SPLS 10-Q 072812
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 
(Mark one)
 
x  Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended:  July 28, 2012
 
o Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from                                to
 
Commission File Number:  0-17586
 
STAPLES, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
04-2896127
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
Five Hundred Staples Drive, Framingham, MA  01702
(Address of principal executive office and zip code)
 
508-253-5000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o  No x
 
The registrant had 682,375,141 shares of common stock outstanding as of August 13, 2012.

Table of Contents

STAPLES, INC. AND SUBSIDIARIES
FORM 10-Q
July 28, 2012
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1
Table of Contents

PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
STAPLES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollar Amounts in Thousands, Except Share Data)
(Unaudited)
 
July 28,
2012
 
January 28,
2012
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
984,666

 
$
1,264,149

Receivables, net
1,855,933

 
2,033,680

Merchandise inventories, net
2,629,598

 
2,431,845

Deferred income tax assets
297,423

 
305,611

Prepaid expenses and other current assets
354,324

 
255,535

Total current assets
6,121,944

 
6,290,820

 
 
 
 
Property and equipment:
 

 
 

Land and buildings
1,013,859

 
1,034,983

Leasehold improvements
1,320,250

 
1,330,373

Equipment
2,505,464

 
2,462,351

Furniture and fixtures
1,083,612

 
1,084,358

Total property and equipment
5,923,185

 
5,912,065

Less: Accumulated depreciation
3,952,490

 
3,831,704

Net property and equipment
1,970,695

 
2,080,361

 
 
 
 
Intangible assets, net of accumulated amortization
412,266

 
449,781

Goodwill
3,861,584

 
3,982,130

Other assets
626,594

 
627,530

Total assets
$
12,993,083

 
$
13,430,622

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
2,236,141

 
$
2,220,414

Accrued expenses and other current liabilities
1,198,676

 
1,414,721

Debt maturing within one year
498,987

 
439,143

Total current liabilities
3,933,804

 
4,074,278

 
 
 
 
Long-term debt
1,542,550

 
1,599,037

Other long-term obligations
719,976

 
735,094

 
 
 
 
Stockholders’ equity:
 

 
 

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

 
—

Common stock, $.0006 par value, 2,100,000,000 shares authorized; issued and outstanding 929,462,709 and 683,273,551 shares at July 28, 2012 and 922,126,579 shares and 695,743,547 at January 28, 2012, respectfully
558

 
553

Additional paid-in capital
4,633,946

 
4,551,299

Accumulated other comprehensive loss
(514,791
)
 
(319,743
)
Retained earnings
7,358,003

 
7,199,060

Less: Treasury stock at cost, 246,189,158 shares at July 28, 2012 and 226,383,032 shares at January 28, 2012
(4,688,011
)
 
(4,416,018
)
Total Staples, Inc. stockholders’ equity
6,789,705

 
7,015,151

Noncontrolling interests
7,048

 
7,062

Total stockholders’ equity
6,796,753

 
7,022,213

Total liabilities and stockholders’ equity
$
12,993,083

 
$
13,430,622

 
See notes to condensed consolidated financial statements.

2
Table of Contents

STAPLES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
 
 
13 Weeks Ended
 
26 Weeks Ended
 
July 28,
2012
 
July 30,
2011
 
July 28,
2012
 
July 30,
2011
Sales
$
5,498,496

 
$
5,819,612

 
$
11,603,321

 
$
11,992,550

Cost of goods sold and occupancy costs
4,071,211

 
4,279,232

 
8,566,321

 
8,815,777

Gross profit
1,427,285

 
1,540,380

 
3,037,000

 
3,176,773


 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 
 
 
Selling, general and administrative
1,192,433

 
1,246,047

 
2,468,834

 
2,516,821

Amortization of intangibles
14,795

 
16,194

 
30,053

 
33,486

Total operating expenses
1,207,228

 
1,262,241

 
2,498,887

 
2,550,307


 
 
 
 
 
 
 
Operating income
220,057

 
278,139

 
538,113

 
626,466


 
 
 
 
 
 
 
Other (expense) income:
 

 
 

 
 
 
 
Interest income
1,450

 
1,519

 
3,101

 
3,978

Interest expense
(41,793
)
 
(41,885
)
 
(84,097
)
 
(90,678
)
Other expense
(1,352
)
 
(369
)
 
(1,698
)
 
(557
)
Consolidated income before income taxes
178,362

 
237,404

 
455,419

 
539,209

Income tax expense
57,967

 
61,104

 
148,011

 
165,227

Consolidated net income
120,395

 
176,300

 
307,408

 
373,982

Loss attributed to the noncontrolling interests
(34
)
 
(138
)
 
(80
)
 
(701
)
Net income attributed to Staples, Inc.
$
120,429

 
$
176,438

 
$
307,488

 
$
374,683


 
 
 
 
 
 
 
Earnings Per Share:
 

 
 

 
 
 
 
Basic earnings per common share
$
0.18

 
$
0.25

 
$
0.45

 
$
0.53

Diluted earnings per common share
$
0.18

 
$
0.25

 
$
0.45

 
$
0.53


 
 
 
 
 
 
 
Dividends declared per common share
$
0.11

 
$
0.10

 
$
0.22

 
$
0.20

 
 
 
 
 
 
 
 
Consolidated comprehensive (loss) income
$
(96,529
)
 
$
59,124

 
$
112,426

 
$
561,177

Comprehensive loss attributed to noncontrolling interests
(115
)
 
(48
)
 
(14
)
 
(495
)
Comprehensive (loss) income attributed to Staples, Inc.
$
(96,414
)
 
$
59,172

 
$
112,440

 
$
561,672

 
See notes to condensed consolidated financial statements.

3
Table of Contents

STAPLES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
(Unaudited)
 
 
26 Weeks Ended
 
July 28,
2012
 
July 30,
2011
Operating Activities:
 

 
 

Consolidated net income, including loss from the noncontrolling interests
$
307,408

 
$
373,982

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
201,555

 
211,550

Amortization of intangibles
30,053

 
33,486

Stock-based compensation
63,130

 
81,470

Excess tax benefits from stock-based compensation arrangements
(179
)
 
(942
)
Deferred income tax expense
8,707

 
54,170

Other
(4,363
)
 
9,901

Changes in assets and liabilities:
 
 
 
Decrease in receivables
143,992

 
58,957

Increase in merchandise inventories
(222,872
)
 
(276,649
)
Increase in prepaid expenses and other assets
(104,641
)
 
(38,399
)
Increase in accounts payable
41,570

 
45,794

Decrease in accrued expenses and other liabilities
(216,573
)
 
(264,790
)
Increase in other long-term obligations
8,993

 
13,634

Net cash provided by operating activities
256,780

 
302,164

 
 
 
 
Investing Activities:
 

 
 

Acquisition of property and equipment
(126,220
)
 
(164,149
)
Net cash used in investing activities
(126,220
)
 
(164,149
)
 
 
 
 
Financing Activities:
 

 
 

Proceeds from issuance of commercial paper, net of repayments
49,998

 
254,926

Proceeds from the exercise of stock options
24,259

 
31,559

Proceeds from borrowings
47,243

 
118,174

Payments on borrowings
(75,083
)
 
(698,631
)
Purchase of noncontrolling interest
(4,649
)
 
—

Cash dividends paid
(148,545
)
 
(140,643
)
Excess tax benefits from stock-based compensation arrangements
179

 
942

Purchase of treasury stock, net
(271,993
)
 
(365,203
)
Net cash used in financing activities
(378,591
)
 
(798,876
)

 
 
 
Effect of exchange rate changes on cash and cash equivalents
(31,452
)
 
22,728


 
 
 
Net decrease in cash and cash equivalents
(279,483
)
 
(638,133
)
Cash and cash equivalents at beginning of period
1,264,149

 
1,461,257

Cash and cash equivalents at end of period
$
984,666

 
$
823,124

 
See notes to condensed consolidated financial statements.

4
Table of Contents

STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
 
Note A — Basis of Presentation
 
The accompanying interim unaudited condensed consolidated financial statements include the accounts of Staples, Inc. and its subsidiaries (“Staples” or “the Company”). All intercompany accounts and transactions have been eliminated in consolidation.  The Company accounts for investments in businesses in which it owns between 20% and 50% of the voting interest using the equity method, if the Company has the ability to exercise significant influence over the business. These financial statements are for the period covering the thirteen and twenty-six weeks ended July 28, 2012 (also referred to as the “second quarter of 2012" and the "first half of 2012") and the period covering the thirteen and twenty-six weeks ended July 30, 2011 (also referred to as the “second quarter of 2011” and the "first half of 2011"). 
 
These financial statements have been prepared based upon Securities and Exchange Commission (“SEC”) rules that permit reduced disclosure for interim periods.  For a more complete discussion of significant accounting policies and certain other information, these financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2012.  In the opinion of management, these financial statements reflect all normal recurring adjustments considered necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented.  The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year.

Note B — Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In May 2011, a pronouncement was issued providing consistent definitions and disclosure requirements of fair value with respect to U.S. GAAP and International Financial Reporting Standards. The pronouncement changed certain fair value measurement principles and enhanced the disclosure requirements, particularly for Level 3 measurements. The changes were effective prospectively for interim and annual periods beginning after December 15, 2011.  The Company adopted this pronouncement on January 29, 2012. The adoption of this guidance did not have a significant impact on the Company's condensed consolidated financial statements.

In June 2011, a pronouncement was issued that amended the guidance relating to the presentation of comprehensive income and its components. The pronouncement eliminates the option to present the components of other comprehensive income as part of the statement of equity and requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted this pronouncement on January 29, 2012.  The adoption of this guidance required changes in presentation only and therefore did not have a significant impact on the Company's condensed consolidated financial statements.

In September 2011, a pronouncement was issued that amended the guidance for goodwill impairment testing. The pronouncement allows the entity to perform an initial qualitative assessment to determine whether it is "more likely than not" that the fair value of the reporting unit is less than its carrying amount. This assessment is used as a basis for determining whether it is necessary to perform the two step goodwill impairment test. The methodology for how goodwill is calculated, assigned to reporting units, and the application of the two step goodwill impairment test have not been revised. The pronouncement is effective for fiscal years beginning after December 15, 2011. The Company adopted this pronouncement on January 29, 2012.  As the Company has not yet performed its annual goodwill impairment analysis, which is performed in the fourth quarter, the potential impact of the adoption of this guidance is currently being evaluated. However, it is not expected to have a significant impact on the Company's condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

In December 2011, a pronouncement was issued that amended the guidance related to the disclosure of recognized financial instruments and derivative instruments that are either offset on the balance sheet or subject to an enforceable master netting arrangement or similar agreement. The amended provisions are effective for fiscal years beginning on or after January 1, 2013, and are required to be applied retrospectively for all prior periods presented. As this pronouncement relates to disclosure only, the adoption of this amendment is not expected to have a material effect on the Company's condensed consolidated financial statements.

5
Table of Contents
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


Note C — Acquisition Reserves
 
In connection with the Company’s acquisition of Corporate Express N.V. ("Corporate Express"), acquisition reserves of $181.0 million were originally established.  The activity related to this reserve for fiscal 2011 and 2012 is as follows (in thousands):
 
 
Balance as of
January 29, 2011
 
Utilization
 
Foreign Exchange Fluctuations
 
Balance as of
July 30, 2011
Transaction costs
$
543

 
$
(119
)
 
$
—

 
$
424

Severance
11,793

 
(2,904
)
 
350

 
9,239

Facility closures
20,287

 
(1,908
)
 
36

 
18,415

Other
9,344

 
(313
)
 
386

 
9,417

Total
$
41,967

 
$
(5,244
)
 
$
772

 
$
37,495


 
Balance as of
January 28, 2012
 
Utilization
 
Adjustments
 
Foreign Exchange Fluctuations
 
Balance as of
July 28, 2012
Severance
$
1,691

 
$
(95
)
 
$
—

 
$
(99
)
 
$
1,497

Facility closures
15,761

 
(10,404
)
 
(5,000
)
 
(10
)
 
347

Other
6,340

 
(38
)
 
—

 
(245
)
 
6,057

Total
$
23,792

 
$
(10,537
)
 
$
(5,000
)
 
$
(354
)
 
$
7,901

 
    
Note D — Fair Value Measurements
 
ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurement), then priority to quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market (Level 2 measurement), then the lowest priority to unobservable inputs (Level 3 measurement).
 
The fair values of cash and cash equivalents, receivables, accounts payable, accrued expenses, other current liabilities and short-term debt approximate their carrying values because of their short-term nature. 

The Company has $1.5 billion, 9.75% notes due January 2014 (the “January 2014 Notes”), of which $750 million was hedged from March 2010 to September 2011.  The Company received cash consideration of $30.3 million when the hedge was terminated in September 2011. The Company also has $325 million, 7.375% notes due October 2012 (the “October 2012 Notes”), which were hedged from January 2003 to September 2011. When the hedge was terminated in September 2011, the Company received cash consideration of $12.4 million. The termination of these hedges resulted in gains which are being amortized over the remaining terms of the respective notes, the unamortized portions of which are reflected in the carrying values of the notes.

The fair values of the January 2014 Notes and the October 2012 Notes were determined based on quoted market prices and are classified as Level 1 liabilities.  The following table reflects the difference between the financial statement carrying values and fair values of these notes as of July 28, 2012 and January 28, 2012 (in thousands):
 
July 28, 2012
 
January 28, 2012
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
October 2012 Notes
$
326,904

 
$
328,468

 
$
332,617

 
$
339,372

January 2014 Notes
1,518,620

 
1,680,000

 
1,525,003

 
1,721,490


6
Table of Contents
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


 
The following table shows the Company’s assets and liabilities as of July 28, 2012 and January 28, 2012 that are measured and recorded in the financial statements at fair value on a recurring basis (in thousands): 
 
July 28, 2012
 
Quoted Prices in Active Markets for Identical Assets or Liabilities
 
Significant Other Observable Inputs
 
Unobservable Inputs
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
Money market funds
$
377,677

 
$
—

 
$
—

Derivative assets
—

 
7,138

 
—

Liabilities
 
 
 
 
 
Derivative liabilities
—

 
(23,487
)
 
—


 
January 28, 2012
 
Quoted Prices in Active Markets for Identical Assets or Liabilities
 
Significant Other Observable Inputs
 
Unobservable Inputs
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
Money market funds
$
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 fair value of the Company’s derivative liabilities are based on quotes received from third-party banks and represent the estimated amount the Company would pay to terminate the agreements taking into consideration current interest and forward exchange rates as well as the creditworthiness of the counterparty.

Note E — Debt and Credit Agreements
 
The Company has a credit agreement with Bank of America, N.A. , as Administrative Agent and other lending institutions named therein (the "November 2014 Revolving Credit Facility"). The November 2014 Revolving Credit Facility provides for a maximum borrowing of $1.0 billion, which pursuant to an accordion feature may be increased to $1.5 billion upon the Company's request and the agreement of the lenders participating in the increase. The Company also has a commercial paper program ("Commercial Paper Program") that allows the Company to issue up to $1.0 billion of unsecured commercial paper notes ("Notes") from time to time. The November 2014 Revolving Credit Facility serves as a backstop to the Commercial Paper Program. Maturities of the Notes vary, but may not exceed 397 days from the date of issue. Payments under the Commercial Paper Program are unconditionally guaranteed on an unsecured, unsubordinated basis by the Guarantor Subsidiaries (See Note L). On July 12, 2012, the Company resumed the issuance of Notes under the Commercial Paper Program. As of July 28, 2012, $50.0 million Notes were outstanding, with a weighted average remaining maturity of three days and a weighted average interest rate of 0.4%. The maximum amount outstanding under the Commercial Paper Program during the second quarter of 2012 was $100.0 million.

The Company also has various other lines of credit under which we may borrow a maximum of $307.8 million. At July 28, 2012, the Company had $134.0 million of borrowings outstanding under these credit agreements.
    
    

7
Table of Contents
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


The major components of the Company’s outstanding debt as of July 28, 2012 and January 28, 2012 are as follows (in thousands):
 
July 28, 2012
 
January 28, 2012
October 2012 Notes
$
326,904

 
$
332,617

January 2014 Notes
1,518,620

 
1,525,003

Commercial Paper Program
49,998

 
—

Lines of credit
133,982

 
170,745

Capital lease obligations and other notes payable
12,033

 
9,815


2,041,537

 
2,038,180

Less: Current portion
(498,987
)
 
(439,143
)
Net long-term debt
$
1,542,550

 
$
1,599,037

 
Note F — Derivative Instruments and Hedging Activities
 
Staples uses interest rate swaps, foreign currency swaps and foreign currency forward agreements to offset certain operational and balance sheet exposures related to changes in interest or foreign exchange rates.  These agreements are entered into to support transactions made in the normal course of business and accordingly are not speculative in nature.  These derivatives qualify for hedge accounting treatment as the derivatives have been highly effective in offsetting the underlying exposures related to the hedged items.
 
All derivatives are recorded at fair value and the changes in fair value are immediately included in earnings if the derivatives do not qualify as effective hedges. If a derivative is designated as a fair value hedge, then changes in the fair value of the derivative are offset against the changes in the fair value of the underlying hedged item in earnings.  If a derivative is designated as a cash flow hedge, then the effective portion of the changes in the fair value of the derivative is recognized as a component of accumulated other comprehensive income (loss) until the underlying hedged item is recognized in earnings or the forecasted transaction is no longer probable of occurring. If a derivative or a nonderivative financial instrument is designated as a hedge of the Company’s net investment in a foreign subsidiary, then changes in the fair value of the financial instrument are recognized as a component of accumulated other comprehensive income (loss) to offset a portion of the change in the translated value of the net investment being hedged, until the investment is sold or liquidated. The Company formally documents all hedging relationships for all derivative and nonderivative hedges and the underlying hedged items, as well as its risk management objectives and strategies for undertaking the hedge transactions.  There are no amounts excluded from the assessment of hedge effectiveness.
 
The Company classifies the fair value of all derivative contracts and the fair value of its hedged firm commitments as either current or long-term depending on whether the maturity date of the derivative contract is within or beyond one year from the balance sheet date. The cash flows from derivatives treated as hedges are classified in the Company’s condensed consolidated statement of cash flows in the same category as the item being hedged.

The table below presents the fair value of the Company's derivative financial instruments that qualify for hedge accounting as well as their classification on the condensed consolidated balance sheet as of July 28, 2012 and January 28, 2012 (in thousands):
 
 
 
 
Fair Value
 
 
Condensed Consolidated Balance Sheet Location
 
July 28, 2012
 
January 28, 2012
Asset derivatives:
 
 
 
 
 
 
Foreign currency forward
 
Other assets
 
$
7,133

 
$
—

Liability derivatives:
 
 
 
 
 
 
Interest rate swaps
 
Other long-term liabilities
 
$
(2,093
)
 
$
—

Foreign currency forward
 
Other long-term liabilities
 
(18,740
)
 
(21,974
)
Foreign currency swaps
 
Other long-term liabilities
 
(2,654
)
 
(14,353
)
Total
 
 
 
$
(23,487
)
 
$
(36,327
)

    

8
Table of Contents
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


The tables below present gains and losses recognized in Other Comprehensive Income ("OCI") during the second quarter and first half of 2012 and 2011 related to derivative financial instruments designated as cash flow hedges or net investment hedges, as well as the amount of gains and losses reclassified into earnings during those periods (in thousands):

 
 
 
 
Gain (loss) recognized in OCI
 
Gain (loss) reclassified into earnings
 
Location of gain (loss) recognized in earnings
 
 
 
 
July 28, 2012
 
July 28, 2012
 
Derivative Type
 
Hedge Designation
 
13 Weeks Ended
 
26 Weeks Ended
 
13 Weeks Ended
 
26 Weeks Ended
 
Interest rate swaps
 
Cash flow
 
$
(2,093
)
 
$
(2,093
)
 
$
—

 
$
—

 
—

Foreign currency swaps
 
Net investment
 
7,766

 
2,478

 
—

 
—

 
—

Foreign currency forward
 
Net investment
 
7,133

 
7,133

 
—

 
—

 
—


 
 
 
 
Gain (loss) recognized in OCI
 
Loss reclassified into earnings
 
Location of Loss recognized in earnings
 
 
 
 
July 30, 2011
 
July 30, 2011
 
Derivative Type
 
Hedge Designation
 
13 Weeks Ended
 
26 Weeks Ended
 
13 Weeks Ended
 
26 Weeks Ended
 
Interest rate swaps
 
Cash flow
 
$
304

 
$
427

 
$
(304
)
 
$
(304
)
 
Other expense
Foreign currency swaps
 
Cash flow
 
(3,631
)
 
(3,631
)
 
—

 
—

 
—

Foreign currency swaps
 
Net investment
 
1,248

 
(17,851
)
 
—

 
—

 
—


Interest Rate Swaps:

During the second quarter of 2012, Staples entered into a series of interest rate swap agreements for an aggregate notional amount of $275.0 million. These swaps were designated as cash flow hedges of interest rate risk, and are used to hedge the Company's exposure to the variability in future cash flows associated with forecasted issuances of debt over a maximum period of twelve months. The effective portion of changes in the fair value of these derivatives is recorded in accumulated other comprehensive income (loss) ("AOCI") and will subsequently be reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in AOCI will be reclassified to interest expense as interest payments are made on the Company's forecasted issuances of fixed-rate debt. During the next twelve months, the Company does not expect a material amount to be reclassified to the consolidated statement of comprehensive income as an increase to interest expense. At July 28, 2012, these interest rate swaps had an aggregate fair value loss of $2.1 million which was included in other long-term obligations. No amounts were included in the condensed consolidated statement of comprehensive income in the second quarter of 2012 related to ineffectiveness associated with these cash flow hedges. The Company has agreements with its interest rate swap counterparties that contain provisions whereby the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness. At July 28, 2012, the termination value of derivatives in a net liability position related to these agreements, which includes accrued interest but excludes any adjustment for nonperformance risk, was $2.1 million. As of July 28, 2012, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at its termination value.

In March 2010, Staples entered into interest rate swaps for an aggregate notional amount of $750 million. These swaps were designated as a fair value hedge and designed to convert half of the aggregate principal amount of the January 2014 Notes into a variable rate obligation.  In September 2011, the Company terminated the $750 million interest rate swaps, realizing a gain of $30.3 million which was recorded as an adjustment to the carrying value of the debt and is being amortized to interest expense over the remaining term of the January 2014 Notes. No amounts had been included in the condensed consolidated statement of comprehensive income in the first half of 2011 related to ineffectiveness associated with this fair value hedge.

 In January 2003, Staples entered into interest rate swaps for an aggregate notional amount of $325 million. These swaps were designated as a fair value hedge and designed to convert the October 2012 Notes into a variable rate obligation. In September 2011, the Company terminated the $325 million interest rate swaps, realizing a gain of $12.4 million which was recorded as an adjustment to the carrying value of the debt and is being amortized to interest expense over the remaining term of the October 2012 Notes. No amounts were included in the condensed consolidated statement of comprehensive income in the first half of 2011 related to ineffectiveness associated with this fair value hedge.

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Table of Contents
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)



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. On May 5, 2011, the Company repaid the outstanding balance on these variable rate credit facilities and terminated the related interest rate swap agreements. As a result of the termination of these interest rate swap agreements, the Company recognized a loss of $0.3 million during the second quarter of 2011.
      
Foreign Currency Swaps and Foreign Currency Forwards:

In May 2012, the Company entered into a foreign currency forward that has been designated as a foreign currency hedge on Staples’ net investment in Euro denominated subsidiaries. Under the terms of the agreement, Staples, upon maturity of the agreement in September 2012, is entitled to receive 115.0 million Euros and is obligated to pay 150.0 million Canadian dollars. At July 28, 2012, this derivative had a fair value gain of $7.1 million which was included in other long-term assets.  No amounts were included in the condensed consolidated statement of comprehensive income for the second quarter of 2012 related to ineffectiveness associated with this net investment hedge.
    
In December 2011, the Company entered into a foreign currency forward designed to convert a series of intercompany loans denominated in Canadian dollars into a fixed U.S. dollar amount. The loans total 750 million Canadian dollars in the aggregate and are scheduled to mature at various dates between October 2012 and October 2013. Staples, upon full maturity of the agreements, will collect $720 million and will be obligated to pay 750 million Canadian dollars. The forward agreements are being accounted for as a fair value hedge. At July 28, 2012 and January 28, 2012, the foreign currency forward had an aggregate fair value loss of $18.7 million and $22.0 million, respectively, which was included in other long-term obligations. The effective portion of this hedge is included as a component of other expense. No amounts were included in the condensed consolidated statement of comprehensive income for the first half of 2012 related to ineffectiveness associated with this fair value hedge. During the second quarter and first half of 2012, gains of $16.6 million and $3.2 million, respectively, were recognized in other expense related to this fair value 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. No amounts were included in the condensed consolidated statement of comprehensive income for the first half of 2011 related to ineffectiveness associated with this cash flow hedge. Upon maturity of the agreement in August 2011, Staples paid 76.4 million Australian dollars and recognized a gain of $0.9 million.
    
In August 2007, the Company entered into a $300 million foreign currency swap that has been designated as a foreign currency hedge on Staples’ net investment in Canadian dollar denominated subsidiaries. In the first quarter of 2012, the Company terminated $50 million of this swap, realizing a loss of approximately $3.0 million which has been recorded as a foreign currency translation loss within other comprehensive income. In the second quarter of 2012, the Company terminated an additional $150 million of this swap, realizing a loss of approximately $6.2 million which has also been recorded as a foreign currency translation loss within other comprehensive income. The $100 million remaining notional amount under the swap agreement has been re-designated as a foreign currency hedge on Staples’ net investment in Canadian dollar denominated subsidiaries. At July 28, 2012 and January 28, 2012, the currency swap had an aggregate fair value loss of $2.7 million and $14.4 million, respectively, which was included in other long-term obligations.  No amounts were included in the condensed consolidated statement of comprehensive income for the first half of 2012 or 2011 related to ineffectiveness associated with this net investment hedge.    

Note G — Equity-Based Employee Compensation and Benefit Plans
 
Under the Amended and Restated 2004 Stock Incentive Plan, the Company grants restricted stock and restricted stock units (collectively, “Restricted Shares”) and nonqualified stock options to associates.  Shares issued pursuant to restricted stock awards are restricted in that they are not transferable until they vest. Shares underlying awards of restricted stock units are not issued until the units vest. Nonqualified stock options cannot be exercised until they vest.  Vesting of the Restricted Shares and nonqualified stock options occurs over different periods, depending on the terms of the individual award, but expenses relating to these awards are all recognized on a straight line basis over the applicable vesting period.

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Table of Contents
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)



The following table summarizes activity related to nonqualified stock options and Restricted Shares in the first half of 2012:
 
 
Nonqualified Stock Options
 
Restricted Shares (1)
 
 
Number of Shares
 
Weighted Average Exercise Price per Share
 
Number of Shares
 
Weighted Average Grant Date Fair Value per Share
Outstanding at January 28, 2012
 
45,995,348

 
$
19.89

 
16,799,262

 
$
18.13

Granted
 
2,478,921

 
13.03

 
4,548,772

 
13.13

Exercised/Released
 
(1,462,782
)
 
11.43

 
(5,188,156
)
 
20.11

Canceled
 
(2,210,790
)
 
19.87

 
(1,318,571
)
 
20.13

Outstanding at July 28, 2012
 
44,800,697

 
$
19.79

 
14,841,307

 
$
15.73

 
 
 
 
 
 
 
 
 
Exercisable at July 28, 2012
 
34,908,337

 
$
20.72

 
 
 
 
Vested or expected to vest at July 28, 2012
 
43,790,123

 
$
19.85

 
 
 
 

(1)
Restricted Shares do not include 0.5 million special performance and retention shares ("Performance Shares") which Staples granted to certain employees in 2010 with a fair market value of $19.27 per share. Performance Shares are awards under which restricted stock is issued only if the Company meets minimum performance targets. The fair value of Performance Shares is based upon the market price of the underlying common stock as of the date of grant.
 
In connection with its equity-based employee compensation and benefit plans, Staples included $32.0 million and $63.1 million in compensation expense for the second quarter and first half of 2012, respectively, and $46.1 million and $81.5 million in compensation expense for the second quarter and first half of 2011, respectively. As of July 28, 2012, Staples had $163.6 million of unamortized stock compensation expense associated with nonqualified stock options, Restricted Shares and Performance Shares which will be expensed over the period through June 2016. 

Staples offers its associates the opportunity for share ownership pursuant to the 2012 Employee Stock Purchase Plan and, prior to January 1, 2012, through the Amended and Restated 1998 Employee Stock Purchase Plan (collectively the “Employee Stock Purchase Plans”). Under the Employee Stock Purchase Plans, U.S. and International associates may purchase shares of Staples common stock at 85% of the lower of the market price of the common stock at the beginning or end of an offering period through payroll deductions in an amount not to exceed 10% of an employee’s annual base compensation. During the first half of 2012 and 2011, the Company issued 2.1 million shares and 1.7 million shares, respectively, pursuant to these plans.

Note H — Pension and Other Post-Retirement Benefit Plans
 
In connection with the acquisition of Corporate Express, Staples assumed the obligations under the defined benefit pension plans Corporate Express sponsored.  The pension plans cover certain employees in Europe and the U.S.  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.
 

11
Table of Contents
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)



The total net cost recognized for the second quarter and first half of 2012 and 2011 associated with the pension and other post-retirement benefit plans is based upon preliminary estimates pending the final actuarial determination of such costs. The following table presents a summary of the total net periodic cost recorded in the condensed consolidated statement of comprehensive income for the second quarter and first half of 2012 and 2011 related to the plans (in thousands):
 
 
 13 Weeks Ended July 28, 2012
 
Pension Plans
 
 Other
Post-Retirement Benefit Plan
Total
 
U.S. Plans
 
International Plans
 
Total
 
Service cost
$
—

 
$
2,531

 
$
2,531

 
$
460

Interest cost
443

 
9,247

 
9,690

 
385

Expected return on plan assets
(438
)
 
(12,398
)
 
(12,836
)
 


Amortization of unrecognized losses and prior service costs
83

 
1,289

 
1,372

 
429

Total cost
$
88

 
$
669

 
$
757

 
$
1,274

 
13 Weeks Ended July 30, 2011
 
Pension Plans
 
 Other
Post-Retirement Benefit Plan
Total
 
U.S. Plans
 
International Plans
 
Total
 
Service cost
$
—

 
$
2,404

 
$
2,404

 
$
443

Interest cost
466

 
10,179

 
10,645

 
372

Expected return on plan assets
(422
)
 
(13,923
)
 
(14,345
)
 
—

Amortization of unrecognized losses and prior service costs
—

 
352

 
352

 
431

Total cost (benefit)
$
44

 
$
(988
)
 
$
(944
)
 
$
1,246


 
26 Weeks Ended July 28, 2012
 
Pension Plans
 
 Other
Post-Retirement Benefit Plan Total
 
U.S. Plans
 
International Plans
 
Total
 
Service cost
$
—

 
$
5,180

 
$
5,180

 
$
920

Interest cost
886

 
18,915

 
19,801

 
770

Expected return on plan assets
(876
)
 
(25,366
)
 
(26,242
)
 
—

Amortization of unrecognized losses and prior service costs
166

 
2,633

 
2,799

 
858

Total cost
$
176

 
$
1,362

 
$
1,538

 
$
2,548


 
26 Weeks Ended July 30, 2011
 
Pension Plans
 
 Other
Post-Retirement Benefit Plan Total
 
U.S. Plans
 
International Plans
 
Total
 
Service cost
$
—

 
$
4,807

 
$
4,807

 
$
897

Interest cost
932

 
20,358

 
21,290

 
752

Expected return on plan assets
(844
)
 
(27,846
)
 
(28,690
)
 
—

Amortization of unrecognized losses and prior service costs
—

 
704

 
704

 
872

Total cost (benefit)
$
88

 
$
(1,977
)
 
$
(1,889
)
 
$
2,521


12
Table of Contents
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)



Cash contributions made to the pension plans during the second quarter and first half of 2012 and 2011 are as follows (in thousands):
 
 
13 Weeks Ended
 
26 Weeks Ended
 
July 28, 2012
 
July 30, 2011
 
July 28, 2012
 
July 30, 2011
U.S. Pension Plans
$
343

 
$
194

 
$
597

 
$
388

International Pension Plans
1,835

 
2,065

 
9,267

 
3,970

Total
$
2,178

 
$
2,259

 
$
9,864

 
$
4,358

 
The Company expects to make additional cash contributions of $0.8 million and $3.8 million to the U.S. Pension Plans and International Pension Plans, respectively, during the remainder of fiscal year 2012.  No cash contributions are expected to be made during 2012 to the Company’s other post-retirement benefit plans.

Note I — Stockholders’ Equity
 
The following table reflects the changes in stockholders’ equity attributed to Staples, Inc. and its noncontrolling interests for the first half of 2012 and 2011 (in thousands): 
 
Attributable to Staples, Inc.
 
Attributable to Noncontrolling Interest
 
Total
Stockholders' equity at January 28, 2012
$
7,015,151

 
$
7,062

 
$
7,022,213

Comprehensive Income:
 
 
 
 
 
Net income
307,488

 
(80
)
 
307,408

Other Comprehensive Income:
 
 
 
 
 
Foreign currency translation adjustments, net
(203,879
)
 
66

 
(203,813
)
Changes in fair value of derivatives, net (1)
8,831

 
—

 
8,831

Comprehensive Income
112,440

 
(14
)
 
112,426

Issuance of common stock for stock options exercised
24,259

 
—

 
24,259

Stock-based compensation
63,130

 
—

 
63,130

Purchase of noncontrolling interest
(4,649
)
 
—

 
(4,649
)
Cash dividends paid
(148,545
)
 
—

 
(148,545
)
Excess tax benefits from stock-based compensation arrangements
179

 
—

 
179

Purchase of treasury stock, net
(271,993
)
 
—

 
(271,993
)
Other
(267
)
 
—

 
(267
)
Stockholders' equity at July 28, 2012
$
6,789,705

 
$
7,048

 
$
6,796,753

 

13
Table of Contents
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


 
Attributable to Staples, Inc.
 
Attributable to Noncontrolling Interest
 
Total
Stockholders' equity at January 29, 2011
$
6,943,710

 
$
7,471

 
$
6,951,181

Comprehensive Income:
 
 
 
 
 
Net income
374,683

 
(701
)
 
373,982

Other Comprehensive Income:
 
 
 
 
 
Foreign currency translation adjustments, net
200,546

 
206

 
200,752

Changes in fair value of derivatives, net (1)
(13,557
)
 
—

 
(13,557
)
Comprehensive Income
561,672

 
(495
)
 
561,177

Issuance of common stock for stock options exercised
31,559

 
—

 
31,559

Stock-based compensation
81,470

 
—

 
81,470

Cash dividends paid
(140,643
)
 
—

 
(140,643
)
Excess tax benefits from stock-based compensation arrangements
942

 
—

 
942

Purchase of treasury stock, net
(365,203
)
 
—

 
(365,203
)
Other
(831
)
 
—

 
(831
)
Stockholders' equity at July 30, 2011
$
7,112,676

 
$
6,976

 
$
7,119,652

 
(1)
Changes in the fair value of derivatives are net of a tax expense (benefit) of $7.9 million for the first half of 2012 and $(7.5) million for the first half of 2011, respectively.


Note J — Computation of Earnings Per Common Share
 
The computation of basic and diluted earnings per share for the second quarter and first half of 2012 and 2011 is as follows (in thousands, except per share data):
 
 
13 Weeks Ended
 
26 Weeks Ended
 
July 28, 2012
 
July 30, 2011
 
July 28, 2012
 
July 30, 2011
Numerator:
 

 
 

 
 

 
 

Net income attributed to Staples, Inc.
$
120,429

 
$
176,438

 
$
307,488

 
$
374,683

Denominator:
 
 
 
 
 
 
 
Weighted-average common shares outstanding
672,862

 
698,917

 
676,554

 
702,618

Effect of dilutive securities:
 
 
 
 
 
 
 
Employee stock options, restricted shares and performance shares
6,262

 
9,754

 
7,727

 
10,419

Weighted-average common shares outstanding assuming dilution
679,124

 
708,671

 
684,281

 
713,037

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.18

 
$
0.25

 
$
0.45

 
$
0.53

Diluted earnings per common share
$
0.18

 
$
0.25

 
$
0.45

 
$
0.53

 
Options to purchase shares of common stock are excluded from the calculation of diluted earnings per share when their inclusion would have an anti-dilutive effect on the calculation.  Options to purchase 39.2 million and 36.0 million shares of Staples, Inc. common stock were excluded from the calculation of diluted earnings per share at July 28, 2012 and July 30, 2011, respectively.
 
Note K — Segment Reporting
 
Staples has three reportable segments: North American Delivery, North American Retail and International Operations. Staples’ North American Delivery segment consists of the U.S. and Canadian businesses that sell and deliver office products and services directly to 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.
 

14
Table of Contents
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


Staples evaluates performance and allocates resources based on profit or loss from operations before stock-based compensation, interest and other expense, non-recurring items and the impact of changes in accounting principles (“business unit income”).  Intersegment sales and transfers are recorded at Staples’ cost; therefore, there is no intercompany profit or loss recognized on these transactions.
 
Staples’ North American Delivery and North American Retail segments are managed separately because the way they market products is different, the classes of customers they service may be different and the distribution methods used to deliver products to customers are different.  The International Operations are considered a separate reportable segment because of the significant differences in the operating environment from the North American operations.
 
The following is a summary of sales and business unit income by reportable segment and a reconciliation of business unit income to consolidated income before income taxes for the second quarter and first half of 2012 and 2011 (in thousands):
 
 
13 Weeks Ended
 
26 Weeks Ended
 
July 28, 2012
 
July 30, 2011
 
July 28, 2012
 
July 30, 2011
 
Sales
North American Delivery
$
2,412,755

 
$
2,433,217

 
$
4,967,826

 
$
4,944,863

North American Retail
1,989,139

 
2,045,143

 
4,312,970

 
4,373,228

International Operations
1,096,602

 
1,341,252

 
2,322,525

 
2,674,459

Total segment sales
$
5,498,496

 
$
5,819,612

 
$
11,603,321

 
$
11,992,550

 
 
 
 
 
 
 
 
 
Business Unit Income (Loss)
North American Delivery
$
185,767

 
$
204,765

 
$
386,726

 
$
401,615

North American Retail
88,413

 
102,872

 
255,368

 
280,221

International Operations
(22,081
)
 
16,576

 
(40,851
)
 
26,100

Business unit income
252,099

 
324,213

 
601,243

 
707,936

Stock-based compensation
(32,042
)
 
(46,074
)
 
(63,130
)
 
(81,470
)
Interest and other expense, net
(41,695
)
 
(40,735
)
 
(82,694
)
 
(87,257
)
Consolidated income before income taxes
$
178,362

 
$
237,404

 
$
455,419

 
$
539,209

 
Note L — Guarantor Subsidiaries
 
Under the terms of the October 2012 Notes, the January 2014 Notes, the November 2014 Revolving Credit Facility and the Commercial Paper Program, the Guarantor Subsidiaries, as defined below, guarantee repayment of the debt. The debt is fully and unconditionally guaranteed on an unsecured, joint and several basis by Staples the Office Superstore, LLC, Staples the Office Superstore, East Inc., Staples Contract & Commercial, Inc. and Staples the Office Superstore Limited Partnership (collectively, the “Guarantor Subsidiaries”). The term of the guarantees is equivalent to the term of the related debt.  Upon payment of the October 2012 notes, the Company will take the actions required under the applicable guarantee fall-away provisions to cause the Guarantor Subsidiaries to be legally released from their guarantees of debt related to the January 2014 Notes, the November 2014 Revolving Credit Facility and the Commercial Paper Program.

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 July 28, 2012 and January 28, 2012 and for the thirteen and twenty-six weeks ended July 28, 2012 and July 30, 2011.  The Guarantor Subsidiaries are wholly owned by Staples, Inc.  The non-guarantor subsidiaries represent more than an inconsequential portion of the consolidated assets and revenues of Staples. Investments in subsidiaries are accounted for by the Parent Company on the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are, therefore, reflected in the Parent Company’s investment accounts and earnings. The principal elimination entries eliminate the Parent Company’s investment in subsidiaries and intercompany balances and transactions.

15
Table of Contents
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)



Condensed Consolidating Balance Sheet
As of July 28, 2012
(in thousands)
 
 
Staples, Inc.
(Parent Co.)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Cash and cash equivalents
$
78,626

 
$
76,954

 
$
829,086

 
$
—

 
$
984,666

Merchandise inventories, net
—

 
1,560,551

 
1,069,047

 
—

 
2,629,598

Other current assets
663,907

 
813,934

 
1,029,839

 
—

 
2,507,680

Total current assets
742,533

 
2,451,439

 
2,927,972

 
—

 
6,121,944

Net property, equipment and other assets
652,538

 
1,120,927

 
1,236,090

 
—

 
3,009,555

Goodwill
1,636,726

 
153,200

 
2,071,658

 
—

 
3,861,584

Investment in affiliates and intercompany, net
5,704,179

 
8,152,766

 
10,676,696

 
(24,533,641
)
 
—

Total assets
$
8,735,976

 
$
11,878,332

 
$
16,912,416

 
$
(24,533,641
)
 
$
12,993,083

Total current liabilities
$
237,404

 
$
2,119,173

 
$
1,577,227

 
$
—

 
$
3,933,804

Total long-term liabilities
1,701,819

 
209,225

 
351,482

 
—

 
2,262,526

Total stockholders' equity
6,796,753

 
9,549,934

 
14,983,707

 
(24,533,641
)
 
6,796,753

Total liabilities and stockholders' equity
$
8,735,976

 
$
11,878,332

 
$
16,912,416

 
$
(24,533,641
)
 
$
12,993,083

 
Condensed Consolidating Balance Sheet
As of January 28, 2012
(in thousands)
 
 
Staples, Inc.
(Parent Co.)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Cash and cash equivalents
$
385,279

 
$
43,323

 
$
835,547

 
$
—

 
$
1,264,149

Merchandise inventories, net
—

 
1,437,074

 
994,771

 
—

 
2,431,845

Other current assets
68,608

 
1,188,378

 
1,337,840

 
—

 
2,594,826

Total current assets
453,887

 
2,668,775

 
3,168,158

 
—

 
6,290,820

Net property, equipment and other assets
671,787

 
1,165,840

 
1,320,045

 
—

 
3,157,672

Goodwill
1,644,728

 
156,303

 
2,181,099

 
—

 
3,982,130

Investment in affiliates and intercompany, net
5,951,426

 
6,935,956

 
10,988,680

 
(23,876,062
)
 
—

Total assets
$
8,721,828

 
$
10,926,874

 
$
17,657,982

 
$
(23,876,062
)
 
$
13,430,622

Total current liabilities
$
(13,544
)
 
$
2,314,411

 
$
1,773,411

 
$
—

 
$
4,074,278

Total long-term liabilities
1,713,159

 
195,852

 
425,120

 
—

 
2,334,131

Total stockholders' equity
7,022,213

 
8,416,611

 
15,459,451

 
(23,876,062
)
 
7,022,213

Total liabilities and stockholders' equity
$
8,721,828

 
$
10,926,874

 
$
17,657,982

 
$
(23,876,062
)
 
$
13,430,622



16
Table of Contents
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


Condensed Consolidating Statement of Comprehensive Income
For the thirteen weeks ended July 28, 2012
(in thousands)
 
 
Staples, Inc.
(Parent Co.)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Sales
$
—

 
$
3,433,007

 
$
2,065,489

 
$
—

 
$
5,498,496

Cost of goods sold and occupancy costs
2,657

 
2,595,598

 
1,472,956

 
—

 
4,071,211

Gross (loss) profit
(2,657
)
 
837,409

 
592,533

 
—

 
1,427,285

Operating and other (income) expenses
(123,086
)
 
721,656

 
504,772

 
145,581

 
1,248,923

Consolidated income before income taxes
120,429

 
115,753

 
87,761

 
(145,581
)
 
178,362

Income tax expense
—

 
51,202

 
6,765

 
—

 
57,967

Consolidated net income
120,429

 
64,551

 
80,996

 
(145,581
)
 
120,395

Loss attributed to the noncontrolling interests
—

 
—

 
(34
)
 
—

 
(34
)
Net income attributed to Staples, Inc.
$
120,429

 
$
64,551

 
$
81,030

 
$
(145,581
)
 
$
120,429

 
 
 
 
 
 
 
 
 
 
Consolidated comprehensive income (loss)
$
(96,414
)
 
$
64,551

 
$
(130,325
)
 
$
65,659

 
$
(96,529
)
Comprehensive loss attributed to noncontrolling interests
—

 
—

 
(115
)
 
—

 
(115
)
Comprehensive income (loss) attributed to Staples, Inc.
$
(96,414
)
 
$
64,551

 
$
(130,210
)
 
$
65,659

 
$
(96,414
)
 
Condensed Consolidating Statement of Comprehensive Income
For the thirteen weeks ended July 30, 2011
(in thousands)
 
 
Staples, Inc.
(Parent Co.)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Sales
$
—

 
$
3,495,872

 
$
2,323,740

 
$
—

 
$
5,819,612

Cost of goods sold and occupancy costs
3,413

 
2,635,730

 
1,640,089

 
—

 
4,279,232

Gross (loss) profit
(3,413
)
 
860,142

 
683,651

 
—

 
1,540,380

Operating and other (income) expenses
(179,851
)
 
743,139

 
532,010

 
207,678

 
1,302,976

Consolidated income before income taxes
176,438

 
117,003

 
151,641

 
(207,678
)
 
237,404

Income tax expense
—

 
53,971

 
7,133

 
—

 
61,104

Consolidated net income
176,438

 
63,032

 
144,508

 
(207,678
)
 
176,300

Loss attributed to the noncontrolling interests
—

 
—

 
(138
)
 
—

 
(138
)
Net income attributed to Staples, Inc.
$
176,438

 
$
63,032

 
$
144,646

 
$
(207,678
)
 
$
176,438

 
 
 
 
 
 
 
 
 
 
Consolidated comprehensive income (loss)
$
59,172

 
$
63,032

 
$
26,646

 
$
(89,726
)
 
$
59,124

Comprehensive loss attributed to noncontrolling interests
—

 
—

 
(48
)
 
—

 
(48
)
Comprehensive income (loss) attributed to Staples, Inc.
$
59,172

 
$
63,032

 
$
26,694

 
$
(89,726
)
 
$
59,172

 



17
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STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


Condensed Consolidating Statement of Comprehensive Income
For the twenty-six weeks ended July 28, 2012
(in thousands)
 
 
Staples, Inc.
(Parent Co.)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Sales
$
—

 
$
7,222,481

 
$
4,380,840

 
$
—

 
$
11,603,321

Cost of goods sold and occupancy costs
5,165

 
5,422,362

 
3,138,794

 
—

 
8,566,321

Gross (loss) profit
(5,165
)
 
1,800,119

 
1,242,046

 
—

 
3,037,000

Operating and other (income) expenses
(312,653
)
 
1,478,200

 
1,066,452

 
349,582

 
2,581,581

Consolidated income before income taxes
307,488

 
321,919

 
175,594

 
(349,582
)
 
455,419

Income tax expense
—

 
138,174

 
9,837

 
—

 
148,011

Consolidated net income
307,488

 
183,745

 
165,757

 
(349,582
)
 
307,408

Loss attributed to the noncontrolling interests
—

 
—

 
(80
)
 
—

 
(80
)
Net income attributed to Staples, Inc.
$
307,488

 
$
183,745

 
$
165,837

 
$
(349,582
)
 
$
307,488

 
 
 
 
 
 
 
 
 
 
Consolidated comprehensive income (loss)
$
112,440

 
$
183,745

 
$
(20,830
)
 
$
(162,929
)
 
$
112,426

Comprehensive loss attributed to noncontrolling interests
—

 
—

 
(14
)
 
—

 
(14
)
Comprehensive income (loss) attributed to Staples, Inc.
$
112,440

 
$
183,745

 
$
(20,816
)
 
$
(162,929
)
 
$
112,440

 
Condensed Consolidating Statement of Comprehensive Income
For the twenty-six weeks ended July 30, 2011
(in thousands)
 
 
Staples, Inc.
(Parent Co.)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Sales
$
—

 
$
7,254,520

 
$
4,738,030

 
$
—

 
$
11,992,550

Cost of goods sold and occupancy costs
5,927

 
5,433,779

 
3,376,071

 
—

 
8,815,777

Gross (loss) profit
(5,927
)
 
1,820,741

 
1,361,959

 
—

 
3,176,773

Operating and other (income) expenses
(380,610
)
 
1,492,499

 
1,086,661

 
439,014

 
2,637,564

Consolidated income before income taxes
374,683

 
328,242

 
275,298

 
(439,014
)
 
539,209

Income tax expense
—

 
145,180

 
20,047

 
—

 
165,227

Consolidated net income
374,683

 
183,062

 
255,251

 
(439,014
)
 
373,982

Loss attributed to the noncontrolling interests
—

 
—

 
(701
)
 
—

 
(701
)
Net income attributed to Staples, Inc.
$
374,683

 
$
183,062

 
$
255,952

 
$
(439,014
)
 
$
374,683

 
 
 
 
 
 
 
 
 
 
Consolidated comprehensive income (loss)
$
561,672

 
$
183,062

 
$
503,651

 
$
(687,208
)
 
$
561,177

Comprehensive loss attributed to noncontrolling interests
—

 
—

 
(495
)
 
—

 
(495
)
Comprehensive income (loss) attributed to Staples, Inc.
$
561,672

 
$
183,062

 
$
504,146

 
$
(687,208
)
 
$
561,672


 





18
Table of Contents
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


Condensed Consolidating Statement of Cash Flows
For the twenty-six weeks ended July 28, 2012
(in thousands)
 
 
Staples, Inc.
(Parent Co.)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidated
Net cash provided by operating activities
$
56,770

 
$
103,197

 
$
96,813

 
$
256,780

Investing Activities:
 

 
 

 
 

 
 

Acquisition of property and equipment
(17,208
)
 
(69,648
)
 
(39,364
)
 
(126,220
)
Cash used in investing activities
(17,208
)
 
(69,648
)
 
(39,364
)
 
(126,220
)
Financing Activities:
 

 
 

 
 

 
 

Proceeds from issuance of commercial paper, net of repayments
49,998

 
—

 
—

 
49,998

Proceeds from the exercise of stock options
24,259

 
—

 
—

 
24,259

Proceeds from borrowings
13,267

 
—

 
33,976

 
47,243

Payments on borrowings
(13,245
)
 
—

 
(61,838
)
 
(75,083
)
Purchase of noncontrolling interest
—

 
—

 
(4,649
)
 
(4,649
)
Cash dividends paid
(148,545
)
 
—

 
—

 
(148,545
)
Excess tax benefits from stock-based compensation arrangements
44

 
82

 
53

 
179

Purchase of treasury stock, net
(271,993
)
 
—

 
—

 
(271,993
)
Cash used in financing activities
(346,215
)
 
82

 
(32,458
)
 
(378,591
)
Effect of exchange rate changes on cash and cash equivalents
—

 
—

 
(31,452
)
 
(31,452
)
Net (decrease) increase in cash and cash equivalents
(306,653
)
 
33,631

 
(6,461
)
 
(279,483
)
Cash and cash equivalents at beginning of period
385,279

 
43,323

 
835,547

 
1,264,149

Cash and cash equivalents at end of period
$
78,626

 
$
76,954

 
$
829,086

 
$
984,666



19
Table of Contents
STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


Condensed Consolidating Statement of Cash Flows
For the twenty-six weeks ended July 30, 2011
(in thousands)
 
 
Staples, Inc.
(Parent Co.)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidated
Net cash provided by (used in) operating activities
$
460,425

 
$
87,077

 
$
(245,338
)
 
$
302,164

Investing Activities:
 

 
 

 
 

 
 

Acquisition of property and equipment
(16,962
)
 
(78,979
)
 
(68,208
)
 
(164,149
)
Cash used in investing activities
(16,962
)
 
(78,979
)
 
(68,208
)
 
(164,149
)
Financing activities:
 

 
 

 
 

 


Proceeds from issuance of commercial paper, net of repayments
254,926

 
—

 
—

 
254,926

Proceeds from the exercise of stock options
31,559

 
—

 
—

 
31,559

Proceeds from borrowings
21,544

 
—

 
96,630

 
118,174

Payments on borrowings
(517,641
)
 
—

 
(180,990
)
 
(698,631
)
Cash dividends paid
(140,643
)
 
—

 
—

 
(140,643
)
Excess tax benefits from stock-based compensation arrangements
571

 
324

 
47

 
942

Purchase of treasury stock, net
(365,203
)
 
—

 
—

 
(365,203
)
Cash (used in) provided by financing activities
(714,887
)
 
324

 
(84,313
)
 
(798,876
)
Effect of exchange rate changes on cash and cash equivalents
—

 
—

 
22,728

 
22,728

Net (decrease) increase in cash and cash equivalents
(271,424
)
 
8,422

 
(375,131
)
 
(638,133
)
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
$
135,397

 
$
46,720

 
$
641,007

 
$
823,124

 
Note M — Commitments and Contingencies
  
The Company currently holds a 39.49% investment interest in a joint venture in India.  In July 2012, the shareholders representing the remaining interests in the joint venture purported to exercise put option rights they hold under an option agreement, pursuant to which they may require the Company to purchase their shares at fair market value.  Prior to the shareholders' purported exercise of the put options, the Company and the other shareholders engaged two valuation firms in India to provide assistance with the valuation of the shares.  The firms valued the joint venture at approximately $89.0 million, which would result in payment by the Company of approximately $54.0 million for the shares.  The Company believes that the valuations were not conducted in accordance with fair market valuation principles as required by the shareholder documentation and contain other significant methodological flaws. The Company therefore believes that the options were improperly exercised by the shareholders. The Company is disputing the valuations pursuant to the terms of the relevant shareholder documentation, which provides for a period of good faith negotiation followed, to the extent unsuccessful, by arbitration. The Company is currently pursuing efforts in good faith to resolve its dispute with the shareholders. Should this not be possible, the Company intends to vigorously pursue its dispute of the valuations and believes it has meritorious arguments in challenging the exercise of the options. However, if the Company is required to purchase the shares based on valuations in excess of what it believes would be the fair value of the business in an arms-length transaction between market participants then, upon acquisition of the shares, the Company would likely recognize a loss, which could be material.
    
Staples had a contractual dispute with Corely S.C./Lyreco S.A.S. as a result of acquiring Corporate Express. Prior to Staples' acquisition of Corporate Express, Corporate Express and Corely/Lyreco entered into an agreement that required Corporate Express to pay €30 million to Corely/Lyreco in the event that the merger between Corporate Express and Corely/Lyreco was not completed as a result of Staples' acquisition of Corporate Express. Upon Staples' acquisition of Corporate Express, Corporate Express paid the €30 million to Corely/Lyreco.  Corely/Lyreco had been seeking through arbitration to have Staples gross up this payment to cover the corporate income taxes it incurred as a result of the payment. On February 29, 2012, after the Company had filed its Annual Report on Form 10-K for the year ended January 28, 2012 with the Securities and Exchange Commission, Staples was notified that the arbitration tribunal had issued its final ruling ordering Staples to pay Corely/Lyreco a portion of the €12.0

20
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STAPLES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)


million claim that was previously disclosed in the Annual Report. Staples paid the amount on March 2, 2012.
 
In addition, from time to time, the Company is involved in litigation arising from the operation of its business that is considered routine and incidental to its business. The Company does not expect the results of any of these actions to have a material adverse effect on its business, results of operations or financial condition.
 

21
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STAPLES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
of Financial Condition and Results of Operations

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward Looking Statements
 
This Quarterly Report on Form 10-Q and, in particular, this management’s discussion and analysis contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”).  Any statements contained in or incorporated by reference into this report that are not statements of historical fact should be considered forward-looking statements.  You can identify these forward-looking statements by the use of the words “believes”, “expects”, “anticipates”, “plans”, “may”, “will”, “would”, “intends”, “estimates” and other similar expressions, whether in the negative or affirmative.  These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management’s beliefs and assumptions, and should be read in conjunction with our condensed consolidated financial statements and notes to condensed consolidated financial statements included in this report.  Staples, Inc. and its subsidiaries ("we", "our" or "us") cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in the forward-looking statements made.  There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by such forward-looking statements.  These risks and uncertainties include, without limitation, those set forth under the heading “Risk Factors” of this Quarterly Report on Form 10-Q.  We do not intend to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.
 
Results of Operations
 
Major contributors to our second quarter of 2012 results, as compared to the results for the second quarter of 2011, are reviewed in detail in the Consolidated Performance and Segment Performance discussions and are summarized below:
 
•
On a consolidated basis, we generated $5.5 billion in sales, a decline of 5.5%;
 
•
North American Delivery’s sales decreased 0.8%, and business unit income rate decreased to 7.7% from 8.4%;
 
•
North American Retail’s sales decreased 2.7%, comparable store sales decreased 2%, and business unit income rate decreased to 4.4% from 5.0%;
 
•
International Operations’ sales decreased 18.2%, including the unfavorable impact of foreign exchange rates, and business unit (loss) income rate decreased to (2.0)% from 1.2%;

•
Net income attributed to Staples, Inc. for the second quarter of 2012 was $120.4 million or $0.18 per diluted share compared to $176.4 million or $0.25 per diluted share for the second quarter of 2011; and

•
Our quarterly income tax rate was 32.5% compared to 25.7% in the prior year.
 
Outlook
 
Our results for the second quarter were weaker than expected. As a result, we are adopting a more conservative sales and earnings outlook. Current expectations for 2012 assume slower growth in the U.S. economy, continued weakness in the demand environment in Europe and an unfavorable impact from foreign exchange rates. Including the impact of the 53rd week in 2012, we now expect full year sales to be flat compared to 2011 and earnings per diluted share to grow in the low single-digits compared to non-GAAP earnings per diluted share in 2011. 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.

Non-GAAP Measures

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 non-recurring tax refund received in the second quarter of 2011. 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

22
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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.

Net income attributed to Staples, Inc. for the second quarter of 2012 was $120.4 million or $0.18 per diluted share compared to $176.4 million or $0.25 per diluted share for the second quarter of 2011. Net income attributed to Staples, Inc. for the first half of 2012 was $307.5 million or $0.45 per diluted share compared to $374.7 million or $0.53 per diluted share for the first half of 2011. Our results for the second quarter and first half of 2011 include the receipt of a $20.8 million refund from the Italian government related to an overpayment of income taxes in previous years. A reconciliation of net income adjusted to remove the 2011 tax refund is shown below (amounts in thousands, except for share data):
 
 
13 Weeks Ended
 
26 Weeks Ended
 
July 28, 2012
 
July 30, 2011
 
July 28, 2012
 
July 30, 2011
 
Net income
 
Per  Diluted
Share
 
Net income
 
Per  Diluted
Share
 
Net income
 
Per  Diluted
Share
 
Net income
 
Per  Diluted
Share
Net income as reported
$
120,429

 
$
0.18

 
$
176,438

 
$
0.25

 
$
307,488

 
$
0.45

 
$
374,683

 
$
0.53

Adjustments, net of taxes:
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
Tax refund
—

 
—

 
(20,800
)
 
(0.03
)
 
—

 
—

 
(20,800
)
 
(0.03
)
Non-GAAP adjusted net income
$
120,429

 
$
0.18

 
$
155,638

 
$
0.22

 
$
307,488

 
$
0.45

 
$
353,883

 
$
0.50


Consolidated Performance
 
Second Quarter of 2012 Compared to the Second Quarter of 2011
 
Sales: Sales for the second quarter of 2012 were $5.50 billion, a $321.1 million or 5.5% decrease from the second quarter of 2011.  The sales decline reflected a $142.6 million unfavorable impact from foreign exchange rates, decreased volumes in International Operations and a 2% decline in comparable store sales in North American Retail. Ongoing weakness in the sales environment and reduced consumption in core categories were the primary factors contributing to our sales decline.
 
Gross Profit:  Gross profit as a percentage of sales was 26.0% for the second quarter of 2012 compared to 26.5% for the second quarter of 2011.  The decrease in gross profit rate for the second quarter of 2012 was primarily driven by lower product margins in North American Delivery and International Operations and by deleverage of fixed costs in International Operations and North American Retail due to a decline in sales. The lower product margins in North American Delivery and International Operations reflected inflationary pressures on core office supplies and investments to drive sales and customer loyalty, and, with respect to International Operations, adverse customer and product mix in Europe. These unfavorable drivers were partially offset by improvements in North American Retail product margins driven by a favorable shift in sales mix.
 
Selling, General and Administrative Expenses:  Selling, general and administrative expenses decreased by $53.6 million from the second quarter of 2011 to the second quarter of 2012, reflecting a reduction in marketing expense and a $13.3 million decrease in stock-based compensation expense due to a change in the structure of management compensation. These reductions were partially offset by increased costs associated with legal settlements. As a percentage of sales, selling, general and administrative expenses were 21.7% for the second quarter of 2012 compared to 21.4% for the second quarter of 2011, reflecting deleverage of labor costs on lower sales.

Amortization of Intangibles: Amortization of intangibles was $14.8 million for the second quarter of 2012 compared to $16.2 million for the second quarter of 2011, primarily reflecting the amortization of trade names, customer relationships and noncompetition agreements related to Corporate Express.  Amortization of intangibles resulting from our acquisition of Corporate Express was $12.3 million for the second quarter of 2012 and $13.2 million for the second quarter of 2011.
 
Interest Income: Interest income was $1.5 million for both the second quarter of 2012 and the second quarter of 2011.  An unfavorable impact from lower interest rates was offset by a favorable impact from higher international cash balances for the second quarter of 2012.
 
Interest Expense:  Interest expense decreased slightly to $41.8 million for the second quarter of 2012 from $41.9 million for the second quarter of 2011.  Our interest rate swap agreements reduced interest expense by $6.0 million for the second quarter

23
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of 2012 compared to a reduction of $7.0 million for the second quarter of 2011.

Other Expense: Other expense was $1.4 million for the second quarter of 2012 compared to $0.4 million for the second quarter of 2011. The increased expense was primarily due to foreign exchange losses in the second quarter of 2012.
 
Income Taxes:  Our tax rate was 32.5% for the second quarter of 2012 compared to 25.7% for the second quarter of 2011.  The increase in the tax rate was primarily due to a tax benefit of $20.8 million in the second quarter of 2011 related to a refund due to Corporate Express from the Italian government that was previously deemed uncollectible, which was recorded as a discrete item in the second quarter of 2011.

Our 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 earnings generated primarily by our entities in Australia, Canada, Hong Kong and the Netherlands contributed to the foreign tax rate differential impacting the effective tax rate.

First Half of 2012 Compared to the First Half of 2011

Sales: Sales for the first half of 2012 were $11.60 billion, a $389.2 million or 3.2% decrease from the first half of 2011.  The decline reflects decreased sales in International Operations, a $198.9 million unfavorable impact from foreign exchange rates and a 1% decline in comparable store sales in North American Retail, partially offset by growth in our North American Delivery business.
 
Gross Profit:  Gross profit as a percentage of sales was 26.2% for the first half of 2012 compared to 26.5% for the first half of 2011.  The decrease in gross profit rate was primarily driven by lower product margins in North American Delivery and International Operations and by deleverage of fixed costs in International Operations and North American Retail due to a decline in sales. The lower product margins in North American Delivery and International Operations reflected inflationary pressures on core office supplies, investments to drive sales and customer loyalty and, with respect to International Operations, adverse customer and product mix in Europe. These unfavorable drivers were partially offset by improvements in North American Retail product margins driven by a favorable shift in sales mix.

Selling, General and Administrative Expenses:  Selling, general and administrative expenses decreased by $48.0 million from the first half of 2011 to the first half of 2012, reflecting a reduction in marketing expense and a $17.6 million decrease in stock-based compensation expense due to a change in the structure of management compensation. These reductions were partially offset by severance-related expenses and increased costs associated with legal settlements. As a percentage of sales, selling, general and administrative expenses were 21.3% for the first half of 2012 compared to 21.0% for the first half of 2011, reflecting deleverage of labor costs on lower sales.
 
Amortization of Intangibles: Amortization of intangibles was $30.1 million for the first half of 2012 compared to $33.5 million for the first half of 2011, primarily reflecting the amortization of trade names, customer relationships and noncompetition agreements related to Corporate Express. Amortization of intangibles resulting from our acquisition of Corporate Express was $24.9 million for the first half of 2012 and $27.5 million for the first half of 2011.
 
Interest Income: Interest income was $3.1 million for the first half of 2012 compared to $4.0 million for the first half of 2011.  The decrease was due to a decline in interest rates, partially offset by higher international cash balances.
 
Interest Expense: Interest expense decreased to $84.1 million for the first half of 2012 from $90.7 million for the first half of 2011.  This decrease was primarily due to a reduction in debt balances resulting from the payoff of the $500 million, 7.75% notes (the "April 2011 Notes") and the pay-down and refinancing of certain debt and liquidity facilities.  Our interest rate swap agreements reduced interest expense by $12.1 million for the first half of 2012 compared to $14.2 million for the first half of 2011.
 
Other Expense: Other expense was $1.7 million for the first half of 2012 compared to $0.6 million for the first half of 2011.  The increased expense was primarily due to foreign exchange losses in the first half of 2012.
 
Income Taxes:  Our tax rate was 32.5% for the first half of 2012 compared to 30.6% for the first half of 2011.  The increase in the tax rate was due to a tax benefit of $20.8 million realized in the first half of 2011 related to a refund due to Corporate Express from the Italian government that was previously deemed uncollectible, which was recorded as a discrete item.

Our 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

24
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income tax expense by taxing jurisdiction are not directly related. The earnings generated primarily by our entities in Australia, Canada, Hong Kong and the Netherlands contributed to the foreign tax rate differential impacting the effective tax rate.
 
Segment Performance
 
We have three reportable segments: North American Delivery, North American Retail and International Operations.  Our North American Delivery segment consists of the U.S. and Canadian businesses that sell and deliver office products and services directly to 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.
 
Business unit income excludes stock-based compensation, interest and other expense, non-recurring items and the impact of changes in accounting principles (see reconciliation of total business unit income to consolidated income before taxes in Note K in the Notes to the Condensed Consolidated Financial Statements).

Second Quarter of 2012 Compared to the Second Quarter of 2011

The following tables provide a summary of our sales and business unit income by reportable segment for the second quarter of 2012 and 2011: 
 
(Amounts in thousands)
13 Weeks Ended
 
July 28, 2012
 
July 30, 2011
 
 
Decrease
From
Prior Year
 
Increase
From
Prior Year
 
July 28, 2012
 
July 30, 2011
 
 
Sales:
 

 
 

 
 

 
 

North American Delivery
$
2,412,755

 
$
2,433,217

 
(0.8
)%
 
3.1
%
North American Retail
1,989,139

 
2,045,143

 
(2.7
)%
 
1.7
%
International Operations
1,096,602

 
1,341,252

 
(18.2
)%
 
15.2
%
Total segment sales
$
5,498,496

 
$
5,819,612

 
(5.5
)%
 
5.2
%
 
 
(Amounts in thousands)
13 Weeks Ended
 
July 28, 2012
 
July 30, 2011
 
July 28, 2012
 
July 30, 2011
 
% of Sales
 
% of Sales
Business Unit Income (Loss):
 

 
 

 
 

 
 

North American Delivery
$
185,767

 
$
204,765

 
7.7
 %
 
8.4
%
North American Retail
88,413

 
102,872

 
4.4
 %
 
5.0
%
International Operations
(22,081
)
 
16,576

 
(2.0
)%
 
1.2
%
Business unit income
$
252,099

 
$
324,213

 
4.6
 %
 
5.6
%
 
North American Delivery: Sales decreased by $20.5 million or 0.8% for the second quarter of 2012.  This decrease was driven by the decision late in the prior year to not renew two large customer contracts, which did not deliver adequate returns, as well as an unfavorable impact from foreign exchange rates of $10.2 million.  These declines were partially offset by increased sales of facilities and breakroom supplies and promotional products.
 
Business unit income as a percentage of sales decreased to 7.7% for the second quarter of 2012 from 8.4% for the second quarter of 2011. The decrease was driven by inflationary pressures on core office supplies, investments to drive growth and loyalty in our on-line businesses and increased costs associated with legal settlements, partially offset by a reduction in marketing expense.

North American Retail:  Sales decreased by $56.0 million or 2.7% for the second quarter of 2012.  This decrease was primarily the result of a 2% comparable store sales decline and a $22.3 million unfavorable impact from foreign exchange rates, partially offset by non-comparable sales for new stores opened in the last twelve months. The decline in comparable store sales reflects a decrease in customer traffic and significant declines in sales of computers, software, and computer accessories. These sales decreases were partially offset by positive performance in copy and print services, mobile phones and accessories and facilities and breakroom supplies.
 
Business unit income as a percentage of sales decreased to 4.4% for the second quarter of 2012 from 5.0% for the second

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quarter of 2011. The decrease was driven by deleverage of rent and occupancy and labor expenses, as well as by costs associated with legal settlements. These unfavorable drivers were partially offset by improved product margins resulting from favorable sales mix and by a reduction in marketing expense.

International Operations:  Sales decreased by $244.7 million or 18.2% for the second quarter of 2012, primarily as a result of weakness in our European and Australian businesses. Ongoing weakness in the sales environment drove a 9% decline in comparable store sales in Europe, as well as declines in the company's European delivery businesses. In addition, foreign exchange rates negatively impacted sales by $110.1 million.
 
Business unit (loss) income as a percentage of sales decreased to (2.0)% for the second quarter of 2012 from 1.2% for the second quarter of 2011.  This decline reflects deleverage of fixed costs on lower sales in our European and Australian businesses, and declines in European product margins due to a combination of adverse customer and product mix as well as an increase in investments to drive sales.

First Half of 2012 Compared to the First Half of 2011

The following tables provide a summary of our sales and business unit income by reportable segment for the first half of 2012 and 2011: 
 
(Amounts in thousands)
26 Weeks Ended
 
July 28, 2012
 
July 30, 2011
 
 
Increase (Decrease)
From
Prior Year
 
Increase
From
Prior Year
 
July 28, 2012
 
July 30, 2011
 
 
Sales:
 

 
 

 
 

 
 

North American Delivery
$
4,967,826

 
$
4,944,863

 
0.5
 %
 
2.5
%
North American Retail
4,312,970

 
4,373,228

 
(1.4
)%
 
1.2
%
International Operations
2,322,525

 
2,674,459

 
(13.2
)%
 
9.3
%
Total segment sales
$
11,603,321

 
$
11,992,550

 
(3.2
)%
 
3.5
%
 
 
(Amounts in thousands)
26 Weeks Ended
 
July 28, 2012
 
July 30, 2011
 
July 28, 2012
 
July 30, 2011
 
% of Sales
 
% of Sales
Business Unit Income (loss):
 

 
 

 
 

 
 

North American Delivery
$
386,726

 
$
401,615

 
7.8
 %
 
8.1
%
North American Retail
255,368

 
280,221

 
5.9
 %
 
6.4
%
International Operations
(40,851
)
 
26,100

 
(1.8
)%
 
1.0
%
Business unit income
$
601,243

 
$
707,936

 
5.2
 %
 
5.9
%
 
North American Delivery: Sales increased by $23.0 million or 0.5% for the first half of 2012, reflecting increased sales of facilities and breakroom supplies, promotional products and copy and print services. These favorable drivers were partially offset by the impact of the decision late in the prior year to not renew two large customer contracts which did not deliver adequate returns and by an unfavorable impact of foreign exchange rates of $14.9 million. 
 
Business unit income as a percentage of sales decreased to 7.8% for the first half of 2012 from 8.1% for the first half of 2011. The decrease was driven by inflationary pressures on core office supplies, investments to drive growth and loyalty in our on-line businesses and increased costs associated with legal settlements, partially offset by a reduction in marketing expense and increased supply chain efficiencies.
 
North American Retail:  Sales decreased by $60.3 million or 1.4% for the first half of 2012.  The decrease was primarily the result of a 1% comparable store sales decline and a $33.2 million unfavorable impact from foreign exchange rates, partially offset by non-comparable sales for new stores opened in the past twelve months.  The decline in comparative store sales reflects a decrease in customer traffic. Declines in software, computers, and paper were partially offset by positive performance in copy and print services, mobile phones and accessories, e-readers and facilities and breakroom supplies.
 
Business unit income as a percentage of sales was 5.9% in the first half of 2012 compared to 6.4% in the first half of 2011, The decrease was driven primarily by deleverage of rent and occupancy costs and labor expenses, as well as legal settlements and related costs. These expenses were partially offset by a reduction in marketing expenses and improved product margins resulting

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from favorable sales mix.

International Operations:  Revenue decreased by $351.9 million or 13.2% for the first half of 2012 as a result of decreased sales in our European and Australian businesses. Broad-based weakness in the sales environment drove a 7% decrease in comparable store sales in Europe, as well as declines in the company's European delivery businesses. In addition, foreign exchange rates negatively impacted revenue by $150.8 million.
 
Business unit (loss) income as a percentage of sales decreased to (1.8)% for the first half of 2012 from 1.0% for the first half of 2011.  The decrease reflects deleverage of fixed costs on lower sales in our European and Australian businesses, an increase in severance-related costs across our International businesses, and declines in European product margins resulting from adverse customer and product mix and an increase in investments to drive sales.


Critical Accounting Policies and Significant Estimates
 
Our condensed consolidated financial statements have been prepared in accordance with U.S. GAAP.  Preparation of these statements requires management to make significant judgments and estimates.  Some of our accounting policies require estimates which may have a significant impact on amounts reported in these financial statements.  A summary of our critical accounting policies and significant estimates may be found in our 2011 Annual Report on Form 10-K, filed on February 29, 2012 (“Annual Report”) in the Critical Accounting Policies and Significant Estimates section of Management's Discussion and Analysis of Financial Condition and Results of Operations.  There have been no material changes to our critical accounting policies as disclosed in that report.
Since the filing of our Annual Report, the political and economic environment in Europe has not improved, the operating results for our European businesses have not met our expectations, and the short-term outlook for these businesses remains challenging to predict.  Despite this short-term instability and uncertainty, our long-term outlook for these businesses has not yet changed and we remain confident in our ability to return to or exceed the levels of operating performance which these businesses experienced in the past.  However, because of the long-term nature of our sales and profit projections and the increased uncertainty in the short-term, we continue to closely monitor events and trends in Europe to assess whether any factors indicate that it is more likely than not that any of our reporting units' fair values have declined below their carrying values.  Given the ongoing instability and uncertainty in the region, we think it is reasonably possible that an interim goodwill impairment test may be required in our third quarter. 


Liquidity and Capital Resources
 
Cash Flows
 
Cash provided by operations was $256.8 million for the first half of 2012 compared to $302.2 million for the first half of 2011, a decrease of $45.4 million.  The decrease was primarily due to a year-over-year decline in net income adjusted for non-cash expenses and the timing of income tax payments, partially offset by favorable changes in working capital.
 
Cash used in investing activities was $126.2 million for the first half of 2012 compared to $164.1 million for the first half of 2011, a decrease of $37.9 million.  The decrease was due to lower capital spending, primarily driven by a reduction in system-related investments and store remodeling activity.
 
Cash used in financing activities was $378.6 million for the first half of 2012 compared to $798.9 million for the first half of 2011, a reduction of $420.3 million.  The decrease was primarily due to the $500 million repayment of the April 2011 Notes in the first quarter of 2011 and lower spending on share repurchases, as we spent $251.4 million in the first half of 2012 to repurchase 18.0 million shares under our share repurchase plan compared with $345.6 million spent in first half of 2011 to buy 19.2 million shares, a decrease of $94.2 million. These reductions in cash outflows were partially offset by lower cash inflows from borrowings under our Commercial Paper Program, as defined below, and revolving lines of credit in the first half of 2012 as compared with in the first half of 2011. In the first half of 2012, the Company paid shareholders cash dividends of $0.22 per share for a total of $148.5 million, an increase from the $0.20 per share for a total of $140.6 million paid in the first half of 2011.
 
Sources of Liquidity
 
To cover seasonal fluctuations in cash flows and to support our various growth initiatives, we utilize cash generated from operations and borrowings available under various credit facilities and a commercial paper program. We have a revolving credit

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agreement with Bank of America, N.A., as Administrative Agent and other lending institutions named therein (the "November 2014 Revolving Credit Facility") which provides for a maximum borrowing of $1.0 billion, and which pursuant to an accordion feature may be increased to $1.5 billion upon the Company's request and the agreement of the lenders participating in the increase. We also have various other lines of credit under which we may borrow a maximum of $307.8 million and related to which $134.0 million of borrowings were outstanding at July 28, 2012.

We have a commercial paper program ("Commercial Paper Program") that allows us to issue up to $1.0 billion of unsecured commercial paper notes (the "Notes") from time to time. The November 2014 Revolving Credit Facility serves as a backstop to the Commercial Paper Program. Maturities of the Notes vary, but may not exceed 397 days from the date of issue. Payments under the Commercial Paper Program are unconditionally guaranteed on an unsecured, unsubordinated basis by the Guarantor Subsidiaries (see Note L in the Notes to the Condensed Consolidated Financial Statements). On July 12, 2012, the Company resumed the issuance of Notes under the Commercial Paper Program. As of July 28, 2012, $50.0 million of Notes were outstanding, with a weighted average remaining maturity of three days and a weighted average interest rate of 0.4%. The maximum amount outstanding under the Commercial Paper Program during the second quarter of 2012 was $100.0 million.

At July 28, 2012, we had approximately $2.11 billion in total cash and funds available through credit agreements, which consisted of $1.12 billion of available credit and $984.7 million of cash and cash equivalents. Of the $984.7 million in cash and cash equivalents, approximately $811.9 million is held in jurisdictions outside the United States. While there could be tax consequences if such amounts were moved out of these jurisdictions or repatriated to the United States, we currently intend to use most of the cash and cash equivalents held outside of the United States to finance the obligations and current operations of our foreign businesses. The determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable because of the complexities associated with its hypothetical calculation.

A summary, as of July 28, 2012, of balances available under our credit agreements and debt outstanding is presented below (in thousands):
 
July 28, 2012
 
Available Credit
 
Debt Outstanding
October 2012 Notes
$
—

 
$
326,904

January 2014 Notes
—

 
1,518,620

November 2014 Revolving Credit Facility
950,002

 
—

Commercial Paper Program
—

 
49,998

Lines of credit
173,770

 
133,982

Capital lease obligations and other notes payable
—

 
12,033

Total
$
1,123,772

 
$
2,041,537

 
At July 28, 2012, there had not been a material change to the information regarding the maturity of contractual obligations disclosed in the subsection entitled “Contractual Obligations and Commercial Commitments” of the Management’s Discussion and Analysis of Financial Condition and Results of Operations on page B-11 of our 2011 Annual Report on Form 10-K. We do not have any off-balance sheet financing arrangements as of July 28, 2012, nor did we utilize any during the second quarter or first half of 2012.

We expect that our cash generated from operations, together with our current cash, funds available under our existing credit agreements and other alternative sources of financing, will be sufficient to fund our planned capital expenditures and other operating cash needs for at least the next twelve months.
 
Uses of Capital
 
As a result of our financial position, in addition to investing in our existing businesses and pursuing strategic acquisitions and partnerships, we also expect to continue to return capital to our shareholders through a cash dividend program and our share repurchase program.   Depending on our credit metrics and our liquidity position, we may repurchase our public notes in the open market or through privately negotiated transactions.
 
Capital expenditures were $126.2 million in the first half of 2012 compared to $164.1 million in the first half of 2011, a decrease of $37.9 million. However, for the full year 2012, we do not expect material changes in capital spending compared with 2011. We are not planning on opening a significant number of new stores in 2012 but will instead focus on improving the productivity of existing stores. We expect the source of funds for our capital expenditures to come from operating cash flows.
 

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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 consider many types of acquisitions for their strategic and other benefits.  In the past, excluding the Corporate Express acquisition, we have focused on smaller acquisitions designed to align with our existing businesses to drive long-term growth.  We expect to continue this strategy and target such acquisitions when opportunities are presented and fit within our financial structure.
 
We paid a second quarter of 2012 cash dividend of $0.11 per share on July 12, 2012 to stockholders of record on June 22, 2012.  We expect the total value of quarterly cash dividend payments for fiscal 2012 to be $0.44 per share.  While it is our intention to continue to pay quarterly cash dividends for the remainder of 2012 and beyond, any decision to pay future cash dividends will be made by our Board of Directors and will depend upon our earnings, financial condition and other factors.

From time to time, we repurchase our common stock pursuant to programs approved by our Board of Directors. On September 13, 2011, we announced a new repurchase program had been approved by the Board of Directors (the "2011 Repurchase Plan"). Under this plan, we are authorized to repurchase up to $1.5 billion of common stock in both open market and privately negotiated transactions. The 2011 Repurchase Plan has no expiration date and may be suspended or discontinued at any time. In the first half of 2012, we spent $251.4 million to repurchase 18.0 million shares under the 2011 Repurchase Plan. As of July 28, 2012, we have spent a total of $433.9 million to repurchase 30.6 million shares under the 2011 Repurchase Plan, and therefore, the remaining repurchase authorization was $1.1 billion as of that date. We consider several factors in determining whether and when to execute share repurchases, including our current and projected operating results, capital expenditure requirements, acquisitions or other strategic initiatives, our capacity leverage and cost of borrowings and the market price of our common stock. 

Inflation and Seasonality
 
While neither inflation nor deflation has had, nor do we expect them to have, a material impact upon our operating results, there can be no assurance that our business will not be affected by inflation or deflation in the future.  Our business is somewhat seasonal, with sales and profitability historically higher during the second half of our fiscal year due to the back-to-school, holiday and January back-to-business seasons.

Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
At July 28, 2012, there had not been a material change in the interest rate and foreign exchange risk information disclosed in the “Quantitative and Qualitative Disclosures about Market Risks” subsection of the Management’s Discussion and Analysis of Financial Condition and Results of Operations on page B-13 of our 2011 Annual Report on Form 10-K.
 
Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated, as of July 28, 2012, the effectiveness of the Company’s disclosure controls and procedures, which were designed to be effective at the reasonable assurance level.  The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Based on the evaluation of the Company’s disclosure controls and procedures as of July 28, 2012, management, the chief executive officer and the chief financial officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level at that date.
 
Changes in Internal Control over Financial Reporting
 
No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended July 28, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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STAPLES, INC. AND SUBSIDIARIES

PART II — OTHER INFORMATION
 
Item 1. Legal Proceedings

We are subject to routine litigation incidental to our business. We do not believe the results of such litigation will have a material adverse effect on our business. See Note M in the Notes to our Condensed Consolidated Financial Statements.

Item 1A.  Risk Factors
 
Global economic conditions could adversely affect our business and financial performance.
 
As the world's leading office products company operating in 26 countries, our operating results and performance depend significantly on worldwide economic conditions and their impact on business and consumer spending. Increases in the levels of unemployment, particularly white collar unemployment, energy and commodity costs, health care costs, higher interest rates and taxes, a return to tighter credit markets, reduced consumer credit availability, turmoil in the financial markets (including recent events in the European Union), lower consumer confidence, lack of small business formation and other factors could result in a decline in business and consumer spending. Although there has been modest improvement in some of these measures, the political and economic environment in Europe has not improved, and 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 if such spending remains stagnant.

Our market is highly competitive and we may not be able to continue to compete successfully.
 
The office supply and services market is highly competitive. We compete with a variety of local, regional, national and international retailers and online and traditional retailers, dealers and distributors for customers, associates, locations, products, services, and other important aspects of our business. In most of our geographic markets, we compete with other high-volume office supply providers such as Office Depot, OfficeMax and Lyreco, as well as mass merchants such as Walmart, Target and Tesco, warehouse clubs such as Costco, computer and electronics retail stores such as Best Buy, specialty technology stores such as Apple, copy and print businesses such as FedEx Office, online retailers such as Amazon.com, and other discount retailers. We also compete with numerous mail order firms, contract stationer businesses, electronic commerce distributors, regional and local dealers and direct manufacturers. Some of our current and potential competitors are larger than we are, may have more experience in selling certain products or delivering services or may have substantially greater financial resources. Also, many of our competitors have increased their presence in our markets in recent years by expanding their assortment of office products and services, opening new stores near our existing stores, and offering direct delivery of office products.  Intense competitive pressures from one or more of our competitors could affect prices or demand for our products and services. If we are unable to timely and appropriately respond to these competitive pressures, or offer the appropriate mix of products and services at competitive prices, our financial performance and market share could be adversely affected.
 
If the products and services that we offer fail to meet our customer needs, our performance could be adversely affected.

We strive to differentiate ourselves from our competitors in part by executing our brand promise: we bring easy to your office. This involves providing our customers with solutions through a broad selection of products and services at competitive prices that meet customers' changing needs and purchasing habits.  For example, technology has rapidly changed how people work and conduct business, which impacts the types of office products being purchased and the services needed by businesses and consumers.  We offer, among other things, convenient store locations, helpful associates and reliable and fast order delivery.  If we misjudge either the demand for products and services we sell or our customers' purchasing habits and tastes, we may be faced with excess inventories of some products or missed opportunities for products and services we do not offer.   Failure to execute on our brand promise of providing the products and services preferred by our customers could have a material adverse affect on our revenue, results of operations and ability to attract and retain customers.

We may be unable to continue to enter new markets successfully.
 
An important part of our business plan is to increase our presence in new markets, which could include providing new products and service offerings or adding delivery operations or stores in new geographic markets. We may have limited experience in newer markets, and any such offerings may present new and difficult challenges. For example, when entering a new geographic market, customers may not be familiar with our brand or our competitors may have a larger, more established market presence.

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Our sales or profit levels in newer activities thus may not be successful enough to recoup our investments in them and may reduce our overall profitability. In addition, for our strategy to be successful, we must identify favorable store sites, negotiate leases on acceptable terms, hire and train qualified associates and adapt management and operational systems to meet the needs of our expanded operations. Local zoning and other land use regulations may prevent or delay the opening of new stores in some markets. If we are unable to open new stores as efficiently as we planned, our future sales and profits may be adversely affected.

Our expanding international operations expose us to risks inherent in foreign operations.
 
We currently operate in 25 countries outside the United States and plan to continue to grow internationally. In certain international market segments, we may not benefit from any first-to-market advantages or otherwise succeed. Cultural differences abroad and local practices of conducting business may conflict with our own business practices and ethics standards. Ensuring compliance with foreign and U.S. laws and our own policies may require that we implement new operational systems and financial controls, conduct audits or internal investigations, train our associates and third parties on our existing compliance methods, and take other actions, all of which may be expensive, divert management's time and impact our operations. There are also different employee/employer relationships and in some cases the existence of workers' councils that may delay or impact the implementation of some of these operational systems. In addition, differences in business practices in our international markets may cause customers to be less receptive to our business model than we expect.
 
Risks inherent in international operations also include, among others, the costs and difficulties of managing international operations, adverse tax consequences and greater difficulty in enforcing intellectual property rights. Other factors that may also have an adverse impact on our international operations include limitations on the repatriation and investment of funds, foreign currency exchange restrictions, complex import and export schemes, increased local competition, our lack of familiarity with local customer preferences, unfavorable foreign trade policies, unstable political or economic conditions, and geopolitical events, including war and terrorism.

Failure to manage growth and continue to expand our operations successfully could adversely affect our financial results.
 
Our business has experienced significant historical growth over the years, and we expect our business to continue to grow organically and through strategic acquisitions.  Sales of our products and services, the types of our customers, the nature of our contracts, the mix of our businesses, the number of countries in which we conduct business, the number of stores that we operate and the number of our associates have grown and changed, and we expect they will continue to grow and change over the long-term. This growth places significant demands on management and operational systems. If we cannot effectively manage our growth, it is likely to result in operational inefficiencies and ineffective management of our business thus negatively impacting our operating results. In addition, as we grow, our business is subject to a wider array of complex state, federal and international regulations, and may be increasingly the target of private actions. This increases the cost of doing business and the risk that our business practices could unknowingly result in liabilities that may adversely affect our business and financial performance.  To the extent we grow through strategic acquisitions, our success will depend on selecting the appropriate targets, integrating such acquisitions quickly and effectively and realizing any expected synergies and cost savings related to such acquisitions.

Our effective tax rate may fluctuate.
 
We are a multi-national, multi-channel provider of office products and services. As a result, our effective tax rate is derived from a combination of applicable tax rates in the various countries, states and other jurisdictions in which we operate. Our effective tax rate may be lower or higher than our tax rates have been in the past due to numerous factors, including the sources of our income, any agreements we may have with taxing authorities in various jurisdictions, changes in the laws and the tax filing positions we take in various jurisdictions. We base our estimate of an effective tax rate at any given point in time upon a calculated mix of the tax rates applicable to our company and to estimates of the amount of business likely to be done in any given jurisdiction. The loss of one or more agreements with taxing jurisdictions, a change in the mix of our business from year to year and from country to country, changes in rules related to accounting for income taxes, adverse outcomes from tax audits that we may be subject to in any of the jurisdictions in which we operate, or changes in tax laws in any of the multiple jurisdictions in which we operate could result in an unfavorable change in our effective tax rate which could have an adverse effect on our business and results of our operations.

Fluctuations in foreign exchange rates could lead to lower earnings.
 
As we have expanded our international operations, our exposure to exchange rate fluctuations has increased.  Sales from our delivery operations and stores outside the U.S. are denominated in the currency of the country in which these operations or stores are located and changes in foreign exchange rates affect the translation of the sales and earnings of these businesses into U.S. dollars for financial reporting purposes. Additionally, merchandising agreements may also be denominated in the currency

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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 commercial paper program and local lines of credit. Our consolidated outstanding debt as of July 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 July 28, 2012, we had $3.86 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.  In addition, our goodwill impairment analysis includes a comparison of the aggregate estimated fair value of all reporting units to our total market capitalization.  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.  For example, we continue to monitor events and trends in Europe to assess whether any factors indicate that it is more likely than not that any of our reporting units' fair values have declined below their carrying values.  Given the ongoing instability and uncertainty in the region, we think it is reasonably possible that an interim goodwill impairment test may be required in our third quarter. 





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Our expanded offering of proprietary branded products may not improve our financial performance and may expose us to intellectual property and product liability claims.
 
Our product offering includes Staples, Quill and other proprietary branded products and services, which represented approximately 27% of our sales in fiscal 2011 and which typically provide for higher margins. Our proprietary branded products compete with other manufacturers' branded items that we offer. An increase in our proprietary branded product and services also exposes us to risk that third parties will assert infringement claims against us with respect to such products and services. We also have greater exposure and responsibility to the consumer for replacements as a result of product defects. If any of our customers are harmed by our proprietary branded products or services, they may bring product liability and other claims against us or we may have to issue voluntary or mandatory recalls. The more proprietary brand product and services we offer, the more these risks increase. A loss of consumer acceptance of these products could also adversely affect our sales and gross margin rates. Any of these circumstances could damage our reputation and have an adverse effect on our business and financial performance.

Problems in our information systems and technologies may disrupt our operations.
 
We rely heavily on various information systems and technology to sell and deliver our products and services and operate our business, including systems to track inventory, to process and record transactions, to generate financial reports and to communicate with our associates, vendors and customers. Our ability to attract and retain customers, compete and operate effectively depends in part on a consistent, secure and easy to use technology infrastructure with reliable back-up systems. Any disruption to the Internet or our technology infrastructure, including a disruption affecting our web sites and information systems, may cause a decline in our customer satisfaction, jeopardize accurate financial reporting, impact our sales volumes or result in increased costs. We may also outsource our information technology to third parties. Although we continue to invest in our technology, if we are unable to continually add software and hardware, effectively manage or upgrade our systems and network infrastructure, and develop effective system availability, disaster recovery plans and protection solutions, our business could be disrupted thus subjecting us to liability and potentially harming our reputation.

In addition, we will periodically make modifications and upgrades to our information systems and technology. Some of these modifications and upgrades will be outsourced to third parties. Modifications involve replacing legacy systems with successor systems, making changes to legacy systems or acquiring new systems with new functionality. Although we make a diligent effort to ensure that all providers of outsourced services observe proper internal control practices and procedures, we cannot assure that failures will not occur. We are aware of inherent risks associated with replacing our systems, including accurately capturing data, system disruptions and outsourcing to third parties. Information technology system disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our operations.

Compromises of our information systems or unauthorized access to confidential information or our customers' or associates' personal information may materially harm our business or damage our reputation.
 
Through our sales and marketing activities and our business operations, we collect and store confidential information and certain personal information from our customers and associates. For example, we handle, collect and store personal information in connection with our customers purchasing products or services, enrolling in our promotional or rewards programs, registering on our web site or otherwise communicating or interacting with us. We also process payment card information and check information. In addition, in the normal course of business, we gather and retain personal information about our associates and generate and have access to confidential business information. We may share confidential and personal information with vendors or other third parties in connection with processing of transactions, operating certain aspects of our business or for marketing purposes. Although we have taken steps designed to safeguard such information, there can be no assurance that such information will be protected against unauthorized access or disclosure. Computer hackers may attempt to penetrate our or our vendors' network security and, if successful, misappropriate such information. A Staples associate, contractor or other third-party with whom we do business may also attempt to circumvent our security measures in order to obtain such information or inadvertently cause a breach involving such information. We could be subject to liability for failure to comply with privacy and information security laws, for failing to protect personal information, or for misusing personal information, such as use of such information for an unauthorized marketing purpose. Loss or misuse of confidential or personal information could disrupt our operations, damage our reputation, and expose us to claims from customers, financial institutions, regulators, payment card associations, employees and other persons, any of which could have an adverse effect on our business, financial condition and results of operations.

Our business may be adversely affected by the actions of and risks associated with third-party vendors and service providers.
 
The products we sell are sourced from a wide variety of third-party vendors. In general, we do not have long-term contracts with these vendors committing them to provide products to us on acceptable terms. For example, we derive benefits from vendor allowances and promotional incentives which may not be offered in the future. We also cannot control the supply, design, function

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or cost of many of the products that we offer for sale and are dependent on the availability and pricing of key products, including paper, ink, toner, technology and printing equipment. Some of the products we offer are supplied to us on an exclusive basis and may be difficult to replace in a timely manner. Additionally, we may not be able to source products that we want to offer for sale on acceptable terms, or at all. Disruptions in the availability of raw materials used in the production of these products, or quality issues that cause us to initiate voluntary or mandatory recalls for proprietary products we sell, may result in customer dissatisfaction, damage our reputation and adversely affect our sales.

Global sourcing of many of the products we sell is an important factor in our financial performance. Our ability to find qualified vendors and access products in a timely and efficient manner is a significant challenge, especially with respect to goods sourced outside the United States. Political instability, the financial instability of suppliers, trade restrictions, tariffs, foreign currency exchange rates, transport capacity and costs, inflation and other factors relating to foreign trade are beyond our control. We also rely upon many independent service providers for services that are important to many aspects of our business. If our vendors or service providers fail or are unable to perform as expected and we are unable to replace them quickly, our business could be harmed at least temporarily until we are able to do so and potentially, in some cases, permanently. These and other issues affecting our vendors and service providers could adversely affect our reputation, business and financial performance.

Various legal proceedings may adversely affect our business and financial performance.
 
We are involved in various private legal proceedings, which include consumer, employment, intellectual property, tort and other litigation. As our workforce expands, we are subject to potentially increasing challenges by private litigants regarding compliance with local, state and national labor regulations, whether meritorious or not.  In addition, companies have increasingly been subject to employment related class action litigation, and we have experienced an increase in “wage and hour” class action lawsuits.  We expect that these trends will continue to affect us. As our operations grow, we are also subject to claims that the technology we use or the products we sell infringe intellectual property rights of third parties. Such claims, whether meritorious or not, involve significant managerial resources and can become costly. Generally, we have indemnification protections in our agreements which our vendors or licensors have typically honored; however, there are no assurances that such vendors or licensors will continue to do so in the future. We estimate exposure and establish reserves for our estimated liabilities, however, litigation is inherently unpredictable and the outcome of legal proceedings and other contingencies could be unexpected and require us to pay substantial amounts of money or take actions that adversely affect our operations. In addition, defending against these claims may involve significant time and expense. Given the large size of our operations and workforce, the visibility of our brand and our position as an industry leader, we may regularly be involved in legal proceedings that could adversely affect our business and financial performance.

Failure to comply with laws, rules and regulations could negatively affect our business operations and financial performance.
 

Our business is subject to federal, state, local and international laws, rules and regulations, such as state and local wage and hour laws, the U.S. Foreign Corrupt Practices Act, import and export laws, unclaimed property laws and many others. The complexity of the regulatory environment in which we operate and the related cost of compliance are both increasing due to legal and regulatory requirements, increased enforcement and our ongoing expansion into new markets and new channels. In addition, as a result of operating in multiple countries, we must comply with multiple foreign laws and regulations that may differ substantially from country to country and may conflict with corresponding U.S. laws and regulations. We may also be subject to investigations or audits by governmental authorities and regulatory agencies, which can occur in the ordinary course of business or which can result from increased scrutiny from a particular agency towards an industry, country or practice. If we fail to comply with laws, rules and regulations or the manner in which they are interpreted or applied, we may be subject to government enforcement action, class action litigation or other litigation, damage to our reputation, civil and criminal liability, damages, fines and penalties, and increased cost of regulatory compliance, any of which could adversely affect our results of operations and financial performance.


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Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
The following table provides information about our purchases of our common stock during the second quarter of fiscal 2012:
 
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)
April 29, 2012 - May 26, 2012
 
3,306,806

 
$
14.11

 
3,306,700

 
$
1,178,323,000

May 27, 2012 - June 30, 2012
 
5,625,603

 
12.86

 
5,600,342

 
1,106,318,000

July 1, 2012 - July 28, 2012
 
4,711,928

 
12.71

 
3,166,942

 
1,066,067,000

Total for the second quarter of 2012
 
13,644,337

 
$
13.16

 
12,073,984


$
1,066,067,000

____________________________________________
(1)
Includes a total of 1,570,353 shares of our common stock withheld during the second quarter of our 2012 fiscal year to satisfy minimum statutory tax withholding obligations in connection with the vesting of restricted stock awards granted pursuant to our equity incentive plans.

(2)
Average price paid per share includes commissions paid in connection with our publicly announced share repurchase program and is rounded to the nearest two decimal places.

(3)
On September 13, 2011, we announced that our Board of Directors approved the repurchase of up to $1.5 billion of common stock in both open market and privately negotiated transactions. Our repurchase program has no expiration date and may be suspended or discontinued at any time.

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable


Item 6.  Exhibits
 
The exhibits listed on the Exhibit Index immediately preceding such exhibits, which is incorporated herein by reference, are filed or furnished as part of this Quarterly Report on Form 10-Q.


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SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
STAPLES, INC.
 
 
 
 
 
 
 
 
Date:
August 15, 2012
By:
/s/ CHRISTINE T. KOMOLA
 
 
 
Christine T. Komola
 
 
 
Senior Vice President and Chief Financial Officer
 
 
 
(Principal Financial Officer and Principal Accounting Officer)


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EXHIBIT INDEX
 
Exhibit No.
 
Description
3.1
 
Amendment to Restated Certificate of Incorporation, dated June 4, 2012. Filed as Exhibit 3.1 to the Company's Form 8-K filed on June 8, 2012.
3.2
 
Amended and Restated By-Laws of the Company, dated June 4, 2012. Filed as Exhibit 3.2 to the Company's Form 8-K filed on June 8, 2012.
10.1
 
Amended and Restated Long Term Cash Incentive Plan. Filed as Exhibit 10.1 to the Company's Form 8-K filed on June 8, 2012.
10.2
 
Amended and Restated Executive Officer Incentive Plan. Filed as Exhibit 10.2 to the Company's Form 8-K filed on June 8, 2012.
10.3
 
2012 Employee Stock Purchase Plan. Filed as Exhibit 10.3 to the Company's Form 8-K filed on June 8, 2012.
10.4+
 
Memorandum of Understanding, dated as of July 24, 2012, by and between the Company and John J. Mahoney.
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.
____________________________________________
 +
Filed herewith.
 
 
 + +    
Furnished herewith.

Attached as Exhibits 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended July 28, 2012 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) related notes to these financial statements tagged in detail.
 


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