Attached files
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EX-31.1 - EX-31.1 - STAPLES INC | a09-31279_1ex31d1.htm |
EX-31.2 - EX-31.2 - STAPLES INC | a09-31279_1ex31d2.htm |
EX-32.2 - EX-32.2 - STAPLES INC | a09-31279_1ex32d2.htm |
EXCEL - IDEA: XBRL DOCUMENT - STAPLES INC | Financial_Report.xls |
EX-32.1 - EX-32.1 - STAPLES INC | a09-31279_1ex32d1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
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Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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For the quarterly period ended: October 31, 2009 |
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Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number: 0-17586
STAPLES, INC.
(Exact name of registrant as specified in its charter)
Delaware |
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04-2896127 |
(State or other jurisdiction of |
(I.R.S. Employer |
Five Hundred Staples Drive, Framingham, MA 01702
(Address of principal executive office and zip code)
508-253-5000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x
The registrant had 723,896,610 shares of common stock outstanding as of November 27, 2009.
STAPLES, INC. AND SUBSIDIARIES
FORM 10-Q
October 31, 2009
TABLE OF CONTENTS
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Page |
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3 |
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4 |
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5 |
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6-20 |
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
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21-31 |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk |
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31 |
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31 |
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32-35 |
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35 |
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36 |
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37 |
2
PART I - FINANCIAL INFORMATION
STAPLES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollar Amounts in Thousands, Except Share Data)
(Unaudited)
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October 31, |
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January 31, |
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2009 |
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2009 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
1,035,147 |
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$ |
633,774 |
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Receivables, net |
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1,957,793 |
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1,841,231 |
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Merchandise inventories, net |
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2,375,898 |
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2,404,174 |
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Deferred income tax asset |
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303,102 |
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281,101 |
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Prepaid expenses and other current assets |
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340,755 |
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636,978 |
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Total current assets |
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6,012,695 |
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5,797,258 |
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Property and equipment: |
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Land and buildings |
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1,067,650 |
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1,040,754 |
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Leasehold improvements |
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1,256,223 |
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1,183,879 |
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Equipment |
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2,012,137 |
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1,949,646 |
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Furniture and fixtures |
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967,712 |
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926,702 |
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Total property and equipment |
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5,303,722 |
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5,100,981 |
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Less accumulated depreciation and amortization |
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3,103,603 |
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2,810,355 |
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Net property and equipment |
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2,200,119 |
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2,290,626 |
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Lease acquisition costs, net of accumulated amortization |
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25,649 |
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26,931 |
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Intangible assets, net of accumulated amortization |
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620,008 |
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701,918 |
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Goodwill |
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4,245,012 |
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3,780,169 |
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Other assets |
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569,852 |
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476,153 |
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Total assets |
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$ |
13,673,335 |
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$ |
13,073,055 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
2,238,087 |
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$ |
1,967,597 |
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Accrued expenses and other current liabilities |
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1,616,971 |
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1,404,709 |
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Commercial paper |
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1,195,557 |
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Debt maturing within one year |
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61,717 |
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277,691 |
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Total current liabilities |
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3,916,775 |
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4,845,554 |
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Long-term debt |
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2,502,867 |
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1,968,928 |
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Other long-term obligations |
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605,295 |
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636,142 |
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Stockholders equity: |
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Preferred stock, $.01 par value, 5,000,000 shares authorized; no shares issued |
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Common stock, $.0006 par value, 2,100,000,000 shares authorized; issued 891,651,331 shares at October 31, 2009 and 882,032,761 shares at January 31, 2009 |
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535 |
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529 |
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Additional paid-in capital |
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4,251,102 |
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4,048,398 |
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Accumulated other comprehensive income (loss) |
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8,639 |
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(494,327 |
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Retained earnings |
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5,694,774 |
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5,367,341 |
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Less: Treasury stock at cost - 167,898,460 shares at October 31, 2009 and 166,427,240 shares at January 31, 2009 |
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(3,386,117 |
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(3,357,734 |
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Total Staples, Inc. stockholders equity |
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6,568,933 |
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5,564,207 |
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Noncontrolling interests |
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79,465 |
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58,224 |
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Total stockholders equity |
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6,648,398 |
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5,622,431 |
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Total liabilities and stockholders equity |
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$ |
13,673,335 |
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$ |
13,073,055 |
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See notes to condensed consolidated financial statements.
3
STAPLES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
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13 Weeks Ended |
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39 Weeks Ended |
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October 31, |
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November 1, |
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October 31, |
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November 1, |
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2009 |
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2008 |
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2009 |
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2008 |
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Sales |
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$ |
6,518,039 |
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$ |
6,950,933 |
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$ |
17,869,377 |
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$ |
16,910,207 |
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Cost of goods sold and occupancy costs |
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4,751,836 |
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5,086,799 |
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13,153,015 |
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12,323,649 |
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Gross profit |
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1,766,203 |
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1,864,134 |
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4,716,362 |
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4,586,558 |
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Operating and other expenses: |
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Selling, general and administrative |
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1,256,479 |
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1,314,134 |
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3,616,049 |
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3,450,599 |
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Integration and restructuring costs |
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15,872 |
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132,282 |
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64,502 |
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132,445 |
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Amortization of intangibles |
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26,890 |
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28,011 |
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75,405 |
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46,426 |
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Total operating expenses |
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1,299,241 |
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1,474,427 |
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3,755,956 |
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3,629,470 |
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Operating income |
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466,962 |
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389,707 |
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960,406 |
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957,088 |
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Other income (expense): |
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Interest income |
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1,364 |
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5,366 |
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4,366 |
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23,148 |
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Interest expense |
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(58,016 |
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(59,902 |
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(179,447 |
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(88,348 |
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Miscellaneous income (expense) |
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8,266 |
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(2,833 |
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5,984 |
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(3,223 |
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Consolidated income before income taxes |
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418,576 |
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332,338 |
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791,309 |
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888,665 |
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Income tax expense |
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144,409 |
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171,644 |
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273,002 |
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363,588 |
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Consolidated net income |
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274,167 |
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160,694 |
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518,307 |
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525,077 |
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Income attributed to the noncontrolling interests |
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4,786 |
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3,991 |
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13,551 |
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5,859 |
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Net income attributed to Staples, Inc |
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$ |
269,381 |
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$ |
156,703 |
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$ |
504,756 |
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$ |
519,218 |
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Earnings Per Share: |
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Basic earnings per common share |
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$ |
0.38 |
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$ |
0.22 |
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$ |
0.71 |
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$ |
0.75 |
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Diluted earnings per common share |
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$ |
0.37 |
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$ |
0.22 |
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$ |
0.70 |
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$ |
0.73 |
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Dividends declared per common share* |
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$ |
0.08 |
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$ |
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$ |
0.25 |
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$ |
0.33 |
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*In 2009, the Company changed its dividend policy from an annual dividend to a quarterly dividend.
See notes to condensed consolidated financial statements.
4
STAPLES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
(Unaudited)
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39 Weeks Ended |
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October 31, |
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November 1, |
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2009 |
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2008 |
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Operating Activities: |
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Consolidated net income, including income from the noncontrolling interests |
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$ |
518,307 |
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$ |
525,077 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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411,330 |
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396,590 |
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Non-cash write-down of indefinite lived intangible assets |
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123,775 |
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Stock-based compensation |
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132,539 |
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134,196 |
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Deferred tax (income) expense |
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(38,028 |
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19,190 |
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Excess tax benefits from stock-based compensation arrangements |
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(2,161 |
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(5,992 |
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Other |
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26,231 |
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8,698 |
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Changes in assets and liabilities: |
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Decrease (increase) in receivables |
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23,072 |
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(197,173 |
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Decrease (increase) in merchandise inventories |
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160,935 |
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(70,085 |
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Decrease in prepaid expenses and other assets |
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218,917 |
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48,470 |
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Increase in accounts payable |
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129,752 |
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235,895 |
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Decrease in accrued expenses and other current liabilities |
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(21,307 |
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(73,902 |
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Increase in other long-term obligations |
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27,700 |
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20,367 |
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Net cash provided by operating activities |
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1,587,287 |
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1,165,106 |
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Investing Activities: |
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Acquisition of property and equipment |
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(191,149 |
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(243,777 |
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Acquisition of businesses and investments in joint ventures, net of cash acquired |
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(4,381,811 |
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Proceeds from the sale of short-term investments |
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27,019 |
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Purchase of short-term investments |
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(3 |
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Net cash used in investing activities |
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(191,149 |
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(4,598,572 |
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Financing Activities: |
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Proceeds from the exercise of stock options and the sale of stock under employee stock purchase plans |
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70,061 |
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129,764 |
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(Repayments of) proceeds from issuance of commercial paper |
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(1,195,557 |
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948,728 |
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Proceeds from borrowings |
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1,176,330 |
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2,762,879 |
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Payments on borrowings, including payment of deferred financing fees |
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(911,979 |
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(377,240 |
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Cash dividends paid |
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(177,323 |
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(231,460 |
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Excess tax benefits from stock-based compensation arrangements |
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2,161 |
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5,992 |
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Purchase of treasury stock, net |
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(28,382 |
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(83,208 |
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Net cash (used in) provided by financing activities |
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(1,064,689 |
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3,155,455 |
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Effect of exchange rate changes on cash and cash equivalents |
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69,924 |
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(79,737 |
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Net increase (decrease) in cash and cash equivalents |
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401,373 |
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(357,748 |
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Cash and cash equivalents at beginning of period |
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633,774 |
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1,245,448 |
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Cash and cash equivalents at end of period |
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$ |
1,035,147 |
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$ |
887,700 |
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See notes to condensed consolidated financial statements.
5
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note A Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements include the accounts of Staples, Inc. and its subsidiaries (Staples, the Company, we, our or us) and the July 2008 acquisition of Corporate Express N.V. (Corporate Express) (see Note C). These financial statements are for the period covering the thirteen and thirty-nine weeks ended October 31, 2009 (also referred to as the third quarter of 2009 and year-to-date 2009) and the period covering the thirteen and thirty-nine weeks ended November 1, 2008 (also referred to as the third quarter of 2008 and year-to-date 2008). All intercompany accounts and transactions are eliminated in consolidation. Certain previously reported amounts have been reclassified to conform with the current period presentation.
These financial statements have been prepared based upon Securities and Exchange Commission (SEC) rules that permit reduced disclosure for interim periods. For a more complete discussion of significant accounting policies and certain other information, these financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Companys Annual Report on Form 10-K for the year ended January 31, 2009. In the opinion of management, these financial statements reflect all normal recurring adjustments considered necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year.
Note B New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 168, The FASB Accounting Standards Codification (ASC) and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162 (the Codification) (ASC Topic 105). The Codification reorganized existing U.S. accounting and reporting standards issued by the FASB and other related private sector standard setters into a single source of authoritative accounting principles arranged by topic. The Codification supersedes all existing U.S. accounting standards; all other accounting literature not included in the Codification (other than SEC guidance for publicly-traded companies) is considered non-authoritative. The Codification was effective on a prospective basis for interim and annual reporting periods ending after September 15, 2009. As a result of the adoption of this pronouncement, this Quarterly Report on Form 10-Q for the quarter ending October 31, 2009 and all subsequent public filings will reference the Codification as the sole source of authoritative literature. Accordingly, all accounting references have been updated and SFAS references have been replaced with ASC references as if the SFAS has been adopted into the Codification. The adoption of the Codification had no impact on the Companys financial condition, results of operations or cash flows.
On February 1, 2009, the Company adopted the accounting pronouncement related to fair value measurement for its nonfinancial assets and liabilities (ASC Topic 820). On February 3, 2008, the Company adopted the accounting pronouncement related to fair value measurement for its financial assets and liabilities. The adoption of these pronouncements had no impact on the Companys financial condition, results of operations or cash flows.
On February 1, 2009, the Company adopted the revised accounting pronouncement relating to business combinations (ASC Topic 805), including assets acquired and liabilities assumed arising from contingencies. This pronouncement requires the use of the acquisition method of accounting, defines the acquirer, establishes the acquisition date, and applies to all transactions and other events in which one entity obtains control over one or more other businesses. This pronouncement also amends the accounting and disclosure requirements for assets and liabilities in a business combination that arise from contingencies. In addition, with the adoption of this pronouncement, changes to valuation allowances for deferred income tax assets and adjustments to unrecognized tax benefits generally are to be recognized as adjustments to income tax expense rather than goodwill. This adoption had no impact on the Companys financial condition, results of operations or cash flows. Furthermore, the Company does not expect this pronouncement to have a material impact on the Companys income tax expense related to adjustments for changes in valuation allowances and tax reserves for prior business combinations in future periods.
On February 1, 2009, the Company adopted the accounting pronouncement on noncontrolling interests in consolidated financial statements (ASC Topic 810). This pronouncement requires that noncontrolling (or minority) interests in subsidiaries be reported in the equity section of a companys balance sheet, rather than in a mezzanine section of the balance sheet between liabilities and equity and changes the manner in which the net income of the subsidiary is reported and disclosed in the controlling companys income statement and establishes guidelines for accounting for changes in ownership percentages and for deconsolidation. This pronouncement required retrospective application to all prior periods presented. The adoption of
6
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
this pronouncement impacted the Companys presentation of minority interests on the balance sheet and statement of income but had no impact on the Companys financial condition, results of operations or cash flows.
On February 1, 2009, the Company adopted the accounting pronouncement relating to disclosures about derivative instruments and hedging activities, which requires disclosure regarding how and why an entity uses derivatives, how these instruments and the related hedged items are accounted for and how derivative instruments and related hedged items affect the entitys financial position, results of operations and cash flows (ASC Topic 815). As this pronouncement relates specifically to disclosures, the adoption of this pronouncement had no impact on the Companys financial condition, results of operations or cash flows.
On August 1, 2009, the Company adopted the accounting pronouncements that amend the requirements for disclosures about fair value of financial instruments, for annual, as well as interim, reporting periods (ASC Topic 825). These pronouncements were effective prospectively for all interim and annual reporting periods ending after June 15, 2009. As these pronouncements related specifically to disclosures, they had no impact on the Companys financial condition, results of operations or cash flows.
On August 1, 2009, the Company adopted prospectively the accounting pronouncement regarding the general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before the financial statements are issued (ASC Topic 855). The implementation of this standard did not have any impact on the financial statements of the Company. Subsequent events through November 30, 2009 have been evaluated for disclosure and recognition.
Recently Issued Accounting Pronouncements
In December 2008, an accounting pronouncement was issued relating to employers disclosures about post-retirement benefit plan assets which requires a company, as a plan sponsor, to provide disclosures about plan assets, including categories of plan assets, the nature of concentrations of risk and disclosures about fair value measurements of plan assets (ASC Topic 715). This pronouncement is effective for financial statements issued for fiscal years ending after December 15, 2009. The Company will adopt this pronouncement as of January 30, 2010. As this pronouncement relates specifically to disclosures, the adoption will not have an impact on the Companys financial condition, results of operations or cash flows.
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140 (SFAS No. 166). SFAS No. 166 has not yet been incorporated into the Codification. SFAS No. 166 requires entities to provide more information regarding sales of securitized financial assets and similar transactions, particularly if the entity has continuing exposure to the risks related to transferred financial assets. SFAS No. 166 eliminates the concept of a qualifying special-purpose entity, changes the requirements for derecognizing financial assets and requires additional disclosures. SFAS No. 166 is effective for fiscal years beginning after November 15, 2009. The Company has not completed its assessment of the impact SFAS No. 166 will have on its financial condition, results of operations or cash flows.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS No. 167). SFAS No. 167 modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. SFAS No. 167 has not yet been incorporated into the Codification. SFAS No. 167 clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entitys purpose and design and a companys ability to direct the activities of the entity that most significantly impact the entitys economic performance. SFAS No. 167 requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. SFAS No. 167 also requires additional disclosures about a companys involvement in variable interest entities and any significant changes in risk exposure due to that involvement. SFAS No. 167 is effective for fiscal years beginning after November 15, 2009. The Company has not completed its assessment of the impact SFAS No. 167 will have on its financial condition, results of operations or cash flows.
Note C Business Combinations
In July 2008, Staples acquired Corporate Express, a Dutch office products distributor with operations in North America, Europe and Australia, through a tender offer for all of its outstanding capital stock.
At the time the tender offer was fully settled on July 23, 2008, Staples had acquired more than 99% of the outstanding capital stock of Corporate Express. Staples has worked diligently to acquire as swiftly as possible the remaining capital stock of Corporate Express by means of a compulsory judicial squeeze out procedure to acquire the remaining minority shares in accordance with the Dutch Civil Code. Staples and the other parties to the squeeze out procedure have submitted their
7
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
arguments to the Dutch court and are awaiting a decision. While Staples does not know the exact date that the Dutch court will render a judgment, it anticipates that a judgment will be rendered prior to the end of fiscal year 2009, which ends on January 30, 2010. There is, however, no guarantee that the court will render a judgment before the end of fiscal 2009.
In July 2008, Staples also acquired, and subsequently paid off, all of the outstanding 8.25% Senior Subordinated Notes due July 1, 2014 and all of the outstanding 7.875% Senior Subordinated Notes due March 1, 2015 of Corporate Express U.S. Finance Inc., a wholly owned subsidiary of Corporate Express. The aggregate cash purchase price for the capital stock of Corporate Express and for the repayment of most of Corporate Express debt was 2.8 billion Euros (approximately $4.4 billion, net of cash acquired).
The operating results of Corporate Express have been included in the consolidated financial statements since July 2, 2008, the date Staples declared the terms of the tender offer unconditional. The Corporate Express results are reported in Staples North American Delivery and International Operations for segment reporting.
Adjustments were made during fiscal 2009 to the fair value of assets acquired and liabilities assumed based on information obtained subsequent to the acquisition. The following table summarizes the final estimated fair values of assets acquired and liabilities assumed (in thousands):
|
|
As of July 2, 2008 |
|
|
Current assets (excluding acquired cash) |
|
$ |
2,182,908 |
|
Property and equipment |
|
322,987 |
|
|
Other assets |
|
1,109,865 |
|
|
Goodwill |
|
2,818,679 |
|
|
Intangible assets |
|
727,560 |
|
|
Total assets acquired |
|
$ |
7,161,999 |
|
|
|
|
|
|
Current liabilities |
|
$ |
1,966,471 |
|
Long-term debt |
|
151,826 |
|
|
Other long-term liabilities |
|
661,891 |
|
|
Total liabilities assumed |
|
$ |
2,780,188 |
|
|
|
|
|
|
Net assets acquired, excluding cash |
|
$ |
4,381,811 |
|
During the second quarter of 2009, the Company finalized its integration and restructuring plans for Corporate Express, including employee severance, facility closures, system consolidation and tax elections, the results of which impacted the final amount allocated to goodwill. The Company recorded approximately $181.5 million of adjustments during the first half of 2009, which resulted in an increase in goodwill. These adjustments primarily related to acquisition reserves, intangible assets, deferred taxes and the Companys reserve for uncertain tax positions. The changes to intangible assets related to values only; no significant changes were made to estimated lives. No adjustments were made to goodwill during the third quarter of 2009.
Staples allocated assets of $3.48 billion, $3.47 billion and $283.8 million to the North American Delivery, International Operations and North American Retail segments, respectively. Included in total assets were goodwill and intangible assets totaling $3.55 billion, of which $1.71 billion, $1.55 billion and $283.8 million were allocated to the North American Delivery, International Operations and North American Retail segments, respectively. None of the goodwill is expected to be deductible for tax purposes. Any further changes to opening net assets, including tax related assets and liabilities, will result in income or expenses that would be recognized through the Companys consolidated statement of income.
8
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
The activity related to the Companys reserves for the periods subsequent to the acquisition date is as follows (in thousands):
|
|
Purchase |
|
Usage |
|
FX Impact |
|
Balance as of |
|
||||
Transaction costs |
|
$ |
41,616 |
|
$ |
(39,323 |
) |
$ |
|
|
$ |
2,293 |
|
Severance |
|
92,117 |
|
(42,854 |
) |
(6,217 |
) |
43,046 |
|
||||
Facility closures |
|
36,218 |
|
(5,473 |
) |
(699 |
) |
30,046 |
|
||||
Other |
|
11,074 |
|
(3,348 |
) |
(1,116 |
) |
6,610 |
|
||||
Total |
|
$ |
181,025 |
|
$ |
(90,998 |
) |
$ |
(8,032 |
) |
$ |
81,995 |
|
The Company believes that the accruals above should be entirely utilized by the end of fiscal year 2010, however some payments related to facility closures may be made over the remaining lease terms.
Note D Integration and Restructuring Costs
Integration and restructuring costs represent the costs associated with the integration of the acquired Corporate Express business with the Companys pre-existing business and the consolidation of certain operations of the combined Company.
Integration and restructuring costs are comprised of the following (in thousands):
|
|
13 Weeks Ended |
|
39 Weeks Ended |
|
||||||||
|
|
October 31, |
|
November 1, |
|
October 31, |
|
November 1, |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Severance and retention |
|
$ |
3,082 |
|
$ |
517 |
|
$ |
25,978 |
|
$ |
517 |
|
Facility closure costs |
|
1,336 |
|
|
|
1,336 |
|
|
|
||||
Consulting and other fees |
|
11,454 |
|
7,990 |
|
25,488 |
|
8,153 |
|
||||
Asset write-downs (whose use was expected to be limited as a result of the acquisition) |
|
|
|
123,775 |
|
11,700 |
|
123,775 |
|
||||
Total |
|
$ |
15,872 |
|
$ |
132,282 |
|
$ |
64,502 |
|
$ |
132,445 |
|
The asset write-down recorded in the third quarter of 2008 related to the write-down of indefinite lived intangible trade names associated with the European catalog business. The trade name write-down was the result of the Companys decision to move toward one global brand with the acquisition of Corporate Express, eliminating, over time, certain legacy Staples brands used in the European catalog business.
Note E Debt and Credit Agreements
On March 3, 2009, the Company terminated and paid off all outstanding balances from the Corporate Express U.S. and European securitization programs that were assumed upon the acquisition of Corporate Express.
On March 27, 2009, the Company issued $500.0 million aggregate principal amount of notes (the March 2009 Notes) due April 1, 2011, with a fixed interest rate of 7.75% payable semi-annually on April 1 and October 1 of each year commencing on October 1, 2009. The sale of the March 2009 Notes was made pursuant to the terms of an underwriting agreement (the Underwriting Agreement), dated March 27, 2009, with Barclays Capital Inc., Banc of America Securities LLC and HSBC Securities (USA) Inc., as representatives of the several underwriters named in the Underwriting Agreement. The Company received net proceeds, after the underwriting discount and estimated fees and expenses, of $497.5 million. The Companys obligations under the March 2009 Notes are unconditionally guaranteed on an unsecured unsubordinated 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).
9
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
On March 27, 2009, the Company reduced its total commitment under the Credit Agreement, dated April 1, 2008, among the Company, Barclays Bank PLC and the other lenders named therein, as amended (the 2008 Agreement) from $1.26 billion to $761.0 million, pursuant to the mandatory commitment reduction provisions triggered by the receipt of proceeds from the offering of the March 2009 Notes. Originally, the total commitment under the 2008 Agreement was $3.0 billion.
On May 19, 2009, the Company entered into a $300.0 million accounts receivable securitization program (the Securitization Program) with several of its wholly owned subsidiaries and certain financial institutions. Under the terms of the Securitization Program, the subsidiaries sell substantially all the customer receivables of the Companys North American Delivery business to a wholly owned bankruptcy remote special purpose entity, Staples Receivables LLC. The Company retains servicing responsibility. The special purpose entity then transfers an interest in the receivables to the financial institutions. Borrowings outstanding under the Securitization Program are included as a component of current liabilities in the condensed consolidated balance sheet, while the accounts receivable securing these obligations are included as a component of net receivables in the condensed consolidated balance sheet. There were no borrowings outstanding under the Securitization Program at October 31, 2009.
On May 26, 2009, as a result of entering into the Securitization Program, the Company voluntarily terminated the entire remaining commitment under the 2008 Agreement, thereby terminating the 2008 Agreement earlier than its July 9, 2009 expiration date. As a result of the termination of the 2008 Agreement, availability under the Companys existing commercial paper program was reduced from approximately $1.5 billion to $750.0 million. The commercial paper program continues to be backstopped by Staples existing $750.0 million revolving credit facility with Bank of America N.A. and other lenders named therein, which matures in October 2011 (the Revolving Credit Facility). As of October 31, 2009, no notes were outstanding under the Companys commercial paper program.
In connection with the March 2009 Notes, the issuance of $1.5 billion aggregate principal amount of notes due January 15, 2014 (the January 2009 Notes), the 2008 Agreement and the Securitization Program, the Company incurred financing fees of $32.9 million, which are being amortized over the terms of the related debt instruments. Amortization of the financing fees is classified as interest expense. Deferred financing fees amortized to interest expense were $1.9 million and $6.0 million for the thirteen and thirty-nine weeks ended October 31, 2009, respectively, and $5.5 million and $9.0 million for the thirteen and thirty-nine weeks ended November 1, 2008, respectively. At October 31, 2009, unamortized financing fees of $2.3 million were included in prepaid and other current assets and $11.3 million were included in other assets.
At October 31, 2009, the fair value of the January 2009 Notes was approximately $1.8 billion and the fair value of the March 2009 Notes was approximately $539 million. The fair value of the notes is based on quoted market prices.
There were no instances of default during 2009 under any of the Companys debt agreements.
Note F Fair Value Measurements, Derivative Instruments and Hedging Activities
Fair Value Measurements: The following table shows the Companys assets and liabilities as of October 31, 2009 that are measured at fair value on a recurring basis (in thousands):
|
|
Quoted Prices in |
|
Significant |
|
Unobservable |
|
|
Assets |
|
|
|
|
|
|
|
|
Derivative assets |
|
|
|
$ |
34,121 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Derivative liabilities |
|
|
|
$ |
(1,847 |
) |
|
|
The fair values of cash and cash equivalents, receivables, accounts payable, accrued expenses and other current liabilities and short-term debt approximate their carrying values because of their short-term nature. The fair values of long-term debt (except as disclosed in Note E above) approximate their carrying values because of the Companys use of derivative instruments that qualify for hedge accounting.
10
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
Derivative Instruments and Hedging Activities: Staples uses interest rate swaps to effectively convert certain fixed rate debt into variable rate debt and certain variable rate debt into fixed rate debt and uses currency swaps to hedge a portion of the value of Staples net investment in Canadian dollar denominated subsidiaries. These derivatives qualify for hedge accounting treatment as the derivatives have been highly effective in offsetting changes in fair value of the hedged items.
All derivatives are recorded at fair value and the changes in fair value are immediately included in earnings if the derivatives do not qualify as effective hedges. If a derivative is designated as a fair value hedge, then changes in the fair value of the derivative are offset against the changes in the fair value of the underlying hedged item in earnings. If a derivative is designated as a cash flow hedge, then the effective portion of the changes in the fair value of the derivative is recognized as a component of accumulated other comprehensive income until the underlying hedged item is recognized in earnings or the forecasted transaction is no longer probable of occurring. If a derivative or a nonderivative financial instrument is designated as a hedge of the Companys net investment in a foreign subsidiary, then changes in the fair value of the financial instrument are recognized as a component of accumulated other comprehensive income to offset a portion of the change in the translated value of the net investment being hedged, until the investment is sold or liquidated. The Company formally documents all hedging relationships for all derivative and nonderivative hedges and the underlying hedged items, as well as its risk management objectives and strategies for undertaking the hedge transactions. There are no amounts excluded from the assessment of hedge effectiveness.
The Company classifies the fair value of all its derivative contracts and the fair value of its hedged firm commitments as either current or long-term, which are included in other assets, debt maturing within one year and other long-term obligations, 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 Companys condensed consolidated statement of cash flows in the same category as the item being hedged.
Interest Rate Swaps: On January 8, 2003, Staples entered into an interest rate swap, for an aggregate notional amount of $325.0 million, designed to convert Staples September 2002 notes due 2012 (the September 2002 Notes) into a variable rate obligation. The swap agreement, scheduled to terminate on October 1, 2012, is designated as a fair value hedge of the September 2002 Notes. Under the interest rate swap agreement, Staples is entitled to receive semi-annual interest payments at a fixed rate of 7.375% and is required to make semi-annual interest payments at a floating rate equal to the 6 month LIBOR plus 3.088%. The interest rate swap agreement is being accounted for as a fair value hedge and the differential to be paid or received on the interest rate swap agreement is accrued and recognized as an adjustment to interest expense over the life of the agreement and the September 2002 Notes. At October 31, 2009, the interest rate swap agreement had a fair value gain of $22.2 million, which was included in other assets. No amounts were included in the condensed consolidated statement of income for the third quarter of 2009, year-to-date 2009, the third quarter of 2008 or year-to-date 2008 related to ineffectiveness associated with this fair value hedge.
In connection with Staples acquisition of Corporate Express, the Company assumed interest rate swaps, for a notional amount of AUD $103.0 million, designed to convert Corporate Express variable rate credit facilities into fixed rate obligations. AUD $30 million of these swaps matured in July 2009, as scheduled. The Company also entered into interest rate swap agreements in August 2009, for a notional amount of AUD $35.0 million, designed to convert local variable rate credit facilities into fixed rate obligations. As of October 31, 2009, the total notional amount of all outstanding interest rate swap agreements is AUD $108 million (approximately $98.9 million, based on foreign exchange rates at October 31, 2009). The swap agreements are scheduled to terminate in five stages: AUD $8 million in January 2010, AUD $40 million in July 2010, AUD $25 million in July 2011, AUD $10 million in August 2011 and the remaining AUD $25 million in August 2012. Under the terms of the agreements, the Company is required to make monthly interest payments at a weighted average interest rate of 6.33% and is entitled to receive monthly interest payments at a floating rate equal to the average bid rate for borrowings having a term closest to the relevant period displayed on the appropriate page of the Reuters screen (BBSY). The interest rate swaps are being accounted for as a cash flow hedge and the differential to be paid or received on the interest rate swap agreements is accrued and recognized as an adjustment to interest expense over the life of the agreements. At October 31, 2009, the interest rate swap agreements had a fair value loss of AUD $1.6 million (approximately $1.4 million), which was included in stockholders equity as a component of accumulated other comprehensive income. No amounts were included in the condensed consolidated statement of income for the third quarter of 2009, year-to-date 2009, the third quarter of 2008 or year-to-date 2008 related to ineffectiveness associated with this cash flow hedge. The amount of estimated cash flow hedges unrealized net gains or losses expected to be reclassified to earnings in the next twelve months is not significant.
Foreign Currency Swaps: On August 15, 2007, the Company entered into a $300.0 million foreign currency swap that has been designated as a foreign currency hedge on Staples net investment in Canadian dollar denominated subsidiaries. Staples,
11
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
upon maturity of the agreement in October 2012, will be entitled to receive $300.0 million and will be obligated to pay 316.2 million in Canadian dollars. Staples will also be entitled to receive quarterly interest payments on $300.0 million at a fixed rate of 5.28% and will be obligated to make quarterly interest payments on 316.2 million Canadian dollars at a fixed rate of 5.17%. At October 31, 2009, the currency swap had an aggregate fair value gain of $11.4 million, which was included in other assets. No amounts were included in the condensed consolidated statement of income for the third quarter of 2009, year-to-date 2009, the third quarter of 2008 or year-to-date 2008 related to ineffectiveness associated with this net investment hedge.
Foreign currency gains (losses), net of taxes, recorded in accumulated other comprehensive income were $1.8 million and $(19.0) million for the third quarter and year-to-date 2009, respectively, and $27.3 million and $26.0 million for the third quarter and year-to-date 2008, respectively.
Note G Equity Based Employee Benefit Plans
Staples offers its associates share ownership through certain equity based employee benefit plans, including the Amended and Restated 1998 Employee Stock Purchase Plan and the Amended and Restated International Employee Stock Purchase Plan (collectively the Employee Stock Purchase Plans) and the Amended and Restated 2004 Stock Incentive Plan.
Under the Employee Stock Purchase Plans, U.S. and International associates may purchase shares of Staples common stock at 85% of the lower of the market price of the common stock at the beginning or end of an offering period through payroll deductions in an amount not to exceed 10% of an employees annual base compensation. Under the Amended and Restated 2004 Stock Incentive Plan, the Company grants restricted stock and restricted stock units (collectively, Restricted Shares) and nonqualified stock options to associates. The Restricted Shares are restricted in that they are not transferable (i.e. they may not be sold) until they vest. The nonqualified stock options cannot be exercised until they vest. Vesting of the Restricted Shares and nonqualified stock options occurs over different periods, depending on the terms of the individual award, but expenses relating to these awards are all recognized on a straight line basis over the applicable vesting period.
The following table summarizes the nonqualified stock option and Restricted Share activity for year-to-date 2009:
|
|
Nonqualified Stock Options (1) |
|
Restricted Shares (2) |
|
||||||
|
|
Number |
|
Weighted |
|
Number |
|
Weighted |
|
||
Outstanding at January 31, 2009 |
|
47,248,741 |
|
$ |
18.86 |
|
12,390,942 |
|
$ |
24.34 |
|
Granted |
|
6,711,831 |
|
20.17 |
|
6,330,316 |
|
20.05 |
|
||
Exercised / Released |
|
(3,998,529 |
) |
15.61 |
|
(4,517,646 |
) |
23.81 |
|
||
Canceled |
|
(1,833,599 |
) |
21.03 |
|
(739,017 |
) |
23.57 |
|
||
Outstanding at October 31, 2009 |
|
48,128,444 |
|
$ |
19.23 |
|
13,464,595 |
|
$ |
22.54 |
|
(1) At October 31, 2009, the aggregate intrinsic value of the outstanding unvested nonqualified stock options was $118.9 million, and the aggregate intrinsic value of the exercisable nonqualified stock options was $126.4 million.
(2) Restricted Share information in the table does not include performance shares (Performance Shares) which Staples grants to certain employees. These are awards under which restricted stock is only issued if the Company meets minimum performance targets. If, at the end of each performance period, the Companys performance falls between minimum and maximum targets, Performance Shares ranging from 70% to 200% of the underlying award will be issued. The fair value of Performance Shares is based upon the market price of the underlying common stock as of the date of grant. As of October 31, 2009, Staples had 1.25 million Performance Shares outstanding, which were issued during 2007, 2008 and 2009. The shares have a weighted-average fair market value per share of $22.29.
In connection with its equity based employee benefit plans, Staples included $42.0 million and $132.5 million in compensation expense for the third quarter of 2009 and year-to-date 2009, respectively, and $47.4 million and $134.2 million in compensation expense for the third quarter of 2008 and year-to-date 2008, respectively. As of October 31, 2009, Staples had $283.8 million of nonqualified stock options and Restricted Shares to be expensed through September 2013.
12
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
Note H Pension Plans
In connection with the acquisition of Corporate Express, Staples assumed the obligations under the defined benefit pension plans Corporate Express sponsored. The pension plans cover most Corporate Express employees in Europe and certain employees in the United States. The benefits due to U.S. plan participants are frozen. A number of the defined benefit plans outside the U.S. are funded with plan assets that have been segregated in trusts. Contributions are made to these trusts, as necessary, to meet legal and other requirements. Prior to the acquisition of Corporate Express in July 2008, the Company sponsored no defined benefit plans.
Net periodic pension cost recognized for the third quarter of 2009 and year-to-date 2009 is based upon preliminary estimates pending the final actuarial determination of such costs for fiscal 2009. The following table presents a summary of the total net periodic cost recorded in the Condensed Consolidated Statement of Income for the third quarter and year-to-date 2009 related to the plans (in thousands):
|
|
13 Weeks Ended October 31, 2009 |
|
39 Weeks Ended October 31, 2009 |
|
||||||||||||||
|
|
International |
|
International |
|
||||||||||||||
|
|
U.S. Plans |
|
Plans |
|
Total |
|
U.S. Plans |
|
Plans |
|
Total |
|
||||||
Service cost |
|
|
|
$ |
2,290 |
|
$ |
2,290 |
|
|
|
$ |
6,532 |
|
$ |
6,532 |
|
||
Interest cost |
|
$ |
534 |
|
12,128 |
|
12,662 |
|
$ |
1,523 |
|
34,589 |
|
36,112 |
|
||||
Expected return on plan assets |
|
(431 |
) |
(14,692 |
) |
(15,123 |
) |
(1,229 |
) |
(41,896 |
) |
(43,125 |
) |
||||||
Amortization of unrecognized losses |
|
|
|
2,382 |
|
2,382 |
|
|
|
6,793 |
|
6,793 |
|
||||||
Net periodic pension cost |
|
$ |
103 |
|
$ |
2,108 |
|
$ |
2,211 |
|
$ |
294 |
|
$ |
6,018 |
|
$ |
6,312 |
|
Cash contributions of $0.2 million and $3.8 million were made to the U.S. Plans and International Plans, respectively, during the third quarter of 2009. Cash contributions of $0.5 million and $8.5 million were made to the U.S. plans and International plans, respectively, during year-to-date 2009. The Company expects to make additional cash contributions of $0.2 million and $3.3 million to the U.S. plans and International plans, respectively, during the remainder of fiscal 2009.
Note I Stockholders Equity and Comprehensive Income
The following table reflects for year-to-date 2009 and 2008 the changes in stockholders equity and comprehensive income attributable to Staples, Inc. and its noncontrolling interests (in thousands). The noncontrolling interests reflect the 41% interest in Corporate Express Australia Limited, as Staples acquired a 59% ownership interest in this business in connection with its acquisition of Corporate Express.
|
|
Attributable |
|
Attributable to Noncontrolling Interests |
|
Total |
|
|||
Stockholders equity at January 31, 2009 |
|
$ |
5,564,207 |
|
$ |
58,224 |
|
$ |
5,622,431 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|||
Net income |
|
504,756 |
|
13,551 |
|
518,307 |
|
|||
Other comprehensive income: |
|
|
|
|
|
|
|
|||
Foreign currency translation adjustments, net |
|
521,920 |
|
7,690 |
|
529,610 |
|
|||
Changes in the fair value of derivatives, net (1) |
|
(18,954 |
) |
|
|
(18,954 |
) |
|||
Total comprehensive income |
|
1,007,722 |
|
21,241 |
|
1,028,963 |
|
|||
Issuance of common stock for stock options exercised and the sale of stock under employee stock purchases plans |
|
70,061 |
|
|
|
70,061 |
|
|||
Tax benefit on exercise of options |
|
2,161 |
|
|
|
2,161 |
|
|||
Stock-based compensation |
|
132,539 |
|
|
|
132,539 |
|
|||
Cash dividends paid |
|
(177,323 |
) |
|
|
(177,323 |
) |
|||
Purchase of treasury stock, net |
|
(28,382 |
) |
|
|
(28,382 |
) |
|||
Other |
|
(2,052 |
) |
|
|
(2,052 |
) |
|||
Stockholders equity at October 31, 2009 |
|
$ |
6,568,933 |
|
$ |
79,465 |
|
$ |
6,648,398 |
|
13
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
|
|
Attributable |
|
Attributable to Noncontrolling Interests |
|
Total |
|
|||
Stockholders equity at February 2, 2008 |
|
$ |
5,718,007 |
|
$ |
10,227 |
|
$ |
5,728,234 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|||
Net income |
|
519,218 |
|
5,859 |
|
525,077 |
|
|||
Other comprehensive income |
|
|
|
|
|
|
|
|||
Foreign currency translation adjustments,net |
|
(833,843 |
) |
(27,013 |
) |
(860,856 |
) |
|||
Changes in the fair value of derivatives, net (1) |
|
25,997 |
|
|
|
25,997 |
|
|||
Total comprehensive income |
|
(288,628 |
) |
(21,154 |
) |
(309,782 |
) |
|||
Issuance of common stock options for stock options exercised and the sale of stock under employee stock purchase plans |
|
129,764 |
|
|
|
129,764 |
|
|||
Tax benefit on exercise of options |
|
5,992 |
|
|
|
5,992 |
|
|||
Stock-based compensation |
|
134,196 |
|
|
|
134,196 |
|
|||
Cash dividends paid |
|
(231,460 |
) |
|
|
(231,460 |
) |
|||
Purchase of treasury stock, net |
|
(83,208 |
) |
|
|
(83,208 |
) |
|||
Noncontrolling interest acquired |
|
|
|
69,272 |
|
69,272 |
|
|||
Other |
|
(2,605 |
) |
|
|
(2,605 |
) |
|||
Stockholders equity at November 1, 2008 |
|
$ |
5,382,058 |
|
$ |
58,345 |
|
$ |
5,440,403 |
|
(1) Changes in the fair value of derivatives are net of taxes of $1.2 million and $19.8 million for the thirteen weeks ended October 31, 2009 and November 1, 2008, respectively, and net of taxes of $(14.2) million and $18.8 million for the thirty-nine weeks ended October 31, 2009 and November 1, 2008, respectively.
The following table summarizes the components of accumulated other comprehensive income (loss) as of October 31, 2009 and January 31, 2009 (in thousands):
|
|
October 31, 2009 |
|
January 31, 2009 |
|
||
Cumulative foreign currency translation |
|
$ |
187,594 |
|
$ |
(336,812 |
) |
Net unrecognized gains on derivative instruments |
|
5,601 |
|
27,041 |
|
||
Deferred pension costs |
|
(184,556 |
) |
(184,556 |
) |
||
Accumulated other comprehensive income (loss) |
|
$ |
8,639 |
|
$ |
(494,327 |
) |
14
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
Note J - Computation of Earnings Per Common Share
The computation of basic and diluted earnings per share for the third quarter and year-to-date 2009 and 2008 is as follows (in thousands, except per share data):
|
|
13 Weeks Ended |
|
39 Weeks Ended |
|
||||||||
|
|
October 31, |
|
November 1, |
|
October 31, |
|
November 1, |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
||||
Net income attributed to Staples, Inc. |
|
$ |
269,381 |
|
$ |
156,703 |
|
$ |
504,756 |
|
$ |
519,218 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
||||
Weighted-average common shares outstanding |
|
711,397 |
|
701,161 |
|
708,019 |
|
696,811 |
|
||||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
||||
Employee stock options, Restricted Shares and Performance Shares |
|
11,225 |
|
11,550 |
|
11,992 |
|
13,873 |
|
||||
Weighted-average common shares outstanding assuming dilution |
|
722,622 |
|
712,711 |
|
720,011 |
|
710,684 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Basic earnings per common share |
|
$ |
0.38 |
|
$ |
0.22 |
|
$ |
0.71 |
|
$ |
0.75 |
|
Diluted earnings per common share |
|
$ |
0.37 |
|
$ |
0.22 |
|
$ |
0.70 |
|
$ |
0.73 |
|
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 13.7 million and 14.6 million shares of Staples common stock were excluded from the calculation of diluted earnings per share at October 31, 2009 and November 1, 2008, respectively.
Note K - Segment Reporting
Staples has three reportable segments: North American Delivery, North American Retail and International Operations. The North American Delivery segment consists of the U.S. and Canadian business units that sell and deliver office products and services directly to customers, and includes Contract (including Corporate Express), Staples Business Delivery and Quill. The North American Retail segment consists of the U.S. and Canadian business units that operate office products stores. The International Operations segment consists of business units (including Corporate Express) that operate office products stores and that sell and deliver office products and services directly to customers and businesses in 25 countries in Europe, Asia, Australia, and South America.
Staples evaluates performance and allocates resources based on profit or loss from operations before integration and restructuring costs, stock-based compensation, interest and other expense, non-recurring items, and the impact of changes in accounting principles (business unit income). Intersegment sales and transfers are recorded at Staples cost; therefore, there is no intercompany profit or loss recognized on these transactions.
Staples North American Delivery and North American Retail segments are managed separately because the way they market products is different, the types of customers they service may be different, and the distribution methods used to deliver products to customers are different. The International Operations are considered a separate reportable segment because of the significant differences in the operating environment from the North American operations.
15
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
The following is a summary of sales and business unit income by reportable segment for the third quarter and year-to-date 2009 and 2008 and a reconciliation of total segment income to consolidated income before income taxes (in thousands):
|
|
13 Weeks Ended |
|
39 Weeks Ended |
|
||||||||
|
|
October 31, |
|
November 1, |
|
October 31, |
|
November 1, |
|
||||
|
|
Sales |
|
Sales |
|
||||||||
North American Delivery |
|
$ |
2,474,424 |
|
$ |
2,783,195 |
|
$ |
7,215,632 |
|
$ |
6,469,487 |
|
North American Retail |
|
2,628,873 |
|
2,599,204 |
|
6,790,476 |
|
7,095,568 |
|
||||
International Operations |
|
1,414,742 |
|
1,568,534 |
|
3,863,269 |
|
3,345,152 |
|
||||
Total reportable segments |
|
$ |
6,518,039 |
|
$ |
6,950,933 |
|
$ |
17,869,377 |
|
$ |
16,910,207 |
|
|
|
13 Weeks Ended |
|
39 Weeks Ended |
|
||||||||
|
|
October 31, |
|
November 1, |
|
October 31, |
|
November 1, |
|
||||
|
|
Business Unit Income |
|
Business Unit Income |
|
||||||||
North American Delivery |
|
$ |
219,003 |
|
$ |
246,206 |
|
$ |
564,554 |
|
$ |
583,023 |
|
North American Retail |
|
265,743 |
|
267,558 |
|
528,965 |
|
546,342 |
|
||||
International Operations |
|
40,069 |
|
55,624 |
|
63,928 |
|
94,364 |
|
||||
Business Unit Income |
|
$ |
524,815 |
|
$ |
569,388 |
|
$ |
1,157,447 |
|
$ |
1,223,729 |
|
Stock-based compensation |
|
(41,981 |
) |
(47,399 |
) |
(132,539 |
) |
(134,196 |
) |
||||
Total Segment Income |
|
482,834 |
|
521,989 |
|
1,024,908 |
|
1,089,533 |
|
||||
Interest and other expense, net |
|
(48,386 |
) |
(57,369 |
) |
(169,097 |
) |
(68,423 |
) |
||||
Integration and restructuring cost |
|
(15,872 |
) |
(132,282 |
) |
(64,502 |
) |
(132,445 |
) |
||||
Consolidated income before income taxes |
|
$ |
418,576 |
|
$ |
332,338 |
|
$ |
791,309 |
|
$ |
888,665 |
|
Note L - Guarantor Subsidiaries
Under the terms of the Companys September 2002 Notes, the Revolving Credit Facility, the commercial paper program, the January 2009 Notes, the March 2009 Notes, and prior to its voluntary termination on May 26, 2009, the 2008 Agreement, the Guarantor Subsidiaries guarantee repayment of the debt. The debt is fully and unconditionally guaranteed on an unsecured, unsubordinated joint and several basis by the Guarantor Subsidiaries. The term of guarantees is equivalent to the term of the related debt. The following condensed consolidating financial data is presented for the holders of the September 2002 Notes, the January 2009 Notes, and the March 2009 Notes and illustrates the composition of Staples, Inc. (the Parent Company), Guarantor Subsidiaries, and non-guarantor subsidiaries as of October 31, 2009 and January 31, 2009 and for the third quarter and year-to-date 2009 and 2008. 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 and therefore are shown separately below.
Investments in subsidiaries are accounted for by the Parent Company on the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are, therefore, reflected in the Parent Companys investment accounts and earnings. The principal elimination entries eliminate the Parent Companys investment in subsidiaries and intercompany balances and transactions.
16
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
Condensed Consolidating Balance Sheet
As of October 31, 2009
(in thousands)
|
|
|
|
|
|
Non- |
|
|
|
|
|
|||||
|
|
Staples, Inc. |
|
Guarantor |
|
Guarantor |
|
|
|
|
|
|||||
|
|
(Parent Co.) |
|
Subsidiaries |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
|||||
Cash and cash equivalents |
|
$ |
345,119 |
|
$ |
21,881 |
|
$ |
668,147 |
|
$ |
|
|
$ |
1,035,147 |
|
Merchandise inventories, net |
|
|
|
1,311,815 |
|
1,064,083 |
|
|
|
2,375,898 |
|
|||||
Other current assets |
|
151,553 |
|
595,415 |
|
1,854,682 |
|
|
|
2,601,650 |
|
|||||
Total current assets |
|
496,672 |
|
1,929,111 |
|
3,586,912 |
|
|
|
6,012,695 |
|
|||||
Net property, equipment and other assets |
|
751,496 |
|
1,313,657 |
|
1,350,475 |
|
|
|
3,415,628 |
|
|||||
Goodwill |
|
1,640,491 |
|
154,526 |
|
2,449,995 |
|
|
|
4,245,012 |
|
|||||
Investment in affiliates and intercompany, net |
|
(2,936,611 |
) |
7,813,668 |
|
2,939,097 |
|
(7,816,154 |
) |
|
|
|||||
Total assets |
|
$ |
(47,952 |
) |
$ |
11,210,962 |
|
$ |
10,326,479 |
|
$ |
(7,816,154 |
) |
$ |
13,673,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total current liabilities |
|
$ |
278,325 |
|
$ |
1,760,824 |
|
$ |
1,877,626 |
|
$ |
|
|
$ |
3,916,775 |
|
Total long-term liabilities |
|
2,184,799 |
|
566,764 |
|
356,599 |
|
|
|
3,108,162 |
|
|||||
Total stockholders equity |
|
(2,511,076 |
) |
8,883,374 |
|
8,092,254 |
|
(7,816,154 |
) |
6,648,398 |
|
|||||
Total liabilities and stockholders equity |
|
$ |
(47,952 |
) |
$ |
11,210,962 |
|
$ |
10,326,479 |
|
$ |
(7,816,154 |
) |
$ |
13,675,335 |
|
Condensed Consolidating Balance Sheet
As of January 31, 2009
(in thousands)
|
|
|
|
|
|
Non- |
|
|
|
|
|
|||||
|
|
Staples, Inc. |
|
Guarantor |
|
Guarantor |
|
|
|
|
|
|||||
|
|
(Parent Co.) |
|
Subsidiaries |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
|||||
Cash and cash equivalents |
|
$ |
74,255 |
|
$ |
45,083 |
|
$ |
514,436 |
|
$ |
|
|
$ |
633,774 |
|
Merchandise inventories, net |
|
|
|
1,148,047 |
|
1,256,127 |
|
|
|
2,404,174 |
|
|||||
Other current assets |
|
94,681 |
|
718,204 |
|
1,946,425 |
|
|
|
2,759,310 |
|
|||||
Total current assets |
|
168,936 |
|
1,911,334 |
|
3,716,988 |
|
|
|
5,797,258 |
|
|||||
Net property, equipment and other assets |
|
754,486 |
|
1,270,406 |
|
1,470,736 |
|
|
|
3,495,628 |
|
|||||
Goodwill |
|
1,346,093 |
|
390,361 |
|
2,043,715 |
|
|
|
3,780,169 |
|
|||||
Investment in affiliates and intercompany, net |
|
614,693 |
|
3,298,704 |
|
3,783,962 |
|
(7,697,359 |
) |
|
|
|||||
Total assets |
|
$ |
2,884,208 |
|
$ |
6,870,805 |
|
$ |
11,015,401 |
|
$ |
(7,697,359 |
) |
$ |
13,073,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total current liabilities |
|
$ |
1,510,628 |
|
$ |
1,046,703 |
|
$ |
2,288,223 |
|
$ |
|
|
$ |
4,845,554 |
|
Total long-term liabilities |
|
1,640,609 |
|
469,365 |
|
495,096 |
|
|
|
2,605,070 |
|
|||||
Total stockholders equity |
|
(267,029 |
) |
5,354,737 |
|
8,232,082 |
|
(7,697,359 |
) |
5,622,431 |
|
|||||
Total liabilities and stockholders equity |
|
$ |
2,884,208 |
|
$ |
6,870,805 |
|
$ |
11,015,401 |
|
$ |
(7,697,359 |
) |
$ |
13,073,055 |
|
17
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
Condensed Consolidating Statement of Income
For the thirteen weeks ended October 31, 2009
(in thousands)
|
|
Staples, Inc. |
|
Guarantor |
|
Non-Guarantor |
|
|
|
||||
|
|
(Parent Co.) |
|
Subsidiaries |
|
Subsidiaries |
|
Consolidated |
|
||||
Sales |
|
$ |
|
|
$ |
3,926,576 |
|
$ |
2,591,463 |
|
$ |
6,518,039 |
|
Cost of goods sold and occupancy costs |
|
2,847 |
|
2,894,661 |
|
1,854,328 |
|
4,751,836 |
|
||||
Gross profit |
|
(2,847 |
) |
1,031,915 |
|
737,135 |
|
1,766,203 |
|
||||
Operating and other expenses |
|
110,852 |
|
806,536 |
|
430,239 |
|
1,347,627 |
|
||||
Consolidated income (loss) before income taxes |
|
(113,699 |
) |
225,379 |
|
306,896 |
|
418,576 |
|
||||
Income tax expense |
|
|
|
48,294 |
|
96,115 |
|
144,409 |
|
||||
Consolidated net income (loss) |
|
(113,699 |
) |
177,085 |
|
210,781 |
|
274,167 |
|
||||
Income attributed to the noncontrolling interests |
|
|
|
|
|
4,786 |
|
4,786 |
|
||||
Net income (loss) attributed to Staples, Inc. |
|
$ |
(113,699 |
) |
$ |
177,085 |
|
$ |
205,995 |
|
$ |
269,381 |
|
Condensed Consolidating Statement of Income
For the thirteen weeks ended November 1, 2008
(in thousands)
|
|
Staples, Inc. |
|
Guarantor |
|
Non-Guarantor |
|
|
|
||||
|
|
(Parent Co.) |
|
Subsidiaries |
|
Subsidiaries |
|
Consolidated |
|
||||
Sales |
|
$ |
|
|
$ |
3,267,766 |
|
$ |
3,683,167 |
|
$ |
6,950,933 |
|
Cost of goods sold and occupancy costs |
|
3,525 |
|
2,359,215 |
|
2,724,059 |
|
5,086,799 |
|
||||
Gross profit |
|
(3,525 |
) |
908,551 |
|
959,108 |
|
1,864,134 |
|
||||
Operating and other expenses |
|
167,717 |
|
639,538 |
|
724,541 |
|
1,531,796 |
|
||||
Consolidated income (loss) before income taxes |
|
(171,242 |
) |
269,013 |
|
234,567 |
|
332,338 |
|
||||
Income tax expense |
|
|
|
97,786 |
|
73,858 |
|
171,644 |
|
||||
Consolidated net income (loss) |
|
(171,242 |
) |
171,227 |
|
160,709 |
|
160,694 |
|
||||
Income attributed to the noncontrolling interests |
|
|
|
|
|
3,991 |
|
3,991 |
|
||||
Net income (loss) attributed to Staples, Inc. |
|
$ |
(171,242 |
) |
$ |
171,227 |
|
$ |
156,718 |
|
$ |
156,703 |
|
Condensed Consolidating Statement of Income
For the thirty-nine weeks ended October 31, 2009
(in thousands)
|
|
Staples, Inc. |
|
Guarantor |
|
Non-Guarantor |
|
|
|
||||
|
|
(Parent Co.) |
|
Subsidiaries |
|
Subsidiaries |
|
Consolidated |
|
||||
Sales |
|
$ |
|
|
$ |
9,736,246 |
|
$ |
8,133,131 |
|
$ |
17,869,377 |
|
Cost of goods sold and occupancy costs |
|
8,677 |
|
7,191,980 |
|
5,952,358 |
|
13,153,015 |
|
||||
Gross profit |
|
(8,677 |
) |
2,544,266 |
|
2,180,773 |
|
4,716,362 |
|
||||
Operating and other expenses |
|
157,225 |
|
2,072,823 |
|
1,695,005 |
|
3,925,053 |
|
||||
Consolidated income (loss) before income taxes |
|
(165,902 |
) |
471,443 |
|
485,768 |
|
791,309 |
|
||||
Income tax expense |
|
|
|
110,326 |
|
162,676 |
|
273,002 |
|
||||
Consolidated net income (loss) |
|
(165,902 |
) |
361,117 |
|
323,092 |
|
518,307 |
|
||||
Income attributed to the noncontrolling interests |
|
|
|
|
|
13,551 |
|
13,551 |
|
||||
Net income (loss) attributed to Staples, Inc. |
|
$ |
(165,902 |
) |
$ |
361,117 |
|
$ |
309,541 |
|
$ |
504,756 |
|
18
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
Condensed Consolidating Statement of Income
For the thirty-nine weeks ended November 1, 2008
(in thousands)
|
|
Staples, Inc. |
|
Guarantor |
|
Non-Guarantor |
|
|
|
||||
|
|
(Parent Co.) |
|
Subsidiaries |
|
Subsidiaries |
|
Consolidated |
|
||||
Sales |
|
$ |
|
|
$ |
9,221,573 |
|
$ |
7,688,634 |
|
$ |
16,910,207 |
|
Cost of goods sold and occupancy costs |
|
10,865 |
|
6,781,769 |
|
5,531,015 |
|
12,323,649 |
|
||||
Gross profit |
|
(10,865 |
) |
2,439,804 |
|
2,157,619 |
|
4,586,558 |
|
||||
Operating and other expenses |
|
204,868 |
|
1,875,974 |
|
1,617,051 |
|
3,697,893 |
|
||||
Consolidated income (loss) before taxes |
|
(215,733 |
) |
563,830 |
|
540,568 |
|
888,665 |
|
||||
Income tax expense |
|
|
|
193,783 |
|
169,805 |
|
363,588 |
|
||||
Consolidated net income (loss) |
|
(215,733 |
) |
370,047 |
|
370,763 |
|
525,077 |
|
||||
Income attributed to the noncontrolling interests |
|
|
|
|
|
5,859 |
|
5,859 |
|
||||
Net income (loss) attributed to Staples, Inc. |
|
$ |
(215,733 |
) |
$ |
370,047 |
|
$ |
364,904 |
|
$ |
519,218 |
|
Condensed Consolidating Statement of Cash Flows
For the thirty-nine weeks ended October 31, 2009
(in thousands)
|
|
Staples, Inc. |
|
Guarantor |
|
Non-Guarantor |
|
|
|
||||
|
|
(Parent Co.) |
|
Subsidiaries |
|
Subsidiaries |
|
Consolidated |
|
||||
Net cash provided by operating activities |
|
$ |
1,476,492 |
|
$ |
71,999 |
|
$ |
38,796 |
|
$ |
1,587,287 |
|
Investing activities: |
|
|
|
|
|
|
|
|
|
||||
Acquisition of property and equipment |
|
(21,047 |
) |
(96,381 |
) |
(73,721 |
) |
(191,149 |
) |
||||
Cash used in investing activities |
|
(21,047 |
) |
(96,381 |
) |
(73,721 |
) |
(191,149 |
) |
||||
Financing Activities: |
|
|
|
|
|
|
|
|
|
||||
(Repayments of) proceeds from issuance of commercial paper |
|
(1,195,557 |
) |
|
|
|
|
(1,195,557 |
) |
||||
Proceeds from borrowings |
|
834,286 |
|
|
|
342,044 |
|
1,176,330 |
|
||||
Payments on borrowings, including payment of deferred financing fees |
|
(687,690 |
) |
|
|
(224,289 |
) |
(911,979 |
) |
||||
Purchase of treasury stock, net |
|
(28,382 |
) |
|
|
|
|
(28,382 |
) |
||||
Cash dividends paid |
|
(177,323 |
) |
|
|
|
|
(177,323 |
) |
||||
Excess tax benefits from stock-based compensation arrangements |
|
24 |
|
1,180 |
|
957 |
|
2,161 |
|
||||
Other |
|
70,061 |
|
|
|
|
|
70,061 |
|
||||
Cash (used in) provided by financing activities |
|
(1,184,581 |
) |
1,180 |
|
118,712 |
|
(1,064,689 |
) |
||||
Effect of exchange rate changes on cash and cash equivalents |
|
|
|
|
|
69,924 |
|
69,924 |
|
||||
Net increase (decrease) in cash and cash equivalents |
|
270,864 |
|
(23,202 |
) |
153,711 |
|
401,373 |
|
||||
Cash and cash equivalents at beginning of period |
|
74,255 |
|
45,083 |
|
514,436 |
|
633,774 |
|
||||
Cash and cash equivalents at end of period |
|
$ |
345,119 |
|
$ |
21,881 |
|
$ |
668,147 |
|
$ |
1,035,147 |
|
19
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
Condensed Consolidating Statement of Cash Flows
For the thirty-nine weeks ended November 1, 2008
(in thousands)
|
|
Staples, Inc. |
|
Guarantor |
|
Non-Guarantor |
|
|
|
||||
|
|
(Parent Co.) |
|
Subsidiaries |
|
Subsidiaries |
|
Consolidated |
|
||||
Net cash provided by (used in) operating activities |
|
$ |
(3,501,226 |
) |
$ |
115,643 |
|
$ |
4,550,689 |
|
$ |
1,165,106 |
|
Investing Activities: |
|
|
|
|
|
|
|
|
|
||||
Acquisition of property and equipment |
|
(29,540 |
) |
(123,371 |
) |
(90,866 |
) |
(243,777 |
) |
||||
Acquisition of businesses and investments in joint ventures, net of cash acquired |
|
|
|
|
|
(4,381,811 |
) |
(4,381,811 |
) |
||||
Proceeds from the sale of short-term investments |
|
27,019 |
|
|
|
|
|
27,019 |
|
||||
Purchase of short-term investments |
|
(3 |
) |
|
|
|
|
(3 |
) |
||||
Cash used in investing activities |
|
(2,524 |
) |
(123,371 |
) |
(4,472,677 |
) |
(4,598,572 |
) |
||||
Financing Activities: |
|
|
|
|
|
|
|
|
|
||||
Proceeds from issuance of commercial paper |
|
948,728 |
|
|
|
|
|
948,728 |
|
||||
Proceeds from borrowings |
|
2,762,879 |
|
|
|
|
|
2,762,879 |
|
||||
Payments on borrowings, including payment of deferred financing fees |
|
(377,240 |
) |
|
|
|
|
(377,240 |
) |
||||
Purchase of treasury stock, net |
|
(83,208 |
) |
|
|
|
|
(83,208 |
) |
||||
Cash dividends paid |
|
(231,460 |
) |
|
|
|
|
(231,460 |
) |
||||
Excess tax benefits from stock-based compensation arrangements |
|
3,528 |
|
2,048 |
|
416 |
|
5,992 |
|
||||
Other |
|
129,764 |
|
|
|
|
|
129,764 |
|
||||
Cash provided by financing activities |
|
3,152,991 |
|
2,048 |
|
416 |
|
3,155,455 |
|
||||
Effect of exchange rate changes on cash and cash equivalents |
|
|
|
|
|
(79,737 |
) |
(79,737 |
) |
||||
Net decrease in cash and cash equivalents |
|
(350,759 |
) |
(5,680 |
) |
(1,309 |
) |
(357,748 |
) |
||||
Cash and cash equivalents at beginning of period |
|
638,543 |
|
42,612 |
|
564,293 |
|
1,245,448 |
|
||||
Cash and cash equivalents at end of period |
|
$ |
287,784 |
|
$ |
36,932 |
|
$ |
562,984 |
|
$ |
887,700 |
|
Note M Contingencies
The Company is the subject of several class action lawsuits filed in various states, where the plaintiffs allege the Company failed to comply with federal and state overtime laws and that it failed to pay them overtime. The Company intends to vigorously defend the cases. The complaints generally seek unspecified monetary damages. At this time, the Company cannot reasonably estimate the possible loss or range of losses that may arise from these lawsuits.
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.
20
STAPLES, INC. AND SUBSIDIARIES
Managements Discussion and Analysis
of Financial Condition and Results of Operations
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This Quarterly Report on Form 10-Q and, in particular, this managements discussion and analysis contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act). Any statements contained in or incorporated by reference into this report that are not statements of historical fact should be considered forward-looking statements. You can identify these forward-looking statements by the use of the words believes, expects, anticipates, plans, may, will, would, intends, estimates and other similar expressions, whether in the negative or affirmative. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and managements beliefs and assumptions, and should be read in conjunction with our condensed consolidated financial statements and notes to condensed consolidated financial statements included in this report. We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in the forward-looking statements made. There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by such forward-looking statements. These risks and uncertainties include, without limitation, those set forth under the heading Risk Factors of this Quarterly Report on Form 10-Q. We do not intend to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.
Acquisition of Corporate Express
In July 2008, we acquired Corporate Express N.V. (Corporate Express), a Dutch office products distributor with operations in North America, Europe and Australia, through a tender offer for all of its outstanding capital stock.
At the time the tender offer was fully settled on July 23, 2008, we had acquired more than 99% of the outstanding capital stock of Corporate Express. We have worked diligently to acquire as swiftly as possible the remaining capital stock of Corporate Express by means of a compulsory judicial squeeze out procedure to acquire the remaining minority shares in accordance with the Dutch Civil Code. We, along with the other parties to the squeeze out procedure, have submitted our respective arguments to the Dutch court and are awaiting a decision. While we do not know the exact date that the Dutch court will render a judgment, we anticipate that a judgment will be rendered prior to the end of fiscal year 2009, which ends on January 30, 2010. There is, however, no guarantee that the court will render a judgment before the end of fiscal 2009.
In July 2008, we also acquired, and subsequently paid off, all of the outstanding 8.25% Senior Subordinated Notes due July 1, 2014 and all of the outstanding 7.875% Senior Subordinated Notes due March 1, 2015 of Corporate Express U.S. Finance Inc., a wholly owned subsidiary of Corporate Express. The aggregate cash purchase price for the capital stock of Corporate Express and for the repayment of most of Corporate Express debt was 2.8 billion Euros (approximately $4.4 billion, net of cash acquired).
The operating results of Corporate Express have been included in our consolidated financial statements since July 2, 2008, the date we declared the terms of the tender offer unconditional. The third quarter of 2009 is our first quarter of results that can be compared to a full prior years quarter that included the post-acquisition results of Corporate Express. The Corporate Express results are reported in our North American Delivery and International Operations for segment reporting.
We allocated assets of $3.48 billion, $3.47 billion and $283.8 million to the North American Delivery, International Operations and North American Retail segments, respectively. Included in total assets were goodwill and intangible assets totaling $3.55 billion, of which $1.71 billion, $1.55 billion and $283.8 million were allocated to the North American Delivery, International Operations and North American Retail segments, respectively.
Results of Operations
We have provided below an overview of our operating results as well as a summary of our consolidated performance and details of our segment performance. As previously announced in the first quarter of 2009, because of the progress of the integration of the two businesses and the difficulty in accurately isolating the impact of Corporate Express operations on our business, we are no longer providing detailed financial information or any related discussion of our business after removing the impact of Corporate Express.
21
Overview
Major contributors to our results for the third quarter of 2009 compared to our results for the third quarter of 2008 are reviewed in detail in the Consolidated Performance and Segment Performance discussions and are summarized below:
· On a consolidated basis, we generated $6.5 billion in sales, a sales decline of 6.2%.
· North American Delivery business unit income rate increased slightly to 8.9%, despite an 11.1% decrease in sales.
· North American Retails comparable store sales were flat, and business unit income rate decreased slightly to 10.1% from 10.3%. The flat comparable store sales for the quarter reflects positive customer traffic offset by a decrease in average order size.
· International Operations sales declined 9.8%, or 11.7% in local currency. Business unit income rate decreased to 2.8% from 3.5%, mainly reflecting losses in our printing systems business.
· We now operate 2,253 stores worldwide, with a net reduction of 2 stores during the third quarter of 2009.
· Year to date operating cash flow increased to $1.59 billion from $1.17 billion in 2008.
While maintaining our focus on expense control, we are also continuing to invest in strategic initiatives to drive our long-term success. These strategic initiatives include:
· North American Delivery share of wallet initiatives to sell a broader array of non-core office products to our customers, including cleaning and break room supplies, copy and print services and promotional products;
· Retail initiatives to drive sales, including increasing our focus on technology products and services and boosting sales of high margin copy and print services;
· Cross-channel initiatives to encourage customers to spend more overall by shopping both our delivery and retail channels; and
· Continued differentiation through the expansion of our own brand product line.
We view customer service as a key component of our long-term success. For our customer service programs, our North American and European delivery businesses are focused on the Perfect Order program to improve product availability, ensure accuracy of orders, improve warehouse performance and productivity of our delivery fleet, and reduce product returns, resulting in fewer trips per order and higher customer satisfaction and retention. In our North American Retail business, our selling models are designed to train associates to provide solutions for small business customers and drive attachment selling, while also rewarding store associates who provide great customer service.
Outlook
The global recession has reduced demand for office products. While we expect sales and earnings to continue to be negatively impacted in the near term, we have been able to partially offset these declines through our customer service, customer retention and acquisition efforts, expense management and focused integration of Corporate Express. We reaffirm our expectations for synergies related to the Corporate Express acquisition, building to $300 million annually over the three year integration period. For the fourth quarter of 2009, we expect total company sales to increase between one percent and three percent in US dollars, or to decrease in the low single-digits in local currency, compared to the same period of 2008. For the fourth quarter of 2009, we expect to achieve diluted earnings per share, on a GAAP basis, in the range of $0.34 to $0.36. This guidance includes approximately $20 million to $25 million of pre-tax integration and restructuring expenses associated with the Corporate Express acquisition which results in a $0.02 impact on diluted earnings per share. We expect to incur the following expenses for fiscal year 2009:
· Integration and restructuring costs of $85 million to $90 million;
· Depreciation expense of $440 million to $450 million;
· Amortization of intangibles of $100 million to $105 million; and
· Net interest expense of $230 million to $235 million.
22
Consolidated Performance
Net income attributed to Staples, Inc. for the third quarter of 2009 was $269.4 million or $0.37 per diluted share compared to $156.7 million or $0.22 per diluted share for 2008. The third quarter results include integration and restructuring costs of $10.4 million, net of taxes ($0.02 per diluted share) for 2009 and $86.6 million, net of taxes ($0.12 per diluted share) for 2008. The third quarter of 2008 also included a tax charge of $57.0 million for the establishment of a reserve ($.08 per diluted share) related to foreign tax credits that were expected to expire.
Net income for year-to-date 2009 was $504.8 million or $0.70 per diluted share compared to $519.2 million or $0.73 per diluted share for year-to-date 2008, which includes the results of the Corporate Express business acquired on July 2, 2008. Our results include integration and restructuring costs of $42.2 million, net of taxes ($0.06 per diluted share) for year-to-date 2009 and $86.8 million, net of taxes ($0.12 per diluted share) for year-to-date 2008. Year-to-date 2008 also included the tax charge of $57.0 million ($.08 per diluted share), which was recorded in the third quarter of 2008.
Our results reflect our continued focus on our strategy of driving profitable sales growth, improving profit margins and increasing asset productivity. We continue to work to deliver on our Easy brand promise to make buying office products easy for our customers in order to differentiate us from our competitors. Our commitment to customer service, customer acquisition and retention efforts, reducing expenses, focused integration of Corporate Express and managing working capital and capital spending were key contributors to sustaining our performance, despite the negative impact of a weakened economy on our customers and our sales growth.
Sales: Sales for the third quarter of 2009 were $6.5 billion, a decrease of 6.2% from the third quarter of 2008. Our sales decline primarily reflects lower sales to existing customers in our North American Delivery and International Operations businesses and, to a much lesser extent, a decrease in comparable store sales in our European retail businesses driven by lower average order size. The sales decrease for the third quarter of 2009 was slightly offset by non-comparable sales for new stores opened in the past twelve months and, to an equal extent, the positive impact of foreign exchange rates of $37.4 million. Sales for year-to-date 2009 were $17.9 billion, an increase of 5.7% from year-to-date 2008. Our sales growth is mainly attributed to non-comparable sales from our acquisition of Corporate Express. This sales growth was partially offset by lower sales to existing customers in our North American Delivery and International Operations businesses and, to a much lesser extent, a decrease in comparable store sales in our retail businesses on lower average order size and the negative impact of foreign exchange rates of $360.3 million.
Gross Profit: Gross profit as a percentage of sales was 27.1% for the third quarter of 2009 compared to 26.8% for the third quarter of 2008. The increase in gross profit rate was primarily driven by buying synergies and, to a lesser extent, improvements in supply chain productivity, partially offset by an unfavorable sales mix and, to a lesser extent, deleverage in fixed occupancy costs. Gross profit as a percentage of sales was 26.4% for year-to-date 2009 compared to 27.1% for year-to-date 2008. The decrease in gross profit rate primarily reflects the inclusion of the results of Corporate Express, whose gross profit rate was lower than our pre-existing businesses and, to a lesser extent, an unfavorable sales mix partially offset by increased buying synergies.
Selling, General and Administrative Expenses: Selling, general and administrative expenses were 19.3% of sales for the third quarter of 2009 compared to 18.9% for the third quarter of 2008. This increase reflects deleverage of fixed costs on lower sales and, to a lesser extent, increased incentive compensation, partially offset by integration synergies and, to a lesser extent, reduced marketing expense. Selling, general and administrative expenses were 20.2% as a percentage of sales for year-to-date 2009 compared to 20.4% for year-to-date 2008. This decrease was primarily driven by the inclusion of the results of Corporate Express, whose selling, general and administrative expense rate was lower than our pre-existing businesses. The decrease also reflects reduced marketing expense partially offset by increased incentive compensation.
Integration and Restructuring Costs: Integration and restructuring costs represent the costs associated with the integration of the acquired Corporate Express business with our pre-existing business and the consolidation of certain operations of the combined company. Integration and restructuring costs were $15.9 million for the third quarter of 2009
23
compared to $132.3 million for the third quarter of 2008 and $64.5 million for year-to-date 2009 compared to $132.4 million for year-to-date 2008. Integration and restructuring costs for the third quarter of 2009 included $11.5 million of consulting and other fees, a $3.1 million charge for severance and retention and a $1.3 million charge for facility closures. Integration and restructuring costs for the third quarter of 2008 included a $123.8 million charge related to the write-down of indefinite lived intangible tradenames and $8.5 million of consulting and other fees. Integration and restructuring costs for year-to-date 2009 included a $26.0 million charge for severance and retention, $25.5 million of consulting and other costs, an $11.7 million charge related to asset write-downs for assets whose use was expected to be limited as a result of the acquisition, and a $1.3 million charge for facility closures. Integration and restructuring costs for year-to-date 2008 included the $123.8 million charge related to the write-down of indefinite lived intangible tradenames and $8.7 million related to consulting and other fees.
Amortization of Intangibles: Amortization of intangibles was $26.9 million for the third quarter of 2009 compared to $28.0 million for the third quarter of 2008 and $75.4 million for year-to-date 2009 compared to $46.4 million for year-to-date 2008. Amortization expense reflects the amortization of certain tradenames, customer relationships and non-competition agreements. Amortization expense relating to intangibles resulting from our acquisition of Corporate Express was $19.1 million for the third quarter of 2009 compared to $24.5 million for the third quarter of 2008 and $51.9 million for year-to-date 2009 compared to $34.9 million for year-to-date 2008.
Interest Income: Interest income decreased to $1.4 million for the third quarter of 2009 from $5.4 million for the third quarter of 2008 and decreased to $4.4 million for year-to-date 2009 from $23.1 million for year-to-date 2008. The decrease in interest income for the third quarter of 2009 was due to a reduction in interest rates, partially offset by a slight increase in our average cash balance. The decrease in interest income for year-to-date 2009 was the result of a reduction in interest rates and our average cash balance, resulting from the use of cash to acquire Corporate Express.
Interest Expense: Interest expense decreased to $58.0 million for the third quarter of 2009 from $59.9 million for the third quarter of 2008 and increased to $179.4 million for year-to-date 2009 from $88.3 million for year-to-date 2008. Interest expense was essentially flat for the third quarter of 2009. The increase in interest expense for year-to-date 2009 was primarily due to borrowings under our January 2009 Notes, our March 2009 Notes, our commercial paper program, our Revolving Credit Facility and our 2008 Agreement (each as defined in Sources of Liquidity) relating to our acquisition of Corporate Express. We use interest rate swap agreements to convert a portion of our fixed rate debt obligations into variable rate obligations and a portion of our variable rate obligations into fixed rate obligations. Excluding the impact of our interest rate swap agreements, interest expense would have been $60.3 million for the third quarter of 2009 compared to $60.8 million for the third quarter of 2008 and $184.7 million for year-to-date 2009 compared to $90.5 million for year-to-date 2008.
Miscellaneous Income (Expense): Miscellaneous income was $8.3 million for the third quarter of 2009 compared to miscellaneous expense of $2.8 million for the third quarter of 2008. Miscellaneous income was $6.0 million for year-to-date 2009 compared to miscellaneous expense of $3.2 million for year-to-date 2008. Miscellaneous income (expense) primarily reflects foreign exchange gains and losses recorded in the respective periods.
Income Taxes: Our effective tax rate was 34.5% for the third quarter of 2009 compared to 51.6% for the third quarter of 2008 and 34.5% for year-to-date 2009 compared to 40.9% for year-to-date 2008. The decrease in our effective tax rate for the third quarter and year-to-date 2009 was due to the establishment of a reserve of $57.0 million in the third quarter of 2008 related to foreign tax credits expected to expire. Our effective tax rate from operations for the third quarter and year-to-date 2008 was 34.5%. We expect our effective tax rate for 2009 to be consistent with the 34.5% reported for the full year 2008.
Segment Performance
Our business is comprised of three segments: North American Delivery, North American Retail and International Operations. Our North American Delivery segment consists of the U.S. and Canadian business units that sell and deliver office products and services directly to customers, and includes Contract (including Corporate Express), Staples Business Delivery
24
and Quill. The North American Retail segment consists of the U.S. and Canadian business units that operate office products stores. The International Operations segment consists of business units (including Corporate Express) that operate office products stores and that sell and deliver office products and services directly to customers and businesses in 25 countries in Europe, Asia, Australia and South America.
The following tables provide a summary of our sales and business unit income by reportable segment. Business unit income excludes integration and restructuring costs, stock-based compensation, interest and other expense, non-recurring items and the impact of changes in accounting principles (see reconciliation of total segment income to consolidated income before taxes in Note K in the Notes to the Condensed Consolidated Financial Statements):
|
|
(Amounts in thousands) |
|
October 31, |
|
November 1, |
|
||||
|
|
October 31, |
|
November 1, |
|
Increase |
|
Increase |
|
||
Sales: |
|
|
|
|
|
|
|
|
|
||
North American Delivery |
|
$ |
2,474,424 |
|
$ |
2,783,195 |
|
(11.1 |
)% |
61.1 |
% |
North American Retail |
|
2,628,873 |
|
2,599,204 |
|
1.1 |
% |
(5.5 |
)% |
||
International Operations |
|
1,414,742 |
|
1,568,534 |
|
(9.8 |
)% |
127.2 |
% |
||
Total Segment Sales |
|
$ |
6,518,039 |
|
$ |
6,950,933 |
|
(6.2 |
)% |
34.5 |
% |
|
|
(Amounts in thousands) |
|
|
|
|
|
||||
|
|
13 Weeks Ended |
|
October 31, |
|
November 1, |
|
||||
|
|
October 31, |
|
November 1, |
|
2009 |
|
2008 |
|
||
|
|
2009 |
|
2008 |
|
% of Sales |
|
% of Sales |
|
||
Business Unit Income: |
|
|
|
|
|
|
|
|
|
||
North American Delivery |
|
$ |
219,003 |
|
$ |
246,206 |
|
8.9 |
% |
8.8 |
% |
North American Retail |
|
265,743 |
|
267,558 |
|
10.1 |
% |
10.3 |
% |
||
International Operations |
|
40,069 |
|
55,624 |
|
2.8 |
% |
3.5 |
% |
||
Business Unit Income |
|
524,815 |
|
569,388 |
|
8.1 |
% |
8.2 |
% |
||
Stock-based compensation |
|
(41,981 |
) |
(47,399 |
) |
(0.7 |
)% |
(0.7 |
)% |
||
Total Segment Income |
|
$ |
482,834 |
|
$ |
521,989 |
|
7.4 |
% |
7.5 |
% |
25
|
|
(Amounts in thousands) |
|
October 31, |
|
November 1, |
|
||||
|
|
October 31, |
|
November 1, |
|
Increase |
|
Increase |
|
||
Sales: |
|
|
|
|
|
|
|
|
|
||
North American Delivery |
|
$ |
7,215,632 |
|
$ |
6,469,487 |
|
11.5 |
% |
32.1 |
% |
North American Retail |
|
6,790,476 |
|
7,095,568 |
|
(4.3 |
)% |
(1.8 |
)% |
||
International Operations |
|
3,863,269 |
|
3,345,152 |
|
15.5 |
% |
73.7 |
% |
||
Total sales |
|
$ |
17,869,377 |
|
$ |
16,910,207 |
|
5.7 |
% |
20.4 |
% |
|
|
(Amounts in thousands) |
|
|
|
|
|
||||
|
|
39 Weeks Ended |
|
October 31, |
|
November 1, |
|
||||
|
|
October 31, |
|
November 1, |
|
2009 |
|
2008 |
|
||
|
|
2009 |
|
2008 |
|
% of Sales |
|
% of Sales |
|
||
Business Unit Income: |
|
|
|
|
|
|
|
|
|
||
North American Delivery |
|
$ |
564,554 |
|
$ |
583,023 |
|
7.8 |
% |
9.0 |
% |
North American Retail |
|
528,965 |
|
546,342 |
|
7.8 |
% |
7.7 |
% |
||
International Operations |
|
63,928 |
|
94,364 |
|
1.7 |
% |
2.8 |
% |
||
Business Unit Income |
|
1,157,447 |
|
1,223,729 |
|
6.5 |
% |
7.2 |
% |
||
Stock-based compensation |
|
(132,539 |
) |
(134,196 |
) |
(0.8 |
)% |
(0.8 |
)% |
||
Total Segment Income |
|
$ |
1,024,908 |
|
$ |
1,089,533 |
|
5.7 |
% |
6.4 |
% |
North American Delivery: Sales decreased 11.1% for the third quarter of 2009 compared to the third quarter of 2008. This decrease was the result of lower spend from existing customers, partially offset by our customer acquisition and retention efforts. Sales increased 11.5% for year-to-date 2009 compared to year-to-date 2008. This increase was the result of non-comparable sales from our acquisition of Corporate Express and, to a much lesser extent, the impact of our customer acquisition and retention efforts, which was partially offset by lower spend from existing customers.
Business unit income as a percentage of sales increased to 8.9% for the third quarter of 2009 from 8.8% for the third quarter of 2008. The slight increase in business unit income as a percentage of sales for the third quarter of 2009 was the result of, in order of magnitude, buying synergies, sales force synergies and improvements in supply chain productivity, which were substantially offset by an unfavorable sales mix as customers purchased fewer higher margin discretionary products and, to a lesser extent, an increase in incentive compensation. Business unit income as a percentage of sales decreased to 7.8% for year-to-date 2009 from 9.0% for year-to-date 2008. The decrease in business unit income as a percentage of sales for year-to-date 2009 was primarily due to the inclusion of the results of Corporate Express, whose business unit income rate was lower than our pre-existing business. The decrease also reflects an unfavorable sales mix partially offset by buying synergies and, to a lesser extent, reduced marketing expense.
North American Retail: Sales increased 1.1% for the third quarter of 2009 compared to the third quarter of 2008. This increase was substantially driven by non-comparable sales for new stores opened in the past twelve months. Sales for the third quarter of 2009 also reflect flat comparable stores sales, primarily reflecting increased customer traffic offset by lower average order size. Our flat comparable store sales performance for the third quarter of 2009 reflects an increase in consumables, driven by ink and toner and technology services, offset by a decline in the sales of durable products, including business machines and furniture but partially offset by computers. Sales decreased 4.3% for year-to-date 2009 compared to year-to-date 2008. This decrease was primarily driven by a 4% decrease in comparable store sales, reflecting lower average order size, slightly lower customer traffic and the negative impact of foreign exchange rates of $142.7 million, partially offset
26
by non-comparable sales for new stores opened in the past twelve months. Our comparable store sales decrease for year-to-date 2009 reflects a significant decline in durable products, including business machines and furniture, and a slight decline in consumables, primarily core office supplies, slightly offset by positive performance in ink and toner and technology services.
Business unit income as a percentage of sales decreased to 10.1% for the third quarter of 2009 from 10.3% for the third quarter of 2008. The slight decrease in business unit income as a percentage of sales for the third quarter of 2009 primarily reflects an unfavorable sales mix, an increase in incentive compensation and, to a lesser extent, deleverage in fixed occupancy costs, partially offset by reduced marketing expense. Business unit income as a percentage of sales increased to 7.8% for year-to-date 2009 from 7.7% for year-to-date 2008. The slight increase in business unit income as a percentage of sales for year-to-date 2009 primarily reflects a favorable sales mix and, to a lesser extent, reduced marketing expense, partially offset by fixed occupancy costs and, to a lesser extent, an increase in incentive compensation.
International Operations: Sales decreased 9.8% for the third quarter of 2009 compared to the third quarter of 2008. This decrease was the result of lower sales in Europe, particularly in our printing systems business, and weakness in our businesses in China. In Europe, comparable store sales decreased 9%. These decreases were partially offset by the positive impact of foreign exchange rates of $29.4 million. Sales increased 15.5% for year-to-date 2009 compared to year-to-date 2008. This increase was the result of non-comparable sales from our acquisition of Corporate Express partially offset by lower sales in our pre-existing Europe delivery businesses and in China, the negative impact of foreign exchange rates of $196.3 million and, to a lesser extent, a 9% decrease in comparable store sales in Europe.
Business unit income as a percentage of sales decreased to 2.8% for the third quarter of 2009 from 3.5% for the third quarter of 2008 and decreased to 1.7% for year-to-date 2009 from 2.8% for year-to-date 2008. The decrease in business unit income as a percentage of sales for the third quarter of 2009 reflects deleverage of fixed expenses on lower sales volume, and, to a lesser extent, increased losses in our printing systems business, which collectively more than offset buying synergies. The decrease in business unit income as a percentage for sales for year-to-date 2009 reflects deleverage of fixed expenses on lower sales volume and, to a lesser extent, increased losses in our businesses in China and our printing systems business, as well as amortization expense associated with the acquisition of Corporate Express, which collectively more than offset buying synergies. This decrease was partially offset by the inclusion of Corporate Express whose business unit income is higher than our pre-existing businesses and, to a lesser extent, reduced marketing expense.
Stock-Based Compensation: Stock-based compensation decreased to $42.0 million for the third quarter of 2009 from $47.4 million for the third quarter of 2008 and decreased to $132.5 million for year-to-date 2009 from $134.2 million for year-to-date 2008. Stock-based compensation includes expenses associated with our employee stock purchase plans and the issuance of stock options, restricted shares and performance share awards. The decrease in the expense for the third quarter and year-to-date 2009 is primarily related to changes in the mix of equity awards.
Critical Accounting Policies and Significant Estimates
Our condensed consolidated financial statements have been prepared based upon Securities and Exchange Commission (SEC) rules that permit reduced disclosure for interim periods. 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 2008 Annual Report on Form 10-K, filed on March 11, 2009, in Note A of the Notes to the Consolidated Financial Statements and in the Critical Accounting Policies section of Managements Discussion and Analysis of Financial Condition and Results of Operations. There have been no material changes to the Accounting Policies or our application of the Accounting Policies, as disclosed in our 2008 Annual Report on Form 10-K filed on March 11, 2009.
27
Liquidity and Capital Resources
Cash Flows
Cash provided by operations was $1.59 billion for year-to-date 2009 compared to $1.17 billion for year-to-date 2008. The increase in operating cash flow from 2008 to 2009 is primarily due to improvements in working capital.
Cash used in investing activities was $191.1 million for year-to-date 2009 compared to $4.60 billion for year-to-date 2008. The change between 2009 and 2008 is primarily due to the 2.8 billion Euros acquisition (approximately $4.4 billion, net of acquired cash) of Corporate Express in 2008.
Cash used in financing activities was $1.06 billion for year-to-date 2009 compared to cash provided by financing activities of $3.16 billion for year-to-date 2008. The change in cash from financing activities between 2008 and 2009 is primarily related to the repayment or refinancing of the debt we entered into or assumed in connection with the Corporate Express acquisition. In 2009, our financing activities primarily consisted of repayments made on commercial paper and the termination of our 2008 Agreement, as defined below, offset by the proceeds from our $500 million aggregate principal notes due April 1, 2011 (the March 2009 Notes). In 2008, our financing cash flows primarily consisted of the proceeds from the financing of our acquisition of Corporate Express.
Sources of Liquidity
We utilize cash generated from operations, short-term investments and our Revolving Credit Facility, as defined below, to cover seasonal fluctuations in cash flows and to support our various growth initiatives. At October 31, 2009, we had $2.2 billion in total cash and funds available through credit agreements, which consisted of $1.2 billion of available credit and $1.0 billion of cash and cash equivalents.
In connection with the acquisition of Corporate Express, we entered into a $3.0 billion Credit Agreement, dated April 1, 2008, among Staples, Inc., Barclays Bank PLC, and the other lenders named therein, as amended (the 2008 Agreement), which served, along with our $750.0 million revolving credit facility with Bank of America N.A. and the other lenders named therein which matures in October 2011 (the Revolving Credit Facility), as a backstop to the commercial paper program. We refinanced the 2008 Agreement by issuing the March 2009 Notes and $1.5 billion aggregate principal amount of notes due January 15, 2014 (the January 2009 Notes). In May 2009, we terminated the 2008 Agreement, and as a result, the Revolving Credit Facility serves as the backstop to our commercial paper program.
28
A summary, as of October 31, 2009, of balances available under our credit agreements and debt outstanding is presented below (amounts in thousands):
|
|
October 31, 2009 |
|
January 31, 2009 |
|
||||||||
|
|
Available |
|
Debt |
|
Available |
|
Debt |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
2008 Agreement due July 2009 |
|
$ |
|
|
$ |
|
|
$ |
790,650 |
|
|
|
|
Commercial Paper Program |
|
|
|
|
(1) |
|
|
$ |
1,195,557 |
(2) |
|||
Revolving Credit Facility effective through October 2011 |
|
750,000 |
|
|
|
|
|
|
|
||||
September 2002 Notes due October 2012 |
|
|
|
325,000 |
|
|
|
325,000 |
|
||||
January 2009 Notes due January 2014 |
|
|
|
1,500,000 |
|
|
|
1,500,000 |
|
||||
March 2009 Notes due April 2011 |
|
|
|
500,000 |
|
|
|
|
|
||||
Lines of credit |
|
455,329 |
|
|
|
144,856 |
|
840 |
|
||||
Other notes and capital leases |
|
|
|
217,338 |
|
|
|
399,976 |
|
||||
Total |
|
$ |
1,205,239 |
|
$ |
2,542,338 |
|
$ |
935,506 |
|
$ |
3,421,373 |
|
(1) At October 31, 2009, this obligation is backstopped by and utilizes borrowing capacity available under our Revolving Credit Facility. During the course of any given quarter and in light of the short-term nature of commercial paper and our financing needs, the amount of available credit under the Revolving Credit Facility and our debt outstanding under our commercial paper program fluctuate.
(2) At January 31, 2009, this obligation was backstopped by, and utilized borrowing capacity of, $470.4 million of our 2008 Agreement and $729.5 million of our Revolving Credit Facility.
At October 31, 2009, other than as described below, as a result of offsetting changes to the maturity of contractual obligations, there had not been a material net change to the information regarding the maturity of contractual obligations disclosed in the subsection entitled Sources of Liquidity of the Managements Discussion and Analysis of Financial Condition and Results of Operations on page B-10 of our 2008 Annual Report on Form 10-K.
On March 3, 2009, we terminated and paid off all outstanding balances from the Corporate Express U.S. and European securitization programs we assumed upon the acquisition of Corporate Express.
On March 27, 2009, we issued the March 2009 Notes with a fixed interest rate of 7.75%, payable semi-annually on April 1 and October 1 of each year commencing on October 1, 2009. The sale of the March 2009 Notes was made pursuant to the terms of an underwriting agreement (the Underwriting Agreement), dated March 27, 2009, with Barclays Capital Inc., Banc of America Securities LLC and HSBC Securities (USA) Inc., as representatives of the several underwriters named in the Underwriting Agreement. We received net proceeds, after the underwriting discount and estimated fees and expenses, of $497.5 million. Our obligations under the March 2009 Notes are unconditionally guaranteed on an unsecured unsubordinated 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).
On March 27, 2009, we reduced our total commitment under the 2008 Agreement from $1.26 billion to $761.0 million, pursuant to the mandatory commitment reduction provisions triggered by the receipt of proceeds from the offering of the March 2009 Notes.
29
On May 19, 2009, we entered into a $300.0 million accounts receivable securitization program (the Securitization Program) with several of our wholly owned subsidiaries and certain financial institutions. Under the terms of the Securitization Program, the subsidiaries sell substantially all the customer receivables of our North American Delivery business to a wholly owned bankruptcy remote special purpose entity, Staples Receivables LLC. Staples, Inc. retains servicing responsibility. The special purpose entity then transfers an interest in the receivables to the financial institutions. Borrowings outstanding under the Securitization Program are included as a component of current liabilities in the condensed consolidated balance sheet, while the accounts receivable securing these obligations are included as a component of net receivables in the condensed consolidated balance sheet. As of October 31, 2009, no borrowings were outstanding under the Securitization Program.
On May 26, 2009, as a result of entering into the Securitization Program, we voluntarily terminated the entire remaining commitment under the 2008 Agreement, thereby terminating the 2008 Agreement earlier than its July 9, 2009 expiration date. As a result of the termination of the 2008 Agreement, availability under our existing commercial paper program was reduced from approximately $1.5 billion to $750.0 million. The commercial paper program continues to be backstopped by our existing Revolving Credit Facility, which matures in October 2011. As of October 31, 2009, there were no notes outstanding under our commercial paper program.
We expect that our cash generated from operations, together with our current cash, funds available under our existing credit agreements and other alternative sources of financing, will be sufficient to fund our capital expenditures, including our future store openings, and other operating cash needs for at least the next twelve months.
Uses of Capital
As a result of our financial position, in addition to investing in our existing businesses and pursuing strategic acquisitions, we also expect to continue to return capital to our shareholders through a cash dividend program. Depending on our credit metrics and our liquidity position, from time to time, we may repurchase our outstanding shares or our public notes through repurchase programs.
In the third quarter of 2009, we continued to make significant progress in refinancing and reducing the debt entered into as a result of the Corporate Express acquisition. We have reduced total debt by approximately $1.9 billion from the second quarter of 2008, when we acquired Corporate Express.
We currently plan to spend approximately $325 million on capital expenditures during 2009, primarily related to continued investments in information systems, distribution centers to improve operational efficiencies and customer service, and store openings. During the last quarter of 2009, we expect to open approximately 5 stores in North America and no stores in Europe or Asia.
While we have primarily grown organically, we may use capital to engage in strategic acquisitions or joint ventures in markets where we currently have a presence and in new geographic markets that could become significant to our business in future years. We do not expect to rely on acquisitions to achieve our targeted growth plans. We consider many types of acquisitions for their strategic and other benefits, such as our 2008 acquisition of Corporate Express. In the past, excluding the Corporate Express acquisition, we have focused on smaller acquisitions designed to align with our existing businesses to drive long-term growth. We expect to continue this strategy and target such acquisitions when opportunities are presented and fit within our financial structure.
We paid a third quarter 2009 cash dividend of $0.0825 per share on October 15, 2009 to stockholders of record on September 25, 2009. We expect the total value of quarterly cash dividend payments in 2009 to be $0.33 per share. While it is our intention to continue to pay quarterly cash dividends for the remainder of 2009 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.
30
Inflation and Seasonality
While neither inflation nor deflation has had, and we do not expect either to have, a material impact upon our operating results, there can be no assurance that our business will not be affected by inflation or deflation in the future. Our business is somewhat seasonal, with sales and profitability slightly lower during the first and second quarters of our fiscal year.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
At October 31, 2009, there had not been a material change in the interest rate risk information and foreign exchange risk information disclosed in the Quantitative and Qualitative Disclosures about Market Risks subsection of the Managements Discussion and Analysis of Financial Condition and Results of Operations on page B-14 of our 2008 Annual Report on Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Companys management, with the participation of the Companys chief executive officer and chief financial officer, evaluated, as of October 31, 2009, the effectiveness of the Companys disclosure controls and procedures, which were designed to be effective at the reasonable assurance level. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Companys disclosure controls and procedures as of October 31, 2009, management, the chief executive officer and the chief financial officer concluded that the Companys disclosure controls and procedures were effective at the reasonable assurance level at that date.
Changes in Internal Control over Financial Reporting
No change in the Companys internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended October 31, 2009 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
In July 2008, the Company completed its acquisition of Corporate Express. Management is currently in the process of implementing its integration of Corporate Express internal controls over financial reporting with the Companys internal controls over financial reporting. This integration will lead to changes in the internal controls over financial reporting for Staples and Corporate Express in future fiscal periods. Management expects the integration process to be completed during fiscal year 2009.
31
STAPLES, INC. AND SUBSIDIARIES
Global economic conditions may continue to cause a decline in business and consumer spending which could adversely affect our business and financial performance.
Our operating results and performance depend significantly on worldwide economic conditions and their impact on business and consumer spending. The decline in business and consumer spending resulting from the global recession and the deterioration of global credit markets has caused our same store sales to decrease for much of 2008 and 2009. We have also seen a decline in average sales per customer in both our delivery and retail businesses. Our business and financial performance may continue to be adversely affected by current and future economic conditions, which may cause a continued or further decline in business and consumer spending.
Our market is highly competitive and we may not be able to continue to compete successfully.
The office products market is highly competitive. We compete with a variety of local, regional, national and international retailers, dealers and distributors for customers, associates, locations, products, services, and other important aspects of our business. In most of our geographic markets, we compete with other high-volume office supply chains such as Office Depot and OfficeMax, as well as mass merchants such as Wal-Mart, warehouse clubs such as Costco, computer and electronics superstores such as Best Buy, copy and print businesses such as FedEx Office, online retailers such as Amazon.com, ink cartridge specialty stores, and other discount retailers. Our retail stores and delivery operations also compete with numerous mail order firms, contract stationer businesses, electronic commerce distributors, regional and local dealers and direct manufacturers.
We strive to differentiate ourselves from our competitors in part by executing our brand promise: we make buying office products easy. This involves, among other things, offering our customers a broad selection of products, convenient store locations, and reliable and fast order delivery. Many of our competitors, however, have increased their presence in our markets in recent years by expanding their assortment of office products and services, opening new stores near our existing stores, and offering direct delivery of office products. Some of our current and potential competitors are larger than we are and have substantially greater financial resources that may be devoted to sourcing, promoting and selling their products. If we fail to execute on our brand promise or are otherwise unable to differentiate ourselves from our competitors, we may be unable to attract and retain customers.
We may not be able to successfully integrate Corporate Express into our operations to realize anticipated benefits and our growth may strain our operations.
In July 2008, we acquired Corporate Express. Although we have substantially integrated our U.S. businesses and have started integrating our European businesses, we have not completed the process and will continue to devote time and resources to integration. The integration of our Corporate Express operations has been and continues to be a complex and time consuming process that may disrupt the combined companys business if not completed in a timely and efficient manner. As a result, we may experience the following:
· impairment of relationships with customers, vendors or key employees;
· substantial demands on our management that may limit their time to attend to other operational, financial and strategic issues;
· difficulty in the integration of operational, financial and administrative functions and systems to permit effective management, and the lack of control if such integration is not implemented or delayed;
· difficulty in the global coordination of marketing, supply chain and sales efforts;
· potential conflicts between business cultures; and
· unexpected liabilities associated with the acquired business or unanticipated costs related to the integration.
We currently expect to realize certain synergies and cost savings as a result of the acquisition. If we fail to successfully integrate our businesses or fail to realize the intended benefits of the acquisition, our business may be adversely affected and the market price of our common stock could decline.
32
Our business has grown dramatically over the years. Although we expect our business to continue to grow organically and through strategic acquisitions, it will likely not grow at the rate experienced in the last year, when we acquired Corporate Express. Sales of our products and services, the types of our customers, the nature of our contracts, the mix of our businesses, the number of countries in which we conduct business, the number of stores that we operate and the number of associates have grown and changed, and we expect they will continue to grow and change in the long-term. This growth places significant demands on management and operational systems. If we cannot effectively manage our growth, it is likely to result in operational inefficiencies and ineffective management of our business. In addition, as we grow, our business is subject to a wider array of complex state, federal and international regulations, and may be increasingly the target of private actions alleging violations of such regulations. This increases the cost of doing business and the risk that our business practices could unknowingly result in liabilities that may adversely affect our business and financial performance.
If we are unable to manage our debt, it could materially harm our business and financial condition and restrict our operating flexibility.
Although we have used a significant portion of our operating cash flow to repay a significant portion of the financing incurred for our acquisition of Corporate Express, we still have significant long-term debt and debt service requirements, with $1.5 billion 9.75% notes due in January 2014, $500 million 7.75% notes due in April 2011 and $325 million 7.375% notes due October 2012. Our consolidated outstanding debt as of October 31, 2009 was $2.5 billion. If we are unable to satisfy our debt service requirements, we may default under one or more of our credit facilities or the indentures governing our notes. If we default or breach our obligations, we could be required to pay a higher rate of interest or lenders could require us to accelerate our repayment obligations, and such a default could materially harm our business and financial condition.
Our level of indebtedness combined with volatile financial markets may have significant consequences, including: restricting our growth; making us more vulnerable to a downturn in our business; making it more expensive to obtain future financing; limiting our ability to borrow additional amounts for working capital, capital expenditures, debt service requirements, future acquisitions or other corporate purposes; restricting our flexibility to respond to changing market conditions; and limiting our ability to use operating cash flow in other areas of our business. As a result of our increased debt, we may also be placed at a competitive disadvantage against less leveraged competitors.
We may be unable to continue to open new stores and enter new markets successfully.
An important part of our business plan is to increase our number of stores and enter new geographic markets. However, due to the current economic environment, we currently plan to open fewer stores this year than we have in recent periods. For example, during the last quarter of 2009, we plan to open approximately 5 stores in North America but do not expect to open any new stores in Europe or Asia. For our strategy to be successful, we must identify favorable store sites, negotiate leases on acceptable terms, hire and train qualified associates and adapt management and operational systems to meet the needs of our expanded operations. These tasks may be difficult to accomplish, especially as we allocate time and resources to managing the profitability of our large existing portfolio of stores and renewing our existing store leases with acceptable terms. In addition, local zoning and other land use regulations may prevent or delay the opening of new stores in some markets. If we are unable to open new stores as efficiently as we planned, our future sales and profits may be adversely affected.
Our strategy also includes opening new stores in markets where we already have a presence so we can take advantage of economies of scale in marketing, distribution and supervision costs. These new stores may draw customers away from existing stores in nearby areas causing customer traffic and comparable store sales performance to decline at those existing stores. Our expansion strategy also includes opening stores in new markets where customers may not be familiar with our brand, where we may not be familiar with local customer preferences or where our competitors may have a large, established market presence. Even if we succeed in opening new stores, these new stores may not achieve the same sales or profit levels as our existing stores and may reduce our overall profitability.
We may be unable to attract and retain qualified associates.
Our customers value courteous and knowledgeable associates, and an important part of our Easy brand strategy is a positive customer service experience. Accordingly, our performance is dependent on attracting and retaining a large number of qualified associates. We face intense competition for qualified associates. We face even tighter labor markets as we expand into emerging markets such as India and China. Many of our associates are in entry-level or part-time positions with historically high rates of turnover. Our ability to meet our labor needs while controlling our labor costs is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the workforce,
33
unemployment levels, prevailing wage rates, changing demographics, health and other insurance costs and changes in employment legislation. If we are unable to attract and retain a sufficient number of qualified associates, our business and financial performance may be adversely affected.
Our quarterly operating results are subject to significant fluctuation.
Our operating results have fluctuated from quarter to quarter in the past, and we expect that they will continue to do so in the future. Factors that could cause these quarterly fluctuations include: the mix of products sold; pricing actions of competitors; the level of advertising and promotional expenses; the outcome of legal proceedings; seasonality, primarily because the sales and profitability of our stores are typically slightly lower in the first half of the year than in the second half of the year, which includes the back-to-school and holiday seasons; severe weather; and the other risk factors described in this section. Most of our operating expenses, such as 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 for that quarter, we may not proportionately reduce operating expenses for that quarter, and therefore such a sales shortfall would have a disproportionate effect on our net income for the quarter.
Our expanding international operations expose us to the unique risks inherent in foreign operations.
We currently operate in 26 different countries outside the United States and may enter new international markets. Operating in multiple countries requires that we comply with multiple foreign laws and regulations that may differ substantially from country to country and may conflict with corresponding U.S. laws and regulations. Additionally, cultural differences abroad and local practices of conducting business may conflict with our own business practices and ethics standards. Ensuring compliance to foreign and U.S. laws and our own policies may require that we implement new operational systems and financial controls, conduct audits or internal investigations, train our associates and third parties on our existing compliance methods, and take other actions, all of which may be expensive, divert managements time and impact our operations. In addition, differences in business practices in our international markets may cause customers to be less receptive to our business model than we expect. Other factors that may also have an adverse impact on our international operations include increased local competition, foreign currency fluctuations, unfavorable foreign trade policies and unstable political and economic conditions.
Our business may be adversely affected by the actions of and risks associated with our third-party vendors.
The products we sell are sourced from a wide variety of third-party vendors. We derive benefits from vendor allowances and promotional incentives which may not be offered in the future. We also cannot control the supply, design, function or cost of many of the products that we offer for sale and are dependent on the availability and pricing of key products, including paper, ink, toner, technology and printing equipment. Some of the products we offer are supplied to us on an exclusive basis and may be difficult to replace in a timely manner. Disruptions in the availability of raw materials used in the production of these products may also adversely affect our sales and result in customer dissatisfaction.
Global sourcing of many of the products we sell is an important factor in our financial performance. Our ability to find qualified vendors and access products in a timely and efficient manner is a significant challenge, especially with respect to goods sourced outside the United States. Political instability, the financial instability of suppliers, trade restrictions, tariffs, foreign currency exchange rates, transport capacity and costs, inflation and other factors relating to foreign trade are beyond our control. In addition, merchandise quality issues could cause us to initiate voluntary or mandatory recalls for our proprietary branded products or other products which may then damage our reputation. These and other issues affecting our vendors could adversely affect our business and financial performance.
Our expanded offering of proprietary branded products may not improve our financial performance and may expose us to intellectual property and product liability claims.
Our product offering includes Staples, Quill and other proprietary branded products, which represented approximately 23% of our sales in fiscal 2008, excluding Corporate Express. Corporate Express also has an own brand program that we will be transitioning to the Staples brand over time. Our proprietary branded products compete with other manufacturers branded items that we offer. An increase in our proprietary branded product offerings may increase the risk that third parties will assert infringement claims against us with respect to such products. In addition, if any of our customers are harmed by our proprietary branded products, they may bring product liability and other claims against us. Any of these circumstances could damage our reputation and have an adverse effect on our business and financial performance.
34
Our effective tax rate may fluctuate.
We are a multi-national, multi-channel provider of office products and services. As a result, our effective tax rate is derived from a combination of applicable tax rates in the various countries, states and other jurisdictions in which we operate. Our effective tax rate may be lower or higher than our tax rates have been in the past due to numerous factors, including the sources of our income, any agreements we may have with taxing authorities in various jurisdictions, and the tax filing positions we take in various jurisdictions. We base our estimate of an effective tax rate at any given point in time upon a calculated mix of the tax rates applicable to our company and to estimates of the amount of business likely to be done in any given jurisdiction. The loss of one or more agreements with taxing jurisdictions, a change in the mix of our business from year to year and from country to country, changes in rules related to accounting for income taxes, changes in tax laws in any of the multiple jurisdictions in which we operate, or adverse outcomes from tax audits that we may be subject to in any of the jurisdictions in which we operate, could result in an unfavorable change in our effective tax rate which could have an adverse effect on our business and results of our operations.
Our information security may be compromised.
Through our sales and marketing activities, we collect and store certain personal information that our customers provide to purchase products or services, enroll in promotional programs, register on our web site, or otherwise communicate and interact with us. We also gather and retain information about our associates in the normal course of business. We may share information about such persons with vendors that assist with certain aspects of our business. Despite instituted safeguards for the protection of such information, we cannot be certain that all of our systems are entirely free from vulnerability to attack. Computer hackers may attempt to penetrate our or our vendors network security and, if successful, misappropriate confidential customer or business information. In addition, a Staples associate, contractor or other third party with whom we do business may attempt to circumvent our security measures in order to obtain such information or inadvertently cause a breach involving such information. Loss of customer or business information could disrupt our operations, damage our reputation, and expose us to claims from customers, financial institutions, payment card associations and other persons, any of which could have an adverse effect on our business, financial condition and results of operations. In addition, compliance with tougher privacy and information security laws and standards may result in significant expense due to increased investment in technology and the development of new operational processes.
Various legal proceedings, investigations or audits may adversely affect our business and financial performance.
We are involved in various private legal proceedings, which include consumer, employment, intellectual property, tort and other litigation. As our workforce expands, we are subject to greater scrutiny by private litigants regarding compliance with local, state and national labor regulations, including overtime or wage and hour laws which have resulted in class action litigation. In addition, we may be subject to investigations or audits by governmental authorities and regulatory agencies, which can occur in the ordinary course of business or which can result from increased scrutiny from a particular agency towards an industry, country or practice. The resolution of these legal proceedings, investigations or audits could require us to pay substantial amounts of money or take actions that adversely affect our operations. In addition, defending against these claims may involve significant time and expense. Given the large size of our operations and workforce, the visibility of our brand and our position as an industry leader, we may regularly be involved in legal proceedings, investigations or audits that could adversely affect our business and financial performance.
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.
35
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
STAPLES, INC. |
|
|
|
|
|
|
Date: November 30, 2009 |
By: |
/s/ JOHN J. MAHONEY |
|
|
John J. Mahoney |
|
|
Vice Chairman and |
|
|
Chief Financial Officer |
|
|
(Principal Financial Officer) |
|
|
|
|
|
|
|
By: |
/s/ CHRISTINE T. KOMOLA |
|
|
Christine T. Komola |
|
|
Senior Vice President, Corporate Controller |
|
|
(Principal Accounting Officer) |
36
Exhibit Index
Exhibit No. |
|
Description of Exhibit |
|
|
|
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.LAB++ |
|
XBRL Taxonomy Label Linkbase Document. |
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101.PRE++ |
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XBRL Taxonomy Presentation Linkbase Document. |
+ Filed herewith.
++ Furnished herewith.
Attached as Exhibit 101 to this report are the following financial statements from the Companys Quarterly Report on Form 10-Q for the quarter ended October 31, 2009 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements tagged as blocks of text.
The XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended (Securities Act) and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liabilities of those sections.
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