |
|
325,151 |
|
|||
Other comprehensive income: |
|
|
|
|
|
|
|
|||
Foreign currency translation adjustments, net |
|
(207,210 |
) |
(459 |
) |
(207,669 |
) |
|||
Deferred pension costs, net |
|
|
|
|
|
|
|
|||
Changes in the fair value of derivatives, net (1) |
|
(4,807 |
) |
432 |
|
(4,375 |
) |
|||
Total other comprehensive income |
|
(212,017 |
) |
(27 |
) |
(212,044 |
) |
|||
Comprehensive income |
|
106,509 |
|
6,598 |
|
113,107 |
|
|||
Issuance of common stock options for stock options exercised and the sale of stock under employee stock purchase plans |
|
38,443 |
|
|
|
38,443 |
|
|||
Stock-based compensation |
|
69,629 |
|
|
|
69,629 |
|
|||
Purchase of noncontrolling interest, including accrued and unpaid transaction costs |
|
(271,001 |
) |
(78,987 |
) |
(349,988 |
) |
|||
Cash dividends paid |
|
(130,100 |
) |
|
|
(130,100 |
) |
|||
Purchase of treasury stock, net |
|
(128,745 |
) |
|
|
(128,745 |
) |
|||
Other |
|
(5,930 |
) |
|
|
(5,930 |
) |
|||
Stockholders equity at July 31, 2010 |
|
$ |
6,450,691 |
|
$ |
10,665 |
|
$ |
6,461,356 |
|
|
|
|
|
|
|
|
|
|||
|
|
Attributable |
|
Attributable to |
|
Total |
|
|||
Stockholders equity at January 31, 2009 |
|
$ |
5,564,207 |
|
$ |
58,224 |
|
$ |
5,622,431 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|||
Net income |
|
235,375 |
|
8,765 |
|
244,140 |
|
|||
Other comprehensive income: |
|
|
|
|
|
|
|
|||
Foreign currency translation adjustments, net |
|
302,966 |
|
6,146 |
|
309,112 |
|
|||
Deferred pension costs, net |
|
(118 |
) |
|
|
(118 |
) |
|||
Changes in the fair value of derivatives, net (1) |
|
20,937 |
|
|
|
20,937 |
|
|||
Total other comprehensive income |
|
323,785 |
|
6,146 |
|
329,931 |
|
|||
Comprehensive income |
|
559,160 |
|
14,911 |
|
574,071 |
|
|||
Issuance of common stock for stock options exercised and the sale of stock under employee stock purchases plans |
|
45,338 |
|
|
|
45,338 |
|
|||
Tax benefit on exercise of options |
|
(8,083 |
) |
|
|
(8,083 |
) |
|||
Stock-based compensation |
|
90,558 |
|
|
|
90,558 |
|
|||
Cash dividends paid |
|
(118,048 |
) |
|
|
(118,048 |
) |
|||
Purchase of treasury stock, net |
|
(24,075 |
) |
|
|
(24,075 |
) |
|||
Other |
|
(1,289 |
) |
|
|
(1,289 |
) |
|||
Stockholders equity at August 1, 2009 |
|
$ |
6,107,768 |
|
$ |
73,135 |
|
$ |
6,180,903 |
|
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(1) Changes in the fair value of derivatives are net of taxes of $1.6 million and $9.8 million for the thirteen weeks ended July 31, 2010 and August 1, 2009, respectively, and net of taxes of $3.3 million and $15.1 million for the twenty-six weeks ended July 31, 2010 and August 1, 2009, respectively.
The following table summarizes the components of accumulated other comprehensive income (loss) as of July 31, 2010 and January 30, 2010 (in thousands):
|
|
July 31, 2010 |
|
January 30, 2010 |
|
||
Foreign currency translation adjustments |
|
$ |
(170,817 |
) |
$ |
36,825 |
|
Derivative instruments (net of taxes) |
|
1,461 |
|
5,836 |
|
||
Deferred pension costs (net of taxes) |
|
(131,998 |
) |
(131,998 |
) |
||
Accumulated other comprehensive loss |
|
$ |
(301,354 |
) |
$ |
(89,337 |
) |
Note I - Computation of Earnings per Common Share
The computation of basic and diluted earnings per share for the second quarter and first half of 2010 and 2009 is as follows (in thousands, except per share data):
|
|
13 Weeks Ended |
|
26 Weeks Ended |
|
||||||||
|
|
July 31, 2010 |
|
August 1, 2009 |
|
July 31, 2010 |
|
August 1, 2009 |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
||||
Net income attributed to Staples, Inc. |
|
$ |
129,756 |
|
$ |
92,411 |
|
$ |
318,526 |
|
$ |
235,375 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
||||
Weighted-average common shares outstanding |
|
719,486 |
|
707,379 |
|
719,140 |
|
706,331 |
|
||||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
||||
Employee stock options and restricted shares |
|
10,249 |
|
12,095 |
|
11,802 |
|
12,375 |
|
||||
Weighted-average common shares outstanding assuming dilution |
|
729,735 |
|
719,474 |
|
730,942 |
|
718,706 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Basic earnings per common share |
|
$ |
0.18 |
|
$ |
0.13 |
|
$ |
0.44 |
|
$ |
0.33 |
|
Diluted earnings per common share |
|
$ |
0.18 |
|
$ |
0.13 |
|
$ |
0.44 |
|
$ |
0.33 |
|
Options to purchase shares of common stock are excluded from the calculation of diluted earnings per share when their inclusion would have an anti-dilutive effect on the calculation. Options to purchase 21.3 million and 23.9 million shares of Staples common stock were excluded from the calculation of diluted earnings per share at July 31, 2010 and August 1, 2009, respectively.
Note J - Segment Reporting
Staples has three reportable segments: North American Delivery, North American Retail and International Operations. Staples 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 Contract, Staples Business Delivery and Quill. The North American Retail segment consists of the U.S. and Canadian business units that operate office products stores. The International Operations segment consists of business units that operate office products stores and that sell and deliver office products and services directly to customers and businesses in 24 countries in Europe, Asia, Australia, and South America.
Staples evaluates performance and allocates resources based on profit or loss from operations before integration and restructuring costs, stock-based compensation, interest and other expense, non-recurring items, and the impact of changes in accounting principles (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 Delivery and North American Retail 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 are different. The International Operations are considered a separate reportable segment because of the significant differences in the operating environment from the North American operations.
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
The following is a summary of sales and business unit income by reportable segment for the second quarter and first half of 2010 and 2009 and a reconciliation of total segment income to consolidated income before income taxes (in thousands):
|
|
13 Weeks Ended |
|
26 Weeks Ended |
|
||||||||
|
|
July 31, 2010 |
|
August 1, 2009 |
|
July 31, 2010 |
|
August 1, 2009 |
|
||||
|
|
Sales |
|
Sales |
|
||||||||
North American Delivery |
|
$ |
2,359,427 |
|
$ |
2,322,850 |
|
$ |
4,822,081 |
|
$ |
4,741,208 |
|
North American Retail |
|
2,010,549 |
|
1,973,268 |
|
4,322,759 |
|
4,161,603 |
|
||||
International Operations |
|
1,164,264 |
|
1,237,661 |
|
2,447,195 |
|
2,448,527 |
|
||||
Total reportable segments |
|
$ |
5,534,240 |
|
$ |
5,533,779 |
|
$ |
11,592,035 |
|
$ |
11,351,338 |
|
|
|
13 Weeks Ended |
|
26 Weeks Ended |
|
||||||||
|
|
July 31, 2010 |
|
August 1, 2009 |
|
July 31, 2010 |
|
August 1, 2009 |
|
||||
|
|
Business Unit Income |
|
Business Unit Income |
|
||||||||
North American Delivery |
|
$ |
206,421 |
|
$ |
184,922 |
|
$ |
409,937 |
|
$ |
345,551 |
|
North American Retail |
|
105,694 |
|
102,771 |
|
282,243 |
|
263,222 |
|
||||
International Operations |
|
13,546 |
|
3,741 |
|
50,434 |
|
23,859 |
|
||||
Business Unit Income |
|
325,661 |
|
$ |
291,434 |
|
742,614 |
|
$ |
632,632 |
|
||
Stock-based compensation |
|
(35,864 |
) |
(55,221 |
) |
(69,629 |
) |
(90,558 |
) |
||||
Total Segment Income |
|
289,797 |
|
236,213 |
|
672,985 |
|
542,074 |
|
||||
Interest and other expense, net |
|
(55,882 |
) |
(58,243 |
) |
(110,216 |
) |
(120,711 |
) |
||||
Integration and restructuring costs |
|
(21,644 |
) |
(29,633 |
) |
(42,526 |
) |
(48,630 |
) |
||||
Consolidated income before income taxes |
|
$ |
212,271 |
|
$ |
148,337 |
|
$ |
520,243 |
|
$ |
372,733 |
|
Note K - Guarantor Subsidiaries
Under the terms of the Companys April 2011 Notes, the Amended and Restated Revolving Credit Agreement with Bank of America N.A. and other lending institutions named therein (the Revolving Credit Facility), the October 2012 Notes, the January 2014 Notes and the commercial paper program, the Guarantor Subsidiaries, as defined below, guarantee repayment of the debt. The debt is 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 (collectively, the Guarantor Subsidiaries). The terms of guarantees are equivalent to the term of the related debt. The following condensed consolidating financial data is presented for the holders of the April 2011 Notes, the October 2012 Notes, and the January 2014 Notes and illustrates the composition of Staples, Inc. (the Parent Company), Guarantor Subsidiaries, and non-guarantor subsidiaries as of July 31, 2010 and January 30, 2010 and for the second quarter and first half of 2010 and 2009. The Guarantor Subsidiaries are wholly owned by Staples, Inc. 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 Companys investment accounts and earnings. The principal elimination entries eliminate the Parent Companys investment in subsidiaries and intercompany balances and transactions.
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
Condensed Consolidating Balance Sheet
As of July 31, 2010
(in thousands)
|
|
Staples, Inc. |
|
Guarantor |
|
Non- |
|
Eliminations |
|
Consolidated |
|
|||||
Cash and cash equivalents |
|
$ |
373,663 |
|
$ |
50,953 |
|
$ |
447,344 |
|
|
|
$ |
871,960 |
|
|
Merchandise inventories, net |
|
|
|
1,460,501 |
|
1,053,508 |
|
|
|
2,514,009 |
|
|||||
Other current assets |
|
88,430 |
|
701,960 |
|
1,690,130 |
|
|
|
2,480,520 |
|
|||||
Total current assets |
|
462,093 |
|
2,213,414 |
|
3,190,982 |
|
|
|
5,866,489 |
|
|||||
Net property, equipment and other assets |
|
723,489 |
|
1,357,044 |
|
1,301,733 |
|
|
|
3,382,266 |
|
|||||
Goodwill |
|
1,630,190 |
|
154,527 |
|
2,200,532 |
|
|
|
3,985,249 |
|
|||||
Investment in affiliates and intercompany, net |
|
6,047,187 |
|
4,959,386 |
|
6,608,802 |
|
(17,615,375 |
) |
|
|
|||||
Total assets |
|
$ |
8,862,959 |
|
$ |
8,684,371 |
|
$ |
13,302,049 |
|
$ |
(17,615,375 |
) |
$ |
13,234,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total current liabilities |
|
$ |
718,346 |
|
$ |
1,540,909 |
|
$ |
1,865,511 |
|
$ |
|
|
$ |
4,124,766 |
|
Total long-term liabilities |
|
1,683,257 |
|
598,405 |
|
366,220 |
|
|
|
2,647,882 |
|
|||||
Total stockholders equity |
|
6,461,356 |
|
6,545,057 |
|
11,070,318 |
|
(17,615,375 |
) |
6,461,356 |
|
|||||
Total liabilities and stockholders equity |
|
$ |
8,862,959 |
|
$ |
8,684,371 |
|
$ |
13,302,049 |
|
$ |
(17,615,375 |
) |
$ |
13,234,004 |
|
Condensed Consolidating Balance Sheet
As of January 30, 2010
(in thousands)
|
|
Staples, Inc. |
|
Guarantor |
|
Non- |
|
Eliminations |
|
Consolidated |
|
|||||
Cash and cash equivalents |
|
$ |
581,095 |
|
$ |
54,324 |
|
$ |
780,400 |
|
$ |
|
|
$ |
1,415,819 |
|
Merchandise inventories, net |
|
|
|
1,312,523 |
|
948,626 |
|
|
|
2,261,149 |
|
|||||
Other current assets |
|
171,292 |
|
640,587 |
|
1,685,920 |
|
|
|
2,497,799 |
|
|||||
Total current assets |
|
752,387 |
|
2,007,434 |
|
3,414,946 |
|
|
|
6,174,767 |
|
|||||
Net property, equipment and other assets |
|
751,876 |
|
1,351,770 |
|
1,354,799 |
|
|
|
3,458,445 |
|
|||||
Goodwill |
|
1,648,686 |
|
154,527 |
|
2,280,909 |
|
|
|
4,084,122 |
|
|||||
Investment in affiliates and intercompany, net |
|
6,243,472 |
|
5,026,554 |
|
3,495,550 |
|
(14,765,576 |
) |
|
|
|||||
Total assets |
|
$ |
9,396,421 |
|
$ |
8,540,285 |
|
$ |
10,546,204 |
|
$ |
(14,765,576 |
) |
$ |
13,717,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total current liabilities |
|
$ |
347,969 |
|
$ |
1,733,223 |
|
$ |
1,701,127 |
|
$ |
|
|
$ |
3,782,319 |
|
Total long-term liabilities |
|
2,193,512 |
|
611,675 |
|
274,888 |
|
|
|
3,080,075 |
|
|||||
Total stockholders equity |
|
6,854,940 |
|
6,195,387 |
|
8,570,189 |
|
(14,765,576 |
) |
6,854,940 |
|
|||||
Total liabilities and stockholders equity |
|
$ |
9,396,421 |
|
$ |
8,540,285 |
|
$ |
10,546,204 |
|
$ |
(14,765,576 |
) |
$ |
13,717,334 |
|
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
Condensed Consolidating Statement of Income
For the thirteen weeks ended July 31, 2010
(in thousands)
|
|
Staples, Inc. |
|
Guarantor |
|
Non- |
|
Eliminations |
|
Consolidated |
|
|||||
Sales |
|
$ |
|
|
$ |
3,388,461 |
|
$ |
2,145,779 |
|
$ |
|
|
$ |
5,534,240 |
|
Cost of goods sold and occupancy costs |
|
2,948 |
|
2,563,640 |
|
1,504,944 |
|
|
|
4,071,532 |
|
|||||
Gross profit |
|
(2,948 |
) |
824,821 |
|
640,835 |
|
|
|
1,462,708 |
|
|||||
Operating and other expenses (income) |
|
(132,704 |
) |
713,255 |
|
501,526 |
|
168,360 |
|
1,250,437 |
|
|||||
Consolidated income before income taxes |
|
129,756 |
|
111,566 |
|
139,309 |
|
(168,360 |
) |
212,271 |
|
|||||
Income tax expense |
|
|
|
50,791 |
|
28,811 |
|
|
|
79,602 |
|
|||||
Consolidated net income |
|
129,756 |
|
60,775 |
|
110,498 |
|
(168,360 |
) |
132,669 |
|
|||||
Income attributed to the noncontrolling interests |
|
|
|
|
|
2,913 |
|
|
|
2,913 |
|
|||||
Net income attributed to Staples, Inc. |
|
$ |
129,756 |
|
$ |
60,775 |
|
$ |
107,585 |
|
$ |
(168,360 |
) |
$ |
129,756 |
|
Condensed Consolidating Statement of Income
For the thirteen weeks ended August 1, 2009
(in thousands)
|
|
Staples, Inc. |
|
Guarantor |
|
Non- |
|
Eliminations |
|
Consolidated |
|
|||||
Sales |
|
$ |
|
|
$ |
2,896,122 |
|
$ |
2,637,657 |
|
$ |
|
|
$ |
5,533,779 |
|
Cost of goods sold and occupancy costs |
|
3,403 |
|
2,157,935 |
|
1,948,184 |
|
|
|
4,109,522 |
|
|||||
Gross profit |
|
(3,403 |
) |
738,187 |
|
689,473 |
|
|
|
1,424,257 |
|
|||||
Operating and other expenses (income) |
|
(95,814 |
) |
627,591 |
|
662,154 |
|
81,989 |
|
1,275,920 |
|
|||||
Consolidated income before income taxes |
|
92,411 |
|
110,596 |
|
27,319 |
|
(81,989 |
) |
148,337 |
|
|||||
Income tax expense |
|
|
|
30,543 |
|
20,633 |
|
|
|
51,176 |
|
|||||
Consolidated net income |
|
92,411 |
|
80,053 |
|
6,686 |
|
(81,989 |
) |
97,161 |
|
|||||
Income attributed to the noncontrolling interests |
|
|
|
|
|
4,750 |
|
|
|
4,750 |
|
|||||
Net income attributed to Staples, Inc. |
|
$ |
92,411 |
|
$ |
80,053 |
|
$ |
1,936 |
|
$ |
(81,989 |
) |
$ |
92,411 |
|
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
Condensed Consolidating Statement of Income
For the twenty-six weeks ended July 31, 2010
(in thousands)
|
|
Staples, Inc. |
|
Guarantor |
|
Non- |
|
Eliminations |
|
Consolidated |
|
|||||
Sales |
|
$ |
|
|
$ |
7,059,955 |
|
$ |
4,532,080 |
|
$ |
|
|
$ |
11,592,035 |
|
Cost of goods sold and occupancy costs |
|
5,908 |
|
5,309,352 |
|
3,195,012 |
|
|
|
8,510,272 |
|
|||||
Gross profit |
|
(5,908 |
) |
1,750,603 |
|
1,337,068 |
|
|
|
3,081,763 |
|
|||||
Operating and other expenses (income) |
|
(324,434 |
) |
1,451,179 |
|
1,072,513 |
|
362,262 |
|
2,561,520 |
|
|||||
Consolidated income before income taxes |
|
318,526 |
|
299,424 |
|
264,555 |
|
(362,262 |
) |
520,243 |
|
|||||
Income tax expense |
|
|
|
128,508 |
|
66,584 |
|
|
|
195,092 |
|
|||||
Consolidated net income |
|
318,526 |
|
170,916 |
|
197,971 |
|
(362,262 |
) |
325,151 |
|
|||||
Income attributed to the noncontrolling interests |
|
|
|
|
|
6,625 |
|
|
|
6,625 |
|
|||||
Net income attributed to Staples, Inc. |
|
$ |
318,526 |
|
$ |
170,916 |
|
$ |
191,346 |
|
$ |
(362,262 |
) |
$ |
318,526 |
|
Condensed Consolidating Statement of Income
For the twenty-six weeks ended August 1, 2009
(in thousands)
|
|
Staples, Inc. |
|
Guarantor |
|
Non- |
|
Eliminations |
|
Consolidated |
|
|||||
Sales |
|
$ |
|
|
$ |
5,809,670 |
|
$ |
5,541,668 |
|
$ |
|
|
$ |
11,351,338 |
|
Cost of goods sold and occupancy costs |
|
5,828 |
|
4,297,319 |
|
4,098,032 |
|
|
|
8,401,179 |
|
|||||
Gross profit |
|
(5,828 |
) |
1,512,351 |
|
1,443,636 |
|
|
|
2,950,159 |
|
|||||
Operating and other expenses (income) |
|
(241,203 |
) |
1,266,288 |
|
1,264,762 |
|
287,579 |
|
2,577,426 |
|
|||||
Consolidated income before income taxes |
|
235,375 |
|
246,063 |
|
178,874 |
|
(287,579 |
) |
372,733 |
|
|||||
Income tax expense |
|
|
|
62,032 |
|
66,561 |
|
|
|
128,593 |
|
|||||
Consolidated net income |
|
235,375 |
|
184,031 |
|
112,313 |
|
(287,579 |
) |
244,140 |
|
|||||
Income attributed to the noncontrolling interests |
|
|
|
|
|
8,765 |
|
|
|
8,765 |
|
|||||
Net income attributed to Staples, Inc. |
|
$ |
235,375 |
|
$ |
184,031 |
|
$ |
103,548 |
|
$ |
(287,579 |
) |
$ |
235,375 |
|
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
Condensed Consolidating Statement of Cash Flows
For the twenty-six weeks ended July 31, 2010
(in thousands)
|
|
|
|
|
|
Non- |
|
|
|
||||
|
|
Staples, Inc. |
|
Guarantor |
|
Guarantor |
|
|
|
||||
|
|
(Parent Co.) |
|
Subsidiaries |
|
Subsidiaries |
|
Consolidated |
|
||||
Net cash provided by operating activities |
|
$ |
116,179 |
|
$ |
79,961 |
|
$ |
49,286 |
|
$ |
245,426 |
|
Investing activities: |
|
|
|
|
|
|
|
|
|
||||
Acquisition of property and equipment |
|
(24,749 |
) |
(83,332 |
) |
(42,638 |
) |
(150,719 |
) |
||||
Acquisition of businesses, net of cash acquired |
|
|
|
|
|
(39,270 |
) |
(39,270 |
) |
||||
Net cash used in investing activities |
|
(24,749 |
) |
(83,332 |
) |
(81,908 |
) |
(189,989 |
) |
||||
Financing Activities: |
|
|
|
|
|
|
|
|
|
||||
Proceeds from borrowings |
|
34,867 |
|
|
|
61,022 |
|
95,889 |
|
||||
Payments on borrowings, including payment of deferred financing fees |
|
(113,327 |
) |
|
|
|
|
(113,327 |
) |
||||
Purchase of treasury stock, net |
|
(128,745 |
) |
|
|
|
|
(128,745 |
) |
||||
Cash dividends paid |
|
(130,100 |
) |
|
|
|
|
(130,100 |
) |
||||
Purchase of noncontrolling interest |
|
|
|
|
|
(345,963 |
) |
(345,963 |
) |
||||
Other |
|
38,443 |
|
|
|
|
|
38,443 |
|
||||
Net cash used in financing activities |
|
(298,862 |
) |
|
|
(284,941 |
) |
(583,803 |
) |
||||
Effect of exchange rate changes on cash and cash equivalents |
|
|
|
|
|
(15,493 |
) |
(15,493 |
) |
||||
Net decrease in cash and cash equivalents |
|
(207,432 |
) |
(3,371 |
) |
(333,056 |
) |
(543,859 |
) |
||||
Cash and cash equivalents at beginning of period |
|
581,095 |
|
54,324 |
|
780,400 |
|
1,415,819 |
|
||||
Cash and cash equivalents at end of period |
|
$ |
373,663 |
|
$ |
50,953 |
|
$ |
447,344 |
|
$ |
871,960 |
|
Condensed Consolidating Statement of Cash Flows
For the twenty-six weeks ended August 1, 2009
(in thousands)
|
|
|
|
|
|
Non- |
|
|
|
||||
|
|
Staples, Inc. |
|
Guarantor |
|
Guarantor |
|
|
|
||||
|
|
(Parent Co.) |
|
Subsidiaries |
|
Subsidiaries |
|
Consolidated |
|
||||
Net cash provided by operating activities |
|
$ |
734,347 |
|
$ |
82,904 |
|
$ |
(119,287 |
) |
$ |
697,964 |
|
Investing activities: |
|
|
|
|
|
|
|
|
|
||||
Acquisition of property and equipment |
|
(11,095 |
) |
(68,177 |
) |
(50,593 |
) |
(129,865 |
) |
||||
Net cash used in investing activities |
|
(11,095 |
) |
(68,177 |
) |
(50,593 |
) |
(129,865 |
) |
||||
Financing Activities: |
|
|
|
|
|
|
|
|
|
||||
Repayments of commercial paper, net of proceeds from issuances |
|
(1,088,470 |
) |
|
|
|
|
(1,088,470 |
) |
||||
Proceeds from borrowings |
|
815,310 |
|
|
|
324,510 |
|
1,139,820 |
|
||||
Payments on borrowings, including payment of deferred financing fees |
|
(341,209 |
) |
|
|
(224,289 |
) |
(565,498 |
) |
||||
Purchase of treasury stock, net |
|
(24,075 |
) |
|
|
|
|
(24,075 |
) |
||||
Cash dividends paid |
|
(118,048 |
) |
|
|
|
|
(118,048 |
) |
||||
Other |
|
45,338 |
|
|
|
|
|
45,338 |
|
||||
Net cash (used in) provided by financing activities |
|
(711,154 |
) |
|
|
100,221 |
|
(610,933 |
) |
||||
Effect of exchange rate changes on cash and cash equivalents |
|
|
|
|
|
42,502 |
|
42,502 |
|
||||
Net increase (decrease) in cash and cash equivalents |
|
12,098 |
|
14,727 |
|
(27,157 |
) |
(332 |
) |
||||
Cash and cash equivalents at beginning of period |
|
74,255 |
|
45,083 |
|
514,436 |
|
633,774 |
|
||||
Cash and cash equivalents at end of period |
|
$ |
86,353 |
|
$ |
59,810 |
|
$ |
487,279 |
|
$ |
633,442 |
|
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
Note L Contingencies
From time to time, the Company is involved in litigation arising from the operation of its business that is considered routine and incidental to its business. 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.
In addition, at the time the Corporate Express tender offer was fully settled on July 23, 2008, Staples had acquired more than 99% of the outstanding capital stock of Corporate Express. Staples has worked diligently to acquire the remaining capital stock of Corporate Express by means of a compulsory judicial squeeze out procedure in accordance with the Dutch Civil Code. Staples and the other parties to the squeeze out procedure have submitted their arguments to the Dutch court and are awaiting a decision. While Staples does not know the exact date that the Dutch court will render a judgment, it anticipates that a judgment will be rendered prior to the end of fiscal 2010. There is, however, no guarantee that the court will render a judgment before such time. Any additional payments will be recorded in equity pursuant to ASC Topic 810.
Staples has also acquired more than 98% of the outstanding capital stock of Corporate Express Australia. Staples is working to acquire the remaining 1.5% of the shares through a compulsory acquisition process that is expected to be completed by September 2010. There is, however, no guarantee that this will be completed before such time.
Note M Subsequent Events
Subsequent events have been evaluated through the date the financial statements were issued and no events or transactions have occurred that require disclosure or adjustment to these condensed consolidated financial statements.
STAPLES, INC. AND SUBSIDIARIES
Managements Discussion and Analysis
of Financial Condition and Results of Operations
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This Quarterly Report on Form 10-Q and, in particular, this managements 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). 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 managements beliefs and assumptions, and should be read in conjunction with our condensed consolidated financial statements and notes to condensed 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.
Results of Operations
We have provided below an overview of our operating results as well as a summary of our consolidated performance and details of our segment performance. Net income is presented in our Consolidated Performance, in accordance with accounting principles generally accepted in the United States (US GAAP) and as adjusted for certain items as noted in reconciliation tables below. Management uses adjusted net income, among other standards, to measure operating performance. We have added this information because we believe it helps in understanding the results of our operations on a comprehensive basis. This adjusted information supplements and is not intended to replace performance measures required by US GAAP disclosure.
Overview
Major contributors to our results for the second quarter of 2010 compared to our results for the second quarter of 2009 are reviewed in detail in the Consolidated Performance and Segment Performance discussions and are summarized below:
· On a consolidated basis, we generated $5.5 billion in sales, which were flat compared to the second quarter of 2009.
· North American Delivery sales increased 1.6% and business unit income rate increased to 8.7% from 8.0%.
· North American Retail sales increased 1.9% and comparable store sales were flat. North American Retails business unit income rate increased to 5.3% from 5.2%
· International Operations sales decreased 5.9% in US dollars and decreased 1.8% in local currency. International Operations business unit income rate increased to 1.2% from 0.3%.
· We now operate 2,264 stores worldwide. This includes an addition of 9 stores during the second quarter associated with the acquisition of OY Lindell AB (Lindell), an office products distributor based in Finland.
We are continuing to invest in strategic growth initiatives to drive our long-term success, including technology products and services, copy and print services, and facility and break room supplies, while maintaining our focus on customer service and expense control.
Outlook
Our expectations for 2010 assume a gradual economic recovery extending throughout the year. For the third quarter and full year we expect sales to increase in the low single digits compared to the same periods in 2009. We expect to achieve diluted earnings per share on a US GAAP basis and adjusted diluted earnings per share for the third quarter and full year 2010 as follows:
STAPLES, INC. AND SUBSIDIARIES
Managements Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
|
|
Third Quarter 2010 |
|
Full Year 2010 |
|
Diluted earnings per share, on an US GAAP basis |
|
$0.38 to $0.40 |
|
$1.20 to $1.24 |
|
Impact of integration and restructuring costs per share |
|
.01 |
|
.05 |
|
Adjusted earnings per share |
|
$0.39 to $0.41 |
|
$1.25 to $1.29 |
|
We no longer anticipate that prior to the end of fiscal year 2010 the US Congress will extend the provisions that allow for the deferral of income tax on certain foreign earnings. As a result, we anticipate that our effective tax rate for the third quarter and full year 2010 will be 37.5%. We have been able to adopt a structure that we expect will allow us to return to a 34.5% tax rate in fiscal 2011, assuming no other changes to the laws.
We expect to incur the following expenses during the third quarter and full year 2010:
|
|
Third Quarter 2010 |
|
Full Year 2010 |
|
Depreciation expense |
|
$120 million to $130 million |
|
$480 million to $490 million |
|
Net interest expense |
|
$50 million to $55 million |
|
$215 million to $220 million |
|
Amortization of intangibles |
|
$15 million to $20 million |
|
$65 million to $70 million |
|
Integration and restructuring costs |
|
Approximately $10 million |
|
$55 million to $60 million |
|
Consolidated Performance
Net income attributed to Staples, Inc. for the second quarter of 2010 was $129.8 million or $0.18 per diluted share compared to $92.4 million or $0.13 per diluted share for the second quarter of 2009. Net income attributed to Staples, Inc. for the first half of 2010 was $318.5 million or $0.44 per diluted share compared to $235.4 million or $0.33 per diluted share for the first half of 2009. Our results for the second quarter and the first half of 2010 and 2009 include integration and restructuring costs. A reconciliation of net income adjusted to remove the integration and restructuring costs, net of taxes is shown below (amounts in thousands, except per share data):
|
|
13 Weeks Ended |
|
26 Weeks Ended |
|
||||||||||||||||||||
|
|
July 31, 2010 |
|
August 1, 2009 |
|
July 31, 2010 |
|
August 1, 2009 |
|
||||||||||||||||
|
|
Net |
|
Per |
|
Net |
|
Per |
|
Net |
|
Per |
|
Net |
|
Per |
|
||||||||
Net income as reported |
|
$ |
129,756 |
|
$ |
0.18 |
|
$ |
92,411 |
|
$ |
0.13 |
|
$ |
318,526 |
|
$ |
0.44 |
|
$ |
235,375 |
|
$ |
0.33 |
|
Adjustments, net of taxes: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Integration and restructuring costs (2) |
|
13,528 |
|
0.02 |
|
19,410 |
|
0.03 |
|
26,579 |
|
0.03 |
|
31,853 |
|
0.04 |
|
||||||||
Adjusted net income |
|
$ |
143,284 |
|
$ |
0.20 |
|
$ |
111,821 |
|
$ |
0.16 |
|
$ |
345,105 |
|
$ |
0.47 |
|
$ |
267,228 |
|
$ |
0.37 |
|
(1) The tax effect of all adjustments is based on an effective tax rate of 37.5% for the second quarter and first half of 2010 and an effective tax rate of 34.5% for the second quarter and first half of 2009.
(2) See Note D in the Notes to the Condensed Consolidated Financial Statements.
STAPLES, INC. AND SUBSIDIARIES
Managements Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
Second Quarter of 2010 Compared to the Second Quarter of 2009:
Sales: Sales for the second quarter of 2010 were $5.5 billion, which was flat compared to the second quarter of 2009. Our sales for the second quarter of 2010 reflect non-comparable sales for new stores opened in the last twelve months offset by negative comparable store sales in Europe.
Gross Profit: Gross profit as a percentage of sales was 26.4% for the second quarter of 2010 compared to 25.7% for the second quarter of 2009. The increase in gross profit rate for the second quarter of 2010 was primarily driven by better buying and supply chain improvements.
Selling, General and Administrative Expenses: Selling, general and administrative expenses as a percentage of sales were 20.9% for the second quarter of 2010 compared to 21.0% for the second quarter of 2009. This decrease reflects reduced stock-based compensation and, to a lesser extent, lower depreciation expense, partially offset by deleverage in labor costs.
Integration and Restructuring Costs: Integration and restructuring costs represent the costs associated with the integration of Corporate Express, including Corporate Express Australia Limited (Corporate Express Australia), with our pre-existing business and the consolidation of certain operations of the combined company. Integration and restructuring costs were $21.6 million for the second quarter of 2010 compared to $29.6 million for the second quarter of 2009. Integration and restructuring costs for the second quarter of 2010 included $15.4 million of consulting and other costs, $4.4 million for facility closures and other asset write-downs, and $1.8 million for severance and retention. Integration and restructuring costs for the second quarter of 2009 included a $20.7 million charge for severance and retention and $8.9 million of consulting and other fees.
Amortization of Intangibles: Amortization of intangibles was $14.9 million for the second quarter of 2010 compared to $26.6 million for the second quarter of 2009, reflecting the amortization of certain trade names, customer relationships and non-competition agreements. Amortization expense relating to intangibles resulting from our acquisition of Corporate Express was $12.2 million for the second quarter of 2010 compared to $18.7 million for the second quarter of 2009.
Interest Income: Interest income was $1.9 million for the second quarter of 2010 compared to $1.3 million for the second quarter of 2009. The increase in interest income for the second quarter of 2010 was primarily due to an increase in our average cash balance, partially offset by a reduction in interest rates.
Interest Expense: Interest expense decreased to $53.2 million in the second quarter of 2010 from $60.9 million in the second quarter of 2009. This decrease was primarily due to the positive impact of our interest rate swap agreements as well as the fees recognized in 2009 associated with borrowings used to fund the acquisition of Corporate Express. We use interest rate swap agreements to convert a portion of our fixed rate debt obligations into variable rate obligations and a portion of our variable rate obligations into fixed rate obligations. Excluding the impact of our interest rate swap agreements, interest expense would have been $60.0 million for the second quarter of 2010 compared to $62.9 million for the second quarter of 2009.
Other Income (Expense): Other expense was $4.6 million for the second quarter of 2010. Other income was $1.4 million for the second quarter of 2009. These amounts primarily reflect foreign exchange gains and losses recorded in the respective periods.
Income Taxes: Our effective tax rate was 37.5% for the second quarter of 2010 compared to 34.5% for the second quarter of 2009. The increase in the effective tax rate from the second quarter of 2009 was due to the expiration of provisions in the Internal Revenue Code which allowed for the deferral of United States income tax on certain unremitted foreign earnings. These expired provisions impacted us in 2010 as a result of our acquisition of Corporate Express and our decision to delay certain changes to our tax structure in order to expedite the squeeze out of the remaining public shareholders of Corporate Express.
STAPLES, INC. AND SUBSIDIARIES
Managements Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
First Half of 2010 Compared to the First Half of 2009:
Sales: Sales for the first half of 2010 were $11.6 billion, an increase of 2.1% from the first half of 2009. Our sales growth for the first half of 2010 reflects the positive impact of foreign exchange rates of $246.2 million and, to a lesser extent, non-comparable sales for new stores opened in the last twelve months, partially offset by negative comparable store sales in Europe and lower sales in our European printing systems business.
Gross Profit: Gross profit as a percentage of sales was 26.6% for the first half of 2010 compared to 26.0% for the first half of 2009. The increase in gross profit rate for the first half of 2010 was primarily driven by better buying and supply chain improvements.
Selling, General and Administrative Expenses: Selling, general and administrative expenses as a percentage of sales were 20.5% for the first half of 2010 compared to 20.8% for the first half of 2009. The decrease reflects reduced stock-based compensation, lower depreciation expense and, to a lesser extent, reduced marketing expense, partially offset by deleverage in labor costs.
Integration and Restructuring Costs: Integration and restructuring costs represent the costs associated with the integration of Corporate Express, including Corporate Express Australia, with our pre-existing business and the consolidation of certain operations of the combined company. Integration and restructuring costs were $42.5 million for the first half of 2010 compared to $48.6 million for the first half of 2009. Integration and restructuring costs for the first half of 2010 included $24.3 million of consulting and other costs, $9.7 million for facility closures and other asset write-downs, and $8.5 million for severance and retention. Integration and restructuring costs for the first half of 2009 included a $22.9 million charge for severance and retention, $14.0 million of consulting and other costs, and an $11.7 million charge related to asset write-downs for assets whose use was expected to be limited as a result of the acquisition.
Amortization of Intangibles: Amortization of intangibles was $30.3 million for the first half of 2010 compared to $48.5 million for the first half of 2009, reflecting the amortization of certain trade names, customer relationships and non-competition agreements. Amortization expense relating to intangibles resulting from our acquisition of Corporate Express was $24.9 million for the first half of 2010 compared to $32.8 million for the first half of 2009.
Interest Income: Interest income was $3.7 million for the first half of 2010 compared to $3.0 million for the first half of 2009. The increase in interest income for the first half of 2010 was primarily due to an increase in our average cash balance, partially offset by a reduction in interest rates.
Interest Expense: Interest expense decreased to $108.6 million for the first half of 2010 from $121.4 million for the first half of 2009. This decrease was primarily due to fees recognized in 2009 associated with borrowings used to fund the acquisition of Corporate Express. In addition, interest expense was positively impacted by our interest rate swap agreements, partially offset by the inclusion of interest on our $500 million, 7.75% notes due April 1, 2011 (the April 2011 Notes) for the entire first half of 2010. Excluding the impact of our interest rate swap agreements, interest expense would have been $120.5 million for the first half of 2010 compared to $124.4 million for the first half of 2009.
Other Expense: Other expense was $5.2 million for the first half of 2010 compared to other expense of $2.3 million for the first half of 2009. These amounts primarily reflect foreign exchange gains and losses recorded in the respective periods.
Income Taxes: Our effective tax rate was 37.5% for the first half of 2010 compared to 34.5% for the first half of 2009. The increase in the effective tax rate from the first half of 2009 was due to the expiration of provisions in the Internal Revenue Code which allowed for the deferral of United States income tax on certain unremitted foreign earnings. These expired provisions impacted us in 2010 as a result of our acquisition of Corporate Express and our decision to delay certain changes to our tax structure in order to expedite the squeeze out of the remaining public shareholders of Corporate Express.
Segment Performance
We have three reportable segments: North American Delivery, North American Retail and International Operations. Staples North American Delivery segment consists of the U.S. and Canadian business units that sell and deliver office
STAPLES, INC. AND SUBSIDIARIES
Managements Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
products and services directly to customers, and includes Contract, Staples Business Delivery and Quill. The North American Retail segment consists of the U.S. and Canadian business units that operate office products stores. The International Operations segment consists of business units that operate office products stores and that sell and deliver office products and services directly to customers and businesses in 24 countries in Europe, Asia, Australia and South America.
Business unit income excludes integration and restructuring costs, stock-based compensation, interest and other expense, non-recurring items and the impact of changes in accounting principles (see reconciliation of total segment income to consolidated income before taxes in Note J in the Notes to the Condensed Consolidated Financial Statements).
Second Quarter of 2010 Compared to the Second Quarter of 2009:
The following tables provide a summary of our sales and business unit income by reportable segment for the second quarter of 2010 and the second quarter of 2009:
|
|
(Amounts in thousands) |
|
July 31, 2010 |
|
August 1, 2009 |
|
||||
|
|
July 31, 2010 |
|
August 1, 2009 |
|
Increase |
|
Increase |
|
||
Sales: |
|
|
|
|
|
|
|
|
|
||
North American Delivery |
|
$ |
2,359,427 |
|
$ |
2,322,850 |
|
1.6 |
% |
18.2 |
% |
North American Retail |
|
2,010,549 |
|
1,973,268 |
|
1.9 |
% |
(5.5 |
)% |
||
International Operations |
|
1,164,264 |
|
1,237,661 |
|
(5.9 |
)% |
21.2 |
% |
||
Total Segment Sales |
|
$ |
5,534,240 |
|
$ |
5,533,779 |
|
0.0 |
% |
9.0 |
% |
|
|
(Amounts in thousands) |
|
July 31, 2010 |
|
August 1, 2009 |
|
||||
|
|
July 31, 2010 |
|
August 1, 2009 |
|
% of Sales |
|
% of Sales |
|
||
Business Unit Income: |
|
|
|
|
|
|
|
|
|
||
North American Delivery |
|
$ |
206,421 |
|
$ |
184,922 |
|
8.7 |
% |
8.0 |
% |
North American Retail |
|
105,694 |
|
102,771 |
|
5.3 |
% |
5.2 |
% |
||
International Operations |
|
13,546 |
|
3,741 |
|
1.2 |
% |
0.3 |
% |
||
Business Unit Income |
|
325,661 |
|
291,434 |
|
5.9 |
% |
5.3 |
% |
||
Stock-based compensation |
|
(35,864 |
) |
(55,221 |
) |
(0.7 |
)% |
(1.0 |
)% |
||
Segment Income |
|
$ |
289,797 |
|
$ |
236,213 |
|
5.2 |
% |
4.3 |
% |
North American Delivery: Sales increased 1.6% for the second quarter of 2010 compared to the second quarter of 2009. The increase in sales for the second quarter of 2010 was the result of the impact of our customer acquisition efforts and the positive impact of foreign exchange rates of $14.2 million, partially offset by lower spend from existing customers.
Business unit income as a percentage of sales was 8.7% for the second quarter of 2010 compared to 8.0% for the second quarter of 2009. The increase in business unit income as a percentage of sales for the second quarter of 2010 primarily reflects better buying, favorable product mix, as customers purchased more discretionary products with higher margins, and reduced amortization expense, partially offset by marketing investments in key initiatives.
North American Retail: Sales increased 1.9% for the second quarter of 2010. This increase was the result of the positive impact of foreign exchange rates of $34.8 million, and to a lesser extent, non-comparable sales for new stores opened in the past twelve months. Our comparable store sales were flat for the second quarter of 2010, a result of an increase in customer traffic offset by lower average order size.
STAPLES, INC. AND SUBSIDIARIES
Managements Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
Business unit income as a percentage of sales increased to 5.3% for the second quarter of 2010 from 5.2% for the second quarter of 2009. The increase in business unit income as a percentage of sales for the second quarter of 2010 primarily reflects better product margins and, to a lesser extent, lower depreciation expense, and reduced distribution and marketing expenses, partially offset by investments in labor to support growth initiatives.
International Operations: Sales decreased 5.9% for the second quarter of 2010. The decrease was the result of the negative impact of foreign exchange rates of $50.8 million and a 9% decrease in comparable store sales in Europe.
Business unit income as a percentage of sales increased to 1.2% for the second quarter of 2010 from 0.3% for the second quarter of 2009. The increase in business unit income for the second quarter of 2010 reflects supply chain improvements, reduced amortization expense and, to a lesser extent, reduced losses in our China business and reduced marketing expense, partially offset by deleverage of rent and labor costs in our European retail businesses.
Stock-Based Compensation: Stock-based compensation decreased to $35.9 million for the second quarter of 2010 from $55.2 million for the second quarter of 2009. Stock-based compensation includes expenses associated with our employee stock purchase plans and the issuance of stock options, restricted shares and performance share awards. The decrease in this expense for the second quarter of 2010 primarily relates to the elimination of certain retirement acceleration clauses in our restricted share awards, as well as approximately $4.8 million of previously announced proceeds to be received related to the settlement of the stock option derivative litigation.
First Half of 2010 Compared to the First Half of 2009:
The following tables provide a summary of our sales and business unit income by reportable segment for the first half of 2010 and the first half of 2009:
|
|
(Amounts in thousands) |
|
July 31, 2010 |
|
August 1, 2009 |
|
||||
|
|
|
|
Increase |
|
Increase |
|
||||
|
|
July 31, 2010 |
|
August 1, 2009 |
|
Prior Year |
|
Prior Year |
|
||
Sales: |
|
|
|
|
|
|
|
|
|
||
North American Delivery |
|
$ |
4,822,081 |
|
$ |
4,741,208 |
|
1.7 |
% |
28.6 |
% |
North American Retail |
|
4,322,759 |
|
4,161,603 |
|
3.9 |
% |
(7.4 |
)% |
||
International Operations |
|
2,447,195 |
|
2,448,527 |
|
(0.1 |
)% |
37.8 |
% |
||
Total Segment Sales |
|
$ |
11,592,035 |
|
$ |
11,351,338 |
|
2.1 |
% |
14.0 |
% |
|
|
(Amounts in thousands) |
|
July 31, 2010 |
|
August 1, 2009 |
|
||||
|
|
July 31, 2010 |
|
August 1, 2009 |
|
% of Sales |
|
% of Sales |
|
||
Business Unit Income: |
|
|
|
|
|
|
|
|
|
||
North American Delivery |
|
$ |
409,937 |
|
$ |
345,551 |
|
8.5 |
% |
7.3 |
% |
North American Retail |
|
282,243 |
|
263,222 |
|
6.5 |
% |
6.3 |
% |
||
International Operations |
|
50,434 |
|
23,859 |
|
2.1 |
% |
1.0 |
% |
||
Business Unit Income |
|
742,614 |
|
632,632 |
|
6.4 |
% |
5.6 |
% |
||
Stock-based compensation |
|
(69,629 |
) |
(90,558 |
) |
(0.6 |
)% |
(0.8 |
)% |
||
Segment Income |
|
$ |
672,985 |
|
$ |
542,074 |
|
5.8 |
% |
4.8 |
% |
STAPLES, INC. AND SUBSIDIARIES
Managements Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
North American Delivery: Sales increased 1.7% for the first half of 2010 compared to the first half of 2009. The increase in sales for the first half of 2010 was the result of the positive impact of foreign exchange rates of $47.9 million and, to a lesser extent, the impact of our customer acquisition efforts, partially offset by lower spend from existing customers.
Business unit income as a percentage of sales was 8.5% for the first half of 2010 compared to 7.3% for the first half of 2009. The increase in business unit income as a percentage of sales for the first half of 2010 was driven primarily by favorable product mix, as customers purchased more discretionary products with higher margins and, to a lesser extent, lower amortization expense.
North American Retail: Sales increased 3.9% for the first half of 2010. This increase was the result of the positive impact of foreign exchange rates of $123.7 million and, to a lesser extent, non-comparable sales for new stores opened in the past twelve months. Our comparable store sales were flat for the first half of 2010 as a result of an increase in customer traffic, offset by lower average order size.
Business unit income as a percentage of sales increased to 6.5% for the first half of 2010 compared to 6.3% for the first half of 2009. The increase in business unit income as a percentage of sales for the first half of 2010 primarily reflects reduced depreciation, distribution and marketing expenses, partially offset by investments in labor to support growth initiatives.
International Operations: Sales decreased 0.1% for the first half of 2010. The decrease for the first half of 2010 was the result of a 7% decrease in comparable store sales in Europe and lower sales in our European printing systems business, offset by the positive impact of foreign exchange rates of $74.6 million.
Business unit income as a percentage of sales increased to 2.1% for the first half of 2010 from 1.0% for the first half of 2009. The increase in business unit income for the first half of 2010 reflects supply chain improvements, reduced amortization expense and, to a lesser extent, reduced marketing expense, partially offset by deleverage in rent and labor costs in our European retail businesses and losses in our European printing systems business.
Stock-Based Compensation: Stock-based compensation decreased to $69.6 million for the first half of 2010 from $90.6 million for the first half of 2009. Stock-based compensation includes expenses associated with our employee stock purchase plans and the issuance of stock options, restricted shares and performance share awards. The decrease in this expense for the first half of 2010 primarily relates to the elimination of certain retirement acceleration clauses in our restricted share awards, as well as approximately $4.8 million of previously announced proceeds to be received related to the settlement of the stock option derivative litigation.
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 2009 Annual Report on Form 10-K, filed on March 2, 2010, in Note A of the Notes to the Consolidated Financial Statements and in the Critical Accounting Policies section of Managements 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, as disclosed in our 2009 Annual Report on Form 10-K filed on March 2, 2010.
Liquidity and Capital Resources
Cash Flows
Cash provided by operations was $245.4 million for the first half of 2010 compared to $698.0 million for the first half of 2009. The decrease in operating cash flow from 2009 to 2010 is primarily due to changes in working capital, slightly offset by an increase in net income adjusted for non-cash expenses.
STAPLES, INC. AND SUBSIDIARIES
Managements Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
Cash used in investing activities was $190.0 million for the first half of 2010 compared to $129.9 million for the first half of 2009. The change between 2010 and 2009 is primarily due to the acquisition of Lindell, an office products distributor based in Finland, and an increase in capital expenditures during the first half of 2010, driven by investments in our supply chain.
Cash used in financing activities was $583.8 million for the first half of 2010 compared to $610.9 million for the first half of 2009. The change in cash from financing activities from 2009 to 2010 is due to higher repayments and refinancing of the debt we entered into or assumed in connection with the Corporate Express acquisition in the first half of 2009 compared to the first half of 2010, offset by the purchase of additional shares of Corporate Express Australia and the resumption of our share repurchase program in the second quarter of 2010. During the second quarter of 2010, we repurchased 5.1 million shares for $101.7 million. During the first half of 2009, our financing activities primarily consisted of repayments made on commercial paper and the Corporate Express U.S and European securitization programs, offset by the proceeds from the April 2011 Notes.
Sources of Liquidity
We utilize cash generated from operations, short-term investments and our Revolving Credit Facility to cover seasonal fluctuations in cash flows and to support our various growth initiatives. At July 31, 2010, we had a total of approximately $2.18 billion in total cash and funds available through credit agreements, which consisted of $1.31 billion of available credit and $872.0 million of cash and cash equivalents.
A summary, as of July 31, 2010, of balances available under our credit agreements and debt outstanding is presented below (amounts in thousands):
|
|
July 31, 2010 |
|
||||
|
|
Available |
|
Debt |
|
||
April 2011 Notes |
|
$ |
|
|
$ |
500,000 |
|
Revolving Credit Facility due October 13, 2012 |
|
750,000 |
|
|
|
||
$325 million, 7.375% notes due October 1, 2012 (the October 2012 Notes) |
|
|
|
325,000 |
|
||
$1.5 billion 9.75% notes due January 1, 2014 (the January 2014 Notes) |
|
|
|
1,500,000 |
|
||
Commercial paper program (1) |
|
|
|
|
|
||
$300 million securitization program due May 17, 2011 |
|
300,000 |
|
|
|
||
Lines of credit |
|
260,897 |
|
72,178 |
|
||
Other notes and capital leases |
|
|
|
181,852 |
|
||
Total |
|
$ |
1,310,897 |
|
$ |
2,579,030 |
|
(1) At July 31, 2010, the obligations under our commercial paper program were backstopped by, and utilize borrowing capacity available under, our Revolving Credit Facility.
At July 31, 2010, there had not been a material net change to the information regarding the maturity of contractual obligations disclosed in the subsection entitled Sources of Liquidity of the Managements Discussion and Analysis of Financial Condition and Results of Operations on page B-13 of our 2009 Annual Report on Form 10-K.
We expect that our cash generated from operations, together with our current cash, funds available under our existing credit agreements and other alternative sources of financing, will be sufficient to fund our planned store openings, and satisfy our current debt obligations and other operating cash needs for at least the next twelve months.
STAPLES, INC. AND SUBSIDIARIES
Managements Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
Uses of Capital
As a result of our financial position, in addition to investing in our existing businesses and pursuing strategic acquisitions, such as our recent acquisition of additional shares in Corporate Express Australia, we also expect to continue to return capital to our shareholders through a cash dividend program and our current share repurchase program. Depending on our credit metrics and our liquidity position, from time to time, we may repurchase our public notes through repurchase programs.
We currently plan to spend approximately $300 million on capital expenditures during the second half of 2010, primarily related to continued investments in information systems, the integration of our distribution networks in North America and Europe, new store openings and remodels of existing stores, and growth initiatives. We expect to open approximately 25 new stores during the second half of 2010.
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 2008 acquisition of Corporate Express. In the past, excluding the Corporate Express acquisition, we have focused on smaller acquisitions, such as our acquisition of Lindell, designed to align with our existing businesses to drive long-term growth. We expect to continue this strategy and target such acquisitions when opportunities are presented and fit within our financial structure.
We paid a second quarter 2010 cash dividend of $0.09 per share on July 15, 2010 to stockholders of record on June 25, 2010. We expect the total value of quarterly cash dividend payments for fiscal 2010 to be $0.36 per share. While it is our intention to continue to pay quarterly cash dividends for the remainder of 2010 and beyond, any decision to pay future cash dividends will be made by our Board of Directors and will depend upon our earnings, financial condition and other factors.
Inflation and Seasonality
While neither inflation nor deflation has had, and we do not expect either to have, a material impact upon our operating results, there can be no assurance that our business will not be affected by inflation or deflation in the future. Our business is somewhat seasonal, with sales and profitability slightly lower during the first and second quarters of our fiscal year.
STAPLES, INC. AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures about Market Risk
At July 31, 2010, there had not been a material change in the interest rate risk information and foreign exchange risk information disclosed in the Quantitative and Qualitative Disclosures about Market Risks subsection of the Managements Discussion and Analysis of Financial Condition and Results of Operations on page B-18 of our 2009 Annual Report on Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Companys management, with the participation of the Companys chief executive officer and chief financial officer, evaluated, as of July 31, 2010, the effectiveness of the Companys disclosure controls and procedures, which were designed to be effective at the reasonable assurance level. 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 Commissions 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 companys 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 Companys disclosure controls and procedures as of July 31, 2010, management, the chief executive officer and the chief financial officer concluded that the Companys disclosure controls and procedures were effective at the reasonable assurance level at that date.
Changes in Internal Control over Financial Reporting
No change in the Companys internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended July 31, 2010 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
STAPLES, INC. AND SUBSIDIARIES
Global economic conditions may continue to cause a decline in business and consumer spending which could adversely affect our business and financial performance.
Our operating results and performance depend significantly on worldwide economic conditions and their impact on business and consumer spending. Increases in the levels of unemployment, energy costs, healthcare costs, higher interest rates and taxes, combined with tighter credit markets, reduced consumer confidence and other factors, contribute to the decline in business and consumer spending. Although there has been some renewed improvement in some of these measures, the level of business and consumer spending is not where it was prior to the global recession. We have also seen a decline in average sales per customer in both our delivery and retail businesses. Our business and financial performance may continue to be adversely affected by current and future economic conditions if there is a renewed decline in business and consumer spending or such spending remains stagnant.
Our market is highly competitive and we may not be able to 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 providers such as Office Depot, OfficeMax and Lyreco, as well as mass merchants such as Wal-Mart and Tesco, warehouse clubs such as Costco, computer and electronics superstores such as Best Buy, copy and print businesses such as FedEx Office, online retailers such as Amazon.com, 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.
Our growth may strain our operations and we may not successfully integrate acquisitions to realize anticipated benefits.
Our business has grown dramatically over the years. Although we expect our business to continue to grow organically and through strategic acquisitions, it will likely not grow at the rate experienced when we acquired Corporate Express N.V. (Corporate Express). Sales of our products and services, the types of our customers, the nature of our contracts, the mix of our businesses, the number of countries in which we conduct business, the number of stores that we operate and the number of our associates have grown and changed, and we expect they will continue to grow and change over the long-term. This growth places significant demands on management and operational systems. If we cannot effectively manage our growth, it is likely to result in operational inefficiencies and ineffective management of our 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.
In addition, our long term strategy for growth, productivity and profitability depends on our ability to make appropriate strategic acquisitions, and integrate such acquisitions quickly and effectively. We must also operate to realize or achieve any expected synergies and cost savings related to such acquisitions. For example, we have not fully completed the integration of the Corporate Express acquisition. This integration has been and continues to be complex and time consuming. While we currently expect to realize the synergies and cost savings of the Corporate Express acquisition, if we fail to successfully integrate our past or future acquisitions or fail to realize the intended benefits of such acquisitions, our business may be adversely affected.
We may be unable to continue to enter new markets successfully.
An important part of our business plan is to increase our presence in new markets, which could include adding delivery operations or stores in new geographic markets or selling new products and services. For example, we plan to open approximately 50 new stores in 2010. For our 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, especially as we allocate time and resources to managing the profitability of our large existing portfolio of stores and renewing our existing store leases with 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 efficiently as we planned, our future sales and profits may be adversely affected.
Our expansion strategy also includes providing new products and service offerings. We may have limited experience in these newer markets such as technology services and such offerings may present new and difficult challenges. In addition, customers may not be familiar with our brand, we may not be familiar with local customer preferences or our competitors may have a larger, more established market presence. Even if we succeed in entering new markets, our sales or profit levels in newer activities may not be successful enough to recoup our investments in them and may reduce our overall profitability.
Our expanding international operations expose us to risks inherent in foreign operations.
We currently operate in 25 countries outside the United States and plan to continue to grow internationally. 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. Cultural differences abroad and local practices of conducting business may conflict with our own business practices and ethics standards. Ensuring compliance to foreign and U.S. laws and our own policies may require that we implement new operational systems and financial controls, conduct audits or internal investigations, train our associates and third parties on our existing compliance methods, and take other actions, all of which may be expensive, divert managements time and impact our operations. There are also different employee/employer relationships and in some cases the existence of workers councils that may delay or impact the implementation of some of these operational systems. In addition, differences in business practices in our international markets may cause customers to be less receptive to our business model than we expect.
Risks inherent in international operations also include, among others, the costs and difficulties of managing international operations, adverse tax consequences, and greater difficulty in enforcing intellectual property rights. Other factors that may also have an adverse impact on our international operations include limitations on the repatriation and investment of funds and foreign currency exchange restrictions, complex import and export schemes, increased local competition, unfavorable foreign trade policies, unstable political or economic conditions, and geopolitical events, including war and terrorism.
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, changes in the laws 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, adverse outcomes from tax audits that we may be subject to in any of the jurisdictions in which we operate, or changes in tax laws in any of the multiple 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.
For instance, the U.S. Congress has allowed certain Internal Revenue Code provisions to expire, including provisions that allow for the deferral of United States income tax on certain unremitted foreign earnings. Our financial position and results of operations for the first half of fiscal year 2010 were negatively impacted because these provisions were not enacted into law. If such provisions are not enacted into law, their expiration could continue to have an adverse
impact on our financial position and results of operations. However, if these provisions are later enacted, they will have a favorable impact on our financial position and results of operations.
Fluctuations in foreign exchange rates could lead to lower earnings.
As we have expanded our international operations, our exposure to exchange rate fluctuations has increased. Sales from our delivery operations and stores outside the U.S. are denominated in the currency of the country in which these operations or stores are located and changes in foreign exchange rates affect the translation of the sales and earnings of these businesses into U.S. dollars for financial reporting purposes. Additionally, merchandising agreements may also be denominated in the currency of the country where the vendor resides. Although we attempt to mitigate such risks, we may not be entirely successful in our strategy.
We may be unable to attract and retain qualified associates.
Our customers value courteous and knowledgeable associates, and an important part of our Easy brand strategy is a positive customer service experience. Accordingly, our performance depends on attracting and retaining a large 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 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 the cost of compliance with local labor laws and regulations. If we are unable to attract and retain a sufficient number of qualified associates, 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. Historically, sales and profitability are generally stronger in the second half of our fiscal year than the first half of our fiscal year due in part to back-to-school, holiday, and back-to-business seasons. Factors that could also 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; severe weather; and the other risk factors described in this section. Most of our operating expenses, such as occupancy costs 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, 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.
If we are unable to manage our debt, it could materially harm our business and financial condition and restrict our operating flexibility.
We have long-term debt and debt service requirements, with $1.5 billion 9.75% notes due in January 2014, $500 million 7.75% notes due in April 2011 and $325 million 7.375% notes due in October 2012. Our consolidated outstanding debt as of July 31, 2010 was $2.58 billion. If we are unable to satisfy our debt service requirements, we may default under one or more of our credit facilities or the indentures governing our notes. If we default or breach our obligations, we could be required to pay a higher rate of interest or lenders could require us to accelerate our repayment obligations, and such a default could materially harm our business and financial condition.
Our level of indebtedness combined with volatile financial markets may have significant consequences, including: restricting our growth; making us more vulnerable to a downturn in our business; making it more expensive to obtain future financing; limiting our ability to borrow additional amounts for working capital, capital expenditures, debt service requirements, future acquisitions or other corporate purposes; restricting our flexibility to respond to changing market conditions; and limiting our ability to use operating cash flow in other areas of our business. As a result of our debt, we may also be placed at a competitive disadvantage against less leveraged competitors.
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 derive benefits from vendor allowances and promotional incentives which may not be offered in the future. We also 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, technology and printing equipment. Some of the products we offer are supplied to us
on an exclusive basis and may be difficult to replace in a timely manner. Disruptions in the availability of raw materials used in the production of these products may also adversely affect our sales and result in customer dissatisfaction.
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, trade restrictions, tariffs, foreign currency exchange rates, transport capacity and costs, inflation and other factors relating to foreign trade are beyond our control. In addition, merchandise quality issues could cause us to initiate voluntary or mandatory recalls for our proprietary branded products or other products we sell which may then damage our reputation. These and other issues affecting our vendors could adversely affect our business, financial performance and reputation.
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 represented approximately 23% of our sales in fiscal 2009. Our proprietary branded products compete with other manufacturers branded items that we offer. An increase in our proprietary branded product offerings also exposes us to risk that third parties will assert infringement claims against us with respect to such products. The more proprietary brand product offerings we sell, the more this risk increases. In addition, if any of our customers are harmed by our proprietary branded products, they may bring product liability and other claims against us or we may have to issue voluntary or mandatory recalls. Any of these circumstances could damage our reputation and have an adverse effect on our business and financial performance.
Technological problems may impact our operations.
We rely heavily on technology to sell and deliver our office products. Our ability to attract and retain customers, compete and operate effectively depends in part on a reliable and easy to use technology infrastructure. Any disruption to the Internet or our technology infrastructure, including those affecting our Web sites and computer systems, may cause a decline in our customer satisfaction, impact our sales volumes or result in increased costs. Although we continue to invest in our technology, if we are unable to continually add software and hardware, effectively manage and upgrade our systems and network infrastructure, and develop effective system availability, disaster recovery plans and protection solutions, our business may be adversely affected.
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 web site, 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, regulators, 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, third party claims, investigations or audits may adversely affect our business and financial performance.
We are involved in various private legal proceedings, which include consumer, employment, intellectual property, tort and other litigation. As our workforce expands, we are subject to potentially increasing challenges by private litigants regarding compliance with local, state and national labor regulations, whether meritorious or not. For example, in January 2010, we entered into a national settlement for several class action lawsuits related to wage and hour claims.
As our operations grow, we are subject to claims that the technology we use or the products we sell infringe intellectual property rights of third parties. Such claims, whether meritorious or not, involve significant managerial
resources and can become costly. Generally, we have indemnification protections in our agreements which our vendors or licensors have historically honored; however, there are no assurances that such vendors or licensors will continue to do so in the future.
In addition, we may be subject to investigations or audits by governmental authorities and regulatory agencies, which can occur in the ordinary course of business or which can result from increased scrutiny from a particular agency towards an industry, country or practice. The resolution of these legal proceedings, third party claims, investigations or audits could require us to pay substantial amounts of money or take actions that adversely affect our operations. In addition, defending against these claims 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, third party claims, investigations or audits that could adversely affect our business and financial performance.
Changes in federal, state or local regulations may increase our cost of doing business.
We are subject to federal, state and local regulations. Last year in the U.S. there were a large number of new legislative and regulatory initiatives and reforms, which has resulted in new legislation. We may experience an increase in costs in complying with such new legislation. Changes affecting our workforce such as raising the local minimum wage, laws encouraging unionization efforts among our associates, healthcare mandates, environmental regulations, and other wage or workplace regulations could increase our costs. In addition, proposed changes in tax regulations may also change our effective tax rate as our business is subject to a combination of applicable tax rates in the various countries, states and other jurisdictions in which we operate as described in more detail above.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about our purchases of our common stock during the second quarter of fiscal 2010:
Fiscal Period |
|
Total Number of |
|
Average Price |
|
Total Number of |
|
Approximate |
|
||
May 2, 2010 May 29, 2010 |
|
|
|
N/A |
|
|
|
$ |
1,007,805,000 |
|
|
May 30, 2010 July 3, 2010 |
|
3,185,166 |
|
20.39 |
|
1,943,900 |
|
968,176,000 |
|
||
July 4, 2010 July 31, 2010 |
|
3,140,373 |
|
19.76 |
|
3,140,373 |
|
906,124,000 |
|
||
Total for second quarter of 2010 |
|
6,325,539 |
|
$ |
20.00 |
|
5,084,273 |
|
$ |
906,124,000 |
|
(1) Includes a total of 1,241,266 shares of our common stock withheld during the second quarter of our 2010 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 7, 2010, we announced that we were resuming the repurchase program approved by the Board of Directors in June 2007. Under the repurchase program the Board of Directors authorized the repurchase of up to $1.5 billion shares of common stock. The program has no expiration date and may be suspended or discontinued at any time.
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.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
STAPLES, INC. |
|
|
|
|
|
|
Date: August 18, 2010 |
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) |
Exhibit No. |
|
Description |
10.1+ |
|
Form of Special Performance Share Award Agreement. |
10.2^ |
|
Staples, Inc. Long Term Cash Incentive Plan. Filed as Exhibit 10.1 to the Companys Form 8-K filed on June 11, 2010. |
10.3^ |
|
Amended and Restated Supplemental Executive Retirement Plan. Filed as Exhibit 10.2 to the Companys Form 8-K filed on June 11, 2010. |
10.4^ |
|
Amended and Restated 2004 Stock Incentive Plan. Filed as Exhibit 10.3 to the Companys Form 8-K filed on June 11, 2010. |
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. |
101.INS++ |
|
XBRL Instance Document. |
101.SCH++ |
|
XBRL Taxonomy Extension Schema Document. |
101.CAL++ |
|
XBRL Taxonomy Calculation Linkbase Document. |
101.DEF++ |
|
XBRL Taxonomy Definition Linkbase Document. |
101.LAB++ |
|
XBRL Taxonomy Label Linkase Document. |
101.PRE++ |
|
XBRL Taxonomy Presentation Linkbase Document. |
+ Filed herewith.
++ Furnished herewith.
Attached as Exhibits 101 to this report are the following financial statements from the Companys Quarterly Report on Form 10-Q for the quarter ended July 31, 2010 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements tagged as blocks of text.
The XBRL related information in Exhibits 101 to this Quarterly Report on Form 10-Q shall not be deemed filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended (Securities Act) and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liabilities of those sections.