SPLS 10-Q 102911
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 29, 2011
 
o Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from                                to
 
Commission File Number:  0-17586
 
STAPLES, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
04-2896127
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
Five Hundred Staples Drive, Framingham, MA  01702
(Address of principal executive office and zip code)
 
508-253-5000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o
 
Indicate by check mark whether the registrant 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 699,422,666 shares of common stock outstanding as of November 11, 2011.
Table of Contents

STAPLES, INC. AND SUBSIDIARIES
FORM 10-Q
October 29, 2011
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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 29,
2011
 
January 29,
2011
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
1,060,364

 
$
1,461,257

Receivables, net
2,125,028

 
1,970,483

Merchandise inventories, net
2,526,976

 
2,359,173

Deferred income tax assets
283,294

 
295,232

Prepaid expenses and other current assets
338,736

 
382,022

Total current assets
6,334,398

 
6,468,167


 
 
 
Property and equipment:
 

 
 

Land and buildings
1,075,719

 
1,064,981

Leasehold improvements
1,330,277

 
1,328,397

Equipment
2,398,539

 
2,287,505

Furniture and fixtures
1,080,540

 
1,032,502

Total property and equipment
5,885,075

 
5,713,385

Less: accumulated depreciation and amortization
3,794,385

 
3,565,614

Net property and equipment
2,090,690

 
2,147,771


 
 
 
Intangible assets, net of accumulated amortization
481,477

 
522,722

Goodwill
4,138,021

 
4,073,162

Other assets
570,431

 
699,845

Total assets
$
13,615,017

 
$
13,911,667


 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
2,337,331

 
$
2,208,386

Accrued expenses and other current liabilities
1,437,944

 
1,497,851

Debt maturing within one year
430,184

 
587,356

Total current liabilities
4,205,459

 
4,293,593


 
 
 
Long-term debt
1,557,063

 
2,014,407

Other long-term obligations
672,498

 
652,486


 
 
 
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 918,764,252 shares at October 29, 2011 and 908,449,980 shares at January 29, 2011
551

 
545

Additional paid-in capital
4,480,962

 
4,334,735

Accumulated other comprehensive income (loss)
7,086

 
(96,933
)
Retained earnings
6,983,799

 
6,492,340

Less: Treasury stock at cost, 218,550,765 shares at October 29, 2011 and 187,536,869 shares at January 29, 2011
(4,299,473
)
 
(3,786,977
)
Total Staples, Inc. stockholders’ equity
7,172,925

 
6,943,710

Noncontrolling interests
7,072

 
7,471

Total stockholders’ equity
7,179,997

 
6,951,181

Total liabilities and stockholders’ equity
$
13,615,017

 
$
13,911,667

 
See notes to condensed consolidated financial statements.

3
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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 29,
2011
 
October 30,
2010
 
October 29,
2011
 
October 30,
2010
Sales
$
6,569,927

 
$
6,537,676

 
$
18,562,477

 
$
18,129,711

Cost of goods sold and occupancy costs
4,737,146

 
4,733,928

 
13,552,923

 
13,244,200

Gross profit
1,832,781

 
1,803,748

 
5,009,554

 
4,885,511


 
 
 
 
 
 
 
Operating and other expenses:
 

 
 

 
 
 
 
Selling, general and administrative
1,283,636

 
1,264,676

 
3,800,457

 
3,643,169

Amortization of intangibles
15,957

 
15,628

 
49,443

 
45,913

Integration and restructuring costs
—

 
9,019

 
—

 
51,545

Total operating and other expenses
1,299,593

 
1,289,323

 
3,849,900

 
3,740,627


 
 
 
 
 
 
 
Operating income
533,188

 
514,425

 
1,159,654

 
1,144,884


 
 
 
 
 
 
 
Other (expense) income:
 

 
 

 
 
 
 
Interest income
1,810

 
2,045

 
5,788

 
5,706

Interest expense
(40,962
)
 
(52,775
)
 
(131,640
)
 
(161,418
)
Other expense
(3,681
)
 
(1,824
)
 
(4,238
)
 
(7,059
)
Consolidated income before income taxes
490,355

 
461,871

 
1,029,564

 
982,113

Income tax expense
164,025

 
173,201

 
329,252

 
368,293

Consolidated net income
326,330

 
288,670

 
700,312

 
613,820

(Loss) income attributed to the noncontrolling interests
(50
)
 
(10
)
 
(751
)
 
6,614

Net income attributed to Staples, Inc.
$
326,380

 
$
288,680

 
$
701,063

 
$
607,206


 
 
 
 
 
 
 
Earnings Per Share:
 

 
 

 
 
 
 
Basic earnings per common share
$
0.47

 
$
0.40

 
$
1.00

 
$
0.85

Diluted earnings per common share
$
0.47

 
$
0.40

 
$
0.99

 
$
0.83


 
 
 
 
 
 
 
Dividends declared per common share
$
0.10

 
$
0.09

 
$
0.30

 
$
0.27

 
See notes to condensed consolidated financial statements.

4
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STAPLES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
(Unaudited)
 
 
39 Weeks Ended
 
October 29,
2011
 
October 30,
2010
Operating Activities:
 

 
 

Consolidated net income, including (loss) income from the noncontrolling interests
$
700,312

 
$
613,820

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
360,633

 
371,279

Stock-based compensation
117,072

 
109,209

Excess tax benefits from stock-based compensation arrangements
(1,023
)
 
—

Deferred income tax expense
127,328

 
152,505

Other
19,828

 
(2,725
)
Changes in assets and liabilities:
 
 
 
Increase in receivables
(118,920
)
 
(145,644
)
Increase in merchandise inventories
(146,023
)
 
(134,132
)
Decrease (increase) in prepaid expenses and other assets
58,692

 
(17,307
)
Increase in accounts payable
103,474

 
151,913

Decrease in accrued expenses and other liabilities
(133,249
)
 
(141,484
)
Increase in other long-term obligations
7,508

 
46,654

Net cash provided by operating activities
1,095,632

 
1,004,088


 
 
 
Investing Activities:
 

 
 

Acquisition of property and equipment
(243,740
)
 
(245,802
)
Acquisition of businesses, net of cash acquired
—

 
(39,065
)
Net cash used in investing activities
(243,740
)
 
(284,867
)

 
 
 
Financing Activities:
 

 
 

Proceeds from the exercise of stock options and the sale of stock under employee stock purchase plans
32,989

 
43,868

Proceeds from borrowings
214,669

 
175,035

Payments on borrowings, including payment of deferred financing fees
(789,931
)
 
(151,068
)
Purchase of noncontrolling interest
(3,591
)
 
(360,595
)
Cash dividends paid
(209,604
)
 
(194,856
)
Excess tax benefits from stock-based compensation arrangements
1,023

 
—

Purchase of treasury stock, net
(512,496
)
 
(285,713
)
Net cash used in financing activities
(1,266,941
)
 
(773,329
)

 
 
 
Effect of exchange rate changes on cash and cash equivalents
14,156

 
8,010


 
 
 
Net decrease in cash and cash equivalents
(400,893
)
 
(46,098
)
Cash and cash equivalents at beginning of period
1,461,257

 
1,415,819

Cash and cash equivalents at end of period
$
1,060,364

 
$
1,369,721

 
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 weeks and thirty-nine weeks ended October 29, 2011 (also referred to as the “third quarter of 2011" and "year-to-date 2011”) and the period covering the thirteen weeks and thirty-nine weeks ended October 30, 2010 (also referred to as the “third quarter of 2010” and "year-to-date 2010").  All intercompany accounts and transactions are eliminated in consolidation.  Certain previously reported amounts have been reclassified to conform with the current period presentation.
 
Prior to 2011, the Company separately tracked the integration and restructuring costs associated with the July 2008 acquisition of Corporate Express N.V. ("Corporate Express"). The integration and restructuring costs represented the integration of Corporate Express with the Company’s pre-existing business and the consolidation of certain operations of the combined company.  In 2011, the Company is no longer tracking integration and restructuring costs because of the progress of the integration and the difficulty in accurately isolating such costs.
 
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 the related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 29, 2011.  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 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 (Accounting Standards Codification (“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 adopted this pronouncement as of January 30, 2011, on a prospective basis.  The impact of adopting this new accounting standard was not material to the Company’s financial statements in year-to-date 2011, and if it were applied in the same manner to fiscal 2010, it would not have had a material impact to revenue for year-to-date 2010.  The Company does not expect the adoption of this new accounting standard to have a significant impact on the timing and pattern of revenue recognition in the future due to the limited number of multiple element arrangements.
 
In December 2010, a pronouncement was issued that modified the process used to test goodwill for impairment.  The pronouncement impacted reporting units with zero or negative carrying amounts and required an additional test to be performed to determine whether goodwill has been impaired and to calculate the amount of that impairment.  This amendment is effective for fiscal years beginning after December 15, 2010.  The Company adopted this pronouncement as of January 30, 2011.  As the Company has not performed its annual goodwill impairment analysis and there have been no indicators of impairment during year-to-date 2011, the Company is currently evaluating the potential impact, if any, the adoption of this pronouncement will have on its consolidated financial condition, results of operations or cash flows.

In May 2011, a pronouncement was issued providing consistent definitions and disclosure requirements of fair value with respect to U.S. GAAP and International Financial Reporting Standards. The pronouncement changed certain fair value measurement principles and enhanced the disclosure requirements, particularly for Level 3 measurements. The pronouncement is effective for fiscal years beginning after December 15, 2011 and is to be applied prospectively. The Company is currently evaluating the potential impact, if any, the adoption of this pronouncement will have on its consolidated financial condition, results of operations or cash flows.

In June 2011, a pronouncement was issued that amended the guidance allowing the presentation of comprehensive income and its components in the statement of changes in equity. The pronouncement provides the option to present the total of

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STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Furthermore, regardless of the presentation methodology elected, the issuer will be required to present on the face of the financial statements a reclassification adjustment for items that are reclassified from other comprehensive income to net income. The methodology for the computation and presentation of earnings per share remains the same. The pronouncement is effective for fiscal years beginning after December 15, 2011 and is to be applied retrospectively. As this pronouncement relates to disclosure only, the adoption will not have a material impact on the Company's consolidated financial condition, results of operations or cash flows.

In September 2011, a pronouncement was issued that amended the guidance for goodwill impairment testing. The pronouncement allows the entity to perform an initial qualitative assessment to determine whether it is "more likely than not" that the fair value of the reporting unit is less than its carrying amount. This assessment is used as a basis for determining whether it is necessary to perform the two step goodwill impairment test. The methodology for how goodwill is calculated, assigned to reporting units and the application of the two step goodwill impairment test have not been revised. The pronouncement is effective for fiscal years beginning after December 15, 2011. The Company does not expect the adoption of this new accounting standard to have a significant impact on its consolidated financial position, results of operations or cash flows.

Note C — Acquisition Reserves
 
In connection with the Company’s acquisition of Corporate Express, acquisition reserves of $181.0 million were originally established.  The activity related to this reserve (in thousands) for fiscal 2011 is as follows:
 
 
Balance as of January 29, 2011
 
Utilization
 
Foreign Exchange Fluctuations
 
Balance as of October 29, 2011
Transaction costs
$
543

 
$
(119
)
 
$
—

 
$
424

Severance
11,793

 
(3,293
)
 
272

 
8,772

Facility closures
20,287

 
(3,252
)
 
27

 
17,062

Other
9,344

 
(347
)
 
316

 
9,313

Total
$
41,967

 
$
(7,011
)
 
$
615

 
$
35,571

 
The Company believes that the majority of the reserves should be utilized by the end of fiscal year 2011, with the exception of certain payments related to facility closures that may be made over the remaining lease terms.
 
Note D — Fair Value Measurements
 
ASC Topic 820, “Fair Value Measurements and Disclosures,” 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 fair values of cash and cash equivalents, receivables, accounts payable, accrued expenses, other current liabilities and short-term debt approximate their carrying values because of their short-term nature.  The Company has $1.5 billion, 9.75% notes due January 2014 (the “January 2014 Notes”), of which $750 million was hedged from March 2010 to September 2011. The Company received cash consideration of $30.3 million when the hedge was terminated in September 2011. The Company also has $325 million, 7.375% notes due October 2012 (the “October 2012 Notes”), which were hedged from January 2003 to September 2011. When the hedge was terminated in September 2011, the Company received cash consideration of $12.4 million.

The fair values of the January 2014 Notes and the October 2012 Notes were determined based on quoted market prices and are classified as a Level 1 liability.  The following table reflects the difference between the carrying value and fair value of these notes as of October 29, 2011 and January 29, 2011 (in thousands). The values in the table below reflect the unhedged portion of the notes only.
 
October 29, 2011
 
January 29, 2011
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
October 2012 Notes
$
335,474

 
$
343,517

 
$
—

 
$
—

January 2014 Notes
$
1,528,196

 
$
1,730,229

 
$
750,000

 
$
915,450


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STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


 
The following table shows the Company’s assets and liabilities as of October 29, 2011 that are measured at fair value on a recurring basis (in thousands):
 
 
Quoted Prices in Active Markets for Identical Assets or Liabilities
 
Significant Other Observable Inputs
 
Unobservable Inputs
 
Level 1
 
Level 2
 
Level 3
Assets


 


 


Money market funds
$
139,576

 
—

 
—

Derivative assets
—

 
$
8,125

 
—

Liabilities


 


 


Derivative liabilities
—

 
$
(21,505
)
 
—

 
The fair value of the Company’s money market funds are based on quotes received from third-party banks.  The Company’s derivative assets and liabilities are based on quotes received from third-party banks and represent the estimated amount the Company would receive or pay to terminate the agreements taking into consideration current interest and forward exchange rates as well as the creditworthiness of the counterparty.

Note E — Debt
 
The Company repaid in full the $500 million, 7.75% notes (the "April 2011 Notes") on the maturity date, April 1, 2011. The Company originally entered into the April 2011 Notes on March 27, 2009.

The Company has a commercial paper program ("Commercial Paper Program") that allows the Company to issue up to $1.0 billion of unsecured commercial paper notes ("Notes") from time to time. The Company's credit agreement (the "November 2014 Revolving Credit Facility") with Bank of America, N.A. and other lenders provides for a maximum borrowing of $1.0 billion and serves as a backstop to the Commercial Paper Program. Under the Commercial Paper Program, the Company uses the proceeds from the Notes for general purposes, including working capital, capital expenditures, acquisitions and share repurchases. Maturities of the Notes vary but may not exceed 397 days from the date of issue. The Notes bear such interest rates, if interest bearing, or will be sold at such discount from their face amounts, as agreed upon from time to time by the dealers under the Commercial Paper Program and the Company. The payments under the Commercial Paper Program are unconditionally guaranteed on an unsecured, unsubordinated basis by the Guarantor Subsidiaries, as defined in Note L. The Commercial Paper Program contains customary events of default with corresponding grace periods. On June 2, 2011, the Company resumed the issuance of Notes under the Commercial Paper Program. During the third quarter of 2011, the Company borrowed under its Commercial Paper Program to support its seasonal cash requirements and stock buyback programs. From June 2, 2011 through the end of the third quarter of 2011, the weighted average amount outstanding under the Commercial Paper Program was $85.0 million, with a weighted average interest rate of 0.4%. At the end of the third quarter of 2011, there were no outstanding borrowings under the Commercial Paper Program. The maximum amount outstanding under the Commercial Paper Program during the third quarter of 2011 was $255.0 million.

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STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)



The major components of the Company’s outstanding debt as of October 29, 2011 and January 29, 2011 are as follows (in thousands):
 
 
October 29, 2011
 
January 29, 2011
April 2011 Notes
$
—

 
$
500,000

October 2012 Notes
335,474

 
325,000

January 2014 Notes
1,528,196

 
1,500,000

Lines of credit
108,865

 
218,689

Capital lease obligations and other notes payable
14,712

 
13,701


1,987,247

 
2,557,390

Fair value adjustments on hedged debt
—

 
44,373

Less: Current portion
(430,184
)
 
(587,356
)
Net long-term debt
$
1,557,063

 
$
2,014,407

 
Note F — Derivative Instruments and Hedging Activities
 
Staples uses interest rate swap agreements and foreign currency swap agreements to offset certain operational and balance sheet exposures related to changes in interest or foreign exchange rates.  These agreements are entered into to support transactions made in the normal course of business and accordingly are not speculative in nature.  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 is 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 derivative contracts and the fair value of its hedged firm commitments as either current or long-term 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:   In January 2003, Staples entered into interest rate swaps, that were designated as a fair value hedge, for an aggregate notional amount of $325 million, designed to convert the October 2012 Notes into a variable rate obligation.  In September 2011, the Company terminated the $325 million interest rate swaps, recognizing a gain of $12.4 million, which is being amortized over the remaining term of the October 2012 Notes.
  
In March 2010, Staples entered into interest rate swaps that were designated as a fair value hedge, 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.  In September 2011, the Company terminated the $750 million interest rate swaps, recognizing a gain of $30.3 million, which is being amortized over the remaining term of the January 2014 Notes.
 
In connection with Staples’ acquisition of Corporate Express, the Company assumed interest rate swaps designed to convert Corporate Express’ variable rate credit facilities into fixed rate obligations.  In May 2011, the Company repaid the outstanding balance on these variable rate credit facilities and terminated the related interest rate swap agreements. As a result, $0.3 million was recognized as a loss related to the termination of these interest rate swap agreements.

Foreign Currency Swaps: In August 2007, the Company entered into a $300 million foreign currency swap that has been

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STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


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 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 29, 2011 and January 29, 2011, the currency swap had aggregate fair value losses of $16.3 million and $11.0 million, respectively, which was included in other long-term obligations.  No amounts were included in the condensed consolidated statement of income for the third quarter and year-to-date 2011 or 2010 related to ineffectiveness associated with this net investment hedge.

In May 2011, the Company entered into a foreign currency swap designed to convert a 75 million intercompany loan denominated in Australian dollars into a fixed Euro amount. The intercompany loan had a fixed interest rate of 6.65%. The agreement was being accounted for as a cash flow hedge. Upon maturity of the agreement in August 2011, Staples paid AUD 76.4 million and recognized a gain of $0.9 million.

In August 2011, the Company entered into a foreign currency swap designed to convert a 75 million intercompany loan denominated in Australian dollars into a fixed Euro amount. The intercompany loan has a fixed interest rate of 6.65%. The agreement is being accounted for as a fair value hedge. Upon maturity of the agreement on October 31, 2011, Staples will be obligated to pay AUD 76.4 million. At October 29, 2011, the currency swap had a fair value loss of $4.5 million, which was included in other long-term obligations.  No amounts were included in the condensed consolidated statement of income for the third quarter and year-to-date 2011 related to ineffectiveness associated with this fair value hedge.

In October 2011, the Company entered into a foreign currency swap designed to convert a 118.3 million intercompany loan denominated in Canadian dollars into a fixed US dollar amount. The intercompany loan has a fixed interest rate of 1.8%. The agreement is being accounted for as a fair value hedge. Upon maturity of the agreement in December 2011, Staples will be obligated to pay $112.1 million. At October 29, 2011, the currency swap had a fair value gain of $6.9 million, which was included in other assets.  No amounts were included in the condensed consolidated statement of income for the third quarter and year-to-date 2011 related to ineffectiveness associated with this fair value hedge.

In October 2011, the Company entered into a foreign currency swap designed to convert a 79.5 million intercompany loan denominated in Canadian dollars into a fixed euro amount. The intercompany loan has a fixed interest rate of 1.32%. The agreement is being accounted for as a fair value hedge. Upon maturity of the agreement in December 2011, Staples will be obligated to pay $77.3 million. At October 29, 2011, the currency swap had a fair value gain of $1.2 million, which was included in other assets.  No amounts were included in the condensed consolidated statement of income for the third quarter and year-to-date 2011 related to ineffectiveness associated with this fair value hedge.
 
Accumulated other comprehensive income (loss) includes foreign currency gains (losses), net of taxes, of $10.9 million and $(2.7) million for the third quarter and year-to-date 2011, respectively, and foreign currency losses, net of taxes, of $1.6 million and $6.0 million for the third quarter and year-to-date 2010, respectively.
 
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 (the “2004 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.

10
Table of Contents
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)



The following table summarizes the nonqualified stock options and Restricted Share activity in year-to-date 2011:

 
 
Nonqualified Stock Options (1)
 
Restricted Shares (2) (3)
 
 
Number of Shares
 
Weighted Average Exercise Price per Share
 
Number of Shares
 
Weighted Average Grant Date Fair Value per Share
Outstanding at January 29, 2011
 
44,813,257

 
$
19.86

 
14,271,158

 
$
20.62

Granted
 
6,086,065

 
15.90

 
8,374,952

 
15.93

Exercised/Released
 
(1,629,997
)
 
10.87

 
(4,347,900
)
 
21.82

Canceled
 
(1,032,814
)
 
21.23

 
(1,049,372
)
 
19.18

Outstanding at October 29, 2011
 
48,236,511

 
$
19.64

 
17,248,838

 
$
18.13

 
 
 
 
 
 
 
 
 
Exercisable at October 29, 2011
 
34,798,180

 
$
20.12

 
 
 
 
(1)
At October 29, 2011, the aggregate intrinsic value of the outstanding nonqualified stock options was $17.9 million and the aggregate intrinsic value of the exercisable nonqualified stock options was $17.8 million. The total intrinsic value of options exercised during year-to-date 2011 and 2010 was $9.9 million and $17.4 million, respectively. The intrinsic value of the nonqualified stock options is the amount by which the market value of the underlying stock exceeds the exercise price of the option.
(2)
Restricted Shares do not include 0.7 million special performance and retention shares ("Performance Shares") which Staples granted to certain employees in 2010 with a fair market value of $19.27 per share. Performance Shares are awards under which restricted stock is only issued if the Company meets minimum performance targets. The fair value of Performance Shares is based upon the market price of the underlying common stock as of the date of grant.
(3)
The total market value of Restricted Shares vesting during year-to-date 2011 and 2010 was $70.1 million and $85.0 million, respectively.
 
In connection with its equity based employee benefit plans, Staples included $35.6 million and $117.1 million in compensation expense for the third quarter and year-to-date 2011, respectively, and $39.6 million and $109.2 million in compensation expense for the third quarter and year-to-date 2010, respectively.
 
As of October 29, 2011, Staples had $240.5 million of nonqualified stock options and Restricted Shares to be expensed over the period through August 2015. 

Note H — Pension and Other Post-Retirement Benefit 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 certain employees in Europe and 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.
 
In August 2010, the Company began sponsoring an unfunded post-retirement life insurance benefit plan, which provides benefits to eligible U.S. executives based on earnings, years of service and age at termination of employment.
 
The total net cost recognized for the third quarter and year-to-date 2011 and 2010 associated with the pension and other post-retirement benefit plans is based upon preliminary estimates pending the final actuarial determination of such costs. The following table presents a summary of the total net periodic cost recorded in the condensed consolidated statement of income for the third quarter and year-to-date 2011 and 2010 related to the plans (in thousands):
 

11
Table of Contents
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


 
 13 Weeks Ended October 29, 2011
 
Pension Plans
 
 Other
Post-Retirement Benefit Plan Total
 
U.S. Plans
 
International Plans
 
Total
 
Service cost
$
—

 
$
2,404

 
$
2,404

 
$
473

Interest cost
466

 
10,178

 
10,644

 
396

Expected return on plan assets
(422
)
 
(13,922
)
 
(14,344
)
 
—

Amortization of unrecognized losses and prior service costs
—

 
352

 
352

 
459

Total cost (benefit)
$
44

 
$
(988
)
 
$
(944
)
 
$
1,328

 
13 Weeks Ended October 30, 2010
 
Pension Plans
 
 Other
Post-Retirement Benefit Plan Total
 
U.S. Plans
 
International Plans
 
Total
 
Service cost
$
—

 
$
1,964

 
$
1,964

 
$
447

Interest cost
463

 
8,178

 
8,641

 
347

Expected return on plan assets
(435
)
 
(13,720
)
 
(14,155
)
 
—

Amortization of unrecognized losses and prior service costs
—

 
874

 
874

 
—

Total cost (benefit)
$
28

 
$
(2,704
)
 
$
(2,676
)
 
$
794

 
39 Weeks Ended October 29, 2011
 
Pension Plans
 
 Other
Post-Retirement Benefit Plan Total
 
U.S. Plans
 
International Plans
 
Total
 
Service cost
$
—

 
$
7,211

 
$
7,211

 
$
1,370

Interest cost
1,398

 
30,536

 
31,934

 
1,148

Expected return on plan assets
(1,266
)
 
(41,768
)
 
(43,034
)
 
—

Amortization of unrecognized losses and prior service costs
—

 
1,056

 
1,056

 
1,331

Total cost (benefit)
$
132

 
$
(2,965
)
 
$
(2,833
)
 
$
3,849



 
39 Weeks Ended October 30, 2010
 
Pension Plans
 
 Other
Post-Retirement Benefit Plan Total
 
U.S. Plans
 
International Plans
 
Total
 
Service cost
$
—

 
$
6,308

 
$
6,308

 
$
447

Interest cost
1,389

 
26,268

 
27,657

 
347

Expected return on plan assets
(1,305
)
 
(44,068
)
 
(45,373
)
 
—

Amortization of unrecognized losses and prior service costs
—

 
2,808

 
2,808

 
—

Total cost (benefit)
$
84

 
$
(8,684
)
 
$
(8,600
)
 
$
794



Cash contributions made to the pension plans during the third quarter and year-to-date 2011 and 2010 are as follows (in thousands):
 

12
Table of Contents
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


 
13 Weeks Ended
39 Weeks Ended
 
October 29, 2011
 
October 30, 2010
 
October 29, 2011
 
October 30, 2010
U.S. Pension Plans
$
194

 
$
506

 
$
582

 
$
1,030

International Pension Plans
1,321

 
3,327

 
5,291

 
8,507

Total
$
1,515

 
$
3,833

 
$
5,873

 
$
9,537

 
The Company expects to make additional cash contributions of $0.2 million and $6.9 million to the U.S. Pension Plans and International Pension Plans, respectively, during the remainder of fiscal year 2011.  No cash contributions are expected to be made during 2011 to the Company’s other post-retirement benefit plans.
 
Note I — Stockholders’ Equity and Comprehensive Income
 
The following table reflects the changes in stockholders’ equity and comprehensive income attributed to Staples, Inc. and its noncontrolling interests for the third quarter and year-to-date 2011 and 2010 (in thousands): 
 
Attributable to Staples, Inc.
 
Attributable to Noncontrolling Interest
 
Total
Stockholders' Equity at January 30, 2011
$
6,943,710

 
$
7,471

 
$
6,951,181

Comprehensive income:


 


 


Net income
701,063

 
(751
)
 
700,312

Other comprehensive income:


 


 


Foreign currency translation adjustments, net
106,676

 
352

 
107,028

Changes in fair value of derivatives, net (1)
(2,657
)
 
—

 
(2,657
)
Comprehensive income
805,082

 
(399
)
 
804,683

Issuance of common stock for stock options exercised and the sale of stock under employee stock purchase plans
32,989

 
—

 
32,989

Stock-based compensation
117,072

 
—

 
117,072

Purchase of noncontrolling interest
(3,591
)
 
—

 
(3,591
)
Cash dividends paid
(209,604
)
 
—

 
(209,604
)
Excess tax benefits from stock-based compensation arrangements
1,023

 
—

 
1,023

Purchase of treasury stock, net
(512,496
)
 
—

 
(512,496
)
Other
(1,260
)
 
—

 
(1,260
)
Stockholders' Equity at October 29, 2011
$
7,172,925

 
$
7,072

 
$
7,179,997

 

13
Table of Contents
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


 
Attributable to Staples, Inc.
 
Attributable to Noncontrolling Interest
 
Total
Stockholders' equity at January 31, 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 fair value of derivatives, net (1)
(6,529
)
 
574

 
(5,955
)
Comprehensive income
607,081

 
9,084

 
616,165

Issuance of common stock 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

 
____________________________________________
(1)
Changes in the fair value of derivatives are net of a tax expense (benefit) of $5.3 million and $(2.2) million for the third quarter and year-to-date 2011, respectively, and net of a tax benefit of $1.2 million and $4.5 million for the third quarter and year-to-date 2010, respectively.
 
The following table summarizes the components of accumulated other comprehensive income (loss) attributed to Staples, Inc. as of October 29, 2011 and January 29, 2011 (in thousands):
 
 
October 29, 2011
 
January 29, 2011
Foreign currency translation adjustments
$
143,834

 
$
37,158

Derivative instruments (net of taxes)
(6,864
)
 
(4,207
)
Deferred pension and other post-retirement benefit costs (net of taxes)
(129,884
)
 
(129,884
)
Accumulated other comprehensive income (loss)
$
7,086

 
$
(96,933
)
 
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 2011 and 2010 is as follows (in thousands, except per share data):
 
 
13 Weeks Ended
 
39 Weeks Ended
 
October 29, 2011
 
October 30, 2010
 
October 29, 2011
 
October 30, 2010
Numerator:
 

 
 

 


 


Net income attributed to Staples, Inc.
$
326,380

 
$
288,680

 
$
701,063

 
$
607,206

Denominator:


 


 


 


Weighted-average common shares outstanding
691,205

 
714,180

 
698,813

 
717,487

Effect of dilutive securities:


 


 


 


Employee stock options, Restricted Shares and Performance Shares
6,804

 
7,653

 
9,215

 
10,419

Weighted-average common shares outstanding assuming dilution
698,009

 
721,833

 
708,028

 
727,906




 


 


 


Basic earnings per common share
$
0.47

 
$
0.40

 
$
1.00

 
$
0.85

Diluted earnings per common share
$
0.47

 
$
0.40

 
$
0.99

 
$
0.83


14
Table of Contents
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


 
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 42.0 million and 27.4 million shares of Staples common stock were excluded from the calculation of diluted earnings per share at October 29, 2011 and October 30, 2010, respectively.
 
Note K — Segment Reporting
 
Staples has three reportable segments: North American Delivery, North American Retail and International Operations. Staples’ North American Delivery segment consists of the U.S. and Canadian businesses that sell and deliver office products and services directly to customers and businesses and includes Staples Advantage, Staples.com and Quill.com.  The North American Retail segment consists of the U.S. and Canadian businesses that operate stores that sell office products and services. The International Operations segment consists of businesses that operate stores and that sell and deliver office products and services directly to customers and businesses in 24 countries in Europe, Australia, South America and Asia.
 
Staples evaluates performance and allocates resources based on profit or loss from operations before integration and restructuring costs, stock-based compensation, interest and other expense, non-recurring items, and the impact of changes in accounting principles (“business unit income”).  Intersegment sales and transfers are recorded at Staples’ cost; therefore, there is no intercompany profit or loss recognized on these transactions.
 
Staples’ North American Delivery and North American Retail segments are managed separately because the way they market products is different, the classes of customers they service may be different and the distribution methods used to deliver products to customers are different.  The International Operations are considered a separate reportable segment because of the significant differences in the operating environment from the North American operations.
 
The following is a summary of sales and business unit income by reportable segment for the third quarter and year-to-date 2011 and 2010 and a reconciliation of business unit income to consolidated income before income taxes (in thousands):
 
 
13 Weeks Ended
 
39 Weeks Ended
 
October 29, 2011
 
October 30, 2010
 
October 29, 2011
 
October 30, 2010
 
Sales
 
Sales
North American Delivery
$
2,582,729

 
$
2,537,094

 
$
7,527,592

 
$
7,359,175

North American Retail
2,656,612

 
2,644,347

 
7,029,840

 
6,967,106

International Operations
1,330,586

 
1,356,235

 
4,005,045

 
3,803,430

Total segment sales
$
6,569,927

 
$
6,537,676

 
$
18,562,477

 
$
18,129,711

 
 
 
 
 
 
 
 
 
Business Unit Income
 
Business Unit Income
North American Delivery
$
244,997

 
$
224,613

 
$
646,612

 
$
634,550

North American Retail
284,204

 
279,640

 
564,425

 
561,883

International Operations
39,589

 
58,771

 
65,689

 
109,205

Business unit income
568,790

 
563,024

 
1,276,726

 
1,305,638

Stock-based compensation
(35,602
)
 
(39,580
)
 
(117,072
)
 
(109,209
)
Interest and other expense, net
(42,833
)
 
(52,554
)
 
(130,090
)
 
(162,771
)
Integration and restructuring costs
—

 
(9,019
)
 
—

 
(51,545
)
Consolidated income before income taxes
$
490,355

 
$
461,871

 
$
1,029,564

 
$
982,113

 
Note L — Guarantor Subsidiaries
 
Under the terms of the Company’s November 2014 Revolving Credit Facility, 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 term of the guarantees is equivalent to the term of the related debt.  The following condensed consolidating financial data is presented for the holders of the 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 29, 2011 and

15
Table of Contents
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


January 29, 2011 and for the thirteen and thirty-nine weeks ended October 29, 2011 and October 30, 2010.  The Guarantor Subsidiaries are wholly owned by Staples, Inc.  The non-guarantor subsidiaries represent more than an inconsequential portion of the consolidated assets and revenues of Staples.
 
Investments in subsidiaries are accounted for by the Parent Company on the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are, therefore, reflected in the Parent Company’s investment accounts and earnings. The principal elimination entries eliminate the Parent Company’s investment in subsidiaries and intercompany balances and transactions.


16
Table of Contents
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


Condensed Consolidating Balance Sheet
As of October 29, 2011
(in thousands)
 
 
Staples, Inc. (Parent Co.)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Cash and cash equivalents
$
297,198

 
$
44,612

 
$
718,554

 
$
—

 
$
1,060,364

Merchandise inventories, net
—

 
1,471,542

 
1,055,434

 
—

 
2,526,976

Other current assets
439,137

 
1,085,660

 
1,222,261

 
—

 
2,747,058

Total current assets
736,335

 
2,601,814

 
2,996,249

 
—

 
6,334,398

Net property, equipment and other assets
662,458

 
1,080,590

 
1,399,550

 
—

 
3,142,598

Goodwill
1,654,346

 
156,303

 
2,327,372

 
—

 
4,138,021

Investment in affiliates and intercompany, net
6,171,368

 
5,660,681

 
8,993,356

 
(20,825,405
)
 
—

Total assets
$
9,224,507

 
$
9,499,388

 
$
15,716,527

 
$
(20,825,405
)
 
$
13,615,017

 
 
 
 
 
 
 
 
 
 
Total current liabilities
$
357,159

 
$
2,134,585

 
$
1,713,715

 
$
—

 
$
4,205,459

Total long-term liabilities
1,687,351

 
183,249

 
358,961

 
—

 
2,229,561

Total stockholders' equity
7,179,997

 
7,181,554

 
13,643,851

 
(20,825,405
)
 
7,179,997

Total liabilities and stockholders' equity
$
9,224,507

 
$
9,499,388

 
$
15,716,527

 
$
(20,825,405
)
 
$
13,615,017

 
Condensed Consolidating Balance Sheet
As of January 29, 2011
(in thousands)
 
 
Staples, Inc. (Parent Co.)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Cash and cash equivalents
$
406,821

 
$
38,298

 
$
1,016,138

 
$
—

 
$
1,461,257

Merchandise inventories, net
—

 
1,396,667

 
962,506

 
—

 
2,359,173

Other current assets
64,699

 
1,147,433

 
1,435,605

 
—

 
2,647,737

Total current assets
471,520

 
2,582,398

 
3,414,249

 
—

 
6,468,167

Net property, equipment and other assets
742,833

 
1,246,194

 
1,381,311

 
—

 
3,370,338

Goodwill
1,617,937

 
154,527

 
2,300,698

 
—

 
4,073,162

Investment in affiliates and intercompany, net
6,691,832

 
4,783,397

 
7,001,204

 
(18,476,433
)
 
—

Total assets
$
9,524,122

 
$
8,766,516

 
$
14,097,462

 
$
(18,476,433
)
 
$
13,911,667

 
 
 
 
 
 
 
 
 
 
Total current liabilities
$
875,100

 
$
1,454,741

 
$
1,963,752

 
$
—

 
$
4,293,593

Total long-term liabilities
1,697,841

 
562,027

 
407,025

 
—

 
2,666,893

Total stockholders' equity
6,951,181

 
6,749,748

 
11,726,685

 
(18,476,433
)
 
6,951,181

Total liabilities and stockholders' equity
$
9,524,122

 
$
8,766,516

 
$
14,097,462

 
$
(18,476,433
)
 
$
13,911,667



17
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 29, 2011
(in thousands)
 
 
Staples, Inc. (Parent Co.)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Sales
$
—

 
$
4,048,603

 
$
2,521,324

 
$
—

 
$
6,569,927

Cost of goods sold and occupancy costs
2,715

 
2,955,171

 
1,779,260

 
—

 
4,737,146

Gross profit
(2,715
)
 
1,093,432

 
742,064

 
—

 
1,832,781

Operating and other (income) expenses
(329,095
)
 
777,847

 
538,588

 
355,086

 
1,342,426

Consolidated income before income taxes
326,380

 
315,585

 
203,476

 
(355,086
)
 
490,355

Income tax expense
—

 
132,037

 
31,988

 
—

 
164,025

Consolidated net income
326,380

 
183,548

 
171,488

 
(355,086
)
 
326,330

Loss attributed to the noncontrolling interests
—

 
—

 
(50
)
 
—

 
(50
)
Net income attributed to Staples, Inc.
$
326,380

 
$
183,548

 
$
171,538

 
$
(355,086
)
 
$
326,380

 
Condensed Consolidating Statement of Income
For the thirteen weeks ended October 30, 2010
(in thousands)
 
 
Staples, Inc. (Parent Co.)
 
Guarantor Subsidiaries
 
Non-Guarantor 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 (income) expenses
(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

 

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STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


Condensed Consolidating Statement of Income
For the thirty-nine weeks ended October 29, 2011
(in thousands)
 
 
Staples, Inc. (Parent Co.)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Sales
$
—

 
$
11,303,123

 
$
7,259,354

 
$
—

 
$
18,562,477

Cost of goods sold and occupancy costs
8,642

 
8,388,950

 
5,155,331

 
—

 
13,552,923

Gross profit
(8,642
)
 
2,914,173

 
2,104,023

 
—

 
5,009,554

Operating and other (income) expenses
(709,705
)
 
2,270,346

 
1,625,249

 
794,100

 
3,979,990

Consolidated income before income taxes
701,063

 
643,827

 
478,774

 
(794,100
)
 
1,029,564

Income tax expense
—

 
277,217

 
52,035

 
—

 
329,252

Consolidated net income
701,063

 
366,610

 
426,739

 
(794,100
)
 
700,312

Loss attributed to the noncontrolling interests
—

 
—

 
(751
)
 
—

 
(751
)
Net income attributed to Staples, Inc.
$
701,063

 
$
366,610

 
$
427,490

 
$
(794,100
)
 
$
701,063

 
Condensed Consolidating Statement of Income
For the thirty-nine weeks ended October 30, 2010
(in thousands)
 
 
Staples, Inc. (Parent Co.)
 
Guarantor Subsidiaries
 
Non-Guarantor 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 (income) expenses
(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

 




19
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STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


Condensed Consolidating Statement of Cash Flows
For the thirty-nine weeks ended October 29, 2011
(in thousands)
 
 
Staples, Inc. (Parent Co.)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidated
Cash provided by (used in) operating activities
$
1,077,346

 
$
116,515

 
$
(98,229
)
 
$
1,095,632

Investing Activities:
 

 
 

 
 

 
 

Acquisition of property and equipment
(29,772
)
 
(122,964
)
 
(91,004
)
 
(243,740
)
Cash used in investing activities
(29,772
)
 
(122,964
)
 
(91,004
)
 
(243,740
)
Financing Activities:
 

 
 

 
 

 
 

Proceeds from borrowings
75,720

 
12,378

 
126,571

 
214,669

Payments on borrowings, including payment of deferred financing fees
(544,385
)
 
—

 
(245,546
)
 
(789,931
)
Purchase of treasury stock, net
(512,496
)
 
—

 
—

 
(512,496
)
Excess tax benefits from stock-based compensation arrangements
579

 
385

 
59

 
1,023

Cash dividends paid
(209,604
)
 
—

 
—

 
(209,604
)
Other
32,989

 
—

 
(3,591
)
 
29,398

Cash (used in) provided by financing activities
(1,157,197
)
 
12,763

 
(122,507
)
 
(1,266,941
)
Effect of exchange rate changes on cash and cash equivalents
—

 
—

 
14,156

 
14,156

Net (decrease) increase in cash and cash equivalents
(109,623
)
 
6,314

 
(297,584
)
 
(400,893
)
Cash and cash equivalents at beginning of period
406,821

 
38,298

 
1,016,138

 
1,461,257

Cash and cash equivalents at end of period
$
297,198

 
$
44,612

 
$
718,554

 
$
1,060,364



20
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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)
 
 
Staples, Inc. (Parent Co.)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidated
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:
 

 
 

 
 

 
0

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

 
Note M — Commitments and 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.
 
The Company has become the subject of several class action lawsuits filed in various states, where the plaintiffs alleged the Company failed to comply with federal and state overtime laws and that it failed to pay them overtime because assistant store managers were misclassified as exempt from overtime pay.  In January 2010, the Company and the attorneys for the plaintiffs jointly announced a settlement of these suits initially recording a charge of $42.0 million, including interest, class counsel’s attorney’s fees and a previous jury verdict obtained in February 2009 for one of these class action lawsuits.  Under the terms of the settlement, the Company does not admit to any wrongdoing in connection with misclassification and resolves claims for damages as far back as 2002 that cover approximately 5,500 current and former associates.
 
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 appealing the judgment.
 
Staples has a contractual dispute with Corely S.C./Lyreco S.A.S., as a result of acquiring Corporate Express. Prior to Staples' acquisition of Corporate Express, Corporate Express and Corely/Lyreco entered into an agreement that required Corporate Express to pay EUR 30 million to Corely/Lyreco in the event that the merger between Corporate Express and Corely/Lyreco was not completed as a result of Staples' acquisition of Corporate Express. Upon Staples' acquisition of Corporate Express, Corporate Express paid the EUR 30 million to Corely/Lyreco.  Corely/Lyreco is seeking through arbitration to have Staples gross up this payment to cover the corporate income taxes it incurred as a result of the payment.   Staples believes that it has meritorious defenses to this contractual dispute. However, there is a reasonable possibility that the arbitral tribunal could rule against Staples and require Staples to pay a portion or all of the corporate taxes incurred by Corely/Lyreco as a result of the payment.

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STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)



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 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.  This squeeze out process turned out to be a long and cumbersome process, and in October 2011, Staples withdrew the squeeze out proceedings. Any additional payments Staples makes to purchase the remaining outstanding capital stock will be recorded in equity pursuant to ASC Topic 810, "Noncontrolling Interest in Consolidated Financial Statements."
 
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.
 

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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 actually will achieve the plans, intentions or expectations disclosed in the forward-looking statements made.  There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by such forward-looking statements.  These risks and uncertainties include, without limitation, those set forth under the heading “Risk Factors” of this Quarterly Report on Form 10-Q.  We do not intend to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.
 
Results of Operations
 
We have provided below an overview of our operating results as well as a summary of our consolidated performance and details of our segment performance.  Net income is presented in our Consolidated Performance, in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and as adjusted for certain items as noted in the reconciliation tables below.  Management uses non-GAAP adjusted net income, among other standards, to measure operating performance.  We have added this information because we believe it helps in understanding the results of our operations on a comparative basis.  This adjusted information supplements and is not intended to replace performance measures required by U.S. GAAP disclosure.
 
Overview
 
Major contributors to our third quarter of 2011 results, as compared to the results for the third quarter of 2010, are reviewed in detail in the Consolidated Performance and Segment Performance discussions and are summarized below:
 
•
On a consolidated basis, we generated $6.6 billion in sales, with sales growth of 0.5%;
 
•
North American Delivery’s sales increased 1.8%, and business unit income rate increased to 9.5% from 8.9%;
 
•
North American Retail’s sales increased 0.5%, comparable store sales decreased 1% and business unit income rate increased to 10.7% from 10.6%;
 
•
International Operations’ sales decreased 1.9%, including the favorable impact of foreign exchange rates, and business unit income rate decreased to 3.0% from 4.3%; and

•
Our quarterly income tax rate was 33.5% compared to 37.5%.
 
We continue to invest in strategic 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.  Our results for the third quarter of 2011 reflect our investments in these initiatives.
 
Outlook
 
For the fourth quarter of 2011, we expect to achieve flat to low single-digit sales growth compared to the same period of 2010, resulting in expected diluted earnings per share on a U.S. GAAP basis in the range of $0.39 to $0.43. For the full year 2011, we expect sales to increase in the low single-digits compared to 2010, resulting in expected diluted earnings per share on a U.S. GAAP basis in the range of $1.38 to $1.42. Excluding the tax refund recorded in the second quarter of 2011 of approximately

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$21 million, or $0.03 per share, we expect to achieve adjusted diluted earnings per share for the full year in the range of $1.35 to $1.39. Staples anticipates its effective tax rate for the full year will be 34%, excluding the second quarter tax refund.

Consolidated Performance
 
Net income attributed to Staples, Inc. for the third quarter of 2011 was $326.4 million or $0.47 per diluted share compared to $288.7 million or $0.40 per diluted share for the third quarter of 2010.   Net income attributed to Staples, Inc. for year-to-date 2011 was $701.1 million or $0.99 per diluted share compared to $607.2 million or $0.83 per diluted share for year-to-date 2010. Our results for year-to-date 2011 include the receipt of a second quarter refund from the Italian government related to an overpayment of income taxes in previous years. Our results for the third quarter of 2010 and year-to-date 2010 include integration and restructuring costs.  A reconciliation of net income adjusted to remove the integration and restructuring costs, net of taxes and the 2011 tax refund, is shown below (amounts in thousands, except for per share data):
 
 
13 Weeks Ended
 
39 Weeks Ended
 
October 29, 2011
 
October 30, 2010
 
October 29, 2011
 
October 30, 2010
 
Net income
 
Per  Diluted
Share
 
Net income
 
Per  Diluted
Share
 
Net income
 
Per  Diluted
Share
 
Net income
 
Per  Diluted
Share
Net income as reported
$
326,380

 
$
0.47

 
$
288,680

 
$
0.40

 
$
701,063

 
$
0.99

 
$
607,206

 
$
0.83

Adjustments, net of taxes:
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Integration and restructuring costs (1)(2)
—

 
—

 
5,637

 
0.01

 
—

 
—

 
32,216

 
0.05

Tax refund
—

 
—

 
—

 
—

 
(20,800
)
 
(0.03
)
 
—

 
—

Non-GAAP adjusted net income
$
326,380

 
$
0.47

 
$
294,317

 
$
0.41

 
$
680,263

 
$
0.96

 
$
639,422

 
$
0.88

__________________________________________
(1)
The tax effect of the 2010 adjustment is based on an effective tax rate of 37.5%.
(2)
See Note A in the Notes to the Condensed Consolidated Financial Statements.

Third Quarter of 2011 Compared to the Third Quarter of 2010
 
Sales: Sales for the third quarter of 2011 were $6.6 billion, an increase of 0.5% from the third quarter of 2010.  Our sales growth for the third quarter of 2011 reflects the positive impact of foreign exchange rates of $95.2 million and, to a lesser extent, growth in our North American Delivery business, partially offset by a decrease in comparable store sales in our International and North American retail businesses.
 
Gross Profit:  Gross profit as a percentage of sales was 27.9% for the third quarter of 2011 compared to 27.6% for the third quarter of 2010.  The increase in gross profit rate for 2011 was primarily the result of improved product margins, offset by deleverage in supply chain costs, driven by higher fuel costs.
 
Selling, General and Administrative Expenses:  Selling, general and administrative expenses were 19.5% of sales for the third quarter of 2011 compared to 19.3% of sales for the third quarter of 2010.  This increase reflects investments in labor to support growth initiatives and deleverage of international fixed costs, partially offset by lower depreciation.
 
Amortization of Intangibles: Amortization of intangibles was $16.0 million for the third quarter of 2011 compared to $15.6 million for the third quarter of 2010, primarily reflecting the amortization of Corporate Express related tradenames, customer relationships and noncompetition agreements.  Amortization of intangibles resulting from our acquisition of Corporate Express was $13.0 million for the third quarter of 2011 and $12.6 million for the third quarter of 2010.
 
Interest Income: Interest income was $1.8 million for the third quarter of 2011 compared to $2.0 million for the third quarter of 2010.  The decrease in interest income for the third quarter of 2011 was primarily due to a decrease in our worldwide weighted average cash balances, partially offset by an increase in foreign interest rates.
 
Interest Expense: Interest expense decreased to $41.0 million for the third quarter of 2011 from $52.8 million for the third quarter of 2010.  This decrease was primarily due to a reduction in debt balances resulting from the repayment of the $500 million, 7.75% Notes (the “April 2011 Notes”) on April 1, 2011 and the paydown and refinancing of foreign debt and liquidity facilities.   Our interest rate swap agreements that were terminated in September 2011 reduced interest expense by $6.2 million for the third

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quarter of 2011 compared to $6.9 million for the third quarter of 2010.

Other Expense: Other expense was $3.7 million for the third quarter of 2011 compared to $1.8 million for the third quarter of 2010.  These amounts primarily reflect foreign exchange gains and losses recorded in the respective periods.
 
Income Taxes:  Our tax rate was 33.5% for the third quarter of 2011 compared to 37.5% for the third quarter of 2010.  The decrease in the tax rate from the third quarter of 2010 to the third quarter of 2011 was primarily due to the enactment of The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act in the fourth quarter of fiscal 2010, which extended certain provisions in the Internal Revenue Code allowing for the deferral of United States income tax on certain unremitted foreign earnings.

Our effective tax rate in any year is impacted by the geographic mix of earnings. The earnings generated primarily by our entities in Australia, Canada, Hong Kong and the Netherlands contributed to the foreign tax rate differential impacting the effective tax rate. As a result, our estimated effective tax rate applicable to results from continuing operations decreased from 34.5% to 34% for fiscal 2011.
 
Year-to-date 2011 Compared to Year-to-date 2010

Sales: Sales for year-to-date 2011 were $18.6 billion, an increase of 2.4% from year-to-date 2010.  Our sales growth for year-to-date 2011 reflects the positive impact of foreign exchange rates of $436.6 million and, to a lesser extent, growth in our North American Delivery business, partially offset by a decrease in comparable store sales in our International and North American retail businesses.
 
Gross Profit:  Gross profit as a percentage of sales was 27.0% for year-to-date 2011 compared to 26.9% for year-to-date 2010.  The increase in gross profit rate for 2011 was primarily the result of improvements in North American Retail product margins, partially offset by deleverage in supply chain costs, driven by higher fuel costs.
 
Selling, General and Administrative Expenses:  Selling, general and administrative expenses were 20.5% of sales for year-to-date 2011 compared to 20.1% of sales for year-to-date 2010.  This increase reflects investments in labor and marketing to support growth initiatives and strengthen brand awareness and deleverage of international fixed costs, partially offset by lower depreciation.
 
Amortization of Intangibles: Amortization of intangibles was $49.4 million for year-to-date 2011 compared to $45.9 million for year-to-date 2010, primarily reflecting the amortization of Corporate Express related tradenames, customer relationships and noncompetition agreements.  Amortization of intangibles resulting from our acquisition of Corporate Express was $40.5 million for year-to-date 2011 and $37.5 million for year-to-date 2010.
 
Interest Income: Interest income was $5.8 million for year-to-date 2011 compared to $5.7 million for year-to-date 2010.  The increase in interest income for year-to-date 2011 was primarily due to an increase in foreign interest rates, offset by a decrease in worldwide weighted average cash balances and a slight decrease in U.S. interest rates.
 
Interest Expense: Interest expense decreased to $131.6 million for year-to-date 2011 from $161.4 million for year-to-date 2010.  This decrease was primarily due to a reduction in debt balances resulting from the repayment of the April 2011 Notes, the paydown and refinancing of certain debt and liquidity facilities and the positive impact of our interest rate swap agreements.  Our interest rate swap agreements reduced interest expense by $20.4 million for year-to-date 2011 compared to $18.1 million for year-to-date 2010.
 
Other Expense: Other expense was $4.2 million for year-to-date 2011 compared to $7.1 million for year-to-date 2010.  These amounts primarily reflect foreign exchange gains and losses recorded in the respective periods.
 
Income Taxes:  Our tax rate was 32.0% for year-to-date 2011 compared to 37.5% for year-to-date 2010.  The decrease in the tax rate from year-to-date 2010 to year-to-date 2011 was primarily due to the enactment of The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act in the fourth quarter of fiscal 2010, which extended certain provisions in the Internal Revenue Code allowing for the deferral of United States income tax on certain unremitted foreign earnings. Year-to-date 2011 also included a tax benefit of $20.8 million related to a refund due to Corporate Express from the Italian government that was previously deemed uncollectible, which was recorded as a discrete item. Our effective tax rate applicable to results from continuing operations for year-to-date 2011, excluding the impact of discrete items, is 34%.

Our effective tax rate in any year is impacted by the geographic mix of earnings. The earnings generated primarily by our

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entities in Australia, Canada, Hong Kong and the Netherlands contributed to the foreign tax rate differential impacting the effective tax rate.

Segment Performance
 
We have three reportable segments: North American Delivery, North American Retail and International Operations.  Our North American Delivery segment consists of the U.S. and Canadian businesses that sell and deliver office products and services directly to customers and businesses and includes Staples Advantage, Staples.com and Quill.com.  Our North American Retail segment consists of the U.S. and Canadian businesses that operate stores that sell office products and services.  Our International Operations segment consists of businesses that operate stores and that sell and deliver office products and services directly to customers and businesses in 24 countries in Europe, Australia, South America and Asia.
 
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 business unit income to consolidated income before taxes in Note K in the Notes to the Condensed Consolidated Financial Statements).

Third Quarter of 2011 Compared to the Third Quarter of 2010

The following tables provide a summary of our sales and business unit income by reportable segment for the third quarter of 2011 and 2010:
 
 
(Amounts in thousands)
 
October 29, 2011
 
October 30, 2010
 
 
Increase
(Decrease)
From
Prior Year
 
Increase (Decrease)
From
Prior Year
 
13 Weeks Ended
 
 
 
October 29, 2011
 
October 30, 2010
 
 
Sales:
 

 
 

 
 

 
 

North American Delivery
$
2,582,729

 
$
2,537,094

 
1.8
 %
 
2.5
 %
North American Retail
2,656,612

 
2,644,347

 
0.5
 %
 
0.6
 %
International Operations
1,330,586

 
1,356,235

 
(1.9
)%
 
(4.1
)%
Total segment sales
$
6,569,927

 
$
6,537,676

 
0.5
 %
 
0.3
 %
 
 
(Amounts in thousands)
13 Weeks Ended
 
October 29, 2011
 
October 30, 2010
 
October 29, 2011
 
October 30, 2010
 
% of Sales
 
% of Sales
Business Unit Income:
 

 
 

 
 

 
 

North American Delivery
$
244,997

 
$
224,613

 
9.5
%
 
8.9
%
North American Retail
284,204

 
279,640

 
10.7
%
 
10.6
%
International Operations
39,589

 
58,771

 
3.0
%
 
4.3
%
Business unit income
$
568,790

 
$
563,024

 
8.7
%
 
8.6
%
 
North American Delivery: Sales increased 1.8% for the third quarter of 2011.  This increase was driven by organic sales growth, our fourth quarter 2010 Print South acquisition and, to a lesser extent, the positive impact of foreign exchange rates of $6.1 million.  Our sales growth was favorably impacted by an increase in facilities and breakroom supplies, promotional products, tablets, laptops and computer accessories. This growth was partially offset by softness in paper.
 
Business unit income as a percentage of sales increased to 9.5% for the third quarter of 2011 from 8.9% for the third quarter of 2010, driven by improved profitability in our Canadian delivery businesses and in our facilities and breakroom and promotional products businesses in the U.S. These improvements were partially offset by investments in website development and other information systems, higher fuel costs and investments in labor to support growth initiatives.  
 
North American Retail:  Sales increased 0.5% for the third quarter of 2011.  This increase was the result of the positive impact of foreign exchange rates of $20.4 million and, to a lesser extent, non-comparable sales for new stores opened in the last twelve months. These increases were offset by a 1% decline in comparable store sales, reflecting a 1% decrease in customer traffic and flat average order size.  Comparable store sales reflect a softness in desktop computers, software and computer media, partially offset by positive performance in laptops and tablets.
 

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Business unit income as a percentage of sales increased to 10.7% for the third quarter of 2011 from 10.6% for the third quarter of 2010, primarily reflecting improved product margins. These increases were partially offset by increased labor expense, investments in new initiatives and increased marketing expenses.

International Operations: Sales decreased 1.9% for the third quarter of 2011.  This decrease was the result of a 12% decrease in comparable store sales in Europe and, to a lesser extent, decreased sales in Australia and in our European Printing Systems businesses, partially offset by the positive impact of foreign exchange rates of $68.7 million.
 
Business unit income as a percentage of sales decreased to 3.0% for the third quarter of 2011 from 4.3% for the third quarter of 2010.  This reflects deleverage of fixed costs in Australia and in our European retail businesses. Business unit income was positively impacted by a gain on the sale of a building in our European Printing Systems business and overall reduced marketing expense in our European businesses.
 
Year-to-date 2011 Compared to Year-to-date2010

The following tables provide a summary of our sales and business unit income by reportable segment for year-to-date 2011 and 2010:
 
 
(Amounts in thousands)
 
October 29, 2011
 
October 30, 2010
 
 
Increase
From
Prior Year
 
Increase (Decrease)
From
Prior Year
 
39 Weeks Ended
 
 
 
October 29, 2011
 
October 30, 2010
 
 
Sales:
 

 
 

 
 

 
 

North American Delivery
$
7,527,592

 
$
7,359,175

 
2.3
%
 
2.0
 %
North American Retail
7,029,840

 
6,967,106

 
0.9
%
 
2.6
 %
International Operations
4,005,045

 
3,803,430

 
5.3
%
 
(1.5
)%
Total segment sales
$
18,562,477

 
$
18,129,711

 
2.4
%
 
1.5
 %
 
 
(Amounts in thousands)
39 Weeks Ended
 
October 29, 2011
 
October 30, 2010
 
October 29, 2011
 
October 30, 2010
 
% of Sales
 
% of Sales
Business Unit Income:
 

 
 

 
 

 
 

North American Delivery
$
646,612

 
$
634,550

 
8.6
%
 
8.6
%
North American Retail
564,425

 
561,883

 
8.0
%
 
8.1
%
International Operations
65,689

 
109,205

 
1.6
%
 
2.9
%
Business unit income
$
1,276,726

 
$
1,305,638

 
6.9
%
 
7.2
%
 
North American Delivery: Sales increased 2.3% for year-to-date 2011.  This increase was driven by organic sales growth, our fourth quarter 2010 Print South acquisition and, to a lesser extent, the positive impact of foreign exchange rates of $32.1 million.  Our sales growth was favorably impacted by an increase in facilities and breakroom supplies, promotional products and computer accessories. This growth was partially offset by softness in copier and fax cartridges and paper.
 
Business unit income as a percentage of sales remained flat at 8.6% for year-to-date 2011 compared to year-to-date 2010, driven by investments in labor to support growth initiatives, investments in website development and other information systems and higher fuel costs.  These expenses were offset by improved profitability in our Canadian delivery businesses and in our facilities and breakroom and promotional products businesses in the U.S., as well as reduced marketing expenses.
 
North American Retail:  Sales increased 0.9% for year-to-date 2011.  This increase was the result of the positive impact of foreign exchange rates of $79.8 million and, to a lesser extent, an increase in non-comparable sales for new stores opened in the past twelve months.  These increases were partially offset by a 1% decrease in comparable store sales, which reflects a decrease in customer traffic and flat average order size.  Comparable store sales reflect a softness in computer media, software and computer accessories, partially offset by positive performance in tablets, laptops, e-readers, and copy and print services.
 
Business unit income as a percentage of sales decreased to 8.0% for year-to-date 2011 from 8.1% for year-to-date 2010, primarily reflecting investments in marketing and increased labor expense, as well as investments in new initiatives, offset by improved product margins and reduced rent and occupancy costs.

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International Operations: Sales increased 5.3% for year-to-date 2011.  This increase was the result of the positive impact of foreign exchange rates of $324.8 million and, to a lesser extent, our second quarter 2010 acquisition of Oy Lindell AB and sales growth in our European delivery business, partially offset by a 10% decrease in comparable store sales in Europe and decreased sales in our European Printing Systems and Australian businesses.
 
Business unit income as a percentage of sales decreased to 1.6% for year-to-date 2011 from 2.9% for year-to-date 2010.  The decrease in business unit income for year-to-date 2011 reflects deleverage of fixed costs and investments in systems in our Australian business and deleverage of fixed costs in our European retail businesses.
 
Critical Accounting Policies and Significant Estimates
 
Our condensed consolidated financial statements have been prepared in accordance with U.S. 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 2010 Annual Report on Form 10-K, filed on March 2, 2011, 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 2010 Annual Report on Form 10-K filed on March 2, 2011.

Liquidity and Capital Resources
 
Cash Flows
 
Cash provided by operations was $1.10 billion for year-to-date2011 compared to $1.00 billion for year-to-date 2010.  The increase in operating cash flow from 2010 to 2011 was primarily due to an increase in net income adjusted for non-cash expenses and the tax refund received from the Italian government in 2011, partially offset by changes in working capital.
 
Cash used in investing activities was $243.7 million for year-to-date 2011 compared to $284.9 million for year-to-date 2010.  The decrease in cash used in investing activities from 2010 to 2011 was due to the 2010 acquisition of Oy Lindell AB ("Lindell"), a Finnish office products distributor, combined with a small decrease in capital expenditures during year-to-date 2011, driven by a reduction in spending on facility and system integration activities and store remodel activities.
 
Cash used in financing activities was $1.27 billion for year-to-date 2011 compared to $773.3 million for year-to-date 2010.   The increase in cash used in financing activities from 2010 to 2011 is primarily related to the $500 million repayment of the April 2011 Notes and increased purchases under our share repurchase program, offset by the prior year purchase of additional shares of Corporate Express Australia.  During year-to-date 2011, we repurchased 29.5 million shares for $490.0 million, compared to 13.1 million shares for $257.8 million during year-to-date 2010.
 
Sources of Liquidity
 
To cover seasonal fluctuations in cash flows and to support our various growth initiatives, we utilize cash generated from operations, short-term investments and our credit agreement (the "November 2014 Revolving Credit Facility") with Bank of America, N.A. and other lenders, which provides for a maximum borrowing of $1.0 billion.  At October 29, 2011, we had approximately $2.33 billion in total cash and funds available through credit agreements, which consisted of $1.27 billion of available credit and $1.06 billion of cash and cash equivalents. Of the $1.06 billion in cash and cash equivalents, approximately $695.9 million is held in jurisdictions outside the United States and as a result there will be tax consequences if such amounts were moved out of these jurisdictions or repatriated to the United States. We currently intend to use most of the cash and cash equivalents held outside of the United States to fund the current operations of our foreign operations and their growth initiatives. The determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable because of the complexities associated with its hypothetical calculation.
 

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A summary, as of October 29, 2011, of balances available under our credit agreements and debt outstanding is presented below (amounts in thousands):

 
October 29, 2011
 
Available Credit
 
Debt Outstanding
October 2012 Notes
$
—

 
$
335,474

January 2014 Notes
—

 
1,528,196

November 2014 Revolving Credit Facility
1,000,000

 
—

Lines of credit
273,362

 
108,865

Other notes and capital leases
—

 
14,712

Total
$
1,273,362

 
$
1,987,247

 
At October 29, 2011, there had not been a material 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-11 of our 2010 Annual Report on Form 10-K. The April 2011 Notes were paid off in full on the maturity date, April 1, 2011.

We have a commercial paper program ("Commercial Paper Program") that allows us to issue up to $1.0 billion of unsecured commercial paper notes ("Notes") from time to time. The Commercial Paper Program is backstopped by the November 2014 Revolving Credit Facility. Under the Commercial Paper Program, we use the proceeds from the Notes for general purposes, including working capital, capital expenditures, acquisitions and share repurchases. Maturities of the Notes vary but may not exceed 397 days from the date of issue. The Notes bear such interest rates, if interest bearing, or will be sold at such discount from their face amounts, as agreed upon from time to time by the dealers under the Commercial Paper Program and the Company. The payments under the Commercial Paper Program are unconditionally guaranteed on an unsecured unsubordinated basis by the Guarantor Subsidiaries, as defined in Note L in the Notes to the Condensed Consolidated Financial Statements. The Commercial Paper Program contains customary events of default with corresponding grace periods. On June 2, 2011, we resumed the issuance of Notes under the Commercial Paper Program. During the third quarter of 2011, we borrowed under our Commercial Paper Program to support our seasonal cash requirements and stock buyback programs. From June 2, 2011 through the end of the third quarter of 2011, the weighted average amount outstanding under the Commercial Paper Program was $85.0 million, with a weighted average interest rate of 0.4%. At the end of the third quarter of 2011, there were no outstanding borrowings under the Commercial Paper Program. The maximum amount outstanding under the Commercial Paper Program during the third quarter of 2011 was $255.0 million.

 We expect that our cash generated from operations, together with our current cash, funds available under our existing credit agreements and other alternative sources of financing, will be sufficient to fund our planned capital expenditures 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 $156 million on capital expenditures during the fourth quarter of 2011. The total 2011 capital expenditure projection represents a decrease of 2.2% from our 2010 capital expenditures and reflects lower investment in remodel activities, facilities and systems. We expect to open approximately 14 new stores during the fourth quarter of 2011.
 
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.  In the past, excluding the Corporate Express acquisition, we have focused on smaller acquisitions 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 2011 cash dividend of $0.10 per share on October 13, 2011 to stockholders of record on September

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23, 2011.  We expect the total value of quarterly cash dividend payments for fiscal 2011 to be $0.40 per share.   While it is our intention to continue to pay quarterly cash dividends for the remainder of 2011 and beyond, any decision to pay future cash dividends will be made by our Board of Directors and will depend upon our earnings, financial condition and other factors.
 
Inflation and Seasonality
 
While neither inflation nor deflation has had, nor do we expect them to have, a material impact upon our operating results, there can be no assurance that our business will not be affected by inflation or deflation in the future.  We believe that our business is somewhat seasonal, with sales and profitability historically higher during the second half of our fiscal year due to the back to school, holiday and January back to business seasons.

Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
At October 29, 2011, 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-15 of our 2010 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 29, 2011, 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 29, 2011, 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 29, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 

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STAPLES, INC. AND SUBSIDIARIES

PART II — OTHER INFORMATION
 
Item 1A.  Risk Factors
 
Global economic conditions 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, particularly white collar unemployment, energy and commodities costs, healthcare costs, higher interest rates and taxes, a return to tighter credit markets, turmoil in the financial markets, lower consumer confidence, lack of small business formation and other factors could result in a decline in business and consumer spending. Although there has been some improvement in some of these measures, the level of business and consumer spending across the globe is not where it was prior to the global recession. 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, Target and Tesco, warehouse clubs such as Costco, computer and electronics superstores such as Best Buy, specialty technology stores such as Apple, copy and print businesses such as FedEx Office, online retailers such as Amazon.com, and other discount retailers. We 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 bring easy to your office. This involves providing our customers with solutions through a broad selection of products and services at competitive prices that meet customers’ changing needs and purchasing habits.  For example, technology has changed how people work and conduct business, which impacts the types of office supplies being purchased.  We offer, among other things, convenient store locations, helpful associates, and reliable and fast order delivery.  Many of our competitors 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 or may have more experience in selling certain products or delivering services and may have substantially greater financial resources.  If we fail to execute on our brand promise, offer the appropriate product mix at competitive prices 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.
 
Our business has grown dramatically over the years, and we expect our business to continue to grow organically and through strategic acquisitions.  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. 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.  To the extent we grow through strategic acquisitions, our success will depend on selecting the appropriate targets, integrating such acquisitions quickly and effectively and realizing any expected synergies and cost savings related to such acquisitions.
 
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 35 new stores in 2011. 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

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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 carry the correct assortment of products, we may not be able to meet customer preferences at competitive prices 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 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.
 
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

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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 and $325 million 7.375% notes due in October 2012. Additionally, we have outstanding obligations under our local lines of credit. Our consolidated outstanding debt as of October 29, 2011 was $1.99 billion. If we are unable to satisfy our debt service requirements, we may default under one or more of our credit facilities or the indentures governing our notes. If we default or breach our obligations, we could be required to pay a higher rate of interest or lenders could require us to accelerate our repayment obligations, and such a default could materially harm our business and financial condition.  Our level of indebtedness may also place us 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 24% of our sales in fiscal 2010. 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.
 
Problems in our information systems and technologies may disrupt our operations.
 
We rely heavily on various information systems and technology to sell and deliver our office products and services and operate our business, including systems to track inventory, to process and record transactions, to generate financial reports and to

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communicate with our associates, vendors and customers. Our ability to attract and retain customers, compete and operate effectively depends in part on a consistent, secure and easy to use technology infrastructure with reliable back-up systems. Any disruption to the Internet or our technology infrastructure, including a disruption affecting our Web sites and information systems, may cause a decline in our customer satisfaction, jeopardize accurate financial reporting, 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 could be disrupted thus subjecting us to liability and potentially harming our reputation.
 
Compromises of our information systems or unauthorized access to confidential information or our customers' or associates' personal information may materially harm our business or damage our reputation.
 
Through our sales and marketing activities and our business operations, we collect and store confidential information and certain personal information from our customers and associates. For example, we handle, collect and store personal information in connection with our customers purchasing products or services, enrolling in our promotional or rewards programs, registering on our web site or otherwise communicating or interacting with us. We also process payment card information and check information. In addition, in the normal course of business, we gather and retain personal information about our associates and generate and have access to confidential business information. We may share confidential and personal information with vendors or other third parties in connection with processing of transactions, operating certain aspects of our business or for marketing purposes. Although we have taken steps designed to safeguard such information, there can be no assurance that such information will be protected against unauthorized access or disclosure. Computer hackers may attempt to penetrate our or our vendors’ network security and, if successful, misappropriate such information. A Staples associate, contractor or other third-party with whom we do business may also attempt to circumvent our security measures in order to obtain such information or inadvertently cause a breach involving such information. We could be subject to liability for failure to comply with privacy and information security laws, for failing to protect personal information, or for misusing personal information, such as use of such information for an unauthorized marketing purpose. Loss or misuse of confidential or personal information could disrupt our operations, damage our reputation, and expose us to claims from customers, financial institutions, regulators, payment card associations, employees and other persons, any of which could have an adverse effect on our business, financial condition and results of operations.
 
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.  In addition, companies have increasingly been subject to employment related class action litigation, and we have experienced an increase in “wage and hour” class action lawsuits.  We expect that these trends will continue to affect us.
 
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 typically 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.


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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 2011:
 
Fiscal Period
 
Total Number of
Shares
Purchased(1)
 
Average Price
Paid per Share
(2)
 
Total Number of
Shares Purchased 
as Part of 2007
Publicly
Announced Plans
or Programs (3)
 
Total Number of
Shares Purchased 
as Part of 2011
Publicly
Announced Plans
or Programs (4)
 
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans or
Programs (3)(4)
July 31, 2011 through August 27, 2011
 
3,270,000

 
$
13.93

 
3,270,000

 
—

 
$
249,250,000

August 28, 2011 through October 1, 2011
 
4,300,255

 
14.09

 
2,190,000

 
2,068,000

 
1,470,909,000

October 2, 2011 through October 29, 2011
 
2,704,070

 
14.37

 
—

 
2,704,000

 
1,432,057,000

Total for the third quarter of 2011
 
10,274,325

 
$
14.11

 
5,460,000

 
4,772,000

 
$
1,432,057,000

____________________________________________
(1)
Includes a total of 42,325 shares of our common stock withheld during the third quarter of our 2011 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 program 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 and authorized the repurchase of up to $1.5 billion of common stock (the "2007 Repurchase Plan").  Under the 2007 Repurchase Plan, a total of $1,281,644,000 was used to repurchase shares and $218,356,000 was remaining in September 2011 when the plan was terminated and replaced by a new program described in note 4 below.

(4)
On September 13, 2011, we announced that we were starting a new repurchase program approved by the Board of Directors in September 2011. This program replaced the 2007 Repurchase Plan. Under the new repurchase program, we were authorized to repurchase up to $1.5 billion of common stock in both open market and privately negotiated transactions. 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 14, 2011
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
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 29, 2011 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 in detail.
 
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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