UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
____________________________________________________________________________
FORM 10-K
____________________________________________________________________________
(Mark one) | ||
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
or | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to | ||
For the fiscal year ended: January 28, 2012 | Commission File Number: 0-17586 | |
STAPLES, INC. (Exact name of registrant as specified in its charter) | ||
Delaware (State or other jurisdiction of incorporation or organization) | Five Hundred Staples Drive, Framingham, MA 01702 (Address of principal executive office and zip code) | 04-2896127 (I.R.S. Employer Identification No.) |
508-253-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $0.0006 per share | The NASDAQ Global Select Market | |
Securities registered pursuant to Section 12(g) of the Act:
None
___________________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
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 ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 ý | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The aggregate market value of common stock held by non-affiliates of the registrant, based on the last sale price of Staples' common stock on July 30, 2011, as reported by NASDAQ, was approximately $11.3 billion. In determining the market value of non-affiliate voting stock, shares of Staples' common stock beneficially owned by each executive officer and director have been excluded. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
The registrant had 694,102,453 shares of common stock, par value $0.0006, outstanding as of February 27, 2012.
Documents Incorporated By Reference
Listed below is the document incorporated by reference and the part of the Form 10-K into which the document is incorporated:
Portions of the Proxy Statement for the 2012 Annual Meeting of Stockholders | Part III | |||
PART I
Item 1. Business
Staples, Inc. and its subsidiaries (''we'', ''Staples'' or the ''Company''), the world's leading office products company, is committed to making it easy for customers to buy a wide range of office products and services. We pioneered the office products superstore concept by opening the first office products superstore in Brighton, Massachusetts in 1986 to serve the needs of small businesses, and we currently serve businesses of all sizes and consumers in North America, Europe, Australia, South America and Asia. We operate three business segments: North American Delivery, North American Retail and International Operations. Additional information regarding our operating segments is presented in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in this Annual Report on Form 10-K, and financial information regarding these segments is provided in Note N in the Notes to the Consolidated Financial Statements contained in this Annual Report on Form 10-K.
Strategy
We provide superior value to our customers through a combination of low prices, a broad selection of office products, a wide range of technology and copy and print services, high quality and innovative Staples brand products, convenient store locations, easy to use web sites, reliable and fast order delivery, and excellent customer service. Our strategy is to maintain our leadership position by delivering on our brand promise: we bring easy to your office.
We view the office products and services market as large and diversified. We reach our contract, catalog, on-line and retail store customers through sales channels which are designed to be convenient. Our businesses attract different customer groups with distinct purchasing behaviors. Our contract business targets mid-size businesses and organizations with 20 to 500 office workers as well as Fortune 1000 companies. Our on-line and catalog customers are generally small businesses and organizations with up to 20 office workers. Our retail stores target small businesses, home offices and consumers. Our ability to address customer groups with different needs expands our available market opportunities and increases awareness of the Staples brand among customers in all segments. Customers around the world often shop on our websites and in our retail stores, which differentiates our multichannel offering from traditional retailers. This allows us to benefit from a number of important economies of scale, such as enhanced efficiencies in purchasing, distribution, advertising, and general and administrative expenses.
North American Delivery
Our strategies for North American Delivery focus on customer service, customer acquisition and retention, and providing our customers a broad assortment of core office products and services. We are also focused on expanding categories beyond core office supplies, including facilities and breakroom supplies, copy and print services, promotional products and furniture. We continue to focus on improving our perfect order metric, which measures the number of orders that we fulfill on time and without error, and have established industry leading customer service standards to support our brand promise. Since acquiring Corporate Express in 2008, we have completed the majority of our integration efforts. We are currently in the process of transitioning all of our legacy Corporate Express customers to our new and improved contract ordering web site, StaplesAdvantage.com.
Our North American Delivery segment consists of the U.S. and Canadian business units that sell and deliver office products and services directly to businesses and consumers, and includes Staples Advantage, Staples.com and Quill.com. The majority of our delivery customers place their orders on-line, making Staples the second largest Internet reseller in the world.
Staples Advantage: Our contract operations focus on serving the needs of mid-sized businesses and organizations up through and including Fortune 1000 companies through Staples Advantage. Contract customers often require more service than is provided by a traditional retail or mail order business. Through our contract sales force, we offer customized pricing and payment terms, usage reporting, the stocking of certain proprietary items, a wide assortment of products with various environmental attributes and services, and full service account management.
Staples.com: Staples.com operations combine the activities of our U.S. and Canadian Internet sites as well as our direct mail catalog business. Staples.com is designed to reach small businesses, home offices and consumers, offering next business day delivery for most office supply orders in the majority of our markets. We continue to make investments in Staples.com to enhance the usability, efficiency and overall customer experience. We have increased our focus on leveraging the cross-channel synergies between Staples.com and our retail store network in an effort to provide our customers with a more integrated and consistent shopping experience. We market Staples.com through Internet and other broad-based media advertising, direct mail advertising, catalog mailings and a telesales group, which is focused on generating new business and growing existing accounts.
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Quill.com: Quill.com is an Internet and catalog business with a targeted approach to servicing the needs of small and mid-sized businesses in the United States. To attract and retain its customers, Quill.com offers outstanding customer service, Quill brand products and special services. Quill.com also operates Medical Arts Press, Inc., an Internet and catalog business offering specialized office supplies and products for medical professionals.
North American Retail
Our strategy for North American Retail focuses on offering an easy-to-shop store with quality products that are in-stock and easy to find, with fast checkout and courteous, helpful and knowledgeable sales associates. Our goals are to continue to be a destination for core office supply categories like ink and toner and to become an authority for business technology through redesigned stores and an expanded technology assortment. We have also made investments to grow our EasyTech business, which offers expert technology services such as installations and repairs, to develop a mobile communication offering in 500 of our stores, and to establish a leadership position in copy and print services. Store sales associates are trained to deliver excellent service through our “Inspired Selling” service model, which encourages engagement with customers and solution selling.
Our North American Retail segment consisted of 1,583 stores in the United States and 334 stores in Canada at the end of fiscal 2011. We operate a portfolio of retail store formats, tailored to the unique characteristics of each location. The “Dover” superstore represents the majority of our U.S. store base. The customer friendly ''Dover'' design appeals to the customer with an open store interior that provides a better view of our wide selection and makes it easier to find products. In an effort to improve store productivity and effectively manage our cost structure, we have reduced the size of our “Dover” store format over time from 24,000 square feet to 15,000 square feet. We also operate smaller format stores designed for rural markets and dense urban markets. Additionally, to address the attractive quick print market opportunity, we operate 26 stand alone copy and print shops. These 3,000 to 4,000 square foot stores are designed for locations with high customer density and offer a full service copy and print shop along with a broad assortment of core office supplies.
We believe that our network of stores and delivery businesses enhances our profitability by allowing us to leverage marketing, distribution and supervision costs. We are highly selective with our new store openings. In determining where to open new retail stores, we assess potential real estate sites through a stringent approval process which evaluates the financial return of each store. Our evaluations consider such factors as the concentration of small and mid-sized businesses and organizations, the number of home offices, household income levels, our current market presence, proximity to competitors, the availability of quality real estate locations and other factors.
In 2012, we plan for our store count to be about flat in North America. We will add stores to existing markets and expand into select new markets. This will be offset by our decision to close certain stores that are at the end of their lease term and are not achieving the desired financial returns. This plan compares to a net of 17 stores opened in 2011 and 29 stores in 2010. We intend to drive increased productivity through our on-going store remodel program, with a focus on upgrading our technology product and service offerings, as well as our copy and print offerings.
International Operations
Our International Operations segment consists of businesses in 24 countries in Europe, Australia, South America and Asia. The markets for office products and services in these countries are highly fragmented.
Our European Office Products business represents a balanced multi-channel portfolio serving contract, retail, Internet and catalog customers in 16 countries. Our contract business includes sizable operations in Scandinavia, Germany, the United Kingdom and the Netherlands. We operate 331 retail stores with the largest concentration of stores in the United Kingdom, Germany, the Netherlands and Portugal. We operate Internet and direct mail catalog businesses with a significant concentration of sales in France, Italy and the United Kingdom.
Our strategies for our European Office Products business focus on strengthening our value proposition with customers, increasing the productivity of our marketing programs, leveraging best practices from our North American businesses, including our mid-market contract selling model, and expanding our mix of business services with a focus on copy and print. We are also focused on improving profitability by reducing overhead expense, increasing sales of higher margin Staples brand products and improving the performance of our supply chain.
In 2010, we acquired the remaining shares in Corporate Express Australia Limited, increasing our ownership to 100% from the 59% we acquired with the acquisition of Corporate Express in 2008. This business serves primarily contract customers in Australia and New Zealand. In addition to our contract business, we operate a public website which targets small business and home office customers. Our strategies focus on improving sales force productivity by providing customers with a broad assortment of products and services, including office products, IT solutions, business furniture and print management.
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We continue to establish a foundation for growth in Asia and South America, where our businesses are in various stages of development. We operate retail and delivery businesses in China, a delivery business in Taiwan through a joint venture with UB Express and a multi-channel business in India through a joint venture with Pantaloon Retail Limited. We also operate delivery businesses in Argentina and Brazil and operate two stores in Argentina.
Merchandising and Marketing
We sell a wide variety of office supplies and services, office machines and related products, computers and related products and office furniture. Our merchandising staff uses integrated systems to perform the vast majority of our merchandise planning and product purchasing centrally. However, some of our business units, particularly Quill.com, our Canadian operations and our multiple international businesses, leverage our global buying and merchandising staff along with local staff to meet their specific buying and merchandising needs. We purchase products from thousands of vendors worldwide and we believe that competitive sources of supply are available to us for substantially all of the products we carry.
Our merchandising team constantly reviews and updates our product assortment to respond to changing customer needs and to maximize the performance of our key categories. Ink and toner remain important product categories, and we offer our customers a wide assortment, an in-stock guarantee and a strong pricing message which is supported by our loyalty programs. We continue to enhance our product offering beyond core office supplies, particularly in the areas of technology and facilities and breakroom supplies.
Our product offering includes Staples, Quill, and other proprietary branded products, which represented approximately 27% of our sales in 2011. We offer more than 10,000 own brand products and services, including an assortment of products with various environmental attributes, which includes our “Sustainable Earth” brand products. Own brand products deliver value to our customers with prices that are on average 10% to 20% lower than the national brand, while generating higher gross margin rates on average than national brands. Our own brand strategy focuses on offering national brand quality at lower prices. We have brought to market hundreds of new own brand products in the last year, many of which are innovative and exclusive to Staples. Our long-term goal is to grow own brand to more than 30% of total sales. Our sourcing office in Shenzhen, China supports our own brand strategy by driving high quality and lower costs and by bringing new products to market more quickly. In addition to our proprietary branded products, we also differentiate our core product offering through exclusive third-party relationships. For instance, we recently began selling an exclusive and innovative line of Martha Stewart home office products in our retail stores and on our websites.
In addition to products, we also offer a broad array of services, which represented 6.0% of our sales in 2011. This includes copy and print services that we provide to our retail and delivery customers, as well as technology services that we provide through our “EasyTech” business in North American Retail. The multi-billion dollar market for these services is highly fragmented, and we believe we have a significant opportunity to offer these services to existing customers and acquire new customers. Over the past several years, we have upgraded the technology, signage, labor, training and quality of these services to increase sales by driving greater customer awareness and differentiating our offering.
The following table shows our sales by each major category as a percentage of total sales for the periods indicated:
Fiscal Year Ended | |||||||||
January 28, 2012 | January 29, 2011 | January 30, 2010 | |||||||
Office supplies | 43.9 | % | 43.3 | % | 43.1 | % | |||
Services | 6.0 | % | 5.5 | % | 5.2 | % | |||
Office machines and related products | 30.1 | % | 30.7 | % | 31.3 | % | |||
Computers and related products | 15.0 | % | 15.3 | % | 15.2 | % | |||
Office furniture | 5.0 | % | 5.2 | % | 5.2 | % | |||
100.0 | % | 100.0 | % | 100.0 | % | ||||
We utilize a variety of marketing vehicles to drive brand awareness and sales of products and services to both new and existing customers. These vehicles include broad-based media such as television, radio, newspaper circulars and Internet advertising, including mobile applications and social media. We also utilize catalogs, e-mail marketing, loyalty programs and sophisticated direct marketing capabilities. In addition, we market to larger customers through a combination of direct mail catalogs, customized catalogs and a field sales force. We change our level of marketing spend, as well as the mix of media employed, depending upon market, customer value, seasonal focus, competition and cost factors. This flexible approach allows us to optimize the effectiveness and efficiency of our marketing expenditures. We continue to improve our systems and capabilities
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to track our customers' multi-channel purchasing behaviors and to execute more effective direct marketing and customer loyalty programs to drive higher sales across all our channels.
Supply Chain
We operate two distinct networks to fulfill the majority of our replenishment and delivery needs in North America. Our network of 66 delivery fulfillment centers supports our North American Delivery operations. During 2011, we completed the multi-year process of integrating the fulfillment center network that we acquired from Corporate Express in 2008. During this integration period, we have enabled 35 of our North American Delivery fulfillment centers to fill orders from both Staples customers and legacy Corporate Express customers.
We operate a separate network of four large distribution centers to support our U.S. retail operations. Our retail distribution centers provide us with significant labor and merchandise cost savings by centralizing receiving and handling functions, and by enabling us to purchase in full truckloads and other economically efficient quantities from suppliers. Our centralized purchasing and distribution systems enable our store associates to spend more time on customer service and store presentation. Since our distribution centers maintain backup inventory, our in-store inventory requirements are reduced, allowing us to more efficiently operate our retail stores.
In Europe, we are in the process of implementing a multi-year supply chain plan to reduce the complexity and redundancy of our distribution network. We are standardizing all of our supply chain processes and systems architecture, and continuing to consolidate facilities. These efforts are expected to improve customer service and quality, drive cost savings and increase overall operating efficiency.
Associates
We have a strong corporate culture that values ethics, high performance, entrepreneurship, and teamwork. We place great importance on recruiting, training, retaining and providing the proper incentives for high quality associates. Offering attractive growth and development opportunities and a commitment to a diverse and safe work environment, we pride ourselves on being a great place to work.
We consider customer relations and our associates' knowledge of our product and service offerings to be significant to our marketing approach and our ability to deliver customer satisfaction. Associates are trained in a number of areas, including where appropriate, sales techniques, management skills and product knowledge.
As of January 28, 2012, Staples employed 51,542 full-time and 36,240 part-time associates.
Corporate Values
Staples is committed to responsible corporate citizenship, or what we refer to internally as Staples Soul. Staples Soul is a holistic approach to business that recognizes the close connection between our financial success and our desire to make a positive impact on our associates, communities and the planet. We believe that by practicing sound ethics, sustaining the environment, embracing diversity and giving back to the community, we will solidify our place as the world's most trusted source for office solutions. For more information, visit www.staples.com/community.
Ethics - Ethics at Staples is part of our culture. Staples maintains ethical business practices by encouraging open and honest communication and fostering an environment where it is safe to speak up without fear of retaliation. Through our Code of Ethics and ongoing communications and training programs, we make it easy for associates around the world to understand what they need to know and do to make sound decisions in the best interests of our company and shareholders. These efforts help ensure that our associates build trusting relationships with customers and other stakeholders, thus strengthening and protecting Staples' brand reputation.
Environment - At Staples, our vision is to generate business and environmental benefits - for ourselves, our customers and our communities - by leading the way in sustainable business practices. We are working to achieve this vision through a continued focus on sourcing and selling more sustainable products, improving our offering of recycling and other green services, maximizing our energy efficiency and renewable energy use and eliminating waste.
We continue to partner with suppliers and stakeholder groups to drive sustainability in our supply chain, in our vendors' supply chains and in certain industries as a whole. In 2011, Staples continued the successful implementation of our “Race to the Top” initiative, launched in 2010, to challenge 23 key suppliers to find innovative solutions for reducing the environmental impacts of packaging, product design and manufacturing.
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We are helping customers make more sustainable choices by offering more than 10,000 products with environmentally friendly features in stores and online as well as greener copy and print services and product recycling programs. In 2011, we recycled more than 67 million ink and toner cartridges and 13 million pounds of office electronics through our customer recycling program.
We also actively mitigate the environmental impact of our own business operations. At the end of 2011, Staples had more than 285 locations designated as ENERGY STAR qualified for energy efficiency, and is hosting 36 solar systems on the rooftops of stores and distribution centers nationally. We also purchased more than 340 million kilowatt hours of green power in the form of renewable energy certificates, equivalent to 50% of our U.S. electricity use.
Diversity - Staples' commitment to diversity and inclusion stems from our recognition that being a successful company requires people with diverse backgrounds and perspectives. We know that differences in age, race, gender, nationality, sexual orientation, physical ability, background and thinking style allow us to be more innovative as a company. We believe that attracting, developing and retaining an associate base that reflects the diversity of our customers is essential to our success. Our diverse workforce and network of suppliers strengthens relationships with our customers and gives us the flexibility to adapt to the ever-changing global marketplace.
Community - Staples contributes to educational and youth oriented community efforts, from literacy and mentoring to career skills development, through in-kind and monetary donations and grants from the Staples Foundation, our private charitable arm. Through our community relations efforts, we have helped more than 6,000 organizations in 2,000 communities across 27 countries.
Competition
We compete with a variety of online and traditional retailers, dealers and distributors in the highly competitive office products market. We compete in most of our geographic markets with other high-volume office supply providers, including Office Depot, OfficeMax and Lyreco, as well as mass merchants such as Walmart, Target and Tesco, warehouse clubs such as Costco, computer and electronics retail stores such as Best Buy, specialty technology stores such as Apple, copy and print businesses such as FedEx Office, online retailers such as Amazon.com and other discount retailers. In addition, our retail stores and delivery operations both compete with numerous mail order firms, contract stationers, electronic commerce distributors, regional and local dealers and direct manufacturers. Many of our competitors have increased their presence in our markets in recent years.
We believe we are able to compete favorably against other high-volume office supply providers, mass merchants and other retailers, dealers and distributors because of the following factors: our focus on the business and home office customer; our tenured management team's ability to respond to the dynamic markets in which we operate and the changing needs of our customers; courteous, helpful and knowledgeable associates focused on making it easy for customers to buy office products and services; a wide assortment of office supplies and services that are in-stock and easy to find; fast checkout; easy to use web sites; reliability and speed of order shipment; convenient store locations; hassle-free returns and competitive prices.
Trademarks, Patents, Copyrights and Domain Names
We own or have applied to register numerous trademarks and service marks in the United States and throughout the world in connection with our businesses. Some of our principal global and regional marks include Staples, the Staples red brick logo, Staples the Office Superstore, the Easy Button logo, ''that was easy'', Staples EasyTech, Quill.com, Corporate Express, Sustainable Earth by Staples and many other marks incorporating ''Staples” or another primary mark, which in the aggregate we consider to be of material importance to our business. While the duration of trademark registrations varies from country to country, trademarks are generally valid and may be renewed indefinitely so long as they are in use and their registrations are properly maintained.
We own and maintain a number of patents on certain products, systems and designs. We also own copyrights for works such as packaging, training materials, promotional materials, computer software, in-store graphics, website content and multi-media. In addition, we have registered and maintain numerous Internet domain names, including many that incorporate ''Staples."
Available Information
We maintain a web site with the address www.staples.com. We are not including the information contained on our web site as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge through our web site our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission ("SEC").
We were organized in 1985 and are incorporated in Delaware.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers, their respective ages and positions as of February 27, 2012 and a description of their business experience are set forth below. There are no family relationships among any of the executive officers named below.
Joseph G. Doody, age 59
Mr. Doody has served as President—Staples North American Delivery since March 2002. Prior to that, he served as President—Staples Contract & Commercial from November 1998, when he first joined Staples, until March 2002.
Christine T. Komola, age 44
Ms. Komola has served as Senior Vice President and Chief Financial Officer since February 2012. Prior to that, she served as the Senior Vice President and Corporate Controller from July 2004 to January 2012. She also served as the Senior Vice President, General Merchandise Manager for furniture from January 2002 to July 2004. She has also held other roles within Staples since joining in April 1997, including Assistant Controller, Vice President of Planning, Margin and Control and Chief Financial Officer of Staples.com.
John J. Mahoney, age 60
Mr. Mahoney has served as Vice Chairman since February 2012. Prior to that, he served as our Vice Chairman and Chief Financial Officer from January 2006 to January 2012. He also served as Executive Vice President, Chief Administrative Officer and Chief Financial Officer from October 1997 to January 2006, and as Executive Vice President and Chief Financial Officer from September 1996, when he first joined Staples, to October 1997.
Michael A. Miles, age 50
Mr. Miles has served as President and Chief Operating Officer since January 2006. Prior to that, he served as Chief Operating Officer since September 2003. Prior to joining Staples in September 2003, Mr. Miles was Chief Operating Officer, Pizza Hut for Yum! Brands, Inc. from January 2000 to August 2003.
Demos Parneros, age 49
Mr. Parneros has served as President—U.S. Stores since April 2002. Prior to that, he served in various capacities since joining Staples in October 1987, including Senior Vice President of Operations from March 1999 to March 2002 and Vice President of Operations from October 1996 to February 1999.
Cynthia Pevehouse, age 54
Ms. Pevehouse has served as our Senior Vice President, General Counsel and Secretary since January 2012. Prior to that, she served as Senior Counsel at the international law firm Steptoe & Johnson LLP from March 2010 to December 2011. She also served as Executive Vice President and General Counsel of Allianz of America Corporation from January 2006 to March 2009. Prior to that, she served as General Counsel at Polycom, Inc. from January 2003 to October 2005 and Ask Jeeves, Inc. from January 2000 to December 2002.
Ronald L. Sargent, age 56
Mr. Sargent has served as Chairman since March 2005, as Chief Executive Officer since February 2002 and as a Director since 1999. Prior to that, he served in various capacities since joining Staples in March 1989, including President from November 1998 to January 2006, Chief Operating Officer from November 1998 to February 2002, President—North American Operations from October 1997 to November 1998, and President—Staples Contract & Commercial from June 1994 to October 1997.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and, in particular, the description of our Business set forth in Item 1 and our Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in Appendix B ("MD&A") 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 use of the words like "believes," "expects," "anticipates," "plans," "may," "will," "would," "intends," "estimates" and other similar expressions, whether in the
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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 MD&A and our consolidated financial statements and notes to consolidated financial statements included in Appendix C. 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 below under the heading "Risk Factors" as well as risks that emerge from time to time that are not possible for us to predict. Forward-looking statements, like all statements in this report, speak only as of the date of this report (unless another date is indicated). We disclaim any obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.
Item 1A. Risk Factors
Global economic conditions could adversely affect our business and financial performance.
As the world's leading office products company operating in 26 countries, our operating results and performance depend significantly on worldwide economic conditions and their impact on business and consumer spending. Increases in the levels of unemployment, particularly white collar unemployment, energy and commodities costs, healthcare costs, higher interest rates and taxes, a return to tighter credit markets, consumer credit availability, turmoil in the financial markets (including recent events in the European Union), lower consumer confidence, lack of small business formation and other factors could result in a decline in business and consumer spending. Although there has been some improvement in some of these measures, the level of business and consumer spending across the globe is not where it was prior to the global recession. Our business and financial performance may continue to be adversely affected by current and future economic conditions if there is a renewed decline in business and consumer spending or such spending remains stagnant.
Our market is highly competitive and we may not be able to continue to compete successfully.
The office supply and services market is highly competitive. We compete with a variety of local, regional, national and international retailers and online and traditional retailers, dealers and distributors for customers, associates, locations, products, services, and other important aspects of our business. In most of our geographic markets, we compete with other high-volume office supply providers such as Office Depot, OfficeMax and Lyreco, as well as mass merchants such as Walmart, Target and Tesco, warehouse clubs such as Costco, computer and electronics retail stores such as Best Buy, specialty technology stores such as Apple, copy and print businesses such as FedEx Office, online retailers such as Amazon.com, and other discount retailers. We also compete with numerous mail order firms, contract stationer businesses, electronic commerce distributors, regional and local dealers and direct manufacturers. Some of our current and potential competitors are larger than we are, may have more experience in selling certain products or delivering services or may have substantially greater financial resources. Also, many of our competitors have increased their presence in our markets in recent years by expanding their assortment of office products and services, opening new stores near our existing stores, and offering direct delivery of office products. Intense competitive pressures from one or more of our competitors could affect prices or demand for our products and services. If we are unable to timely and appropriately respond to these competitive pressures, or offer the appropriate mix of products and services at competitive prices, our financial performance and market share could be adversely affected.
If the products and services that we offer fail to meet our customer needs, our performance could be adversely affected.
We strive to differentiate ourselves from our competitors in part by executing our brand promise: we bring easy to your office. This involves providing our customers with solutions through a broad selection of products and services at competitive prices that meet customers' changing needs and purchasing habits. For example, technology has rapidly changed how people work and conduct business, which impacts the types of office products being purchased and the services needed by businesses and consumers. We offer, among other things, convenient store locations, helpful associates and reliable and fast order delivery. If we misjudge either the demand for products and services we sell or our customers' purchasing habits and tastes, we may be faced with excess inventories of some products or missed opportunities for products and services we do not offer. Failure to execute on our brand promise of providing the products and services preferred by our customers could have a material adverse affect on our revenue, results of operations and ability to attract and retain customers.
We may be unable to continue to enter new markets successfully.
An important part of our business plan is to increase our presence in new markets, which could include providing new products and service offerings or adding delivery operations or stores in new geographic markets. We may have limited experience in these newer markets such as technology services, and such offerings may present new and difficult challenges. For example,
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when entering a new geographic market customers may not be familiar with our brand or our competitors may have a larger, more established market presence. Our sales or profit levels in newer activities thus may not be successful enough to recoup our investments in them and may reduce our overall profitability. In addition, for our strategy to be successful, we must identify favorable store sites, negotiate leases on acceptable terms, hire and train qualified associates and adapt management and operational systems to meet the needs of our expanded operations. Local zoning and other land use regulations may prevent or delay the opening of new stores in some markets. If we are unable to open new stores as efficiently as we planned, our future sales and profits may be adversely affected.
Our expanding international operations expose us to risks inherent in foreign operations.
We currently operate in 25 countries outside the United States and plan to continue to grow internationally. In certain international market segments, we may not benefit from any first-to-market advantages or otherwise succeed. Cultural differences abroad and local practices of conducting business may conflict with our own business practices and ethics standards. Ensuring compliance with foreign and U.S. laws and our own policies may require that we implement new operational systems and financial controls, conduct audits or internal investigations, train our associates and third parties on our existing compliance methods, and take other actions, all of which may be expensive, divert management's time and impact our operations. There are also different employee/employer relationships and in some cases the existence of workers' councils that may delay or impact the implementation of some of these operational systems. In addition, differences in business practices in our international markets may cause customers to be less receptive to our business model than we expect.
Risks inherent in international operations also include, among others, the costs and difficulties of managing international operations, adverse tax consequences and greater difficulty in enforcing intellectual property rights. Other factors that may also have an adverse impact on our international operations include limitations on the repatriation and investment of funds, foreign currency exchange restrictions, complex import and export schemes, increased local competition, our lack of familiarity with local customer preferences, unfavorable foreign trade policies, unstable political or economic conditions, and geopolitical events, including war and terrorism.
Failure to manage growth and continue to expand our operations successfully could adversely affect our financial results.
Our business has experienced significant historical growth over the years, and we expect our business to continue to grow organically and through strategic acquisitions. Sales of our products and services, the types of our customers, the nature of our contracts, the mix of our businesses, the number of countries in which we conduct business, the number of stores that we operate and the number of our associates have grown and changed, and we expect they will continue to grow and change over the long-term. This growth places significant demands on management and operational systems. If we cannot effectively manage our growth, it is likely to result in operational inefficiencies and ineffective management of our business thus negatively impacting our operating results. In addition, as we grow, our business is subject to a wider array of complex state, federal and international regulations, and may be increasingly the target of private actions. This increases the cost of doing business and the risk that our business practices could unknowingly result in liabilities that may adversely affect our business and financial performance. To the extent we grow through strategic acquisitions, our success will depend on selecting the appropriate targets, integrating such acquisitions quickly and effectively and realizing any expected synergies and cost savings related to such acquisitions.
Our effective tax rate may fluctuate.
We are a multi-national, multi-channel provider of office products and services. As a result, our effective tax rate is derived from a combination of applicable tax rates in the various countries, states and other jurisdictions in which we operate. Our effective tax rate may be lower or higher than our tax rates have been in the past due to numerous factors, including the sources of our income, any agreements we may have with taxing authorities in various jurisdictions, changes in the laws and the tax filing positions we take in various jurisdictions. We base our estimate of an effective tax rate at any given point in time upon a calculated mix of the tax rates applicable to our company and to estimates of the amount of business likely to be done in any given jurisdiction. The loss of one or more agreements with taxing jurisdictions, a change in the mix of our business from year to year and from country to country, changes in rules related to accounting for income taxes, adverse outcomes from tax audits that we may be subject to in any of the jurisdictions in which we operate, or changes in tax laws in any of the multiple jurisdictions in which we operate could result in an unfavorable change in our effective tax rate which could have an adverse effect on our business and results of our operations.
Fluctuations in foreign exchange rates could lead to lower earnings.
As we have expanded our international operations, our exposure to exchange rate fluctuations has increased. Sales from our delivery operations and stores outside the U.S. are denominated in the currency of the country in which these operations or stores
8
are located and changes in foreign exchange rates affect the translation of the sales and earnings of these businesses into U.S. dollars for financial reporting purposes. Additionally, merchandising agreements may also be denominated in the currency of the country where the vendor resides. Although we attempt to mitigate such risks by sometimes entering into foreign exchange hedges or utilizing risk management strategies, such hedges and strategies themselves present some risk and thus may not be entirely successful in mitigating the risk.
We may be unable to attract, train, engage and retain qualified associates.
Our customers value courteous and knowledgeable associates, and an important part of our “Easy” brand strategy is a positive customer service experience. Accordingly, our performance depends on attracting, training, engaging and retaining a large number of qualified associates. We face intense competition for qualified associates. We face even tighter labor markets as we expand into emerging markets such as India and China. Many of our associates, particularly in retail stores, are in entry-level or part-time positions with historically high rates of turnover. Our ability to meet our labor needs while controlling our labor costs is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the workforce, unemployment levels, prevailing wage rates, changing demographics, health and other insurance costs and the cost of compliance with labor and wage laws and regulations. If we are unable to attract, train, engage and retain a sufficient number of qualified associates, our business and financial performance may be adversely affected.
Our quarterly operating results are subject to significant fluctuation.
Our operating results have fluctuated from quarter to quarter in the past, and we expect that they will continue to do so in the future. Historically, sales and profitability are generally stronger in the second half of our fiscal year than the first half of our fiscal year due in part to back-to-school, holiday and back-to-business seasons. Factors that could also cause these quarterly fluctuations include: the mix of products sold; pricing actions of competitors; the level of advertising and promotional expenses; the outcome of legal proceedings; severe weather; consumer confidence; and the other risk factors described in this section. Most of our operating expenses, such as occupancy costs and associate salaries, do not vary directly with the amount of sales and are difficult to adjust in the short term. As a result, if sales in a particular quarter are below expectations, we may not proportionately reduce operating expenses for that quarter, and therefore such a sales shortfall would have a disproportionate effect on our net income for the quarter.
If we are unable to manage our debt, it could materially harm our business and financial condition and restrict our operating flexibility.
We have long-term debt and debt service requirements, with $1.5 billion 9.75% notes due in January 2014 and $325 million 7.375% notes due in October 2012. Additionally, we have outstanding obligations under our local lines of credit. Our consolidated outstanding debt as of January 28, 2012 was $2.04 billion. If we are unable to satisfy our debt service requirements, we may default under one or more of our credit facilities or the indentures governing our notes. If we default or breach our obligations, we could be required to pay a higher rate of interest or lenders could require us to accelerate our repayment obligations. As a result, we may be forced to use an unplanned portion of cash flows to pay our debt, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes, which could materially harm our business and financial condition. Our level of indebtedness may also place us at a competitive disadvantage against less leveraged competitors.
We could incur significant goodwill impairment charges.
At January 28, 2012, we had $4.0 billion of goodwill on our balance sheet. We evaluate goodwill for impairment annually in the fourth quarter, or sooner if events occur or circumstances change that indicate potential impairment. Certain factors, including consumer spending levels, industry and macroeconomic conditions, the price of our stock and the future profitability of our acquired businesses might have a negative impact on the carrying value of our goodwill. The process of testing goodwill for impairment involves numerous judgments, assumptions and estimates made by management which inherently reflect a high degree of uncertainty. If the business climate deteriorates, or if we fail to manage acquired companies successfully, then actual results may not be consistent with these judgments, assumptions and estimates, and our goodwill may become impaired. This would in turn have an adverse impact on our financial position and results of operations. Our goodwill impairment analysis also includes a comparison of the aggregate estimated fair value of all reporting units to our total market capitalization. Therefore, a significant and sustained decline in our stock price could result in goodwill impairment charges.
Our expanded offering of proprietary branded products may not improve our financial performance and may expose us to intellectual property and product liability claims.
Our product offering includes Staples, Quill and other proprietary branded products and services, which represented
9
approximately 27% of our sales in fiscal 2011 and which typically provide for higher margins. Our proprietary branded products compete with other manufacturers' branded items that we offer. An increase in our proprietary branded product and services also exposes us to risk that third parties will assert infringement claims against us with respect to such products and services. We also have greater exposure and responsibility to the consumer for replacements as a result of product defects. If any of our customers are harmed by our proprietary branded products or services, they may bring product liability and other claims against us or we may have to issue voluntary or mandatory recalls. The more proprietary brand product and services we offer, the more these risks increase. A loss of consumer acceptance of these products could also adversely affect our sales and gross margin rates. Any of these circumstances could damage our reputation and have an adverse effect on our business and financial performance.
Problems in our information systems and technologies may disrupt our operations.
We rely heavily on various information systems and technology to sell and deliver our products and services and operate our business, including systems to track inventory, to process and record transactions, to generate financial reports and to communicate with our associates, vendors and customers. Our ability to attract and retain customers, compete and operate effectively depends in part on a consistent, secure and easy to use technology infrastructure with reliable back-up systems. Any disruption to the Internet or our technology infrastructure, including a disruption affecting our web sites and information systems, may cause a decline in our customer satisfaction, jeopardize accurate financial reporting, impact our sales volumes or result in increased costs. We may also outsource our information technology to third parties. Although we continue to invest in our technology, if we are unable to continually add software and hardware, effectively manage or upgrade our systems and network infrastructure, and develop effective system availability, disaster recovery plans and protection solutions, our business could be disrupted thus subjecting us to liability and potentially harming our reputation.
In addition, we will periodically make modifications and upgrades to our information technology systems and technology. Some of these modifications and upgrades will be outsourced to third parties. Modifications involve replacing legacy systems with successor systems, making changes to legacy systems or acquiring new systems with new functionality. Although we make a diligent effort to ensure that all providers of outsourced services observe proper internal control practices and procedures, we cannot assure that failures will not occur. We are aware of inherent risks associated with replacing our systems, including accurately capturing data, system disruptions and outsourcing to third parties. Information technology system disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our operations.
Compromises of our information systems or unauthorized access to confidential information or our customers' or associates' personal information may materially harm our business or damage our reputation.
Through our sales and marketing activities and our business operations, we collect and store confidential information and certain personal information from our customers and associates. For example, we handle, collect and store personal information in connection with our customers purchasing products or services, enrolling in our promotional or rewards programs, registering on our web site or otherwise communicating or interacting with us. We also process payment card information and check information. In addition, in the normal course of business, we gather and retain personal information about our associates and generate and have access to confidential business information. We may share confidential and personal information with vendors or other third parties in connection with processing of transactions, operating certain aspects of our business or for marketing purposes. Although we have taken steps designed to safeguard such information, there can be no assurance that such information will be protected against unauthorized access or disclosure. Computer hackers may attempt to penetrate our or our vendors' network security and, if successful, misappropriate such information. A Staples associate, contractor or other third-party with whom we do business may also attempt to circumvent our security measures in order to obtain such information or inadvertently cause a breach involving such information. We could be subject to liability for failure to comply with privacy and information security laws, for failing to protect personal information, or for misusing personal information, such as use of such information for an unauthorized marketing purpose. Loss or misuse of confidential or personal information could disrupt our operations, damage our reputation, and expose us to claims from customers, financial institutions, regulators, payment card associations, employees and other persons, any of which could have an adverse effect on our business, financial condition and results of operations.
Our business may be adversely affected by the actions of and risks associated with third-party vendors and service providers.
The products we sell are sourced from a wide variety of third-party vendors. In general, we do not have long-term contracts with these vendors committing them to provide products to us on acceptable terms. For example, we derive benefits from vendor allowances and promotional incentives which may not be offered in the future. We also cannot control the supply, design, function or cost of many of the products that we offer for sale and are dependent on the availability and pricing of key products, including paper, ink, toner, technology and printing equipment. Some of the products we offer are supplied to us on an exclusive basis and may be difficult to replace in a timely manner. Additionally, we may not be able to source products that we want to offer for sale on acceptable terms, or at all. Disruptions in the availability of raw materials used in the production of these products, or quality
10
issues that cause us to initiate voluntary or mandatory recalls for proprietary products we sell, may result in customer dissatisfaction, damage our reputation and adversely affect our sales.
Global sourcing of many of the products we sell is an important factor in our financial performance. Our ability to find qualified vendors and access products in a timely and efficient manner is a significant challenge, especially with respect to goods sourced outside the United States. Political instability, the financial instability of suppliers, trade restrictions, tariffs, foreign currency exchange rates, transport capacity and costs, inflation and other factors relating to foreign trade are beyond our control. We also rely upon many independent service providers for services that are important to many aspects of our business. If our vendors or service providers fail or are unable to perform as expected and we are unable to replace them quickly, our business could be harmed at least temporarily until we are able to do so and potentially, in some cases, permanently. These and other issues affecting our vendors and service providers could adversely affect our reputation, business and financial performance.
Various legal proceedings may adversely affect our business and financial performance.
We are involved in various private legal proceedings, which include consumer, employment, intellectual property, tort and other litigation. As our workforce expands, we are subject to potentially increasing challenges by private litigants regarding compliance with local, state and national labor regulations, whether meritorious or not. In addition, companies have increasingly been subject to employment related class action litigation, and we have experienced an increase in “wage and hour” class action lawsuits. We expect that these trends will continue to affect us. As our operations grow, we are also subject to claims that the technology we use or the products we sell infringe intellectual property rights of third parties. Such claims, whether meritorious or not, involve significant managerial resources and can become costly. Generally, we have indemnification protections in our agreements which our vendors or licensors have typically honored; however, there are no assurances that such vendors or licensors will continue to do so in the future. We estimate exposure and establish reserves for our estimated liabilities, however, litigation is inherently unpredictable and the outcome of legal proceedings and other contingencies could be unexpected and require us to pay substantial amounts of money or take actions that adversely affect our operations. In addition, defending against these claims may involve significant time and expense. Given the large size of our operations and workforce, the visibility of our brand and our position as an industry leader, we may regularly be involved in legal proceedings that could adversely affect our business and financial performance.
Failure to comply with laws, rules and regulations could negatively affect our business operations and financial performance.
Our business is subject to federal, state, local and international laws, rules and regulations, such as state and local wage and hour laws, the U.S. Foreign Corrupt Practices Act, import and export laws, unclaimed property laws and many others. The complexity of the regulatory environment in which we operate and the related cost of compliance are both increasing due to legal and regulatory requirements, increased enforcement and our ongoing expansion into new markets and new channels. In addition, as a result of operating in multiple countries, we must comply with multiple foreign laws and regulations that may differ substantially from country to country and may conflict with corresponding U.S. laws and regulations. We may also be subject to investigations or audits by governmental authorities and regulatory agencies, which can occur in the ordinary course of business or which can result from increased scrutiny from a particular agency towards an industry, country or practice. If we fail to comply with laws, rules and regulations or the manner in which they are interpreted or applied, we may be subject to government enforcement action, class action litigation or other litigation, damage to our reputation, civil and criminal liability, damages, fines and penalties, and increased cost of regulatory compliance, any of which could adversely affect our results of operations and financial performance.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
As of January 28, 2012, we operated a total of 2,295 retail stores in 48 states and the District of Columbia in the United States, 10 provinces and 2 territories in Canada, and in Belgium, Finland, Germany, the Netherlands, Norway, Portugal, Sweden, the United Kingdom, China, Argentina and Australia. As of that same date, we also operated 124 distribution and fulfillment centers in 29 states in the United States, 7 provinces in Canada, and in Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, the United Kingdom, China, Argentina, Brazil and Australia. The following table sets forth the locations of our facilities as of January 28, 2012:
RETAIL STORES
Country/State/Province/Region/Territory | Number of Stores | |
United States | ||
Alabama | 12 | |
Arizona | 43 | |
Arkansas | 8 | |
California | 221 | |
Colorado | 20 | |
Connecticut | 39 | |
Delaware | 7 | |
District of Columbia | 2 | |
Florida | 101 | |
Georgia | 39 | |
Idaho | 8 | |
Illinois | 54 | |
Indiana | 30 | |
Iowa | 16 | |
Kansas | 4 | |
Kentucky | 17 | |
Louisiana | 1 | |
Maine | 12 | |
Maryland | 44 | |
Massachusetts | 76 | |
Michigan | 42 | |
Minnesota | 7 | |
Mississippi | 2 | |
Missouri | 11 | |
Montana | 8 | |
Nebraska | 5 | |
Nevada | 7 | |
New Hampshire | 23 | |
New Jersey | 89 | |
New Mexico | 11 | |
New York | 142 | |
North Carolina | 50 | |
North Dakota | 2 | |
Ohio | 63 | |
Oklahoma | 18 | |
Oregon | 21 | |
Pennsylvania | 95 | |
Rhode Island | 10 | |
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South Carolina | 21 | |
South Dakota | 1 | |
Tennessee | 23 | |
Texas | 60 | |
Utah | 14 | |
Vermont | 7 | |
Virginia | 45 | |
Washington | 31 | |
West Virginia | 6 | |
Wisconsin | 11 | |
Wyoming | 4 | |
Total United States | 1,583 | |
Canada | ||
Alberta | 37 | |
British Columbia | 42 | |
Manitoba | 10 | |
New Brunswick | 10 | |
Newfoundland | 4 | |
Nova Scotia | 14 | |
Northwest Territories | 1 | |
Ontario | 132 | |
Prince Edward Island | 2 | |
Quebec | 71 | |
Saskatchewan | 10 | |
Yukon | 1 | |
Total Canada | 334 | |
Belgium | 6 | |
Finland | 7 | |
Germany | 62 | |
The Netherlands | 46 | |
Norway | 21 | |
Portugal | 35 | |
Sweden | 17 | |
United Kingdom | 137 | |
China | 28 | |
Argentina | 2 | |
Australia | 17 | |
2,295 | ||
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DISTRIBUTION AND FULFILLMENT CENTERS
Country/State/Province/Region/Territory | Number of Centers | |
United States | ||
Arizona | 2 | |
Alaska | 1 | |
California | 7 | |
Colorado | 1 | |
Connecticut | 2 | |
Delaware | 1 | |
Florida | 1 | |
Georgia | 2 | |
Idaho | 1 | |
Illinois | 3 | |
Indiana | 1 | |
Iowa | 2 | |
Kansas | 1 | |
Maryland | 2 | |
Massachusetts | 2 | |
Michigan | 1 | |
Minnesota | 2 | |
New Jersey | 2 | |
New York | 2 | |
North Carolina | 2 | |
Ohio | 2 | |
Oregon | 3 | |
Pennsylvania | 2 | |
South Carolina | 1 | |
Tennessee | 1 | |
Texas | 5 | |
Virginia | 1 | |
Washington | 1 | |
Wisconsin | 2 | |
Total United States | 56 | |
Canada | ||
Alberta | 3 | |
British Columbia | 2 | |
Manitoba | 1 | |
New Foundland | 1 | |
Nova Scotia | 2 | |
Ontario | 3 | |
Quebec | 2 | |
Total Canada | 14 | |
Austria | 1 | |
Belgium | 2 | |
Denmark | 2 | |
Finland | 1 | |
France | 2 | |
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Germany | 2 | |
Ireland | 2 | |
Italy | 1 | |
The Netherlands | 1 | |
Norway | 3 | |
Poland | 1 | |
Portugal | 1 | |
Spain | 1 | |
Sweden | 1 | |
United Kingdom | 4 | |
China | 4 | |
Argentina | 1 | |
Brazil | 1 | |
Australia | 23 | |
124 | ||
Most of the existing facilities, including those acquired in connection with our acquisition of Corporate Express, are leased by us with initial lease terms expiring between 2012 and 2026. In most instances, we have renewal options at increased rents. Leases for 156 of the existing stores provide for contingent rent based upon sales.
We own our Framingham, Massachusetts corporate office, which consists of approximately 650,000 square feet.
Item 3. Legal Proceedings
We are subject to ordinary routine litigation incidental to our business. We do not believe the results of such litigation will have a material adverse effect on our business. See Note H of the Notes to our Consolidated Financial Statements.
Item 4. Mine Safety Disclosures
Not applicable
15
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
NASDAQ
Our common stock is traded on the NASDAQ Global Select Market under the symbol "SPLS". The following table sets forth for the periods indicated the high and low sales prices per share of our common stock on the NASDAQ Global Select Market, as reported by NASDAQ.
High | Low | |||||||
Fiscal Year Ended January 28, 2012 | ||||||||
First Quarter | $ | 22.95 | $ | 19.22 | ||||
Second Quarter | 21.50 | 14.75 | ||||||
Third Quarter | 16.11 | 11.94 | ||||||
Fourth Quarter | 16.34 | 13.68 | ||||||
Fiscal Year Ended January 29, 2011 | ||||||||
First Quarter | $ | 26.00 | $ | 22.00 | ||||
Second Quarter | 23.97 | 18.82 | ||||||
Third Quarter | 21.25 | 17.45 | ||||||
Fourth Quarter | 23.75 | 19.96 | ||||||
Cash Dividend
Since 2004, we have returned cash to our stockholders through a cash dividend. We paid quarterly dividends of $0.10 per share on April 14, 2011, July 14, 2011, October 13, 2011 and January 12, 2012, resulting in a total dividend payment for 2011 of $277.9 million or $0.40 per share. We paid quarterly dividends of $0.09 per share on April 15, 2010, July 15, 2010, October 24, 2010 and January 13, 2011, resulting in a total dividend payment for 2010 of $258.7 million or $0.36 per share.
Our payment of dividends is permitted under our public notes and existing financing agreements, although our revolving credit agreement restricts the payment of dividends in the event we are in default under such agreement or such payout would cause a default under such agreement. While it is our intention to continue to pay quarterly cash dividends for 2012 and beyond, any decision to pay future cash dividends will be made by our Board of Directors and will depend upon our earnings, financial condition and other factors.
16
Stock Performance Graph
The following graph compares the cumulative total stockholder return on Staples' common stock, the Standard & Poor's 500 Index and the Standard & Poor's Retail Index during our 2007 through 2011 fiscal years, assuming the investment of $100.00 on February 3, 2007 with dividends being reinvested.
TOTAL RETURN TO STOCKHOLDERS
3-Feb-07 | 2-Feb-08 | 31-Jan-09 | 30-Jan-10 | 29-Jan-11 | 28-Jan-12 | |||||||||||||||||||
Staples, Inc. | $ | 100.00 | $ | 91.49 | $ | 61.82 | $ | 92.41 | $ | 89.40 | $ | 65.82 | ||||||||||||
S&P 500 Index | $ | 100.00 | $ | 97.69 | $ | 59.95 | $ | 79.82 | $ | 97.53 | $ | 101.64 | ||||||||||||
S&P Retail Index | $ | 100.00 | $ | 86.89 | $ | 55.42 | $ | 88.75 | $ | 113.80 | $ | 129.57 | ||||||||||||
Issuer Purchases of Equity Securities
The following table provides information about our purchases of our common stock during the fourth quarter of fiscal 2011:
Fiscal Period | Total Number of Shares Purchased(1) | Average Price Paid per Share (2) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(3) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(3) | ||||||||||
October 30, 2011 - November 26, 2011 | 2,714,398 | $ | 14.50 | 2,713,955 | $ | 1,392,698,000 | ||||||||
November 27, 2011 - December 31, 2011 | 2,878,099 | 14.32 | 2,861,000 | 1,351,734,000 | ||||||||||
January 1, 2012 - January 28, 2012 | 2,294,119 | 15.16 | 2,258,707 | 1,317,495,000 | ||||||||||
Total for fourth quarter of 2011 | 7,886,616 | $ | 14.62 | 7,833,662 | $ | 1,317,495,000 | ||||||||
(1) | Includes a total of 52,954 shares of our common stock withheld during the fourth quarter of our 2011 fiscal year to satisfy minimum statutory tax withholding obligations in connection with the vesting of restricted stock awards granted pursuant to our equity incentive plans. |
(2) | Average price paid per share includes commissions paid in connection with our publicly announced share repurchase |
17
programs and is rounded to the nearest two decimal places.
(3) | Under our new repurchase program, we are authorized to repurchase up to $1.5 billion of common stock in both open market and privately negotiated transactions. Our repurchase program has no expiration date and may be suspended or discontinued at any time. |
Other Information
For information regarding securities authorized for issuance under our equity compensation plans, please see Note J in the Notes to the Consolidated Financial Statements contained in this Annual Report on Form 10-K.
At February 27, 2012, we had 5,184 holders of record of our common stock.
Item 6. Selected Financial Data
The information required by this Item is attached as Appendix A.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information required by this Item is attached as part of Appendix B.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The information required by this Item is attached as part of Appendix B under the caption "Quantitative and Qualitative Disclosures about Market Risks."
Item 8. Financial Statements and Supplementary Data
The information required by this Item is attached as Appendix C.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
1. 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 January 28, 2012, the effectiveness of the Company's disclosure controls and procedures, which were designed to be effective at the reasonable assurance level. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC'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 January 28, 2012, management, the chief executive officer and the chief financial officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level at that date.
2. Internal Control over Financial Reporting
(a) Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company's principal executive and principal financial officers and effected by the company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
18
accounting principles and includes those policies and procedures that:
• | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; |
• | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and |
• | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. |
Staples' internal control system was designed to provide reasonable assurance to the Company's management and Board regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations which may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of Staples' internal controls over financial reporting as of January 28, 2012. In making this assessment, it used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, we conclude that, as of January 28, 2012, the Company has maintained effective internal control over financial reporting based on those criteria.
The independent registered public accounting firm, Ernst & Young LLP, has audited the Consolidated Financial Statements and has issued an attestation report on Staples Inc.'s internal controls over financial reporting as of January 28, 2012 as stated in its reports which are included herein.
19
(b) Attestation Report of the Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Staples, Inc.
We have audited Staples, Inc.'s internal control over financial reporting as of January 28, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Staples, Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Staples, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 28, 2012, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Staples, Inc. and subsidiaries as of January 28, 2012 and January 29, 2011 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended January 28, 2012 of Staples, Inc. and our report dated February 29, 2012 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP | ||
Boston, Massachusetts | ||
February 29, 2012 | ||
20
(c) Changes in Internal Control Over Financial Reporting
No change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended January 28, 2012 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K and incorporated herein by reference to the definitive proxy statement with respect to our 2012 Annual Meeting of Stockholders (the "Proxy Statement"), which we will file with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Report.
Item 10. Directors, Executive Officers and Corporate Governance
Certain information required by this Item is contained under the heading "Executive Officers of the Registrant" in Part I of this Annual Report on Form 10-K. Other information required by this Item will appear under the headings "Proposal 1—Election of Directors" and "Corporate Governance" in our Proxy Statement, which sections are incorporated herein by reference.
The information required by this Item pursuant to Item 405 of Regulation S-K will appear under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" in our Proxy Statement, which section is incorporated herein by reference.
We have adopted a written code of ethics that applies to our principal executive officer, principal financial officer, and principal accounting officer or controller, or persons performing similar functions. Our code of ethics, which also applies to our directors and all of our officers and associates, can be found on our web site, which is located at www.staples.com, and is also an exhibit to this report. We intend to make all required disclosures concerning any amendments to or waivers from our code of ethics by filing a Form 8-K disclosing such waiver, or to the extent permitted by applicable NASDAQ regulations, by posting such information in the Investor Information section of our web site.
Item 11. Executive Compensation
The information required by this Item will appear under the headings "Corporate Governance", "Director Compensation", and "Executive Compensation" including "Compensation Discussion and Analysis", "Compensation Committee Interlocks and Insider Participation" and "Compensation Committee Report" in our Proxy Statement, which sections are incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item will appear under the headings "Beneficial Ownership of Common Stock" and "Securities Authorized for Issuance under Equity Compensation Plans" in our Proxy Statement, which sections are incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item will appear under the headings "Certain Relationships and Related Transactions" and "Director Independence" in our Proxy Statement, which sections are incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by this Item will appear under the heading "Independent Registered Public Accounting Firm's Fees" in our Proxy Statement, which section is incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules
(a) | Index to Consolidated Financial Statements: The following financial statements and schedules of Staples, Inc. are included as Appendix C of this Report: |
1. Financial Statements.
• | Consolidated Balance Sheets—January 28, 2012 and January 29, 2011. |
21
• | Consolidated Statements of Income—Fiscal years ended January 28, 2012, January 29, 2011 and January 30, 2010. |
• | Consolidated Statements of Stockholders' Equity—Fiscal years ended January 28, 2012, January 29, 2011 and January 30, 2010. |
• | Consolidated Statements of Cash Flows—Fiscal years ended January 28, 2012, January 29, 2011 and January 30, 2010. |
• | Notes to Consolidated Financial Statements. |
2. Financial Statement Schedules.
• | Schedule II—Valuation and Qualifying Accounts. |
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission other than the one listed above are not required under the related instructions or are not applicable and, therefore, have been omitted.
3. Exhibits. The exhibits which are filed or furnished with this report or which are incorporated herein by reference are set forth in the Exhibit Index on page D-1, which is incorporated herein by reference.
22
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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, on February 29, 2012.
STAPLES, INC. | ||
By: | /s/ RONALD L. SARGENT | |
Ronald L. Sargent, | ||
Chairman of the Board and Chief Executive Officer (Principal Executive Officer) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
23
Signature | Capacity | Date | ||
/s/ RONALD L. SARGENT | Chairman of the Board and Chief Executive Officer (Principal Executive Officer) | February 29, 2012 | ||
Ronald L. Sargent | ||||
/s/ BASIL L. ANDERSON | Director | February 29, 2012 | ||
Basil L. Anderson | ||||
/s/ ARTHUR M. BLANK | Director | February 29, 2012 | ||
Arthur M. Blank | ||||
/s/ MARY ELIZABETH BURTON | Director | February 29, 2012 | ||
Mary Elizabeth Burton | ||||
/s/ JUSTIN KING | Director | February 29, 2012 | ||
Justin King | ||||
/s/ CAROL MEYROWITZ | Director | February 29, 2012 | ||
Carol Meyrowitz | ||||
/s/ ROWLAND T. MORIARTY | Director | February 29, 2012 | ||
Rowland T. Moriarty | ||||
/s/ ROBERT C. NAKASONE | Director | February 29, 2012 | ||
Robert C. Nakasone | ||||
/s/ ELIZABETH A. SMITH | Director | February 29, 2012 | ||
Elizabeth A. Smith | ||||
/s/ ROBERT E. SULENTIC | Director | February 29, 2012 | ||
Robert E. Sulentic | ||||
/s/ VIJAY VISHWANATH | Director | February 29, 2012 | ||
Vijay Vishwanath | ||||
/s/ PAUL F. WALSH | Director | February 29, 2012 | ||
Paul F. Walsh | ||||
/s/ CHRISTINE T. KOMOLA | Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | February 29, 2012 | ||
Christine T. Komola | ||||
24
APPENDIX A
STAPLES, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(Dollar Amounts in Thousands, Except Per Share Data)
Fiscal Year Ended | ||||||||||||||||||||
January 28, 2012 (1) (52 Weeks) | January 29, 2011(2) (52 weeks) | January 30, 2010(3) (52 weeks) | January 31, 2009(4) (52 weeks) | February 2, 2008(5) (52 weeks) | ||||||||||||||||
Statement of Income Data: | ||||||||||||||||||||
Sales | $ | 25,022,192 | $ | 24,545,113 | $ | 24,275,451 | $ | 23,083,775 | $ | 19,372,682 | ||||||||||
Gross profit | 6,741,828 | 6,606,155 | 6,473,903 | 6,246,936 | 5,550,671 | |||||||||||||||
Net income attributed to Staples, Inc. | 984,656 | 881,948 | 738,671 | 805,264 | 995,670 | |||||||||||||||
Basic earnings per common share | 1.42 | 1.23 | 1.04 | 1.15 | 1.41 | |||||||||||||||
Diluted earnings per common share | 1.40 | 1.21 | 1.02 | 1.13 | 1.38 | |||||||||||||||
Dividends | $ | 0.40 | $ | 0.36 | $ | 0.33 | $ | 0.33 | $ | 0.29 | ||||||||||
Statistical Data: | ||||||||||||||||||||
Stores open at end of period | 2,295 | 2,281 | 2,243 | 2,218 | 2,038 | |||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Working capital | $ | 2,216,542 | $ | 2,174,574 | $ | 2,392,448 | $ | 951,704 | $ | 1,945,484 | ||||||||||
Total assets | 13,430,622 | 13,911,667 | 13,717,334 | 13,073,055 | 9,036,344 | |||||||||||||||
Total long-term debt, less current portion | 1,599,037 | 2,014,407 | 2,500,329 | 1,968,928 | 342,169 | |||||||||||||||
Noncontrolling interest | 7,062 | 7,471 | 83,054 | 58,224 | 10,227 | |||||||||||||||
Stockholders' equity | $ | 7,022,213 | $ | 6,951,181 | $ | 6,854,940 | $ | 5,622,431 | $ | 5,728,234 | ||||||||||
The Company's fiscal year is the 52 or 53 weeks ending the Saturday closest to January 31. Results of operations include the results of acquired businesses since the relevant acquisition date.
(1) | Results of operations for this period reflect the receipt of a $20.8 million tax benefit related to a refund due to Corporate Express N.V. ("Corporate Express") from the Italian government that was previously deemed uncollectible. |
(2) | Results of operations for this period reflect $57.8 million ($36.8 million, net of taxes) of integration and restructuring costs associated with the acquisition of Corporate Express. |
(3) | Results of operations for this period reflect $84.2 million ($55.2 million, net of taxes) of integration and restructuring costs associated with the acquisition of Corporate Express and a $42.0 million ($27.5 million, net of taxes) charge related to the settlement of retail wage and hour class action lawsuits. |
(4) | Results of operations for this period reflect $173.5 million ($113.7 million, net of taxes) of integration and restructuring costs associated with the acquisition of Corporate Express. The results of Corporate Express have been included since its acquisition in July 2008. |
(5) | Results of operations for this period reflect a $38.0 million ($24.3 million, net of taxes) charge related to the settlement of California wage and hour class action litigation. |
A-1
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Our fiscal year is the 52 or 53 weeks ending on the Saturday closest to January 31. Fiscal year 2011 ("2011") consisted of the 52 weeks ended January 28, 2012, fiscal year 2010 ("2010") consisted of the 52 weeks ended January 29, 2011 and fiscal year 2009 ("2009") consisted of the 52 weeks ended January 30, 2010.
Results of Operations
Major contributors to our 2011 results, as compared to the results for 2010, are reviewed in detail in the Consolidated Performance and Segment Performance discussions and are summarized below:
• | On a consolidated basis, we generated $25.02 billion in sales, with sales growth of 1.9%; |
• | North American Delivery sales increased 2.1%, and the business unit income rate increased to 8.7% from 8.5%; |
• | North American Retail sales increased 1.4%, and the business unit income rate increased to 8.3% from 8.1%; |
• | International Operations sales increased 2.7%, while the business unit income rate decreased to 1.8% from 3.2%; and |
• | Our annual income tax rate was 32.6% compared to 34.5%. |
To drive our long-term success, we continue to invest in strategic initiatives, including technology products and services, copy and print services, and facilities and breakroom supplies, while maintaining our focus on customer service and expense control. Our results for 2011 reflect our investments in these initiatives.
Outlook
Our expectations for 2012 assume modest improvement in the U.S. economy and that international demand will remain soft, primarily in our European markets. We expect demand for core office supplies to move in line with these trends. To accelerate our growth, we will continue to invest in adjacent categories to meet additional customer needs. These include technology products and services, copy and print services and facilities and breakroom supplies. We expect to continue to experience growth in these areas in 2012 and to benefit from continued strong demand for technology products. We also plan to improve our execution in our International segment during 2012 by controlling costs, leveraging new leadership and by focusing on the product and service offerings that have yielded success in North America.
In 2011, earnings per diluted share was $1.40 on a U.S. GAAP basis and $1.37 on a non-GAAP basis, which excludes the $0.03 per share impact of a $20.8 million tax refund received from the Italian government (see the non-GAAP reconciliation table on page B-2). Including the impact of the 53rd week in 2012, we expect sales to increase in the low single-digits compared to 2011, and earnings per diluted share to grow in the high single-digits relative to non-GAAP earnings per diluted share in 2011.
As with all forward looking statements made in this Annual Report on Form 10-K, we do not intend to publicly update any of the forward looking statements above.
Non-GAAP Measures
In our outlook above and in our analysis of the results of operations below, we have referred to non-GAAP financial measures related to net income and earnings per share which reflect adjustments to exclude the impact of a tax refund received in 2011, integration and restructuring costs in 2010 and 2009, and costs associated with a legal settlement in 2009. We believe these non-GAAP financial measures better enable management and investors to understand and analyze our performance by providing meaningful information relevant to events of a non-recurring nature that impact the comparability of underlying business results from period to period. However, these supplemental measures should be considered in addition to, and not as a substitute for or superior to, the related measures that are determined in accordance with GAAP. Reconciliations of the non-GAAP measures to their corresponding GAAP measures are included in the analysis of our consolidated performance below.
Consolidated Performance
2011 Compared with 2010
Net income attributed to Staples, Inc. for 2011 was $984.7 million or $1.40 per diluted share compared to $881.9 million or $1.21 per diluted share for 2010. Our results for 2011 include the receipt of a $20.8 million refund from the Italian government related to an overpayment of income taxes in previous years. Our results for 2010 include $36.8 million in integration and restructuring costs, net of tax.
B-1
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
A reconciliation of net income adjusted to remove these items is shown below (amounts in thousands, except per share data):
2011 | 2010 | |||||||||||||||
Net income | Per Diluted Share | Net income | Per Diluted Share | |||||||||||||
Net income as reported | $ | 984,656 | $ | 1.40 | $ | 881,948 | $ | 1.21 | ||||||||
Adjustments, net of taxes: | ||||||||||||||||
Integration and restructuring costs (1)(2) | — | — | 36,780 | 0.06 | ||||||||||||
Tax refund | (20,800 | ) | (0.03 | ) | — | — | ||||||||||
Non-GAAP adjusted net income | $ | 963,856 | $ | 1.37 | $ | 918,728 | $ | 1.27 | ||||||||
(1) | The tax effect of the 2010 adjustment is based on our 2010 effective tax rate of 34.5%. |
(2) | See Note A to the Notes to the Consolidated Financial Statements. |
Sales: Sales for 2011 were $25.02 billion, an increase of 1.9% from 2010. Our sales growth for 2011 reflects the positive impact of foreign exchange rates of $419.9 million and, to a lesser extent, growth in our North American Delivery business, partially offset by a decrease in comparable store sales in our European retail businesses.
Gross Profit: Gross profit as a percentage of sales was 26.9% for both 2011 and 2010. Gross profit increased in North American Retail as a result of improved product margins, offset by higher fuel costs in our North American Delivery and International Operations.
Selling, General and Administrative Expenses: Selling, general and administrative expenses as a percentage of sales for 2011 were 20.2% compared to 20.0% for 2010. This increase reflects investments in labor to support growth initiatives and deleverage in international fixed costs, partially offset by reduced incentive compensation and lower depreciation.
Amortization of Intangibles: Amortization of intangibles was $64.9 million for 2011 compared to $61.7 million for 2010, primarily reflecting the amortization of Corporate Express related tradenames, customer relationships and noncompetition agreements. Amortization of intangibles resulting from our acquisition of Corporate Express was $53.1 million for 2011 compared to $50.1 million for 2010.
Interest Income: Interest income decreased to $7.6 million for 2011 from $7.7 million for 2010. This decrease was primarily due to a decrease in our worldwide weighted-average cash balances and a slight decrease in U.S. interest rates, mostly offset by an increase in foreign interest rates.
Interest Expense: Interest expense decreased to $173.8 million for 2011 from $214.8 million for 2010. This decrease was primarily due to a reduction in debt balances resulting from the repayment of the $500 million, 7.75% Notes (the “April 2011 Notes”) on April 1, 2011, the repayment or refinancing of certain debt and liquidity facilities and the positive impact of our interest rate swap agreements, slightly offset by an increase in foreign borrowings. We used interest rate swap agreements to convert a portion of our fixed rate debt obligations into variable rate obligations. In September 2011, we terminated all of our existing interest rate swap agreements. The interest rate swap agreements that were terminated reduced interest expense by $26.3 million in 2011 and by $25.2 million for 2010.
Other Expense: Other expense was $3.1 million for 2011 compared to $9.8 million for 2010. The expense in 2011 primarily reflects equity method losses related to a joint venture, partially offset by foreign exchange gains, while the amount in 2010 primarily related to foreign exchange losses.
B-2
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Income Taxes: Our effective tax rate was 32.6% for 2011 and 34.5% for 2010. A reconciliation of the federal statutory tax rate to our effective tax rate on historical net income is as follows:
2011 | 2010 | |||||
Federal statutory rate | 35.0 | % | 35.0 | % | ||
State effective rate, net of federal benefit | 2.6 | % | 3.3 | % | ||
Effect of foreign taxes | (4.6 | )% | (5.5 | )% | ||
Tax credits | (0.5 | )% | (0.4 | )% | ||
Italian tax refund (previously deemed uncollectible) | (1.4 | )% | — | % | ||
Other | 1.5 | % | 2.1 | % | ||
Effective tax rate | 32.6 | % | 34.5 | % | ||
The effective tax rate in any year is impacted by the geographic mix of earnings. The earnings generated primarily by Staples in Australia, Canada, Hong Kong and the Netherlands contribute to the foreign tax rate differential noted above. Income taxes have not been provided on certain undistributed earnings of foreign subsidiaries of approximately $896.6 million, net of the noncontrolling interest, because such earnings are considered to be indefinitely reinvested in the business. The determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable because of the complexities associated with its hypothetical calculation.
2010 Compared with 2009
Net income attributed to Staples, Inc. for 2010 was $881.9 million or $1.21 per diluted share compared to $738.7 million or $1.02 per diluted share for 2009. Our results for 2010 include integration and restructuring costs and our results for 2009 include integration and restructuring costs and a settlement for wage and hour class action lawsuits. A reconciliation of net income adjusted to remove these items, net of taxes, is shown below (amounts in thousands, except per share data):
2010 | 2009 | |||||||||||||||
Net income | Per Diluted Share | Net Income | Per Diluted Share | |||||||||||||
Net income as reported | $ | 881,948 | $ | 1.21 | $ | 738,671 | $ | 1.02 | ||||||||
Adjustments, net of taxes:(1) | ||||||||||||||||
Integration and restructuring costs(2) | 36,780 | 0.06 | 55,180 | 0.08 | ||||||||||||
Retail wage and hour settlement(3) | — | — | 27,510 | 0.04 | ||||||||||||
Non-GAAP adjusted net income | $ | 918,728 | $ | 1.27 | $ | 821,361 | $ | 1.14 | ||||||||
(1) | The tax effect of all adjustments is based on the effective tax rate in effect for the period the expenses were incurred. |
(2) | See Note A to the Notes to the Consolidated Financial Statements. |
(3) | See Note H to the Notes to the Consolidated Financial Statements. |
Sales: Sales for 2010 were $24.55 billion, an increase of 1.1% from 2009. Our sales growth for 2010 reflects the positive impact of foreign exchange rates of $222.1 million, growth in our North American Delivery business and, to a lesser extent, non-comparable store sales for stores opened in the last twelve months, partially offset by negative comparable store sales in North America and Europe, in part related to the impact of the inclement weather and resulting promotional activities late in the fourth quarter of 2010.
Gross Profit: Gross profit as a percentage of sales was 26.9% for 2010 compared to 26.7% for 2009. The increase in gross profit rate for 2010 was primarily driven by improvements in product margin and, to a lesser extent, supply chain efficiencies.
Selling, General and Administrative Expenses: Selling, general and administrative expenses were 20.0% of sales for 2010 compared to 20.2% for 2009. This decrease reflects the settlement of several retail wage and hour class action lawsuits in 2009, reduced stock-based compensation and lower retirement plan expenses, mostly offset by investments in growth initiatives, primarily labor.
Integration and Restructuring Costs: Integration and restructuring costs were $57.8 million for 2010 compared to $84.2 million for 2009. Integration and restructuring costs for 2010 included $37.6 million of consulting and other costs, $10.0 million for severance and retention, and $10.2 million for facility closures and other asset write-downs. Integration and restructuring costs for 2009 included $46.1 million of consulting and other costs, $30.5 million for severance and retention and $7.6 million for facility
B-3
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
closures and other asset write-downs.
Amortization of Intangibles: Amortization of intangibles was $61.7 million for 2010 compared to $100.1 million for 2009. Amortization expense reflects the amortization of certain tradenames, customer relationships and non-competition agreements. Amortization expense relating to intangibles resulting from our acquisition of Corporate Express was $50.1 million for 2010 compared to $69.1 million for 2009.
Interest Income: Interest income increased to $7.7 million for 2010 compared to $6.1 million for 2009. This increase was due to an increase in our average cash balance, partially offset by a reduction in interest rates.
Interest Expense: Interest expense decreased to $214.8 million for 2010 compared to $237.0 million for 2009. This decrease was primarily due to expenses recognized in 2009 related to fees associated with borrowings used to fund the acquisition of Corporate Express as well as the positive impact of our interest rate swap agreements. These positive changes partially offset the inclusion of interest on our April 2011 Notes, as defined below. Our interest rate swap agreements reduced interest expense by $25.2 million for 2010 compared to $8.2 million for 2009.
Other (Expense) Income: Other expense was $9.8 million for 2010. Other income was $4.5 million for 2009. These amounts primarily reflect foreign exchange gains and losses recorded in the respective periods.
Income Taxes: Our effective tax rate was 34.5% for 2010 and 2009. In the fourth quarter of fiscal 2010, The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 ("The Tax Relief Act") was enacted, extending certain provisions in the Internal Revenue Code which allowed for the deferral of United States income tax on certain unremitted foreign earnings. Prior to the enactment of The Tax Relief Act, we had anticipated that our tax rate for fiscal 2010 would have been 37.5%.
A reconciliation of the federal statutory tax rate to our effective tax rate on historical net income was as follows:
2010 | 2009 | |||||
Federal statutory rate | 35.0 | % | 35.0 | % | ||
State effective rate, net of federal benefit | 3.3 | % | 2.9 | % | ||
Effect of foreign taxes | (5.5 | )% | (3.4 | )% | ||
Tax credits | (0.4 | )% | (0.7 | )% | ||
Other | 2.1 | % | 0.7 | % | ||
Effective tax rate | 34.5 | % | 34.5 | % | ||
The effective tax rate in any year is impacted by the geographic mix of earnings. The earnings generated primarily by Staples' entities in Australia, Canada, Hong Kong and the Netherlands contribute to the foreign tax rate differential noted above. Income taxes have not been provided on certain undistributed earnings of foreign subsidiaries of approximately $761.3 million, net of the noncontrolling interest, because such earnings are considered to be indefinitely reinvested in the business. A determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable because of the complexities associated with its hypothetical calculation.
Segment Performance
We have three reportable segments: North American Delivery, North American Retail and International Operations. Our North American Delivery segment consists of the U.S. and Canadian businesses that sell and deliver office products and services directly to consumers and businesses and includes Staples Advantage, Staples.com and Quill.com. Our North American Retail segment consists of the U.S. and Canadian businesses that operate stores that sell office products and services. Our International Operations segment consists of businesses that operate stores and that sell and deliver office products and services directly to consumers and businesses in 24 countries in Europe, Australia, South America and Asia. Additional geographic information about our sales is provided in Note N in the Notes to the Consolidated Financial Statements.
B-4
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The following tables provide a summary of our sales and business unit income by reportable segment and store activity for the last three fiscal years. Business unit income excludes integration and restructuring costs, stock-based compensation, interest and other expense, non-recurring items and the impact of changes in accounting principles (see reconciliation of total business unit income to consolidated income before income taxes in Note N in the Notes to the Consolidated Financial Statements):
(Amounts in thousands) | 2011 Increase From Prior Year | 2010 Increase (Decrease) From Prior Year | ||||||||||||||||
Sales: | 2011 | 2010 | 2009 | |||||||||||||||
North American Delivery | $ | 10,056,011 | $ | 9,849,218 | $ | 9,640,390 | 2.1 | % | 2.2 | % | ||||||||
North American Retail | 9,660,847 | 9,529,757 | 9,364,190 | 1.4 | % | 1.8 | % | |||||||||||
International Operations | 5,305,334 | 5,166,138 | 5,270,871 | 2.7 | % | (2.0 | )% | |||||||||||
Total segment sales | $ | 25,022,192 | $ | 24,545,113 | $ | 24,275,451 | 1.9 | % | 1.1 | % | ||||||||
(Amounts in thousands) | 2011 % of Sales | 2010 % of Sales | 2009 % of Sales | ||||||||||||||||||
Business Unit Income: | 2011 | 2010 | 2009 | ||||||||||||||||||
North American Delivery | $ | 877,867 | $ | 841,429 | $ | 786,723 | 8.7 | % | 8.5 | % | 8.2 | % | |||||||||
North American Retail | 804,396 | 770,122 | 774,529 | 8.3 | % | 8.1 | % | 8.3 | % | ||||||||||||
International Operations | 97,993 | 166,606 | 122,028 | 1.8 | % | 3.2 | % | 2.3 | % | ||||||||||||
Business unit income | $ | 1,780,256 | $ | 1,778,157 | $ | 1,683,280 | 7.1 | % | 7.2 | % | 6.9 | % | |||||||||
Store Activity | Stores Open at Beginning of Period | Stores Acquired | Stores Opened | Stores Closed | Stores Open at End of Period | ||||||||||||
2010 | North American Retail | 1,871 | — | 41 | 12 | 1,900 | |||||||||||
2010 | International Operations | 372 | 9 | 12 | 12 | 381 | |||||||||||
2010 | Total | 2,243 | 9 | 53 | 24 | 2,281 | |||||||||||
2011 | North American Retail | 1,900 | — | 31 | 14 | 1,917 | |||||||||||
2011 | International Operations | 381 | — | 6 | 9 | 378 | |||||||||||
2011 | Total | 2,281 | — | 37 | 23 | 2,295 | |||||||||||
North American Delivery
2011 Compared with 2010
Sales increased 2.1% for 2011 compared to 2010. This increase was driven by organic sales growth, our fourth quarter 2010 Print South acquisition and, to a lesser extent, the positive impact of foreign exchange rates of $28.6 million. Our sales growth was favorably impacted by an increase in facilities and breakroom supplies, promotional products and technology products. This growth was partially offset by softness in paper and copier and fax cartridges.
Business unit income as a percentage of sales increased to 8.7% for 2011 from 8.5% for 2010, primarily driven by improved profitability in our facilities and breakroom and promotional products businesses in the U.S. and in our delivery businesses in Canada, as well as overall reduced incentive compensation. This was partially offset by investments in labor to support growth initiatives, investments in website development and other information systems and higher fuel costs.
2010 Compared with 2009
Sales increased 2.2% for 2010 compared to 2009. This increase was driven by our customer acquisition and retention efforts. This was most notable in our Contract businesses, which experienced growth primarily in our promotional products and printing businesses. To a lesser extent, our sales growth was positively impacted by foreign exchange rates of $65.0 million. These increases were partially offset by lower sales to existing customers.
Business unit income as a percentage of sales increased to 8.5% for 2010 from 8.2% for 2009, primarily driven by a strong performance in our Contract business. For total North American Delivery, the increase in business unit income as a percentage of sales was driven primarily by improved product margins and, to a lesser extent, reduced amortization expense, partially offset by investments in marketing and pricing to support growth initiatives.
B-5
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
North American Retail
2011 Compared with 2010
Sales increased 1.4% for 2011 compared to 2010. This increase was the result of non-comparable sales for new stores opened in the past twelve months and the positive impact of foreign exchange rates of $70.3 million. Comparable store sales were flat this year, reflecting a decrease in customer traffic, offset by an increase in average order size. Comparable store sales reflect positive performance in laptops, tablets and e-readers, offset by a softness in digital cameras, computer media and software.
Business unit income as a percentage of sales increased to 8.3% for 2011 from 8.1% for 2010, primarily reflecting improved product margins and reduced rent and occupancy costs, partially offset by investments in marketing and labor to drive new initiatives.
2010 Compared with 2009
Sales increased 1.8% for 2010 compared to 2009. This increase was driven by the positive impact of foreign exchange rates of $175.9 million and, to a lesser extent, non-comparable sales for stores opened in the past twelve months, offset by a 1% decrease in comparable store sales reflecting lower average order size and promotional activities conducted to offset the impact of inclement weather late in the fourth quarter. Our comparable store sales decrease for 2010 reflects a decline in durable products, driven by computer accessories and business machines, partially offset by a slight increase in consumables. The slight increase in consumables reflects positive performance in our service offerings.
Business unit income as a percentage of sales decreased to 8.1% for 2010 from 8.3% for 2009. The slight decrease in business unit income as a percentage of sales for 2010 primarily reflects investments in labor and deleverage of fixed overhead costs. This was partially offset by lower depreciation and marketing expenses.
International Operations
2011 Compared with 2010
Sales increased 2.7% for 2011 compared to 2010. This increase was driven by the positive impact of foreign exchange rates of $321.0 million and, to a lesser extent, a full year of sales from our second quarter 2010 acquisition of Oy Lindell AB ("Oy Lindell"), an office products distributor based in Finland. These increases were partially offset by a 9% decrease in comparable store sales in Europe and decreased sales in our European Printing Systems and Australian businesses.
Business unit income as a percentage of sales decreased to 1.8% for 2011 from 3.2% for 2010. The decrease for 2011 reflects deleverage in fixed costs and expenses associated with our system investments in Australia, and deleverage in fixed costs in our European retail businesses.
2010 Compared with 2009
Sales decreased 2.0% for 2010 compared to 2009. This decrease was driven by a 6% decrease in comparable store sales in Europe and, to a lesser extent, lower sales in our European Printing Systems business and the negative impact of foreign exchange rates of $18.7 million, partially offset by sales growth in our European delivery and South American businesses.
Business unit income as a percentage of sales increased to 3.2% for 2010 from 2.3% for 2009. The increase for 2010 reflects improvement in supply chain costs in our European delivery businesses, reduced amortization expense, reduced retirement expenses and the release of a foreign capital duty reserve due to the lapse in the statute of limitations. These increases were partially offset by deleverage in rent and labor costs in our European retail businesses.
Critical Accounting Policies and Significant Estimates
Our financial statements have been prepared in accordance with U.S. GAAP and are based on the application of significant accounting policies (see Note A in the Notes to the Consolidated Financial Statements). Preparation of these statements requires management to make significant judgments and estimates. We believe that the following are some of the more critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations.
Inventory: We record inventory at the lower of weighted-average cost or market value. We reserve for obsolete, overstocked and inactive inventory based on the difference between the weighted-average cost of the inventory and the estimated market value using assumptions of future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional reserves may be required.
Based on historical experience, we do not believe these estimates and assumptions will have a material impact upon the financial statements. Past experience has shown little variability in reserve estimates. Over the past three years, our inventory
B-6
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
write-offs have been within a range that has averaged approximately a 5% difference from our additions to inventory reserves.
Purchase and Advertising Rebates: We earn rebates from our vendors, which are based on various quantitative contract terms that can be complex and subject to interpretation. Amounts expected to be received from vendors relating to the purchase of merchandise inventories and reimbursement of incremental costs, such as advertising, are recognized as a reduction of inventory cost and realized as part of cost of goods sold as the merchandise is sold. Several controls are in place, including direct confirmation with vendors, which we believe allows us to ensure that these amounts are recorded in accordance with the terms of the contracts.
Past experience has shown little variability in purchase and advertising rebate estimates, no collectability issues and no significant write-off history. Given the historical accuracy of our estimates, we believe that a significant change in our estimates is not likely.
Impairment of Long-Lived Assets: We evaluate long-lived assets held for use for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is measured based upon the estimated undiscounted cash flows expected to be generated from the use of an asset plus any net proceeds expected to be realized upon its eventual disposition. An impairment loss is recognized if an asset's carrying value is not recoverable and if it exceeds its fair value. Our policy is to evaluate long-lived assets for impairment at a store level for retail operations and at an operating unit level for Staples' other operations. Our undiscounted cash flow projections are based on historical cash flows and our latest forecasts. These projections and our estimates regarding proceeds to be received upon an asset's disposition reflect numerous assumptions and a significant degree of judgment on the part of management. If actual results are less favorable than management's projections, future write-offs may be necessary.
We believe our operating results at the store level for retail operations and at the operating unit level for our other operations would need to be significantly less favorable than projected to result in a material impairment. Our projected future cash flows are sufficient to recover the carrying values of the underlying assets, with the exception of a limited number of retail stores in new markets or challenging markets where short and long-term initiatives are underway to improve current cash flows. However, based upon our historical experience with operations in such markets, we believe that a significant change in our projections is not likely. In addition, if there was an impairment of these store assets, it would not have a material effect on the Company's consolidated financial results.
Impairment of Goodwill: We review goodwill for impairment annually, in the fourth quarter, and when events or changes in circumstances indicate that the carrying value of goodwill might exceed its current fair value. We determine fair value using discounted cash flow analysis, which requires significant management assumptions and estimates regarding industry economic factors and the future profitability of our businesses. It is our policy to allocate goodwill and conduct impairment testing at a reporting unit level based on our most current business plans, which reflect changes we anticipate in the economy and the industry. We established, and continue to evaluate, our reporting units based on our internal reporting structure and generally define such reporting units at our operating segment level or one level below. The key assumptions used in the discounted cash flow approach include:
• | The reporting unit's projections of financial results, which range from four to nine years depending on the maturity of the underlying business. For established businesses in North America and Australia, we use a four year model, while in Europe we predominantly use a six year model that reflects the changes we are making in the business to capture new segments in the market and improve profitability. In the emerging markets, we use a nine year model, which is based on our long-range plans at constant foreign exchange rates. The nine year period reflects management's expectations of the development time for emerging markets. In general, our reporting units' fair values are most sensitive to our sales growth and operating profit rate assumptions, which represent estimates based on our current and projected sales mix, profit improvement opportunities and market conditions. If the business climate deteriorates, or if we fail to manage acquired companies successfully, then actual results may not be consistent with these assumptions and estimates, and our goodwill may become impaired. |
• | The projected terminal value for each reporting unit represents the present value of projected cash flows beyond the last period in the discounted cash flow analysis. The terminal values are most sensitive to our assumptions regarding long-term growth rates, which are based on several factors including local and macroeconomic variables, the market opportunity, and future growth plans. While we believe our long-term growth assumptions are reasonable in relation to these factors and our historical results, actual growth rates may be lower than our assumptions due to a variety of potential causes, such as a secular decline in demand for our products and services, unforeseen competition, long-term GDP growth rates in established economies being lower than historical growth rates, or a long-term deceleration in the growth rates of emerging markets. |
B-7
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
• | The discount rate, which is used to measure the present value of the projected future cash flows, is set using a weighted-average cost of capital method that considers market and industry data as well as our specific risk factors that are likely to be considered by a market participant. The weighted-average cost of capital is our estimate of the overall after-tax rate of return required by equity and debt holders of a business enterprise. The reporting units' weighted-average costs of capital in future periods may be impacted by adverse changes in market and economic conditions, including risk-free interest rates, and are subject to change based on the facts and circumstances that exist at the time of the valuation, which may increase the possibility of a potential future impairment charge. |
To validate the reasonableness of our reporting units' estimated fair values, we reconcile the aggregate fair values of our reporting units to our total market capitalization.
Volatility in the current macroeconomic environment has influenced our assumptions and estimates, with the result that the fair values of most of our reporting units declined from the prior year. Despite these declines, all of our reporting units passed the step one impairment test under ASC 350, Intangibles - Goodwill and Other, as of January 28, 2012. However, for our European Retail reporting unit, which represented approximately 8% (approximately $315 million) of our goodwill balance at January 28, 2012, the fair value was less than 10% greater than the carrying value of the related reporting unit. Given the historical performance of our European Retail reporting unit, we believe that our projections are reasonable. We will, however, continue to monitor the performance of our European Retail reporting unit in light of the current macroeconomic environment. Despite this increased focus, our expectations for the business remain strong and at this time we do not believe there will be a significant change in our estimates or assumptions that would give rise to a material impairment.
We also have reporting units in China and South America, emerging market economies which are inherently more volatile compared with more mature regions such as North America or Europe. While the fair value of these reporting units substantially exceeded their carrying values, our impairment analysis for these reporting units requires a greater degree of judgment and the risk associated with our impairment test conclusions is therefore higher. Despite the increased risk, we do not believe there will be a significant change in our estimates or assumptions that would lead to a material impairment charge.
The fair values of all of our reporting units are based on underlying assumptions that represent our best estimate. Many of the factors used in assessing fair value are outside of the control of management and if actual results are not consistent with our assumptions and judgments, we could be exposed to an impairment charge.
Pension Benefits: Our pension costs and obligations are dependent on various assumptions. Our major assumptions relate primarily to expected long-term rates of return on plan assets, discount rates and inflation. In estimating the expected return on plan assets, we take into account the historical performance for the major asset classes held, or anticipated to be held, by the applicable pension funds and current forecasts of future rates of return for those asset classes. We base the discount rate on the interest rate on high quality (AA rated) corporate bonds that have a maturity approximating the term of the related obligations. We also make assumptions regarding employee demographic factors such as retirement patterns, mortality, turnover and the rate of compensation increases.
Based on our analysis of the financial impact of pension obligation assumptions and estimates, we do not believe these assumptions and estimates will have a material impact on our financial statements. The effect on pension obligations at January 28, 2012 of a change in discount rate and other assumptions is included in Note K of the Notes to the Consolidated Financial Statements.
Income Taxes: The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which may result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reported date. For those tax positions for which it is more likely than not that a tax benefit will be sustained, we record the largest amount of tax benefit likely of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. Interest is accrued, where applicable. We recognize net tax-related interest and penalties in income tax expense. If we do not believe that it is more likely than not that a tax benefit will be sustained, no tax benefit is recognized. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities due to closure of income tax examinations, new regulatory or judicial pronouncements, or other relevant events. As a result, our effective tax rate may fluctuate significantly on a quarterly and annual basis.
We record deferred income tax assets for timing differences related to tax payments. We record a valuation allowance to reduce our deferred income tax assets to the amount that is more likely than not to be realized. We have considered estimated future taxable income and ongoing tax planning strategies in assessing the amount needed for the valuation allowance. If actual results differ unfavorably from those estimates used, we may not be able to realize all or part of our net deferred tax assets and additional valuation allowances may be required.
B-8
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Historically, settlements related to our unrecognized tax benefits, as described in Note I in the Notes to the Consolidated Financial Statements, have been minimal. In addition, we have historically had minimal changes in our valuation allowances related to deferred assets.
New Accounting Pronouncements
In October 2009, a pronouncement was issued that amended the rules on revenue recognition for multiple-deliverable revenue arrangements. This amendment eliminated the residual method of allocation for multiple-deliverable revenue arrangements, and requires that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method (Accounting Standards Codification (“ASC”) Topic 605). This pronouncement establishes a selling price hierarchy for determining the selling price of a deliverable, which includes: (1) vendor-specific objective evidence if available, (2) third-party evidence if vendor-specific objective evidence is not available, and (3) estimated selling price if neither vendor-specific nor third-party evidence is available. In addition, this pronouncement expands the disclosure requirements related to a vendor’s multiple-deliverable revenue arrangements. This pronouncement is effective for revenue arrangements entered into or materially modified in fiscal years beginning after June 15, 2010. We adopted this pronouncement as of January 30, 2011, on a prospective basis. The impact of adopting this new accounting standard was not material to our financial statements in 2011, and if it were applied in the same manner to fiscal 2010, it would not have had a material impact on revenue for 2010. We do not expect the adoption of this new accounting standard to have a significant impact on the timing and pattern of revenue recognition in the future due to the limited number of multiple element arrangements.
In December 2010, a pronouncement was issued that modified the process used to test goodwill for impairment. The pronouncement impacted reporting units with zero or negative carrying amounts and required an additional test to be performed to determine whether goodwill has been impaired and to calculate the amount of that impairment. This amendment is effective for fiscal years beginning after December 15, 2010. We adopted this pronouncement as of January 30, 2011. Since none of our reporting units had zero or negative carrying amounts, this pronouncement had no impact on the Company's financial position and results of operations in 2011.
In May 2011, a pronouncement was issued providing consistent definitions and disclosure requirements of fair value with respect to U.S. GAAP and International Financial Reporting Standards. The pronouncement changed certain fair value measurement principles and enhanced the disclosure requirements, particularly for Level 3 measurements. The pronouncement is effective for fiscal years beginning after December 15, 2011 and is to be applied prospectively. We are currently evaluating the potential impact, if any, the adoption of this pronouncement will have on our consolidated financial condition, results of operations or cash flows.
In June 2011, a pronouncement was issued that amended the guidance allowing the presentation of comprehensive income and its components in the statement of changes in equity. The pronouncement provides the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Furthermore, regardless of the presentation methodology elected, the issuer will be required to present on the face of the financial statements a reclassification adjustment for items that are reclassified from other comprehensive income to net income. The methodology for the computation and presentation of earnings per share remains the same. The pronouncement is effective for fiscal years beginning after December 15, 2011 and is to be applied retrospectively. As this pronouncement relates to disclosure only, the adoption will not have a material impact on our consolidated financial condition, results of operations or cash flows.
In September 2011, a pronouncement was issued that amended the guidance for goodwill impairment testing. The pronouncement allows the entity to perform an initial qualitative assessment to determine whether it is "more likely than not" that the fair value of the reporting unit is less than its carrying amount. This assessment is used as a basis for determining whether it is necessary to perform the two step goodwill impairment test. The methodology for how goodwill is calculated, assigned to reporting units and the application of the two step goodwill impairment test have not been revised. The pronouncement is effective for fiscal years beginning after December 15, 2011. We do not expect the adoption of this new accounting standard to have a significant impact on our consolidated financial position, results of operations or cash flows.
In December 2011, a pronouncement was issued that amended the guidance related to the disclosure of recognized financial instruments and derivative instruments that are either offset on the balance sheet or subject to an enforceable master netting arrangement or similar agreement. The amended provisions are effective for fiscal years beginning on or after January 1, 2013, and are required to be applied retrospectively for all prior periods presented. As this pronouncement relates to disclosure only, the adoption of this amendment will not have a material effect on our consolidated financial position, results of operations or cash flows.
B-9
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources
Cash Flows
2011 Compared to 2010
Cash provided by operations was $1.58 billion for 2011 compared to $1.45 billion for 2010. The increase in operating cash flow from 2010 to 2011 was primarily due to an increase in net income adjusted for non-cash expenses in 2011, and to a lesser extent from changes in working capital including the impact of deferred taxes.
Cash used in investing activities was $383.7 million for 2011 compared to $472.0 million for 2010. The decrease in cash used in investing activities from 2010 to 2011 was primarily due to the 2010 acquisition of Oy Lindell, a Finnish office products distributor, combined with a small decrease in capital expenditures during 2011, driven by a reduction in spending on new stores and store remodels activities and lower spending related to facility and system integration.
Cash used in financing activities was $1.36 billion for 2011 compared to $938.4 million for 2010. The increase in cash used in financing activities from 2010 to 2011 is primarily related to the $500 million repayment of the April 2011 Notes and increased purchases under our share repurchase program, offset by the prior year purchase of additional shares of Corporate Express Australia Limited ("Corporate Express Australia"). During 2011, we repurchased 37.3 million shares for $604.5 million compared to 18.0 million shares for $367.4 million during 2010 under our share repurchase program.
2010 Compared to 2009
Cash provided by operations was $1.45 billion for 2010 compared to $2.08 billion for 2009. The decrease in operating cash flow from 2009 to 2010 is primarily due to changes in working capital, offset by an increase in net income adjusted for non-cash expenses. The most significant changes in working capital relate to income taxes and inventory, where we derived material benefits in 2009 as a result of the acquisition of Corporate Express, which did not recur in 2010.
Cash used in investing activities was $472.0 million for 2010 compared to $313.2 million for 2009. The increase from 2009 to 2010 is primarily due to an increase in capital expenditures in 2010, driven by investments in facility and systems integration activities and the acquisition of Oy Lindell, an office products distributor based in Finland for €31 million (approximately $39 million based on foreign exchange rates on the acquisition date).
Cash used in financing activities was $938.4 million for 2010 compared to $1.04 billion for 2009. The change in cash from financing activities from 2009 to 2010 is due to the 2009 repayments and refinancing of the debt we entered into or assumed in connection with the Corporate Express acquisition, offset by the 2010 purchase of additional shares of Corporate Express Australia and the resumption of our share repurchase program during 2010. During 2010, we repurchased 18.0 million shares for $367.4 million under our share repurchase program. During 2009, our financing activities primarily consisted of repayments made on our Commercial Paper Program and the termination of our $3.0 billion credit agreement, which we entered into on April 1, 2008 (the "2008 Agreement") offset by the proceeds from the April 2011 Notes (each as defined below).
Sources of Liquidity
To cover seasonal fluctuations in cash flows and to support our various growth initiatives, we utilize cash generated from operations and borrowings available under our credit agreement with Bank of America, N.A. and other lenders (as defined below), which provides for a maximum borrowing of $1.0 billion. We also have various other lines of credit under which we may borrow a maximum of $373.1 million. At January 28, 2012, we had $2.5 billion in total cash and funds available, which consisted of $1.20 billion of available credit and $1.26 billion of cash and cash equivalents. Of the $1.26 billion of cash and cash equivalents, approximately $805 million is held in jurisdictions outside of the United States. While there could be tax consequences if such amounts were moved out of these jurisdictions or repatriated to the United States, we currently intend to use most of the cash and cash equivalents held outside of the United States to finance the current operations of our foreign subsidiaries and their growth initiatives. The determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable because of the complexities associated with its hypothetical calculation.
Off-Balance Sheet Financing Arrangements
We do not have any off-balance sheet financing arrangements as of January 28, 2012, nor did we utilize any during 2011.
B-10
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Contractual Obligations and Commercial Commitments
A summary, as of January 28, 2012, of balances available under our credit agreements and contractual obligations is presented below (amounts in thousands):
Payments Due By Period | ||||||||||||||||||||||||
Contractual Obligations and Commercial Commitments (1)(2) | Available Credit | Total Outstanding Obligations | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | ||||||||||||||||||
October 2012 Notes | — | 332,617 | 332,617 | — | — | — | ||||||||||||||||||
January 2014 Notes | — | 1,525,003 | — | 1,525,003 | — | — | ||||||||||||||||||
November 2014 Revolving Credit Facility | 1,000,000 | — | — | — | — | — | ||||||||||||||||||
Lines of credit | 202,311 | 170,745 | 101,540 | 69,205 | — | — | ||||||||||||||||||
Other notes and capital leases | — | 9,815 | 4,986 | 3,392 | 732 | 705 | ||||||||||||||||||
Total | $ | 1,202,311 | $ | 2,038,180 | $ | 439,143 | $ | 1,597,600 | $ | 732 | $ | 705 | ||||||||||||
Interest expense | — | $ | 304,383 | $ | 164,227 | $ | 140,156 | $ | — | $ | — | |||||||||||||
Operating leases (3) | — | $ | 4,586,634 | $ | 867,147 | $ | 1,438,537 | $ | 1,011,877 | $ | 1,269,073 | |||||||||||||
Purchase obligations (4) | — | $ | 488,921 | $ | 369,143 | $ | 49,588 | $ | 18,755 | $ | 51,435 | |||||||||||||
(1) | As of January 28, 2012, we had gross unrecognized tax benefits of $250.4 million, all of which, if recorded, would impact our tax rate and an additional $32.7 million for gross accrued interest and penalties (see Note I in the Notes to the Consolidated Financial Statements). At this time, we are unable to make a reasonable estimate of the timing of payments in connection with these tax liabilities; therefore, such amounts are not included in the contractual obligation table above. |
(2) | The above table excludes expected future contributions to our pension and post-retirement benefit plans. See Note K in the Notes to the Consolidated Financial Statements for future details about these future contributions. |
(3) | The operating lease payments reported above do not include common area maintenance or real estate taxes, which are expected to approximate 25% to 28% of the related operating lease payments. Utility costs related to leased facilities have also been excluded from this table because the payments do not represent contractual obligations until the services have been provided. |
(4) | Many of our purchase commitments may be canceled by us without advance notice or payment, and we have excluded such commitments, along with intercompany commitments. Contracts that may be terminated by us without cause or penalty but require advance notice for termination are valued on the basis of an estimate of what we would owe under the contract upon providing notice of termination. |
April 2011 Notes: We repaid in full the $500 million, 7.75% notes (the "April 2011 Notes") on the maturity date, April 1, 2011. We originally entered into the April 2011 Notes on March 27, 2009.
October 2012 Notes: On September 30, 2002, we issued $325 million aggregate principal amount of notes due October 1, 2012 (the "October 2012 Notes"), with a fixed interest rate of 7.375% payable semi-annually on April 1 and October 1 of each year commencing on April 1, 2003. In January 2003, we entered into an interest rate swap agreement to turn the October 2012 Notes into variable rate obligations and the swap agreement was subsequently terminated in September 2011 (see Note F to the Notes to the Consolidated Financial Statements). Our obligations under the October 2012 Notes are unconditionally guaranteed on an unsecured, unsubordinated basis by Staples the Office Superstore LLC, Staples the Office Superstore, East Inc., Staples Contract and Commercial, Inc. and Staples the Office Superstore Limited Partnership (collectively, the "Guarantor Subsidiaries").
January 2014 Notes: On January 15, 2009, we issued $1.5 billion aggregate principal amount of notes due January 15, 2014 (the "January 2014 Notes"), with a fixed interest rate of 9.75% payable semi-annually on January 15 and July 15 of each year commencing on July 15, 2009. From the sale of the January 2014 Notes, we received net proceeds, after the underwriting discount and estimated fees and expenses of $1.49 billion. In March 2010, we entered into an interest rate swap agreement to turn half of the January 2014 Notes into variable rate obligations, and the swap agreement was subsequently terminated in September 2011 (see Note F of the Notes to the Consolidated Financial Statements). Our obligations under the January 2014 Notes are unconditionally guaranteed on an unsecured, unsubordinated basis by the Guarantor Subsidiaries.
Revolving Credit Facility: On November 4, 2010, we entered into a new credit agreement (the "November 2014 Revolving Credit Facility") with Bank of America, N.A, as Administrative Agent and other lending institutions named therein. The November 2014 Revolving Credit Facility replaced the Amended and Restated Revolving Credit Agreement dated as of October 13, 2006,
B-11
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
as amended, which provided for a maximum borrowing of $750.0 million and was due to expire in October 2011 (the "Prior Revolving Credit Facility"). As of January 28, 2012, no borrowings were outstanding under the November 2014 Revolving Credit Agreement, resulting in $1.0 billion of availability under this agreement.
The November 2014 Revolving Credit Facility provides for a maximum borrowing of $1.0 billion which, pursuant to an accordion feature, may be increased to $1.5 billion upon our request and the agreement of the lenders participating in the increase. Borrowings made pursuant to the November 2014 Revolving Credit Facility may be syndicated loans, swing line loans, multicurrency loans, or letters of credit, the combined sum of which may not exceed the maximum borrowing amount. Borrowings made pursuant to the November 2014 Revolving Credit Facility will bear interest at various interest rates, depending on the type of borrowing, plus a percentage spread based on our credit rating and fixed charge coverage ratio. Under the November 2014 Revolving Credit Facility, we agree to pay a facility fee at rates that range from 0.15% to 0.35% per annum depending on our credit rating and fixed charge coverage ratio. Amounts borrowed under the November 2014 Revolving Credit Facility may be borrowed, repaid, and reborrowed from time to time until November 4, 2014.
The November 2014 Revolving Credit Facility is unsecured and ranks pari passu with our public notes and other indebtedness and contains customary affirmative and negative covenants for credit facilities of this type. The November 2014 Revolving Credit Facility also contains financial covenants that require us to maintain a minimum fixed charge coverage ratio and a maximum adjusted funded debt to total capitalization ratio. The borrowings under the November 2014 Revolving Credit Facility are unconditionally guaranteed on an unsecured, unsubordinated basis by the Guarantor Subsidiaries.
Commercial Paper Program: We have a commercial paper program ("Commercial Paper Program") that allows us to issue up to $1.0 billion of unsecured commercial paper notes ("Notes") from time to time. Our November 2014 Revolving Credit Facility serves as a backstop to the Commercial Paper Program. Under the Commercial Paper Program, we use the proceeds from the Notes for general purposes, including working capital, capital expenditures, acquisitions and share repurchases. Maturities of the Notes vary but may not exceed 397 days from the date of issue. The Notes bear such interest rates, if interest bearing, or will be sold at such discount from their face amounts, that we and the dealers under the Commercial Paper Program agree upon from time to time. The payments under the Commercial Paper Program are unconditionally guaranteed on an unsecured, unsubordinated basis by the Guarantor Subsidiaries. The Commercial Paper Program contains customary events of default with corresponding grace periods. On June 2, 2011, we resumed the issuance of Notes under the Commercial Paper Program. During 2011, we borrowed under our Commercial Paper Program to support our seasonal cash requirements and stock buyback programs. From June 2, 2011 through the end of commercial paper usage, the weighted-average amount outstanding under the Commercial Paper Program was $150.0 million, with a weighted-average interest rate of 0.3%. At the end of 2011, there were no outstanding borrowings under the Commercial Paper Program. The maximum amount outstanding under the Commercial Paper Program during 2011 was $345.0 million.
Other Lines of Credit: We had $373.1 million in borrowing capacity under various other lines of credit as of January 28, 2012 with an outstanding balance of $170.7 million, leaving $202.4 million of available credit at that date.
There were no instances of default during 2011 under any of our debt agreements.
We expect that our cash generated from operations, together with our current cash, funds available under our existing credit agreements and other alternative sources of financing, will be sufficient to fund our capital expenditures for at least the next twelve months.
Uses of Capital
As a result of our financial position, in addition to investing in our existing businesses and pursuing strategic acquisitions and partnerships, we also expect to continue to return capital to our shareholders through a cash dividend program and our share repurchase program. Depending on our credit metrics and our liquidity position, from time to time, we may repurchase our public notes in the open market or through privately negotiated transactions.
We do not expect material changes in capital spending in 2012. We expect the source of funds for our capital expenditures to come from operating cash flows. We are not planning on opening a significant number of new stores in 2012, but will instead focus on improving the productivity of existing stores.
While we have primarily grown organically, we may use capital to engage in strategic acquisitions or joint ventures in markets where we currently have a presence and in new geographic markets that could become significant to our business in future years. We do not expect to rely on acquisitions to achieve our targeted growth plans. We consider many types of acquisitions for their strategic and other benefits. In the past, excluding the Corporate Express acquisition, we have focused on smaller acquisitions designed to align with our existing businesses to drive long-term growth. We expect to continue this strategy and target such acquisitions when opportunities are presented and fit within our financial structure.
B-12
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
We paid quarterly dividends of $0.10 per share on April 14, 2011, July 14, 2011, October 13, 2011 and January 12, 2012, resulting in a total dividend payment for 2011 of $277.9 million or $0.40 per share. We paid quarterly dividends of $0.09 per share on April 15, 2010, July 15, 2010, October 24, 2010 and January 13, 2011, resulting in a total dividend payment for 2010 of $258.7 million or $0.36 per share. While it is our intention to continue to pay quarterly cash dividends for 2012 and beyond, any decision to pay future cash dividends will be made by our Board of Directors and will depend upon our earnings, financial condition and other factors.
From time to time, we repurchase our common stock pursuant to programs approved by our Board of Directors. We spent a total of $604.5 million and $367.4 million on share repurchases during fiscal years 2011 and 2010, respectively. There were no repurchases during fiscal year 2009. On September 13, 2011, we announced a new repurchase program had been approved by the Board of Directors (the "2011 Repurchase Plan"). Under this plan, we are authorized to repurchase up to $1.5 billion of common stock in both open market and privately negotiated transactions. The 2011 Repurchase Plan has no expiration date and may be suspended or discontinued at any time. As of January 28, 2012, we have spent a total of $182.5 million to repurchase 12.6 million shares under the 2011 Repurchase Plan, and therefore, the remaining repurchase authorization was $1.3 billion as of that date. We consider several factors in determining whether and when to execute share repurchases, including our current and projected operating results, capital expenditure requirements, acquisitions or other strategic initiatives, our capacity leverage and cost of borrowings and the market price of our common stock.
Inflation and Seasonality
While neither inflation nor deflation has had, nor do we expect them to have, a material impact upon operating results, there can be no assurance that our business will not be affected by inflation or deflation in the future. We believe that our business is somewhat seasonal, with sales and profitability historically higher during the second half of our fiscal year due to the back-to-school, holiday and January back-to-business seasons.
Quantitative and Qualitative Disclosures about Market Risks
We are exposed to market risk from changes in interest rates and foreign exchange rates. We have a risk management control process to monitor our interest rate and foreign exchange risks. The risk management process uses analytical techniques, including market value, sensitivity analysis and value at risk estimates.
Interest Rate Risk
At January 28, 2012, we had variable rate debt obligations of approximately $180.6 million. While variable rate debt obligations expose us to the risk of rising interest rates, management does not believe that the potential exposure is material to our overall financial position or results of operations. Based on January 28, 2012 borrowing levels, a 1.0% increase or decrease in current market interest rates would have the effect of causing a $1.8 million additional pre-tax charge or credit to our statement of operations (see Note F to the Notes to the Consolidated Financial Statements). In certain instances we may use interest rate swap agreements to modify fixed rate obligations to variable rate obligations, thereby adjusting the interest rates to current market rates and ensuring that the debt instruments are always reflected at fair value. We had no interest rate swap agreements outstanding as of January 28, 2012.
Foreign Currency Risk
We are exposed to foreign exchange risks through our business operations and investments in subsidiaries in Canada, Europe, Australia, South America and Asia. The currencies for which we have the most significant exposure to exchange rate fluctuations include the Canadian Dollar, the Euro, the British Pound Sterling and the Australian Dollar.
Revenue and expense transactions in our foreign subsidiaries are primarily denominated in the respective local currencies. The income statements of our international operations are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency-denominated transactions results in increased revenues and operating expenses for our international operations. Similarly, our revenues and operating expenses will decrease for our international operations when the U.S. dollar strengthens against foreign currencies. While the matching of local currency revenues and local currency expenses provides in effect a natural hedge, such matching does not completely reduce the foreign currency exchange rate exposure. Revenues from our foreign operations accounted for approximately 33% of consolidated revenues in 2011.
The conversion of our foreign subsidiaries' financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other comprehensive income (loss) in stockholders' equity. In 2011, we recorded consolidated foreign currency translation losses of approximately $192.0 million. In addition, certain of our foreign subsidiaries have assets
B-13
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
and liabilities that are denominated in currencies other than the relevant entity's functional currency. Changes in the functional currency value of these assets and liabilities will result in a transaction gain or loss. In 2011, we recorded foreign currency transaction gains of approximately $0.5 million, which are recorded in “Other (expense) income” in our consolidated statement of income.
Our international business is subject to risks, including, but not limited to differing economic conditions, changes in political climate, differing tax structures, and other regulations and restrictions, all of which may influence foreign currency exchange rate volatility. Accordingly, our future results could be materially adversely impacted by changes in these or other factors. As exchange rates vary, our international financial results may vary from expectations and adversely impact our overall operating results.
In accordance with our risk management policies, we use derivative instruments on a limited basis to hedge our foreign currency exposures (see Note F to the Notes to the Consolidated Financial Statements). As of January 28, 2012 we have entered into currency swaps in Canadian dollars in order to hedge a portion of our foreign exchange risk related to our net investment in foreign subsidiaries and to hedge certain intercompany loans. Any increase or decrease in the fair value of our currency exchange rate sensitive derivative instruments would be offset by a corresponding decrease or increase in the fair value of the hedged underlying asset.
B-14
Item 8 | APPENDIX C | |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||
C-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Staples, Inc.
We have audited the accompanying consolidated balance sheets of Staples, Inc. and subsidiaries as of January 28, 2012 and January 29, 2011, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended January 28, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15(a) 2. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Staples, Inc. and subsidiaries at January 28, 2012 and January 29, 2011, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 28, 2012, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Staples, Inc.'s internal control over financial reporting as of January 28, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 29, 2012 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP | |
Boston, Massachusetts | |
February 29, 2012 | |
C-2
STAPLES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollar Amounts in Thousands, Except Share Data)
January 28, 2012 | January 29, 2011 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,264,149 | $ | 1,461,257 | ||||
Receivables, net | 2,033,680 | 1,970,483 | ||||||
Merchandise inventories, net | 2,431,845 | 2,359,173 | ||||||
Deferred income tax assets | 305,611 | 295,232 | ||||||
Prepaid expenses and other current assets | 255,535 | 382,022 | ||||||
Total current assets | 6,290,820 | 6,468,167 | ||||||
Property and equipment: | ||||||||
Land and buildings | 1,034,983 | 1,064,981 | ||||||
Leasehold improvements | 1,330,373 | 1,328,397 | ||||||
Equipment | 2,462,351 | 2,287,505 | ||||||
Furniture and fixtures | 1,084,358 | 1,032,502 | ||||||
Total property and equipment | 5,912,065 | 5,713,385 | ||||||
Less: accumulated depreciation and amortization | 3,831,704 | 3,565,614 | ||||||
Net property and equipment | 2,080,361 | 2,147,771 | ||||||
Intangible assets, net of accumulated amortization | 449,781 | 522,722 | ||||||
Goodwill | 3,982,130 | 4,073,162 | ||||||
Other assets | 627,530 | 699,845 | ||||||
Total assets | $ | 13,430,622 | $ | 13,911,667 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 2,220,414 | $ | 2,208,386 | ||||
Accrued expenses and other current liabilities | 1,414,721 | 1,497,851 | ||||||
Debt maturing within one year | 439,143 | 587,356 | ||||||
Total current liabilities | 4,074,278 | 4,293,593 | ||||||
Long-term debt | 1,599,037 | 2,014,407 | ||||||
Other long-term obligations | 735,094 | 652,486 | ||||||
Stockholders’ equity: | ||||||||
Preferred stock, $.01 par value, 5,000,000 shares authorized; no shares issued | — | — | ||||||
Common stock, $.0006 par value, 2,100,000,000 shares authorized; issued 922,126,579 shares at January 28, 2012 and 908,449,980 shares at January 29, 2011 | 553 | 545 | ||||||
Additional paid-in capital | 4,551,299 | 4,334,735 | ||||||
Accumulated other comprehensive loss | (319,743 | ) | (96,933 | ) | ||||
Retained earnings | 7,199,060 | 6,492,340 | ||||||
Less: Treasury stock at cost, 226,383,032 shares at January 28, 2012 and 187,536,869 shares at January 29, 2011 | (4,416,018 | ) | (3,786,977 | ) | ||||
Total Staples, Inc. stockholders’ equity | 7,015,151 | 6,943,710 | ||||||
Noncontrolling interests | 7,062 | 7,471 | ||||||
Total stockholders’ equity | 7,022,213 | 6,951,181 | ||||||
Total liabilities and stockholders’ equity | $ | 13,430,622 | $ | 13,911,667 | ||||
See notes to consolidated financial statements.
C-3
STAPLES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollar Amounts in Thousands, Except Share Data)
Fiscal Year Ended | ||||||||||||
January 28, 2012 | January 29, 2011 | January 30, 2010 | ||||||||||
Sales | $ | 25,022,192 | $ | 24,545,113 | $ | 24,275,451 | ||||||
Cost of goods sold and occupancy costs | 18,280,364 | 17,938,958 | 17,801,548 | |||||||||
Gross profit | 6,741,828 | 6,606,155 | 6,473,903 | |||||||||
Operating and other expenses: | ||||||||||||
Selling, general and administrative | 5,048,492 | 4,913,188 | 4,907,236 | |||||||||
Amortization of intangibles | 64,902 | 61,689 | 100,078 | |||||||||
Integration and restructuring costs | — | 57,765 | 84,244 | |||||||||
Total operating and other expenses | 5,113,394 | 5,032,642 | 5,091,558 | |||||||||
Operating income | 1,628,434 | 1,573,513 | 1,382,345 | |||||||||
Other (expense) income: | ||||||||||||
Interest income | 7,577 | 7,722 | 6,117 | |||||||||
Interest expense | (173,751 | ) | (214,824 | ) | (237,025 | ) | ||||||
Other (expense) income | (3,119 | ) | (9,816 | ) | 4,457 | |||||||
Consolidated income before income taxes | 1,459,141 | 1,356,595 | 1,155,894 | |||||||||
Income tax expense | 475,308 | 468,026 | 398,783 | |||||||||
Consolidated net income | 983,833 | 888,569 | 757,111 | |||||||||
(Loss) income attributed to the noncontrolling interests | (823 | ) | 6,621 | 18,440 | ||||||||
Net income attributed to Staples, Inc. | $ | 984,656 | $ | 881,948 | $ | 738,671 | ||||||
Earnings Per Share: | ||||||||||||
Basic earnings per common share | $ | 1.42 | $ | 1.23 | $ | 1.04 | ||||||
Diluted earnings per common share | $ | 1.40 | $ | 1.21 | $ | 1.02 | ||||||
Dividends declared per common share | $ | 0.40 | $ | 0.36 | $ | 0.33 | ||||||
See notes to consolidated financial statements.
C-4
STAPLES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Dollar Amounts in Thousands)
For the Fiscal Years Ended January 28, 2012, January 29, 2011 and January 30, 2010
Equity Attributed to Staples, Inc. | ||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive (Loss) Income | Retained Earnings | Treasury Stock | Non- controlling Interests | Total Stockholders Equity | Comprehensive Income (Loss) | |||||||||||||||||||||||||
Balances at January 31, 2009 | $ | 529 | $ | 4,048,398 | $ | (494,327 | ) | $ | 5,367,341 | $ | (3,357,734 | ) | $ | 58,224 | $ | 5,622,431 | $ | — | ||||||||||||||
Issuance of common stock for stock options exercised | 8 | 114,339 | — | — | — | — | 114,347 | — | ||||||||||||||||||||||||
Tax benefit on exercise of options | — | 8,763 | — | — | — | — | 8,763 | — | ||||||||||||||||||||||||
Stock-based compensation | — | 174,691 | — | — | — | — | 174,691 | — | ||||||||||||||||||||||||
Sale of common stock under Employee Stock Purchase Plan and International Savings Plan | 1 | 36,610 | — | — | — | — | 36,611 | — | ||||||||||||||||||||||||
Net income for the year | — | — | — | 738,671 | — | 18,440 | 757,111 | 757,111 | ||||||||||||||||||||||||
Common stock dividend | — | — | — | (236,874 | ) | — | — | (236,874 | ) | |||||||||||||||||||||||
Foreign currency translation adjustments | — | — | 373,637 | — | — | 6,390 | 380,027 | 380,027 | ||||||||||||||||||||||||
Changes in the fair value of derivatives (net of taxes of $15,807) | — | — | (21,205 | ) | — | — | — | (21,205 | ) | (21,205 | ) | |||||||||||||||||||||
Deferred pension costs (net of taxes of $17,128) | — | — | 52,558 | — | — | — | 52,558 | 52,558 | ||||||||||||||||||||||||
Purchase of treasury shares | — | — | — | — | (30,661 | ) | — | (30,661 | ) | — | ||||||||||||||||||||||
Other | — | (2,859 | ) | — | — | — | — | (2,859 | ) | — | ||||||||||||||||||||||
Balances at January 30, 2010 | $ | 538 | $ | 4,379,942 | $ | (89,337 | ) | $ | 5,869,138 | $ | (3,388,395 | ) | $ | 83,054 | $ | 6,854,940 | $ | 1,168,491 | ||||||||||||||
Issuance of common stock for stock options exercised | 3 | 40,562 | — | — | — | — | 40,565 | — | ||||||||||||||||||||||||
Stock-based compensation | — | 146,879 | — | — | — | — | 146,879 | — | ||||||||||||||||||||||||
Sale of common stock under Employee Stock Purchase Plan and International Savings Plan | 4 | 44,860 | — | — | — | — | 44,864 | — | ||||||||||||||||||||||||
Net income for the year | — | — | — | 881,948 | — | 6,621 | 888,569 | 888,569 | ||||||||||||||||||||||||
Common stock dividend | — | — | — | (258,746 | ) | — | — | (258,746 | ) | — | ||||||||||||||||||||||
Foreign currency translation adjustments | — | — | 333 | — | — | 2,050 | 2,383 | 2,383 | ||||||||||||||||||||||||
Changes in the fair value of derivatives (net of taxes of $7,471) | — | — | (10,043 | ) | — | — | 574 | (9,469 | ) | (9,469 | ) | |||||||||||||||||||||
Deferred pension and other post-retirement benefit costs (net of taxes of $7,507) | — | — | 2,114 | — | — | — | 2,114 | 2,114 | ||||||||||||||||||||||||
Purchase of treasury shares | — | — | — | — | (398,582 | ) | — | (398,582 | ) | — | ||||||||||||||||||||||
Purchase of noncontrolling interest | — | (275,767 | ) | — | — | — | (84,828 | ) | (360,595 | ) | — | |||||||||||||||||||||
Other | — | (1,741 | ) | — | — | — | — | (1,741 | ) | — | ||||||||||||||||||||||
C-5
Balances at January 29, 2011 | $ | 545 | $ | 4,334,735 | $ | (96,933 | ) | $ | 6,492,340 | $ | (3,786,977 | ) | $ | 7,471 | $ | 6,951,181 | $ | 883,597 | ||||||||||||||
Issuance of common stock for stock options exercised | 3 | 25,886 | — | — | — | — | 25,889 | — | ||||||||||||||||||||||||
Tax benefit on exercise of options | — | 1,805 | — | — | — | — | 1,805 | — | ||||||||||||||||||||||||
Stock-based compensation | — | 151,822 | — | — | — | — | 151,822 | — | ||||||||||||||||||||||||
Sale of common stock under Employee Stock Purchase Plan and International Savings Plan | 5 | 47,972 | — | — | — | — | 47,977 | — | ||||||||||||||||||||||||
Net income for the year | — | — | — | 984,656 | — | (823 | ) | 983,833 | 983,833 | |||||||||||||||||||||||
Common stock dividend | — | — | — | (277,936 | ) | — | — | (277,936 | ) | — | ||||||||||||||||||||||
Foreign currency translation adjustments | — | — | (193,785 | ) | — | — | 1,813 | (191,972 | ) | (191,972 | ) | |||||||||||||||||||||
Changes in the fair value of derivatives (net of taxes of $1,399) | — | — | (1,505 | ) | — | — | — | (1,505 | ) | (1,505 | ) | |||||||||||||||||||||
Deferred pension and other post-retirement benefit costs (net of taxes of $902) | — | — | (27,520 | ) | — | — | — | (27,520 | ) | (27,520 | ) | |||||||||||||||||||||
Purchase of treasury shares | — | — | — | — | (629,041 | ) | — | (629,041 | ) | — | ||||||||||||||||||||||
Purchase of noncontrolling interest | — | (8,602 | ) | — | — | — | (1,398 | ) | (10,000 | ) | — | |||||||||||||||||||||
Other | — | (2,319 | ) | — | — | — | (1 | ) | (2,320 | ) | — | |||||||||||||||||||||
Balances at January 28, 2012 | $ | 553 | $ | 4,551,299 | $ | (319,743 | ) | $ | 7,199,060 | $ | (4,416,018 | ) | $ | 7,062 | $ | 7,022,213 | $ | 762,836 | ||||||||||||||
See notes to consolidated financial statements.
C-6
STAPLES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
Fiscal Year Ended | ||||||||||||
January 28, 2012 | January 29, 2011 | January 30, 2010 | ||||||||||
Operating Activities: | ||||||||||||
Consolidated net income, including (loss) income from the noncontrolling interests | $ | 983,833 | $ | 888,569 | $ | 757,111 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 482,056 | 498,863 | 552,441 | |||||||||
Stock-based compensation | 151,822 | 146,879 | 174,691 | |||||||||
Excess tax benefits from stock-based compensation arrangements | (1,805 | ) | — | (8,763 | ) | |||||||
Deferred income tax expense | 6,706 | 172,630 | (89,753 | ) | ||||||||
Other | 4,452 | 5,418 | (17,177 | ) | ||||||||
Changes in assets and liabilities: | ||||||||||||
(Increase) decrease in receivables | (73,670 | ) | (95,656 | ) | 129,137 | |||||||
(Increase) decrease in merchandise inventories | (82,343 | ) | (46,450 | ) | 244,600 | |||||||
Decrease (increase) in prepaid expenses and other assets | 123,660 | (70,600 | ) | 254,805 | ||||||||
Increase in accounts payable | 23,677 | 63,305 | 40,365 | |||||||||
(Decrease) increase in accrued expenses and other liabilities | (117,389 | ) | (191,917 | ) | 71,208 | |||||||
Increase (decrease) in other long-term obligations | 75,476 | 75,450 | (24,457 | ) | ||||||||
Net cash provided by operating activities | 1,576,475 | 1,446,491 | 2,084,208 | |||||||||
Investing activities: | ||||||||||||
Acquisition of property and equipment | (383,654 | ) | (408,889 | ) | (313,228 | ) | ||||||
Acquisition of businesses, net of cash acquired | — | (63,066 | ) | — | ||||||||
Net cash used in investing activities | (383,654 | ) | (471,955 | ) | (313,228 | ) | ||||||
Financing activities: | ||||||||||||
Proceeds from the exercise of stock options and the sale of stock under employee stock purchase plans | 73,866 | 85,429 | 150,958 | |||||||||
Repayments on issuance of commercial paper, net | — | — | (1,195,557 | ) | ||||||||
Proceeds from borrowings | 301,843 | 201,566 | 1,211,424 | |||||||||
Payments on borrowings, including payment of deferred financing fees | (820,631 | ) | (207,478 | ) | (945,333 | ) | ||||||
Purchase of noncontrolling interest | (10,000 | ) | (360,595 | ) | — | |||||||
Cash dividends paid | (277,936 | ) | (258,746 | ) | (236,874 | ) | ||||||
Excess tax benefits from stock-based compensation arrangements | 1,805 | — | 8,763 | |||||||||
Purchase of treasury stock, net | (629,041 | ) | (398,582 | ) | (30,661 | ) | ||||||
Net cash used in financing activities | (1,360,094 | ) | (938,406 | ) | (1,037,280 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | (29,835 | ) | 9,308 | 48,345 | ||||||||
Net (decrease) increase in cash and cash equivalents | (197,108 | ) | 45,438 | 782,045 | ||||||||
Cash and cash equivalents at beginning of period | 1,461,257 | 1,415,819 | 633,774 | |||||||||
Cash and cash equivalents at end of period | $ | 1,264,149 | $ | 1,461,257 | $ | 1,415,819 | ||||||
See notes to consolidated financial statements.
C-7
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A—Summary of Significant Accounting Policies
Nature of Operations: Staples, Inc. and subsidiaries ("Staples" or "the Company") pioneered the office products superstore concept and is the world's leading office products company. Staples has three reportable segments: North American Delivery, North American Retail and International Operations. The North American Delivery segment consists of the U.S. and Canadian businesses that sell and deliver office products and services directly to customers and businesses and includes Staples Advantage, Staples.com and Quill.com. The North American Retail segment consists of the U.S. and Canadian businesses that operate stores that sell office products and services. The International Operations segment consists of business units that operate stores and that sell and deliver office products and services directly to customers in 24 countries in Europe, Australia, South America and Asia.
Basis of Presentation: The consolidated financial statements include the accounts of Staples, Inc. and its wholly and majority owned subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation. The Company accounts for investments in businesses in which it owns between 20% and 50% of the voting interest using the equity method, if the Company has the ability to exercise significant influence over the investee company. Certain previously reported amounts have been reclassified to conform with the current period presentation.
Fiscal Year: Staples' fiscal year is the 52 or 53 weeks ending on the Saturday closest to January 31. Fiscal year 2011 ("2011") consisted of the 52 weeks ended January 28, 2012, fiscal year 2010 ("2010") consisted of the 52 weeks ended January 29, 2011 and fiscal year 2009 ("2009") consisted of the 52 weeks ended January 30, 2010.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires management of Staples to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash Equivalents: Staples considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Receivables: Receivables include trade receivables financed under regular commercial credit terms and other non-trade receivables. Gross trade receivables were $1.49 billion at January 28, 2012 and $1.47 billion at January 29, 2011. Concentrations of credit risk with respect to trade receivables are limited due to Staples' large number of customers and their dispersion across many industries and geographic regions.
An allowance for doubtful accounts has been recorded to reduce trade receivables to an amount expected to be collectible from customers based on specific evidence as well as historic trends. The allowance recorded at January 28, 2012 and January 29, 2011 was $46.0 million and $55.3 million, respectively.
Other non-trade receivables were $591.5 million at January 28, 2012 and $559.1 million at January 29, 2011 and consisted primarily of purchase and advertising rebates due from vendors under various incentive and promotional programs. Amounts expected to be received from vendors relating to the purchase of merchandise inventories and reimbursement of incremental costs, such as advertising, are recognized as a reduction of inventory cost and realized as part of cost of goods sold as the merchandise is sold.
Merchandise Inventories: Merchandise inventories are valued at the lower of weighted-average cost or market value. The Company reserves for obsolete, overstocked and inactive inventory based on the difference between the weighted-average cost of the inventory and the estimated market value using assumptions of future demand and market conditions.
Private Label Credit Card: Staples offers a private label credit card which is managed by a financial services company. Under the terms of the agreement, Staples is obligated to pay fees which approximate the financial institution's cost of processing and collecting the receivables, which are non-recourse to Staples.
Property and Equipment: Property and equipment are recorded at cost. Expenditures for normal maintenance and repairs are charged to expense as incurred. Depreciation and amortization, which includes the amortization of assets recorded under capital lease obligations, are provided using the straight-line method over the following useful lives: 40 years for buildings; 3-10 years for furniture and fixtures; and 3-10 years for equipment, which includes computer equipment and software with estimated useful lives of 3-7 years. Leasehold improvements are amortized over the shorter of the terms of the underlying leases or the estimated economic lives of the improvements.
Lease Acquisition Costs: Lease acquisition costs, which are included in other assets, are recorded at cost and amortized using the straight-line method over the respective lease terms, including option renewal periods if renewal of the lease is reasonably assured, which range from 5 to 40 years. Lease acquisition costs, net of accumulated amortization, at January 28, 2012 and
C-8
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
January 29, 2011 were $20.0 million and $22.6 million, respectively.
Goodwill and Intangible Assets: We review goodwill for impairment annually, in the fourth quarter, and when events or changes in circumstances indicate that the carrying value of goodwill might exceed its current fair value. We determine fair value using discounted cash flow analysis, which requires significant management assumptions and estimates regarding industry economic factors and the future profitability of our businesses. It is our policy to allocate goodwill and conduct impairment testing at a reporting unit level based on our most current business plans, which reflect changes we anticipate in the economy and the industry. We established, and continue to evaluate, our reporting units based on our internal reporting structure and generally define such reporting units at our operating segment level or one level below. The key assumptions used in the discounted cash flow approach include:
• | The reporting unit's projections of financial results which range from four to nine years depending on the maturity of the underlying business. For established businesses in North America and Australia, we use a four year model, while in Europe we predominantly use a six year model that reflects the changes we are making in the business to capture new segments in the market and improve profitability. In the emerging markets, we use a nine year model, which is based on our long-range plans at constant foreign exchange rates. The nine year period reflects management's expectations of the development time for emerging markets. |
• | The projected terminal value for each reporting unit, which represents the present value of projected cash flows beyond the last period in the discounted cash flow analysis. The terminal value reflects our assumptions related to long-term growth rates and profitability, which are based on several factors including local and macroeconomic variables, market opportunities, and future growth plans. |
• | The discount rate, which is used to measure the present value of the projected future cash flows, is set using a weighted-average cost of capital method that considers market and industry data as well as our specific risk factors that are likely to be considered by a market participant. The weighted-average cost of capital is our estimate of the overall after-tax rate of return required by equity and debt holders of a business enterprise. |
The changes in the carrying amounts of goodwill during the year ended January 28, 2012 are as follows (in thousands):
Goodwill at January 29, 2011 | 2011 Net Additions | 2011 Adjustments | 2011 Foreign Exchange Fluctuations | Goodwill at January 28, 2012 | ||||||||||||||||
North American Delivery | $ | 1,586,397 | $ | 1,776 | $ | (2,664 | ) | $ | — | $ | 1,585,509 | |||||||||
North American Retail | 289,400 | — | — | (321 | ) | 289,079 | ||||||||||||||
International Operations | 2,197,365 | — | (3,515 | ) | (86,308 | ) | 2,107,542 | |||||||||||||
Consolidated | $ | 4,073,162 | $ | 1,776 | $ | (6,179 | ) | $ | (86,629 | ) | $ | 3,982,130 | ||||||||
The Company's intangible assets are summarized below (in thousands):
Weighted Average Amortization Period | January 28, 2012 | January 29, 2011 | ||||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | |||||||||||||||||||||
Customer relationships | 12.3 years | $ | 678,608 | $ | (260,870 | ) | $ | 417,738 | $ | 689,861 | $ | (209,442 | ) | $ | 480,419 | |||||||||||
Tradenames | 8.1 years | 248,714 | (216,671 | ) | 32,043 | 251,765 | (209,462 | ) | 42,303 | |||||||||||||||||
Total | 11.9 years | $ | 927,322 | $ | (477,541 | ) | $ | 449,781 | $ | 941,626 | $ | (418,904 | ) | $ | 522,722 | |||||||||||
Estimated future amortization expense associated with the intangible assets at January 28, 2012 is as follows (in thousands):
2012 | $ | 59,935 | |
2013 | 59,419 | ||
2014 | 59,186 | ||
2015 | 57,643 | ||
2016 | 47,219 | ||
Thereafter | 166,379 | ||
$ | 449,781 | ||
Fair Value of Financial Instruments: ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure
C-9
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
fair value. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurement), then priority to quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market (Level 2 measurement), then the lowest priority to unobservable inputs (Level 3 measurement).
The fair values of cash and cash equivalents, receivables, accounts payable, accrued expenses, other current liabilities and short-term debt approximate their carrying values because of their short-term nature. The Company has $1.5 billion 9.75% notes due January 2014 (the “January 2014 Notes”), of which $750 million was hedged from March 2010 to September 2011. The Company received cash consideration of $30.3 million when the hedge was terminated in September 2011. The Company also has $325 million, 7.375% notes due October 2012 (the “October 2012 Notes”), which were hedged from January 2003 to September 2011. When the hedge was terminated in September 2011, the Company received cash consideration of $12.4 million.
The fair values of the January 2014 Notes and the October 2012 Notes were determined based on quoted market prices and are classified as Level 1 liabilities. The following table reflects the difference between the carrying value and fair value of the unhedged portion of these notes as of January 28, 2012 and January 29, 2011 (in thousands):
January 28, 2012 | January 29, 2011 | |||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
October 2012 Notes | $ | 332,617 | $ | 339,372 | $ | — | $ | — | ||||||||
January 2014 Notes | 1,525,003 | 1,721,490 | 750,000 | 915,450 | ||||||||||||
The following table shows the Company's other assets and liabilities as of January 28, 2012 that are measured at fair value on a recurring basis (in thousands):
Quoted Prices in Active Markets for Identical Assets or Liabilities Level 1 | Significant Other Observable Inputs Level 2 | Unobservable Inputs Level 3 | |||||||||
Assets | |||||||||||
Money market funds | $ | 468,913 | — | — | |||||||
Liabilities | |||||||||||
Derivative liabilities | — | $ | (36,418 | ) | — | ||||||
The fair value of the Company's money market funds are based on quotes received from third-party banks. The Company's derivative assets and liabilities are based on quotes received from third-party banks and represent the estimated amount the Company would receive or pay to terminate the agreements taking into consideration current interest and forward exchange rates as well as the creditworthiness of the counterparty.
The fair values of the assets in the Company's pension plans are described in detail in Note K.
Impairment of Long-Lived Assets: The Company evaluates long-lived assets held for use for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is measured based upon the estimated undiscounted cash flows expected to be generated from the use of an asset plus any net proceeds expected to be realized upon its eventual disposition. An impairment loss is recognized if an asset's carrying value is not recoverable and if it exceeds its fair value. Staples' policy is to evaluate long-lived assets for impairment at a store level for retail operations and at an operating unit level for Staples' other operations.
Store Closing Costs: The Company recognizes costs associated with store closings when they are incurred. A liability is recognized for the fair value of future contractual obligations when the Company ceases using a store facility. Such obligations comprise future minimum lease payments, property taxes, utilities, and common area maintenance, and are net of estimated sublease income. Payments made to terminate a lease agreement prior to the end of its term are typically accrued when notification is given to the landlord. For property and equipment that we expect to retire at the time of a store closing, the Company evaluates whether the assets are impaired on a held and used basis. If the assets are determined to not be impaired, the Company reduces the remaining useful lives of the assets at the time management commits to the store closing, resulting in accelerated depreciation expense. Asset retirement obligations related to leased properties are recognized when incurred and the related cost is amortized over the remaining term of the lease.
Revenue Recognition: Revenue is recognized at the point of sale for the Company's retail operations and at the time of shipment for its delivery sales. The Company offers its customers various coupons, discounts and rebates, which are treated as a reduction of revenue. Staples sells certain machines to customers which are financed by external financing companies and for which they have given repurchase guarantees. The Company recognizes revenue from the sale of these machines only when the
C-10
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
right of recourse has ended and the Company is legally released from its repurchase obligation.
Sales of extended service plans are administered by either an unrelated third-party or by the Company. The unrelated third-party is the legal obligor in most of the areas they administer and accordingly bears all performance obligations and risk of loss related to the service plans sold in such areas. In these areas, Staples recognizes a net commission revenue at the time of sale for the service plans. In certain areas where Staples is the legal obligor, the revenues associated with the sale are deferred and recognized over the life of the service contract, which is typically one to five years.
Revenue is recorded net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority.
Cost of Goods Sold and Occupancy Costs: Cost of goods sold and occupancy costs includes the costs of merchandise sold, inbound and outbound freight, receiving and distribution, and store and distribution center occupancy (including real estate taxes and common area maintenance).
Shipping and Handling Costs: All shipping and handling costs are included as a component of cost of goods sold and occupancy costs.
Selling, General and Administrative Expenses: Selling, general and administrative expenses include payroll, advertising and other operating expenses for the Company's stores and delivery operations not included in cost of goods sold and occupancy costs.
Advertising: Staples expenses the costs of producing an advertisement the first time the advertising takes place, except for the cost of direct response advertising, primarily catalog production costs, which are capitalized and amortized over their expected period of future benefits (i.e., the life of the catalog). Direct catalog production costs included in prepaid and other assets totaled $19.5 million at January 28, 2012 and $18.7 million at January 29, 2011. The cost of communicating an advertisement is expensed when the communication occurs. Total advertising and marketing expense was $582.6 million, $560.5 million and $553.5 million for 2011, 2010 and 2009, respectively.
Integration and Restructuring Costs: Prior to 2011, the Company separately tracked the integration and restructuring costs associated with the July 2008 acquisition of Corporate Express N.V. ("Corporate Express"), a Dutch office products distributor with operations in North America, Europe and Australia through a tender offer of all of its outstanding capital stock. The integration and restructuring costs represented the integration of Corporate Express with the Company's pre-existing business and the consolidation of certain operations of the combined Company. In 2011, the Company ceased tracking integration and restructuring costs as the status of the integration made it difficult to accurately isolate such costs.
Stock-Based Compensation: The Company accounts for stock-based compensation in accordance with ASC Topics 505 and 718. Stock-based compensation for stock options is measured based on the estimated fair value of each award on the date of grant using a binomial valuation model. Stock-based compensation for restricted shares is measured based on the closing market price of the Company's common stock price on the date of grant, less the present value of dividends expected to be paid on the underlying shares but foregone during the vesting period. The Company recognizes stock-based compensation costs as expense on a straight-line basis over the requisite service period.
Pension and Other Post-Retirement Benefits: The Company maintains pension and post-retirement life insurance plans for certain employees globally. These plans include significant obligations, which are calculated based on actuarial valuations. Key assumptions used in determining these obligations and related expenses include expected long-term rates of return on plan assets, discount rates and inflation. The Company also makes assumptions regarding employee demographic factors such as retirement patterns, mortality, turnover and the rate of compensation increases. These assumptions are evaluated annually.
Foreign Currency: The assets and liabilities of Staples' foreign subsidiaries are translated into U.S. dollars at current exchange rates as of the balance sheet date, and revenues and expenses are translated at average monthly exchange rates. The resulting translation adjustments are recorded as a separate component of stockholders' equity. Foreign currency transaction gains and losses relate to the settlement of assets or liabilities in another currency. Foreign currency transaction gains (losses) were $0.5 million, $(7.6) million and $5.7 million for 2011, 2010 and 2009, respectively. These amounts are included in other income (expense).
Derivative Instruments and Hedging Activities: The Company recognizes all derivative financial instruments in the consolidated financial statements at fair value. Changes in the fair value of derivative financial instruments that qualify for hedge accounting are recorded in stockholders' equity as a component of accumulated other comprehensive income or as an adjustment to the carrying value of the hedged item. Changes in fair values of derivatives not qualifying for hedge accounting are reported in earnings.
Accounting for Income Taxes: Deferred income tax assets and liabilities are determined based on the differences between
C-11
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
financial reporting and tax bases of assets and liabilities and are measured using the enacted income tax rates and laws that are expected to be in effect when the temporary differences are expected to reverse. Additionally, deferred income tax assets and liabilities are separated into current and non-current amounts based on the classification of the related assets and liabilities for financial reporting purposes.
The Company accounts for uncertain tax provisions in accordance ASC Topic 740 (Income Taxes). These provisions require companies to determine whether it is "more likely than not" that a tax position will be sustained upon examination by the appropriate taxing authorities before any benefit can be recorded in the financial statements. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.
New Accounting Pronouncements: In October 2009, a pronouncement was issued that amended the rules on revenue recognition for multiple-deliverable revenue arrangements. This amendment eliminated the residual method of allocation for multiple-deliverable revenue arrangements, and requires that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method (ASC Topic 605). This pronouncement establishes a selling price hierarchy for determining the selling price of a deliverable, which includes: (1) vendor-specific objective evidence if available, (2) third-party evidence if vendor-specific objective evidence is not available, and (3) estimated selling price if neither vendor-specific nor third-party evidence is available. In addition, this pronouncement expands the disclosure requirements related to a vendor’s multiple-deliverable revenue arrangements. This pronouncement is effective for revenue arrangements entered into or materially modified in fiscal years beginning after June 15, 2010. The Company adopted this pronouncement as of January 30, 2011, on a prospective basis. The impact of adopting this new accounting standard was not material to the Company’s financial statements in 2011, and if it were applied in the same manner to fiscal 2010, it would not have had a material impact on revenue for 2010. The Company does not expect the adoption of this new accounting standard to have a significant impact on the timing and pattern of revenue recognition in the future due to the limited number of multiple element arrangements.
In December 2010, a pronouncement was issued that modified the process used to test goodwill for impairment. The pronouncement impacted reporting units with zero or negative carrying amounts and required an additional test to be performed to determine whether goodwill has been impaired and to calculate the amount of that impairment. This amendment is effective for fiscal years beginning after December 15, 2010. The Company adopted this pronouncement as of January 30, 2011. Since none of the Company's reporting units had zero or negative carrying amounts, this pronouncement had no impact on the Company's financial position and results of operations in 2011.
In May 2011, a pronouncement was issued providing consistent definitions and disclosure requirements of fair value with respect to U.S. GAAP and International Financial Reporting Standards. The pronouncement changed certain fair value measurement principles and enhanced the disclosure requirements, particularly for Level 3 measurements. The pronouncement is effective for fiscal years beginning after December 15, 2011 and is to be applied prospectively. The Company is currently evaluating the potential impact, if any, the adoption of this pronouncement will have on its consolidated financial condition, results of operations or cash flows.
In June 2011, a pronouncement was issued that amended the guidance allowing the presentation of comprehensive income and its components in the statement of changes in equity. The pronouncement provides the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Furthermore, regardless of the presentation methodology elected, the issuer will be required to present on the face of the financial statements a reclassification adjustment for items that are reclassified from other comprehensive income to net income. The methodology for the computation and presentation of earnings per share remains the same. The pronouncement is effective for fiscal years beginning after December 15, 2011 and is to be applied retrospectively. As this pronouncement relates to disclosure only, the adoption will not have a material impact on the Company's consolidated financial condition, results of operations or cash flows.
In September 2011, a pronouncement was issued that amended the guidance for goodwill impairment testing. The pronouncement allows the entity to perform an initial qualitative assessment to determine whether it is "more likely than not" that the fair value of the reporting unit is less than its carrying amount. This assessment is used as a basis for determining whether it is necessary to perform the two step goodwill impairment test. The methodology for how goodwill is calculated, assigned to reporting units and the application of the two step goodwill impairment test have not been revised. The pronouncement is effective for fiscal years beginning after December 15, 2011. The Company does not expect the adoption of this new accounting standard to have a significant impact on its consolidated financial position, results of operations or cash flows.
In December 2011, a pronouncement was issued that amended the guidance related to the disclosure of recognized financial instruments and derivative instruments that are either offset on the balance sheet or subject to an enforceable master netting arrangement or similar agreement. The amended provisions are effective for fiscal years beginning on or after January 1, 2013, and are required to be applied retrospectively for all prior periods presented. As this pronouncement relates to disclosure only,
C-12
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
the adoption of this amendment will not have a material effect on the Company's consolidated financial condition, results of operations or cash flows.
NOTE B—Business Combinations and Acquisition of Noncontrolling Interest
ASC Topic 805 ("Business Combinations") requires that companies record acquisitions using the acquisition method of accounting. Accordingly, the purchase price is allocated to the tangible assets and liabilities and identifiable intangible assets acquired, based on their estimated fair values. The excess purchase price over the fair value is recorded as goodwill. Purchased intangibles with finite lives are amortized over their respective useful lives.
In July 2008, Staples acquired more than 99% of the capital stock of Corporate Express. With the acquisition of Corporate Express, the Company became approximately a 59% shareholder of Corporate Express Australia Limited ("Corporate Express Australia"), a public company traded on the Australian Securities Exchange. The Corporate Express results are reported in Staples' North American Delivery and International Operations for segment reporting.
In March 2010, the Company announced that it had made an offer to acquire all of the noncontrolling interest in Corporate Express Australia for cash consideration of AUD $5.60 per share (the "Offer"). In July 2010, the Company declared the Offer unconditional, and in September 2010, through a compulsory acquisition process, the Company acquired the final outstanding shares, bringing the Company's ownership of this business to 100% for an aggregate purchase price of approximately AUD $407 million (approximately $361 million).
The Company also worked diligently to acquire the remaining capital stock of Corporate Express by means of a compulsory judicial "squeeze out" procedure in accordance with the Dutch Civil Code. However, in October 2011, after a long and cumbersome process, Staples withdrew the squeeze out proceedings. Subsequent to the withdrawal of these proceedings, the Company paid an aggregate of €7.5 million (approximately $10.0 million) to acquire additional shares in Corporate Express, bringing its current ownership to approximately 99.7%.
The purchases of the additional shares in 2010 and 2011 were accounted for in accordance with ASC Topic 810, "Noncontrolling Interest in Consolidated Financial Statements," as an equity transaction, by adjusting the carrying amount of the noncontrolling interest to reflect the change in the Company's ownership interest in Corporate Express and Corporate Express Australia. The purchase of the noncontrolling interest is reflected as a financing cash outflow in the consolidated statement of cash flows.
In July 2010, the Company entered the Finnish market, acquiring Oy Lindell AB ("Lindell"), a Finnish office products distributor. The aggregate cash purchase price was €31 million (approximately $39 million based on foreign exchange rates on the acquisition date), net of cash acquired. As a result of this acquisition, the Company recorded goodwill of $16.4 million and $4.3 million of intangible assets, which are being amortized on a straight line basis over their weighted-average estimated lives of 5 years. The goodwill and intangible assets were allocated to the International Operations segment. None of the goodwill is deductible for tax purposes.
NOTE C—Acquisition Reserves
In connection with the Company's acquisition of Corporate Express, acquisition reserves of $181.0 million were established. The activity related to this reserve (in thousands) for fiscal 2010 and 2011 is as follows:
Balance as of January 30, 2010 | Utilization | Foreign Exchange Fluctuations | Balance as of January 29, 2011 | |||||||||||||
Transaction costs | $ | 807 | $ | (264 | ) | $ | — | $ | 543 | |||||||
Severance | 28,843 | (16,206 | ) | (844 | ) | 11,793 | ||||||||||
Facility closures | 28,390 | (7,973 | ) | (130 | ) | 20,287 | ||||||||||
Other | 10,759 | (1,172 | ) | (243 | ) | 9,344 | ||||||||||
Total | $ | 68,799 | $ | (25,615 | ) | $ | (1,217 | ) | $ | 41,967 | ||||||
C-13
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Balance as of January 29, 2011 | Utilization | Adjustments | Foreign Exchange Fluctuations | Balance as of January 28, 2012 | ||||||||||||||||
Transaction costs | $ | 543 | $ | (119 | ) | $ | (424 | ) | $ | — | $ | — | ||||||||
Severance | 11,793 | (3,911 | ) | (5,231 | ) | (960 | ) | 1,691 | ||||||||||||
Facility closures | 20,287 | (3,898 | ) | (600 | ) | (28 | ) | 15,761 | ||||||||||||
Other | 9,344 | (699 | ) | (2,180 | ) | (125 | ) | 6,340 | ||||||||||||
Total | $ | 41,967 | $ | (8,627 | ) | $ | (8,435 | ) | $ | (1,113 | ) | $ | 23,792 | |||||||
The majority of the reserves have been substantially utilized by the end of fiscal year 2011, with the exception of certain payments related to facility closures that will be made over the remaining lease terms and certain other obligations related to the integration of the business.
NOTE D—Accrued Expenses and Other Current Liabilities
The major components of accrued liabilities are as follows (in thousands):
January 28, 2012 | January 29, 2011 | |||||||
Taxes | $ | 320,861 | $ | 258,518 | ||||
Employee related | 402,058 | 420,598 | ||||||
Acquisition and restructuring reserves | 49,549 | 82,144 | ||||||
Advertising and marketing | 101,023 | 109,383 | ||||||
Other | 541,230 | 627,208 | ||||||
Total | $ | 1,414,721 | $ | 1,497,851 | ||||
NOTE E—Debt and Credit Agreements
The major components of the Company's outstanding debt are as follows (in thousands):
January 28, 2012 | January 29, 2011 | |||||||
April 2011 Notes | $ | — | $ | 500,000 | ||||
October 2012 Notes | 332,617 | 325,000 | ||||||
January 2014 Notes | 1,525,003 | 1,500,000 | ||||||
Lines of credit | 170,745 | 218,689 | ||||||
Capital lease obligations and other notes payable | 9,815 | 13,701 | ||||||
2,038,180 | 2,557,390 | |||||||
Fair value adjustments on hedged debt | — | 44,373 | ||||||
Less: Current portion | (439,143 | ) | (587,356 | ) | ||||
Net long-term debt | $ | 1,599,037 | $ | 2,014,407 | ||||
Aggregate annual maturities of long-term debt and capital lease obligations are as follows (in thousands):
Fiscal Year: | Total | ||
2012 | $ | 439,143 | |
2013 | 1,596,980 | ||
2014 | 620 | ||
2015 | 416 | ||
2016 | 316 | ||
Thereafter | 705 | ||
$ | 2,038,180 | ||
Future minimum lease payments under capital leases of $1.4 million are included in aggregate annual maturities shown above. Staples entered into no new capital lease obligations in 2011 or 2010.
C-14
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Interest paid by Staples totaled $184.5 million, $210.9 million and $217.5 million for 2011, 2010 and 2009, respectively. There was no interest capitalized in 2011, 2010 or 2009.
April 2011 Notes: The Company repaid in full the $500 million, 7.75% notes (the "April 2011 Notes") on the maturity date, April 1, 2011. The Company originally entered into the April 2011 Notes on March 27, 2009.
October 2012 Notes: On September 30, 2002, Staples issued $325 million aggregate principal amount of notes due October 1, 2012, with a fixed interest rate of 7.375% payable semi-annually on April 1 and October 1 of each year commencing on April 1, 2003. In January 2003, Staples entered into an interest rate swap agreement to turn the October 2012 Notes into variable rate obligations, and the swap agreement was subsequently terminated in September 2011 (see Note F). The Company's obligations under the October 2012 Notes are unconditionally guaranteed on an unsecured, unsubordinated basis by the Staples the Office Superstore, LLC, Staples the Office Superstore, East Inc., Staples Contract & Commercial, Inc. and Staples the Office Superstore Limited Partnership (collectively, the “Guarantor Subsidiaries”).
January 2014 Notes: On January 15, 2009, Staples issued $1.5 billion aggregate principal amount of notes due January 15, 2014, with a fixed interest rate of 9.75% payable semi-annually on January 15 and July 15 of each year commencing on July 15, 2009. From the sale of the January 2014 Notes, the Company received net proceeds, after the underwriting discount and estimated fees and expenses of $1.49 billion. In March 2010, Staples entered into an interest rate swap agreement to turn half of the January 2014 Notes into variable rate obligations, and the swap agreement was subsequently terminated in September 2011 (see Note F). The Company's obligations under the January 2014 Notes are unconditionally guaranteed on an unsecured, unsubordinated basis by the Guarantor Subsidiaries.
Revolving Credit Facility: On November 4, 2010, Staples entered into a new credit agreement (the "November 2014 Revolving Credit Facility") with Bank of America, N.A, as Administrative Agent and other lending institutions named therein. The November 2014 Revolving Credit Facility replaced the Amended and Restated Revolving Credit Agreement dated as of October 13, 2006, as amended, which provided for a maximum borrowing of $750 million and was due to expire in October 2011 (the "Prior Revolving Credit Facility"). As of January 28, 2012, no borrowings were outstanding under the November 2014 Revolving Credit Agreement, resulting in $1.0 billion of availability under this agreement.
The November 2014 Revolving Credit Facility provides for a maximum borrowing of $1.0 billion which, pursuant to an accordion feature, may be increased to $1.5 billion upon the request of the Company and the agreement of the lenders participating in the increase. Borrowings made pursuant to the November 2014 Revolving Credit Facility may be syndicated loans, swing line loans, multicurrency loans, or letters of credit, the combined sum of which may not exceed the maximum borrowing amount. Borrowings made pursuant to the November 2014 Revolving Credit Facility will bear interest at various interest rates, depending on the type of borrowing, plus a percentage spread based on Staples' credit rating and fixed charge coverage ratio. Under the November 2014 Revolving Credit Facility, Staples agree to pay a facility fee at rates that range from 0.15% to 0.35% per annum depending on its credit rating and fixed charge coverage ratio. Amounts borrowed under the November 2014 Revolving Credit Facility may be borrowed, repaid, and reborrowed from time to time until November 4, 2014.
The November 2014 Revolving Credit Facility is unsecured and ranks pari passu with Staples' public notes and other indebtedness and contains customary affirmative and negative covenants for credit facilities of this type. The November 2014 Revolving Credit Facility also contains financial covenants that require Staples to maintain a minimum fixed charge coverage ratio and a maximum adjusted funded debt to total capitalization ratio. The borrowings under the November 2014 Revolving Credit Facility are unconditionally guaranteed on an unsecured, unsubordinated basis by the Guarantor Subsidiaries.
Commercial Paper Program: The Company has a commercial paper program ("Commercial Paper Program") that allows the Company to issue up to $1.0 billion of unsecured commercial paper notes ("Notes") from time to time. The November 2014 Revolving Credit Facility serves as a backstop to the Commercial Paper Program. Under the Commercial Paper Program, the Company uses the proceeds from the Notes for general purposes, including working capital, capital expenditures, acquisitions and share repurchases. Maturities of the Notes vary but may not exceed 397 days from the date of issue. The Notes bear such interest rates, if interest bearing, or will be sold at such discount from their face amounts, as agreed upon from time to time by the dealers under the Commercial Paper Program and the Company. The payments under the Commercial Paper Program are unconditionally guaranteed on an unsecured, unsubordinated basis by the Guarantor Subsidiaries. The Commercial Paper Program contains customary events of default with corresponding grace periods. On June 2, 2011, the Company resumed the issuance of Notes under the Commercial Paper Program. During 2011, the Company borrowed under its Commercial Paper Program to support its seasonal cash requirements and stock buyback programs. From June 2, 2011 through the end of commercial paper usage, the weighted average amount outstanding under the Commercial Paper Program was $150.0 million, with a weighted-average interest rate of 0.3%. At the end of 2011, there were no outstanding borrowings under the Commercial Paper Program. The maximum amount outstanding under the Commercial Paper Program during 2011 was $345.0 million.
Other Lines of Credit: The Company had $373.1 million in borrowing capacity under various other lines of credit as of
C-15
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
January 28, 2012 with outstanding borrowings of $170.7 million, leaving $202.4 million of available credit at that date.
There were no instances of default during 2011 under any of the Company's debt agreements.
Deferred Financing Fees
In connection with the issuance of certain debt instruments, the Company incurred financing fees which are being amortized over the terms of the related debt instruments. Amortization of the financing fees is classified as interest expense. Deferred financing fees amortized to interest expense were $4.2 million, $6.3 million and $7.9 million for 2011, 2010 and 2009, respectively. At January 28, 2012, unamortized financing fees of $0.4 million were included in prepaid expenses and other current assets and unamortized fees of $7.5 million were included in other assets. At January 29, 2011, unamortized financing fees of $0.2 million were included in prepaid expenses and other current assets and unamortized fees of $11.9 million were included in other assets.
NOTE F—Derivative Instruments and Hedging Activities
Staples uses interest rate swap agreements, foreign currency swap and foreign currency forward agreements to offset certain operational and balance sheet exposures related to changes in interest or foreign exchange rates. These agreements are entered into to support transactions made in the normal course of business and accordingly are not speculative in nature. These derivatives qualify for hedge accounting treatment as the derivatives have been highly effective in offsetting changes in fair value of the hedged items.
All derivatives are recorded at fair value and the changes in fair value are immediately included in earnings if the derivatives do not qualify as effective hedges. If a derivative is designated as a fair value hedge, then changes in the fair value of the derivative are offset against the changes in the fair value of the underlying hedged item in earnings. If a derivative is designated as a cash flow hedge, then the effective portion of the changes in the fair value of the derivative is recognized as a component of accumulated other comprehensive income (loss) until the underlying hedged item is recognized in earnings or the forecasted transaction is no longer probable of occurring. If a derivative or a nonderivative financial instrument is designated as a hedge of the Company's net investment in a foreign subsidiary, then changes in the fair value of the financial instrument are recognized as a component of accumulated other comprehensive income (loss) to offset a portion of the change in the translated value of the net investment being hedged, until the investment is sold or liquidated. The Company formally documents all hedging relationships for all derivative and nonderivative hedges and the underlying hedged items, as well as its risk management objectives and strategies for undertaking the hedge transactions. There are no amounts excluded from the assessment of hedge effectiveness.
The Company classifies the fair value of all derivative contracts and the fair value of its hedged firm commitments as either current or long-term depending on whether the maturity date of the derivative contract is within or beyond one year from the balance sheet date. The cash flows from derivatives treated as hedges are classified in the Company's consolidated statement of cash flows in the same category as the item being hedged.
Interest Rate Swaps: In January 2003, Staples entered into interest rate swaps for an aggregate notional amount of $325 million. These swaps were designed as a fair value hedge and designed to convert the October 2012 Notes into a variable rate obligation. At January 29, 2011, the interest rate swap agreement had a fair value gain of $23.0 million, which was included in other assets. In September 2011, the Company terminated the $325 million interest rate swaps, realizing a gain of $12.4 million, which is being amortized over the remaining term of the October 2012 Notes. No amounts were included in the consolidated statement of income for 2011, 2010 or 2009 related to ineffectiveness associated with this fair value hedge.
In March 2010, Staples entered into interest rate swaps for an aggregate notional amount of $750 million. These swaps were designated as a fair value hedge and designed to convert half of the aggregate principal amount of the January 2014 Notes into a variable rate obligation. At January 29, 2011 the interest rate swap agreement had a fair value gain of $21.4 million which was included in other assets. In September 2011, the Company terminated the $750 million interest rate swaps, realizing a gain of $30.3 million, which is being amortized over the remaining term of the January 2014 Notes. No amounts were included in the consolidated statement of income for 2011 or 2010 related to the ineffectiveness associated with this fair value hedge.
In connection with Staples' acquisition of Corporate Express, the Company assumed interest rate swaps designed to convert Corporate Express' variable rate credit facilities into fixed rate obligations. In May 2011, the Company repaid the outstanding balance on these variable rate credit facilities and terminated the related interest rate swap agreements. As a result, $0.3 million was recognized as a loss related to the termination of these interest rate swap agreements.
Foreign Currency Swaps and Foreign Currency Forwards: In August 2007, the Company entered into a $300.0 million foreign currency swap that has been designated as a foreign currency hedge on Staples' net investment in Canadian dollar denominated subsidiaries. Staples, upon maturity of the agreement in October 2012, will be entitled to receive $300.0 million and will be obligated to pay 316.2 million Canadian dollars. Staples will also be entitled to receive quarterly interest payments on
C-16
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
$300.0 million at a fixed rate of 5.28% and will be obligated to make quarterly interest payments on 316.2 million Canadian dollars at a fixed rate of 5.17%. At January 28, 2012 and January 29, 2011, the currency swap had aggregate fair value losses of $14.4 million and $11.0 million, respectively, which was included in other long-term obligations. No amounts were included in the consolidated statement of income for 2011, 2010 or 2009 related to ineffectiveness associated with this net investment hedge.
In May 2011, the Company entered into a foreign currency swap designed to convert a 75 million intercompany loan denominated in Australian dollars into a fixed Euro amount. The intercompany loan had a fixed interest rate of 6.65%. The agreement was accounted for as a cash flow hedge. Upon maturity of the agreement in August 2011, Staples paid AUD 76.4 million and recognized a gain of $0.9 million.
In August 2011, the Company entered into a foreign currency swap designed to convert a 75 million intercompany loan denominated in Australian dollars into a fixed Euro amount. The intercompany loan had a fixed interest rate of 6.65%. The agreement was accounted for as a fair value hedge. Upon maturity of the agreement on October 31, 2011, Staples paid AUD 76.4 million and recognized a loss of $4.1 million.
In October 2011, the Company entered into a foreign currency swap designed to convert a 118.3 million intercompany loan denominated in Canadian dollars into a fixed U.S. dollar amount. The intercompany loan had a fixed interest rate of 1.8%. The agreement was accounted for as a fair value hedge. Upon maturity of the agreement in December 2011, Staples paid $112.1 million and recognized a gain of $2.2 million.
In October 2011, the Company entered into a foreign currency swap designed to convert a 79.5 million intercompany loan denominated in Canadian dollars into a fixed Euro amount. The intercompany loan had a fixed interest rate of 1.32%. The agreement was accounted for as a fair value hedge. Upon maturity of the agreement in December 2011, Staples paid 79.5 million Canadian dollars and recognized a loss of $2.1 million.
In December 2011, the Company entered into a foreign currency forward designed to convert a series of intercompany loans denominated in Canadian dollars into a fixed U.S. dollar amount. The loans total 750 million Canadian dollars in the aggregate and are scheduled to mature at various dates between October 2012 and October 2013. Staples, upon full maturity of the agreements, will collect $720.0 million U.S. dollars. The forward agreements are being accounted for as a fair value hedge. At January 28, 2012, the foreign currency forward had an aggregate fair value loss of $22.0 million, which was included in other long-term obligations. The effective portion of this hedge is included as a component of other income (expense). No amounts were included in the condensed consolidated statement of income for 2011 related to ineffectiveness associated with this fair value hedge.
NOTE G—Accumulated Other Comprehensive Loss
Amounts included in accumulated other comprehensive loss for the Company's derivative instruments and minimum pension and other post-retirement liabilities are recorded net of the related income tax effects. The following table details the composition of accumulated other comprehensive loss for 2011, 2010 and 2009 (in thousands):
2011 | 2010 | 2009 | ||||||||||
Foreign currency translation adjustments | $ | (156,627 | ) | $ | 37,158 | $ | 36,825 | |||||
Derivative instruments (net of taxes) | (5,712 | ) | (4,207 | ) | 5,836 | |||||||
Deferred benefit costs (net of taxes) | (157,404 | ) | (129,884 | ) | (131,998 | ) | ||||||
Total | $ | (319,743 | ) | $ | (96,933 | ) | $ | (89,337 | ) | |||
NOTE H—Commitments and Contingencies
Staples leases certain retail and support facilities under long-term non-cancelable lease agreements. Most lease agreements contain renewal options and rent escalation clauses and, in some cases, allow termination within a certain number of years with notice and a fixed payment. Certain agreements provide for contingent rental payments based on sales.
Other long-term obligations at January 28, 2012 include $122.6 million relating to future rent escalation clauses and lease incentives under certain existing store operating lease arrangements. These rent obligations are recognized on a straight-line basis over the respective terms of the leases. Future minimum lease commitments due for retail and support facilities (including lease commitments for 37 retail stores not yet opened at January 28, 2012) and equipment leases under non-cancelable operating leases are as follows (in thousands):
C-17
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Fiscal Year: | Total | ||
2012 | $ | 867,147 | |
2013 | 774,273 | ||
2014 | 664,264 | ||
2015 | 557,642 | ||
2016 | 454,235 | ||
Thereafter | 1,269,073 | ||
$ | 4,586,634 | ||
Future minimum lease commitments do not include $31.9 million of minimum rentals due under non-cancelable subleases.
Rent expense was $839.6 million, $829.4 million and $834.3 million for 2011, 2010 and 2009, respectively.
As of January 28, 2012, Staples had purchase obligations of $488.9 million. Many of the Company's purchase commitments, including intercompany commitments, may be canceled by the Company without advance notice or payment, and accordingly the Company has excluded such commitments from the following schedule. Contracts that may be terminated by the Company without cause or penalty, but that require advance notice for termination, are valued on the basis of an estimate of what the Company would owe under the contract upon providing notice of termination. Such purchase obligations will arise as follows (in thousands):
Fiscal Year: | Total | ||
2012 | $ | 369,143 | |
2013 through 2014 | 49,588 | ||
2015 through 2016 | 18,755 | ||
Thereafter | 51,435 | ||
$ | 488,921 | ||
Letters of credit are issued by Staples during the ordinary course of business through major financial institutions as required by certain vendor contracts. As of January 28, 2012, Staples had open standby letters of credit totaling $147.8 million.
The Company has become the subject of several class action lawsuits filed in various states, where the plaintiffs alleged the Company failed to comply with federal and state overtime laws and that it failed to pay them overtime because assistant store managers were misclassified as exempt from overtime pay. In January 2010, the Company and the attorneys for the plaintiffs jointly announced a settlement of these suits recording a charge of $42.0 million, including interest, class counsel's attorney's fees and a previous jury verdict obtained in February 2009 for one of these class action lawsuits. Under the terms of the settlement, the Company does not admit to any wrongdoing in connection with misclassification and resolves claims for damages as far back as 2002 that cover approximately 5,500 current and former associates.
In connection with the 1991 acquisition of Agena S.A., Corporate Express initiated legal proceedings against Béfec (a predecessor of PricewaterhouseCoopers, France), the accountants who certified the acquisition balance sheet. Corporate Express claimed damages totaling €134.0 million plus interest and fees. In October 2010, the Commercial Court in France issued its judgment in this case and did not award any of the claimed damages to Corporate Express. The Company is currently appealing the judgment.
Staples has a contractual dispute with Corely S.C./Lyreco S.A.S., as a result of acquiring Corporate Express. Prior to Staples' acquisition of Corporate Express, Corporate Express and Corely/Lyreco entered into an agreement that required Corporate Express to pay €30.0 million to Corely/Lyreco in the event that the merger between Corporate Express and Corely/Lyreco was not completed as a result of Staples' acquisition of Corporate Express. Upon Staples' acquisition of Corporate Express, Corporate Express paid the €30.0 million to Corely/Lyreco. Corely/Lyreco is seeking through arbitration to have Staples gross up this payment to cover the corporate income taxes it incurred as a result of the payment, which Corely/Lyreco claims is approximately €12.0 million plus interest and legal fees. Staples believes that it has meritorious defenses to this contractual dispute. However, there is a reasonable possibility that the arbitral tribunal could rule against Staples and require Staples to pay a portion or all of the corporate taxes incurred by Corely/Lyreco as a result of the payment.
At the time the Corporate Express tender offer was fully settled on July 23, 2008, Staples had acquired more than 99% of the outstanding capital stock of Corporate Express. Staples worked diligently to acquire the remaining capital stock of Corporate Express by means of a compulsory judicial "squeeze out" procedure in accordance with the Dutch Civil Code. This squeeze out process turned out to be a long and cumbersome process, and in October 2011, Staples withdrew the squeeze out proceedings. Any additional payments Staples makes to purchase the remaining outstanding capital stock will be recorded in equity pursuant
C-18
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
to ASC Topic 810, "Noncontrolling Interest in Consolidated Financial Instruments."
In addition, from time to time, the Company is involved in litigation arising from the operation of its business that is considered routine and incidental to its business. The Company does not expect the results of any of these actions to have a material adverse effect on its business, results of operations or financial condition.
NOTE I—Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The approximate tax effect of the significant components of Staples' deferred tax assets and liabilities are as follows (in thousands):
January 28, 2012 | January 29, 2011 | |||||||
Deferred income tax assets: | ||||||||
Deferred rent | $ | 46,446 | $ | 49,256 | ||||
Foreign tax credit carryforwards | 90,730 | 109,913 | ||||||
Net operating loss carryforwards | 313,732 | 402,136 | ||||||
Capital loss carryforwards | 18,598 | 20,110 | ||||||
Employee benefits | 126,632 | 125,466 | ||||||
Merger related charges | 15,072 | 20,044 | ||||||
Inventory | 42,556 | 52,604 | ||||||
Insurance | 39,375 | 35,891 | ||||||
Deferred revenue | 82,724 | 26,672 | ||||||
Depreciation | 32,887 | 45,362 | ||||||
Unrealized loss on hedge instruments | 6,028 | 4,629 | ||||||
Other—net | 77,925 | 78,786 | ||||||
Total deferred income tax assets | 892,705 | 970,869 | ||||||
Total valuation allowance | (307,616 | ) | (331,567 | ) | ||||
Net deferred income tax assets | $ | 585,089 | $ | 639,302 | ||||
Deferred income tax liabilities: | ||||||||
Intangibles | $ | (148,601 | ) | $ | (200,901 | ) | ||
Other—net | (4,616 | ) | (3,308 | ) | ||||
Total deferred income tax liabilities | (153,217 | ) | (204,209 | ) | ||||
Net deferred income tax assets | $ | 431,872 | $ | 435,093 | ||||
The deferred tax asset from tax loss carryforwards of $313.7 million represents approximately $1.16 billion of net operating loss carryforwards, $639.9 million of which are subject to expiration beginning in 2012. The remainder has an indefinite carryforward period. The deferred tax asset from foreign tax credit carryforwards of $90.7 million is subject to expiration beginning in 2015. The valuation allowance decreased by $24.0 million during 2011, primarily due to utilization of certain foreign net operating losses.
For financial reporting purposes, consolidated income before income taxes includes the following components (in thousands):
2011 | 2010 | 2009 | ||||||||||
Pretax income: | ||||||||||||
United States | $ | 1,009,979 | $ | 877,936 | $ | 728,765 | ||||||
Foreign | 449,162 | 478,659 | 427,129 | |||||||||
$ | 1,459,141 | $ | 1,356,595 | $ | 1,155,894 | |||||||
C-19
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The provision for income taxes consists of the following (in thousands):
2011 | 2010 | 2009 | ||||||||||
Current tax expense: | ||||||||||||
Federal | $ | 253,078 | $ | 142,282 | $ | 329,809 | ||||||
State | 59,877 | 49,797 | 42,547 | |||||||||
Foreign | 155,647 | 103,317 | 116,180 | |||||||||
Deferred tax expense (benefit): | ||||||||||||
Federal | 75,233 | 141,103 | (63,494 | ) | ||||||||
State | (4,666 | ) | 6,329 | (8,191 | ) | |||||||
Foreign | (63,861 | ) | 25,198 | (18,068 | ) | |||||||
Total income tax expense | $ | 475,308 | $ | 468,026 | $ | 398,783 | ||||||
A reconciliation of the federal statutory tax rate to Staples' effective tax rate on net income is as follows:
2011 | 2010 | 2009 | |||||||
Federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | |||
State effective rate, net of federal benefit | 2.6 | 3.3 | 2.9 | ||||||
Effect of foreign taxes | (4.6 | ) | (5.5 | ) | (3.4 | ) | |||
Tax credits | (0.5 | ) | (0.4 | ) | (0.7 | ) | |||
Italian tax refund (previously deemed uncollectible) | (1.4 | ) | — | — | |||||
Other | 1.5 | 2.1 | 0.7 | ||||||
Effective tax rate | 32.6 | % | 34.5 | % | 34.5 | % | |||
The effective tax rate in any year is impacted by the geographic mix of earnings. Additionally, certain foreign operations are subject to both U.S. and foreign income tax regulations, and as a result, income before tax by location and the components of income tax expense by taxing jurisdiction are not directly related.
The tax impact of the unrealized gain or loss on instruments designated as hedges of net investments in foreign subsidiaries is reported in accumulated other comprehensive loss in stockholders' equity.
The Company operates in multiple jurisdictions and could be subject to audit in these jurisdictions. These audits can involve complex issues that may require an extended period of time to resolve and may cover multiple years. In the Company's opinion, an adequate provision for income taxes has been made for all years subject to audit.
Income tax payments were $308.9 million, $404.9 million and $236.1 million during 2011, 2010 and 2009, respectively.
Income taxes have not been provided on certain undistributed earnings of foreign subsidiaries of approximately $896.6 million, net of the noncontrolling interest, because such earnings are considered to be indefinitely reinvested in the business. The determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable because of the complexities associated with its hypothetical calculation.
Uncertain Tax Positions
At January 28, 2012, the Company had $250.4 million of gross unrecognized tax benefits, of which $247.6 million, if recognized, would affect the Company's tax rate. At January 29, 2011, the Company had $254.2 million of gross unrecognized tax benefits, of which $209.5 million, if recognized, would affect the Company's tax rate. The Company does not reasonably expect any material changes to the estimated amount of liability associated with its uncertain tax positions through fiscal 2012.
C-20
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The following summarizes the activity related to our unrecognized tax benefits (in thousands):
2011 | 2010 | 2009 | ||||||||||
Balance at beginning of fiscal year | $ | 254,167 | $ | 264,277 | $ | 222,892 | ||||||
Additions for tax positions related to current year | 48,032 | 25,876 | 47,354 | |||||||||
Additions (reductions) for tax positions of prior years | 15,361 | (9,983 | ) | 15,422 | ||||||||
Reduction for Statute of Limitations Expiration | (13,441 | ) | (19,840 | ) | (20,802 | ) | ||||||
Settlements | (53,722 | ) | (6,163 | ) | (589 | ) | ||||||
Balance at end of fiscal year | $ | 250,397 | $ | 254,167 | $ | 264,277 | ||||||
The change in uncertain tax positions during 2011 for settlement primarily relates to reductions in deferred tax assets against which a tax reserve had been maintained and had no impact on the overall effective tax rate.
Staples is subject to U.S. federal income tax, as well as income tax of multiple state and foreign jurisdictions. The Company has substantially concluded all U.S. federal income tax matters for years through 2007. All material state, local and foreign income tax matters for years through 2002 have been substantially concluded.
Staples' continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. The Company had $32.7 million and $30.1 million accrued for gross interest and penalties as of January 28, 2012 and January 29, 2011, respectively.
NOTE J—Equity Based Employee Benefit Plans
Staples offers its associates share ownership through certain equity based employee benefit plans, including the Amended and Restated 1998 Employee Stock Purchase Plan and the Amended and Restated International Employee Stock Purchase Plan (collectively the "Employee Stock Purchase Plans") and the Amended and Restated 2004 Stock Incentive Plan (the "2004 Plan").
In connection with certain equity based employee benefit plans, Staples included approximately $151.8 million, $146.9 million and $174.7 million in compensation expense for 2011, 2010 and 2009, respectively. The excess income tax benefit related to stock-based compensation was $1.8 million for 2011 and $8.8 million for 2009. There was no excess income tax benefit related to stock-based compensation for 2010. As of January 28, 2012, Staples had $186.5 million of unamortized stock-based compensation costs related to non-qualified stock options, restricted stock and restricted stock units, which will be expensed through August 2015.
Employee Stock Purchase Plans
In December 2011, the Company adopted the 2012 Employee Stock Purchase Plan, subject to shareholder approval, which authorizes a total of up to approximately 15.0 million shares of common stock to be sold to participating employees. Under this plan, participating employees may purchase shares of common stock at 85% of its fair market value at the beginning or end of an offering period, whichever is lower, through payroll deductions in an amount not to exceed 10% of an employee's annual base compensation.
Stock Award Plans
The 2004 Plan was implemented in July 2004 and replaced the amended and restated 1992 Equity Incentive Plan (the "1992 Plan") and the amended and restated 1990 Director Stock Option Plan (the "1990 Plan"). Unexercised options under both the 1992 Plan and the 1990 Plan remain outstanding. Under the 2004 Plan, Staples may issue up to 97.4 million shares of common stock to management and employees using various forms of awards, including, restricted stock and restricted stock units (collectively, "Restricted Shares"), nonqualified stock options and performance shares. The Restricted Shares are restricted in that they are non transferable (i.e. may not be sold until they vest). The nonqualified stock options cannot be exercised until they vest. Vesting of Restricted Shares and nonqualified stock options occurs over different periods depending on the terms of the individual award. Options outstanding under the Company's plans have an exercise price equal to the fair market value of the common stock on the date of grant. Options outstanding are exercisable at various percentages of the total shares subject to the option starting one year after the grant. All options expire ten years after the grant date, subject to earlier termination in the event of employment termination.
C-21
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Stock Options
Information with respect to stock options granted under the above plans is as follows:
Number of Shares | Weighted-Average Exercise Price Per Share | Weighted-Average Remaining Contractual Term in Years | Aggregate Intrinsic Value (1) (in thousands) | |||||||||||
Outstanding at January 29, 2011 | 44,813,257 | $ | 19.86 | |||||||||||
Granted | 6,086,065 | 15.90 | ||||||||||||
Exercised | (3,251,293 | ) | 11.31 | |||||||||||
Canceled | (1,652,681 | ) | 21.27 | |||||||||||
Outstanding at January 28, 2012 | 45,995,348 | $ | 19.89 | 5.35 | $ | 18,713 | ||||||||
Exercisable at January 28, 2012 | 32,768,260 | $ | 20.51 | 4.11 | $ | 18,103 | ||||||||
Vested or expected to vest at January 28, 2012 | 44,393,242 | $ | 19.94 | 5.25 | $ | 18,711 | ||||||||
(1) | The intrinsic value of the nonqualified stock options is the amount by which the market value of the underlying stock exceeds the exercise price of an option. |
The total intrinsic value of options exercised during 2011, 2010 and 2009 were $14.6 million, $24.0 million and $60.8 million, respectively.
The weighted-average fair values of options and employee stock purchase plan shares granted during 2011, 2010 and 2009 were $3.58, $4.75 and $5.57, respectively.
For stock options granted on or after May 1, 2005, the fair value of each award is estimated on the date of grant using a binomial valuation model. The binomial model considers characteristics of fair value option pricing that are not available under the Black-Scholes model. Similar to the Black-Scholes model, the binomial model takes into account variables such as volatility, dividend yield rate and risk free interest rate. However, in addition, the binomial model considers the contractual term of the option, the probability that the option will be exercised prior to the end of its contractual life, and the probability of termination or retirement of the option holder in computing the value of the option. For these reasons, the Company believes that the binomial model provides a fair value that is more representative of actual experience and future expected experience than that value calculated using the Black-Scholes model.
The fair value of options granted in each year was estimated at the date of grant using the following weighted-average assumptions:
2011 | 2010 | 2009 | |||||||
Risk free interest rate | 2.1 | % | 2.3 | % | 2.1 | % | |||
Expected dividend yield | 1.4 | % | 1.3 | % | 1.1 | % | |||
Expected stock volatility | 28 | % | 31 | % | 35 | % | |||
Expected life of options | 5.5 years | 5.4 years | 5.3 years | ||||||
The expected stock volatility factor was calculated using an average of historical and implied volatility measures to reflect the different periods in the Company's history that would impact the value of the stock options granted to employees. The fair value of stock options is expensed over the applicable vesting period using the straight line method.
Restricted Shares
Beginning in fiscal 2006, the Company began issuing Restricted Shares to employees and directors as part of its regular equity compensation program. All shares underlying awards of Restricted Shares are restricted in that they are not transferable (i.e., they may not be sold) until they vest. Subject to limited exceptions, if the employees who received the Restricted Shares leave Staples prior to the vesting date for any reason, the Restricted Shares will be forfeited and returned to Staples. The fair value of restricted shares is expensed over the applicable vesting period using the straight line method. The following table summarizes the Company's grants of Restricted Shares in 2011:
C-22
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Number of Shares | Weighted-Average Grant Date Fair Value Per Share | ||||||
Nonvested at January 29, 2011 | 14,271,158 | $ | 20.62 | ||||
Granted | 8,377,845 | 15.93 | |||||
Vested | (4,519,697 | ) | 21.72 | ||||
Canceled | (1,330,044 | ) | 18.78 | ||||
Nonvested at January 28, 2012 | 16,799,262 | $ | 18.13 | ||||
The total market value of Restricted Shares vested during 2011, 2010 and 2009 was $73.3 million, $96.5 million and $94.9 million, respectively.
Performance Shares
In fiscal 2006, the Company began granting performance shares which are restricted stock awards whose underlying shares are paid out and issued to the recipient only if the Company meets minimum performance targets. Some of these awards are subject to additional vesting requirements. For the 2009 performance share awards, payouts were based on 2009 earnings per share performance. The Company met the performance target that was established in 2009 and 0.5 million shares were awarded in March 2010, subject to vesting over a three year period.
In 2010, the Company switched from granting annual performance share awards and introduced a performance based long term cash incentive plan based on meeting minimum performance targets. The expense associated with these 2010 and 2011 awards is reflected as part of selling, general and administrative expense.
Although not a part of the annual grant cycle, in July 2010 the Company granted special performance shares totaling 0.6 million at target at $19.27 per share. These awards will payout only if the Company meets minimum performance objectives, which will be established in each year of a three year performance cycle. One-third of the target award will be applied as a target amount for each of the fiscal years within the performance cycle. No payout will occur until the completion of the three year performance cycle. Any shares that are paid out will also be subject to additional vesting requirements.
For fiscal year 2011 and 2010, 58% and 93% of the target shares were earned based on the extent to which the 2011 and 2010 objective were achieved.
Shares Available for Issuance
At January 28, 2012, 60.7 million shares of common stock were reserved for issuance under Staples' 2004 Plan, 401(k) Plan and employee stock purchase plans.
NOTE K—Pension and Other Retirement Plans
In connection with the acquisition of Corporate Express, Staples assumed the obligations under the pension plans Corporate Express sponsored. The pension plans cover certain employees in Europe and the United States. The benefits due to U.S. plan participants are frozen. A number of the defined benefit plans outside the U.S. are funded with plan assets that have been segregated in trusts. Contributions are made to these trusts, as necessary, to meet legal and other requirements.
In August 2010, the Company began sponsoring an unfunded post-retirement life insurance benefit plan, which provides benefits to eligible U.S. executives based on earnings, years of service and age at termination of employment.
C-23
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The following table presents a summary of the total projected benefit obligation for the pension plans, the fair value of plan assets and the associated funded status recorded in the consolidated balance sheet at January 28, 2012 and January 29, 2011 (in thousands):
January 28, 2012 | January 29, 2011 | |||||||||||||||||||||||
Projected Benefit Obligations | Fair Value of Plan Assets | Funded Status | Projected Benefit Obligations | Fair Value of Plan Assets | Funded Status | |||||||||||||||||||
Overfunded Plans: | ||||||||||||||||||||||||
International Plans | $ | (779,248 | ) | $ | 962,428 | $ | 183,180 | $ | (780,928 | ) | $ | 963,404 | $ | 182,476 | ||||||||||
Total Overfunded Plans | $ | (779,248 | ) | $ | 962,428 | $ | 183,180 | $ | (780,928 | ) | $ | 963,404 | $ | 182,476 | ||||||||||
Underfunded Plans: | ||||||||||||||||||||||||
U.S. Plans | $ | (38,618 | ) | $ | 29,640 | $ | (8,978 | ) | $ | (33,431 | ) | $ | 28,451 | $ | (4,980 | ) | ||||||||
International Plans | (136,542 | ) | 102,241 | (34,301 | ) | (130,314 | ) | 99,415 | (30,899 | ) | ||||||||||||||
Total Underfunded Plans | $ | (175,160 | ) | $ | 131,881 | $ | (43,279 | ) | $ | (163,745 | ) | $ | 127,866 | $ | (35,879 | ) | ||||||||
The following tables present a summary of the total net cost recorded in the consolidated statement of income for the pension and post-retirement life insurance benefit plans for 2011, 2010 and 2009 (in thousands):
2011 | ||||||||||||||||
Pension Plans | Post-retirement Benefit Plan | |||||||||||||||
U.S. Plans | International Plans | Total | Total | |||||||||||||
Service cost | $ | — | $ | 9,987 | $ | 9,987 | $ | 1,765 | ||||||||
Interest cost | 1,864 | 42,934 | 44,798 | 1,479 | ||||||||||||
Expected return on plan assets | (1,686 | ) | (58,903 | ) | (60,589 | ) | — | |||||||||
Amortization of actuarial losses | — | 1,461 | 1,461 | 1,716 | ||||||||||||
Net periodic pension expense (income) | $ | 178 | $ | (4,521 | ) | $ | (4,343 | ) | $ | 4,960 | ||||||
2010 | ||||||||||||||||
Pension Plans | Post-retirement Benefit Plan | |||||||||||||||
U.S. Plans | International Plans | Total | Total | |||||||||||||
Service cost | $ | — | $ | 10,717 | $ | 10,717 | $ | 895 | ||||||||
Interest cost | 1,841 | 37,718 | 39,559 | 695 | ||||||||||||
Expected return on plan assets | (1,735 | ) | (61,361 | ) | (63,096 | ) | — | |||||||||
Amortization of actuarial losses | 2 | 3,991 | 3,993 | — | ||||||||||||
Net periodic pension expense (income) | $ | 108 | $ | (8,935 | ) | $ | (8,827 | ) | $ | 1,590 | ||||||
2009 | ||||||||||||||||
Pension Plans | Post-retirement Benefit Plan | |||||||||||||||
U.S. Plans | International Plans | Total | Total | |||||||||||||
Service cost | $ | — | $ | 9,641 | $ | 9,641 | $ | — | ||||||||
Interest cost | 1,868 | 47,962 | 49,830 | — | ||||||||||||
Expected return on plan assets | (1,507 | ) | (57,531 | ) | (59,038 | ) | — | |||||||||
Amortization of actuarial losses | — | 9,328 | 9,328 | — | ||||||||||||
Net periodic pension expense | $ | 361 | $ | 9,400 | $ | 9,761 | $ | — | ||||||||
C-24
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The following table presents the changes in benefit obligations during 2010 and 2011 (in thousands):
Pension Plans | Post-retirement Benefit Plans | |||||||||||||||
U.S. Plans | International Plans | Total | Total | |||||||||||||
Projected benefit obligation at January 30, 2010 | $ | 32,178 | $ | 903,807 | $ | 935,985 | $ | — | ||||||||
Service cost | — | 10,717 | 10,717 | 895 | ||||||||||||
Interest cost | 1,841 | 37,718 | 39,559 | 695 | ||||||||||||
Plan participants' contributions | — | 1,427 | 1,427 | — | ||||||||||||
Actuarial losses | 761 | 22,049 | 22,810 | — | ||||||||||||
Benefits paid | (1,349 | ) | (47,551 | ) | (48,900 | ) | — | |||||||||
Prior service cost | — | — | — | 23,691 | ||||||||||||
Other | — | (3,202 | ) | (3,202 | ) | — | ||||||||||
Currency translation adjustments | — | (13,723 | ) | (13,723 | ) | — | ||||||||||
Projected benefit obligation at January 29, 2011 | $ | 33,431 | $ | 911,242 | $ | 944,673 | $ | 25,281 | ||||||||
Service cost | — | 9,987 | 9,987 | 1,765 | ||||||||||||
Interest cost | 1,864 | 42,934 | 44,798 | 1,479 | ||||||||||||
Plan participants' contributions | — | 1,455 | 1,455 | — | ||||||||||||
Actuarial losses | 4,816 | 37,388 | 42,204 | 9,264 | ||||||||||||
Benefits paid | (1,493 | ) | (55,668 | ) | (57,161 | ) | (491 | ) | ||||||||
Other | — | 11,031 | 11,031 | — | ||||||||||||
Currency translation adjustments | — | (42,579 | ) | (42,579 | ) | — | ||||||||||
Projected benefit obligation at January 28, 2012 | $ | 38,618 | $ | 915,790 | $ | 954,408 | $ | 37,298 | ||||||||
The accumulated benefit obligation for the U.S. Plans and International Plans at January 28, 2012 was $38.6 million and $889.5 million, respectively. The accumulated benefit obligation for the U.S. Plans and International Plans at January 29, 2011 was $33.4 million and $885.8 million, respectively. The accumulated benefit obligation for the post-retirement benefit obligation was $37.3 million and $25.3 million at January 28, 2012 and January 29, 2011, respectively.
C-25
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The following table presents the changes in pension plan assets for each of the defined benefit pension plans during 2010 and 2011 (in thousands):
U.S. Plans | International Plans | Total | ||||||||||
Fair value of plan assets at January 30, 2010 | $ | 24,836 | $ | 995,957 | $ | 1,020,793 | ||||||
Actual return on plan assets | 3,760 | 116,697 | 120,457 | |||||||||
Employer's contributions | 1,206 | 13,504 | 14,710 | |||||||||
Plan participants' contributions | — | 1,427 | 1,427 | |||||||||
Benefits paid | (1,349 | ) | (47,551 | ) | (48,900 | ) | ||||||
Amortization of unrecognized losses | (2 | ) | (3,991 | ) | (3,993 | ) | ||||||
Currency translation adjustments | — | (13,224 | ) | (13,224 | ) | |||||||
Fair value of plan assets at January 29, 2011 | $ | 28,451 | $ | 1,062,819 | $ | 1,091,270 | ||||||
Actual return on plan assets | 1,521 | 85,889 | 87,410 | |||||||||
Employer's contributions | 1,161 | 10,987 | 12,148 | |||||||||
Plan participants' contributions | — | 1,455 | 1,455 | |||||||||
Benefits paid | (1,493 | ) | (55,668 | ) | (57,161 | ) | ||||||
Other | — | 11,031 | 11,031 | |||||||||
Amortization of unrecognized losses | — | (1,461 | ) | (1,461 | ) | |||||||
Currency translation adjustments | — | (50,383 | ) | (50,383 | ) | |||||||
Fair value of plan assets at January 28, 2012 | $ | 29,640 | $ | 1,064,669 | $ | 1,094,309 | ||||||
The funded status for the U.S. Plans and International Pension Plans at January 28, 2012 was $9.0 million underfunded and $148.9 million overfunded, respectively. The funded status for the U.S. Plans and International Pension Plans at January 29, 2011 was $5.0 million underfunded and $151.6 million overfunded, respectively.
Amounts recognized in the consolidated balance sheet consist of the following (in thousands):
January 28, 2012 | ||||||||||||||||
Pension Plans | Post-retirement Benefit Plans | |||||||||||||||
U.S. Plans | International Plans | Total | Total | |||||||||||||
Prepaid benefit cost (included in other assets) | $ | — | $ | 183,180 | $ | 183,180 | $ | — | ||||||||
Accrued benefit liability (included in other long-term obligations) | (8,978 | ) | (34,301 | ) | (43,279 | ) | (37,298 | ) | ||||||||
Accumulated other comprehensive loss | 7,638 | 119,377 | 127,015 | 30,389 | ||||||||||||
Net amount recognized | $ | (1,340 | ) | $ | 268,256 | $ | 266,916 | $ | (6,909 | ) | ||||||
January 29, 2011 | ||||||||||||||||
Pension Plans | Post-retirement Benefit Plans | |||||||||||||||
U.S. Plans | International Plans | Total | Total | |||||||||||||
Prepaid benefit cost (included in other assets) | $ | — | $ | 182,476 | $ | 182,476 | $ | — | ||||||||
Accrued benefit liability (included in other long-term obligations) | (4,980 | ) | (30,899 | ) | (35,879 | ) | (25,281 | ) | ||||||||
Accumulated other comprehensive loss | 2,655 | 105,613 | 108,268 | 21,616 | ||||||||||||
Net amount recognized | $ | (2,325 | ) | $ | 257,190 | $ | 254,865 | $ | (3,665 | ) | ||||||
Amounts recognized in accumulated other comprehensive loss that have not yet been recognized as components of net periodic pension and post-retirement costs at January 28, 2012 and January 29, 2011 are comprised of actuarial losses and prior service costs.
C-26
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The amount of accumulated other comprehensive loss expected to be recognized as components of net periodic pension and post-retirement benefit costs during 2012 is approximately $2.0 million and $2.1 million, respectively.
There were no significant amendments to any of the Company's defined benefit pension plans or the post-retirement life insurance benefit plan in 2011 or 2010 that would have had a material effect on the consolidated statement of income in these periods.
Assumptions Used to Determine Plan Financial Information
The valuation of benefit obligations and net periodic pension and post-retirement benefit cost uses participant-specific information such as salary, age and years of service, as well as certain assumptions, the most significant of which include estimates of discount rates, expected return on plan assets, rate of compensation increases, interest rates and mortality rates.
The following table presents the assumptions used to measure the net periodic cost and the year-end benefit obligations for the defined benefit pension and post-retirement benefit plans for 2011, 2010 and 2009:
2011 | |||||||||
Pension Plans | Post-retirement Benefit Plan | ||||||||
U.S. Plans | International Plans | ||||||||
Weighted-average assumptions used to measure net periodic pension cost: | |||||||||
Discount rate | 5.7 | % | 4.8 | % | 4.9 | % | |||
Expected return on plan assets | 7.0 | % | 6.4 | % | — | % | |||
Rate of compensation increase | — | % | 2.2 | % | 3.0 | % | |||
Weighted-average assumptions used to measure benefit obligations at year-end: | |||||||||
Discount rate | 4.7 | % | 4.3 | % | 4.9 | % | |||
Rate of compensation increase | — | % | 2.1 | % | 3.0 | % | |||
Rate of pension increase | — | % | 1.1 | % | — | % | |||
2010 | |||||||||
Pension Plans | Post-retirement Benefit Plan | ||||||||
U.S. Plans | International Plans | ||||||||
Weighted-average assumptions used to measure net periodic pension cost: | |||||||||
Discount rate | 5.9 | % | 4.6 | % | 5.9 | % | |||
Expected return on plan assets | 7.0 | % | 6.4 | % | — | % | |||
Rate of compensation increase | — | % | 2.2 | % | 3.0 | % | |||
Weighted-average assumptions used to measure benefit obligations at year-end: | |||||||||
Discount rate | 5.7 | % | 4.8 | % | 5.9 | % | |||
Rate of compensation increase | — | % | 2.1 | % | 3.0 | % | |||
Rate of pension increase | — | % | 1.1 | % | — | % | |||
C-27
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
2009 | ||||||
Pension Plans | ||||||
U.S. Plans | International Plans | |||||
Weighted-average assumptions used to measure net periodic pension cost: | ||||||
Discount rate | 6.8 | % | 5.8 | % | ||
Expected return on plan assets | 7.0 | % | 6.4 | % | ||
Rate of compensation increase | — | % | 3.0 | % | ||
Weighted-average assumptions used to measure benefit obligations at year-end: | ||||||
Discount rate | 5.9 | % | 4.5 | % | ||
Rate of compensation increase | — | % | 2.1 | % | ||
Rate of pension increase | — | % | 1.1 | % | ||
The following table shows the effect on pension obligations at January 28, 2012 of a change in discount rate and other assumptions (in thousands):
Change in Discount Rate | ||||||||||||
(.25%) | No change | 0.25% | ||||||||||
Change in rate of compensation increase: | ||||||||||||
(.25%) | $ | 26,074 | $ | (1,616 | ) | $ | (27,452 | ) | ||||
No change | 27,563 | — | (26,087 | ) | ||||||||
0.25% | 29,412 | 1,580 | (24,763 | ) | ||||||||
Change in rate of pension increase: | ||||||||||||
(.25%) | $ | 4,792 | $ | (21,879 | ) | $ | (46,810 | ) | ||||
No change | 27,563 | — | (26,087 | ) | ||||||||
0.25% | 51,876 | 22,930 | (4,517 | ) | ||||||||
The discount rate used is the interest rate on high quality (AA rated) corporate bonds that have a maturity approximating the term of the related obligations. In estimating the expected return on plan assets, appropriate consideration is taken into account of the historical performance for the major asset classes held, or anticipated to be held, by the applicable pension funds and of current forecasts of future rates of return for those asset classes.
Staples' investment strategy for worldwide pension plan assets is to seek a competitive rate of return relative to an appropriate level of risk depending on the funded status of each plan. The majority of the plans' investment managers employ active investment management strategies with the goal of outperforming the broad markets in which they invest. Risk management practices include diversification across asset classes and investment styles and periodic rebalancing toward asset allocation targets. A portion of the currency risk related to investments in equity securities, real estate and debt securities is hedged.
The target allocation reflects a risk/return profile Staples feels is appropriate relative to each plan's liability structure and return goals. Staples conducts periodic asset-liability studies for the plan assets in order to model various potential asset allocations in comparison to each plan's forecasted liabilities and liquidity needs.
Outside the United States, asset allocation decisions are typically made by an independent board of trustees. As in the U.S., investment objectives are designed to generate returns that will enable the plan to meet its future obligations. In some countries local regulations require adjustments in asset allocation, typically leading to a higher percentage in fixed income than would otherwise be deployed. Staples acts in a consulting and governance role via its board representatives in reviewing investment strategy, with final decisions on asset allocation and investment managers made by local trustees.
C-28
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The Company's pension plans' actual and target asset allocations at January 28, 2012 and January 29, 2011 are as follows:
January 28, 2012 | ||||||||||||||||||
Actual | Target | |||||||||||||||||
U.S. Plans | International Plans | Total | U.S. Plans | International Plans | Total | |||||||||||||
Asset allocation: | ||||||||||||||||||
Equity securities | 36 | % | 31 | % | 31 | % | 40 | % | 39 | % | 39 | % | ||||||
Debt securities | 57 | % | 49 | % | 49 | % | 60 | % | 47 | % | 47 | % | ||||||
Real estate | 7 | % | 8 | % | 8 | % | — | % | 8 | % | 8 | % | ||||||
Cash | — | % | 5 | % | 5 | % | — | % | — | % | — | % | ||||||
Other | — | % | 7 | % | 7 | % | — | % | 6 | % | 6 | % | ||||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||
January 29, 2011 | ||||||||||||||||||
Actual | Target | |||||||||||||||||
U.S. Plans | International Plans | Total | U.S. Plans | International Plans | Total | |||||||||||||
Asset allocation: | ||||||||||||||||||
Equity securities | 41 | % | 33 | % | 33 | % | 36 | % | 39 | % | 39 | % | ||||||
Debt securities | 59 | % | 49 | % | 49 | % | 64 | % | 48 | % | 48 | % | ||||||
Real estate | — | % | 9 | % | 9 | % | — | % | 7 | % | 7 | % | ||||||
Cash | — | % | 3 | % | 3 | % | — | % | — | % | — | % | ||||||
Other | — | % | 6 | % | 6 | % | — | % | 6 | % | 6 | % | ||||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||
No pension plan assets are expected to be returned to the Company during 2012.
Information on Fair Value of Plan Assets
The fair values of the Company's pension plan assets at January 28, 2012 by asset category are as follows (in thousands):
U.S. Pension Plans | ||||||||||||||||
Asset Category: | Fair Market Value | Quoted Prices in Active Markets for Identical Assets Level 1 | Significant Other Observable Inputs Level 2 | Unobservable Inputs Level 3 | ||||||||||||
Equity securities(1) | $ | 10,731 | $ | 10,731 | $ | — | $ | — | ||||||||
Debt securities(2) | 16,703 | 6,765 | — | 9,938 | ||||||||||||
Real estate(3) | 2,206 | 2,206 | — | — | ||||||||||||
Total | $ | 29,640 | $ | 19,702 | $ | — | $ | 9,938 | ||||||||
C-29
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
International Pension Plans | ||||||||||||||||
Asset Category: | Fair Market Value | Quoted Prices in Active Markets for Identical Assets Level 1 | Significant Other Observable Inputs Level 2 | Unobservable Inputs Level 3 | ||||||||||||
Equity securities(1) | $ | 323,373 | $ | 295,455 | $ | 27,918 | $ | — | ||||||||
Debt securities(2) | 524,357 | 517,346 | 7,011 | — | ||||||||||||
Real estate(3) | 88,871 | 80,824 | 8,047 | — | ||||||||||||
Cash | 56,980 | 56,980 | — | — | ||||||||||||
Other(4) | 71,088 | 15,026 | 56,062 | — | ||||||||||||
Total | $ | 1,064,669 | $ | 965,631 | $ | 99,038 | $ | — | ||||||||
(1) | This category includes investments in equity securities of large, small and medium sized companies in the U.S. and in foreign companies, including those in developing countries. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. |
(2) | This category includes investments in investment grade fixed income instrument, U.S. dollar denominated debt securities of emerging market issuers and high yield fixed-income securities that are rated below investment grade. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is issued to value the fund. |
(3) | This category includes investments in mortgage-backed and asset-backed securities. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. |
(4) | This category includes commodities of approximately $49.9 million and non-separated investments with insurance companies of approximately $13.1 million. |
The change in the fair value for the pension assets valued using significant unobservable inputs (Level 3) was due to the following:
U.S. Plans | |||
Balance at January 29, 2011 | $ | 10,129 | |
Actual Return on Plan Assets: | |||
Relating to assets still held at the reporting date | 536 | ||
Relating to assets sold during the period | — | ||
Purchases, sales and settlements | (727 | ) | |
Balance at January 28, 2012 | $ | 9,938 | |
Expected Benefit Payments and Contributions
The following table presents the expected benefit payments to pension plan participants for the next five years, and the aggregate for the following five years (in thousands):
Pension Plans | ||||||||||||
U.S. Plans | International Plans | Total | ||||||||||
2012 | $ | 1,674 | $ | 52,766 | $ | 54,440 | ||||||
2013 | 1,718 | 52,025 | 53,743 | |||||||||
2014 | 1,827 | 52,621 | 54,448 | |||||||||
2015 | 1,941 | 53,361 | 55,302 | |||||||||
2016 | 2,045 | 52,907 | 54,952 | |||||||||
2017-2021 | 11,974 | 258,290 | 270,264 | |||||||||
These payments have been estimated based on the same assumptions used to measure the plans' projected benefit obligation at January 28, 2012 and include benefits attributable to estimated future compensation increases for the pension plans.
The 2012 expected benefit payments to plan participants not covered by the respective plan assets (that is, underfunded plans) represent a component of other long-term obligations in the consolidated balance sheet.
C-30
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The following table presents, based on current assumptions, the Company's expected contributions for the next five years and the aggregate for the following five years (in thousands):
Pension Plans | ||||||||||||
U.S. Plans | International Plans | Total | ||||||||||
2012 | $ | 1,366 | $ | 13,341 | $ | 14,707 | ||||||
2013 | 1,483 | 13,715 | 15,198 | |||||||||
2014 | 1,483 | 13,771 | 15,254 | |||||||||
2015 | 1,465 | 13,860 | 15,325 | |||||||||
2016 | 1,465 | 14,242 | 15,707 | |||||||||
2017-2021 | 5,804 | 76,274 | 82,078 | |||||||||
There are no expected benefit payments and contributions associated with the other post-retirement benefit plans.
Employees' 401(k) Savings Plan and Other Defined Contribution Plans
Staples' Employees' 401(k) Savings Plan (the "401(k) Plan") is available to all United States based employees of Staples who meet minimum age and length of service requirements. Beginning in 2009, contributions to the 401(k) Plan are made in cash and vest ratably over a five year period. The Supplemental Executive Retirement Plan (the "SERP Plan"), which is similar in many respects to the 401(k) Plan, is available to certain Company executives and other highly compensated employees, whose contributions to the 401(k) Plan are limited, and allows such individuals to supplement their contributions to the 401(k) Plan by making pre-tax contributions to the SERP Plan. Company contributions to the SERP Plan are based on a similar matching formula and vesting period.
The expense associated with the Company's match for the Staples 401(k) Savings Plan and for contributions made related to certain foreign defined contribution plans for 2011, 2010 and 2009 was $41.2 million, $35.6 million and $36.3 million, respectively.
NOTE L—Stockholders' Equity
Repurchase Program
On June 7, 2010, the Company resumed the share repurchase program which went into effect in the second quarter of 2007 (the "2007 Repurchase Plan"), allowing for the repurchase of $1.5 billion of Staples' common stock. Under the 2007 Repurchase Plan, a total of $1.28 billion was used to repurchase shares and $218.4 million was remaining when the plan was terminated and replaced by a new program in September 2011.
On September 13, 2011, the Company announced a new repurchase program that had been approved by the Board of Directors in September 2011 (the "2011 Repurchase Plan"). Under the 2011 Repurchase Plan, the Company was authorized to repurchase up to $1.5 billion of common stock in both open market and privately negotiated transactions. The program has no expiration date and may be suspended or discontinued at any time. Under the 2011 Repurchase Plan, a total of $182.5 million was used to repurchase 12.6 million shares as of January 28, 2012. The Company has the authority to repurchase up to $1.32 billion under the share repurchase program as of January 28, 2012.
Outstanding Shares
The following summarizes the activity related to our outstanding shares (in thousands):
January 28, 2012 | January 29, 2011 | January 30, 2010 | |||||||
Outstanding at beginning of fiscal year | 709,458 | 718,010 | 704,907 | ||||||
Repurchases | (37,315 | ) | (17,817 | ) | — | ||||
Releases | 3,387 | 3,574 | 2,988 | ||||||
Issuance of stock for exercises of common stock options and sales under Employee Stock Purchase Plans | 7,081 | 5,691 | 10,115 | ||||||
Outstanding at end of fiscal year | 682,611 | 709,458 | 718,010 | ||||||
C-31
NOTE M—Computation of Earnings per Common Share
The computation of basic and diluted earnings per share for 2011, 2010 and 2009 is as follows (in thousands, except per share data):
2011 | 2010 | 2009 | ||||||||||
Numerator: | ||||||||||||
Net income attributed to Staples, Inc. | $ | 984,656 | $ | 881,948 | $ | 738,671 | ||||||
Denominator: | ||||||||||||
Weighted-average common shares outstanding | 694,986 | 715,596 | 709,744 | |||||||||
Effect of dilutive securities: | ||||||||||||
Employee stock options, Restricted Shares and Performance Shares | 9,033 | 10,624 | 12,094 | |||||||||
Weighted-average common shares outstanding assuming dilution | 704,019 | 726,220 | 721,838 | |||||||||
Basic earnings per common share | $ | 1.42 | $ | 1.23 | $ | 1.04 | ||||||
Diluted earnings per common share | $ | 1.40 | $ | 1.21 | $ | 1.02 | ||||||
Options to purchase shares of common stock are excluded from the calculation of diluted earnings per share when their inclusion would have an anti-dilutive effect on the calculation. Options to purchase 41.3 million shares, 13.3 million shares and 12.7 million shares of Staples common stock were excluded from the calculation of diluted earnings per share for 2011, 2010 and 2009, respectively.
NOTE N—Segment Reporting
Staples has three reportable segments: North American Delivery, North American Retail and International Operations. The North American Delivery segment consists of the U.S. and Canadian businesses that sell and deliver office products and services directly to consumers and businesses and includes Staples Advantage, Staples.com and Quill.com. The North American Retail segment consists of the U.S. and Canadian businesses that operate stores that sell office products and services. The International Operations segment consists of businesses that operate stores and that sell and deliver office products and services directly to consumers and businesses in 24 countries in Europe, Australia, South America and Asia.
Staples evaluates performance and allocates resources based on profit or loss from operations before integration and restructuring costs, stock-based compensation, interest and other expense, non-recurring items and the impact of changes in accounting principles ("business unit income"). The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note A. Intersegment sales and transfers are recorded at Staples' cost; therefore, there is no intercompany profit or loss recognized on these transactions.
Staples' North American Delivery and North American Retail segments are managed separately because the way they market products is different, the classes of customers they service may be different and the distribution methods used to deliver products to customers are different. The International Operations are considered a separate reportable segment because of the significant differences in the operating environment from the North American operations.
C-32
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The following is a summary of sales, business unit income, and significant accounts and balances by reportable segment (in thousands):
2011 | 2010 | 2009 | ||||||||||
Sales: | ||||||||||||
North American Delivery | $ | 10,056,011 | $ | 9,849,218 | $ | 9,640,390 | ||||||
North American Retail | 9,660,847 | 9,529,757 | 9,364,190 | |||||||||
International Operations | 5,305,334 | 5,166,138 | 5,270,871 | |||||||||
Total segment sales | $ | 25,022,192 | $ | 24,545,113 | $ | 24,275,451 | ||||||
Business Unit Income: | ||||||||||||
North American Delivery | $ | 877,867 | $ | 841,429 | $ | 786,723 | ||||||
North American Retail | 804,396 | 770,122 | 774,529 | |||||||||
International Operations | 97,993 | 166,606 | 122,028 | |||||||||
Business unit income | 1,780,256 | 1,778,157 | 1,683,280 | |||||||||
Depreciation & Amortization: | ||||||||||||
North American Delivery | $ | 149,826 | $ | 157,960 | $ | 175,058 | ||||||
North American Retail | 199,885 | 217,177 | 229,362 | |||||||||
International Operations | 132,345 | 123,726 | 148,021 | |||||||||
Total depreciation & amortization | $ | 482,056 | $ | 498,863 | $ | 552,441 | ||||||
Capital Expenditures: | ||||||||||||
North American Delivery | $ | 131,295 | $ | 140,247 | $ | 93,309 | ||||||
North American Retail | 169,652 | 183,828 | 133,161 | |||||||||
International Operations | 82,707 | 84,814 | 86,758 | |||||||||
Total capital expenditures | $ | 383,654 | $ | 408,889 | $ | 313,228 | ||||||
The following is a reconciliation of total business unit income to consolidated income before income taxes (in thousands):
2011 | 2010 | 2009 | ||||||||||
Total business unit income | $ | 1,780,256 | $ | 1,778,157 | $ | 1,683,280 | ||||||
Stock-based compensation | (151,822 | ) | (146,879 | ) | (174,691 | ) | ||||||
Integration and restructuring costs | — | (57,765 | ) | (84,244 | ) | |||||||
Impact of wage and hour settlement | — | — | (42,000 | ) | ||||||||
Interest and other expense, net | (169,293 | ) | (216,918 | ) | (226,451 | ) | ||||||
Consolidated income before income taxes | $ | 1,459,141 | $ | 1,356,595 | $ | 1,155,894 | ||||||
The following table shows our assets by reportable segment (in thousands):
January 28, 2012 | January 29, 2011 | January 30, 2010 | ||||||||||
Assets: | ||||||||||||
North American Delivery | $ | 4,725,434 | $ | 4,999,421 | $ | 4,998,220 | ||||||
North American Retail | 3,313,281 | 3,165,648 | 3,145,853 | |||||||||
International Operations | 5,391,907 | 5,746,598 | 5,573,261 | |||||||||
Total consolidated assets | $ | 13,430,622 | $ | 13,911,667 | $ | 13,717,334 | ||||||
C-33
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The following table shows our sales by each major category as a percentage of total sales for the periods indicated:
Fiscal Year Ended | |||||||||
January 28, 2012 | January 29, 2011 | January 30, 2010 | |||||||
Office supplies | 43.9 | % | 43.3 | % | 43.1 | % | |||
Services | 6.0 | % | 5.5 | % | 5.2 | % | |||
Office machines and related products | 30.1 | % | 30.7 | % | 31.3 | % | |||
Computers and related products | 15.0 | % | 15.3 | % | 15.2 | % | |||
Office furniture | 5.0 | % | 5.2 | % | 5.2 | % | |||
100.0 | % | 100.0 | % | 100.0 | % | ||||
Geographic Information:
2011 | 2010 | 2009 | ||||||||||
Sales: | ||||||||||||
United States | $ | 16,643,255 | $ | 16,462,822 | $ | 16,343,340 | ||||||
Canada | 3,073,603 | 2,916,153 | 2,661,238 | |||||||||
International | 5,305,334 | 5,166,138 | 5,270,873 | |||||||||
Total consolidated sales | $ | 25,022,192 | $ | 24,545,113 | $ | 24,275,451 | ||||||
January 28, 2012 | January 29, 2011 | January 29, 2011 | ||||||||||
Long-lived Assets: | ||||||||||||
United States | $ | 3,381,719 | $ | 3,461,083 | $ | 3,561,702 | ||||||
Canada | 274,679 | 281,555 | 263,761 | |||||||||
International | 2,875,846 | 3,023,609 | 3,028,198 | |||||||||
Total consolidated long-lived assets | $ | 6,532,244 | $ | 6,766,247 | $ | 6,853,661 | ||||||
NOTE O—Guarantor Subsidiaries
Under the terms of the Company's November 2014 Revolving Credit Facility, the October 2012 Notes and the January 2014 Notes, the Guarantor Subsidiaries (as defined in Note E) guarantee repayment of the debt. The debt is fully and unconditionally guaranteed on an unsecured, joint and several basis by the Guarantor Subsidiaries. The term of guarantees is equivalent to the term of the related debt. The following condensed consolidating financial data is presented for the holders of the October 2012 Notes and the January 2014 Notes and illustrates the composition of Staples, Inc. (the "Parent Company"), Guarantor Subsidiaries, and non-guarantor subsidiaries as of January 28, 2012 and January 29, 2011 and for the years ended January 28, 2012, January 29, 2011 and January 30, 2010. The Guarantor Subsidiaries are wholly owned by Staples, Inc. The non-guarantor subsidiaries represent more than an inconsequential portion of the consolidated assets and revenues of Staples.
Investments in subsidiaries are accounted for by the Parent Company on the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are, therefore, reflected in the Parent Company's investment accounts and earnings. The principal elimination entries eliminate the Parent Company's investment in subsidiaries and intercompany balances and transactions.
C-34
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Condensed Consolidating Balance Sheet
January 28, 2012
(in thousands)
Staples, Inc. (Parent Co.) | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Cash and cash equivalents | $ | 385,279 | $ | 43,323 | $ | 835,547 | $ | — | $ | 1,264,149 | ||||||||||
Merchandise inventories, net | — | 1,437,074 | 994,771 | — | 2,431,845 | |||||||||||||||
Other current assets | 68,608 | 1,188,378 | 1,337,840 | — | 2,594,826 | |||||||||||||||
Total current assets | 453,887 | 2,668,775 | 3,168,158 | — | 6,290,820 | |||||||||||||||
Net property, equipment and other assets | 671,787 | 1,165,840 | 1,320,045 | — | 3,157,672 | |||||||||||||||
Goodwill | 1,644,728 | 156,303 | 2,181,099 | — | 3,982,130 | |||||||||||||||
Investment in affiliates and intercompany, net | 5,951,426 | 6,935,956 | 10,988,680 | (23,876,062 | ) | — | ||||||||||||||
Total assets | $ | 8,721,828 | $ | 10,926,874 | $ | 17,657,982 | $ | (23,876,062 | ) | $ | 13,430,622 | |||||||||
Total current liabilities | $ | (13,544 | ) | $ | 2,314,411 | $ | 1,773,411 | $ | — | $ | 4,074,278 | |||||||||
Total long-term liabilities | 1,713,159 | 195,852 | 425,120 | — | 2,334,131 | |||||||||||||||
Total stockholders' equity | 7,022,213 | 8,416,611 | 15,459,451 | (23,876,062 | ) | 7,022,213 | ||||||||||||||
Total liabilities and stockholders' equity | $ | 8,721,828 | $ | 10,926,874 | $ | 17,657,982 | $ | (23,876,062 | ) | $ | 13,430,622 | |||||||||
Condensed Consolidating Balance Sheet
As of January 29, 2011
(in thousands)
Staples, Inc. (Parent Co.) | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Cash and cash equivalents | $ | 406,821 | $ | 38,298 | $ | 1,016,138 | $ | — | $ | 1,461,257 | ||||||||||
Merchandise inventories, net | — | 1,396,667 | 962,506 | — | 2,359,173 | |||||||||||||||
Other current assets | 64,699 | 1,147,433 | 1,435,605 | — | 2,647,737 | |||||||||||||||
Total current assets | 471,520 | 2,582,398 | 3,414,249 | — | 6,468,167 | |||||||||||||||
Net property, equipment and other assets | 742,833 | 1,246,194 | 1,381,311 | — | 3,370,338 | |||||||||||||||
Goodwill | 1,617,937 | 154,527 | 2,300,698 | — | 4,073,162 | |||||||||||||||
Investment in affiliates and intercompany, net | 6,691,832 | 4,783,397 | 7,001,204 | (18,476,433 | ) | — | ||||||||||||||
Total assets | $ | 9,524,122 | $ | 8,766,516 | $ | 14,097,462 | $ | (18,476,433 | ) | $ | 13,911,667 | |||||||||
Total current liabilities | $ | 875,100 | $ | 1,454,741 | $ | 1,963,752 | $ | — | $ | 4,293,593 | ||||||||||
Total long-term liabilities | 1,697,841 | 562,027 | 407,025 | — | 2,666,893 | |||||||||||||||
Total stockholders' equity | 6,951,181 | 6,749,748 | 11,726,685 | (18,476,433 | ) | 6,951,181 | ||||||||||||||
Total liabilities and stockholders' equity | $ | 9,524,122 | $ | 8,766,516 | $ | 14,097,462 | $ | (18,476,433 | ) | $ | 13,911,667 | |||||||||
C-35
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Condensed Consolidating Statement of Income
For the year ended January 28, 2012
(in thousands)
Staples, Inc. (Parent Co.) | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Sales | $ | — | $ | 15,303,379 | $ | 9,718,813 | $ | — | $ | 25,022,192 | ||||||||||
Cost of goods sold and occupancy costs | 11,328 | 11,383,452 | 6,885,584 | — | 18,280,364 | |||||||||||||||
Gross (loss) profit | (11,328 | ) | 3,919,927 | 2,833,229 | — | 6,741,828 | ||||||||||||||
Operating and other (income) expenses | (995,984 | ) | 3,096,381 | 2,181,477 | 1,000,813 | 5,282,687 | ||||||||||||||
Consolidated income (loss) before income taxes | 984,656 | 823,546 | 651,752 | (1,000,813 | ) | 1,459,141 | ||||||||||||||
Income tax expense | — | 307,177 | 168,131 | — | 475,308 | |||||||||||||||
Consolidated net income (loss) | 984,656 | 516,369 | 483,621 | (1,000,813 | ) | 983,833 | ||||||||||||||
Loss attributed to the noncontrolling interests | — | — | (823 | ) | — | (823 | ) | |||||||||||||
Net income (loss) attributed to Staples, Inc. | $ | 984,656 | $ | 516,369 | $ | 484,444 | $ | (1,000,813 | ) | $ | 984,656 | |||||||||
Condensed Consolidating Statement of Income
For the year ended January 29, 2011
(in thousands)
Staples, Inc. (Parent Co.) | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Sales | $ | — | $ | 14,900,355 | $ | 9,644,758 | $ | — | $ | 24,545,113 | ||||||||||
Cost of goods sold and occupancy costs | 11,277 | 11,126,849 | 6,800,832 | — | 17,938,958 | |||||||||||||||
Gross (loss) profit | (11,277 | ) | 3,773,506 | 2,843,926 | — | 6,606,155 | ||||||||||||||
Operating and other (income) expenses | (893,225 | ) | 3,072,351 | 2,154,558 | 915,876 | 5,249,560 | ||||||||||||||
Consolidated income (loss) before income taxes | 881,948 | 701,155 | 689,368 | (915,876 | ) | 1,356,595 | ||||||||||||||
Income tax expense | — | 318,705 | 149,321 | — | 468,026 | |||||||||||||||
Consolidated net income (loss) | 881,948 | 382,450 | 540,047 | (915,876 | ) | 888,569 | ||||||||||||||
Income attributed to the noncontrolling interests | — | — | 6,621 | — | 6,621 | |||||||||||||||
Net income (loss) attributed to Staples, Inc. | $ | 881,948 | $ | 382,450 | $ | 533,426 | $ | (915,876 | ) | $ | 881,948 | |||||||||
C-36
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Condensed Consolidating Statement of Income
For the year ended January 30, 2010
(in thousands)
Staples, Inc. (Parent Co.) | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Sales | $ | — | $ | 13,577,862 | $ | 10,697,589 | $ | — | $ | 24,275,451 | ||||||||||
Cost of goods sold and occupancy costs | 11,324 | 10,043,973 | 7,746,251 | — | 17,801,548 | |||||||||||||||
Gross (loss) profit | (11,324 | ) | 3,533,889 | 2,951,338 | — | 6,473,903 | ||||||||||||||
Operating and other (income) expenses | (749,995 | ) | 2,956,530 | 2,261,707 | 849,767 | 5,318,009 | ||||||||||||||
Consolidated income (loss) before income taxes | 738,671 | 577,359 | 689,631 | (849,767 | ) | 1,155,894 | ||||||||||||||
Income tax expense | — | 174,152 | 224,631 | — | 398,783 | |||||||||||||||
Consolidated net income (loss) | 738,671 | 403,207 | 465,000 | (849,767 | ) | 757,111 | ||||||||||||||
Income attributed to the noncontrolling interests | — | — | 18,440 | — | 18,440 | |||||||||||||||
Net income (loss) attributed to Staples, Inc. | $ | 738,671 | $ | 403,207 | $ | 446,560 | $ | (849,767 | ) | $ | 738,671 | |||||||||
Condensed Consolidating Statement of Cash Flows
For the year ended January 28, 2012
(in thousands)
Staples, Inc. (Parent Co.) | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Consolidated | |||||||||||||
Net cash provided by operating activities | $ | 1,334,183 | $ | 197,956 | $ | 44,336 | $ | 1,576,475 | ||||||||
Investing activities: | ||||||||||||||||
Acquisition of property and equipment | (49,863 | ) | (206,150 | ) | (127,641 | ) | (383,654 | ) | ||||||||
Cash used in investing activities | (49,863 | ) | (206,150 | ) | (127,641 | ) | (383,654 | ) | ||||||||
Financing activities: | ||||||||||||||||
Proceeds from the exercise of stock options and the sale of stock under employee stock purchase plans | 73,866 | — | — | 73,866 | ||||||||||||
Proceeds from borrowings | 93,856 | 12,378 | 195,609 | 301,843 | ||||||||||||
Payments on borrowings, including payment of deferred financing fees | (567,419 | ) | — | (253,212 | ) | (820,631 | ) | |||||||||
Purchase of noncontrolling interest | — | — | (10,000 | ) | (10,000 | ) | ||||||||||
Cash dividends paid | (277,936 | ) | — | — | (277,936 | ) | ||||||||||
Excess tax benefits from stock-based compensation arrangements | 812 | 841 | 152 | 1,805 | ||||||||||||
Purchase of treasury stock, net | (629,041 | ) | — | — | (629,041 | ) | ||||||||||
Cash (used in) provided by financing activities | (1,305,862 | ) | 13,219 | (67,451 | ) | (1,360,094 | ) | |||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | (29,835 | ) | (29,835 | ) | ||||||||||
Net (decrease) increase in cash and cash equivalents | (21,542 | ) | 5,025 | (180,591 | ) | (197,108 | ) | |||||||||
Cash and cash equivalents at beginning of period | 406,821 | 38,298 | 1,016,138 | 1,461,257 | ||||||||||||
Cash and cash equivalents at end of period | $ | 385,279 | $ | 43,323 | $ | 835,547 | $ | 1,264,149 | ||||||||
C-37
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Condensed Consolidating Statement of Cash Flows
For the year ended January 29, 2011
(in thousands)
Staples, Inc. (Parent Co.) | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Consolidated | |||||||||||||
Net cash provided by operating activities | $ | 479,783 | $ | 198,293 | $ | 768,415 | $ | 1,446,491 | ||||||||
Investing activities: | ||||||||||||||||
Acquisition of property and equipment | (56,984 | ) | (214,319 | ) | (137,586 | ) | (408,889 | ) | ||||||||
Acquisition of businesses, net of cash acquired | — | — | (63,066 | ) | (63,066 | ) | ||||||||||
Cash used in investing activities | (56,984 | ) | (214,319 | ) | (200,652 | ) | (471,955 | ) | ||||||||
Financing activities: | ||||||||||||||||
Proceeds from the exercise of stock options and the sale of stock under employee stock purchase plans | 85,429 | — | — | 85,429 | ||||||||||||
Proceeds from borrowings | 71,033 | — | 130,533 | 201,566 | ||||||||||||
Payments on borrowings | (96,207 | ) | — | (111,271 | ) | (207,478 | ) | |||||||||
Cash dividends paid | (258,746 | ) | — | — | (258,746 | ) | ||||||||||
Purchase of noncontrolling interest | — | — | (360,595 | ) | (360,595 | ) | ||||||||||
Purchase of treasury stock, net | (398,582 | ) | — | — | (398,582 | ) | ||||||||||
Cash used in financing activities | (597,073 | ) | — | (341,333 | ) | (938,406 | ) | |||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | 9,308 | 9,308 | ||||||||||||
Net (decrease) increase in cash and cash equivalents | (174,274 | ) | (16,026 | ) | 235,738 | 45,438 | ||||||||||
Cash and cash equivalents at beginning of period | 581,095 | 54,324 | 780,400 | 1,415,819 | ||||||||||||
Cash and cash equivalents at end of period | $ | 406,821 | $ | 38,298 | $ | 1,016,138 | $ | 1,461,257 | ||||||||
C-38
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Condensed Consolidating Statement of Cash Flows
For the year ended January 30, 2010
(in thousands)
Staples, Inc. (Parent Co.) | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Consolidated | |||||||||||||
Net cash provided by operating activities | $ | 1,709,923 | $ | 159,872 | $ | 214,413 | $ | 2,084,208 | ||||||||
Investing activities: | ||||||||||||||||
Acquisition of property and equipment | (42,737 | ) | (155,684 | ) | (114,807 | ) | (313,228 | ) | ||||||||
Cash used in investing activities | (42,737 | ) | (155,684 | ) | (114,807 | ) | (313,228 | ) | ||||||||
Financing activities: | ||||||||||||||||
Payments on issuance of commercial paper | (1,195,557 | ) | — | — | (1,195,557 | ) | ||||||||||
Proceeds from borrowings | 869,380 | — | 342,044 | 1,211,424 | ||||||||||||
Payments on borrowings, including payment of deferred financing fees | (721,044 | ) | — | (224,289 | ) | (945,333 | ) | |||||||||
Purchase of treasury stock, net | (30,661 | ) | — | — | (30,661 | ) | ||||||||||
Excess tax benefits from stock-based compensation arrangements | 3,452 | 5,053 | 258 | 8,763 | ||||||||||||
Cash dividends paid | (236,874 | ) | — | — | (236,874 | ) | ||||||||||
Proceeds from the exercise of stock options and the sale of stock under employee stock purchase plans | 150,958 | — | — | 150,958 | ||||||||||||
Cash (used in) provided by financing activities | (1,160,346 | ) | 5,053 | 118,013 | (1,037,280 | ) | ||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | 48,345 | 48,345 | ||||||||||||
Net increase in cash and cash equivalents | 506,840 | 9,241 | 265,964 | 782,045 | ||||||||||||
Cash and cash equivalents at beginning of period | 74,255 | 45,083 | 514,436 | 633,774 | ||||||||||||
Cash and cash equivalents at end of period | $ | 581,095 | $ | 54,324 | $ | 780,400 | $ | 1,415,819 | ||||||||
NOTE P—Subsequent Events
Subsequent events have been evaluated through the date the financial statements were issued and no events or transactions have occurred that require disclosure or adjustment to these consolidated financial statements.
NOTE Q—Quarterly Summary (Unaudited)
(In thousands, except per share amounts) | ||||||||||||||||
First Quarter | Second Quarter(1) | Third Quarter | Fourth Quarter | |||||||||||||
Fiscal Year Ended January 28, 2012 | ||||||||||||||||
Sales | $ | 6,172,938 | $ | 5,819,612 | $ | 6,569,927 | $ | 6,459,715 | ||||||||
Gross profit | 1,636,393 | 1,540,380 | 1,832,781 | 1,732,274 | ||||||||||||
Net income attributed to Staples, Inc. | 198,245 | 176,438 | 326,380 | 283,593 | ||||||||||||
Basic earnings per common share | $ | 0.28 | $ | 0.25 | $ | 0.47 | $ | 0.41 | ||||||||
Diluted earnings per share | $ | 0.28 | $ | 0.25 | $ | 0.47 | $ | 0.41 | ||||||||
C-39
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
First Quarter(2) | Second Quarter(3) | Third Quarter(4) | Fourth Quarter(5) | |||||||||||||
Fiscal Year Ended January 29, 2011 | ||||||||||||||||
Sales | $ | 6,057,795 | $ | 5,534,240 | $ | 6,537,676 | $ | 6,415,402 | ||||||||
Gross profit | 1,619,055 | 1,462,708 | 1,803,748 | 1,720,644 | ||||||||||||
Net income attributed to Staples, Inc. | 188,770 | 129,756 | 288,680 | 274,742 | ||||||||||||
Basic earnings per common share | $ | 0.26 | $ | 0.18 | $ | 0.40 | $ | 0.39 | ||||||||
Diluted earnings per share | $ | 0.26 | $ | 0.18 | $ | 0.40 | $ | 0.38 | ||||||||
(1) | Results of operation for this period include a $20.8 million tax benefit related to a refund due to Corporate Express from the Italian government that was previously deemed uncollectible, which was recorded as a discrete item. |
(2) | Results of operation for this period include a $13.1 million charge, net of taxes ($0.02 per diluted share) related to integration and restructuring costs. |
(3) | Results of operation for this period include a $13.5 million charge, net of taxes ($0.02 per diluted share) related to integration and restructuring costs. |
(4) | Results of operation for this period include a $5.6 million charge, net of taxes ($0.01 per diluted share) related to integration and restructuring costs. |
(5) | Results of operation for this period include a $4.6 million charge, net of taxes ($0.01 per diluted share) related to integration and restructuring costs. |
C-40
(9) Item 15(a)2
Staples, Inc.
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
Accounts Receivable Allowance for Doubtful Accounts
Valuation and qualifying account information related to operations is as follows (in thousands):
Balance at Beginning of Period | Additions Charged to Expense | Deductions— Write-offs, Payments and Other Adjustments | Balance at End of Period | |||||||||||||
Fiscal year ended: | ||||||||||||||||
January 30, 2010 | $ | 57,293 | $ | 45,754 | $ | 40,023 | $ | 63,024 | ||||||||
January 29, 2011 | 63,024 | 20,679 | 28,355 | 55,348 | ||||||||||||
January 28, 2012 | 55,348 | 23,622 | 33,008 | 45,962 | ||||||||||||
C-41
EXHIBIT INDEX
Exhibit No. | Description | |
3.1^ | Restated Certificate of Incorporation, dated as of September 29, 2008. Filed as Exhibit 3.1 to the Company's Form 10-Q for the quarter ended November 1, 2008. | |
3.2^ | Amended and Restated By-laws of the Company, as amended, dated March 10, 2009. | |
4.1^ | Indenture, dated September 30, 2002, for the 7.375% Senior Notes due 2012, by and among the Company, the Guarantor Subsidiaries and HSBC Bank USA. Filed as Exhibit 4.1 to the Company's Form 8-K filed on October 8, 2002. | |
4.2^ | First Supplemental Indenture (7.375% Senior Notes), entered into as of February 1, 2004, to Indenture, dated as of September 30, 2002, by and among the Company, the Subsidiary Guarantors, the Initial Subsidiary Guarantors and HSBC Bank. Filed as Exhibit 4.1 to the Company's Form 10-Q for the quarter ended May 1, 2004. | |
4.3^ | Indenture, dated January 15, 2009, for the 9.75% Senior Notes due 2014, by and among the Company, the Guarantor Subsidiaries and HSBC Bank (USA) Inc. Filed as Exhibit 4.1 to the Company's Form 8-K filed on January 21, 2009. | |
4.4^ | Form of 9.75% Senior Note due 2014. Filed as Exhibit 4.2 to the Company's Form 8-K filed on January 21, 2009. | |
10.1^ | Credit Agreement, dated November 4, 2010, by and among Staples, Inc., the lenders named therein, Bank of America, N.A., as Administrative Agent, Barclays Capital and HSBC Bank USA, National Association, as Co-Syndication Agents, and Wells Fargo Bank, National Association and JPMorgan Chase Bank, N.A., as Co-Documentation Agents, with Merrill Lynch, Pierce Fenner & Smith Incorporated, Barclays Capital and HSBC Securities (USA) Inc. having acted as joint lead arrangers and joint bookrunners (including schedules and exhibits). Filed as Exhibit 10.1 to the Company's Form 8-K filed on November 4, 2010 | |
10.2^ | Amended and Restated Commercial Paper Dealer Agreement, dated as of August 6, 2008, among the Company, Banc of America Securities LLC and the other parties thereto. Filed as Exhibit 10.4 to the Company's Form 10-Q for the quarter ended on August 2, 2008. | |
10.3^ | Amended and Restated Commercial Paper Dealer Agreement, dated as of August 6, 2008, among the Company, Lehman Brothers Inc. and the other parties thereto. Filed as Exhibit 10.5 to the Company's Form 10-Q for the quarter ended on August 2, 2008. | |
10.4^ | Letter, dated as of September 29, 2008, assigning Lehman Brothers Inc. interests to Barclays Capital Inc., for the Amended and Commercial Paper Dealer Agreement, dated as of August 6, 2008, among the Company, Lehman Brothers Inc. and the other parties thereto. Filed as Exhibit 10.5 to the Company's Form 10-Q for the quarter ended on November 1, 2008. | |
10.5^ | Commercial Paper Dealer Agreement, dated as of September 19, 2008, among the Company, JP Morgan Securities Inc. and the other parties thereto. Filed as Exhibit 10.6 to the Company's Form 10-Q for the quarter ended on November 1, 2008. | |
10.6*^ | Amended and Restated 2004 Stock Incentive Plan, as amended. Filed as Exhibit 10.2 to the Company's Form 10-Q for the quarter ended on October 30, 2010. | |
10.7*^ | Form of Non-Employee Director Restricted Stock Award Agreement (Initial Grant) under the Amended and Restated 2004 Stock Incentive Plan. Filed as Exhibit 10.15 to the Company's Form 10-K for the fiscal year ended on January 31, 2009. | |
10.8*^ | Form of Non-Employee Director Restricted Stock Award Agreement under the Amended and Restated 2004 Stock Incentive Plan. Filed as Exhibit 10.2 to the Company's Form 10-Q for the quarter ended on April 30, 2011. | |
10.9*^ | Form of Non-Employee Director Stock Option Agreement under the Amended and Restated 2004 Stock Incentive Plan. Filed as Exhibit 10.3 to the Company's Form 10-Q for the quarter ended on April 30, 2011. | |
10.10*^ | Form of Non-Employee Director Restricted Stock Unit Award Agreement under the Amended and Restated 2004 Stock Incentive Plan. Filed as Exhibit 10.12 to the Company's Form 10-K for the fiscal year ended January 30, 2010. | |
D-1
Exhibit No. | Description | |
10.11*^ | Form of Restricted Stock Award Agreement under the Amended and Restated 2004 Stock Incentive Plan. Filed as Exhibit 10.2 to the Company's Form 10-Q for the quarter ended on May 1, 2010. | |
10.12*^ | Form of Non-Qualified Stock Option Agreement under the Amended and Restated 2004 Stock Incentive Plan. Filed as Exhibit 10.3 to the Company's Form 10-Q for the quarter ended on May 1, 2010. | |
10.13*^ | Form of Performance Share Award Agreement under the Amended and Restated 2004 Stock Incentive Plan. Filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended on July 31, 2010. | |
10.14*^ | Form of Performance Share Award Agreement under the Amended and Restated 2004 Stock Incentive Plan. Filed as Exhibit 10.3 to the Company's Form 8-K filed on June 10, 2009. | |
10.15*^** | Performance Share Award Agreement, dated as of March 8, 2007, by and between the Company and Ronald L. Sargent. Filed as Exhibit 10.6 to the Company's Form 10-Q for the quarter ended May 5, 2007. | |
10.16*^ | Restricted Stock Award Agreement, dated as of March 8, 2007, by and between the Company and Ronald L. Sargent. Filed as Exhibit 10.7 to the Company's Form 10-Q for the quarter ended May 5, 2007. | |
10.17*^ | Amended and Restated 1992 Equity Incentive Plan, as amended. Filed as Exhibit 10.21 to the Company's Form 10-K for the fiscal year ended February 2, 2008. | |
10.18*^ | Amended and Restated 1990 Director Stock Option Plan, as amended. Filed as Exhibit 10.22 to the Company's Form 10-K for the fiscal year ended February 2, 2008. | |
10.19*^ | 1997 United Kingdom Company Share Option Scheme. Filed as Exhibit 10.3 to the Company's Form 10-K for the fiscal year ended on January 31, 1998. | |
10.20*^ | 1997 UK Savings Related Share Option Scheme. Filed as Exhibit 10.5 to the Company's Form 10-K for the fiscal year ended on February 1, 2003. | |
10.21*^ | Amended and Restated 1998 Employee Stock Purchase Plan, as amended. Filed as Exhibit 10.1 to the Company's Form 8-K filed on June 10, 2009. | |
10.22*^ | Amended and Restated International Employee Stock Purchase Plan, as amended. Filed as Exhibit 10.2 to the Company's Form 8-K filed on June 10, 2009. | |
10.23*+ | 2012 Employee Stock Purchase Plan. | |
10.24*^ | Non-Management Director Compensation Summary. Filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended April 30, 2011. | |
10.25*^ | Executive Officer Incentive Plan for fiscal years 2008 through 2012. Filed as Exhibit 10.3 to the Company's Form 8-K filed on June 13, 2008. | |
10.26*^ | Amendment to Executive Officer Incentive Plan. Filed as Exhibit 10.4 to the Company's Form 10-Q for the quarter ended on May 1, 2010. | |
10.27*^ | Staples, Inc. Long Term Cash Incentive Plan. Filed as Exhibit 10.1 to the Company's Form 8-K filed on June 11, 2010. | |
10.28*^ | Form of Severance Benefits Agreement signed by executive officers of the Company. Filed as Exhibit 10.4 to the Company's Form 10-Q for the quarter ended on April 29, 2006. | |
10.29*^ | Form of Non-Compete and Non-Solicitation Agreement signed by executive officers of the Company. Filed as Exhibit 10.6 to the Company's Form 10-K for the fiscal year ended January 29, 2000. | |
10.30*^ | Form of Proprietary and Confidential Information Agreement signed by executive officers of the Company. Filed as Exhibit 10.30 to the Company's Form 10-K for the fiscal year ended on February 1, 2003. | |
10.31*^ | Form of Indemnification Agreement signed by executive officers and directors of the Company. Filed as Exhibit 10.34 to the Company's Form 10-K for the fiscal year ended on January 31, 2009. | |
10.32*+ | Form of Outside Directorship Agreement. | |
10.33*^ | Offer Letter, dated as of July 30, 2003, by and between the Company and Michael A. Miles. Filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended on November 1, 2003. | |
10.34*^ | Second Amended and Restated Severance Benefits Agreement, dated March 13, 2006, by and between the Company and Ronald L. Sargent. Filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended on April 29, 2006. | |
D-2
Exhibit No. | Description | |
10.35*^ | Amendment, dated December 22, 2008, to Second Amended and Restated Severance Benefits Agreement, dated March 13, 2006, by and between the Company and Ronald L. Sargent. Filed as Exhibit 10.37 to the Company's Form 10-K for the fiscal year ended on January 31, 2009. | |
10.36*^ | Amended and Restated Severance Benefits Agreement, dated March 13, 2006, by and between the Company and John J. Mahoney. Filed as Exhibit 10.2 to the Company's Form 10-Q for the quarter ended on April 29, 2006. | |
10.37*^ | Amendment, dated December 23, 2008, to Amended and Restated Severance Benefits Agreement, dated March 13, 2006, by and between the Company and John J. Mahoney. Filed as Exhibit 10.39 to the Company's Form 10-K for the fiscal year ended on January 31, 2009. | |
10.38*^ | Amended and Restated Severance Benefits Agreement, dated March 13, 2006, by and between the Company and Michael A. Miles. Filed as Exhibit 10.3 to the Company's Form 10-Q for the quarter ended on April 29, 2006. | |
10.39*^ | Amendment, dated December 31, 2008, to Amended and Restated Severance Benefits Agreement, dated March 13, 2006, by and between the Company and Michael A. Miles. Filed as Exhibit 10.41 to the Company's Form 10-K for the fiscal year ended on January 31, 2009. | |
10.40*^ | Long Term Care Insurance Plan Summary. Filed as Exhibit 10.39 to the Company's Form 10-K for the fiscal year ended on January 29, 2011. | |
10.41*^ | Survivor Benefit Plan. Filed as Exhibit 10.24 to the Company's Form 10-K for the fiscal year ended on January 29, 2005. | |
10.42*+ | Executive Life Insurance Plans Summary of Provisions. | |
10.43*^ | Amended and Restated Supplemental Executive Retirement Plan. Filed as Exhibit 10.2 to the Company's Form 8-K filed on June 11, 2010. | |
10.44*^ | Policy on Personal Use of Corporate Aircraft. Filed as Exhibit 10.28 to the Company's Form 10-K for the fiscal year ended on January 29, 2005. | |
10.45*+ | Senior Executive Long Term Disability Supplemental Coverage Reimbursement Policy. | |
10.46*^ | Tax Services Reimbursement. Filed as Exhibit 10.45 to the Company's Form 10-K for the fiscal year ended on January 29, 2011. | |
14.1^ | Code of Ethics. Filed as Exhibit 14.1 to the Company's Form 10-K for the fiscal year ended on January 29, 2011. | |
21.1+ | Subsidiaries of the Company. | |
23.1+ | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm. | |
31.1+ | Principal Executive Officer—Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2+ | Principal Financial Officer—Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1++ | Principal Executive Officer—Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2++ | Principal Financial Officer—Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS+ | XBRL Instance Document. | |
101.SCH+ | XBRL Taxonomy Extension Schema Document. | |
101.CAL+ | XBRL Taxonomy Calculation Linkbase Document | |
101.DEF+ | XBRL Taxonomy Definition Linkbase Document. | |
101.LAB+ | XBRL Taxonomy Label Linkbase Document. | |
101.PRE+ | XBRL Taxonomy Presentation Linkbase Document. | |
* A management contract or compensatory plan or arrangement required to be filed as an exhibit to this annual report pursuant to Item 15(b) of Form 10-K.
** Portions of the exhibit have been omitted pursuant to a grant of confidential treatment.
^ An exhibit previously filed with the Securities and Exchange Commission and incorporated herein by reference. Unless otherwise indicated, such exhibit was filed under Commission File Number 0-17586.
+ Filed herewith.
++ Furnished herewith.
D-3