SPLS 10-Q 042812
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: April 28, 2012
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 689,174,382 shares of common stock outstanding as of May 14, 2012.
STAPLES, INC. AND SUBSIDIARIES
FORM 10-Q
April 28, 2012
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) |
| | | | | | | |
| April 28, 2012 | | January 28, 2012 |
ASSETS | |
| | |
|
Current assets: | |
| | |
|
Cash and cash equivalents | $ | 1,204,521 |
| | $ | 1,264,149 |
|
Receivables, net | 1,953,502 |
| | 2,033,680 |
|
Merchandise inventories, net | 2,502,834 |
| | 2,431,845 |
|
Deferred income tax assets | 301,506 |
| | 305,611 |
|
Prepaid expenses and other current assets | 283,447 |
| | 255,535 |
|
Total current assets | 6,245,810 |
| | 6,290,820 |
|
| | | |
Property and equipment: | |
| | |
|
Land and buildings | 1,040,217 |
| | 1,034,983 |
|
Leasehold improvements | 1,329,935 |
| | 1,330,373 |
|
Equipment | 2,491,950 |
| | 2,462,351 |
|
Furniture and fixtures | 1,089,155 |
| | 1,084,358 |
|
Total property and equipment | 5,951,257 |
| | 5,912,065 |
|
Less: accumulated depreciation and amortization | 3,920,260 |
| | 3,831,704 |
|
Net property and equipment | 2,030,997 |
| | 2,080,361 |
|
| | | |
Intangible assets, net of accumulated amortization | 439,695 |
| | 449,781 |
|
Goodwill | 3,996,308 |
| | 3,982,130 |
|
Other assets | 645,458 |
| | 627,530 |
|
Total assets | $ | 13,358,268 |
| | $ | 13,430,622 |
|
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | |
|
Current liabilities: | |
| | |
|
Accounts payable | $ | 2,194,416 |
| | $ | 2,220,414 |
|
Accrued expenses and other current liabilities | 1,274,712 |
| | 1,414,721 |
|
Debt maturing within one year | 438,115 |
| | 439,143 |
|
Total current liabilities | 3,907,243 |
| | 4,074,278 |
|
| | | |
Long-term debt | 1,595,932 |
| | 1,599,037 |
|
Other long-term obligations | 759,822 |
| | 735,094 |
|
| | | |
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 922,699,482 shares at April 28, 2012 and 922,126,579 shares at January 28, 2012 | 553 |
| | 553 |
|
Additional paid-in capital | 4,585,976 |
| | 4,551,299 |
|
Accumulated other comprehensive loss | (297,801 | ) | | (319,743 | ) |
Retained earnings | 7,311,324 |
| | 7,199,060 |
|
Less: Treasury stock at cost, 232,544,821 shares at April 28, 2012 and 226,383,032 shares at January 28, 2012 | (4,511,943 | ) | | (4,416,018 | ) |
Total Staples, Inc. stockholders’ equity | 7,088,109 |
| | 7,015,151 |
|
Noncontrolling interests | 7,162 |
| | 7,062 |
|
Total stockholders’ equity | 7,095,271 |
| | 7,022,213 |
|
Total liabilities and stockholders’ equity | $ | 13,358,268 |
| | $ | 13,430,622 |
|
See notes to condensed consolidated financial statements.
STAPLES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
|
| | | | | | | |
| 13 Weeks Ended |
| April 28, 2012 | | April 30, 2011 |
Sales | $ | 6,104,825 |
| | $ | 6,172,938 |
|
Cost of goods sold and occupancy costs | 4,495,110 |
| | 4,536,545 |
|
Gross profit | 1,609,715 |
| | 1,636,393 |
|
| | | |
Operating expenses: | |
| | |
|
Selling, general and administrative | 1,276,401 |
| | 1,270,774 |
|
Amortization of intangibles | 15,258 |
| | 17,292 |
|
Total operating expenses | 1,291,659 |
| | 1,288,066 |
|
| | | |
Operating income | 318,056 |
| | 348,327 |
|
| | | |
Other (expense) income: | |
| | |
|
Interest income | 1,651 |
| | 2,459 |
|
Interest expense | (42,304 | ) | | (48,793 | ) |
Other expense | (346 | ) | | (188 | ) |
Consolidated income before income taxes | 277,057 |
| | 301,805 |
|
Income tax expense | 90,044 |
| | 104,123 |
|
Consolidated net income | 187,013 |
| | 197,682 |
|
Loss attributed to the noncontrolling interests | (46 | ) | | (563 | ) |
Net income attributed to Staples, Inc. | $ | 187,059 |
| | $ | 198,245 |
|
| | | |
Earnings Per Share: | |
| | |
|
Basic earnings per common share | $ | 0.27 |
| | $ | 0.28 |
|
Diluted earnings per common share | $ | 0.27 |
| | $ | 0.28 |
|
| | | |
Dividends declared per common share | $ | 0.11 |
| | $ | 0.10 |
|
| | | |
Consolidated comprehensive income | $ | 208,955 |
| | $ | 502,053 |
|
Comprehensive income (loss) attributed to noncontrolling interests | 101 |
| | (447 | ) |
Comprehensive income attributed to Staples, Inc. | $ | 208,854 |
| | $ | 502,500 |
|
See notes to condensed consolidated financial statements.
STAPLES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
(Unaudited)
|
| | | | | | | |
| 13 Weeks Ended |
| April 28, 2012 | | April 30, 2011 |
Operating Activities: | |
| | |
|
Consolidated net income, including loss from the noncontrolling interests | $ | 187,013 |
| | $ | 197,682 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 116,530 |
| | 121,843 |
|
Stock-based compensation | 31,088 |
| | 35,396 |
|
Excess tax benefits from stock-based compensation arrangements | (179 | ) | | (387 | ) |
Deferred income tax expense | 10,689 |
| | 28,079 |
|
Other | 1,916 |
| | 4,995 |
|
Changes in assets and liabilities: | | | |
Decrease in receivables | 81,112 |
| | 48,929 |
|
Increase in merchandise inventories | (64,498 | ) | | (148,738 | ) |
(Increase) decrease in prepaid expenses and other assets | (51,384 | ) | | 31,060 |
|
(Decrease) increase in accounts payable | (30,234 | ) | | 20,861 |
|
Decrease in accrued expenses and other liabilities | (142,755 | ) | | (133,519 | ) |
Increase in other long-term obligations | 7,559 |
| | 4,065 |
|
Net cash provided by operating activities | 146,857 |
| | 210,266 |
|
| | | |
Investing Activities: | |
| | |
|
Acquisition of property and equipment | (52,077 | ) | | (62,617 | ) |
Net cash used in investing activities | (52,077 | ) | | (62,617 | ) |
| | | |
Financing Activities: | |
| | |
|
Proceeds from the exercise of stock options | 4,501 |
| | 4,836 |
|
Proceeds from borrowings | 25,153 |
| | 39,799 |
|
Payments on borrowings | (19,836 | ) | | (536,294 | ) |
Purchase of noncontrolling interest | (688 | ) | | — |
|
Cash dividends paid | (74,749 | ) | | (70,936 | ) |
Excess tax benefits from stock-based compensation arrangements | 179 |
| | 387 |
|
Purchase of treasury stock, net | (95,925 | ) | | (148,477 | ) |
Net cash used in financing activities | (161,365 | ) | | (710,685 | ) |
| | | |
Effect of exchange rate changes on cash and cash equivalents | 6,957 |
| | 34,294 |
|
| | | |
Net decrease in cash and cash equivalents | (59,628 | ) | | (528,742 | ) |
Cash and cash equivalents at beginning of period | 1,264,149 |
| | 1,461,257 |
|
Cash and cash equivalents at end of period | $ | 1,204,521 |
| | $ | 932,515 |
|
See notes to condensed consolidated financial statements.
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note A — Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements include the accounts of Staples, Inc. and its subsidiaries (“Staples” or “the Company”). All intercompany accounts and transactions have been eliminated in consolidation. The Company accounts for investments in businesses in which it owns between 20% and 50% of the voting interest using the equity method, if the Company has the ability to exercise significant influence over the business. These financial statements are for the period covering the thirteen weeks ended April 28, 2012 (also referred to as the “first quarter of 2012") and the period covering the thirteen weeks ended April 30, 2011 (also referred to as the “first quarter of 2011”).
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 28, 2012. 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 — Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
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 changes were effective prospectively for interim and annual periods beginning after December 15, 2011. The Company adopted this pronouncement on January 29, 2012. The adoption of this guidance did not have a significant impact on the Company's condensed consolidated financial statements.
In June 2011, a pronouncement was issued that amended the guidance relating to the presentation of comprehensive income and its components. The pronouncement eliminates the option to present the components of other comprehensive income as part of the statement of equity and requires an entity to present the total of 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. The Company adopted this pronouncement on January 29, 2012. The adoption of this guidance required changes in presentation only and therefore did not have a significant impact on the Company's condensed consolidated financial statements.
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 adopted this pronouncement on January 29, 2012. As the Company has not yet performed its annual goodwill impairment analysis, which is performed in the fourth quarter, the potential impact of the adoption of this guidance is currently being evaluated. However, it is not expected to have a significant impact on the Company's condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
In December 2011, a pronouncement was issued that amended the guidance related to the disclosure of recognized financial instruments and derivative instruments that are either offset on the balance sheet or subject to an enforceable master netting arrangement or similar agreement. The amended provisions are effective for fiscal years beginning on or after January 1, 2013, and are required to be applied retrospectively for all prior periods presented. As this pronouncement relates to disclosure only, the adoption of this amendment is not expected to have a material effect on the Company's condensed consolidated financial statements.
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
Note C — Acquisition Reserves
In connection with the Company’s acquisition of Corporate Express N.V. ("Corporate Express"), acquisition reserves of $181.0 million were originally established. The activity related to this reserve for fiscal 2011 and 2012 is as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Balance as of January 29, 2011 | | Utilization | | Foreign Exchange Fluctuations | | Balance as of April 30, 2011 |
Transaction costs | $ | 543 |
| | $ | (119 | ) | | $ | — |
| | $ | 424 |
|
Severance | 11,793 |
| | (2,055 | ) | | 607 |
| | 10,345 |
|
Facility closures | 20,287 |
| | (928 | ) | | 65 |
| | 19,424 |
|
Other | 9,344 |
| | (313 | ) | | 482 |
| | 9,513 |
|
Total | $ | 41,967 |
| | $ | (3,415 | ) | | $ | 1,154 |
| | $ | 39,706 |
|
|
| | | | | | | | | | | | | | | |
| Balance as of January 28, 2012 | | Utilization | | Foreign Exchange Fluctuations | | Balance as of April 28, 2012 |
Severance | $ | 1,691 |
| | $ | (54 | ) | | $ | 12 |
| | $ | 1,649 |
|
Facility closures | 15,761 |
| | (534 | ) | | 2 |
| | 15,229 |
|
Other | 6,340 |
| | (32 | ) | | 29 |
| | 6,337 |
|
Total | $ | 23,792 |
| | $ | (620 | ) | | $ | 43 |
| | $ | 23,215 |
|
The majority of the reserves have been substantially utilized with the exception of certain payments related to facility closures that will be made over the remaining lease terms and certain other obligations related to the integration of the business.
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 termination of these hedges resulted in gains which are being amortized over the remaining terms of the respective notes, the unamortized portions of which are reflected in the carrying values of the notes.
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 April 28, 2012 and January 28, 2012 (in thousands):
|
| | | | | | | | | | | | | | | |
| April 28, 2012 | | January 28, 2012 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
October 2012 Notes | $ | 329,761 |
| | $ | 333,743 |
| | $ | 332,617 |
| | $ | 339,372 |
|
January 2014 Notes | 1,521,812 |
| | 1,701,530 |
| | 1,525,003 |
| | 1,721,490 |
|
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
The following table shows the Company’s assets and liabilities as of April 28, 2012 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 | $ | 471,359 |
| | $ | — |
| | $ | — |
|
Liabilities |
|
| |
|
| |
|
|
Derivative liabilities | — |
| | 52,029 |
| | — |
|
The fair value of the Company’s money market funds are based on quotes received from third-party banks. The fair value of the Company’s derivative liabilities are based on quotes received from third-party banks and represent the estimated amount the Company would 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 and Credit Agreements
The Company has a credit agreement with Bank of America, N.A. , as Administrative Agent and other lending institutions named therein (the "November 2014 Revolving Credit Facility"). The November 2014 Revolving Credit Facility provides for a maximum borrowing of $1.0 billion, which pursuant to an accordion feature may be increased to $1.5 billion upon the Company's request and the agreement of the lenders participating in the increase. The Company also has a commercial paper program ("Commercial Paper Program") that allows the Company to issue up to $1.0 billion of unsecured commercial paper notes from time to time. The November 2014 Revolving Credit Facility serves as a backstop to the Commercial Paper Program. At April 28, 2012, there were no outstanding borrowings under either the November 2014 Revolving Credit Facility or the Commercial Paper Program, and the Company did not borrow under either during the first quarter of 2012.
The Company also has various other lines of credit under which we may borrow a maximum of $309.0 million. At April 28, 2012, the Company had $174.1 million of borrowings outstanding under these credit agreements.
The major components of the Company’s outstanding debt as of April 28, 2012 and January 28, 2012 are as follows (in thousands):
|
| | | | | | | |
| April 28, 2012 | | January 28, 2012 |
October 2012 Notes | $ | 329,761 |
| | $ | 332,617 |
|
January 2014 Notes | 1,521,812 |
| | 1,525,003 |
|
Lines of credit | 174,102 |
| | 170,745 |
|
Capital lease obligations and other notes payable | 8,372 |
| | 9,815 |
|
| 2,034,047 |
| | 2,038,180 |
|
Less: Current portion | (438,115 | ) | | (439,143 | ) |
Net long-term debt | $ | 1,595,932 |
| | $ | 1,599,037 |
|
Note F — Derivative Instruments and Hedging Activities
Staples uses interest rate swaps, foreign currency swaps and foreign currency forward 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 the underlying exposures related to 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
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
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 for an aggregate notional amount of $325 million. These swaps were designated as a fair value hedge and designed to convert the October 2012 Notes into a variable rate obligation. In September 2011, the Company terminated the $325 million interest rate swaps, realizing a gain of $12.4 million, which is being amortized over the remaining term of the October 2012 Notes. No amounts were included in the condensed consolidated statement of comprehensive income in the first quarter of 2011 related to ineffectiveness associated with this fair value hedge.
In March 2010, Staples entered into interest rate swaps for an aggregate notional amount of $750 million. These swaps were designated as a fair value hedge and 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, realizing a gain of $30.3 million, which is being amortized over the remaining term of the January 2014 Notes. No amounts were included in the condensed consolidated statement of comprehensive income in the first quarter of 2011 related to ineffectiveness associated with this fair value hedge.
Foreign Currency Swaps and Foreign Currency Forwards: In August 2007, the Company entered into a $300 million foreign currency swap that has been designated as a foreign currency hedge on Staples’ net investment in Canadian dollar denominated subsidiaries. Under the original terms of the agreement, Staples, upon maturity of the agreement in October 2012, was entitled to receive $300 million and was obligated to pay 316.2 million Canadian dollars. Staples was also entitled to receive quarterly interest payments on $300 million at a fixed rate of 5.28%, and obligated to make quarterly interest payments on 316.2 million Canadian dollars at a fixed rate of 5.17%. In the first quarter of 2012, the Company terminated $50 million of this swap, realizing a loss of approximately $3.0 million which has been recorded as a foreign currency translation loss within other comprehensive income. The $250 million remaining notional amount under the swap agreement has been re-designated as a foreign currency hedge on Staples’ net investment in Canadian dollar denominated subsidiaries. At April 28, 2012 and January 28, 2012, the currency swap had an aggregate fair value loss of $16.6 million and $14.4 million, respectively, which was included in other long-term obligations. No amounts were included in the condensed consolidated statement of comprehensive income for the first quarter of 2012 or 2011 related to ineffectiveness associated with this net investment hedge.
In December 2011, the Company entered into a foreign currency forward designed to convert a series of intercompany loans denominated in Canadian dollars into a fixed U.S. dollar amount. The loans total 750 million Canadian dollars in the aggregate and are scheduled to mature at various dates between October 2012 and October 2013. Staples, upon full maturity of the agreements, will collect $720 million U.S. dollars. The forward agreements are being accounted for as a fair value hedge. At April 28, 2012 and January 28, 2012, the foreign currency forward had an aggregate fair value loss of $35.4 million and $22.0 million, respectively, which was included in other long-term obligations. The effective portion of this hedge is included as a component of other expense. No amounts were included in the condensed consolidated statement of comprehensive income for the first quarter of 2012 related to ineffectiveness associated with this fair value hedge.
Note G — 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.
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
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 first quarter of 2012 and 2011 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 comprehensive income for the first quarter of 2012 and 2011 related to the plans (in thousands):
|
| | | | | | | | | | | | | | | |
| 13 Weeks Ended April 28, 2012 |
| Pension Plans | | Other Post-Retirement Benefit Plan Total |
| U.S. Plans | | International Plans | | Total | |
Service cost | $ | — |
| | $ | 2,648 |
| | $ | 2,648 |
| | $ | 460 |
|
Interest cost | 443 |
| | 9,668 |
| | 10,111 |
| | 385 |
|
Expected return on plan assets | (438 | ) | | (12,968 | ) | | (13,406 | ) | | — |
|
Amortization of unrecognized losses and prior service costs | 83 |
| | 1,345 |
| | 1,428 |
| | 429 |
|
Total cost | $ | 88 |
| | $ | 693 |
| | $ | 781 |
| | $ | 1,274 |
|
|
| | | | | | | | | | | | | | | |
| 13 Weeks Ended April 30, 2011 |
| Pension Plans | | Other Post-Retirement Benefit Plan Total |
| U.S. Plans | | International Plans | | Total | |
Service cost | $ | — |
| | $ | 2,403 |
| | $ | 2,403 |
| | $ | 454 |
|
Interest cost | 466 |
| | 10,179 |
| | 10,645 |
| | 380 |
|
Expected return on plan assets | (422 | ) | | (13,923 | ) | | (14,345 | ) | | — |
|
Amortization of unrecognized losses and prior service costs | — |
| | 352 |
| | 352 |
| | 441 |
|
Total cost (benefit) | $ | 44 |
| | $ | (989 | ) | | $ | (945 | ) | | $ | 1,275 |
|
Cash contributions made to the pension plans during the first quarter of 2012 and 2011 are as follows (in thousands):
|
| | | | | | | |
| 13 Weeks Ended |
| April 28, 2012 | | April 30, 2011 |
U.S. Pension Plans | $ | 254 |
| | $ | 194 |
|
International Pension Plans | 7,561 |
| | 1,905 |
|
Total | $ | 7,815 |
| | $ | 2,099 |
|
The Company expects to make additional cash contributions of $1.1 million and $6.0 million to the U.S. Pension Plans and International Pension Plans, respectively, during the remainder of fiscal year 2012. No cash contributions are expected to be made during 2012 to the Company’s other post-retirement benefit plans.
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
Note H — Stockholders’ Equity
The following table reflects the changes in stockholders’ equity attributed to Staples, Inc. and its noncontrolling interests for the first quarter of 2012 and 2011 (in thousands):
|
| | | | | | | | | | | |
| Attributable to Staples, Inc. | | Attributable to Noncontrolling Interest | | Total |
Stockholders' equity at January 28, 2012 | $ | 7,015,151 |
| | $ | 7,062 |
| | $ | 7,022,213 |
|
Net income | 187,059 |
| | (46 | ) | | 187,013 |
|
Other comprehensive income | 21,795 |
| | 147 |
| | 21,942 |
|
Issuance of common stock for stock options exercised | 4,501 |
| | — |
| | 4,501 |
|
Stock-based compensation | 31,088 |
| | — |
| | 31,088 |
|
Purchase of noncontrolling interest | (688 | ) | | — |
| | (688 | ) |
Cash dividends paid | (74,749 | ) | | — |
| | (74,749 | ) |
Excess tax benefits from stock-based compensation arrangements | 179 |
| | — |
| | 179 |
|
Purchase of treasury stock, net | (95,925 | ) | | — |
| | (95,925 | ) |
Other | (302 | ) | | (1 | ) | | (303 | ) |
Stockholders' equity at April 28, 2012 | $ | 7,088,109 |
| | $ | 7,162 |
| | $ | 7,095,271 |
|
|
| | | | | | | | | | | |
| Attributable to Staples, Inc. | | Attributable to Noncontrolling Interest | | Total |
Stockholders' equity at January 29, 2011 | $ | 6,943,710 |
| | $ | 7,471 |
| | $ | 6,951,181 |
|
Net income | 198,245 |
| | (563 | ) | | 197,682 |
|
Other comprehensive income | 304,255 |
| | 116 |
| | 304,371 |
|
Issuance of common stock for stock options exercised | 4,836 |
| | — |
| | 4,836 |
|
Stock-based compensation | 35,396 |
| | — |
| | 35,396 |
|
Cash dividends paid | (70,936 | ) | | — |
| | (70,936 | ) |
Excess tax benefits from stock-based compensation arrangements | 387 |
| | — |
| | 387 |
|
Purchase of treasury stock, net | (148,477 | ) | | — |
| | (148,477 | ) |
Other | (401 | ) | | — |
| | (401 | ) |
Stockholders' equity at April 30, 2011 | $ | 7,267,015 |
| | $ | 7,024 |
| | $ | 7,274,039 |
|
During the first quarter of 2012, the Company issued 773,081 shares pursuant to the exercise of stock options and 33,624 shares upon the vesting of restricted stock units. Also, the Company had 648,210 restricted shares released from restrictions in the first quarter of 2012 upon the satisfaction of vesting conditions.
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
Note I — Computation of Earnings Per Common Share
The computation of basic and diluted earnings per share for the first quarter of 2012 and 2011 is as follows (in thousands, except per share data):
|
| | | | | | | |
| 13 Weeks Ended |
| April 28, 2012 | | April 30, 2011 |
Numerator: | |
| | |
|
Net income attributed to Staples, Inc. | $ | 187,059 |
| | $ | 198,245 |
|
Denominator: |
|
| |
|
|
Weighted-average common shares outstanding | 680,246 |
| | 706,318 |
|
Effect of dilutive securities: |
|
| |
|
|
Employee stock options, restricted shares and performance shares | 9,191 |
| | 11,085 |
|
Weighted-average common shares outstanding assuming dilution | 689,437 |
| | 717,403 |
|
|
|
| |
|
|
Basic earnings per common share | $ | 0.27 |
| | $ | 0.28 |
|
Diluted earnings per common share | $ | 0.27 |
| | $ | 0.28 |
|
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 39.8 million and 20.6 million shares of Staples common stock were excluded from the calculation of diluted earnings per share at April 28, 2012 and April 30, 2011, respectively.
Note J — Segment Reporting
Staples has three reportable segments: North American Delivery, North American Retail and International Operations. Staples’ North American Delivery segment consists of the U.S. and Canadian 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 stock-based compensation, interest and other expense, non-recurring items and the impact of changes in accounting principles (“business unit income”). Intersegment sales and transfers are recorded at Staples’ cost; therefore, there is no intercompany profit or loss recognized on these transactions.
Staples’ North American Delivery and North American Retail segments are managed separately because the way they market products is different, the classes of customers they service may be different and the distribution methods used to deliver products to customers are different. The International Operations are considered a separate reportable segment because of the significant differences in the operating environment from the North American operations.
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
The following is a summary of sales and business unit income by reportable segment and a reconciliation of business unit income to consolidated income before income taxes for the first quarter of 2012 and 2011 (in thousands):
|
| | | | | | | |
| 13 Weeks Ended |
| April 28, 2012 | | April 30, 2011 |
| Sales |
North American Delivery | $ | 2,555,071 |
| | $ | 2,511,646 |
|
North American Retail | 2,323,831 |
| | 2,328,085 |
|
International Operations | 1,225,923 |
| | 1,333,207 |
|
Total segment sales | $ | 6,104,825 |
| | $ | 6,172,938 |
|
| | | |
| Business Unit Income (Loss) |
North American Delivery | $ | 200,959 |
| | $ | 196,850 |
|
North American Retail | 166,955 |
| | 177,349 |
|
International Operations | (18,770 | ) | | 9,524 |
|
Business unit income | 349,144 |
| | 383,723 |
|
Stock-based compensation | (31,088 | ) | | (35,396 | ) |
Interest and other expense, net | (40,999 | ) | | (46,522 | ) |
Consolidated income before income taxes | $ | 277,057 |
| | $ | 301,805 |
|
Note K — 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 April 28, 2012 and January 28, 2012 and for the thirteen weeks ended April 28, 2012 and April 30, 2011. 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.
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
Condensed Consolidating Balance Sheet
As of April 28, 2012
(in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| Staples, Inc. (Parent Co.) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
Cash and cash equivalents | $ | 322,896 |
| | $ | 45,901 |
| | $ | 835,724 |
| | $ | — |
| | $ | 1,204,521 |
|
Merchandise inventories, net | — |
| | 1,461,041 |
| | 1,041,793 |
| | — |
| | 2,502,834 |
|
Other current assets | 544,092 |
| | 813,543 |
| | 1,180,820 |
| | — |
| | 2,538,455 |
|
Total current assets | 866,988 |
| | 2,320,485 |
| | 3,058,337 |
| | — |
| | 6,245,810 |
|
Net property, equipment and other assets | 666,580 |
| | 1,138,242 |
| | 1,311,328 |
| | — |
| | 3,116,150 |
|
Goodwill | 1,646,265 |
| | 156,303 |
| | 2,193,740 |
| | — |
| | 3,996,308 |
|
Investment in affiliates and intercompany, net | 5,963,120 |
| | 7,201,826 |
| | 11,033,513 |
| | (24,198,459 | ) | | — |
|
Total assets | $ | 9,142,953 |
| | $ | 10,816,856 |
| | $ | 17,596,918 |
| | $ | (24,198,459 | ) | | $ | 13,358,268 |
|
Total current liabilities | $ | 312,560 |
| | $ | 2,050,271 |
| | $ | 1,544,412 |
| | $ | — |
| | $ | 3,907,243 |
|
Total long-term liabilities | 1,735,122 |
| | 212,560 |
| | 408,072 |
| | — |
| | 2,355,754 |
|
Total stockholders' equity | 7,095,271 |
| | 8,554,025 |
| | 15,644,434 |
| | (24,198,459 | ) | | 7,095,271 |
|
Total liabilities and stockholders' equity | $ | 9,142,953 |
| | $ | 10,816,856 |
| | $ | 17,596,918 |
| | $ | (24,198,459 | ) | | $ | 13,358,268 |
|
Condensed Consolidating Balance Sheet
As of January 28, 2012
(in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| Staples, Inc. (Parent Co.) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
Cash and cash equivalents | $ | 385,279 |
| | $ | 43,323 |
| | $ | 835,547 |
| | $ | — |
| | $ | 1,264,149 |
|
Merchandise inventories, net | — |
| | 1,437,074 |
| | 994,771 |
| | — |
| | 2,431,845 |
|
Other current assets | 68,608 |
| | 1,188,378 |
| | 1,337,840 |
| | — |
| | 2,594,826 |
|
Total current assets | 453,887 |
| | 2,668,775 |
| | 3,168,158 |
| | — |
| | 6,290,820 |
|
Net property, equipment and other assets | 671,787 |
| | 1,165,840 |
| | 1,320,045 |
| | — |
| | 3,157,672 |
|
Goodwill | 1,644,728 |
| | 156,303 |
| | 2,181,099 |
| | — |
| | 3,982,130 |
|
Investment in affiliates and intercompany, net | 5,951,426 |
| | 6,935,956 |
| | 10,988,680 |
| | (23,876,062 | ) | | — |
|
Total assets | $ | 8,721,828 |
| | $ | 10,926,874 |
| | $ | 17,657,982 |
| | $ | (23,876,062 | ) | | $ | 13,430,622 |
|
Total current liabilities | $ | (13,544 | ) | | $ | 2,314,411 |
| | $ | 1,773,411 |
| | $ | — |
| | $ | 4,074,278 |
|
Total long-term liabilities | 1,713,159 |
| | 195,852 |
| | 425,120 |
| | — |
| | 2,334,131 |
|
Total stockholders' equity | 7,022,213 |
| | 8,416,611 |
| | 15,459,451 |
| | (23,876,062 | ) | | 7,022,213 |
|
Total liabilities and stockholders' equity | $ | 8,721,828 |
| | $ | 10,926,874 |
| | $ | 17,657,982 |
| | $ | (23,876,062 | ) | | $ | 13,430,622 |
|
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
Condensed Consolidating Statement of Comprehensive Income
For the thirteen weeks ended April 28, 2012
(in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| Staples, Inc. (Parent Co.) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
Sales | $ | — |
| | $ | 3,789,474 |
| | $ | 2,315,351 |
| | $ | — |
| | $ | 6,104,825 |
|
Cost of goods sold and occupancy costs | 2,508 |
| | 2,826,764 |
| | 1,665,838 |
| | — |
| | 4,495,110 |
|
Gross (loss) profit | (2,508 | ) | | 962,710 |
| | 649,513 |
| | — |
| | 1,609,715 |
|
Operating and other (income) expenses | (189,567 | ) | | 756,544 |
| | 561,680 |
| | 204,001 |
| | 1,332,658 |
|
Consolidated income before income taxes | 187,059 |
| | 206,166 |
| | 87,833 |
| | (204,001 | ) | | 277,057 |
|
Income tax expense | — |
| | 86,972 |
| | 3,072 |
| | — |
| | 90,044 |
|
Consolidated net income | 187,059 |
| | 119,194 |
| | 84,761 |
| | (204,001 | ) | | 187,013 |
|
Loss attributed to the noncontrolling interests | — |
| | — |
| | (46 | ) | | — |
| | (46 | ) |
Net income attributed to Staples, Inc. | $ | 187,059 |
| | $ | 119,194 |
| | $ | 84,807 |
| | $ | (204,001 | ) | | $ | 187,059 |
|
| | | | | | | | | |
Consolidated comprehensive income | $ | 208,854 |
| | $ | 119,194 |
| | $ | 109,495 |
| | $ | (228,588 | ) | | $ | 208,955 |
|
Comprehensive income attributed to noncontrolling interests | — |
| | — |
| | 101 |
| | — |
| | 101 |
|
Comprehensive income attributed to Staples, Inc. | $ | 208,854 |
| | $ | 119,194 |
| | $ | 109,394 |
| | $ | (228,588 | ) | | $ | 208,854 |
|
Condensed Consolidating Statement of Comprehensive Income
For the thirteen weeks ended April 30, 2011
(in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| Staples, Inc. (Parent Co.) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
Sales | $ | — |
| | $ | 3,758,648 |
| | $ | 2,414,290 |
| |
|
| | $ | 6,172,938 |
|
Cost of goods sold and occupancy costs | 2,514 |
| | 2,798,049 |
| | 1,735,982 |
| |
|
| | 4,536,545 |
|
Gross (loss) profit | (2,514 | ) | | 960,599 |
| | 678,308 |
| | — |
| | 1,636,393 |
|
Operating and other (income) expenses | (200,759 | ) | | 749,360 |
| | 554,651 |
| | 231,336 |
| | 1,334,588 |
|
Consolidated income before income taxes | 198,245 |
| | 211,239 |
| | 123,657 |
| | (231,336 | ) | | 301,805 |
|
Income tax expense | — |
| | 91,209 |
| | 12,914 |
| | — |
| | 104,123 |
|
Consolidated net income | 198,245 |
| | 120,030 |
| | 110,743 |
| | (231,336 | ) | | 197,682 |
|
Loss attributed to the noncontrolling interests | — |
| | — |
| | (563 | ) | | — |
| | (563 | ) |
Net income attributed to Staples, Inc. | $ | 198,245 |
| | $ | 120,030 |
| | $ | 111,306 |
| | $ | (231,336 | ) | | $ | 198,245 |
|
| | | | | | | | | |
Consolidated comprehensive income | $ | 502,500 |
| | $ | 120,030 |
| | $ | 477,005 |
| | $ | (597,482 | ) | | $ | 502,053 |
|
Comprehensive loss attributed to noncontrolling interests | — |
| | — |
| | (447 | ) | | — |
| | (447 | ) |
Comprehensive income attributed to Staples, Inc. | $ | 502,500 |
| | $ | 120,030 |
| | $ | 477,452 |
| | $ | (597,482 | ) | | $ | 502,500 |
|
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
Condensed Consolidating Statement of Cash Flows
For the thirteen weeks ended April 28, 2012
(in thousands)
|
| | | | | | | | | | | | | | | |
| Staples, Inc. (Parent Co.) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidated |
Net cash provided by operating activities | $ | 114,231 |
| | $ | 30,791 |
| | $ | 1,835 |
| | $ | 146,857 |
|
Investing Activities: | |
| | |
| | |
| | |
|
Acquisition of property and equipment | (9,042 | ) | | (28,295 | ) | | (14,740 | ) | | (52,077 | ) |
Cash used in investing activities | (9,042 | ) | | (28,295 | ) | | (14,740 | ) | | (52,077 | ) |
Financing Activities: | |
| | |
| | |
| | |
|
Proceeds from the exercise of stock options | 4,501 |
| | — |
| | — |
| | 4,501 |
|
Proceeds from borrowings | 7,284 |
| | — |
| | 17,869 |
| | 25,153 |
|
Payments on borrowings | (8,727 | ) | | — |
| | (11,109 | ) | | (19,836 | ) |
Purchase of noncontrolling interest | — |
| | — |
| | (688 | ) | | (688 | ) |
Cash dividends paid | (74,749 | ) | | — |
| | — |
| | (74,749 | ) |
Excess tax benefits from stock-based compensation arrangements | 44 |
| | 82 |
| | 53 |
| | 179 |
|
Purchase of treasury stock, net | (95,925 | ) | | — |
| | — |
| | (95,925 | ) |
Cash (used in) provided by financing activities | (167,572 | ) | | 82 |
| | 6,125 |
| | (161,365 | ) |
Effect of exchange rate changes on cash and cash equivalents | — |
| | — |
| | 6,957 |
| | 6,957 |
|
Net (decrease) increase in cash and cash equivalents | (62,383 | ) | | 2,578 |
| | 177 |
| | (59,628 | ) |
Cash and cash equivalents at beginning of period | 385,279 |
| | 43,323 |
| | 835,547 |
| | 1,264,149 |
|
Cash and cash equivalents at end of period | $ | 322,896 |
| | $ | 45,901 |
| | $ | 835,724 |
| | $ | 1,204,521 |
|
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
Condensed Consolidating Statement of Cash Flows
For the thirteen weeks ended April 30, 2011
(in thousands)
|
| | | | | | | | | | | | | | | |
| Staples, Inc. (Parent Co.) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Consolidated |
Net cash provided by (used in) operating activities | $ | 452,110 |
| | $ | 37,177 |
| | $ | (279,021 | ) | | $ | 210,266 |
|
Investing Activities: | |
| | |
| | |
| | |
|
Acquisition of property and equipment | (7,113 | ) | | (30,695 | ) | | (24,809 | ) | | (62,617 | ) |
Cash used in investing activities | (7,113 | ) | | (30,695 | ) | | (24,809 | ) | | (62,617 | ) |
Financing activities: | |
| | |
| | |
| |
|
|
Proceeds from the exercise of stock options | 4,836 |
| | — |
| | — |
| | 4,836 |
|
Proceeds from borrowings | 12,887 |
| | — |
| | 26,912 |
| | 39,799 |
|
Payments on borrowings | (515,433 | ) | | — |
| | (20,861 | ) | | (536,294 | ) |
Cash dividends paid | (70,936 | ) | | — |
| | — |
| | (70,936 | ) |
Excess tax benefits from stock-based compensation arrangements | 28 |
| | 272 |
| | 87 |
| | 387 |
|
Purchase of treasury stock, net | (148,477 | ) | | — |
| | — |
| | (148,477 | ) |
Cash (used in) provided by financing activities | (717,095 | ) | | 272 |
| | 6,138 |
| | (710,685 | ) |
Effect of exchange rate changes on cash and cash equivalents | — |
| | — |
| | 34,294 |
| | 34,294 |
|
Net (decrease) increase in cash and cash equivalents | (272,098 | ) | | 6,754 |
| | (263,398 | ) | | (528,742 | ) |
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 | $ | 134,723 |
| | $ | 45,052 |
| | $ | 752,740 |
| | $ | 932,515 |
|
Note L — Commitments and Contingencies
Staples had 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 €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 €30 million to Corely/Lyreco. Corely/Lyreco had been seeking through arbitration to have Staples gross up this payment to cover the corporate income taxes it incurred as a result of the payment. On February 29, 2012, after the Company had filed its Annual Report on Form 10-K for the year ended January 28, 2012 with the Securities and Exchange Commission, Staples was notified that the arbitration tribunal had issued its final ruling ordering Staples to pay Corely/Lyreco a portion of the €12.0 million claim that was previously disclosed in the Annual Report. Staples paid the amount on March 2, 2012.
In addition, 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.
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. Staples, Inc. and its subsidiaries ("we", "our" or "us") 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
Major contributors to our first quarter of 2012 results, as compared to the results for the first quarter of 2011, are reviewed in detail in the Consolidated Performance and Segment Performance discussions and are summarized below:
| |
• | On a consolidated basis, we generated $6.1 billion in sales, a decline of 1.1%; |
| |
• | North American Delivery’s sales increased 1.7%, and business unit income rate increased to 7.9% from 7.8%; |
| |
• | North American Retail’s sales decreased 0.2%, comparable store sales were flat and business unit income rate decreased to 7.2% from 7.6%; |
| |
• | International Operations’ sales decreased 8.0%, including the unfavorable impact of foreign exchange rates, and business unit (loss) income rate decreased to (1.5)% from 0.7%; |
| |
• | Net income attributed to Staples, Inc. for the first quarter of 2012 was $187.1 million or $0.27 per diluted share compared to $198.2 million or $0.28 per diluted share for the first quarter of 2011. Net income for the first quarter of 2012 included $19.1 million of expenses, net of tax, or $0.03 per diluted share associated with headcount reductions and a legal settlement; and |
| |
• | Our quarterly income tax rate was 32.5% compared to 34.5%. |
To drive our long-term success, we continue to invest in strategic initiatives, 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 first quarter of 2012 reflect our investments in these initiatives as we evolve to meet the changing needs of our customers, as well as the expenses we incurred to drive long-term profit improvement.
Outlook
We remain committed to the full year 2012 outlook that was previously disclosed in our Annual Report on Form 10-K for the year ended January 28, 2012.
Consolidated Performance
First Quarter of 2012 Compared to the First Quarter of 2011
Sales: Sales for the first quarter of 2012 were $6.1 billion, a decrease of 1.1% from the first quarter of 2011. Our sales decline for the first quarter of 2012 reflects the negative impact of foreign exchange rates of $56.3 million and a decrease in our Australian and European businesses, partially offset by growth in our North American Delivery business.
Gross Profit: Gross profit as a percentage of sales was 26.4% for the first quarter of 2012 compared to 26.5% for the first quarter of 2011. The decrease in gross profit rate for the first quarter of 2012 was primarily due to a decline in profitability in International Operations, driven by lower product margins and deleverage of fixed costs on declining sales, partially offset by supply chain efficiencies.
Selling, General and Administrative Expenses: Selling, general and administrative expenses were 20.9% of sales for the first quarter of 2012 compared to 20.6% of sales for the first quarter of 2011. This increase reflects expenses of $28.3 million associated with headcount reductions and the legal settlement of a contractual dispute associated with the acquisition of Corporate Express N.V. ("Corporate Express"), partially offset by a reduction in marketing expenses.
Amortization of Intangibles: Amortization of intangibles was $15.3 million for the first quarter of 2012 compared to $17.3 million for the first quarter of 2011, 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 $12.6 million for the first quarter of 2012 and $14.3 million for the first quarter of 2011.
Interest Income: Interest income was $1.7 million for the first quarter of 2012 compared to $2.5 million for the first quarter of 2011. The decrease in interest income for the first quarter of 2012 was primarily due to a decrease in U.S. cash balances and lower weighted-average international interest rates, partially offset by higher international cash balances.
Interest Expense: Interest expense decreased to $42.3 million for the first quarter of 2012 from $48.8 million for the first quarter of 2011. 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. We previously used interest rate swap agreements to convert a portion of our fixed rate debt obligations into variable rate obligations. In September 2011, we terminated all of our existing interest rate swap agreements and are amortizing the gains related to the cash received over the term of the related debt agreements. This amortization reduced interest expense by $6.0 million for the first quarter of 2012. In the first quarter of 2011, the interest rate swap agreements reduced interest expense by $7.2 million.
Other Expense: Other expense was $0.3 million for the first quarter of 2012 compared to $0.2 million for the first quarter of 2011. These amounts primarily reflect foreign exchange losses recorded in the respective periods.
Income Taxes: Our tax rate was 32.5% for the first quarter of 2012 compared to 34.5% for the first quarter of 2011. 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.
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 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 J in the Notes to the Condensed Consolidated Financial Statements).
First Quarter of 2012 Compared to the First Quarter of 2011
The following tables provide a summary of our sales and business unit income by reportable segment for the first quarter of 2012 and 2011:
|
| | | | | | | | | | | | | |
| (Amounts in thousands) 13 Weeks Ended | | April 28, 2012 | | April 30, 2011 |
| | Increase (Decrease) From Prior Year | | Increase From Prior Year |
| | | | | |
| April 28, 2012 | | April 30, 2011 | | |
Sales: | |
| | |
| | |
| | |
|
North American Delivery | $ | 2,555,071 |
| | $ | 2,511,646 |
| | 1.7 | % | | 2.0 | % |
North American Retail | 2,323,831 |
| | 2,328,085 |
| | (0.2 | )% | | 0.7 | % |
International Operations | 1,225,923 |
| | 1,333,207 |
| | (8.0 | )% | | 3.9 | % |
Total segment sales | $ | 6,104,825 |
| | $ | 6,172,938 |
| | (1.1 | )% | | 1.9 | % |
|
| | | | | | | | | | | | | |
| (Amounts in thousands) 13 Weeks Ended | | April 28, 2012 | | April 30, 2011 |
| April 28, 2012 | | April 30, 2011 | | % of Sales | | % of Sales |
Business Unit Income (Loss): | |
| | |
| | |
| | |
|
North American Delivery | $ | 200,959 |
| | $ | 196,850 |
| | 7.9 | % | | 7.8 | % |
North American Retail | 166,955 |
| | 177,349 |
| | 7.2 | % | | 7.6 | % |
International Operations | (18,770 | ) | | 9,524 |
| | (1.5 | )% | | 0.7 | % |
Business unit income | $ | 349,144 |
| | $ | 383,723 |
| | 5.7 | % | | 6.2 | % |
North American Delivery: Sales increased 1.7% for the first quarter of 2012. This increase was driven by organic sales growth offset slightly by the negative impact of foreign exchange rates of $4.7 million. Our sales growth was favorably impacted by an increase in facilities and breakroom supplies, copy and print services, and promotional products. This growth was partially offset by a modest decline in paper.
Business unit income as a percentage of sales increased to 7.9% for the first quarter of 2012 from 7.8% for the first quarter of 2011, driven by operational efficiencies and continued expense control in supply chain, which were mostly offset by costs associated with headcount reductions and the legal settlement of a contractual dispute associated with the acquisition of Corporate Express, as well as lower product margins.
North American Retail: Sales decreased 0.2% for the first quarter of 2012. This decrease was the result of the negative impact of foreign exchange rates of $10.9 million mostly offset by an increase in non-comparable sales for new stores opened in the last twelve months. Comparable store sales were flat. Comparable store sales reflect positive performance in tablets, copy and print services, e-readers and mobiles phones and accessories, offset by a continued decline in software and desktop computers.
Business unit income as a percentage of sales decreased to 7.2% for the first quarter of 2012 from 7.6% for the first quarter of 2011, as a result of costs associated with headcount reductions, the legal settlement associated with the acquisition of Corporate Express, and investments in labor and new initiatives. These expenses were partially offset by reduced marketing and depreciation expense.
International Operations: Sales decreased 8.0% for the first quarter of 2012. This decrease was the result of the negative impact of foreign exchange rates of $40.7 million and decreased sales in our Australian and European businesses, including a 6% decrease in comparable store sales in Europe.
Business unit (loss) income as a percentage of sales decreased to (1.5)% for the first quarter of 2012 from 0.7% for the first quarter of 2011. This decline reflects costs associated with headcount reductions across our International businesses, as well as deleverage of fixed costs in our European retail and Australian businesses and the legal settlement associated with the acquisition of Corporate Express and, to a lesser extent, declines in European product margins.
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 2011 Annual Report on Form 10-K, filed on February 29, 2012, in Note A of the Notes to the Consolidated Financial Statements and in the Critical Accounting Policies and Significant Estimates section of Management’s Discussion and Analysis of Financial Condition and Results of Operations. There have been no material changes to our significant accounting policies as disclosed in that report.
Liquidity and Capital Resources
Cash Flows
Cash provided by operations was $146.9 million for the first quarter of 2012 compared to $210.3 million for the first quarter of 2011, a decrease of $63.4 million. The decrease was primarily due to a year-over-year decline in net income adjusted for non-cash expenses and an increase in cash used for working capital purposes, primarily related to the timing of income tax payments.
Cash used in investing activities was $52.1 million for the first quarter of 2012 compared to $62.6 million for the first quarter of 2011, a decrease of $10.5 million. The decrease was due to lower capital spending, primarily driven by a reduction in system-related investments and the timing of spending on store remodels.
Cash used in financing activities was $161.4 million for the first quarter of 2012 compared to $710.7 million for the first quarter of 2011, a reduction of $549.3 million. The decrease was primarily due to the repayment of the $500 million April 2011 Notes in the first quarter of 2011. The decrease was also partly due to lower spending on share repurchases as we spent $92.5 million in the first quarter of 2012 to repurchase 5.9 million shares under our share repurchase plan, compared with $147.0 million spent in first quarter of 2011 to buy 7.1 million shares, a decrease of $54.5 million. In the first quarter of 2012, the Company paid shareholders an $0.11 per share cash dividend for a total of $74.7 million, an increase from the $0.10 per share for a total of $70.9 million paid in the first quarter of 2011.
Sources of Liquidity
To cover seasonal fluctuations in cash flows and to support our various growth initiatives, we utilize cash generated from operations and borrowings available under our credit agreement with Bank of America, N.A., as Administrative Agent and other lending institutions named therein (the "November 2014 Revolving Credit Facility"). The November 2014 Revolving Credit Facility provides for a maximum borrowing of $1.0 billion, which pursuant to an accordion feature may be increased to $1.5 billion upon our request and the agreement of the lenders participating in the increase. We also have a commercial paper program ("Commercial Paper Program") that allows us to issue up to $1.0 billion of unsecured commercial paper notes from time to time. The November 2014 Revolving Credit Facility serves as a backstop to the Commercial Paper Program. At April 28, 2012, there were no outstanding borrowings under either the November 2014 Revolving Credit Facility or the Commercial Paper Program, and we did not borrow under either during the first quarter of 2012.
We also have various other lines of credit under which we may borrow a maximum of $309.0 million, and under which $174.1 million of borrowings were outstanding as of April 28, 2012.
At April 28, 2012, we had approximately $2.3 billion in total cash and funds available through credit agreements, which consisted of $1.1 billion of available credit and $1.2 billion of cash and cash equivalents. Of the $1.2 billion in cash and cash equivalents, approximately $818.4 million is held in jurisdictions outside the United States. While there could 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 finance the current operations of our foreign businesses and their 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.
A summary, as of April 28, 2012, of balances available under our credit agreements and debt outstanding is presented below (in thousands):
|
| | | | | | | |
| April 28, 2012 |
| Available Credit | | Debt Outstanding |
October 2012 Notes | $ | — |
| | $ | 329,761 |
|
January 2014 Notes | — |
| | 1,521,812 |
|
November 2014 Revolving Credit Facility | 1,000,000 |
| | — |
|
Lines of credit | 134,830 |
| | 174,102 |
|
Other notes and capital leases | — |
| | 8,372 |
|
Total | $ | 1,134,830 |
| | $ | 2,034,047 |
|
At April 28, 2012, there had not been a material change to the information regarding the maturity of contractual obligations disclosed in the subsection entitled “Contractual Obligations and Commercial Commitments” of the Management’s Discussion and Analysis of Financial Condition and Results of Operations on page B-11 of our 2011 Annual Report on Form 10-K. We do not have any off-balance sheet financing arrangements as of April 28, 2012, nor did we utilize any during the first quarter of 2012.
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 and partnerships, 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, we may repurchase our public notes in the open market or through privately negotiated transactions.
Capital expenditures were $52.1 million in the first quarter of 2012 compared to $62.6 million in the first quarter of 2011, a decrease of $10.5 million. However, for the full year 2012, we do not expect material changes in capital spending compared with 2011. We are not planning on opening a significant number of new stores in 2012 but will instead focus on improving the productivity of existing stores. We expect the source of funds for our capital expenditures to come from operating cash flows.
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. However, 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 first quarter of 2012 cash dividend of $0.11 per share on April 12, 2012 to stockholders of record on March 23, 2012. We expect the total value of quarterly cash dividend payments for fiscal 2012 to be $0.44 per share. While it is our intention to continue to pay quarterly cash dividends for the remainder of 2012 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.
From time to time, we repurchase our common stock pursuant to programs approved by our Board of Directors. On September 13, 2011, we announced a new repurchase program had been approved by the Board of Directors (the "2011 Repurchase Plan"). Under this plan, we are authorized to repurchase up to $1.5 billion of common stock in both open market and privately negotiated transactions. The 2011 Repurchase Plan has no expiration date and may be suspended or discontinued at any time. In the first quarter of 2012, we spent $92.5 million to repurchase 5.9 million shares under the 2011 Repurchase Plan. As of April 28, 2012, we have spent a total of $275.0 million to repurchase 18.5 million shares under the 2011 Repurchase Plan, and therefore, the remaining repurchase authorization was $1.2 billion as of that date. We consider several factors in determining whether and when to execute share repurchases, including our current and projected operating results, capital expenditure requirements, acquisitions or other strategic initiatives, our capacity leverage and cost of borrowings and the market price of our common stock.
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 April 28, 2012, there had not been a material change in the interest rate 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-13 of our 2011 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 April 28, 2012, 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 April 28, 2012, 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 April 28, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
STAPLES, INC. AND SUBSIDIARIES
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
We are subject to routine litigation incidental to our business. We do not believe the results of such litigation will have a material adverse effect on our business. See Note L of the Notes to our Consolidated Financial Statements.
Item 1A. Risk Factors
Global economic conditions could adversely affect our business and financial performance.
As the world's leading office products company operating in 26 countries, 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 commodity costs, healthcare costs, higher interest rates and taxes, a return to tighter credit markets, reduced consumer credit availability, turmoil in the financial markets (including recent events in the European Union), 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 slight 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 supply and services market is highly competitive. We compete with a variety of local, regional, national and international retailers and online and traditional 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 Walmart, Target and Tesco, warehouse clubs such as Costco, computer and electronics retail stores 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. Some of our current and potential competitors are larger than we are, may have more experience in selling certain products or delivering services or may have substantially greater financial resources. Also, 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. Intense competitive pressures from one or more of our competitors could affect prices or demand for our products and services. If we are unable to timely and appropriately respond to these competitive pressures, or offer the appropriate mix of products and services at competitive prices, our financial performance and market share could be adversely affected.
If the products and services that we offer fail to meet our customer needs, our performance could be adversely affected.
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 rapidly changed how people work and conduct business, which impacts the types of office products being purchased and the services needed by businesses and consumers. We offer, among other things, convenient store locations, helpful associates and reliable and fast order delivery. If we misjudge either the demand for products and services we sell or our customers' purchasing habits and tastes, we may be faced with excess inventories of some products or missed opportunities for products and services we do not offer. Failure to execute on our brand promise of providing the products and services preferred by our customers could have a material adverse affect on our revenue, results of operations and ability to attract and retain customers.
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 providing new products and service offerings or adding delivery operations or stores in new geographic markets. We may have limited experience in newer markets, and any such offerings may present new and difficult challenges. For example, when entering a new geographic market, customers may not be familiar with our brand or our competitors may have a larger, more established market presence. Our sales or profit levels in newer activities thus may not be successful enough to recoup our investments in them and may reduce
our overall profitability. In addition, 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. 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 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. In certain international market segments, we may not benefit from any first-to-market advantages or otherwise succeed. 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, foreign currency exchange restrictions, complex import and export schemes, increased local competition, our lack of familiarity with local customer preferences, unfavorable foreign trade policies, unstable political or economic conditions, and geopolitical events, including war and terrorism.
Failure to manage growth and continue to expand our operations successfully could adversely affect our financial results.
Our business has experienced significant historical growth 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 thus negatively impacting our operating results. 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.
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 by sometimes entering into foreign exchange
hedges or utilizing risk management strategies, such hedges and strategies themselves present some risk and thus may not be entirely successful in mitigating the risk.
We may be unable to attract, train, engage 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, training, engaging 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, particularly in retail stores, are in entry-level or part-time positions with historically high rates of turnover. Our ability to meet our labor needs while controlling our labor costs is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the workforce, unemployment levels, prevailing wage rates, changing demographics, health and other insurance costs and the cost of compliance with labor and wage laws and regulations. If we are unable to attract, train, engage 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; consumer confidence; 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 April 28, 2012 was $2.03 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. As a result, we may be forced to use an unplanned portion of cash flows to pay our debt, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes, which could materially harm our business and financial condition. Our level of indebtedness may also place us at a competitive disadvantage against less leveraged competitors.
We could incur significant goodwill impairment charges.
At April 28, 2012, we had $4.00 billion of goodwill on our balance sheet. We evaluate goodwill for impairment annually in the fourth quarter, or sooner if events occur or circumstances change that indicate potential impairment. Certain factors, including consumer spending levels, industry and macroeconomic conditions, the price of our stock and the future profitability of our acquired businesses might have a negative impact on the carrying value of our goodwill. The process of testing goodwill for impairment involves numerous judgments, assumptions and estimates made by management which inherently reflect a high degree of uncertainty. If the business climate deteriorates, or if we fail to manage acquired companies successfully, then actual results may not be consistent with these judgments, assumptions and estimates, and our goodwill may become impaired. This would in turn have an adverse impact on our financial position and results of operations. Our goodwill impairment analysis also includes a comparison of the aggregate estimated fair value of all reporting units to our total market capitalization. Therefore, a significant and sustained decline in our stock price could result in goodwill impairment charges.
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 and services, which represented approximately 27% of our sales in fiscal 2011 and which typically provide for higher margins. Our proprietary branded products compete with other manufacturers' branded items that we offer. An increase in our proprietary branded product and services also
exposes us to risk that third parties will assert infringement claims against us with respect to such products and services. We also have greater exposure and responsibility to the consumer for replacements as a result of product defects. If any of our customers are harmed by our proprietary branded products or services, they may bring product liability and other claims against us or we may have to issue voluntary or mandatory recalls. The more proprietary brand product and services we offer, the more these risks increase. A loss of consumer acceptance of these products could also adversely affect our sales and gross margin rates. 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 products and services and operate our business, including systems to track inventory, to process and record transactions, to generate financial reports and to 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. We may also outsource our information technology to third parties. Although we continue to invest in our technology, if we are unable to continually add software and hardware, effectively manage or 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.
In addition, we will periodically make modifications and upgrades to our information systems and technology. Some of these modifications and upgrades will be outsourced to third parties. Modifications involve replacing legacy systems with successor systems, making changes to legacy systems or acquiring new systems with new functionality. Although we make a diligent effort to ensure that all providers of outsourced services observe proper internal control practices and procedures, we cannot assure that failures will not occur. We are aware of inherent risks associated with replacing our systems, including accurately capturing data, system disruptions and outsourcing to third parties. Information technology system disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our operations.
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.
Our business may be adversely affected by the actions of and risks associated with third-party vendors and service providers.
The products we sell are sourced from a wide variety of third-party vendors. In general, we do not have long-term contracts with these vendors committing them to provide products to us on acceptable terms. For example, 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. Additionally, we may not be able to source products that we want to offer for sale on acceptable terms, or at all. Disruptions in the availability of raw materials used in the production of these products, or quality issues that cause us to initiate voluntary or mandatory recalls for proprietary products we sell, may result in customer dissatisfaction, damage our reputation and adversely affect our sales.
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. We also rely upon many independent service providers for services that are important to many aspects of our business. If our vendors or service providers fail or are unable to perform as expected and we are unable to replace them quickly, our business could be harmed at least temporarily until we are able to do so and potentially, in some cases, permanently. These and other issues affecting our vendors and service providers could adversely affect our reputation, business and financial performance.
Various legal proceedings 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 also 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. We estimate exposure and establish reserves for our estimated liabilities, however, litigation is inherently unpredictable and the outcome of legal proceedings and other contingencies could be unexpected and 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 that could adversely affect our business and financial performance.
Failure to comply with laws, rules and regulations could negatively affect our business operations and financial performance.
Our business is subject to federal, state, local and international laws, rules and regulations, such as state and local wage and hour laws, the U.S. Foreign Corrupt Practices Act, import and export laws, unclaimed property laws and many others. The complexity of the regulatory environment in which we operate and the related cost of compliance are both increasing due to legal and regulatory requirements, increased enforcement and our ongoing expansion into new markets and new channels. In addition, as a result of operating in multiple countries, we must 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. We may also 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. If we fail to comply with laws, rules and regulations or the manner in which they are interpreted or applied, we may be subject to government enforcement action, class action litigation or other litigation, damage to our reputation, civil and criminal liability, damages, fines and penalties, and increased cost of regulatory compliance, any of which could adversely affect our results of operations and financial performance.
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 first quarter of fiscal 2012:
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Fiscal Period | | Total Number of Shares Purchased(1) | | Average Price Paid per Share (2) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (3) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (3) |
January 29, 2012 - February 25, 2012 | | 1,784,831 |
| | $ | 14.95 |
| | 1,782,180 |
| | $ | 1,290,858,000 |
|
February 26, 2012 - March 31, 2012 | | 2,648,541 |
| | 15.94 |
| | 2,427,000 |
| | 1,252,182,000 |
|
April 1, 2012 - April 28, 2012 | | 1,725,101 |
| | 15.77 |
| | 1,725,000 |
| | 1,224,984,000 |
|
Total for the first quarter of 2012 | | 6,158,473 |
| | $ | 15.59 |
| | 5,934,180 |
|
| $ | 1,224,984,000 |
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(1) | Includes a total of 224,293 shares of our common stock withheld during the first quarter of our 2012 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. |
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(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. |
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(3) | On September 13, 2011, we announced that our Board of Directors approved the repurchase of up to $1.5 billion of common stock in both open market and privately negotiated transactions. Our repurchase program has no expiration date and may be suspended or discontinued at any time. |
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
On May 11, 2012, John J. Mahoney, Vice Chairman, notified the Company of his intention to retire, effective July 6, 2012, after 16 years with the Company.
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.
SIGNATURE
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.
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| | | |
| | | STAPLES, INC. |
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| | | |
Date: | May 16, 2012 | By: | /s/ CHRISTINE T. KOMOLA |
| | | Christine T. Komola |
| | | Senior Vice President and Chief Financial Officer |
| | | (Principal Financial Officer and Principal Accounting Officer) |
EXHIBIT INDEX
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| | |
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. |
____________________________________________
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+ | Filed herewith. |
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+ + | 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 April 28, 2012 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) related notes to these financial statements tagged in detail.