SPLS 10-Q 050413
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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:  May 4, 2013

or
 
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 offices 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.
 
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 663,915,458 shares of common stock outstanding as of May 20, 2013.

Table of Contents

STAPLES, INC. AND SUBSIDIARIES
FORM 10-Q
May 4, 2013
TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



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PART I. FINANCIAL INFORMATION 

Item 1. Financial Statements 

STAPLES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollar Amounts in Thousands, Except Share Data)
(Unaudited)
 
May 4, 2013
 
February 2, 2013
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
1,435,453

 
$
1,334,302

Receivables, net
1,744,074

 
1,815,586

Merchandise inventories, net
2,388,086

 
2,314,058

Deferred income tax assets
221,449

 
218,899

Prepaid expenses and other current assets
357,684

 
346,773

Current assets of discontinued operations
176,459

 
170,819

Total current assets
6,323,205

 
6,200,437

 
 
 
 
Property and equipment:
 

 
 

Land and buildings
1,001,690

 
1,015,225

Leasehold improvements
1,294,920

 
1,300,258

Equipment
2,618,315

 
2,625,949

Furniture and fixtures
1,076,550

 
1,088,669

Total property and equipment
5,991,475

 
6,030,101

Less: Accumulated depreciation
4,110,158

 
4,066,926

Net property and equipment
1,881,317

 
1,963,175

 
 
 
 
Intangible assets, net of accumulated amortization
364,821

 
384,609

Goodwill
3,182,323

 
3,221,162

Other assets
504,460

 
510,622

Total assets
$
12,256,126

 
$
12,280,005

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
2,058,433

 
$
1,896,040

Accrued expenses and other current liabilities
1,315,703

 
1,405,752

Debt maturing within one year
967,633

 
987,161

Current liabilities of discontinued operations
112,241

 
129,672

Total current liabilities
4,454,010

 
4,418,625

 
 
 
 
Long-term debt, net of current maturities
1,000,429

 
1,001,943

Other long-term obligations
705,596

 
723,343

 
 
 
 
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 933,115,289 and 665,021,069 shares at May 4, 2013 and 932,246,614 shares and 669,182,785 shares at February 2, 2013, respectively
560

 
559

Additional paid-in capital
4,740,545

 
4,711,113

Accumulated other comprehensive loss
(482,985
)
 
(388,773
)
Retained earnings
6,785,378

 
6,694,207

Less: Treasury stock at cost, 268,094,220 shares at May 4, 2013 and 263,063,829 shares at February 2, 2013
(4,955,844
)
 
(4,888,953
)
Total Staples, Inc. stockholders’ equity
6,087,654

 
6,128,153

Noncontrolling interests
8,437

 
7,941

Total stockholders’ equity
6,096,091

 
6,136,094

Total liabilities and stockholders’ equity
$
12,256,126

 
$
12,280,005

 
See notes to condensed consolidated financial statements.

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STAPLES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
 
 
13 Weeks Ended
 
May 4,
2013
 
April 28,
2012
Sales
$
5,814,571

 
$
6,025,421

Cost of goods sold and occupancy costs
4,303,561

 
4,424,838

Gross profit
1,511,010

 
1,600,583

Operating expenses:
 

 
 

Selling, general and administrative
1,212,540

 
1,258,747

Amortization of intangibles
13,383

 
15,258

Total operating expenses
1,225,923

 
1,274,005

 
 
 
 
Operating income
285,087

 
326,578

 
 
 
 
Other (expense) income:
 

 
 

Interest income
1,735

 
1,585

Interest expense
(30,972
)
 
(42,148
)
Other income (expense), net
(3,375
)
 
(344
)
Income from continuing operations before income taxes
252,475

 
285,671

Income tax expense
82,054

 
92,844

Income from continuing operations, including the portion attributable to the noncontrolling interests
170,421

 
192,827

Discontinued Operations:
 
 
 
Loss from discontinued operations, net of income taxes
(494
)
 
(5,814
)
Consolidated net income
169,927

 
187,013

Loss attributed to the noncontrolling interests
—

 
(46
)
Income attributed to Staples, Inc.
$
169,927

 
$
187,059

Amounts attributable to Staples, Inc.:
 
 
 
Income from continuing operations
$
170,421

 
$
192,873

Loss from discontinued operations
(494
)
 
(5,814
)
Income attributed to Staples, Inc.
$
169,927

 
$
187,059

 
 
 
 
Basic Earnings Per Common Share:
 

 
 

Continuing operations attributed to Staples, Inc.
$
0.26

 
$
0.28

Discontinued operations attributed to Staples, Inc.
—

 
(0.01
)
Net income attributed to Staples, Inc.
$
0.26

 
$
0.27

Diluted Earnings Per Common Share:
 
 
 
Continuing operations attributed to Staples, Inc.
$
0.26

 
$
0.28

Discontinued operations attributed to Staples, Inc.
—

 
(0.01
)
Net income attributed to Staples, Inc.
$
0.26

 
$
0.27

 
 
 
 
Dividends declared per common share
$
0.12

 
$
0.11



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Condensed Consolidated Statements of Comprehensive Income
 
13 Weeks Ended
 
May 4,
2013
 
April 28,
2012
Comprehensive income from consolidated operations
$
75,811

 
$
208,955

Comprehensive income attributed to noncontrolling interests
96

 
101

Comprehensive income attributed to Staples, Inc.
$
75,715

 
$
208,854


See notes to condensed consolidated financial statements.


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STAPLES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
(Unaudited)
 
13 Weeks Ended
 
May 4,
2013
 
April 28,
2012
Operating Activities:
 

 
 

Consolidated net income
$
169,927

 
$
187,013

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
100,558

 
101,272

Amortization of intangible assets
13,383

 
15,258

Stock-based compensation
26,367

 
31,088

Excess tax benefits from stock-based compensation arrangements
(90
)
 
(179
)
Deferred income tax expense
7,636

 
10,689

Other
(1,621
)
 
1,916

Changes in assets and liabilities:
 
 
 
Decrease in receivables
43,085

 
81,112

Increase in merchandise inventories
(103,531
)
 
(64,498
)
Increase in prepaid expenses and other assets
(21,085
)
 
(51,384
)
Increase (decrease) in accounts payable
173,555

 
(30,234
)
Decrease in accrued expenses and other liabilities
(59,880
)
 
(142,755
)
(Decrease) increase in other long-term obligations
(735
)
 
7,559

Net cash provided by operating activities
347,569

 
146,857

 
 
 
 
Investing Activities:
 

 
 

Acquisition of property and equipment
(41,096
)
 
(52,077
)
Cash paid for termination of joint venture
(34,298
)
 
—

Net cash used in investing activities
(75,394
)
 
(52,077
)
 
 
 
 
Financing Activities:
 

 
 

Proceeds from the exercise of stock options
4,732

 
4,501

Proceeds from borrowings
8,171

 
25,153

Payments on borrowings
(25,094
)
 
(19,836
)
Purchase of noncontrolling interest
(89
)
 
(688
)
Cash dividends paid
(78,756
)
 
(74,749
)
Excess tax benefits from stock-based compensation arrangements
90

 
179

Repurchase of common stock
(66,892
)
 
(95,925
)
Net cash used in financing activities
(157,838
)
 
(161,365
)
Effect of exchange rate changes on cash and cash equivalents
(12,011
)
 
6,957

Net increase (decrease) in cash and cash equivalents
102,326

 
(59,628
)
Cash and cash equivalents at beginning of period
1,334,302

 
1,264,149

Cash and cash equivalents at end of period
1,436,628

 
1,204,521

Less: Net increase in cash and cash equivalents attributed to discontinued operations
(1,175
)
 
—

Cash and cash equivalents at the end of the period attributed to continuing operations
$
1,435,453

 
$
1,204,521

See notes to condensed consolidated financial statements.


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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 13 weeks ended May 4, 2013 (also referred to as the “first quarter of 2013") and the period covering the 13 weeks ended April 28, 2012 (also referred to as the “first quarter of 2012”).  Certain previously reported amounts have been reclassified to conform with the current period presentation.

The Company's European Printing Systems Division business (“PSD”) is being presented as a discontinued operation in the condensed consolidated statement of comprehensive income. The assets and liabilities comprising the PSD disposal group meet the criteria to be classified as held-for-sale and are being aggregated and presented as current assets and liabilities from discontinued operations in the condensed consolidated balance sheet. See Note D - Discontinued Operations for additional information regarding PSD. Unless otherwise stated, any reference to the condensed consolidated statement of comprehensive income in the notes to the condensed consolidated financial statements refers to results from continuing operations.
 
These financial statements have been prepared based upon Securities and Exchange Commission (“SEC”) rules that permit reduced disclosure for interim periods.  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.  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 February 2, 2013 ("Annual Report"). 

The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year. 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.

Note B — Recent Accounting Pronouncements

Effective February 3, 2013, the Company adopted a new pronouncement which requires the disclosure of certain information related to items reclassified from accumulated other comprehensive loss to net income. The adoption of this guidance requires changes in presentation only and, therefore, does not have a significant impact on the Company's condensed consolidated financial statements.

In March 2013, a pronouncement was issued providing guidance with respect to the release of cumulative translation adjustments into net income when a parent company sells either a part or all of an investment in a foreign entity. The guidance requires the release of cumulative translation adjustments when a company no longer holds a controlling financial interest in a foreign subsidiary or a group of assets that constitutes a business within a foreign entity. The pronouncement is effective for fiscal years beginning after December 15, 2013, with early adoption permitted. The Company elected to adopt this guidance as of February 3, 2013. The adoption of this guidance is not expected to have a significant impact on the Company's condensed consolidated financial statements.


Note C — Restructuring Charges
In 2012, the Company initiated a strategic plan (the “Plan”) aimed at accelerating growth, particularly in the Company's online businesses. Elements of the Plan include more fully integrating the Company's retail and online offerings, restructuring its International Operations segment and improving the productivity of its stores in North America. Pursuant to the Plan, during 2012 the Company took the following actions:
▪
closed 46 retail stores in Europe and accelerated the closure of 15 retail stores in the United States;
▪
closed and consolidated certain sub-scale delivery businesses in Europe;
▪
announced its commitment to pursue the sale of PSD;
▪
reorganized certain general and administrative functions in Europe; and
▪
rebranded its business in Australia from the Corporate Express tradename to the Staples tradename.

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


As a result of the actions taken under the Plan, during 2012 the Company recorded pre-tax restructuring charges of $207.0 million related to continuing operations. Of this amount, approximately $177 million related to the Company's International Operations segment and approximately $30 million related to the North American Stores & Online segment. The Company does not expect to incur material costs in the future in connection with the Plan. The Company expects to substantially complete the actions required under the Plan by the end of fiscal 2013.
Also during 2012, the Company recorded a pre-tax charge of $20.1 million primarily for severance and benefit costs in connection with the Company's decision to pursue the sale of PSD (see Note D - Discontinued Operations). The Company does not expect to incur any significant restructuring charges in the future for PSD in connection with the Plan.
The table below shows a reconciliation of the beginning and ending liability balances related to each major type of cost incurred under the Plan (in thousands):
 
 
Continuing Operations
 
Discontinued Operations
 
 
Contractual Obligation
 
Employee Related
 
Other
 
Total
 
Employee Related
Accrued restructuring balance as of February 2, 2013
 
$
102,561

 
$
68,259

 
$
6,445

 
$
177,265

 
$
11,753

Cash payments
 
(13,643
)
 
(11,592
)
 
(5,319
)
 
(30,554
)
 
(7,097
)
Foreign currency translations
 
(3,169
)
 
(2,012
)
 
(185
)
 
(5,366
)
 
(668
)
Accrued restructuring balance as of May 4, 2013
 
$
85,749

 
$
54,655

 
$
941

 
$
141,345

 
$
3,988

The Company expects that payments related to employee related liabilities will be substantially completed by the end of fiscal 2013. The Company anticipates that payments related to facility lease obligations will be complete by fiscal year 2026.

For the restructuring liabilities related to continuing operations, $16.9 million of the contractual obligations and all of the employee-related and other obligations are included within Accrued expenses and other current liabilities and $68.9 million of the contractual obligations are included in Other long-term obligations in the Company's consolidated balance sheet as of May 4, 2013. For discontinued operations, all liabilities are classified within Current liabilities of discontinued operations.
    
Note D — Discontinued Operations

In September 2012, the Company announced its commitment to pursue the sale of PSD, a former component of the Company's International Operations segment, which operates in five countries in Europe and focuses on the sale, rental and servicing of printing machinery. The Company is actively marketing the business and expects to complete the sale in 2013. The Company is in the early stages of this process, but based on preliminary information received to date, the Company expects to recognize a loss upon the sale of PSD, which could be material depending on the final terms and conditions of the sale.


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

The Company has classified certain assets and liabilities of PSD as a disposal group and accounted for the group as held-for-sale in the Company's condensed consolidated balance sheet. The following table shows the carrying amounts of the major classes of the assets and liabilities included in the disposal group as of May 4, 2013 (in thousands):
 
 
May 4, 2013
 
 
 
ASSETS
 
 
Cash and cash equivalents
 
$
470

Receivables, net
 
111,599

Merchandise inventories, net
 
50,242

Deferred income tax assets, current
 
4,636

Prepaid expenses and other current assets
 
2,445

Non-current assets
 
7,067

Total assets of discontinued operations
 
$
176,459

 
 
 
LIABILITIES
 
 
Accounts payable
 
$
67,303

Accrued expenses and other current liabilities
 
26,871

Debt maturing within one year
 
3,489

Other long-term obligations
 
14,578

Total liabilities of discontinued operations
 
$
112,241

    
The Company has presented PSD as a discontinued operation in its condensed consolidated statement of comprehensive income. The following table provides detail for PSD's results of operations during the first quarter of 2013 and 2012 (in thousands):
 
 
13 Weeks Ended

 
May 4, 2013
 
April 28, 2012
Sales
 
$
80,138

 
$
79,404

 
 
 
 
 
Income (loss) from discontinued operations, before income taxes
 
560

 
(8,614
)
Income tax expense (benefit)
 
1,054

 
(2,800
)
Loss from discontinued operations, net of income taxes
 
$
(494
)
 
$
(5,814
)

Note E — 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. 


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

  The following table shows the difference between the financial statement carrying value and fair value of the Company's debt obligations (see Note F - Debt and Credit Agreements) as of May 4, 2013 and February 2, 2013 (in thousands). The fair values of these notes were determined based on quoted market prices and are classified as Level 1 measurements.
 
May 4, 2013
 
February 2, 2013
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
January 2014 Notes
$
875,967

 
$
920,509

 
$
879,454

 
$
940,009

January 2018 Notes
498,715

 
514,734

 
498,635

 
502,202

January 2023 Notes
499,068

 
518,203

 
499,040

 
496,369

 
The following table shows the Company’s assets and liabilities as of May 4, 2013 and February 2, 2013 that are measured and recorded in the financial statements at fair value on a recurring basis (in thousands): 
 
May 4, 2013
 
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
$
565,095

 
$
—

 
$
—

Derivative assets
—

 
465

 
—

Liabilities
 
 
 
 
 
Derivative liabilities
—

 
(8,431
)
 
—


 
February 2, 2013
 
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
$
585,479

 
$
—

 
$
—

Liabilities
 
 
 
 
 
Derivative liabilities
—

 
(20,153
)
 
—


     The fair values of the Company’s money market funds are based on quotes received from third-party banks.  The fair values of the Company’s derivative assets and liabilities are based on quotes received from third-party banks and represent the estimated amount the Company would receive or pay to terminate the agreements taking into consideration current interest and forward exchange rates as well as the creditworthiness of the counterparty.

Note F — 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. As of May 4, 2013, no amounts were outstanding under the November 2014 Revolving Credit Facility and no Notes were outstanding. The Company did not borrow under either the November 2014 Revolving Credit Facility or the Commercial Paper Program during the first quarter of 2013.

The Company also has various other lines of credit under which we may borrow a maximum of $183.9 million. At May 4, 2013, the Company had outstanding borrowings of $88.0 million and outstanding letters of credit of $0.2 million, leaving $95.7 million of available credit at that date.
    

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The major components of the Company’s outstanding debt as of May 4, 2013 and February 2, 2013 are as follows (in thousands):
 
May 4, 2013
 
February 2, 2013
January 2014 Notes
$
875,967

 
$
879,454

January 2018 Notes
498,715

 
498,635

January 2023 Notes
499,068

 
499,040

Other lines of credit
87,967

 
103,734

Capital lease obligations and other notes payable
6,345

 
8,241

 
1,968,062

 
1,989,104

Less: current portion
(967,633
)
 
(987,161
)
Net long-term debt
$
1,000,429

 
$
1,001,943


Note G — Derivatives Instruments and Hedging Activities
 
From time to time, Staples uses interest rate swap agreements, 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 non-derivative 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 derivatives, non-derivative 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 of May 4, 2013 and February 2, 2013 as well as their classification on the condensed consolidated balance sheet (in thousands):
 
 
 
 
Fair Value
 
 
Consolidated Balance Sheet Location
 
May 4, 2013
 
February 2, 2013
Liability derivatives:
 
 
 
 
 
 
Foreign currency forwards
 
Accrued expenses and other current liabilities
 
$
(8,010
)
 
$
(9,967
)
    
Interest Rate Swaps:

Beginning in the second quarter of 2012, the Company entered into a series of interest rate swap agreements for an aggregate notional amount of $325 million. These swaps were designated as cash flow hedges of interest rate risk, and were used to hedge the Company's exposure to the variability in future cash flows associated with the forecasted issuances of the January 2018 Notes and the January 2023 Notes (see Note F - Debt and Credit Agreements). Upon issuance of these notes in January 2013, the Company terminated these swaps, realizing a gain of $1.3 million. Of this amount, $0.7 million is being amortized to interest expense over the terms of the January 2018 Notes and January 2023 Notes and $0.6 million was recognized as a gain in

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Other (expense) income in the consolidated statement of income in the fourth quarter of 2012 due to ineffectiveness associated with these cash flow hedges.

In March 2010, Staples entered into interest rate swap agreements 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 hedged portion of the January 2014 Notes. In January 2013, the Company repurchased approximately $632.8 million of the unhedged portion of the January 2014 Notes pursuant to a cash tender offer.

Foreign Currency Forwards and Swaps:

In December 2011, the Company entered into foreign currency forwards designed to convert a series of intercompany loans denominated in Canadian dollars into a fixed U.S. dollar amount. The loans totaled 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 have collected $720 million and have been obligated to pay 750 million Canadian dollars. The forward agreements are being accounted for as a fair value hedge. In 2012, the Company settled 500 million Canadian dollars of the notional amount relating to these forwards, realizing an aggregate loss of approximately $24.2 million which was recorded within Other expense. At May 4, 2013 and February 2, 2013, the outstanding foreign currency forwards had an aggregate fair value loss of $8.0 million and $10.0 million, respectively. The liability as of May 4, 2013 is included in Accrued expenses and other current liabilities. During the first quarter of 2013 and 2012, a gain of $2.0 million and a loss of $13.4 million, respectively, were recognized in Other expense related to the outstanding portions of this fair value hedge. No amounts were included in the condensed consolidated statements of comprehensive income related to ineffectiveness associated with this fair value hedge.

In August 2007, the Company entered into a $300 million foreign currency swap that had been designated as a foreign currency hedge on Staples’ net investment in Canadian dollar denominated subsidiaries. In 2012, the Company terminated these swaps, recognizing a loss of approximately $14.9 million which was recorded as a foreign currency translation loss within other comprehensive income, of which approximately $3.0 million was recorded in the first quarter of 2012. No amounts were included in the consolidated statements of income related to ineffectiveness associated with this net investment hedge.

Note H — Pension and Other Post-Retirement Benefit Plans
 
In connection with the acquisition of Corporate Express N.V. ("Corporate Express"), Staples assumed the obligations under the defined benefit pension plans which 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.
 
The total net cost recognized for the first quarter of 2013 associated with the pension and other post-retirement benefit plans is based on unaudited actuarial estimates 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 first quarter of 2013 and 2012 related to the plans (in thousands):
 
13 Weeks Ended May 4, 2013
 
Pension Plans
 
 Other
Post-Retirement Benefit Plan
Total
 
U.S. Plans
 
International Plans
 
Total
 
Service cost
$
—

 
$
3,927

 
$
3,927

 
$
798

Interest cost
410

 
7,749

 
8,159

 
633

Expected return on plan assets
(468
)
 
(15,100
)
 
(15,568
)
 
—

Amortization of unrecognized losses and prior service costs
155

 
3,304

 
3,459

 
534

Total cost (benefit)
$
97

 
$
(120
)
 
$
(23
)
 
$
1,965


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Table of Contents

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

 
$
2,648

 
$
2,648

 
$
460

Interest cost
443

 
9,668

 
10,111

 
385

Expected return on plan assets
(438
)
 
(12,968
)
 
(13,406
)
 
—

Amortization of unrecognized losses and prior service costs
83

 
1,345

 
1,428

 
429

Total cost
$
88

 
$
693

 
$
781

 
$
1,274


Note I — Stockholders' Equity
 
The following table reflects the changes in stockholders’ equity attributed to Staples, Inc. and its noncontrolling interests for the first quarter of 2013 and 2012 (in thousands): 
 
Attributable to Staples, Inc.
 
Attributable to Noncontrolling Interest
 
Total
Stockholders' equity at February 2, 2013
$
6,128,153

 
$
7,941

 
$
6,136,094

Comprehensive Income:
 
 
 
 
 
Consolidated net income
169,927

 
—

 
169,927

Other comprehensive (loss) income
(94,212
)
 
96

 
(94,116
)
Comprehensive income
75,715

 
96

 
75,811

Issuance of common stock for stock options exercised
4,732

 
—

 
4,732

Stock-based compensation
26,367

 
—

 
26,367

Purchase of noncontrolling interest
(89
)
 
—

 
(89
)
Cash dividends paid
(78,756
)
 
—

 
(78,756
)
Net tax shortfall related to stock-based compensation arrangements
(1,174
)
 
—

 
(1,174
)
Purchase of treasury stock, net
(66,892
)
 
—

 
(66,892
)
Other
(402
)
 
400

 
(2
)
Stockholders' equity at May 4, 2013
$
6,087,654

 
$
8,437

 
$
6,096,091

 
 
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:
 
 
 
 
 
Consolidated net income (loss)
187,059

 
(46
)
 
187,013

Other comprehensive income
21,795

 
147

 
21,942

Comprehensive Income
208,854

 
101

 
208,955

Issuance of common stock for stock options exercised
4,501

 
—

 
4,501

Stock-based compensation
31,088

 
—

 
31,088

Purchase of noncontrolling interest
(688
)
 
—

 
(688
)
Cash dividends paid
(74,749
)
 
—

 
(74,749
)
Excess tax benefits from stock-based compensation arrangements
179

 
—

 
179

Purchase of treasury stock, net
(95,925
)
 
—

 
(95,925
)
Other
(302
)
 
(1
)
 
(303
)
Stockholders' equity at April 28, 2012
$
7,088,109

 
$
7,162

 
$
7,095,271

 
    
Other comprehensive income pertaining to the noncontrolling interests during the first quarter of 2013 and 2012 related to foreign currency translation adjustments.    

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


During the first quarter of 2013, the Company issued 395,038 shares pursuant to the exercise of stock options and 18,992 shares upon the vesting of restricted stock units. Also, the Company had 376,249 restricted shares released from restrictions in the first quarter of 2013 upon the satisfaction of vesting conditions.

Note J — Accumulated Other Comprehensive Loss

The following table details the changes in accumulated other comprehensive income ("AOCI") for the first quarter of 2013 (in thousands):
 
 
Foreign Currency Translation Adjustment
 
Deferred Benefit Costs
 
Accumulated Other Comprehensive Loss
Balance at February 2, 2013
 
$
(124,713
)
 
$
(264,060
)
 
$
(388,773
)
Foreign currency translation adjustment
 
(96,907
)
 
—

 
(96,907
)
Reclassification adjustment:
 
 
 
 
 
 
Amortization of deferred benefit costs (net of taxes of $1.3 million)
 
—

 
2,695

 
2,695

Balance at May 4, 2013
 
$
(221,620
)
 
$
(261,365
)
 
$
(482,985
)

During the first quarters of 2013 and 2012, the Company recorded reclassification adjustments related to amortizing deferred benefit costs included in AOCI, which resulted in expenses of $4.0 million and $1.9 million, respectively, being recorded in Selling, general and administrative expenses in the condensed consolidated statement of comprehensive income. The tax benefits related to these adjustments were $1.3 million and $0.6 million, respectively.

Note K — Computation of Earnings per Common Share
 
The computation of basic and diluted earnings per share for the first quarter of 2013 and 2012 is as follows (in thousands, except per share data):
 
13 Weeks Ended
 
May 4, 2013
 
April 28, 2012
Numerator:
 

 
 

Income from continuing operations, attributed to Staples, Inc.
$
170,421

 
$
192,873

Loss from discontinued operations, net of income taxes
(494
)
 
(5,814
)
Income attributed to Staples, Inc.
169,927

 
187,059

 
 
 
 
Denominator:
 
 
 
Weighted-average common shares outstanding
655,970

 
680,246

Effect of dilutive securities:
 
 
 
Employee stock options, restricted shares and performance shares
8,114

 
9,191

Weighted-average common shares outstanding assuming dilution
664,084

 
689,437

 
 
 
 
Basic Earnings Per Common Share:
 
 
 
Continuing operations attributed to Staples, Inc.
$
0.26

 
$
0.28

Discontinued operations attributed to Staples, Inc.
—

 
(0.01
)
Net income attributed to Staples, Inc.
$
0.26

 
$
0.27

 
 
 
 
Diluted Earnings Per Common Share:
 
 
 
Continuing operations attributed to Staples, Inc.
$
0.26

 
$
0.28

Discontinued operations attributed to Staples, Inc.
—

 
(0.01
)
Net income attributed to Staples, Inc.
$
0.26

 
$
0.27

 

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

For the first quarter of 2013 and 2012, approximately 40.9 million and 39.8 million options to purchase common stock, respectively, were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive.

Note L — Segment Reporting
 
Staples has three reportable segments: North American Stores & Online, North American Commercial and International Operations. During 2012, the Company realigned its organization by combining its North American retail stores with Staples.com, its North American website, to provide a more integrated and consistent shopping experience for its small business and home office customers who often shop across both channels. The new North American Stores & Online segment sells office-related products and services to customers in the United States and Canada. Staples.com had previously been a component of the former North American Delivery segment, which is now referred to as North American Commercial. The new North American Commercial segment consists of the U.S. and Canadian businesses that sell and deliver office products and services directly to businesses and includes Staples Advantage and Quill.com. Segment information for the first quarter of 2012 has been revised to reflect this change in the Company's reportable segments.

The International Operations segment consists of businesses that that sell and deliver office products and services directly to consumers and businesses and operate stores in 23 countries in Europe, Australia, South America and Asia. As discussed in Note D - Discontinued Operations, the Company has classified PSD, which was formerly part of the International Operations segment, as a discontinued operation. Accordingly, the segment measures for International Operations for the first quarter of 2012 have been revised to exclude PSD.
 
Staples evaluates performance and allocates resources based on profit or loss from operations before goodwill and long-lived asset impairment charges, restructuring charges, stock-based compensation, interest and other expense, other 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 Stores & Online and North American Commercial segments are managed separately because the way they sell and market products is different and the classes of customers they service 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 income from continuing operations before income taxes for the first quarter of 2013 and 2012 (in thousands):
 
 
13 Weeks Ended
 
May 4, 2013
 
April 28, 2012
 
Sales
North American Stores & Online
$
2,768,377

 
$
2,869,391

North American Commercial
2,043,018

 
2,009,510

International Operations
1,003,176

 
1,146,520

Total segment sales
$
5,814,571

 
$
6,025,421

 
 
 
 
 
Business Unit Income (Loss)
North American Stores & Online
$
172,319

 
$
209,236

North American Commercial
149,892

 
158,678

International Operations
(10,757
)
 
(10,248
)
Business unit income
311,454

 
357,666

Stock-based compensation
(26,367
)
 
(31,088
)
Interest and other expense, net
(32,612
)
 
(40,907
)
Income from continuing operations before income taxes
$
252,475

 
$
285,671



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Table of Contents

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

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward Looking Statements
 
This Quarterly Report on Form 10-Q and, in particular, this management’s discussion and analysis contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”).  Any statements contained in or incorporated by reference into this report that are not statements of historical fact should be considered forward-looking statements.  You can identify these forward-looking statements by the use of the words “believes”, “expects”, “anticipates”, “plans”, “may”, “will”, “would”, “intends”, “estimates” and other similar expressions, whether in the negative or affirmative.  These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management’s beliefs and assumptions, and should be read in conjunction with our condensed consolidated financial statements and notes to condensed consolidated financial statements included in this report.  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 first quarter of 2013 results, as compared to the results for the first quarter of 2012, are reviewed in detail in the Consolidated Performance and Segment Performance discussions and are summarized below:
 
•
We generated $5.81 billion in sales, a decrease of 3.5%;
 
•
North American Stores & Online's sales decreased 3.5%, comparable store sales decreased 2% and business unit income rate decreased to 6.2% from 7.3%;
 
•
North American Commercial's sales increased 1.7% and business unit income rate decreased to 7.3% from 7.9%;
 
•
International Operations’ sales decreased 12.5% and business unit loss rate increased to (1.1)% from (0.9)%; and

•
Income from continuing operations attributable to Staples, Inc. for the first quarter of 2013 was $170.4 million or $0.26 per diluted share compared to $192.9 million or $0.28 per diluted share for the first quarter of 2012.

Outlook
 
Our outlook for 2013 is unchanged from the expectations we disclosed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013 ("Annual Report"). We expect full year 2013 sales to increase in the low single digits compared to 2012 sales on a 52 week basis of $23.9 billion. We expect full year 2013 diluted earnings per share from continuing operations to be in the range of $1.30 to $1.35. We expect to generate more than $900 million of free cash flow and plan to continue repurchasing our common stock through open-market purchases during 2013. See our Annual Report for additional discussion related to our outlook for 2013.
Non-GAAP Measures
In the context of our outlook, we have referred to 2012 sales on a 52 week basis and free cash flow (which we define as net cash provided by operating activities less capital expenditures), both of which are non-GAAP financial measures. We believe that basing our outlook on these measures better enables management and investors to understand and analyze our projected financial performance by providing meaningful information that facilitates the comparability of underlying business results from period to period. However, these supplemental measures should be considered in addition to, and not as a substitute for or superior to, the related measures that are determined in accordance with GAAP.


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Table of Contents

Consolidated Performance
 
First quarter of 2013 Compared to the First quarter of 2012
 
Sales:  Sales for the first quarter of 2013 were $5.81 billion, a $210.9 million or 3.5% decrease from the first quarter of 2012.  The sales decline was driven by ongoing weakness in International Operations, a 1% impact from store closures in North America and Europe, a 2% decline in comparable store sales in North American Stores & Online and a $28.9 million unfavorable impact from foreign exchange rates, partially offset by a 1.7% sales increase in North American Commercial. Declines in office machines and peripherals, office supplies, computers, and ink and toner were partly offset by growth in facilities and breakroom supplies, tablets and other mobile technology, and technology and copy and print services.

Gross Profit:  Gross profit as a percentage of sales was 26.0% for the first quarter of 2013 compared to 26.6% for the first quarter of 2012.  The decrease in gross profit rate for the first quarter of 2013 was driven by lower product margins in all three of the Company's reportable segments and by deleverage of fixed costs in International Operations and North America Stores & Online due to declines in sales. The lower product margins reflect investments to drive sales as well as unfavorable customer and product mix in our Europe delivery businesses.

Selling, General and Administrative Expenses:  Selling, general and administrative expenses decreased by $46.2 million or 3.7% from the first quarter of 2012 to the first quarter of 2013. The decline was primarily driven by a favorable comparison to the prior year quarter which included significant expenses associated with headcount reductions and the legal settlement of a contractual dispute. The decline also reflects decreased compensation expense as a result of lower headcount and a change in management incentive compensation. These reductions were partially offset by increased investments in our online businesses and other initiatives to drive growth and profit improvement. As a percentage of sales, selling, general and administrative expenses were 20.9% in both the first quarter of 2013 and the first quarter of 2012.

Amortization of Intangibles: Amortization of intangibles was $13.4 million for the first quarter of 2013 compared to $15.3 million for the first quarter of 2012, primarily reflecting the amortization of tradenames and customer relationships. Amortization of intangibles resulting from our acquisition of Corporate Express was $11.0 million for the first quarter of 2013 compared with $12.6 million for the first quarter of 2012.
 
Interest Income: Interest income increased slightly to $1.7 million for the first quarter of 2013 from $1.6 million for the first quarter of 2012, reflecting higher cash balances offset by an unfavorable impact from lower interest rates for the first quarter of 2013.
 
Interest Expense: Interest expense decreased to $31.0 million for the first quarter of 2013 from $42.1 million for the first quarter of 2012.  The decrease in interest expense was the result of the repayment in October 2012 of our $325 million 7.375% notes and the early extinguishment in January 2013 of $632.8 million of our $1.5 billion 9.75% notes, partly offset by interest on our $500 million 2.375% Notes and our $500 million 4.375% Notes, both of which were issued in January 2013. Our interest rate swap agreements reduced interest expense by $3.2 million for the first quarter of 2013 compared to a reduction of $6.0 million for the first quarter of 2012.

Other Expense: Other expense was $3.4 million for the first quarter of 2013 compared to $0.3 million for the first quarter of 2012. The increased expense was primarily due to foreign exchange losses in the first quarter of 2013.
 
Income Taxes:  Our tax rate related to continuing operations was 32.5% in both the first quarter of 2013 and the first quarter of 2012. 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.

Discontinued Operations: In conjunction with the strategic plan we announced in the third quarter of 2012, we are pursuing the sale of our European Printing Systems Division business ("PSD"), a former component of our International Operations segment which operates in five countries in Europe and focuses on the sale, rental and servicing of printing machinery. Loss from discontinued operations, net of tax, was $0.5 million in the first quarter of 2013 compared with a loss of $5.8 million for the first quarter of 2012. The reduced loss in the first quarter of 2013 was primarily attributable to savings from headcount reductions and a favorable comparison with the prior year quarter which included expenses related to severance.


16
Table of Contents

Segment Performance
 
We have three reportable segments: North American Stores & Online, North American Commercial and International Operations. During 2012, we realigned our organization by combining our North American retail stores with Staples.com, our North American website, to provide a more integrated and consistent shopping experience for our small business and home office customers who often shop across both channels. The new North American Stores & Online segment sells office-related products and services to customers in the United States and Canada. Staples.com had previously been a component of the former North American Delivery segment, which is now referred to as North American Commercial. The new North American Commercial segment consists of the U.S. and Canadian businesses that sell and deliver office products and services directly to businesses and includes Staples Advantage and Quill.com. Our segment information for the first quarter of 2012 has been revised to reflect this change in our reportable segments.

The International Operations segment consists of businesses that sell and deliver office products and services directly to consumers and businesses and operate stores in 23 countries in Europe, Australia, South America and Asia. In the third quarter 2012, we began classifying PSD, which was formerly part of the International Operations segment, as a discontinued operation. Accordingly, the segment measures for International Operations for the first quarter of 2012 have been revised to exclude PSD.
 
Staples evaluates performance and allocates resources based on business unit income, which represents profit or loss from operations before goodwill and long-lived asset impairment charges, restructuring charges, stock-based compensation, interest and other expense, other non-recurring items and the impact of changes in accounting principles. See a reconciliation of total business unit income to income from continuing operations before income taxes in Note L - Segment Reporting in the Notes to the Condensed Consolidated Financial Statements.

First quarter of 2013 Compared to the First quarter of 2012

The following tables provide a summary of our sales and business unit income by reportable segment for the first quarter of 2013 and 2012: 
 
(Amounts in thousands)
13 Weeks Ended
 
May 4, 2013
 
April 28, 2012
 
 
Increase (Decrease)
From
Prior Year
 
Increase (Decrease)
From
Prior Year
 
May 4, 2013
 
April 28, 2012
 
 
Sales:
 

 
 

 
 

 
 

North American Stores & Online
$
2,768,377

 
$
2,869,391

 
(3.5
)%
 
0.9
 %
North American Commercial
2,043,018

 
2,009,510

 
1.7
 %
 
0.7
 %
International Operations
1,003,176

 
1,146,520

 
(12.5
)%
 
(8.0
)%
Total segment sales
$
5,814,571

 
$
6,025,421

 
(3.5
)%
 
(1.0
)%
 
 
(Amounts in thousands)
13 Weeks Ended
 
May 4, 2013
 
April 28, 2012
 
May 4, 2013
 
April 28, 2012
 
% of Sales
 
% of Sales
Business Unit Income (Loss):
 

 
 

 
 

 
 

North American Stores & Online
$
172,319

 
$
209,236

 
6.2
 %
 
7.3
 %
North American Commercial
149,892

 
158,678

 
7.3
 %
 
7.9
 %
International Operations
(10,757
)
 
(10,248
)
 
(1.1
)%
 
(0.9
)%
Business unit income
$
311,454

 
$
357,666

 
5.4
 %
 
5.9
 %
 
North American Stores & Online:  Sales decreased by $101.0 million or 3.5% for the first quarter of 2013. This decrease was driven by a 2% decline in comparable store sales and the closure of 48 stores during fiscal year 2012, which negatively impacted sales growth in the first quarter of 2013 by approximately 1%, net of estimated migration of sales to remaining stores. The decrease in comparable store sales resulted from lower traffic and decreased sales of computers, software and technology accessories as well as office machines. These declines were partially offset by increased sales of tablets and other mobile technology, facilities and breakroom supplies and copy and print services.
 
Business unit income as a percentage of sales decreased to 6.2% for the first quarter of 2013 from 7.3% for the first quarter of 2012. The decrease was driven by investments to drive growth in Staples.com, deleverage of fixed expenses on lower sales and severance costs related to optimizing the store labor model.

17
Table of Contents


North American Commercial:  Sales increased by $33.5 million or 1.7% for the first quarter of 2013.  The increase was primarily due to increased sales of facilities and breakroom supplies, partially offset by decreased sales of office supplies.

Business unit income as a percentage of sales decreased to 7.3% for the first quarter of 2013 from 7.9% for the first quarter of 2012. The decline was primarily driven by investments to drive growth, including marketing and sales force, and by reduced product margins. These factors were partially offset by a favorable comparison to the first quarter of 2012, which included expenses related to headcount reductions and the settlement of a contractual dispute.
    
International Operations:  Sales decreased by $143.3 million or 12.5% for the first quarter of 2013. The decrease was primarily driven by broad-based weakness in the sales environment in our European delivery and Australian businesses and by the closure of 49 European stores during fiscal year 2012, which negatively impacted sales growth in the first quarter of 2013 by approximately 2%.  The decrease was also driven by a $12.7 million unfavorable impact from foreign exchange rates and a 3% decline in comparable store sales in Europe.
 
Business unit loss as a percentage of sales increased to 1.1% for the first quarter of 2013 from 0.9% for the first quarter of 2012.  The increased rate of loss was driven by lower product margins and deleverage of fixed costs in our European delivery and Australian businesses. The lower product margins stemmed from unfavorable customer and product mix and an increase in investments to drive sales. These factors were partially offset by savings related to headcount reductions in our European and Australian businesses and by a favorable comparison to the first quarter of 2012, which included charges for severance and the settlement of a contractual dispute, as well as improved profitability in our European retail business.
    
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 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.

Liquidity and Capital Resources
 
Cash Flows
 
Cash provided by operations was $347.6 million for first quarter of 2013 compared to $146.9 million for first quarter of 2012, an increase of $200.7 million.  The increase was driven by favorable changes in working capital, particularly with respect to accounts payable as a result of the timing of purchases and payment of invoices.
 
Cash used in investing activities was $75.4 million for first quarter of 2013 compared to $52.1 million for first quarter of 2012, an increase of $23.3 million.  The increase was due to a $34.3 million payment in the first quarter of 2013 related to the termination of the Company's joint venture arrangement in India, partly offset by an $11.0 million decrease in capital spending as a result of a shift in planned expenditures to later in fiscal year 2013.
 
Cash used in financing activities was $157.8 million for first quarter of 2013 compared to $161.4 million for first quarter of 2012, a decrease of $3.5 million.  We spent $64.9 million in the first quarter of 2013 to repurchase 4.9 million shares under our share repurchase plan compared with $92.5 million spent in first quarter of 2012 to buy 5.9 million shares, a decrease of $27.6 million. This decline in cash usage was partly offset by the impact of a $22.2 million decrease in net borrowings under our various lines of credit. In the first quarter of 2013, the Company paid shareholders cash dividends of $0.12 per share for a total of $78.8 million, an increase from the $0.11 per share for a total of $74.7 million paid in the first quarter of 2012.
 

18
Table of Contents

Sources of Liquidity
 
To cover seasonal fluctuations in cash flows and to support our various initiatives, we utilize cash generated from operations and borrowings available under various credit facilities and a commercial paper program. We have a revolving credit 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. As of May 4, 2013, no amounts were outstanding under the November 2014 Revolving Credit Facility and the Company did not borrow under this facility during the first quarter of 2013.     We also have various other lines of credit under which we may borrow a maximum of $183.9 million and related to which $88.0 million of borrowings were outstanding at May 4, 2013.

Our commercial paper program ("Commercial Paper Program") 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. As of May 4, 2013, no Notes were outstanding and we did not borrow under the Commercial Paper Program during the first quarter of 2013.

At May 4, 2013, we had approximately $2.53 billion in total cash and funds available through credit agreements, which consisted of $1.10 billion of available credit and $1.44 billion of cash and cash equivalents. Of the $1.44 billion in cash and cash equivalents, approximately $543.7 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 May 4, 2013, of balances available under our credit agreements and debt outstanding is presented below (in thousands):
 
May 4, 2013
 
Available Credit
 
Debt Outstanding
January 2014 Notes
$
—

 
$
875,967

January 2018 Notes
—

 
498,715

January 2023 Notes
—

 
499,068

November 2014 Revolving Credit Facility
1,000,000

 
—

Other lines of credit
95,724

 
87,967

Capital lease obligations and other notes payable
—

 
6,345

Total
$
1,095,724

 
$
1,968,062

 
As of May 4, 2013, there has not been a material change to the amounts and expected maturity of contractual obligations disclosed in the subsection entitled “Contractual Obligations and Commercial Commitments” in Management’s Discussion and Analysis of Financial Condition and Results of Operations on page B-13 of our Annual Report. We do not have any off-balance sheet financing arrangements as of May 4, 2013, nor did we utilize any during the first quarter of 2013.

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 $41.1 million in the first quarter of 2013 compared to $52.1 million in the first quarter of 2012, a decrease of $11.0 million. For the full year 2013, we expect a modest increase in capital spending compared with 2012 resulting from investments in our online businesses and our other strategic growth initiatives. We are not planning to open a significant number of new stores in 2013, but will instead continue to 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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While we have primarily grown organically, we may use capital to engage in strategic acquisitions or joint ventures in markets where we currently have a presence and in new geographic markets that could become significant to our business in future years.  We do not expect to rely on acquisitions to achieve our targeted growth plans.  We consider many types of acquisitions for their strategic and other benefits.
 
We paid a first quarter of 2013 cash dividend of $0.12 per share on April 18, 2013 to stockholders of record on March 29, 2013.  We expect the total value of quarterly cash dividend payments for fiscal 2013 to be $0.48 per share.  While it is our intention to continue to pay quarterly cash dividends for the remainder of 2013 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 quarter of 2013, we spent $64.9 million to repurchase 4.9 million shares under the 2011 Repurchase Plan. As of May 4, 2013, we have spent a total of $696.6 million to repurchase 52.4 million shares under the 2011 Repurchase Plan, and therefore, the remaining repurchase authorization was $803.4 million 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 for leverage, 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 consolidated operating results, we may see price increases in certain categories from time to time.  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 May 4, 2013, 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations on page B-16 of our 2012 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 May 4, 2013, 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 May 4, 2013, 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 May 4, 2013 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

From time to time, 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, results of operations or financial condition.

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, and our ability to generate cash flow may be negatively impacted, by current and future economic conditions if there is a renewed decline in business and consumer spending or if such spending remains stagnant.

We face uncertainties in connection with the implementation of our strategies to transform our business, and our inability to successfully implement our strategies could adversely affect our business and financial performance.

In September 2012, we announced plans to transform our business, including accelerating growth in online businesses by expanding our product assortment, integrating our retail and online offering, improving store productivity in North America, restructuring operations in order to reduce complexity and improve profitability of our European operations, and initiating a multi-year cost savings plan in order to help fund these investments. The success of our transformation is subject to both the risks affecting our business generally and the inherent difficulty associated with implementing our new strategies and is dependent on the skills, experience, and efforts of our management and other associates and our success with third parties. If we are unable to successfully implement our plans, we risk taking additional charges in the future, including potential impairment of assets and charges for additional restructuring activities that may be required. To the extent we pursue acquisitions or other operational and strategic opportunities, our success will depend on selecting the appropriate targets or partners, completing integration efforts quickly and effectively and realizing any expected synergies and cost savings. There is no assurance that we will be able to successfully implement these strategic initiatives or that the implementation of changes will result in the benefits or costs savings at the levels that we anticipate or at all, which may result in an adverse impact on our business and financial results.

We have recognized substantial goodwill impairment charges in the past and may be required to recognize additional goodwill impairment charges in the future.

During the third quarter of 2012, we recorded a pre-tax goodwill impairment charge of $771.5 million related to our Europe Retail and Europe Catalog reporting units as a result of industry trends and the ongoing economic weakness in Europe, and the related strategic decision to reallocate resources to other Staples business units with greater growth potential. At May 4, 2013, we had $3.18 billion of remaining goodwill on our balance sheet, and we could experience material goodwill impairment charges in the future.  Certain factors, including consumer spending levels, industry and macroeconomic conditions, the price of our stock and the future profitability of our 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, if our plans change or if we fail to manage our restructuring activities successfully, then actual results may not be consistent with these judgments, assumptions and estimates, and our goodwill may become impaired in future periods.  This would in turn have an adverse impact on our financial position and results of operations. 


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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 Wal-Mart, 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 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 believe that the strategic plan we announced in September 2012 will help us to accelerate our growth and achieve our vision: every product your business needs to succeed. One of our top priorities is to significantly expand our product offering beyond core office supplies. Over the past few years we have had success driving growth in adjacent product categories, such as facilities and breakroom supplies. These positive results have reinforced our strategy and we are now continuing to broaden our offering, focusing on categories including technology products, medical supplies, safety supplies, packaging and shipping supplies, and office decor. Our success is contingent on providing our customers the selection of products, as well as services, at competitive prices that meet customers' changing needs and purchasing habits.  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 provide 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 includes accelerating growth in our online businesses and providing new products and service offerings. 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 or product market, customers may not be familiar with our brand or our competitors may have a larger, more established market presence. Our sales or profit levels in newer activities thus may not be successful enough to recoup our investments in them and may reduce our overall profitability. In addition, for our strategy to be successful, we must hire and train qualified associates and adapt management and operational systems to meet the needs of our expanded operations. If we are unable to enter new markets as efficiently as we planned, our future sales and profits may be adversely affected.

Our international operations expose us to risks inherent in foreign operations.
 
We currently operate in 25 countries outside the United States. 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.

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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. In addition, our effective tax rate may fluctuate quarterly, and the resulting tax rate may be negative or unusually high as a result of significant charges in a quarter that are not tax deductible, such as those charges associated with goodwill and long-lived asset impairment and our restructuring activities that we recorded in 2012. 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 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, particularly in tight labor markets in emerging markets. 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 expense and 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.
 
Our indebtedness could adversely affect us by reducing our flexibility to respond to changing business and economic conditions.
On October 1, 2012, we repaid all of our $325 million 7.375% senior notes. In February 2013, we concluded a tender offer of our 9.75% notes due in January 2014, which resulted in the repurchase of $633.1 million of these notes and left $866.9 million of notes outstanding. Also, in January 2013, we issued $500 million 2.75% senior notes due January 2018 and $500 million 4.375% senior notes due January 2023. As of May 4, 2013, our consolidated outstanding debt was $1.97 billion. As of May 4, 2013, we also had $1.1 billion of additional borrowing capacity under our commercial paper program, revolving credit

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facility and other lines of credit. We are not restricted from incurring substantial additional indebtedness in the future. Incurring substantial indebtedness in the future could reduce our ability to obtain additional financing for working capital, capital expenditures, acquisitions, and other general corporate purposes and could make us more vulnerable to economic downturns and economic pressures. Our level of indebtedness may also place us at a competitive disadvantage against less leveraged competitors. 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.

Our expanded offering of proprietary branded products may not improve our financial performance and may expose us to intellectual property liability, product liability, import/export liability, government investigations and claims, and other risks associated with global sourcing.
 
Our product offering includes Staples, Quill and other proprietary branded products and services, which represented approximately 28% of our sales in fiscal 2012 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 products and services also exposes us to added risks that could increase the cost of doing business, such as third party intellectual property infringement, false advertising, and product liability claims against us with respect to such products and services; and import and export compliance issues. Furthermore, although we have implemented policies and procedures designed to facilitate compliance with laws and regulations relating to importing merchandise from abroad, there can be no assurance that contractors, agents, vendors, manufacturers or other third parties with whom we do business will not violate such laws and regulations or our policies, which could subject us to liability and could adversely affect our operations or operating results. 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 branded products 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

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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, use 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 misuse confidential or personal information to which they have access; 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, unauthorized access to, or misuse of confidential or personal information could disrupt our operations, damage our reputation, and expose us to claims from customers, financial institutions, regulators, payment card associations, employees and other persons, any of which could have an adverse effect on our business, financial condition and results of operations.

Our business may be adversely affected by the actions of and risks associated with third-party vendors and service providers.
 
The products we sell are sourced from a wide variety of third-party vendors. In general, we do not have long-term contracts with these vendors committing them to provide products to us on acceptable terms. For example, we derive benefits from vendor allowances and promotional incentives which may not be offered in the future. We also cannot control the supply, design, function or cost of many of the products that we offer for sale and are dependent on the availability and pricing of key products, including paper, ink, toner and technology. 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, commercial, 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 often have 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 significant 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, the False Claims Act, the Employee Retirement Income Security Act (“ERISA”), securities laws, import and export laws (including customs regulations), 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

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addition, as a result of operating in multiple countries, we must comply with multiple foreign laws and regulations that may differ substantially from country to country and may conflict with corresponding U.S. laws and regulations. We may also be subject to investigations or audits by governmental authorities and regulatory agencies, which can occur in the ordinary course of business or which can result from increased scrutiny from a particular agency towards an industry, country or practice. If we fail to comply with laws, rules and regulations or the manner in which they are interpreted or applied, we may be subject to government enforcement action, class action litigation or other litigation, damage to our reputation, civil and criminal liability, damages, fines and penalties, and increased cost of regulatory compliance, any of which could adversely affect our results of operations and financial performance.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
The following table provides information about our purchases of our common stock during the first quarter of fiscal 2013:
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)
February 3, 2013 - March 2, 2013
 
1,220,043

 
$
13.34

 
1,220,000

 
$
852,033,000

March 3, 2013 - April 6, 2013
 
285,318

 
12.89

 
190,000

 
849,584,000

April 7, 2013 - May 4, 2013
 
3,525,030

 
13.11

 
3,523,502

 
803,402,000

Total for the first quarter of 2013
 
5,030,391

 
$
13.16

 
4,933,502


$
803,402,000

____________________________________________
(1)
Includes a total of 96,889 shares of our common stock withheld during the first quarter of our 2013 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:
May 22, 2013
By:
/s/ STEPHEN BACICA
 
 
 
Stephen Bacica
 
 
 
Senior Vice President and Corporate Controller
 
 
 
(Principal Accounting Officer)
 
 
 
 
 
 
By:
/s/ CHRISTINE T. KOMOLA
 
 
 
Christine T. Komola
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
(Principal Financial Officer)



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Table of Contents

EXHIBIT INDEX
 
Exhibit No.
 
Description
10.1+
 
Second Amended and Restated Long Term Cash Incentive Plan.
10.2+
 
Form of Performance Share Award Agreement under the Amended and Restated 2004 Stock Incentive Plan.
14.1+
 
Code of Ethics.
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 May 4, 2013 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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