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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark one)

 

x

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

For the quarterly period ended: October 31, 2009

 

 

o

Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period  from                to               

 

Commission File Number:  0-17586

 

STAPLES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

04-2896127

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

 

Five Hundred Staples Drive, Framingham, MA  01702

(Address of principal executive office and zip code)

 

508-253-5000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o
(Do not check if a smaller reporting company)

 

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.

 

 

 



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

FORM  10-Q
October 31, 2009
TABLE OF CONTENTS
 

 

 

Page

 

 

 

 

Part I — Financial Information:

 

 

 

 

 

 

 

Item 1. Financial Statements:

 

 

 

Condensed Consolidated Balance Sheets (unaudited)

 

 

3

Condensed Consolidated Statements of Income (unaudited)

 

 

4

Condensed Consolidated Statements of Cash Flows (unaudited)

 

 

5

Notes to Condensed Consolidated Financial Statements

 

 

6-20

 

 

 

 

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

 

 

21-31

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

 

31

 

 

 

 

Item 4. Controls and Procedures

 

 

31

 

 

 

 

Part II — Other Information

 

 

 

 

 

 

 

Item 1A. Risk Factors

 

 

32-35

 

 

 

 

Item 6. Exhibits

 

 

35

 

 

 

 

Signatures

 

 

36

 

 

 

 

Exhibit Index

 

 

37

 

2



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

STAPLES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollar Amounts in Thousands, Except Share Data)

(Unaudited)

 

 

 

October 31,

 

January 31,

 

 

 

2009

 

2009

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

1,035,147

 

$

633,774

 

Receivables, net

 

1,957,793

 

1,841,231

 

Merchandise inventories, net

 

2,375,898

 

2,404,174

 

Deferred income tax asset

 

303,102

 

281,101

 

Prepaid expenses and other current assets

 

340,755

 

636,978

 

Total current assets

 

6,012,695

 

5,797,258

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

Land and buildings

 

1,067,650

 

1,040,754

 

Leasehold improvements

 

1,256,223

 

1,183,879

 

Equipment

 

2,012,137

 

1,949,646

 

Furniture and fixtures

 

967,712

 

926,702

 

Total property and equipment

 

5,303,722

 

5,100,981

 

Less accumulated depreciation and amortization

 

3,103,603

 

2,810,355

 

Net property and equipment

 

2,200,119

 

2,290,626

 

 

 

 

 

 

 

Lease acquisition costs, net of accumulated amortization

 

25,649

 

26,931

 

Intangible assets, net of accumulated amortization

 

620,008

 

701,918

 

Goodwill

 

4,245,012

 

3,780,169

 

Other assets

 

569,852

 

476,153

 

Total assets

 

$

13,673,335

 

$

13,073,055

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

2,238,087

 

$

1,967,597

 

Accrued expenses and other current liabilities

 

1,616,971

 

1,404,709

 

Commercial paper

 

 

1,195,557

 

Debt maturing within one year

 

61,717

 

277,691

 

Total current liabilities

 

3,916,775

 

4,845,554

 

 

 

 

 

 

 

Long-term debt

 

2,502,867

 

1,968,928

 

Other long-term obligations

 

605,295

 

636,142

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

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

 

 

 

Common stock, $.0006 par value, 2,100,000,000 shares authorized; issued 891,651,331 shares at October 31, 2009 and 882,032,761 shares at January 31, 2009

 

535

 

529

 

Additional paid-in capital

 

4,251,102

 

4,048,398

 

Accumulated other comprehensive income (loss)

 

8,639

 

(494,327

)

Retained earnings

 

5,694,774

 

5,367,341

 

Less: Treasury stock at cost - 167,898,460 shares at October 31, 2009 and 166,427,240 shares at January 31, 2009

 

(3,386,117

)

(3,357,734

)

Total Staples, Inc. stockholders’ equity

 

6,568,933

 

5,564,207

 

Noncontrolling interests

 

79,465

 

58,224

 

Total stockholders’ equity

 

6,648,398

 

5,622,431

 

Total liabilities and stockholders’ equity

 

$

13,673,335

 

$

13,073,055

 

 

See notes to condensed consolidated financial statements.

 

3



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Dollar Amounts in Thousands, Except Per Share Data)

(Unaudited)

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

October 31,

 

November 1,

 

October 31,

 

November 1,

 

 

 

2009

 

2008

 

2009

 

2008

 

Sales

 

$

6,518,039

 

$

6,950,933

 

$

17,869,377

 

$

16,910,207

 

Cost of goods sold and occupancy costs

 

4,751,836

 

5,086,799

 

13,153,015

 

12,323,649

 

Gross profit

 

1,766,203

 

1,864,134

 

4,716,362

 

4,586,558

 

 

 

 

 

 

 

 

 

 

 

Operating and other expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

1,256,479

 

1,314,134

 

3,616,049

 

3,450,599

 

Integration and restructuring costs

 

15,872

 

132,282

 

64,502

 

132,445

 

Amortization of intangibles

 

26,890

 

28,011

 

75,405

 

46,426

 

Total operating expenses

 

1,299,241

 

1,474,427

 

3,755,956

 

3,629,470

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

466,962

 

389,707

 

960,406

 

957,088

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

1,364

 

5,366

 

4,366

 

23,148

 

Interest expense

 

(58,016

)

(59,902

)

(179,447

)

(88,348

)

Miscellaneous income (expense)

 

8,266

 

(2,833

)

5,984

 

(3,223

)

Consolidated income before income taxes

 

418,576

 

332,338

 

791,309

 

888,665

 

Income tax expense

 

144,409

 

171,644

 

273,002

 

363,588

 

Consolidated net income

 

274,167

 

160,694

 

518,307

 

525,077

 

Income attributed to the noncontrolling interests

 

4,786

 

3,991

 

13,551

 

5,859

 

Net income attributed to Staples, Inc

 

$

269,381

 

$

156,703

 

$

504,756

 

$

519,218

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share*

 

$

0.08

 

$

 

$

0.25

 

$

0.33

 

 


*In 2009, the Company changed its dividend policy from an annual dividend to a quarterly dividend.

 

See notes to condensed consolidated financial statements.

 

4



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)

(Unaudited)

 

 

 

39 Weeks Ended

 

 

 

October 31,

 

November 1,

 

 

 

2009

 

2008

 

Operating Activities:

 

 

 

 

 

Consolidated net income, including income from the noncontrolling interests

 

$

518,307

 

$

525,077

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

411,330

 

396,590

 

Non-cash write-down of indefinite lived intangible assets

 

 

123,775

 

Stock-based compensation

 

132,539

 

134,196

 

Deferred tax (income) expense

 

(38,028

)

19,190

 

Excess tax benefits from stock-based compensation arrangements

 

(2,161

)

(5,992

)

Other

 

26,231

 

8,698

 

Changes in assets and liabilities:

 

 

 

 

 

Decrease (increase) in receivables

 

23,072

 

(197,173

)

Decrease (increase) in merchandise inventories

 

160,935

 

(70,085

)

Decrease in prepaid expenses and other assets

 

218,917

 

48,470

 

Increase in accounts payable

 

129,752

 

235,895

 

Decrease in accrued expenses and other current liabilities

 

(21,307

)

(73,902

)

Increase in other long-term obligations

 

27,700

 

20,367

 

Net cash provided by operating activities

 

1,587,287

 

1,165,106

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

Acquisition of property and equipment

 

(191,149

)

(243,777

)

Acquisition of businesses and investments in joint ventures, net of cash acquired

 

 

(4,381,811

)

Proceeds from the sale of short-term investments

 

 

27,019

 

Purchase of short-term investments

 

 

(3

)

Net cash used in investing activities

 

(191,149

)

(4,598,572

)

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

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

 

70,061

 

129,764

 

(Repayments of) proceeds from issuance of commercial paper

 

(1,195,557

)

948,728

 

Proceeds from borrowings

 

1,176,330

 

2,762,879

 

Payments on borrowings, including payment of deferred financing fees

 

(911,979

)

(377,240

)

Cash dividends paid

 

(177,323

)

(231,460

)

Excess tax benefits from stock-based compensation arrangements

 

2,161

 

5,992

 

Purchase of treasury stock, net

 

(28,382

)

(83,208

)

Net cash (used in) provided by financing activities

 

(1,064,689

)

3,155,455

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

69,924

 

(79,737

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

401,373

 

(357,748

)

Cash and cash equivalents at beginning of period

 

633,774

 

1,245,448

 

Cash and cash equivalents at end of period

 

$

1,035,147

 

$

887,700

 

 

See notes to condensed consolidated financial statements.

 

5



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

 

Note A  — Basis of Presentation

 

The accompanying interim unaudited condensed consolidated financial statements include the accounts of Staples, Inc. and its subsidiaries (“Staples”, “the Company”, “we”, “our” or “us”) 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 Company’s 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 Company’s 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 Company’s 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 Company’s financial condition, results of operations or cash flows.   Furthermore, the Company does not expect this pronouncement to have a material impact on the Company’s 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 company’s 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 company’s 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



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

this pronouncement impacted the Company’s presentation of minority interests on the balance sheet and statement of income but had no impact on the Company’s 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 entity’s 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 Company’s 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 Company’s 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 Company’s 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 entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. 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 company’s 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



Table of Contents

 

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 Company’s 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 Company’s consolidated statement of income.

 

8



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

The activity related to the Company’s reserves for the periods subsequent to the acquisition date is as follows (in thousands):

 

 

 

Purchase
accounting
adjustments
offset to goodwill

 

Usage

 

FX Impact

 

Balance as of
October 31, 2009

 

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 Company’s pre-existing business and the consolidation of certain operations of the combined Company.

 

Integration and restructuring costs are comprised of the following (in thousands):

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

October 31,
2009

 

November 1,
2008

 

October 31,
2009

 

November 1,
2008

 

 

 

 

 

 

 

 

 

 

 

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 Company’s 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 Company’s 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



Table of Contents

 

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 Company’s 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 Company’s 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 Company’s 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 Company’s debt agreements.

 

Note F — Fair Value Measurements, Derivative Instruments and Hedging Activities

 

Fair Value Measurements:  The following table shows the Company’s assets and liabilities as of October 31, 2009 that are measured at fair value on a recurring basis (in thousands):

 

 

 

Quoted Prices in
Active Markets for
Identical Assets or
Liabilities

Level 1

 

Significant
Other
Observable
Inputs

Level 2

 

Unobservable
Inputs
Level 3

 

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 Company’s use of derivative instruments that qualify for hedge accounting.

 

10



Table of Contents

 

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 Company’s net investment in a foreign subsidiary, then changes in the fair value of the financial instrument are recognized as a component of accumulated other comprehensive income 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 Company’s condensed consolidated statement of cash flows in the same category as the item being hedged.

 

Interest Rate Swaps:  On January 8, 2003, Staples entered into an interest rate swap, for an aggregate notional amount of $325.0 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



Table of Contents

 

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 employee’s annual base compensation.  Under the Amended and Restated 2004 Stock Incentive Plan, the Company grants restricted stock and restricted stock units (collectively, “Restricted Shares”) and nonqualified stock options to associates.  The Restricted Shares are restricted in that they are not transferable (i.e. they may not be sold) until they vest. The nonqualified stock options cannot be exercised until they vest.  Vesting of the Restricted Shares and nonqualified stock options occurs over different periods, depending on the terms of the individual award, but expenses relating to these awards are all recognized on a straight line basis over the applicable vesting period.

 

The following table summarizes the nonqualified stock option and Restricted Share activity for year-to-date 2009:

 

 

 

Nonqualified Stock Options (1)

 

Restricted Shares (2)

 

 

 

Number
of Shares

 

Weighted
Average
Exercise
Price
per Share

 

Number
of Shares

 

Weighted
Average
Grant Date
Fair Value
Per Share

 

Outstanding at January 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 Company’s 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



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

Note H — Pension Plans

 

In connection with the acquisition of Corporate Express, Staples assumed the obligations under the defined benefit pension plans Corporate Express sponsored.  The pension plans cover most Corporate Express employees in Europe and certain employees in the United States.   The benefits due to U.S. plan participants are frozen.  A number of the defined benefit plans outside the U.S. are funded with plan assets that have been segregated in trusts.  Contributions are made to these trusts, as necessary, to meet legal and other requirements.  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
to Staples,
Inc.

 

Attributable to Noncontrolling Interests

 

Total

 

Stockholders’ equity at January 31, 2009

 

$

5,564,207

 

$

58,224

 

$

5,622,431

 

Comprehensive income:

 

 

 

 

 

 

 

Net income

 

504,756

 

13,551

 

518,307

 

Other comprehensive income:

 

 

 

 

 

 

 

Foreign currency translation adjustments, net

 

521,920

 

7,690

 

529,610

 

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

 

(18,954

)

 

 (18,954

)

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



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

 

 

Attributable
to Staples,
Inc.

 

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



Table of Contents

 

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,
2009

 

November 1,
2008

 

October 31,
2009

 

November 1,
2008

 

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



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

The following is a summary of sales and business unit income by reportable segment for the third quarter and year-to-date 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,
2009

 

November 1,
2008

 

October 31,
2009

 

November 1,
2008

 

 

 

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,
2009

 

November 1,
2008

 

October 31,
2009

 

November 1,
2008

 

 

 

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 Company’s 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 Company’s investment accounts and earnings. The principal elimination entries eliminate the Parent Company’s investment in subsidiaries and intercompany balances and transactions.

 

16



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

Condensed Consolidating Balance Sheet

As of October 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



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

Condensed Consolidating Statement of Income

For the thirteen weeks ended October 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



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

Condensed Consolidating Statement of Income

For the thirty-nine weeks ended 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



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

Condensed Consolidating Statement of Cash Flows

For the thirty-nine weeks ended 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



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

of Financial Condition and Results of Operations

 

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

 

Forward Looking Statements

 

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