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: November 1, 2008
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 |
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04-2896127 |
(State or other jurisdiction of |
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(I.R.S. Employer |
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incorporation or organization) |
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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 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 |
(Do not check if a smaller reporting company) |
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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 713,387,435 shares of common stock outstanding as of November 28, 2008.
STAPLES, INC. AND SUBSIDIARIES
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Page |
Part I – Financial Information: |
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Item 1. Financial Statements: |
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Condensed Consolidated Balance Sheets |
3 |
Condensed Consolidated Statements of Income |
4 |
Condensed Consolidated Statements of Cash Flows |
5 |
Notes to Condensed Consolidated Financial Statements |
6-18 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
19-28 |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk |
28 |
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Item 4. Controls and Procedures |
29 |
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Part II – Other Information |
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Item 1A. Risk Factors |
30-33 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
33 |
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Item 6. Exhibits |
33 |
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Signatures |
34 |
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Exhibit Index |
35 |
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
STAPLES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollar Amounts in Thousands, Except Share Data)
(Unaudited)
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November 1, |
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February 2, |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
887,700 |
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$ |
1,245,448 |
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Short-term investments |
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— |
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27,016 |
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Receivables, net |
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2,096,663 |
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822,254 |
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Merchandise inventories, net |
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2,668,289 |
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2,053,163 |
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Deferred income tax asset |
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242,279 |
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173,545 |
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Prepaid expenses and other current assets |
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284,911 |
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233,956 |
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Total current assets |
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6,179,842 |
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4,555,382 |
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Property and equipment: |
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Land and buildings |
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1,028,726 |
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859,751 |
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Leasehold improvements |
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1,185,903 |
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1,135,132 |
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Equipment |
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1,932,415 |
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1,819,381 |
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Furniture and fixtures |
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917,514 |
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871,361 |
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Total property and equipment |
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5,064,558 |
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4,685,625 |
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Less accumulated depreciation and amortization |
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2,722,815 |
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2,524,486 |
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Net property and equipment |
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2,341,743 |
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2,161,139 |
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Lease acquisition costs, net of accumulated amortization |
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28,397 |
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31,399 |
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Intangible assets, net of accumulated amortization |
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766,145 |
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231,310 |
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Goodwill |
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3,724,004 |
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1,764,928 |
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Other assets |
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993,087 |
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292,186 |
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Total assets |
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$ |
14,033,218 |
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$ |
9,036,344 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
2,497,903 |
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$ |
1,560,728 |
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Accrued expenses and other current liabilities |
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1,229,646 |
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1,025,364 |
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Commercial paper |
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948,728 |
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— |
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Debt maturing within one year |
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1,991,604 |
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23,806 |
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Total current liabilities |
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6,667,881 |
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2,609,898 |
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Long-term debt |
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1,149,645 |
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342,169 |
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Other long-term obligations |
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775,289 |
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356,043 |
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Minority interest |
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58,345 |
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10,227 |
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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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— |
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— |
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Common stock,
$.0006 par value, 2,100,000,000 shares authorized; |
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529 |
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520 |
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Additional paid-in capital |
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3,987,666 |
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3,720,319 |
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Cumulative foreign currency translation adjustments |
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(331,446 |
) |
476,399 |
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Retained earnings |
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5,081,290 |
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4,793,542 |
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Less:
Treasury stock at cost - 166,381,578 shares at November 1, 2008 |
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(3,355,981 |
) |
(3,272,773 |
) |
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Total stockholders’ equity |
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5,382,058 |
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5,718,007 |
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Total liabilities and stockholders’ equity |
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$ |
14,033,218 |
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$ |
9,036,344 |
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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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November 1, |
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November 3, |
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November 1, |
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November 3, |
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Sales |
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$ |
6,950,933 |
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$ |
5,168,351 |
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$ |
16,910,207 |
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$ |
14,048,240 |
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Cost of goods sold and occupancy costs |
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5,086,799 |
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3,662,677 |
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12,323,649 |
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10,047,260 |
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Gross profit |
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1,864,134 |
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1,505,674 |
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4,586,558 |
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4,000,980 |
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Operating and other expenses: |
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Selling, general and administrative |
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1,314,134 |
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1,072,998 |
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3,450,599 |
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2,957,909 |
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Integration and restructuring costs |
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132,282 |
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— |
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132,445 |
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— |
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Amortization of intangibles |
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28,011 |
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4,371 |
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46,426 |
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11,681 |
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Total operating expenses |
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1,474,427 |
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1,077,369 |
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3,629,470 |
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2,969,590 |
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Operating income |
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389,707 |
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428,305 |
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957,088 |
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1,031,390 |
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Other income (expense): |
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Interest income |
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5,366 |
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8,715 |
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23,148 |
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34,895 |
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Interest expense |
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(59,902 |
) |
(8,466 |
) |
(88,348 |
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(30,667 |
) |
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Miscellaneous expense |
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(2,833 |
) |
15 |
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(3,223 |
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(1,472 |
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Income before income taxes and minority interests |
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332,338 |
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428,569 |
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888,665 |
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1,034,146 |
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Income tax expense |
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171,644 |
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154,285 |
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363,588 |
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372,293 |
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Income before minority interests |
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160,694 |
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274,284 |
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525,077 |
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661,853 |
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Minority interests |
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3,991 |
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(234 |
) |
5,859 |
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(636 |
) |
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Net income |
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$ |
156,703 |
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$ |
274,518 |
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$ |
519,218 |
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$ |
662,489 |
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Earnings Per Share: |
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Basic earnings per common share |
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$ |
0.22 |
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$ |
0.39 |
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$ |
0.75 |
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$ |
0.94 |
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Diluted earnings per common share |
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$ |
0.22 |
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$ |
0.38 |
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$ |
0.73 |
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$ |
0.92 |
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Dividends declared per common share |
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$ |
— |
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$ |
— |
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$ |
0.33 |
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$ |
0.29 |
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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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November 1, |
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November 3, |
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Operating Activities: |
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Net income |
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$ |
519,218 |
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$ |
662,489 |
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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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396,590 |
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285,940 |
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Amortization of deferred financing costs |
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8,982 |
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— |
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Non-cash write-down of indefinite lived intangible assets |
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123,775 |
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— |
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Stock-based compensation |
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134,196 |
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133,196 |
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Deferred tax expense |
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19,190 |
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25,272 |
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Excess tax benefits from stock-based compensation arrangements |
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(5,992 |
) |
(17,395 |
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Other |
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5,575 |
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1,679 |
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Changes in assets and liabilities: |
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Increase in receivables |
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(130,794 |
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(113,711 |
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Increase in merchandise inventories |
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(70,085 |
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(99,489 |
) |
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Increase in prepaid expenses and other assets |
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(16,402 |
) |
(51,323 |
) |
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Increase in accounts payable |
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30,711 |
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114,724 |
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Increase (decrease) in accrued expenses and other liabilities |
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115,711 |
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(189,720 |
) |
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Increase in other long-term obligations |
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34,431 |
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90,161 |
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Net cash provided by operating activities |
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1,165,106 |
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841,823 |
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Investing Activities: |
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Acquisition of property and equipment |
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(243,777 |
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(315,905 |
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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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(178,295 |
) |
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Proceeds from the sale of short-term investments |
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27,019 |
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3,776,385 |
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Purchase of short-term investments |
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(3 |
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(3,440,117 |
) |
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Net cash used in investing activities |
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(4,598,572 |
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(157,932 |
) |
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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 |
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129,769 |
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125,703 |
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Proceeds from the issuance of commercial paper, net of repayments |
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948,728 |
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— |
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Proceeds from borrowings |
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2,762,879 |
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10,701 |
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Payments on borrowings |
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(360,790 |
) |
(204,889 |
) |
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Payment of deferred financing costs |
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(16,450 |
) |
— |
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Cash dividends paid |
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(231,465 |
) |
(207,552 |
) |
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Excess tax benefits from stock-based compensation arrangements |
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5,992 |
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17,395 |
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Purchase of treasury stock, net |
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(83,208 |
) |
(578,159 |
) |
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Net cash provided by (used in) financing activities |
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3,155,455 |
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(836,801 |
) |
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Effect of exchange rate changes on cash and cash equivalents |
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(79,737 |
) |
45,960 |
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Net decrease in cash and cash equivalents |
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(357,748 |
) |
(106,950 |
) |
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Cash and cash equivalents at beginning of period |
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1,245,448 |
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1,017,671 |
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Cash and cash equivalents at end of period |
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$ |
887,700 |
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$ |
910,721 |
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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 recent 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 November 1, 2008 (also referred to as the “third quarter of 2008” and “year-to-date 2008”, respectively) and the period covering the thirteen and thirty-nine weeks ended November 3, 2007 (also referred to as the “third quarter of 2007” and “year-to-date 2007”, respectively). 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 in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, such interim 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. 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 February 2, 2008.
Note B – New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurement), then priority to quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market (Level 2 measurement), then the lowest priority to unobservable inputs (Level 3 measurement). In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2, “Effective date of FASB Statement No. 157”, which delayed for one year the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Effective February 3, 2008, the Company adopted SFAS No. 157 for its financial assets. The adoption had no impact on the Company’s financial condition, results of operations or cash flows. The Company has not yet determined the impact on its financial statements of the February 1, 2009 adoption of SFAS No. 157 as it pertains to non-financial assets and liabilities.
The following table shows assets and liabilities as of November 1, 2008, that are measured at fair value on a recurring basis (in thousands):
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Quoted Prices in |
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Significant |
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Unobservable |
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Derivative assets |
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— |
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$ |
41,135 |
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— |
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In September 2006, the FASB issued SFAS No. 158, “Employers: Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statement Nos. 87, 88, 106 and 132(R)” (“SFAS No. 158”). SFAS No. 158 requires deferred pension gains and losses to be reflected in accumulated other comprehensive income and requires that the valuation date of plan accounts be changed to the end of the company’s fiscal year, with that change required to be implemented for fiscal years ending after December 15, 2008. The Company will adopt the provisions of SFAS No. 158 in fiscal 2008 as a result of the assumption of pension plans in connection with the acquisition of Corporate Express (see Note C). This adoption will have no impact on the Company’s financial condition, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities to elect to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which
6
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 was effective for the Company on February 3, 2008. The adoption of SFAS No. 159 did not have an impact on the Company’s financial condition, results of operations or cash flows.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). SFAS No. 161 enhances disclosures for derivative instruments and hedging activities, including: (i) the manner in which a company uses derivative instruments; (ii) the manner in which derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and (iii) the effect of derivative instruments and related hedged items on a company’s financial position. SFAS No. 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The Company will adopt this statement as of February 1, 2009. As SFAS No. 161 relates specifically to disclosures, this standard will have no impact on the Company’s financial condition, results of operations or cash flows.
In April 2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. 142-3”). FSP No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets”. FSP No. 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. The adoption of FSP No. 142-3 is not expected to have a material impact on the Company’s financial condition, results of operations or cash flows.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with generally accepted accounting principles in the United States for non-governmental entities. SFAS No. 162 is effective 60 days following approval by the U.S. Securities and Exchange Commission (“SEC”) of the Public Company Accounting Oversight Board’s amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. The Company does not expect SFAS No. 162 to have a material impact on its financial condition, results of operations or cash flows.
Note C – Business Acquisition
In July 2008, Staples 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. The acquisition of Corporate Express establishes Staples’ contract business in Europe and Canada and increases Staples’ contract business in the United States. The acquisition also extends Staples geographic reach to Australia and New Zealand. As a result of the acquisition, the Company has operations in 27 countries.
The aggregate cash purchase price of 2.8 billion Euros (approximately $4.4 billion, net of cash acquired) for the capital stock of Corporate Express and for the repayment of most of Corporate Express’ debt was funded primarily with the sale of notes under the Commercial Paper Program, which is backstopped by the 2008 Agreement, and additional funds from the 2008 Term Credit Facility, the Company’s existing Revolving Credit Facility (each as described in Note E), and the Company’s available cash and short-term investments.
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 intends by the end of fiscal year 2009 to acquire the remaining capital of Corporate Express by means of a compulsory acquisition procedure in accordance with the Dutch Civil Code. In July 2008, Staples also acquired 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 operating results of Corporate Express have been included in the condensed 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.
The acquisition is being accounted for using the purchase method in accordance with SFAS No. 141, “Business Combinations”. Accordingly, the purchase price has been allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of net assets acquired was recorded as goodwill.
7
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
The purchase price allocation, including an independent appraisal for certain tangible and intangible assets, has been prepared on a preliminary basis based on the information that was available to management at the time the Condensed Consolidated Financial Statements were prepared, and revisions to the preliminary purchase price allocation are expected as additional information becomes available.
The Company has not finalized its integration and restructuring plans for Corporate Express, including severance, facility closures, systems consolidation and tax elections, the results of which will impact the final purchase price allocation. This may also include asset impairments related to Staples historical operations as its corporate infrastructure and related assets adapt to business changes. These amounts will be recognized in the income statement as integration and restructuring costs. In addition, certain historical tax assets may be negatively impacted by the acquisition, which could result in additional tax expense that would be recognized through an increase in the Company’s effective tax rate.
The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date the terms the tender offer were declared unconditional (in thousands):
|
|
As of July 2, 2008 |
|
|
Current assets (excluding acquired cash) |
|
$ |
2,136,397 |
|
Property and equipment |
|
462,953 |
|
|
Other assets |
|
959,150 |
|
|
Goodwill |
|
2,489,172 |
|
|
Intangible assets |
|
865,200 |
|
|
Total assets acquired |
|
$ |
6,912,872 |
|
|
|
|
|
|
Current liabilities |
|
$ |
1,507,263 |
|
Long-term debt |
|
404,222 |
|
|
Other long-term liabilities |
|
619,576 |
|
|
Total liabilities assumed |
|
$ |
2,531,061 |
|
|
|
|
|
|
Net assets acquired |
|
$ |
4,381,811 |
|
At July 2, 2008, the date the terms of the tender offer were declared unconditional, Staples allocated assets of $3.90 billion and $3.09 billion to the North American Delivery and International Operations segments, respectively. Included in total assets were goodwill and intangible assets totaling $3.35 billion, of which $2.22 billion and $1.14 billion were allocated to the North American Delivery and International Operations segments, respectively. Of the $865.2 million of estimated acquired intangible assets, $692.9 million was assigned to customer relationships that are being amortized over a weighted average useful life of 12.6 years, $162.3 million was assigned to tradenames, which have lives ranging from 18 months to 10 years with a weighted average useful life of 6.9 years, and $10.0 million was assigned to order backlog that is being amortized over its useful life of 18 months.
For the preliminary valuation of customer relationships the Company used the multi-period excess earnings method. This approach discounts the estimated after tax cash flows (including gross margins on revenues, operating expenses and market participant synergies, less a charge for the tradename and contributory charges) associated with the existing base of customers as of the acquisition date, factoring in expected attrition of the existing customer base. The present value of the cash flows was calculated using a discount rate of 10%.
The activity related to the Company’s reserves for the periods subsequent to the acquisition date is as follows (in thousands):
|
|
Purchase accounting |
|
Utilization |
|
Balance |
|
|||
Transaction costs |
|
$ |
52,490 |
|
$ |
(30,695 |
) |
$ |
21,795 |
|
Severance |
|
30,000 |
|
— |
|
30,000 |
|
|||
Facility closures |
|
418 |
|
— |
|
418 |
|
|||
Other |
|
24 |
|
(24 |
) |
— |
|
|||
Total |
|
$ |
82,932 |
|
$ |
(30,719 |
) |
$ |
52,213 |
|
8
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
The following unaudited proforma summary presents information as if Corporate Express had been acquired as of February 4, 2007. In addition to an adjustment to amortization expense to reflect the value of intangibles recorded for this acquisition, the proforma amounts include incremental interest expense for all periods to reflect the increase in borrowings under the 2008 Agreement, the Commercial Paper Program, the 2008 Term Credit Facility, and the Revolving Credit Facility (each as defined in Note E) to finance the acquisition as if the increase had occurred at the beginning of fiscal 2007. Proforma interest expense also reflects the elimination of interest expense on Corporate Express debt that was repaid at the time of acquisition. No adjustment was made to reduce historical interest income to reflect the Company’s use of available cash in this acquisition. The proforma summary also reflects the effective tax rate applicable for the combined company. The proforma amounts do not reflect any benefits from economies that might be achieved from combining the operations of the two companies.
The proforma information presented below (in thousands, except per share data) does not necessarily reflect the actual results that would have occurred had the companies been combined during the periods presented, nor is it necessarily indicative of the future results of operations of the combined companies.
|
|
13 Weeks Ended |
|
39 Weeks Ended |
|
||||||||
|
|
November 1, 2008 |
|
November 3, 2007 |
|
November 1, 2008 |
|
November 3, 2007 |
|
||||
Net sales |
|
$ |
6,950,933 |
|
$ |
7,071,029 |
|
$ |
20,284,858 |
|
$ |
19,651,562 |
|
Income from continuing operations (1) |
|
156,703 |
|
255,134 |
|
443,136 |
|
600,075 |
|
||||
Net income (1) |
|
156,703 |
|
272,520 |
|
507,404 |
|
629,427 |
|
||||
Basic earnings per share |
|
0.22 |
|
0.39 |
|
0.73 |
|
0.89 |
|
||||
Diluted earnings per share |
|
0.22 |
|
0.38 |
|
0.71 |
|
0.87 |
|
||||
(1) Fiscal 2008 results include $124,012 of costs, net of taxes, related to strategic initiatives and certain transaction costs incurred by Corporate Express prior to the transaction date.
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 Company. Integration and restructuring costs were $132.3 million and $132.4 million for the third quarter of 2008 and year-to-date 2008, respectively. Included in integration and restructuring costs for the third quarter of 2008 and year-to-date 2008 is a $123.8 million charge related to the write-down of indefinite lived intangible tradenames associated with the European catalog business. The tradename 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, the legacy Staples brands used in the European catalog business. For the third quarter of 2008, integration and restructuring costs also include $7.4 million of consulting fees, $0.6 million of travel related expenses and a $0.5 million charge for employee retention costs.
Note E – Debt and Credit Agreements
In September 2008, Barclays Bank PLC agreed to assume the obligations of Lehman Brothers, Inc. and their affiliates under the Company’s 2008 Agreement, the Revolving Credit Facility, the Commercial Paper Program, and the 2008 Term Credit Facility as described below.
The 2008 Agreement
On April 1, 2008, Staples entered into a $3.0 billion credit agreement (the “2008 Agreement”) with Lehman Commercial Paper Inc., as administrative agent, Bank of America, N.A. and HSBC Bank USA, National Association, as co-syndication agents, and Lehman Brothers Inc., as lead arranger and bookrunner, for a commitment period beginning on July 9, 2008 and continuing until 364 days thereafter, unless earlier terminated pursuant to the terms of the 2008 Agreement. The 2008 Agreement provides financing solely (1) for the Company’s acquisition of all of the outstanding capital stock of Corporate Express, including related transaction fees, costs and expenses, and (2) backstop the Company’s Commercial Paper Program. Amounts borrowed under the 2008 Agreement may be borrowed, repaid and reborrowed from time to time, with the aggregate principal amount of the loans outstanding not to exceed the maximum borrowing amount of $3.0 billion. Borrowings made pursuant to the 2008 Agreement will bear interest at either (a) the base rate (the higher of the prime rate, as defined in the 2008 Agreement, or the federal funds rate plus 0.50%) plus an “applicable margin,” defined as a percentage spread based on Staples’ credit
9
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
rating or (b) the Eurocurrency rate plus a different “applicable margin,” also defined as a percentage spread based on Staples’ credit rating. The applicable margin for each base rate loan and Eurocurrency rate loan increases periodically, as set forth in the 2008 Agreement. The payments under the 2008 Agreement are guaranteed by the same subsidiaries of Staples (see Note J) that guarantee Staples’ publicly issued notes, the Commercial Paper Program, the 2008 Term Credit Facility and the Revolving Credit Facility (each as defined below). Under the 2008 Agreement, Staples agrees to pay a commitment fee, payable quarterly, at rates that range from 0.080% to 0.175% based on Staples’ credit rating. The 2008 Agreement also contains financial covenants that require Staples to maintain a minimum fixed charge coverage ratio of 1.5:1.0 and a maximum adjusted funded debt to total capitalization ratio of 0.75:1.0. The 2008 Agreement also contains affirmative and negative covenants that are consistent with those contained in Staples’ 2008 Term Credit Facility and Revolving Credit Facility. The 2008 Agreement contains certain customary events of default with corresponding grace periods. On July 1, 2008, Staples entered into the first amendment to the 2008 Agreement. The amendment was entered into to provide that certain events, including the establishment of the 2008 Term Credit Facility (as described below) and maintaining certain obligations of Corporate Express after the acquisition, will not reduce the maximum commitment available under the 2008 Agreement. On September 12, 2008, Staples entered into the second amendment to the 2008 Agreement. The amendment provides Staples with the flexibility, within ten business days of the receipt of proceeds from other indebtedness, to use such proceeds to repay the Commercial Paper Program (as described below).
As of November 1, 2008, $1.57 billion of borrowings were outstanding under the 2008 Agreement at a weighted average interest rate of 4.38%. As of November 1, 2008, the available credit under this agreement was $478.1 million.
The Revolving Credit Facility
On May 5, 2008, Staples entered into the first amendment (the “Amendment”) to the Amended and Restated $750.0 million Revolving Credit Agreement, as amended, dated as of October 13, 2006 (the “Revolving Credit Facility”). The Amendment was entered into in connection with the Company’s acquisition of the outstanding capital stock of Corporate Express and provided certain post-acquisition cure periods to allow the Company to cure defaults that could arise (i) as a result of change in control provisions contained in Corporate Express’ outstanding debt obligations and (ii) under Corporate Express’ and the Company’s outstanding debt obligations as a result of events or circumstances, such as litigation, liens or defaults, affecting Corporate Express. The Amendment did not alter the amount that may be borrowed under, or the terms of, the Revolving Credit Facility and confirmed the obligations of the Company to the lenders and administrative agent who are parties thereto.
As of November 1, 2008, $668.0 million of borrowings were outstanding under the Revolving Credit Facility and $21.3 million of letters of credit were issued against this facility. As of November 1, 2008, the available credit under this facility was $60.7 million.
The Commercial Paper Program
On June 9, 2008, Staples entered into a commercial paper program (the “Commercial Paper Program”) on a private placement basis under which the Company may issue unsecured commercial paper notes (the “Notes”) up to a maximum aggregate principal amount outstanding at any time of $3.0 billion. The 2008 Agreement serves as a backstop to the Commercial Paper Program. Under the Commercial Paper Program, Staples may issue Notes from time to time, and the proceeds of the Notes will be used for general corporate purposes, including working capital, capital expenditures, acquisitions and share repurchases. Maturities of the Notes vary but may not exceed 397 days from the date of issue. The Notes bear such interest rates, if interest bearing, or will be sold at such discount from their face amounts, as agreed upon from time to time by the dealers under the Commercial Paper Program and Staples. The payments under the Commercial Paper Program are guaranteed by the same subsidiaries (see Note J) that guarantee the publicly issued notes, the 2008 Agreement, the 2008 Term Credit Facility, and the Revolving Credit Facility. The Commercial Paper Program contains customary events of default with corresponding grace periods.
As of November 1, 2008, $948.7 million of Notes were outstanding under the Commercial Paper Program. The Notes have a weighted average remaining maturity of 15 days with a weighted average interest rate of 3.97%.
The 2008 Term Credit Facility
On July 1, 2008, Staples entered into a $400.0 million credit facility (the “2008 Term Credit Facility”) with Lehman Commercial Paper Inc., as administrative agent, Bank of America, N.A. and HSBC Bank USA, National Association, as co-syndication agents, and Lehman Brothers Inc., Banc of America Securities LLC and HSBC Securities (USA) Inc., as joint lead arrangers and joint bookrunners. The 2008 Term Credit Facility provides for borrowing of a maximum principal amount of up to $400.0 million. Borrowings under the 2008 Term Credit Facility may be used by Staples for working capital and in connection with the acquisition of Corporate Express, including the repayment of Corporate Express’ indebtedness. Amounts borrowed under the 2008 Term Credit Facility once borrowed may not be reborrowed. The 2008 Term Credit Facility contains customary affirmative and negative covenants that are substantially the same as those in the 2008 Agreement and the Revolving Credit Facility, has the same financial covenants as the 2008 Agreement and the Revolving Credit Facility and provides for customary events of default with corresponding grace periods that are substantially the same as those in our 2008 Agreement.
As of November 1, 2008, $150.0 million of borrowings were outstanding under the 2008 Term Credit Facility. On November 26, 2008, the Company repaid the entire remaining balance due. No further credit is available under this facility.
10
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
Corporate Express Securitization Programs
In connection with the acquisition of Corporate Express, the Company assumed the obligations under Corporate Express’ U.S. Securitization Program and the European Securitization Program (the “Securitization Programs”). As of November 1, 2008, the Company was able to borrow a maximum of $200.0 million and EUR 75.0 million (approximately $98 million based on exchange rates on that date) under the Securitization Programs. As of November 1, 2008, the utilized balance under the U.S. Securitization Program was $186.7 million and, based on the exchange rates on this date, the utilized balance under the European Securitization Program was $47.9 million. Borrowings outstanding under the Securitization Programs are included as a component of current liabilities in the Company’s condensed consolidated balance sheet, while the accounts receivable securing these obligations are included as a component of net receivables.
There were no instances of default during 2008 under any of the Company’s debt agreements.
Deferred Financing Fees
In connection with entering into the 2008 Agreement and the 2008 Term Credit Facility, the Company incurred financing fees of $16.5 million, which are being amortized over the term of the related debt instrument. Amortization of the financing fees are classified as interest expense. Deferred financing fees amortized to interest expense for the quarter and year to date period ended November 1, 2008 amounted to $5.5 million and $9.0 million, respectively. Unamortized financing fees at November 1, 2008 were $7.5 million and included in prepaid expenses and other current assets.
Note F – Equity Based Employee Benefit Plans
Staples offers its associates share ownership through certain equity based employee benefit plans, including the Employees’ 401(k) Savings Plan (the “401(k) Plan”), 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.
All U.S. based associates who meet minimum age and length of service requirements are eligible to participate in the 401(k) Plan. Company contributions to the 401(k) Plan are calculated on a matching formula applied to associates’ contributions that are made in the form of Company common stock and vest ratably over a five year period. After five years of service, participants are fully vested in all contributions. 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 nonqualified stock options and restricted stock and restricted stock units (collectively, “Restricted Shares”) to associates. The nonqualified stock options and Restricted Shares are restricted in that they are not transferable (i.e. they may not be exercised or sold) until they vest. Vesting of these awards 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.
11
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
The following table summarizes the nonqualified stock option and Restricted Share activity during year-to-date 2008:
|
|
Nonqualified Stock Options |
|
Restricted Shares |
|
||||||
|
|
Number |
|
Weighted |
|
Number |
|
Weighted |
|
||
Outstanding at February 2, 2008 |
|
51,374,926 |
|
$ |
17.90 |
|
9,857,269 |
|
$ |
24.61 |
|
Granted |
|
183,689 |
|
21.58 |
|
938,647 |
|
21.82 |
|
||
Exercised / released |
|
(1,478,855 |
) |
15.31 |
|
(224,413 |
) |
22.11 |
|
||
Canceled |
|
(658,632 |
) |
20.22 |
|
(229,719 |
) |
24.54 |
|
||
Outstanding at May 3, 2008 |
|
49,421,128 |
|
$ |
17.97 |
|
10,341,784 |
|
$ |
24.41 |
|
Granted |
|
4,867,262 |
|
24.30 |
|
5,156,149 |
|
24.30 |
|
||
Exercised / released |
|
(2,956,925 |
) |
16.17 |
|
(1,866,753 |
) |
24.46 |
|
||
Canceled |
|
(318,185 |
) |
22.35 |
|
(274,902 |
) |
24.50 |
|
||
Outstanding at August 2, 2008 |
|
51,013,280 |
|
$ |
18.65 |
|
13,356,278 |
|
$ |
24.36 |
|
Granted |
|
342,179 |
|
22.58 |
|
111,288 |
|
24.89 |
|
||
Exercised / released |
|
(3,620,615 |
) |
16.26 |
|
(81,324 |
) |
22.77 |
|
||
Canceled |
|
(290,131 |
) |
22.59 |
|
(255,831 |
) |
24.33 |
|
||
Outstanding at November 1, 2008 |
|
47,444,713 |
|
$ |
18.83 |
|
13,130,411 |
|
$ |
24.37 |
|
Staples also grants performance share awards to certain employees, which are awards of restricted stock that only are issued and vest if the Company meets minimum performance targets (the “Performance Shares”). If at the end of each three year period, the Company’s performance falls between the minimum and maximum targets, a percentage of the Performance Shares, ranging from 90% to 200%, will vest depending on the performance achieved. If the Company does not achieve the minimum performance target, none of the Performance Shares will be issued.
In connection with its equity based employee benefit plans, Staples included $47.4 million and $134.2 million in compensation expense for the thirteen weeks and thirty-nine weeks ended November 1, 2008, respectively, and $50.1 million and $133.2 million in compensation expense for the thirteen and thirty-nine weeks ended November 3, 2007, respectively. As of November 1, 2008, Staples had $286.5 million of nonqualified stock options and Restricted Shares to be expensed over the period through September 2012.
Note G – Comprehensive Income
Comprehensive (loss) income includes net income, foreign currency translation adjustments and changes in the fair value of derivatives that are designated as hedges of net investments in foreign subsidiaries (net of the related tax effects), which are reported separately in stockholders’ equity (in thousands):
|
|
13 Weeks Ended |
|
39 Weeks Ended |
|
||||||||
|
|
November 1, |
|
November 3, |
|
November 1, |
|
November 3, |
|
||||
Net income |
|
$ |
156,703 |
|
$ |
274,518 |
|
$ |
519,218 |
|
$ |
662,489 |
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
||||
Foreign currency translation adjustments, net |
|
(848,685 |
) |
94,882 |
|
(833,842 |
) |
236,854 |
|
||||
Change in the fair value of derivatives |
|
47,084 |
|
48,779 |
|
44,823 |
|
15,755 |
|
||||
Tax effect of changes in the fair value of derivatives |
|
(19,776 |
) |
(20,487 |
) |
(18,826 |
) |
(6,617 |
) |
||||
Total comprehensive (loss) income |
|
$ |
(664,674 |
) |
$ |
397,692 |
|
$ |
(288,627 |
) |
$ |
908,481 |
|
12
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
Note H – Computation of Earnings Per Common Share
The computation of basic and diluted earnings per share for the third quarter and year-to-date 2008 and 2007 is as follows (in thousands, except per share data):
|
|
13 Weeks Ended |
|
39 Weeks Ended |
|
||||||||
|
|
November 1, |
|
November 3, |
|
November 1, |
|
November 3, |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
||||
Net income |
|
$ |
156,703 |
|
$ |
274,518 |
|
$ |
519,218 |
|
$ |
662,489 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
||||
Weighted-average common shares outstanding |
|
701,161 |
|
702,259 |
|
696,811 |
|
707,301 |
|
||||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
||||
Employee stock options and restricted shares |
|
11,550 |
|
12,999 |
|
13,873 |
|
16,114 |
|
||||
Weighted-average common shares outstanding assuming dilution |
|
712,711 |
|
715,258 |
|
710,684 |
|
723,415 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Basic earnings per common share |
|
$ |
0.22 |
|
$ |
0.39 |
|
$ |
0.75 |
|
$ |
0.94 |
|
Diluted earnings per common share |
|
$ |
0.22 |
|
$ |
0.38 |
|
$ |
0.73 |
|
$ |
0.92 |
|
Note I – Segment Reporting
Staples has three reportable segments: North American Retail, North American Delivery and International Operations. Staples’ North American Retail segment consists of the U.S. and Canadian business units that operate office products stores. 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 Staples Business Delivery, Quill and Contract (including Corporate Express). 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.
In connection with the acquisition of Corporate Express, Staples allocated assets of $3.90 billion and $3.09 billion to the North American Delivery and International Operations segments, respectively. Included in total assets were goodwill and intangible assets totaling $3.35 billion, of which $2.22 billion and $1.14 billion were allocated to the North American Delivery and International Operations segments, respectively.
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, income taxes, 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 Retail and North American Delivery segments are managed separately because the way they market products is different, the classes of customers they service may be different, and the distribution methods used to deliver products to customers is different. The International Operations are considered a separate reportable segment because of the significant differences in the operating environment from the North American operations.
13
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 2008 and 2007 and a reconciliation of total segment income to income before income taxes and minority interest (in thousands):
|
|
13 Weeks Ended |
|
39 Weeks Ended |
|
||||||||
|
|
November 1, |
|
November 3, |
|
November 1, |
|
November 3, |
|
||||
|
|
Sales |
|
Sales |
|
||||||||
|
|
|
|
|
|
|
|
|
|
||||
North American Retail |
|
$ |
2,599,204 |
|
$ |
2,750,884 |
|
$ |
7,095,568 |
|
$ |
7,225,679 |
|
North American Delivery |
|
2,783,195 |
|
1,727,141 |
|
6,469,487 |
|
4,896,999 |
|
||||
International Operations |
|
1,568,534 |
|
690,326 |
|
3,345,152 |
|
1,925,562 |
|
||||
Total reportable segments |
|
$ |
6,950,933 |
|
$ |
5,168,351 |
|
$ |
16,910,207 |
|
$ |
14,048,240 |
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
13 Weeks Ended |
|
39 Weeks Ended |
|
||||||||
|
|
November 1, |
|
November 3, |
|
November 1, |
|
November 3, |
|
||||
|
|
Business Unit Income |
|
Business Unit Income |
|
||||||||
|
|
|
|
|
|
|
|
|
|
||||
North American Retail |
|
$ |
267,558 |
|
$ |
305,869 |
|
$ |
546,342 |
|
$ |
652,252 |
|
North American Delivery |
|
246,206 |
|
187,450 |
|
583,023 |
|
507,380 |
|
||||
International Operations |
|
55,624 |
|
23,064 |
|
94,364 |
|
42,954 |
|
||||
Business unit income |
|
$ |
569,388 |
|
$ |
516,383 |
|
$ |
1,223,729 |
|
$ |
1,202,586 |
|
Stock-based compensation |
|
(47,399 |
) |
(50,078 |
) |
(134,196 |
) |
(133,196 |
) |
||||
Integration and restructuring costs |
|
(132,282 |
) |
— |
|
(132,445 |
) |
— |
|
||||
Impact of wage and hour settlement |
|
— |
|
(38,000 |
) |
— |
|
(38,000 |
) |
||||
Total segment income |
|
389,707 |
|
428,305 |
|
957,088 |
|
1,031,390 |
|
||||
Interest and other income (expense), net |
|
(57,369 |
) |
264 |
|
(68,423 |
) |
2,756 |
|
||||
Income before income taxes and minority interests |
|
$ |
332,338 |
|
$ |
428,569 |
|
$ |
888,665 |
|
$ |
1,034,146 |
|
Under the terms of the Company’s 7.375% Senior Notes, the Revolving Credit Facility, the 2008 Agreement, the 2008 Term Credit Facility and the Commercial Paper Program, certain subsidiaries guarantee repayment of the debt. The debt is fully and unconditionally guaranteed on an unsecured, joint and several basis by Staples the Office Superstore, LLC, Staples the Office Superstore East, Inc., Staples Contract & Commercial, Inc., and Staples the Office Superstore, Limited Partnership, all of which are wholly owned subsidiaries of Staples (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 debt and illustrates the composition of Staples, Inc. (the “Parent Company”), the Guarantor Subsidiaries, and the non-guarantor subsidiaries as of November 1, 2008 and February 2, 2008 and for the third quarter and year-to-date 2008 and 2007. The non-guarantor subsidiaries, including Corporate Express, represent more than an inconsequential portion of the consolidated assets and revenues of Staples.
Investments in subsidiaries are accounted for by the Parent Company on the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are, therefore, reflected in the Parent Company’s investment accounts and earnings. The principal elimination entries eliminate the Parent Company’s investment in subsidiaries and intercompany balances and transactions.
14
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
Condensed Consolidating Balance
Sheet
As of November 1, 2008
(in thousands)
|
|
|
|
|
|
Non- |
|
|
|
|
|
|||||
|
|
Staples, Inc. |
|
Guarantor |
|
Guarantor |
|
|
|
|
|
|||||
|
|
(Parent Co.) |
|
Subsidiaries |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash and cash equivalents |
|
$ |
287,784 |
|
$ |
36,932 |
|
$ |
562,984 |
|
$ |
— |
|
$ |
887,700 |
|
Merchandise inventories |
|
— |
|
1,257,496 |
|
1,410,793 |
|
— |
|
2,668,289 |
|
|||||
Other current assets |
|
61,666 |
|
689,765 |
|
1,872,422 |
|
— |
|
2,623,853 |
|
|||||
Total current assets |
|
349,450 |
|
1,984,193 |
|
3,846,199 |
|
— |
|
6,179,842 |
|
|||||
Net property, equipment and other assets |
|
709,117 |
|
1,273,530 |
|
2,146,725 |
|
— |
|
4,129,372 |
|
|||||
Goodwill |
|
290,759 |
|
154,527 |
|
3,278,718 |
|
— |
|
3,724,004 |
|
|||||
Investment in affiliates and intercompany, net |
|
1,709,770 |
|
3,812,082 |
|
1,663,954 |
|
(7,185,806 |
) |
— |
|
|||||
Total assets |
|
$ |
3,059,096 |
|
$ |
7,224,332 |
|
$ |
10,935,596 |
|
$ |
(7,185,806 |
) |
$ |
14,033,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total current liabilities |
|
$ |
2,879,985 |
|
$ |
1,288,382 |
|
$ |
2,499,514 |
|
$ |
— |
|
$ |
6,667,881 |
|
Total long-term liabilities |
|
779,355 |
|
488,695 |
|
656,884 |
|
— |
|
1,924,934 |
|
|||||
Minority interests |
|
— |
|
— |
|
58,345 |
|
— |
|
58,345 |
|
|||||
Total stockholders’ equity |
|
(600,244 |
) |
5,447,255 |
|
7,720,853 |
|
(7,185,806 |
) |
5,382,058 |
|
|||||
Total liabilities and stockholders’ equity |
|
$ |
3,059,096 |
|
$ |
7,224,332 |
|
$ |
10,935,596 |
|
$ |
(7,185,806 |
) |
$ |
14,033,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Condensed Consolidating Balance Sheet |
||||||||||||||||
As of February 2, 2008 |
||||||||||||||||
(in thousands) |
||||||||||||||||
|
||||||||||||||||
|
|
|
|
|
|
Non- |
|
|
|
|
|
|||||
|
|
Staples, Inc. |
|
Guarantor |
|
Guarantor |
|
|
|
|
|
|||||
|
|
(Parent Co.) |
|
Subsidiaries |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash and cash equivalents |
|
$ |
638,543 |
|
$ |
42,612 |
|
$ |
564,293 |
|
$ |
— |
|
$ |
1,245,448 |
|
Short-term investments |
|
27,016 |
|
— |
|
— |
|
— |
|
27,016 |
|
|||||
Merchandise inventories |
|
— |
|
1,271,978 |
|
781,185 |
|
— |
|
2,053,163 |
|
|||||
Other current assets |
|
38,343 |
|
632,238 |
|
559,174 |
|
— |
|
1,229,755 |
|
|||||
Total current assets |
|
703,902 |
|
1,946,828 |
|
1,904,652 |
|
— |
|
4,555,382 |
|
|||||
Net property, equipment and other assets |
|
354,949 |
|
1,326,736 |
|
1,034,349 |
|
— |
|
2,716,034 |
|
|||||
Goodwill |
|
296,511 |
|
154,527 |
|
1,313,890 |
|
— |
|
1,764,928 |
|
|||||
Investment in affiliates and intercompany, net |
|
(1,055,173 |
) |
3,069,532 |
|
3,070,975 |
|
(5,085,334 |
) |
— |
|
|||||
Total assets |
|
$ |
300,189 |
|
$ |
6,497,623 |
|
$ |
7,323,866 |
|
$ |
(5,085,334 |
) |
$ |
9,036,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total current liabilities |
|
$ |
340,421 |
|
$ |
1,150,712 |
|
$ |
1,118,765 |
|
$ |
— |
|
$ |
2,609,898 |
|
Total long-term liabilities |
|
128,300 |
|
472,554 |
|
97,358 |
|
— |
|
698,212 |
|
|||||
Minority interests |
|
— |
|
— |
|
10,227 |
|
— |
|
10,227 |
|
|||||
Total stockholders’ equity |
|
(168,532 |
) |
4,874,357 |
|
6,097,516 |
|
(5,085,334 |
) |
5,718,007 |
|
|||||
Total liabilities and stockholders’ equity |
|
$ |
300,189 |
|
$ |
6,497,623 |
|
$ |
7,323,866 |
|
$ |
(5,085,334 |
) |
$ |
9,036,344 |
|
15
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
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 |
|
||||
Income (loss) before income taxes and minority interests |
|
(171,242 |
) |
269,013 |
|
234,567 |
|
332,338 |
|
||||
Income tax expense |
|
— |
|
97,786 |
|
73,858 |
|
171,644 |
|
||||
Income (loss) before minority interests |
|
(171,242 |
) |
171,227 |
|
160,709 |
|
160,694 |
|
||||
Minority interests |
|
— |
|
— |
|
3,991 |
|
3,991 |
|
||||
Net income (loss) |
|
$ |
(171,242 |
) |
$ |
171,227 |
|
$ |
156,718 |
|
$ |
156,703 |
|
Condensed Consolidating Statement of Income
For the thirteen weeks ended November 3, 2007
(in thousands)
|
|
Staples, Inc. |
|
Guarantor |
|
Non-Guarantor |
|
|
|
||||
|
|
(Parent Co.) |
|
Subsidiaries |
|
Subsidiaries |
|
Consolidated |
|
||||
Sales |
|
$ |
— |
|
$ |
3,357,286 |
|
$ |
1,811,065 |
|
$ |
5,168,351 |
|
Cost of goods sold and occupancy costs |
|
3,196 |
|
2,390,586 |
|
1,268,895 |
|
3,662,677 |
|
||||
Gross profit |
|
(3,196 |
) |
966,700 |
|
542,170 |
|
1,505,674 |
|
||||
Operating and other expenses |
|
16,188 |
|
687,854 |
|
373,063 |
|
1,077,105 |
|
||||
Income (loss) before income taxes and minority interests |
|
(19,384 |
) |
278,846 |
|
169,107 |
|
428,569 |
|
||||
Income tax expense |
|
— |
|
96,116 |
|
58,169 |
|
154,285 |
|
||||
Income (loss) before minority interest |
|
(19,384 |
) |
182,730 |
|
110,938 |
|
274,284 |
|
||||
Minority interests |
|
— |
|
— |
|
(234 |
) |
(234 |
) |
||||
Net income (loss) |
|
$ |
(19,384 |
) |
$ |
182,730 |
|
$ |
111,172 |
|
$ |
274,518 |
|
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 |
|
||||
Income (loss) before income taxes and minority interests |
|
(215,733 |
) |
563,830 |
|
540,568 |
|
888,665 |
|
||||
Income tax expense |
|
— |
|
193,783 |
|
169,805 |
|
363,588 |
|
||||
Income (loss) before minority interests |
|
(215,733 |
) |
370,047 |
|
370,763 |
|
525,077 |
|
||||
Minority interests |
|
— |
|
— |
|
5,859 |
|
5,859 |
|
||||
Net income (loss) |
|
$ |
(215,733 |
) |
$ |
370,047 |
|
$ |
364,904 |
|
$ |
519,218 |
|
16
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidating Statement of Income
For the thirty-nine weeks ended November 3, 2007
(in thousands)
|
|
Staples, Inc. |
|
Guarantor |
|
Non-Guarantor |
|
|
|
||||
|
|
(Parent Co.) |
|
Subsidiaries |
|
Subsidiaries |
|
Consolidated |
|
||||
Sales |
|
$ |
— |
|
$ |
9,230,842 |
|
$ |
4,817,398 |
|
$ |
14,048,240 |
|
Cost of goods sold and occupancy costs |
|
7,349 |
|
6,678,579 |
|
3,361,332 |
|
10,047,260 |
|
||||
Gross profit |
|
(7,349 |
) |
2,552,263 |
|
1,456,066 |
|
4,000,980 |
|
||||
Operating and other expenses |
|
45,022 |
|
1,873,263 |
|
1,048,549 |
|
2,966,834 |
|
||||
Income (loss) before income taxes and minority interests |
|
(52,371 |
) |
679,000 |
|
407,517 |
|
1,034,146 |
|
||||
Income tax expense |
|
— |
|
231,196 |
|
141,097 |
|
372,293 |
|
||||
Income (loss) before minority interests |
|
(52,371 |
) |
447,804 |
|
266,420 |
|
661,853 |
|
||||
Minority interests |
|
— |
|
— |
|
(636 |
) |
(636 |
) |
||||
Net income (loss) |
|
$ |
(52,371 |
) |
$ |
447,804 |
|
$ |
267,056 |
|
$ |
662,489 |
|
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 investment in joint ventures, net of cash acquired |
|
— |
|
— |
|
(4,381,811 |
) |
(4,381,811 |
) |
||||
Purchase of short-term investments |
|
(3 |
) |
— |
|
— |
|
(3 |
) |
||||
Proceeds from the sale of short-term investments |
|
27,019 |
|
— |
|
— |
|
27,019 |
|
||||
Cash used in investing activities |
|
(2,524 |
) |
(123,371 |
) |
(4,472,677 |
) |
(4,598,572 |
) |
||||
Financing Activities: |
|
|
|
|
|
|
|
|
|
||||
Proceeds from borrowings and issuance of commercial paper, net |
|
3,711,607 |
|
— |
|
— |
|
3,711,607 |
|
||||
Payments on borrowings |
|
(360,790 |
) |
— |
|
— |
|
(360,790 |
) |
||||
Purchase of treasury stock, net |
|
(83,208 |
) |
— |
|
— |
|
(83,208 |
) |
||||
Excess tax benefits from stock-based compensation arrangements |
|
3,528 |
|
2,048 |
|
416 |
|
5,992 |
|
||||
Cash dividends paid |
|
(231,465 |
) |
— |
|
— |
|
(231,465 |
) |
||||
Other |
|
113,319 |
|
— |
|
— |
|
113,319 |
|
||||
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 |
|
17
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidating Statement of Cash Flows
For the thirty-nine weeks ended November 3, 2007
(in thousands)
|
|
Staples, Inc. |
|
Guarantor |
|
Non-Guarantor |
|
|
|
||||
|
|
(Parent Co.) |
|
Subsidiaries |
|
Subsidiaries |
|
Consolidated |
|
||||
Net cash provided by operating activities |
|
$ |
464,677 |
|
$ |
255,139 |
|
$ |
122,007 |
|
$ |
841,823 |
|
Investing Activities: |
|
|
|
|
|
|
|
|
|
||||
Acquisition of property and equipment |
|
(43,687 |
) |
(194,182 |
) |
(78,036 |
) |
(315,905 |
) |
||||
Acquisition of businesses and investment in joint ventures, net of cash acquired |
|
— |
|
(82,202 |
) |
(96,093 |
) |
(178,295 |
) |
||||
Purchase of short-term investments |
|
(3,440,117 |
) |
— |
|
— |
|
(3,440,117 |
) |
||||
Proceeds from the sale of short-term investments |
|
3,776,385 |
|
— |
|
— |
|
3,776,385 |
|
||||
Cash provided by (used in) investing activities |
|
292,581 |
|
(276,384 |
) |
(174,129 |
) |
(157,932 |
) |
||||
Financing Activities: |
|
|
|
|
|
|
|
|
|
||||
Payments on borrowings |
|
(204,889 |
) |
— |
|
— |
|
(204,889 |
) |
||||
Purchase of treasury stock, net |
|
(578,159 |
) |
— |
|
— |
|
(578,159 |
) |
||||
Excess tax benefits from stock-based compensation arrangements |
|
9,512 |
|
7,715 |
|
168 |
|
17,395 |
|
||||
Cash dividends paid |
|
(207,552 |
) |
— |
|
— |
|
(207,552 |
) |
||||
Other |
|
136,404 |
|
— |
|
— |
|
136,404 |
|
||||
Cash (used in) provided by financing activities |
|
(844,684 |
) |
7,715 |
|
168 |
|
(836,801 |
) |
||||
Effect of exchange rate changes on cash and cash equivalents |
|
— |
|
— |
|
45,960 |
|
45,960 |
|
||||
Net decrease in cash and cash equivalents |
|
(87,426 |
) |
(13,530 |
) |
(5,994 |
) |
(106,950 |
) |
||||
Cash and cash equivalents at beginning of period |
|
476,549 |
|
49,687 |
|
491,435 |
|
1,017,671 |
|
||||
Cash and cash equivalents at end of period |
|
$ |
389,123 |
|
$ |
36,157 |
|
$ |
485,441 |
|
$ |
910,721 |
|
Note K – Commitments and Contingencies
The Company is involved from time to time in litigation arising from the operation of its business that is considered routine and incidental to its business; however, 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.
18
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. The acquisition of Corporate Express establishes a contract business in Europe and Canada and increases our contract business in the United States. The acquisition also extends our geographic reach to Australia and New Zealand. As a result of the acquisition, we have operations in 27 countries.
The aggregate cash purchase price of 2.8 billion Euros (approximately $4.4 billion, net of cash acquired) for the capital stock of Corporate Express and for our repayment of most of Corporate Express’ debt was funded primarily with the sale of notes under our Commercial Paper Program, which is backstopped by our 2008 Agreement, and additional funds from our 2008 Term Credit Facility, our existing Revolving Credit Facility (each as defined below), and our available cash and short-term investments.
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 intend by the end of fiscal year 2009 to acquire the remaining capital of Corporate Express by means of a compulsory acquisition procedure in accordance with the Dutch Civil Code. In July 2008, we also acquired 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 operating results of Corporate Express have been included in the condensed consolidated financial statements since July 2, 2008, the date we 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.
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. In order to enhance comparability between our 2007 and 2008 results, certain operational measures for fiscal 2008 are accompanied by a presentation of such measure after removing the impact of the Corporate Express acquisition. Management is using such adjusted operational measures in the initial post acquisition period to evaluate our pre-acquisition operating results against prior year results and our operating plan. This adjusted information supplements and is not intended to represent measures that are calculated or presented in accordance with disclosures required by accounting principles generally accepted in the United States.
As we have begun the integration of Corporate Express, it has become difficult to accurately isolate the impact of the Corporate Express operations from our overall business. Accordingly, the following information discussing our results after removing the impact of the Corporate Express acquisition is not exact and represents our best estimate. In the coming quarters, as the integration of Corporate Express proceeds, it will become increasingly difficult to accurately quantify the impact of the Corporate Express operations on our overall results, and we’ll soon no longer be able, or consider it meaningful, to provide financial information or any related discussion of our business after removing the impact of Corporate Express.
19
Overview
We produced fairly stable results for the third quarter of 2008 despite the challenging economic environment. Excluding sales of $1.96 billion related to Corporate Express, our consolidated sales declined 3.4% in the third quarter of 2008. Major contributors to the third quarter of 2008 results (as compared to the results for the third quarter of 2007) are reviewed in detail in the Consolidated Performance and Segment Performance discussions and are summarized below:
|
· |
|
On a consolidated basis including Corporate Express, we reached $6.95 billion in sales, with sales growth of 34.5%. |
|
· |
|
North American Retail’s comparable store sales declined 8% and business unit income rate fell to 10.3% from 11.1%, as negative comparable store sales drove deleverage in rent and occupancy expenses and labor. Despite these economic challenges, we achieved excellent customer service and continued to invest in our “EasyWay” service model. |
|
· |
|
North American Delivery sales grew 61.1% as a result of the acquisition of Corporate Express. Excluding sales of $1.07 billion related to Corporate Express, sales declined 0.9% on lower sales to existing customers, partially offset by successful customer acquisition and retention efforts and excellent customer service. Business unit income rate declined from 10.9% to 8.8%. Excluding the results of Corporate Express, business unit income increased to 12.3%. |
|
· |
|
International Operations sales grew 127.2%. Excluding sales of $886 million related to Corporate Express, sales declined 1.1% in US dollars and grew 0.4% in local currency. Business unit income rate increased to 3.5% from 3.3% and increased to 3.4% excluding the results of Corporate Express. |
|
· |
|
We now operate 2,216 stores worldwide. We had a net addition of 30 stores in North America and a net closure of 5 stores in International Operations. |
While maintaining our focus on expense control, we are also continuing to invest in new strategic initiatives and customer service programs to ensure our long term success, despite the current weak economic climate. These strategic initiatives include:
|
· |
|
Implementing a series of retail store business initiatives to drive productivity; including improving the profitability of technology sales, boosting sales of high margin copy and EasyTech services, and reducing the size of our primary “Dover” store format to 18,000 square feet from 20,000 square feet; |
|
· |
|
Continued differentiation through our own brand products; and |
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· |
|
Cross-channel initiatives to encourage customers to spend more overall by shopping both Staples’ retail and delivery channels. |
For our customer service programs, our North American and European delivery businesses have focused on the “Perfect Order” program to improve product availability, ensure accuracy of orders, improve warehouse performance and productivity of our delivery trucks, 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 providing incentives for store associates to provide great customer service.
Outlook
The economic environment remains challenging, and we expect it to remain so for the foreseeable future. Despite this difficult environment, we expect to achieve stable performance through customer service, customer retention and acquisition efforts, expense management and focused integration of Corporate Express. We will endeavor to provide as much transparency as possible; however, as a result of the difficulty in forecasting sales in the current environment, we will not provide specific sales and earnings guidance for the fourth quarter of 2008 and for 2009. To the extent we have clear visibility, we will provide guidance on factors that will influence profitability, such as anticipated synergies from the Corporate Express integration, integration and restructuring expense, amortization of intangibles and interest expense. We expect the following:
|
· |
|
Corporate Express integration synergies building to $300 million annually over a three year integration period; |
|
· |
|
Integration and restructuring expense of $10 to $15 million for the fourth quarter of 2008 and $50 to $70 million for 2009; |
|
· |
|
Amortization of intangibles of $30 to $35 million for the fourth quarter of 2008 and $110 to $120 million for 2009; and |
|
· |
|
Net interest expense of $60 to $70 million for the fourth quarter of 2008 and $220 to $250 million for 2009. |
20
Consolidated Performance:
Net income for the third quarter of 2008 was $156.7 million, or $0.22 per diluted share, compared to $274.5 million or $0.38 per diluted share for the third quarter of 2007. Net income for year-to-date 2008 was $519.2 million, or $0.73 per diluted share, compared to $662.5 million, or $0.92 per diluted share, for year-to-date 2007. Our results for the third quarter and year-to-date 2008 include the results of the newly acquired Corporate Express business since its acquisition on July 2, 2008. Our results for the third quarter and year-to-date 2008 also include pretax integration and restructuring costs of $132.3 million and $132.4 million, respectively, and total net interest expense before taxes of $54.5 million and $65.2 million, respectively, which substantially relates to our acquisition financing. Our results reflect our continuing focus on our strategy of driving profitable sales growth, improving profit margins and increasing asset productivity while operating in a difficult economic environment. 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, our focus on higher margin Staples brand products, our continued focus on customer acquisition and retention efforts, and expense control were key contributors to sustaining our performance in the third quarter of 2008, despite the negative impact of a weakened economy on our customers and our organic sales growth.
Sales: Sales for the third quarter of 2008 were $6.95 billion, an increase of 34.5% from the third quarter of 2007. Sales for year-to-date 2008 were $16.91 billion, an increase of 20.4% from year-to-date 2007. Our sales growth for the third quarter and year-to-date 2008 reflects sales of $1.96 billion and $2.63 billion, respectively, from the Corporate Express business. Excluding the sales from Corporate Express, sales decreased 3.4% for the third quarter and increased 1.7% for year-to-date 2008. The 3.4% decline for the third quarter of 2008 was substantially driven by an 8% decrease in comparable store sales in our North American Retail business and, to a much lesser degree, the negative impact of foreign exchange rates of $52.2 million. This sales decline was partially offset by sales from new stores opened in our North American Retail business. The 1.7% sales growth for year-to-date 2008 was primarily driven by the following three factors, in order of magnitude: increased sales from new stores opened, the positive impact of foreign exchange rates of $195.9 million, and organic growth in our delivery businesses. This growth was partially offset by a 6% decrease in comparable store sales in our retail businesses.
Gross Profit: Gross profit as a percentage of sales was 26.8% for the third quarter of 2008 and 27.1% for year-to-date 2008 compared to 29.1% for the third quarter of 2007 and 28.5% for year-to-date 2007. Our gross profit rate for the third quarter and year-to-date 2008 was negatively impacted by 2.4% and 1.2%, respectively, due to the inclusion of the results of Corporate Express, whose gross profit rate is lower than our existing businesses. The negative impact of Corporate Express on our gross profit rate for the third quarter was offset primarily by improved product margins in our North American businesses and, to a lesser extent, supply chain improvements in all our segments substantially offset by deleverage in fixed occupancy costs on a decrease in comparable store sales in North American Retail. For year-to-date 2008, the net decrease in gross profit rate primarily reflects deleverage in fixed occupancy costs on a decrease in comparable store sales in North American Retail, partially offset by improved product margins in our North American businesses and, to a lesser extent, supply chain improvements in all of our segments.
Selling, General and Administrative Expenses: Selling, general and administrative expenses were 18.9% of sales for the third quarter and 20.4% of sales for year-to-date 2008 compared to 20.8% for the third quarter of 2007 and 21.1% for year-to-date 2007. Selling, general and administrative expenses as a percentage of sales for the third quarter and year-to-date 2008 includes a 1.2% and 0.8% improvement, respectively, related to the inclusion of the results of Corporate Express, whose selling, general and administrative expense rate is lower than our existing businesses. The net decrease in selling, general and administrative expenses for the third quarter, after adjusting for the improvement from Corporate Express, was primarily driven by the $38.0 million charge related to the California wage and hour class action lawsuits included in the prior year and, to a lesser extent, decreased marketing expenses in all our businesses, partially offset by deleverage in labor on a decrease in comparable store sales in our North American Retail business. The net increase in selling, general and administrative expenses for year-to-date 2008, after adjusting for the improvement from Corporate Express, primarily reflects deleverage in labor, partially offset by the $38.0 million charge related to the California wage and hour class action lawsuits included in the prior year and, to a lesser extent, decreased marketing expenses in all of our businesses. Our results continue to reflect our ongoing focus on expense control in a challenging economic environment.
Integration and Restructuring Costs: Integration and restructuring costs were $132.3 million and $132.4 million for the third quarter and year-to-date 2008, respectively. These expenses reflect costs associated with the integration of Corporate Express with the Company’s pre-existing business and the consolidation of certain operations of the Company. Included in integration and restructuring costs for the third quarter and year-to-date 2008 is a $123.8
21
million charge related to the write-down of indefinite lived intangible tradenames associated with our European catalog business. The tradename write-down was the result of our decision to move toward one global brand with the acquisition of Corporate Express, eliminating, over time, the legacy brands used in the European catalog business. For the third quarter of 2008, integration and restructuring costs also include $7.4 million of consulting fees, $0.6 million of travel related expenses and a $0.5 million charge for employee retention costs.
Amortization of Intangibles: Amortization of intangibles was $28.0 million for the third quarter of 2008 and $46.4 million for year-to-date 2008 compared to $4.4 million for the third quarter of 2007 and $11.7 million for year-to-date 2008, reflecting the amortization of certain tradenames, customer relationships and noncompetition agreements. Amortization expense relating to the intangibles resulting from our acquisition of Corporate Express was $24.5 million and $34.9 million for the third quarter and year-to-date 2008, respectively.
Interest income: Interest income decreased to $5.4 million for the third quarter of 2008 and $23.1 million for year-to-date 2008 from $8.7 million for the third quarter of 2007 and $34.9 million for year-to-date 2007. The decrease in interest income for the third quarter and year-to-date 2008 is primarily due to a decrease in our average cash and short-term investment portfolio resulting from our acquisition of Corporate Express, combined with a decrease in interest rates.
Interest expense: Interest expense increased to $59.9 million for the third quarter of 2008 and $88.3 million for year-to-date 2008 from $8.5 million for the third quarter of 2007 and $30.7 million for year-to-date 2007. The increase in interest expense for the third quarter and year-to-date 2008 is primarily due to borrowings under our Commercial Paper Program, our 2008 Agreement, our Revolving Credit Facility and the 2008 Term Credit Facility (each as defined below) relating to our acquisition of Corporate Express, slightly offset by the impact of the repayment of our $200.0 million 7.125% senior notes in August 2007. We use interest rate swap agreements to convert our fixed rate debt obligations into variable rate obligations. Excluding the impact of our interest rate swap agreements, interest expense would have been $60.8 million for the third quarter of 2008 and $90.5 million for year-to-date of 2008 compared to $7.6 million for the third quarter of 2007 and $29.1 million for year-to-date 2007.
Miscellaneous expense: Miscellaneous expense was $2.8 million for the third quarter and $3.2 million year-to-date 2008, compared to miscellaneous income of $0.01 million for the third quarter of 2007 and miscellaneous expense of $1.5 million for year-to-date 2007. These amounts primarily reflect foreign exchange gains and losses recorded in the respective periods.
Income Taxes: Our effective tax rate was 51.6% and 40.9% for the third quarter and year-to-date 2008, respectively, compared to 36.0% for the third quarter and year-to-date 2007. The increase in our effective tax rate in 2008 was due to the establishment of a reserve of $57.0 million related to foreign tax credits expected to expire. We continue to develop plans to minimize our tax expense considering the tax attributes of the combined entity. As a result of our tax planning it is possible that we could reverse a portion or all of this reserve in future periods. Our effective tax rate from operations for the third quarter and year-to-date 2008 remains at 34.5%. The decrease in the effective tax rate from operations compared to the prior year was due to geographical changes in the mix of earnings, primarily attributable to the acquisition of Corporate Express.
Segment Performance:
Our business is comprised of three segments: North American Retail, North American Delivery and International Operations. Our North American Retail segment consists of the U.S. and Canadian business units that operate office products stores. 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 businesses, and includes Staples Business Delivery, Quill and Contract (including Corporate Express). 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.
In connection with our acquisition of Corporate Express, we allocated assets of $3.90 billion and $3.09 billion to the North American Delivery and International Operations segments, respectively. The Corporate Express assets include goodwill and intangible assets of $3.35 billion, of which $2.22 billion and $1.14 billion were allocated to the North American Delivery and International Operations segments, respectively.
22
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, income taxes, non-recurring items and the impact of changes in accounting principles (see reconciliation of total segment income to consolidated income before income taxes and minority interest in Note I to the Condensed Consolidated Financial Statements included in this report):
|
|
|
|
|
|
November 1, |
|
|
|
||
|
|
(Amounts in thousands) |
|
Increase |
|
November 3, |
|
||||
|
|
November 1, |
|
November 3, |
|
From |
|
Increase From |
|
||
Sales: |
|
|
|
|
|
|
|
|
|
||
North American Retail |
|
$ |
2,599,204 |
|
$ |
2,750,884 |
|
(5.5 |
)% |
3.2 |
% |
North American Delivery |
|
2,783,195 |
|
1,727,141 |
|
61.1 |
% |
14.7 |
% |
||
International Operations |
|
1,568,534 |
|
690,326 |
|
127.2 |
% |
17.8 |
% |
||
Total sales |
|
$ |
6,950,933 |
|
$ |
5,168,351 |
|
34.5 |
% |
8.7 |
% |
|
|
|
|
|
|
|
|
|
|
||
|
|
(Amounts in thousands) |
|
November 1, |
|
November 3, |
|
||||
|
|
November 1, |
|
November 30, |
|
2008 |
|
2007 |
|
||
|
|
2008 |
|
2007 |
|
% of Sales |
|
% of Sales |
|
||
Business Unit Income: |
|
|
|
|
|
|
|
|
|
||
North American Retail |
|
$ |
267,558 |
|
$ |
305,869 |
|
10.3 |
% |
11.1 |
% |
North American Delivery |
|
246,206 |
|
187,450 |
|
8.8 |
% |
10.9 |
% |
||
International Operations |
|
55,624 |
|
23,064 |
|
3.5 |
% |
3.3 |
% |
||
Business unit income |
|
569,388 |
|
516,383 |
|
8.2 |
% |
10.0 |
% |
||
Stock-based compensation |
|
(47,399 |
) |
(50,078 |
) |
(.7 |
)% |
(1.0 |
)% |
||
Integration and restructuring costs |
|
(132,282 |
) |
— |
|
(1.9 |
)% |
— |
% |
||
Impact of wage and hour settlement |
|
— |
|
(38,000 |
) |
— |
% |
(0.7 |
)% |
||
Total segment income |
|
$ |
389,707 |
|
$ |
428,305 |
|
5.6 |
% |
8.3 |
% |
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
November 1, |
|
|
|
||
|
|
(Amounts in thousands) |
|
Increase |
|
November 3, |
|
||||
|
|
39 Weeks Ended |
|
(Decrease) |
|
2007 |
|
||||
|
|
November 1, |
|
November 3, |
|
From |
|
Increase From |
|
||
|
|
2008 |
|
2007 |
|
Prior Year |
|
Prior Year |
|
||
Sales: |
|
|
|
|
|
|
|
|
|
||
North American Retail |
|
$ |
7,095,568 |
|
$ |
7,225,679 |
|
(1.8 |
)% |
3.5 |
% |
North American Delivery |
|
6,469,487 |
|
4,896,999 |
|
32.1 |
% |
15.2 |
% |
||
International Operations |
|
3,345,152 |
|
1,925,562 |
|
73.7 |
% |
17.4 |
% |
||
Total sales |
|
$ |
16,910,207 |
|
$ |
14,048,240 |
|
20.4 |
% |
9.1 |
% |
|
|
|
|
|
|
|
|
|
|
||
|
|
(Amounts in thousands) |
|
|
|
|
|
||||
|
|
39 Weeks Ended |
|
November 1, |
|
November 3, |
|
||||
|
|
November 1, |
|
November 3, |
|
2008 |
|
2007 |
|
||
|
|
2008 |
|
2007 |
|
% of Sales |
|
% of Sales |
|
||
Business Unit Income: |
|
|
|
|
|
|
|
|
|
||
North American Retail |
|
$ |
546,342 |
|
$ |
652,252 |
|
7.7 |
% |
9.0 |
% |
North American Delivery |
|
583,023 |
|
507,380 |
|
9.0 |
% |
10.4 |
% |
||
International Operations |
|
94,364 |
|
42,954 |
|
2.8 |
% |
2.2 |
% |
||
Business unit income |
|
1,223,729 |
|
1,202,586 |
|
7.2 |
% |
8.6 |
% |
||
Stock-based compensation |
|
(134,196 |
) |
(133,196 |
) |
(0.8 |
)% |
(0.9 |
)% |
||
Integration and restructuring costs |
|
(132,445 |
) |
— |
|
(0.8 |
)% |
— |
% |
||
Impact of wage and hour settlement |
|
— |
|
(38,000 |
) |
— |
% |
(0.3 |
)% |
||
Total segment income |
|
$ |
957,088 |
|
$ |
1,031,390 |
|
5.7 |
% |
7.3 |
% |
23
North American Retail: Sales decreased 5.5% for the third quarter of 2008 and 1.8% for year-to-date 2008. The decrease in the third quarter is primarily due to an 8% decrease in comparable store sales, reflecting a reduction in average order size and, to a lesser extent, reduced traffic. Foreign exchange rates had a negative impact of $36.4 million. This decline was partially offset by non-comparable sales for new stores opened in the past 12 months. The slight decrease in sales for year-to-date 2008 primarily reflects a 7% decrease in comparable stores, substantially offset by non-comparable sales for new stores opened in the past 12 months and, to a lesser extent, the positive impact of foreign exchange rates of $60.9 million. Our comparable store sales decrease in the third quarter and year-to-date 2008 reflects a significant decline in the performance of non-consumable products including business machines, furniture and computer peripherals, followed by a modest decline in consumables, which was driven by core office supplies. For year-to-date 2008, our decrease in consumable sales was slightly offset by positive performance in ink and toner. We added 30 stores to the North American store base in the third quarter of 2008. As of November 1, 2008, the North American store base included 1,832 open stores compared to 1,715 stores as of November 3, 2007 and 1,738 stores as of February 2, 2008.
Business unit income as a percentage of sales decreased to 10.3% for the third quarter of 2008 and 7.7% for year-to-date 2008 from 11.1% for the third quarter of 2007 and 9.0% for year-to-date 2007. The decrease in business unit income as a percentage of sales for the third quarter and year-to-date 2008 primarily reflects deleverage in fixed costs resulting from a decrease in comparable store sales and, to a lesser extent, deleverage in labor in order to maintain our customer service standards. These negative factors were partially offset by increased product margin rates and to a lesser extent, in order of magnitude, reduced marketing spend, supply chain improvements and our focus on expense control.
North American Delivery: Sales increased 61.1% for the third quarter of 2008 and 32.1% for year-to-date 2008 compared to the third quarter and year-to-date 2007. Excluding non-comparable sales from Corporate Express of $1.07 billion and $1.43 billion for the third quarter and year-to-date 2008, respectively, sales would have decreased 0.9% for the third quarter and increased 3.0% for year-to-date 2008. This slight decrease in sales for the third quarter of 2008 reflects lower sales to existing customers, partially offset by our customer acquisition and retention efforts. The year-to-date sales growth reflects the impact of our customer acquisition and retention efforts, partially offset by lower sales to existing customers.
Business unit income as a percentage of sales was 8.8% for the third quarter of 2008 and 9.0% for year-to-date 2008 compared to 10.9% for the third quarter of 2007 and 10.4% for year-to-date 2007. Business unit income as a percentage of sales for the third quarter of 2008 and for year-to-date 2008 was reduced by 3.5% and 1.8%, respectively, due to the inclusion of the results of Corporate Express, whose business unit income rate is lower than our existing businesses. Excluding the impact of Corporate Express for the third quarter of 2008, the increase in business unit income was primarily due to reduced marketing expense and an increase in product margin rates and, to a lesser extent, supply chain improvements. Excluding the impact of Corporate Express for year-to-date 2008, the increase in business unit income primarily reflects reduced marketing expense and, to a lesser extent, supply chain improvements.
International Operations: Sales increased 127.2% for the third quarter of 2008 and 73.7% for year-to-date 2008 compared to the third quarter and year-to-date 2007. Excluding non-comparable sales from Corporate Express of $885.9 million and $1.20 billion for the third quarter and year-to-date 2008, respectively, sales would have decreased 1.1% and increased 11.2% for the third quarter and year-to-date 2008, respectively. The decline for the third quarter was the result of a decrease in comparable store sales of 6% and, to a lesser extent, the negative impact of foreign exchange rates of $10.7 million, partially offset by organic growth from our delivery businesses. The increase for year-to-date 2008 was the result of the positive impact of foreign exchange rates of $126.1 million and, to a lesser extent, organic growth from our delivery businesses offset by a 3% decrease in comparable store sales. As of November 1, 2008, the International store base included 384 open stores compared to 293 stores as of November 3, 2007 and 300 stores as of February 2, 2008.
Business unit income as a percentage of sales increased to 3.5% for the third quarter of 2008 and 2.8% for year-to-date 2008 from 3.3% for the third quarter of 2007 and 2.2% for year-to-date 2007. Of the 0.2% increase in business unit
24
income as a percentage of sales for the third quarter and the 0.6% increase in business unit income as a percentage of sales for year-to-date 2008, 0.2% and 0.4%, respectively, was due to the inclusion of the results of Corporate Express, whose business unit income rate is higher than our existing businesses. The business unit income rate was flat for the third quarter of 2008, excluding the impact of Corporate Express. The flat performance for the third quarter of 2008 reflects reduced marketing expenses, improvement in product margin rates due to product mix, better buying and own brand penetration in our European businesses and, to a lesser extent, supply chain improvements and our focus on expense control. These improvements were offset by increased losses in our Asian businesses. The net improvement for year-to-date 2008, excluding the impact of Corporate Express, primarily reflects improvement in product margin rates due to product mix, better buying and own brand penetration in our European businesses and, to a lesser extent, supply chain improvements and our focus on expense control, partially offset by increased losses in our Asian businesses.
Stock-Based Compensation: Stock-based compensation decreased to $47.4 million for the third quarter of 2008 and increased to $134.2 million for year-to-date 2008 from $50.1 million in the third quarter of 2007 and $133.2 million for year-to-date 2007. Stock-based compensation includes expenses associated with our employee stock purchase plans, the issuance of stock options, restricted shares, and performance share awards, as well as the company match in the employee 401(k) savings plan. The decrease in the third quarter and the increase in year-to-date 2008 primarily reflect changes in the mix of equity awards granted.
Critical Accounting Policies and Significant Estimates
Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. 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 2007 Annual Report on Form 10-K, filed on March 4, 2008, in Note A of the Notes to the Condensed Consolidated Financial Statements and in the Critical Accounting Policies section of Management’s Discussion and Analysis of Financial Condition and Results of Operations. There have been no material changes to the Accounting Policies or our application of the Accounting Policies, as disclosed in our 2007 Annual Report on Form 10-K, since March 4, 2008.
Liquidity and Capital Resources
Cash Flows
Cash provided by operations was $1.17 billion for year-to-date 2008 compared to $841.8 million for year-to-date 2007. The increase in operating cash flow from year-to-date 2007 to year-to-date 2008 is primarily due to a decrease in the change in working capital as compared to the change in working capital of the prior year.
Cash used in investing activities was $4.60 billion for year-to-date 2008 compared to $157.9 million for year-to-date 2007. The change between 2008 and 2007 is primarily due to the 2.8 billion Euro acquisition (approximately $4.4 billion, net of acquired cash) of Corporate Express.
Cash provided by financing activities was $3.16 billion for year-to-date 2008 compared to cash used in financing activities of $836.8 million for year-to-date 2007. The increase in cash provided by financing activities for year-to-date 2008 is primarily related to borrowings made pursuant to the 2008 Agreement, which serves as a backstop to our Commercial Paper Program, our Commercial Paper Program, the 2008 Term Credit Facility and the Revolving Credit Facility (each as defined below) to fund the acquisition of Corporate Express. The increase in cash provided by financing activities is also the result of the repayment of our $200 million 7.125% senior notes in August 2007. In addition, under our share repurchase program, we repurchased 2.8 million shares for $65.0 million during year-to-date 2008 and 23.3 million shares for $567.4 million during year-to-date 2007. At the present time, we have suspended our share repurchase program as a result of the acquisition of Corporate Express.
Sources of Liquidity
We utilize cash generated from operations, short-term investments and our Revolving Credit Facility to cover seasonal fluctuations in cash flows and to support our various growth initiatives. In addition, as a result of the acquisition of Corporate Express, we entered into the 2008 Agreement which serves as a backstop to the Commercial Paper Program,
25
and the 2008 Term Credit Facility (each as defined below). We also amended our Revolving Credit Facility. As of November 1, 2008, largely in connection with the acquisition of Corporate Express, we had borrowings outstanding of $1.57 billion under the 2008 Agreement, $948.7 million under the Commercial Paper Program, $150.0 million under the 2008 Term Credit Facility and $668.0 million under the Revolving Credit Facility. On November 26, 2008, we repaid the entire remaining balance due on the 2008 Term Credit Facility.
We had $1.57 billion in total cash and funds available through credit agreements at November 1, 2008, which consisted of $685.0 million of available credit and $887.7 million of cash and cash equivalents.
A summary, as of November 1, 2008, of balances available under credit agreements and debt outstanding is presented below (amounts in thousands):
|
|
|
|
|
|
Payments Due By Period |
|
|||||||||
|
|
Available |
|
Debt |
|
Less
than |
|
1 - 2 |
|
3 - 5 |
|
|||||
2008 Agreement due July 2009 |
|
$ |
478,129 |
|
$ |
1,569,000 |
|
$ |
1,569,000 |
|
|
|
|
|
||
Commercial Paper Program |
|
— |
|
948,728 |
|
948,728 |
|
|
|
|
|
|||||
2008 Term Credit Facility effective through November 2008 |
|
— |
|
150,000 |
|
150,000 |
|
|
|
|
|
|||||
Revolving Credit Facility effective through October 2011 |
|
60,744 |
|
668,000 |
|
— |
|
|
|
668,000 |
|
|||||
Senior Notes due October 2012 |
|
— |
|
325,000 |
|
|
|
|
|
325,000 |
|
|||||
Lines of credit |
|
146,165 |
|
249 |
|
249 |
|
|
|
|
|
|||||
Other notes payable and capital leases |
|
— |
|
422,602 |
|
272,355 |
|
150,247 |
|
|
|
|||||
Total |
|
$ |
685,038 |
|
$ |
4,083,579 |
|
$ |
2,940,332 |
|
$ |
150,247 |
|
$ |
993,000 |
|
We issue letters of credit under our Revolving Credit Facility in the ordinary course of business. At November 1, 2008, we had $21.3 million of open letters of credit and $668.0 million of borrowings, thus reducing the available credit under our Revolving Credit Facility from $750.0 million to $60.7 million.
In September 2008, Barclays Bank PLC agreed to assume the obligations of Lehman Brothers, Inc. and their affiliates under our 2008 Agreement, our Revolving Credit Facility, our Commercial Paper Program and our 2008 Term Credit Facility as described below.
On April 1, 2008, we entered into a $3.0 billion credit agreement (the “2008 Agreement”) with Lehman Commercial Paper Inc., as administrative agent, Bank of America, N.A. and HSBC Bank USA, National Association, as co-syndication agents, and Lehman Brothers Inc., as lead arranger and bookrunner, for a commitment period beginning July 9, 2008 and continuing until 364 days thereafter, unless earlier terminated pursuant to the terms of the 2008 Agreement. The 2008 Agreement provides financing solely (1) for our acquisition of all of the outstanding capital stock of Corporate Express, including related transaction fees, costs and expenses, and (2) to backstop our Commercial Paper Program. Amounts borrowed under the 2008 Agreement may be borrowed, repaid and reborrowed from time to time, with the aggregate principal amount of the loans outstanding not to exceed the maximum borrowing amount of $3.0 billion. Borrowings made pursuant to the 2008 Agreement will bear interest at either (a) the base rate (the higher of the prime rate, as defined in the 2008 Agreement, or the federal funds rate plus 0.50%) plus an “applicable margin,” defined as a percentage spread based on our credit rating or (b) the Eurocurrency rate plus a different “applicable margin,” also defined as a percentage spread based on our credit rating. The applicable margin for each base rate loan and Eurocurrency rate loan increases periodically, as set forth in the 2008 Agreement. The payments under the 2008 Agreement are guaranteed by the same subsidiaries that guarantee our publicly issued notes, the Commercial Paper Program, the 2008 Term Credit Facility and the Revolving Credit Facility (each as defined below). Under the 2008 Agreement, we agree to pay a commitment fee, payable quarterly, at rates that range from 0.080% to 0.175% based on our credit rating. The 2008 Agreement also contains financial covenants that
26
require us to maintain a minimum fixed charge coverage ratio of 1.5:1.0 and a maximum adjusted funded debt to total capitalization ratio of 0.75:1.0. The 2008 Agreement also contains affirmative and negative covenants that are consistent with those contained in our 2008 Term Credit Facility and our Revolving Credit Facility. The 2008 Agreement contains certain customary events of default with corresponding grace periods. On July 1, 2008, we entered into the first amendment to the 2008 Agreement. The amendment provides that certain events, including the establishment of the 2008 Term Credit Facility (as described below) and maintaining certain obligations of Corporate Express after the acquisition, will not reduce the maximum commitment available under the 2008 Agreement. On September 12, 2008, we entered into the second amendment to the 2008 Agreement. The amendment provides us with the flexibility, within ten business days of the receipt of proceeds from other indebtedness, to use such proceeds to repay our Commercial Paper Program (as described below).
On May 5, 2008, we entered into the first amendment (the “Amendment”) to the Amended and Restated $750.0 million Revolving Credit Agreement, as amended, dated as of October 13, 2006 (the “Revolving Credit Facility”). The Amendment was entered into in connection with our acquisition of Corporate Express and provided certain post-acquisition cure periods to allow us to cure defaults that could arise (i) as a result of change in control provisions contained in Corporate Express’ outstanding debt obligations and (ii) under Corporate Express’ and our outstanding debt obligations as a result of events or circumstances, such as litigation, liens or defaults, affecting Corporate Express. The Amendment did not alter the amount that may be borrowed under, or the terms of, the Revolving Credit Facility and confirmed our obligations to the lenders and administrative agent who are parties thereto.
On June 9, 2008, we entered into a commercial paper program (the “Commercial Paper Program”) on a private placement basis under which we may issue unsecured commercial paper notes (the “Notes”) up to a maximum aggregate principal amount outstanding at any time of $3.0 billion. The 2008 Agreement serves as a backstop to the Commercial Paper Program. Under the Commercial Paper Program, we may issue Notes from time to time, and the proceeds of the Notes will be used for general corporate purposes, including working capital, capital expenditures, acquisitions and share repurchases. Maturities of the Notes issued under the Commercial Paper Program vary but may not exceed 397 days from the date of issue. The Notes bear such interest rates, if interest bearing, or will be sold at such discount from their face amounts, as agreed upon from time to time by the dealers under the Commercial Paper Program and Staples. The payments under the Commercial Paper Program are guaranteed by the same subsidiaries that guarantee our publicly issued notes, our 2008 Agreement, our 2008 Term Credit Facility, and our Revolving Credit Facility. The Commercial Paper Program contains customary events of default with corresponding grace periods. As of November 1, 2008, the Notes have a weighted average remaining maturity of 15 days with a weighted average interest rate of 3.97%.
On July 1, 2008, we entered into a $400.0 million credit facility (the “2008 Term Credit Facility”) with Lehman Commercial Paper, Inc., as administrative agent, Bank of America, N.A. and HSBC Bank USA, National Association, as co-syndication agents, and Lehman Brothers Inc., Banc of America Securities LLC and HSBC Securities (USA) Inc., as joint lead arrangers and joint bookrunners. The 2008 Term Credit Facility provides for borrowing of a maximum aggregate principal amount of up to $400.0 million. Borrowings under the 2008 Term Credit Facility may be used by us for working capital and in connection with our acquisition of Corporate Express, including the repayment of Corporate Express’ indebtedness. Amounts borrowed under the 2008 Term Credit Facility once borrowed may not be reborrowed. The 2008 Term Credit Facility contains customary affirmative and negative covenants that are substantially the same as those in our 2008 Agreement and our Revolving Credit Facility, has the same financial covenants as the 2008 Agreement and Revolving Credit Facility and provides for customary events of default with corresponding grace periods that are substantially the same as those in our 2008 Agreement. On November 26, 2008, we repaid the entire remaining balance due on the 2008 Term Credit Facility.
In addition, in connection with our acquisition of Corporate Express, we assumed the obligations under Corporate Express’ U.S. Securitization Program and the European Securitization Program (the “Securitization Programs”). As of November 1, 2008, we were able to borrow a maximum of $200.0 million and EUR 75.0 million (approximately $98 million based on exchange rates on that date) under the Securitization Programs. As of November 1, 2008, the utilized balance under the U.S Securitization Program was $186.7 million and, based on the exchange rates on this date, the utilized balance under the European Securitization Program was $47.9 million. Borrowings outstanding under the Securitization Programs are included as a component of current liabilities in our condensed consolidated balance sheet, while the accounts receivable securing these obligations are included as a component of net receivables.
There were no instances of default during 2008 under any of our debt agreements.
27
After taking into account our acquisition of Corporate Express, we expect that our cash generated from operations, together with our current cash, funds available under our existing credit agreements and other alternative sources of financing, will be sufficient to fund our planned 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 an annual cash dividend. Based on our credit metrics and our liquidity position, from time to time, we may also return capital to our shareholders through our share repurchase program.
We plan to terminate our 2008 Agreement and execute our permanent financing before July 2009, and we will use the most attractive resources that are available on the market, whether it be bank financing or going to the public bond market. Consistent with our overall capital structure framework, our goals for the financing include optimizing liquidity and flexibility, funding permanent assets with long-term financing, and using our strong cash flow to repay short-term debt, enabling us to rebuild our credit profile, minimize interest costs and stagger maturities.
We currently plan to spend approximately $200 million on capital expenditures during the fourth quarter of 2008 related to new store openings and continued investments in information systems and distribution centers to improve operational efficiencies and customer service. We expect to open approximately 10 new stores in North America, Europe and Asia during the last quarter of 2008. We estimate that our cash requirements, including pre-opening expenses, net inventory, leasehold improvements and fixtures, will be approximately $1.4 million for each new store. We may also use additional funds to purchase lease rights from tenants occupying retail space that is suitable for a Staples store.
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 recent acquisition of Corporate Express. However, we have typically targeted and expect to continue to target acquisitions that are small, aligned with our existing businesses, focused on both strengthening our presence in existing markets and expanding our presence into new geographies that could become long-term meaningful drivers of our business, and financed from our operating cash flows.
We paid a cash dividend of $0.33 per share of common stock on April 17, 2008, to shareholders of record on March 28, 2008, resulting in a total dividend payment of $231.5 million. In 2007, we paid a cash dividend of $0.29 per share of common stock on April 19, 2007, to shareholders of record on March 30, 2007, resulting in a total dividend payment of $207.6 million. While it is our intention to pay annual cash dividends in years following 2008, 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.
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
We are exposed to market risk from changes in interest rates and foreign exchange rates.
At November 1, 2008, as a result of our acquisition of Corporate Express, there have been changes in the interest rate market risk information disclosed by us in our Annual Report on Form 10-K for the year ended February 2, 2008.
Our variable rate obligations, approximately $4.08 billion at November 1, 2008, expose us to the risk of rising interest rates. At November 1, 2008, we had borrowings under the 2008 Agreement, the Commercial Paper Program, the 2008 Term Credit Facility and the Revolving Credit Facility. Management does not believe that the potential interest rate exposure is material to our overall financial position or results of operations. Based on November 1, 2008 borrowing levels, a 1.0% increase or decrease in current market interest rates would have the effect of causing a $40.8 million additional pre-tax charge or credit to our statement of operations.
28
More detailed information concerning market risk can be found under the sub-caption “Quantitative and Qualitative Disclosures about Market Risks” of the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page B-10 of our Annual Report on Form 10-K filed on March 4, 2008 for the year ended February 2, 2008.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated, as of November 1, 2008, the effectiveness of the Company’s disclosure controls and procedures, which were designed to be effective at the reasonable assurance level. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of November 1, 2008, the chief executive and chief financial officers concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level at that date.
Changes in Internal Control over Financial Reporting
In July 2008, the Company completed its acquisition of Corporate Express. Management is currently in the process of evaluating the internal controls and procedures of Corporate Express. Management plans to integrate Corporate Express’ internal controls over financial reporting with the Company’s internal controls over financial reporting. This integration may lead to changes in the internal controls over financial reporting for Staples or Corporate Express in future fiscal periods. Management expects the integration process to be completed during 2009.
No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended November 1, 2008 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
29
STAPLES, INC. AND SUBSIDIARIES
PART II — OTHER INFORMATION
Item 1A. Risk Factors
An updated description of the risk factors associated with our business is set forth below. These risk factors have been updated from those included in our Annual Report on Form 10-K to, among other things, reflect the risks associated with the general decline of the worldwide economy, our acquisition of Corporate Express, and our increased debt commitments.
Economic conditions may 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 recent deterioration of global credit markets has caused our same store sales to decline from prior periods in our retail and international businesses. 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 increased decline in business and consumer spending.
Our market is highly competitive and we may not 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, 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. The integration of our Corporate Express operations will be a complex, time-consuming and potentially expensive process and may disrupt the combined company’s 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 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 achieve synergies and cost savings growing to approximately $300 million annually over a three year period. However, there is no guarantee that we will achieve these synergies and cost savings or timing of these synergies and cost savings even if they are ultimately achieved. Our ability to achieve these synergies and costs savings could be affected by the factors referenced above as well
30
as other factors specified in these risk factors, including economic conditions. 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.
Our business has grown dramatically over the past several years. While we cannot provide any assurances about our future sales or earnings, we anticipate that our business will continue to grow organically and through strategic acquisitions. Accordingly, sales of our products and services, the number of stores that we operate, the number of countries in which we conduct business and the number of associates working with us have grown, and we expect they will continue to grow. This growth places significant demands on management and operational systems. If we cannot effectively expand and support our operational, information and financial systems, increase and manage our associate base, and share critical information and best practices across different business groups and geographies, this growth 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.
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 than we did in recent prior periods. During the fourth quarter of 2008, we plan to open approximately 10 new stores in North America, Europe and 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 successfully, especially as we allocate time and resources to managing the profitability of our large existing portfolio of stores and renewing our existing store leases on 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.
If we are unable to manage our debt, it could materially harm our business and financial condition and restrict our operating flexibility.
Our borrowings and debt service requirements have increased substantially in connection with the acquisition of Corporate Express. Our consolidated outstanding debt as of November 1, 2008 was $4.08 billion, with a major portion of it due next year. If we are unable to satisfy our debt service requirements, we may default under one or more of our credit facilities. 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.
We plan to use a significant portion of our operating cash flow to reduce our outstanding debt obligations over the next several years. Our level of indebtedness combined with the recent unprecedented deterioration of the global credit and financial markets may have important consequences, including: restricting our growth; making us more vulnerable to a downturn in our business; making it more expensive to obtain future financing; making it more difficult for us to satisfy our obligations; 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 attract and retain qualified associates.
Our retail and delivery customers value courteous and knowledgeable associates, and an important part of our “Easy” brand strategy is providing our customers with a positive customer service experience. Accordingly, our
31
performance is dependent on attracting and retaining a large and growing 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 generally while controlling our labor costs is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the workforce, unemployment levels, prevailing wage rates, changing demographics, health and other insurance costs and changes in employment legislation. In addition, 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 may result in litigation and increase our labor costs. If we are unable to attract and retain a sufficient number of qualified associates or our labor costs increase significantly, 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 rent expense 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. Ensuring such compliance may require that we implement new operational systems and financial controls that may be expensive and divert management’s time from implementing our growth strategies. In addition, cultural differences and differences in the business climate 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 promotion 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, merchandise quality issues, trade restrictions, tariffs, foreign currency exchange rates, transport capacity and costs, inflation and other factors relating to foreign trade are beyond our control. 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 together represented approximately 22% of our total sales in fiscal 2007. 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
32
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.
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 website, 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 may adversely affect our business and financial performance.
We are involved in various legal proceedings, which include consumer, employment, intellectual property, tort and other litigation. The resolution of these legal proceedings could require us to pay substantial amounts of money or take actions that adversely affect our operations. In addition, defending against these proceedings may involve significant time and expense. Given the large size of our operations and workforce, the visibility of our brand and our position as an industry leader, we may regularly be involved in legal proceedings that could adversely affect our business and financial performance.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the first quarter of 2008, we suspended our share repurchase program as a result of our acquisition of Corporate Express. Therefore, there were no share repurchases during the reporting period.
Item 6. Exhibits
The exhibits listed on the Exhibit Index immediately preceding such exhibits, which is incorporated herein by reference, are filed or furnished as part of this Quarterly Report on Form 10-Q.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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STAPLES, INC. |
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Date: December 1, 2008 |
By: |
/s/ JOHN J. MAHONEY |
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John J. Mahoney |
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Vice Chairman and |
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Chief Financial Officer |
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(Principal Financial Officer) |
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By: |
/s/ CHRISTINE T. KOMOLA |
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Christine T. Komola |
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Senior Vice President, Corporate Controller |
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(Principal Accounting Officer) |
34
EXHIBIT INDEX
Exhibit No. |
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Description of Exhibit |
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3.1+ |
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Restated Certificate of Incorporation, dated as of September 29, 2008. |
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10.1+ |
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Amendment No. 2 to Credit Agreement, dated as of September 12, 2008, by and among Staples, Inc., the lenders named therein, Lehman Commercial Paper Inc., as administrative agent, Bank of America, N.A. and HSBC Bank USA, National Association, as co-syndication agents, to the Credit Agreement, dated as of April 1, 2008, by and among Staples, Inc., the lenders named therein, Lehman Commercial Paper Inc., as administrative agent, Bank of America, N.A. and HSBC Bank USA, National Association, as co-syndication agents. |
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10.2+ |
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Assignment and Assumption, dated as of September 25, 2008, assigned by Lehman Commercial Paper Inc. to Barclays Bank PLC for the Credit Agreement, dated as of April 1, 2008, by and among Staples, Inc., the lenders named therein, Lehman Commercial Paper Inc., as administrative agent, Bank of America, N.A. and HSBC Bank USA, National Association, as co-syndication agents. |
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10.3+ |
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Assignment and Acceptance, dated as of September 25, 2008, assigned by Lehman Commercial Paper, Inc. to Barclays Bank PLC for the Amended and Restated Revolving Credit Agreement, dated as of October 13, 2006, among Staples, Inc., the Lenders parties thereto, Bank of America, N.A., as Administrative Agent, and the other parties thereto. |
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10.4+ |
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Assignment and Assumption, dated as of September 25, 2008, assigned by Lehman Brothers Commercial Bank to Barclays Bank PLC for the Credit Agreement, dated as of July 1, 2008, among Staples, Inc., the Lenders parties thereto, Lehman Commercial Paper Inc., as Administrative Agent, and the other parties thereto. |
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10.5+ |
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Letter, dated as of September 29, 2008, assigning Lehman Brothers Inc. interests to Barclays Capital Inc., for the Amended and Restated Commercial Paper Dealer Agreement, dated as of August 6, 2008, among Staples, Inc., Lehman Brothers Inc. and the other parties thereto. |
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10.6+ |
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Commercial Paper Dealer Agreement among Staples, Inc., JP Morgan Securities Inc. and the other parties thereto, dated as of September 19, 2008. |
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31.1+ |
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Principal Executive Officer – Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2+ |
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Principal Financial Officer – Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1++ |
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Principal Executive Officer – Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2++ |
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Principal Financial Officer – Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
+ Filed herewith
++ Furnished herewith