Table of Contents

 

 

 

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: October 30, 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
(State or other jurisdiction of
incorporation or organization)

 

 

04-2896127
(I.R.S. Employer
Identification No.)

 

Five Hundred Staples Drive, Framingham, MA 01702

(Address of principal executive office and zip code)

 

508-253-5000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes 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

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

The registrant had 723,195,266 shares of common stock outstanding as of November 16, 2010.

 

 

 



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

FORM 10-Q

October 30, 2010

TABLE OF CONTENTS

 

 

Page

 

 

Part I — Financial Information:

 

 

 

Item 1. Financial Statements:

 

Condensed Consolidated Balance Sheets (unaudited)

3

Condensed Consolidated Statements of Income (unaudited)

4

Condensed Consolidated Statements of Cash Flows (unaudited)

5

Notes to Condensed Consolidated Financial Statements

6-20

 

 

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

21-30

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

31

 

 

Item 4. Controls and Procedures

31

 

 

Part II — Other Information

 

 

 

Item 1A. Risk Factors

32-36

 

 

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

37

 

 

Item 6. Exhibits

37

 

 

Signatures

38

 

 

Exhibit Index

39

 

2



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

STAPLES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollar Amounts in Thousands, Except Share Data)

(Unaudited)

 

 

 

October 30,

 

January 30,

 

 

 

2010

 

2010

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

1,369,721

 

$

1,415,819

 

Receivables, net

 

1,995,066

 

1,811,365

 

Merchandise inventories, net

 

2,432,273

 

2,261,149

 

Deferred income tax asset

 

282,435

 

353,329

 

Prepaid expenses and other current assets

 

355,873

 

333,105

 

Total current assets

 

6,435,368

 

6,174,767

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

Land and buildings

 

1,075,375

 

1,051,391

 

Leasehold improvements

 

1,304,545

 

1,268,848

 

Equipment

 

2,211,215

 

2,035,658

 

Furniture and fixtures

 

1,012,955

 

966,783

 

Total property and equipment

 

5,604,090

 

5,322,680

 

Less accumulated depreciation and amortization

 

3,499,740

 

3,158,147

 

Net property and equipment

 

2,104,350

 

2,164,533

 

 

 

 

 

 

 

Lease acquisition costs, net of accumulated amortization

 

23,214

 

25,083

 

Intangible assets, net of accumulated amortization

 

537,108

 

579,923

 

Goodwill

 

4,108,070

 

4,084,122

 

Other assets

 

672,652

 

688,906

 

Total assets

 

$

13,880,762

 

$

13,717,334

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

2,289,351

 

$

2,111,696

 

Accrued expenses and other current liabilities

 

1,537,407

 

1,603,354

 

Debt maturing within one year

 

589,643

 

67,269

 

Total current liabilities

 

4,416,401

 

3,782,319

 

 

 

 

 

 

 

Long-term debt

 

2,054,758

 

2,500,329

 

Other long-term obligations

 

626,838

 

579,746

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

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

 

 

 

Common stock, $.0006 par value, 2,100,000,000 shares authorized; issued 906,024,936 shares at October 30, 2010 and 896,655,170 shares at January 30, 2010

 

544

 

538

 

Additional paid-in capital

 

4,254,523

 

4,379,942

 

Accumulated other comprehensive loss

 

(86,992

)

(89,337

)

Retained earnings

 

6,281,488

 

5,869,138

 

Less: Treasury stock at cost - 182,487,378 shares at October 30, 2010 and 167,990,178 shares at January 30, 2010

 

(3,674,108

)

(3,388,395

)

Total Staples, Inc. stockholders’ equity

 

6,775,455

 

6,771,886

 

Noncontrolling interests

 

7,310

 

83,054

 

Total stockholders’ equity

 

6,782,765

 

6,854,940

 

Total liabilities and stockholders’ equity

 

$

13,880,762

 

$

13,717,334

 

 

See notes to condensed consolidated financial statements.

 

3



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Dollar Amounts in Thousands, Except Per Share Data)

(Unaudited)

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

October 30,

 

October 31,

 

October 30,

 

October 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

6,537,676

 

$

6,518,039

 

$

18,129,711

 

$

17,869,377

 

Cost of goods sold and occupancy costs

 

4,733,928

 

4,751,836

 

13,244,200

 

13,153,015

 

Gross profit

 

1,803,748

 

1,766,203

 

4,885,511

 

4,716,362

 

 

 

 

 

 

 

 

 

 

 

Operating and other expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

1,264,676

 

1,256,479

 

3,643,169

 

3,616,049

 

Integration and restructuring costs

 

9,019

 

15,872

 

51,545

 

64,502

 

Amortization of intangibles

 

15,628

 

26,890

 

45,913

 

75,405

 

Total operating expenses

 

1,289,323

 

1,299,241

 

3,740,627

 

3,755,956

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

514,425

 

466,962

 

1,144,884

 

960,406

 

 

 

 

 

 

 

 

 

 

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

Interest income

 

2,045

 

1,364

 

5,706

 

4,366

 

Interest expense

 

(52,775

)

(58,016

)

(161,418

)

(179,447

)

Other (expense) income

 

(1,824

)

8,266

 

(7,059

)

5,984

 

Consolidated income before income taxes

 

461,871

 

418,576

 

982,113

 

791,309

 

Income tax expense

 

173,201

 

144,409

 

368,293

 

273,002

 

Consolidated net income

 

288,670

 

274,167

 

613,820

 

518,307

 

(Loss) income attributed to the noncontrolling interests

 

(10

)

4,786

 

6,614

 

13,551

 

Net income attributed to Staples, Inc.

 

$

288,680

 

$

269,381

 

$

607,206

 

$

504,756

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.40

 

$

0.38

 

$

0.85

 

$

0.71

 

Diluted earnings per common share

 

$

0.40

 

$

0.37

 

$

0.83

 

$

0.70

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.09

 

$

0.08

 

$

0.27

 

$

0.25

 

 

See notes to condensed consolidated financial statements.

 

4



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)

(Unaudited)

 

 

 

39 Weeks Ended

 

 

 

October 30,

 

October 31,

 

 

 

2010

 

2009

 

Operating Activities:

 

 

 

 

 

Consolidated net income, including income from the noncontrolling interests

 

$

613,820

 

$

518,307

 

Adjustments to reconcile net income attributed to the controlling interests to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

371,279

 

411,330

 

Stock-based compensation

 

109,209

 

132,539

 

Deferred tax expense (income)

 

152,505

 

(38,028

)

Excess tax benefits from stock-based compensation arrangments

 

 

(2,161

)

Other

 

(2,725

)

26,231

 

Changes in assets and liabilities:

 

 

 

 

 

(Increase) decrease in receivables

 

(145,644

)

23,072

 

(Increase) decrease in merchandise inventories

 

(134,132

)

160,935

 

(Increase) decrease in prepaid expenses and other assets

 

(17,307

)

218,917

 

Increase in accounts payable

 

151,913

 

129,752

 

Decrease in accrued expenses and other current liabilities

 

(141,484

)

(21,307

)

Increase in other long-term obligations

 

46,654

 

27,700

 

Net cash provided by operating activities

 

1,004,088

 

1,587,287

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

Acquisition of property and equipment

 

(245,802

)

(191,149

)

Acquisition of businesses, net of cash acquired

 

(39,065

)

 

Net cash used in investing activities

 

(284,867

)

(191,149

)

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

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

 

43,868

 

70,061

 

Repayments of commercial paper, net of proceeds from issuances

 

 

(1,195,557

)

Proceeds from borrowings

 

175,035

 

1,176,330

 

Payments on borrowings, including payment of deferred financing fees

 

(151,068

)

(911,979

)

Purchase of noncontrolling interest

 

(360,595

)

 

Cash dividends paid

 

(194,856

)

(177,323

)

Excess tax benefits from stock-based compensation arrangments

 

 

2,161

 

Purchase of treasury stock, net

 

(285,713

)

(28,382

)

Net cash used in financing activities

 

(773,329

)

(1,064,689

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

8,010

 

69,924

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(46,098

)

401,373

 

Cash and cash equivalents at beginning of period

 

1,415,819

 

633,774

 

Cash and cash equivalents at end of period

 

$

1,369,721

 

$

1,035,147

 

 

See notes to condensed consolidated financial statements.

 

5



Table of Contents

 

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 thirty-nine weeks ended October 30, 2010 (also referred to as the “third quarter of 2010” and “year-to-date 2010”) and the period covering the thirteen and thirty-nine weeks ended October 31, 2009 (also referred to as the “third quarter of 2009” and “year-to-date 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 Company’s 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 Company’s 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 entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s 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 company’s 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 Company’s 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 vendor’s 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 Combinations

 

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

 

6



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

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.

 

With the acquisition of Corporate Express N.V. (“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, and on September 6, 2010, through a compulsory acquisition process, the Company acquired the final outstanding shares, bringing the Company’s ownership of this business to 100% for an aggregate purchase price of approximately AUD $407 million (approximately $361 million). The purchase of the additional shares in 2010 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 Company’s 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.

 

Note D — Integration and Restructuring Costs

 

Integration and restructuring costs represent the costs associated with the integration of Corporate Express, including Corporate Express Australia, with the Company’s 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

 

39 Weeks Ended

 

 

 

October 30, 2010

 

October 31, 2009

 

October 30, 2010

 

October 31, 2009

 

Consulting and other costs

 

$

6,828

 

$

11,454

 

$

31,179

 

$

25,488

 

Severance and retention

 

1,371

 

3,082

 

9,830

 

25,978

 

Facility closure costs and other asset write-downs

 

 820

 

 1,336

 

 10,536

 

 13,036

 

Total

 

$

9,019

 

$

15,872

 

$

51,545

 

$

64,502

 

 

In connection with the Company’s acquisition of Corporate Express, acquisition reserves of $181.0 million were established.  The activity related to the Company’s acquisition reserves (in thousands) for fiscal 2010 is as follows:

 

 

 

Balance as of
January 30, 2010

 

Utilization

 

Foreign Exchange
Fluctuations

 

Balance as of
October 30, 2010

 

Transaction costs

 

$

807

 

$

(83

)

$

 

$

724

 

Severance

 

28,843

 

(11,952

)

(560

)

16,331

 

Facility closures

 

28,390

 

(4,638

)

(102

)

23,650

 

Other

 

10,759

 

(972

)

(147

)

9,640

 

Total

 

$

68,799

 

$

(17,645

)

$

(809

)

$

50,345

 

 

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.

 

7



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

Note E — Credit Agreements

 

On November 4, 2010, Staples, Inc. entered into a new Credit Agreement (the “New Credit Agreement” or “Agreement”) with Bank of America, N.A, as Administrative Agent and other lending institutions named therein. The New Credit Agreement replaces the Amended and Restated Revolving Credit Agreement dated as of October 13, 2006, as amended, which provided for a maximum borrowing of $750.0 million and was due to expire in October 2011 (the “Prior Agreement”).  As of November 4, 2010, no borrowings were outstanding under the Prior Agreement.

 

The New Credit Agreement provides for a maximum borrowing of $1.0 billion which, pursuant to an accordion feature, may be increased to $1.5 billion upon the request of Staples and the agreement of the lenders participating in the increase.  Borrowings made pursuant to the New Credit Agreement may be syndicated loans, swing line loans, multicurrency loans, or letters of credit, the combined sum of which may not exceed the maximum borrowing amount.  Borrowings made pursuant to the New Credit Agreement will bear interest at various interest rates, depending on the type of borrowing, plus a percentage spread based on Staples’ credit rating and fixed charge coverage ratio.  Under the Agreement, Staples also agrees to pay a facility fee at rates that range from 0.15% to 0.35% per annum depending on Staples’ credit rating and fixed charge coverage ratio.  Amounts borrowed under the New Credit Agreement may be borrowed, repaid, and reborrowed from time to time until November 4, 2014.

 

The New Credit Agreement is unsecured and ranks pari passu with Staples’ public notes and other indebtedness and contains customary affirmative and negative covenants for credit facilities of this type. The borrowings under this New Credit Agreement are unconditionally guaranteed on an unsecured unsubordinated basis by the same subsidiaries that guarantee Staples’ publicly issued notes.

 

Note F — 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 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 Company’s assets and liabilities as of October 30, 2010 that are measured at fair value on a recurring basis (in thousands):

 

 

 

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

 

Significant
Other Observable
Inputs
Level 2 (1)

 

Unobservable
Inputs
Level 3

 

Assets

 

 

 

 

 

 

 

Derivative assets

 

 

$

62,450

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Derivative liabilities

 

 

$

(5,836

)

 

 


(1)          Based on model-based valuation techniques

 

8



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

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 long-term debt, with the exception of the unhedged portion of the January 2014 Notes, approximates the carrying value because of the Company’s 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 October 30, 2010 and January 30, 2010 (in thousands):

 

 

 

October 30, 2010

 

January 30, 2010

 

 

 

Carrying Value

 

Fair Value

 

Carrying Value

 

Fair Value

 

April 2011 Notes

 

$

500,000

 

$

514,337

 

$

500,000

 

$

537,500

 

Unhedged portion of the January 2014 Notes ($750.0 million hedged in March 2010)

 

$

750,000

 

$

927,707

 

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 Company’s 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 liabilities depending on whether the maturity date of the derivative contract is within or beyond one year from the balance sheet date. The cash flows from derivatives treated as hedges are classified in the Company’s 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 October 30, 2010, the interest rate swap agreement had a fair value gain of $23.6 million, which was included in other assets.  No amounts were included in the condensed consolidated statement of income for the third quarter of 2010, year-to-date 2010, the third quarter of 2009 or year-to-date 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

 

9



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

$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 October 30, 2010, the total notional amount of all outstanding interest rate swaps was AUD $60 million (approximately $58.7 million based on foreign exchange rates at October 30, 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 October 30, 2010, the interest rate swap agreements had a fair value loss of $0.6 million, which was included in stockholders’ equity as a component of accumulated other comprehensive loss.  No amounts were included in the condensed consolidated statement of income for the third quarter of 2010, year-to-date 2010, the third quarter of 2009 or year-to-date 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 15, 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 October 30, 2010, the interest rate swap agreement had a fair value gain of $38.9 million, which was included in other assets.  No amounts were included in the condensed consolidated statement of income for the third quarter of 2010 or year-to-date 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 October 30, 2010, the currency swap had an aggregate fair value loss of $3.8 million, which was included in other long-term obligations.  No amounts were included in the condensed consolidated statement of income for the third quarter of 2010, year-to-date 2010, the third quarter of 2009 or year-to-date 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 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 October 30, 2010, the currency swap had a fair value loss of $1.2 million, which was included in accrued expenses and other current liabilities.

 

Accumulated other comprehensive loss includes foreign currency losses, net of taxes of $1.6 million and $6.0 million for the third quarter and year-to-date 2010, respectively and foreign currency gains, net of taxes of $1.8 million and foreign currency losses, net of taxes of $19.0 million for the third quarter and year-to-date 2009, respectively.

 

10



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

Note G — 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 employee’s 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 for year-to-date 2010:

 

 

 

Nonqualified Stock Options (1)

 

Restricted Shares (2)

 

 

 

Number
of Shares

 

Weighted
Average
Exercise
Price
Per Share

 

Number
of Shares

 

Weighted
Average
Grant Date
Fair Value
Per Share

 

Outstanding at January 30, 2010

 

43,834,405

 

$

19.57

 

12,973,840

 

$

22.52

 

Granted

 

4,721,048

 

19.45

 

7,174,481

 

19.40

 

Exercised / Released

 

(1,972,495

)

13.69

 

(4,486,487

)

24.01

 

Canceled

 

(601,074

)

21.64

 

(766,252

)

21.53

 

Outstanding at October 30, 2010

 

45,981,884

 

19.79

 

14,895,582

 

$

20.62

 

Exercisable at October 30, 2010

 

33,069,048

 

$

19.30

 

 

 

 

 

 


(1) At October 30, 2010, the aggregate intrinsic value of the outstanding nonqualified stock options was $90.4 million and the aggregate intrinsic value of the exercisable nonqualified stock options was $82.9 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 Company’s 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 October 30, 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 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 October 30, 2010.

 

In connection with its equity based employee benefit plans, Staples included $39.6 million and $109.2 million in compensation expense for the third quarter and year-to-date 2010, respectively, and $42.0 million and $132.5 million in compensation expense for the third quarter and year-to-date 2009, respectively.   As of October 30, 2010, Staples had $260.7 million related to grants of nonqualified stock options and Restricted Shares to be expensed over the period through August 2014.

 

11



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

Note H — 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 third quarter and year-to-date 2010 and for the third quarter and year-to-date 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 October 30, 2010

 

13 Weeks Ended October 31, 2009

 

 

 

U.S. Plans

 

International
Plans

 

Total

 

U.S. Plans

 

International
Plans

 

Total

 

Service cost

 

$

 

$

1,964

 

$

1,964

 

$

 

$

2,290

 

$

2,290

 

Interest cost

 

463

 

8,178

 

8,641

 

534

 

12,128

 

12,662

 

Expected return on plan assets

 

(435

)

(13,720

)

(14,155

)

(431

)

(14,692

)

(15,123

)

Amortization of unrecognized losses

 

 

874

 

874

 

 

2,382

 

2,382

 

Net periodic pension cost (income)

 

$

28

 

$

(2,704

)

$

(2,676

)

$

103

 

$

2,108

 

$

2,211

 

 

 

 

39 Weeks Ended October 30, 2010

 

39 Weeks Ended October 31, 2009

 

 

 

U.S. Plans

 

International
Plans

 

Total

 

U.S. Plans

 

International
Plans

 

Total

 

Service cost

 

$

 

$

6,308

 

$

6,308

 

$

 

$

6,532

 

$

6,532

 

Interest cost

 

1,389

 

26,268

 

27,657

 

1,523

 

34,589

 

36,112

 

Expected return on plan assets

 

(1,305

)

(44,068

)

(45,373

)

(1,229

)

(41,896

)

(43,125

)

Amortization of unrecognized losses

 

 

2,808

 

2,808

 

 

6,793

 

6,793

 

Net periodic pension cost (income)

 

$

84

 

$

(8,684

)

$

(8,600

)

$

294

 

$

6,018

 

$

6,312

 

 

Cash contributions made to Corporate Express pension plans for the third quarter and year-to-date 2010 and the third quarter and year-to-date 2009 are as follows (in thousands):

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

October 30, 2010

 

October 31, 2009

 

October 30, 2010

 

October 31, 2009

 

U.S. Plans

 

$

506

 

$

166

 

$

1,030

 

$

498

 

International Plans

 

3,327

 

3,822

 

8,507

 

8,483

 

Total

 

$

3,833

 

$

3,988

 

$

9,537

 

$

8,981

 

 

The Company expects to make additional cash contributions of $0.2 million and $3.5 million to the U.S. Plans and International Plans, respectively, during the remainder of fiscal 2010.

 

12



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

Note I — Stockholders’ Equity and Comprehensive Income

 

The following table reflects the changes in stockholders’ equity and comprehensive income attributable to Staples, Inc. and its noncontrolling interests for year-to-date 2010 and 2009 (in thousands):

 

 

 

Attributable to
Staples, Inc.

 

Attributable to
Noncontrolling
Interests

 

Total

 

Stockholders’ equity at January 30, 2010

 

$

6,771,886

 

$

83,054

 

$

6,854,940

 

Comprehensive income:

 

 

 

 

 

 

 

Net income

 

607,206

 

6,614

 

613,820

 

Other comprehensive income:

 

 

 

 

 

 

 

Foreign currency translation adjustments, net

 

6,404

 

1,896

 

8,300

 

Changes in the fair value of derivatives, net (1)

 

(6,529

)

574

 

(5,955

)

Comprehensive income

 

607,081

 

9,084

 

616,165

 

Issuance of common stock options for stock options exercised and the sale of stock under employee stock purchase plans

 

43,868

 

 

43,868

 

Stock-based compensation

 

109,209

 

 

109,209

 

Purchase of noncontrolling interest in Corporate Express Australia

 

(275,767

)

(84,828

)

(360,595

)

Cash dividends paid

 

(194,856

)

 

(194,856

)

Purchase of treasury stock, net

 

(285,713

)

 

(285,713

)

Other

 

(253

)

 

(253

)

Stockholders’ equity at October 30, 2010

 

$

6,775,455

 

$

7,310

 

$

6,782,765

 

 

 

 

Attributable to
Staples, Inc.

 

Attributable to
Noncontrolling
Interests

 

Total

 

Stockholders’ equity at January 31, 2009

 

$

5,564,207

 

$

58,224

 

$

5,622,431

 

Comprehensive income:

 

 

 

 

 

 

 

Net income

 

504,756

 

13,551

 

518,307

 

Other comprehensive income:

 

 

 

 

 

 

 

Foreign currency translation adjustments, net

 

521,920

 

7,690

 

529,610

 

Changes in the fair value of derivatives, net (1)

 

(18,954

)

 

(18,954

)

Comprehensive income

 

1,007,722

 

21,241

 

1,028,963

 

Issuance of common stock for stock options exercised and the sale of stock under employee stock purchases plans

 

70,061

 

 

70,061

 

Stock-based compensation

 

132,539

 

 

132,539

 

Cash dividends paid

 

(177,323

)

 

(177,323

)

Tax benefit on exercise of options

 

2,161

 

 

2,161

 

Purchase of treasury stock, net

 

(28,382

)

 

(28,382

)

Other

 

(2,052

)

 

(2,052

)

Stockholders’ equity at October 31, 2009

 

$

6,568,933

 

$

79,465

 

$

6,648,398

 

 


(1) Changes in the fair value of derivatives are net of taxes of $(1.2) million for the thirteen weeks ended October 30, 2010 and $1.2 million for the thirteen weeks ended October 31, 2009, and net of taxes of $(4.5) million for the thirty-nine weeks ended October 30, 2010 and $(14.2) million for the thirty-nine weeks ended October 31, 2009.

 

13



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

The following table summarizes the components of accumulated other comprehensive loss as of October 30, 2010 and January 30, 2010 (in thousands):

 

 

 

October 30, 2010

 

January 30, 2010

 

Foreign currency translation adjustments

 

$

45,125

 

$

36,825

 

Derivative instruments (net of taxes)

 

(119

)

5,836

 

Deferred pension costs (net of taxes)

 

(131,998

)

(131,998

)

Accumulated other comprehensive loss

 

$

(86,992

)

$

(89,337

)

 

Note J - Computation of Earnings Per Common Share

 

The computation of basic and diluted earnings per share for the third quarter and year-to-date 2010 and 2009 is as follows (in thousands, except per share data):

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

October 30,
2010

 

October 31,
2009

 

October 30,
2010

 

October 31,
2009

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributed to Staples, Inc.

 

$

288,680

 

$

269,381

 

$

607,206

 

$

504,756

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

714,180

 

711,397

 

717,487

 

708,019

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Employee stock options, Restricted Shares and Performance Shares

 

7,653

 

11,225

 

10,419

 

11,992

 

Weighted-average common shares outstanding assuming dilution

 

721,833

 

722,622

 

727,906

 

720,011

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.40

 

$

0.38

 

$

0.85

 

$

0.71

 

Diluted earnings per common share

 

$

0.40

 

$

0.37

 

$

0.83

 

$

0.70

 

 

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 27.4 million and 13.7 million shares of Staples common stock were excluded from the calculation of diluted earnings per share at October 30, 2010 and October 31, 2009, respectively.

 

Note K - Segment Reporting

 

Staples has three reportable segments: North American Delivery, North American Retail and International Operations. The North American Delivery segment consists of the U.S. and Canadian business units that sell and deliver office products and services directly to customers, and includes 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 types 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.

 

14



Table of Contents

 

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 third quarter and year-to-date 2010 and 2009 and a reconciliation of total segment income to consolidated income before income taxes (in thousands):

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

October 30, 2010

 

October 31, 2009

 

October 30, 2010

 

October 31, 2009

 

 

 

Sales

 

Sales

 

North American Delivery

 

$

2,537,094

 

$

2,474,424

 

$

7,359,175

 

$

7,215,632

 

North American Retail

 

2,644,347

 

2,628,873

 

6,967,106

 

6,790,476

 

International Operations

 

1,356,235

 

1,414,742

 

3,803,430

 

3,863,269

 

Total segment sales

 

$

6,537,676

 

$

6,518,039

 

$

18,129,711

 

$

17,869,377

 

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

October 30, 2010

 

October 31, 2009

 

October 30, 2010

 

October 31, 2009

 

 

 

Business Unit Income

 

Business Unit Income

 

North American Delivery

 

$

224,613

 

$

219,003

 

$

634,550

 

$

564,554

 

North American Retail

 

279,640

 

265,743

 

561,883

 

528,965

 

International Operations

 

58,771

 

40,069

 

109,205

 

63,928

 

Business unit income

 

$

563,024

 

$

524,815

 

$

1,305,638

 

$

1,157,447

 

Stock-based compensation

 

(39,580

)

(41,981

)

(109,209

)

(132,539

)

Total segment income

 

523,444

 

482,834

 

1,196,429

 

1,024,908

 

Interest and other expense, net

 

(52,554

)

(48,386

)

(162,771

)

(169,097

)

Integration and restructuring costs

 

(9,019

)

(15,872

)

(51,545

)

(64,502

)

Consolidated income before income taxes

 

$

461,871

 

$

418,576

 

$

982,113

 

$

791,309

 

 

Note L - Guarantor Subsidiaries

 

Under the terms of the Company’s April 2011 Notes, $750.0 million Amended and Restated Revolving Credit Agreement (which was replaced by the New Credit Agreement (as defined in Note E) entered into on November 4, 2010),  the October 2012 Notes and the January 2014 Notes,  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 October 30, 2010 and January 30, 2010 and for the third quarter and year-to-date 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.

 

15



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

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

 

Condensed Consolidating Balance Sheet

As of October 30, 2010

(in thousands)

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

Staples, Inc.

 

Guarantor

 

Guarantor

 

 

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Consolidated

 

Cash and cash equivalents

 

$

680,879

 

$

44,271

 

$

644,571

 

$

 

$

1,369,721

 

Merchandise inventories, net

 

 

1,372,114

 

1,060,159

 

 

2,432,273

 

Other current assets

 

76,254

 

659,229

 

1,897,891

 

 

2,633,374

 

Total current assets

 

757,133

 

2,075,614

 

3,602,621

 

 

6,435,368

 

Net property, equipment and other assets

 

685,513

 

1,316,341

 

1,335,470

 

 

3,337,324

 

Goodwill

 

1,630,190

 

154,527

 

2,323,353

 

 

4,108,070

 

Investment in affiliates and intercompany, net

 

6,168,830

 

5,540,158

 

6,654,032

 

(18,363,020

)

 

Total assets

 

$

9,241,666

 

$

9,086,640

 

$

13,915,476

 

$

(18,363,020

)

$

13,880,762

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

$

764,022

 

$

1,627,706

 

$

2,024,673

 

$

 

$

4,416,401

 

Total long-term liabilities

 

1,694,879

 

606,153

 

380,564

 

 

2,681,596

 

Total stockholders’ equity

 

6,782,765

 

6,852,781

 

11,510,239

 

(18,363,020

)

6,782,765

 

Total liabilities and stockholders’ equity

 

$

9,241,666

 

$

9,086,640

 

$

13,915,476

 

$

(18,363,020

)

$

13,880,762

 

 

Condensed Consolidating Balance Sheet

As of January 30, 2010

(in thousands)

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

Staples, Inc.

 

Guarantor

 

Guarantor

 

 

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

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

 

 

16



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

Condensed Consolidating Statement of Income

For the thirteen weeks ended October 30, 2010

(in thousands)

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

Staples, Inc.

 

Guarantor

 

Guarantor

 

 

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Consolidated

 

Sales

 

$

 

$

3,968,034

 

$

2,569,642

 

$

 

$

6,537,676

 

Cost of goods sold and occupancy costs

 

2,807

 

2,913,335

 

1,817,786

 

 

4,733,928

 

Gross profit

 

(2,807

)

1,054,699

 

751,856

 

 

1,803,748

 

Operating and other expenses (income)

 

(291,487

)

769,053

 

537,809

 

326,502

 

1,341,877

 

Consolidated income before income taxes

 

288,680

 

285,646

 

214,047

 

(326,502

)

461,871

 

Income tax expense

 

 

127,369

 

45,832

 

 

173,201

 

Consolidated net income

 

288,680

 

158,277

 

168,215

 

(326,502

)

288,670

 

Loss attributed to the noncontrolling interests

 

 

 

(10

)

 

(10

)

Net income attributed to Staples, Inc.

 

$

288,680

 

$

158,277

 

$

168,225

 

$

(326,502

)

$

288,680

 

 

Condensed Consolidating Statement of Income

For the thirteen weeks ended October 31, 2009

(in thousands)

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

Staples, Inc.

 

Guarantor

 

Guarantor

 

 

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Consolidated

 

Sales

 

$

 

$

3,926,576

 

$

2,591,463

 

$

 

$

6,518,039

 

Cost of goods sold and occupancy costs

 

2,847

 

2,894,661

 

1,854,328

 

 

4,751,836

 

Gross profit

 

(2,847

)

1,031,915

 

737,135

 

 

1,766,203

 

Operating and other expenses (income)

 

(272,228

)

806,536

 

430,239

 

383,080

 

1,347,627

 

Consolidated income before income taxes

 

269,381

 

225,379

 

306,896

 

(383,080

)

418,576

 

Income tax expense

 

 

48,294

 

96,115

 

 

144,409

 

Consolidated net income

 

269,381

 

177,085

 

210,781

 

(383,080

)

274,167

 

Income attributed to the noncontrolling interests

 

 

 

4,786

 

 

4,786

 

Net income attributed to Staples, Inc.

 

$

269,381

 

$

177,085

 

$

205,995

 

$

(383,080

)

$

269,381

 

 

17



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

Condensed Consolidating Statement of Income

For the thirty-nine weeks ended October 30, 2010

(in thousands)

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

Staples, Inc.

 

Guarantor

 

Guarantor

 

 

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Consolidated

 

Sales

 

$

 

$

11,027,989

 

$

7,101,722

 

$

 

$

18,129,711

 

Cost of goods sold and occupancy costs

 

8,715

 

8,222,687

 

5,012,798

 

 

13,244,200

 

Gross profit

 

(8,715

)

2,805,302

 

2,088,924

 

 

4,885,511

 

Operating and other expenses (income)

 

(615,921

)

2,220,232

 

1,610,325

 

688,762

 

3,903,398

 

Consolidated income before income taxes

 

607,206

 

585,070

 

478,599

 

(688,762

)

982,113

 

Income tax expense

 

 

255,877

 

112,416

 

 

368,293

 

Consolidated net income

 

607,206

 

329,193

 

366,183

 

(688,762

)

613,820

 

Income attributed to the noncontrolling interests

 

 

 

6,614

 

 

6,614

 

Net income attributed to Staples, Inc.

 

$

607,206

 

$

329,193

 

$

359,569

 

$

(688,762

)

$

607,206

 

 

Condensed Consolidating Statement of Income

For the thirty-nine weeks ended October 31, 2009

(in thousands)

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

Staples, Inc.

 

Guarantor

 

Guarantor

 

 

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Consolidated

 

Sales

 

$

 

$

9,736,246

 

$

8,133,131

 

$

 

$

17,869,377

 

Cost of goods sold and occupancy costs

 

8,677

 

7,191,980

 

5,952,358

 

 

13,153,015

 

Gross profit

 

(8,677

)

2,544,266

 

2,180,773

 

 

4,716,362

 

Operating and other expenses (income)

 

(513,433

)

2,072,823

 

1,695,005

 

670,658

 

3,925,053

 

Consolidated income before income taxes

 

504,756

 

471,443

 

485,768

 

(670,658

)

791,309

 

Income tax expense

 

 

110,326

 

162,676

 

 

273,002

 

Consolidated net income

 

504,756

 

361,117

 

323,092

 

(670,658

)

518,307

 

Income attributed to the noncontrolling interests

 

 

 

13,551

 

 

13,551

 

Net income attributed to Staples, Inc.

 

$

504,756

 

$

361,117

 

$

309,541

 

$

(670,658

)

$

504,756

 

 

18



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

Condensed Consolidating Statement of Cash Flows

For the thirty-nine weeks ended October 30, 2010

(in thousands)

 

 

 

 

 

 

 

Non-

 

 

 

 

 

Staples, Inc.

 

Guarantor

 

Guarantor

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Consolidated

 

Net cash provided by operating activities

 

$

595,676

 

$

124,154

 

$

284,258

 

$

1,004,088

 

Investing activities:

 

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

(35,318

)

(134,207

)

(76,277

)

(245,802

)

Acquisition of businesses, net of cash acquired

 

 

 

(39,065

)

(39,065

)

Cash used in investing activities

 

(35,318

)

(134,207

)

(115,342

)

(284,867

)

Financing Activities:

 

 

 

 

 

 

 

 

 

Proceeds from borrowings

 

58,827

 

 

116,208

 

175,035

 

Payments on borrowings, including payment of deferred financing fees

 

(82,700

)

 

(68,368

)

(151,068

)

Purchase of treasury stock, net

 

(285,713

)

 

 

(285,713

)

Cash dividends paid

 

(194,856

)

 

 

(194,856

)

Other

 

43,868

 

 

(360,595

)

(316,727

)

Cash used in financing activities

 

(460,574

)

 

(312,755

)

(773,329

)

Effect of exchange rate changes on cash and cash equivalents

 

 

 

8,010

 

8,010

 

Net increase (decrease) in cash and cash equivalents

 

99,784

 

(10,053

)

(135,829

)

(46,098

)

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

 

$

680,879

 

$

44,271

 

$

644,571

 

$

1,369,721

 

 

Condensed Consolidating Statement of Cash Flows

For the thirty-nine weeks ended October 31, 2009

(in thousands)

 

 

 

 

 

 

 

Non-

 

 

 

 

 

Staples, Inc.

 

Guarantor

 

Guarantor

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Consolidated

 

Net cash provided by operating activities

 

$

1,476,492

 

$

71,999

 

$

38,796

 

$

1,587,287

 

Investing activities:

 

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

(21,047

)

(96,381

)

(73,721

)

(191,149

)

Cash used in investing activities

 

(21,047

)

(96,381

)

(73,721

)

(191,149

)

Financing Activities:

 

 

 

 

 

 

 

 

 

Repayments of commercial paper, net of proceeds from issuances

 

(1,195,557

)

 

 

(1,195,557

)

Proceeds from borrowings

 

834,286

 

 

342,044

 

1,176,330

 

Payments on borrowings, including payment of deferred financing fees

 

(687,690

)

 

(224,289

)

(911,979

)

Purchase of treasury stock, net

 

(28,382

)

 

 

(28,382

)

Cash dividends paid

 

(177,323

)

 

 

(177,323

)

Excess tax benefits from stock-based compensation arrangements

 

24

 

1,180

 

957

 

2,161

 

Other

 

70,061

 

 

 

70,061

 

Cash (used in) provided by financing activities

 

(1,184,581

)

1,180

 

118,712

 

(1,064,689

)

Effect of exchange rate changes on cash and cash equivalents

 

 

 

69,924

 

69,924

 

Net increase (decrease) in cash and cash equivalents

 

270,864

 

(23,202

)

153,711

 

401,373

 

Cash and cash equivalents at beginning of period

 

74,255

 

45,083

 

514,436

 

633,774

 

Cash and cash equivalents at end of period

 

$

345,119

 

$

21,881

 

$

668,147

 

$

1,035,147

 

 

19



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

Note M — 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.

 

In connection with the 1991 acquisition of Agena S.A., Corporate Express initiated legal proceedings against Befec (a predecessor of PricewaterhouseCoopers, France), the accountants who certified the acquisition balance sheet.  Corporate Express claimed damages totaling EUR 134 million plus interest and fees.  In October 2010, the Commercial Court in France issued its judgment in this case and did not award any of the claimed damages to Corporate Express. The Company is currently considering whether it will appeal the judgment.

 

Note N — 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.

 

20



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

of Financial Condition and Results of Operations

 

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

 

Forward Looking Statements

 

This Quarterly Report on Form 10-Q and, in particular, this management’s discussion and analysis contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”).  Any statements contained in or incorporated by reference into this report that are not statements of historical fact should be considered forward-looking statements.  You can identify these forward-looking statements by the use of the words “believes”, “expects”, “anticipates”, “plans”, “may”, “will”, “would”, “intends”, “estimates” and other similar expressions, whether in the negative or affirmative.  These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management’s beliefs and assumptions, and should be read in conjunction with our condensed consolidated financial statements and notes to condensed consolidated financial statements included in this report.  We cannot guarantee that we 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 metrics, 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 third quarter of 2010 compared to our results for the third 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 $6.5 billion in sales, an increase of 0.3% compared to the third quarter of 2009;

·                  North American Delivery sales increased 2.5%, and the business unit income rate was unchanged at 8.9%;

·                  North American Retail sales increased 0.6%, and comparable store sales decreased 1% while business unit income rate increased to 10.6% from 10.1%;

·                  International Operations sales decreased 4.1% in US dollars and decreased 0.7% in local currency, while the business unit income rate increased to 4.3% from 2.8%; and

·                  We now operate 2,278 stores worldwide, with a net increase of 14 stores during the third quarter of 2010.

 

We continue to invest in strategic growth initiatives to drive our long term success, including technology products and services, copy and print services, and facility and breakroom supplies, while maintaining our focus on customer service and expense control.

 

Outlook

 

Our expectations assume a slow economic recovery throughout the remainder of 2010 that will encourage existing customers to increase spending on office products and services, reversing the declining trend experienced throughout the recession.  In addition, we are continuing to invest in higher margin technology and service initiatives and expanding into

 

21



Table of Contents

 

adjacent product categories to meet additional customer needs.   These sales initiatives will be combined with our ongoing investment in global integration activities, as well as our focus on improving profitability in our international businesses.

 

For the fourth quarter and full year of 2010, 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 fourth quarter and full year 2010 as follows:

 

 

 

Fourth Quarter 2010

 

Full Year 2010

 

Diluted earnings per share, on a US GAAP basis

 

$0.38 to $0.40

 

$1.22 to $1.24

 

Impact of integration and restructuring costs per share

 

0.01

 

0.05

 

Adjusted diluted earnings per share

 

$0.39 to $0.41

 

$1.27 to $1.29

 

 

The table above includes integration and restructuring costs of approximately $8 million for the fourth quarter and $60 million for full year 2010.  As previously stated, we do not 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 fourth quarter and full year 2010 will be 37.5%.  We have made changes to our 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.

 

22



Table of Contents

 

Consolidated Performance

 

Net income attributed to Staples, Inc. for the third quarter of 2010 was $288.7 million or $0.40 per diluted share compared to $269.4 million or $0.37 per diluted share for the third quarter of 2009.  Net income attributed to Staples, Inc. for year-to-date 2010 was $607.2 million or $0.83 per diluted share compared to $504.8 million or $0.70 per diluted share for year-to-date 2009.  Our results for the third quarter and year-to-date 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 for share data):

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

October 30, 2010

 

October 31, 2009

 

October 30, 2010

 

October 31, 2009

 

 

 

Net
income

 

Per
Diluted
Share

 

Net
income

 

Per
Diluted
Share

 

Net
income

 

Per
Diluted
Share

 

Net
income

 

Per
Diluted
Share

 

Net income as reported

 

$

288,680

 

$

0.40

 

$

269,381

 

$

0.37

 

$

607,206

 

$

0.83

 

$

504,756

 

$

0.70

 

Adjustments, net of taxes: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Integration and restructuring costs (2)

 

5,637

 

0.01

 

10,396

 

0.02

 

32,216

 

0.05

 

42,249

 

0.06

 

Adjusted net income

 

$

294,317

 

$

0.41

 

$

279,777

 

$

0.39

 

$

639,422

 

$

0.88

 

$

547,005

 

$

0.76

 

 


(1)          The tax effect of all adjustments is based on an effective tax rate of 37.5% for the third quarter and year-to-date 2010 and an effective tax rate of 34.5% for the third quarter and year-to-date 2009.

(2)          See Note D in the Notes to the Condensed Consolidated Financial Statements.

 

Third Quarter of 2010 Compared to the Third Quarter of 2009:

 

Sales:  Sales for the third quarter of 2010 were $6.5 billion, an increase of 0.3% compared to the third quarter of 2009. Our sales for the third quarter of 2010 reflect increased sales in our North American Delivery business and, to a much lesser extent, non-comparable store sales for stores opened in the last twelve months.  This was offset by a decrease in comparable store sales and, to a lesser extent, the negative impact of foreign exchange of $16.1 million.

 

Gross Profit:  Gross profit as a percentage of sales was 27.6% for the third quarter of 2010 compared to 27.1% for the third quarter of 2009. The increase in gross profit rate for the third quarter of 2010 was primarily driven by improvements in product margin and supply chain.

 

Selling, General and Administrative Expenses:  Selling, general and administrative expenses were 19.3% of sales for the third quarter of 2010 and 2009, resulting from investments in growth initiatives, primarily labor and marketing, offset by a reduction in overhead costs in our European Printing Systems business and reduced depreciation.

 

Integration and Restructuring Costs: Integration and restructuring costs were $9.0 million for the third quarter of 2010 compared to $15.9 million for the third quarter of 2009.  Integration and restructuring costs for the third quarter of 2010 included $6.8 million of consulting and other costs, $1.4 million for severance and retention and $0.8 million for facility closures and other asset write-downs.  Integration and restructuring costs for the third quarter of 2009 included $11.5 million of consulting and other fees, $3.1 million for severance and retention and $1.3 million for facility closures.

 

Amortization of Intangibles: Amortization of intangibles was $15.6 million for the third quarter of 2010 compared to $26.9 million for the third quarter of 2009, reflecting the amortization of certain tradenames, customer relationships and non-competition agreements.  Amortization expense relating to intangibles resulting from our acquisition of Corporate Express was $12.6 million for the third quarter of 2010 compared to $19.1 million for the third quarter of 2009.

 

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Interest Income:   Interest income was $2.0 million for the third quarter of 2010 compared to $1.4 million for the third quarter of 2009. The increase in interest income for the third quarter of 2010 was due to an increase in effective interest rates combined with an increase in our average cash balance.

 

Interest Expense:  Interest expense decreased to $52.8 million for the third quarter of 2010 compared to $58.0 million for the third quarter of 2009.  This decrease was primarily due to the positive impact of our interest rate swap agreements as well as the expense recognized in 2009 related to fees associated with borrowings used to fund the acquisition of Corporate Express.  Excluding the impact of our interest rate swap agreements, interest expense would have been $59.6 million for the third quarter of 2010 compared to $60.3 million for the third quarter of 2009.

 

Other (Expense) Income:  Other expense was $1.8 million for the third quarter of 2010.  Other income was $8.3 million for the third 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 third quarter of 2010 compared to 34.5% for the third quarter of 2009.  The increase in the effective tax rate from the third 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 legal entity structure in order to expedite the squeeze out of the remaining public shareholders of Corporate Express.

 

Year-to-Date 2010 Compared to Year-to-Date 2009:

 

Sales:  Sales for year-to-date 2010 were $18.1 billion, an increase of 1.5% from year-to-date 2009.  Our sales growth for year-to-date 2010 reflects the positive impact of foreign exchange rates of $230.1 million and, to a lesser extent, non-comparable sales for stores opened in the last twelve months and growth in our North American Delivery business, partially offset by negative comparable store sales, primarily in Europe, and lower sales in our European Printing Systems business.

 

Gross Profit:  Gross profit as a percentage of sales was 26.9% for year-to-date 2010 compared to 26.4% for year-to-date 2009.  The increase in gross profit rate for year-to-date 2010 was primarily driven by improvements in product margin and supply chain.

 

Selling, General and Administrative Expenses:  Selling, general and administrative expenses were 20.1% of sales for year-to-date 2010 compared to 20.2% of sales for year-to-date 2009.  The decrease reflects reduced stock-based compensation, lower depreciation expense and, to a lesser extent, a reduction in overhead costs in our European Printing Systems business, partially offset by investments in growth initiatives, primarily labor and marketing.

 

Integration and Restructuring Costs: Integration and restructuring costs were $51.5 million for year-to-date 2010 compared to $64.5 million for year-to-date 2009.  Integration and restructuring costs for year-to-date 2010 included $31.2 million for consulting and other costs, $10.5 million for facility closures and other asset write-downs and $9.8 million for severance and retention. Integration and restructuring costs for year-to-date 2009 included $26.0 million for severance and retention, $25.5 million for consulting and other costs, $11.7 million related to asset write-downs for assets whose use was expected to be limited as a result of the acquisition and $1.3 million for facility closures.

 

Amortization of Intangibles: Amortization of intangibles was $45.9 million for year-to-date 2010 compared to $75.4 million for year-to-date 2009.  Amortization expense reflects the amortization of certain tradenames, customer relationships and non-competition agreements.  Amortization expense relating to intangibles resulting from our acquisition of Corporate Express was $37.5 million year-to-date 2010 compared to $51.9 million for year-to-date 2009.

 

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Interest Income:   Interest income was $5.7 million for year-to-date 2010 compared to $4.4 million for year-to-date 2009. The increase in interest income for year-to-date 2010 was due to an increase in our average cash balance, partially offset by a reduction in interest rates.

 

Interest Expense:  Interest expense decreased to $161.4 million for year-to-date 2010 compared to $179.4 million for year-to-date 2009.  The decrease in interest expense for year-to-date 2010 was primarily due to expenses recognized in 2009 related to fees 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 year-to-date 2010.  Excluding the impact of our interest rate swap agreements, interest expense would have been $179.5 million for year-to-date 2010 compared to $184.7 million for year-to-date 2009.

 

Other (Expense) Income:  Other expense was $7.1 million for year-to-date 2010.  Other income was $6.0 million for year-to-date 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 year-to-date 2010 compared to 34.5% for year-to-date 2009.  The increase in the effective tax rate from year-to-date 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 legal entity 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 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 K in the Notes to the Condensed Consolidated Financial Statements).

 

Third Quarter of 2010 Compared to the Third Quarter of 2009:

 

The following tables provide a summary of our sales and business unit income by reportable segment for the third quarter of 2010 and 2009:

 

(Amounts in thousands)

 

 

 

 

 

 

 

October 30, 2010

 

October 31, 2009

 

 

 

13 Weeks Ended

 

Increase
(Decrease)
From

 

Increase
(Decrease)
From

 

 

 

October 30, 2010

 

October 31, 2009

 

Prior Year

 

Prior Year

 

Sales:

 

 

 

 

 

 

 

 

 

North American Delivery

 

$

2,537,094

 

$

2,474,424

 

2.5

%

(11.1

)%

North American Retail

 

2,644,347

 

2,628,873

 

0.6

%

1.1

%

International Operations

 

1,356,235

 

1,414,742

 

(4.1

)%

(9.8

)%

Total segment sales

 

$

6,537,676

 

$

6,518,039

 

0.3

%

(6.2

)%

 

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(Amounts in thousands)

 

 

 

13 Weeks Ended

 

October 30, 2010

 

October 31, 2009

 

 

 

October 30, 2010

 

October 31, 2009

 

% of Sales

 

% of Sales

 

Business Unit Income:

 

 

 

 

 

 

 

 

 

North American Delivery

 

$

224,613

 

$

219,003

 

8.9

%

8.9

%

North American Retail

 

279,640

 

265,743

 

10.6

%

10.1

%

International Operations

 

58,771

 

40,069

 

4.3

%

2.8

%

Business unit income

 

563,024

 

524,815

 

8.6

%

8.1

%

Stock-based compensation

 

(39,580

)

(41,981

)

(0.6

)%

(0.7

)%

Total segment income

 

$

523,444

 

$

482,834

 

8.0

%

7.4

%

 

North American Delivery:  Sales increased 2.5% for the third quarter of 2010 compared to the third quarter of 2009.  The increase in sales for the third quarter of 2010 was driven by our customer acquisition efforts and the positive impact of foreign exchange rates of $7.6 million, partially offset by lower spend from existing customers.

 

Business unit income as a percentage of sales was unchanged from the third quarter of 2009 at 8.9%.  Business unit income as a percentage of sales for the third quarter of 2010 primarily reflects reduced amortization expense and, to a lesser extent, supply chain improvements, offset by investments in marketing and pricing to support key initiatives and business development.

 

North American Retail: Sales increased 0.6% for the third quarter of 2010.   The increase was the result of the positive impact of foreign exchange rates of $24.9 million and, to a lesser extent, non-comparable sales for stores opened in the past twelve months.   Our comparable store sales decreased 1% for the third quarter of 2010, primarily driven by weaker sales of computers.

 

Business unit income as a percentage of sales increased to 10.6% for the third quarter of 2010 from 10.1% for the third quarter of 2009. The increase in business unit income as a percentage of sales for the third quarter of 2010 primarily reflects improved product margins and, to a lesser extent, reduced depreciation expense, partially offset by an investment in labor.

 

International Operations:  Sales decreased 4.1% for the third quarter of 2010, primarily as a result of the negative impact of foreign exchange rates of $48.6 million and a 2% decrease in comparable store sales in Europe.

 

Business unit income as a percentage of sales increased to 4.3% for the third quarter of 2010 from 2.8% for the third quarter of 2009.  The increase in business unit income for the third quarter of 2010 reflects reduced losses in our European Printing Systems business, improvement in our Australian business, reduced amortization expense, improvements in supply chain, and a reduction in overhead costs in our European Delivery business, partially offset by deleverage in rent and labor costs in our European Retail business.

 

Stock-Based Compensation:  Stock-based compensation decreased to $39.6 million for the third quarter of 2010 from $42.0 million for the third 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 third quarter of 2010 primarily relates to changes in our equity compensation structure, including the elimination of certain retirement acceleration clauses in our restricted share awards.

 

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Year-to-Date 2010 Compared to Year-to-Date 2009:

 

The following tables provide a summary of our sales and business unit income by reportable segment year-to-date 2010 compared to year-to-date 2009:

 

(Amounts in thousands)

 

 

 

 

 

 

 

October 30, 2010

 

October 31, 2009

 

 

 

39 Weeks Ended

 

Increase
(Decrease)
From

 

Increase
(Decrease)
From

 

 

 

October 30,2010

 

October 31, 2009

 

Prior Year

 

Prior Year

 

Sales:

 

 

 

 

 

 

 

 

 

North American Delivery

 

$

7,359,175

 

$

7,215,632

 

2.0

%

11.5

%

North American Retail

 

6,967,106

 

6,790,476

 

2.6

%

(4.3

)%

International Operations

 

3,803,430

 

3,863,269

 

(1.5

)%

15.5

%

Total segment sales

 

$

18,129,711

 

$

17,869,377

 

1.5

%

5.7

%

 

(Amounts in thousands)

 

 

 

39 Weeks Ended

 

October 30, 2010

 

October 31, 2009

 

 

 

October 30, 2010

 

October 31, 2009

 

% of Sales

 

% of Sales

 

Business Unit Income:

 

 

 

 

 

 

 

 

 

North American Delivery

 

$

634,550

 

$

564,554

 

8.6

%

7.8

%

North American Retail

 

561,883

 

528,965

 

8.1

%

7.8

%

International Operations

 

109,205

 

63,928

 

2.9

%

1.7

%

Business unit income

 

1,305,638

 

1,157,447

 

7.2

%

6.5

%

Stock-based compensation

 

(109,209

)

(132,539

)

(0.6

)%

(0.8

)%

Total segment income

 

$

1,196,429

 

$

1,024,908

 

6.6

%

5.7

%

 

North American Delivery:  Sales increased 2.0% for year-to-date 2010 compared to year-to-date 2009.  The increase in sales for year-to-date 2010 was driven by our customer acquisition efforts and, to a lesser extent, the positive impact of foreign exchange rates of $55.5 million, partially offset by lower spend from existing customers.

 

Business unit income as a percentage of sales increased to 8.6% for year-to-date 2010 from 7.8% for year-to-date 2009.  The increase in business unit income as a percentage of sales for year-to-date 2010 was driven primarily by improved product margins and, to a lesser extent, reduced amortization expense, partially offset by investments in marketing and pricing to support growth initiatives.

 

North American Retail: Sales increased 2.6% for year-to-date 2010, driven by the positive impact of foreign exchange rates of $148.6 million and, to a lesser extent, non-comparable sales for stores opened in the past twelve months.  Our comparable store sales for year-to-date 2010 were flat as a result of a slight increase in customer traffic, offset by lower average order size.

 

Business unit income as a percentage of sales increased to 8.1% for year-to-date 2010 from 7.8% for year-to-date 2009.   The slight increase in business unit income as a percentage of sales for year-to-date 2010 primarily reflects reduced marketing and depreciation expenses combined with supply chain improvements, partially offset by investments in labor.

 

International Operations:  Sales decreased 1.5% for year-to-date 2010 compared to year-to-date 2009 driven by a 7% decrease in comparable store sales in Europe and lower sales in our European Printing Systems business, partially offset by the positive impact of foreign exchange rates of $26.0 million.

 

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Business unit income as a percentage of sales increased to 2.9% for year-to-date 2010 from 1.7% for year-to-date 2009.  The increase in business unit income for year-to-date 2010 reflects improvement in supply chain, reduction in overhead costs in our European Delivery business, as well as reduced amortization expense, partially offset by deleverage in rent and labor costs in our European Retail business.

 

Stock-Based Compensation:  Stock-based compensation decreased to $109.2 million for year-to-date 2010 from $132.5 million for year-to-date 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 the expense for year-to-date 2010 primarily relates to changes in our equity compensation structure, including the elimination of certain retirement acceleration clauses in our restricted share awards, as well as the proceeds received from the settlement of stock option derivative litigation.

 

Critical Accounting Policies and Significant Estimates

 

Our condensed consolidated financial statements have been prepared in accordance with US GAAP. 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations.   There have been no material changes to the Accounting Policies or our application of the Accounting Policies, 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 $1.0 billion for year-to-date 2010 compared to $1.59 billion for year-to-date 2009.  The decrease in operating cash flow from 2009 to 2010 is primarily due to changes in working capital, offset by an increase in net income adjusted for non-cash expenses.

 

Cash used in investing activities was $284.9 million for year-to-date 2010 compared to $191.1 million for year-to-date 2009.  The change between 2010 and 2009 is primarily due to an increase in capital expenditures during 2010, driven by investments in our supply chain and the acquisition of Oy Lindell Ab (“Lindell”), an office products distributor based in Finland.

 

Cash used in financing activities was $773.3 million for year-to-date 2010 compared to $1.06 billion for year-to-date 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 during 2009, offset by the purchase of additional shares of Corporate Express Australia and the resumption of our share repurchase program during 2010.  During 2010, we repurchased 13.1 million shares for $257.8 million.  During 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.

 

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Sources of Liquidity

 

We utilize cash generated from operations, short-term investments and our New Credit Agreement (as defined below) to cover seasonal fluctuations in cash flows and to support our various growth initiatives.  At October 30, 2010, we had $2.60 billion in total cash and funds available through credit agreements, which consisted of $1.23 billion of available credit and $1.37 billion of cash and cash equivalents.

 

A summary, as of October 30, 2010, of balances available under our credit agreements and debt outstanding is presented below (amounts in thousands):

 

 

 

October 30, 2010

 

 

 

Available Credit

 

Debt Outstanding

 

April 2011 Notes due April 1, 2011

 

$

 

$

500,000

 

Revolving Credit Facility due October 13, 2011 (1)

 

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

 

$300 million securitization program due May 17, 2011

 

300,000

 

 

Lines of credit

 

179,270

 

84,411

 

Other notes and capital leases

 

 

172,541

 

Total

 

$

1,229,270

 

$

2,581,952

 

 


(1)          On November 4, 2010, we entered into a New Credit Agreement, as defined below, with Bank of America, N.A and other lending institutions. The New Credit Agreement replaces the Revolving Credit Agreement, dated as of October 13, 2006, which provided for a maximum borrowing of $750.0 million and was due to expire on October 13, 2011.

 

On November 4, 2010, we entered into a new Credit Agreement (the “New Credit Agreement” or “Agreement”) with Bank of America, N.A, as Administrative Agent and other lending institutions named therein. The New Credit Agreement replaces the Amended and Restated Revolving Credit Agreement dated as of October 13, 2006, as amended, which provided for a maximum borrowing of $750.0 million and was due to expire in October 2011 (the “Prior Agreement”). As of November 4, 2010, no borrowings were outstanding under the Prior Agreement.

 

The New Credit Agreement provides for a maximum borrowing of $1.0 billion which, pursuant to an accordion feature, may be increased to $1.5 billion upon the request of the Company and the agreement of the lenders participating in the increase.  Borrowings made pursuant to the New Credit Agreement may be syndicated loans, swing line loans, multicurrency loans, or letters of credit, the combined sum of which may not exceed the maximum borrowing amount.  Borrowings made pursuant to the New Credit Agreement will bear interest at various interest rates, depending on the type of borrowing, plus a percentage spread based on our credit rating and fixed charge coverage ratio.  Under the Agreement, we also agree to pay a facility fee at rates that range from 0.15% to 0.35% per annum depending on our credit rating and fixed charge coverage ratio.  Amounts borrowed under the New Credit Agreement may be borrowed, repaid, and reborrowed from time to time until November 4, 2014.

 

The New Credit Agreement is unsecured and ranks pari passu with our public notes and other indebtedness and contains customary affirmative and negative covenants for credit facilities of this type.  The borrowings under this New Credit Agreement are unconditionally guaranteed on an unsecured unsubordinated basis by the same subsidiaries that guarantee our publicly issued notes.

 

At October 30, 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations on page B-13 of our 2009 Annual Report on Form 10-K.

 

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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 capital expenditures, including our future store openings, and other operating cash needs for at least the next twelve months.

 

Uses of Capital

 

As a result of our financial position, in addition to investing in our existing businesses and pursuing strategic acquisitions, we also expect to continue to return capital to our shareholders through a cash dividend program and our 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 $150 million to $175 million on capital expenditures during the fourth quarter, bringing our full year spend to approximately $400 million to $425 million.  This projection represents an increase of approximately 28% to 36% from our 2009 capital expenditures, reflecting an increase in facility and system integration activities, and an increase in the number and magnitude of remodel activities planned for 2010.  We expect to open approximately 10 new stores in North America, Europe and Asia during the fourth quarter, bringing our total store openings for 2010 to 50, compared to 56 stores opened in 2009.  We expect the source of funds for these expenditures to come from operating cash flows.

 

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 third quarter 2010 cash dividend of $0.09 per share on October 14, 2010 to stockholders of record on September 24, 2010.  We expect the total value of quarterly cash dividend payments in 2010 to be $0.36 per share.   While it is our intention to continue to pay quarterly cash dividends for the remainder of fiscal year 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.

 

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Table of Contents

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

At October 30, 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 Management’s 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 Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated, as of October 30, 2010, the effectiveness of the Company’s 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 Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Based on the evaluation of the Company’s disclosure controls and procedures as of October 30, 2010, management, the chief executive officer and the chief financial officer concluded that the Company’s 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 Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended October 30, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Table of Contents

 

PART II — OTHER INFORMATION

 

Item 1A. Risk Factors

 

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 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 efficiently to realize or achieve any expected synergies and cost savings related to such acquisitions. For example, we have not fully completed the

 

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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 with 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 management’s 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

 

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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 year-to-date 2010 were negatively impacted because these provisions were not enacted into law, resulting in an effective tax rate of 37.5%.  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 with retroactive effect, they will have a favorable impact on our financial position and results of operations.  We have made changes to our legal entity 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.

 

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 October 30, 2010 was $2.6 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.

 

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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

 

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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.

 

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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 third quarter of fiscal 2010:

 

Fiscal Period

 

Total Number of
Shares
Purchased(1)

 

Average Price
Paid per Share
(2)

 

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

 

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

 

August 1, 2010 – August 28, 2010

 

3,451,320

 

$

19.28

 

3,451,320

 

$

839,566,000

 

August 29, 2010 – October 2, 2010

 

3,433,610

 

19.41

 

3,390,556

 

773,757,000

 

October 3, 2010 – October 30, 2010

 

1,151,649

 

20.64

 

1,151,500

 

749,992,000

 

Total for third quarter of 2010

 

8,036,579

 

$

19.53

 

7,993,376

 

$

749,992,000

 

 


(1)          Includes a total of 43,203 shares of our common stock withheld during the third 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.

 

Item 6.  Exhibits

 

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

 

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SIGNATURES

 

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

 

 

 

 

STAPLES, INC.

 

 

 

 

 

 

Date: November 17, 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)

 

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EXHIBIT INDEX

 

Exhibit No.

 

Description

10.1

 

Credit Agreement, dated November 4, 2010, by and among Staples, Inc., the lenders named therein, Bank of America, N.A., as Administrative Agent, Barclays Capital and HSBC Bank USA, National Association, as Co-Syndication Agents, and Wells Fargo Bank, National Association and JPMorgan Chase Bank, N.A., as Co-Documentation Agents, with Merrill Lynch, Pierce Fenner & Smith Incorporated, Barclays Capital and HSBC Securities (USA) Inc. having acted as joint lead arrangers and joint bookrunners (including schedules and exhibits). Filed as Exhibit 10.1 to the Company’s Form 8-K filed on November 4, 2010.

10.2+

 

Amended and Restated 2004 Stock Incentive Plan.

31.1+

 

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

31.2+

 

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

32.1++

 

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

32.2++

 

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

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 Linkbase 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 Company’s Quarterly Report on Form 10-Q for the quarter ended October 30, 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.

 

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