Item 1. Business
Staples
Staples, Inc. and its subsidiaries ("we", "Staples" or the "Company"), the world's leading office products company, is committed to making it easy for customers to buy a wide range of office products, including supplies, technology, furniture, and business services. We pioneered the office products superstore concept by opening the first office products superstore in Brighton, Massachusetts in 1986 to serve the needs of small businesses, and currently serve customers of all sizes in 25 countries throughout North and South America, Europe, Asia and Australia. In July 2008, Staples completed the acquisition of Corporate Express N.V. ("Corporate Express"), one of the world's leading suppliers of office products to businesses and institutions. We operate three business segments: North American Delivery, North American Retail, and International Operations. Additional information regarding our operating segments is presented in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in this Annual Report on Form 10-K, and financial information regarding these segments is provided in Note N in the Notes to the Consolidated Financial Statements contained in this Annual Report on Form 10-K.
Business Strategy
We view the office products market as a large, diversified market for office supplies and services, business machines and related products, computers, technology and related products, and office furniture. We reach each sector of the office products market through sales channels which are designed to be convenient to our contract, catalog, on-line and retail store customers. Our businesses attract different customer groups with distinct purchasing behaviors. Our Contract business targets mid-size businesses and organizations with between 20 and 500 office workers as well as Fortune 1000 companies. Our catalog and on-line customers are generally small businesses and organizations with up to 20 office workers which we target through our catalogs and web sites. Our retail stores target small businesses, home offices and consumers. Our ability to address customer groups with different needs expands our available market opportunities; increases awareness of the Staples brand among customers in all segments, who often shop across multiple sales channels; and allows us to benefit from a number of important economies of scale, such as enhanced efficiencies in purchasing, distribution, advertising, and general and administrative expenses.
We provide superior value to our customers through a combination of low prices, a broad selection of products, high quality and innovative Staples brand products, convenient store locations, easy to use web sites, reliable and fast order delivery, and excellent customer service. Our strategy is to maintain our leadership in the office products industry by delivering on our brand promise: we make buying office products easy. We strive to be the trusted source for office solutions, by expanding our offering in categories like copy and print services, technology, and facilities and breakroom supplies.
North American Delivery
Our strategies for North American Delivery focus on customer service, customer acquisition and retention, and selling a broader assortment of products and services to our customers to grow sales and increase profitability. The addition of Corporate Express expanded our offerings into new areas and enhanced our offerings in existing areas, including facilities and breakroom supplies, printing, promotional products, furniture, and data center supplies. We continue to focus on improving our perfect order metric, which measures the number of orders that we fulfill on time and without error. We have established industry leading customer service standards to improve recovery of service failures and to make it easy for customers to resolve any issues with their orders. Since acquiring Corporate Express, we have achieved significant purchasing synergies, integrated the sales forces, reduced overhead expense, and begun to rationalize our distribution network. Over the next few years, the integration of Corporate Express will continue to be a key driver of our North American Delivery results. These efforts include further rationalization of distribution facilities, consolidation of systems and websites and increasing average order size.
Our North American Delivery segment consists of the United States and Canadian business units that sell and deliver office products and services directly to consumers and businesses and includes: "Contract," "Staples Business Delivery", and "Quill." The majority of our delivery customers place their orders on-line, making Staples the second largest Internet reseller in the world.
Contract: Our Contract operations focus on serving the needs of mid-sized businesses and organizations through Staples Business Advantage and Fortune 1000 companies through Staples National Advantage. The acquisition of
Corporate Express significantly increased the size of our Contract business in the United States, and established our Contract business in Canada. Contract customers often require more service than is provided by a traditional retail or mail order business. Through our Contract sales force, we offer customized pricing and payment terms, usage reporting, the stocking of certain proprietary items, a wide assortment of eco-friendly products and services, and full service account management.
Staples Business Delivery: Our Staples Business Delivery operations combine the activities of our direct mail catalog business, our Staples.com web site, and our Canadian Internet sites. Staples Business Delivery is primarily designed to reach small businesses and home offices, offering next business day delivery for most office supply orders in a majority of our markets. We market Staples Business Delivery through Internet and other broad-based media advertising, direct mail advertising, catalog mailings, and a telesales group generating new business and growing existing accounts.
Quill: Acquired by Staples in 1998, Quill is an Internet and catalog business with a targeted approach to servicing the needs of small and medium-sized businesses in the United States. To attract and retain its customers, Quill offers outstanding customer service, Quill brand products, and special services. Quill also operates Medical Arts Press, a specialty Internet and catalog business offering products for medical professionals.
North American Retail
Our strategy for North American Retail focuses on offering an easy-to-shop store with quality products that are in-stock and easy to find, with fast checkout and courteous, helpful and knowledgeable sales associates. Our goals are to continue to be a destination for core supplies categories like ink and toner, to become an authority for business technology through our rapidly growing EasyTech service offering, and to establish leadership in copy and print services. Store associates are trained to deliver excellent service through our EasyWay service model, which encourages engagement with customers and solution selling. As a result of our focus on service, training programs, and offering incentives to reward excellent customer service, customer satisfaction survey scores have improved for the past several years.
Our North American Retail segment consists of 1,555 stores in the United States and 316 stores in Canada at the end of fiscal 2009. We operate a portfolio of four retail store formats, tailored to the unique characteristics of each location. The "Dover" superstore represents the majority of our U.S. store base. The customer friendly "Dover" design appeals to the customer with an open store interior that provides a better view of our wide selection and makes it easier to find products. We also operate a 14,600 square foot store format designed for rural markets and a 10,000 square foot store suited to dense urban markets such as New York City. Additionally, we operate approximately 20 stand alone copy and print shops to address the attractive quick print market opportunity. This 4,000 square foot store is designed for locations with high customer density and offers a full service copy and print shop and a broad assortment of core office supplies.
Our real estate strategy is to expand our store base in a steady and disciplined fashion to produce strong sales and high returns on our investments. We believe that our network of stores and delivery businesses enhances our profitability by allowing us to leverage marketing, distribution and supervision costs. In determining where to open new retail stores, we assess potential real estate sites through a stringent approval process which evaluates the financial return of each store. Our evaluations consider such factors as the concentration of small and mid-sized businesses and organizations, the number of home offices, household income levels, our current market presence, proximity to competitors, the availability of quality real estate locations and other factors.
We plan to open approximately 40 new stores in North America in 2010, compared to 48 new stores in 2009, and 106 new stores in 2008. The growth program for 2010 will continue to focus on adding stores to existing markets as well as expansion into new markets.
International Operations
Our International Operations segment consists of businesses in 23 countries in Europe, Asia, South America and Australia.
Our European Office Products business represents a balanced multi-channel portfolio serving Contract, Retail, and Catalog customers in 17 countries. We operate 328 retail stores in seven countries, with the largest concentration of stores in the UK, Germany and the Netherlands. We operate a catalog business in 15 countries, with a significant
concentration of sales in France and Italy. The acquisition of Corporate Express added a large European Contract business to our portfolio, including sizable operations in the Nordics and Germany.
Our strategies for our European Office Products business focus on increasing profitability by achieving purchasing synergies, reducing overhead expense, and improving the performance of our supply chain. We have implemented a more streamlined regional management structure to reduce administrative costs, reinforce our multi-channel value proposition and leverage best practices.
We also operate a European printing systems business which we acquired from Corporate Express. This business is a leading value added reseller of printing equipment and related services, supplies, and spare parts, and is the largest independent distributor of Heidelberg offset printing presses.
We continue to establish a foundation for growth in Asia and South America, where our businesses are in various stages of development. We operate retail and delivery businesses in China, a delivery business in Taiwan through a joint venture with UB Express, and a multi-channel business in India through a joint venture with Pantaloon Retail Limited. We also operate delivery businesses in Argentina and Brazil and operate two stores in Argentina.
With the acquisition of Corporate Express, Staples acquired a 59% ownership interest in Corporate Express Australia Limited, a public company traded on the Australian Stock Exchange. This primarily contract business is a leading supplier of office, warehouse and factory essentials in Australia and New Zealand.
Merchandising
We sell a wide variety of office supplies and services, business machines and related products, computers and related products, and office furniture. Our merchandising staff uses integrated computer systems to perform the vast majority of our merchandise planning and product purchasing centrally. However, some of our business units, particularly Quill, our Canadian operations, and our multiple international businesses, leverage our global buying and merchandising staff along with local staff to meet their specific buying and merchandising needs. We purchase products from several hundred vendors worldwide, and we believe that competitive sources of supply are available to us for substantially all of the products we carry.
We have approximately 15,000 SKUs stocked in our North American Delivery fulfillment centers and approximately 8,000 SKUs stocked in each of our typical North American retail stores. Our merchandising team constantly reviews and updates our product assortment to respond to changing customer needs and to maximize the performance of our key categories. Ink and toner remain important product categories, and we continue to increase sales in these areas by offering a wide assortment, an in-stock guarantee, and a strong pricing message which communicates the benefits of our loyalty program, including cartridge recycling rebates, and multi-pack discounts. We continue to enhance our product offering, particularly in the areas of technology and facilities and breakroom supplies.
Our product offering includes Staples, Quill, and other proprietary branded products, which represented approximately 23% of our sales in 2009. We offer more than 2,000 own brand products, including an assortment of Staples "Eco-Easy" products, which includes our "Sustainable Earth" brand products. Own brand products deliver value to our customers with prices that are on average 10% to 15% lower than the national brand, while generating higher gross margin rates on average than national brands. Our own brand strategy focuses on offering national brand quality at lower prices with a full range of marketing initiatives, including clear and impactful packaging, in-store displays, sampling and advertising. We have brought to market hundreds of new own brand products, many of which are innovative and exclusive to Staples. Our long-term goal is to grow own brand products to more than 30% of total product sales. Our sourcing office in Shenzhen, China supports our own brand strategy by driving high quality and lower costs, and by bringing new products to market more quickly.
We also offer an array of services, including high-speed, color and self-service copying, other printing services, faxing and pack and ship. The multi-billion dollar copy and print market is highly fragmented, and we believe we have a significant opportunity to gain share in this market. Over the past several years, we have upgraded the technology, signage, labor, training and quality processes in our copy and print centers. Investments in new services, sales force, marketing, and pricing drive greater customer awareness of our capabilities. Our copy and print business is highly profitable, and growth in this area contributes meaningfully to gross margin. We also offer copy services to our Contract customers in North America, leveraging our Contract sales force and delivery network.
Technology services represent a significant growth opportunity. We provide a full range of installation, upgrade, and repair services, as well as data protection, privacy, and security services through our "EasyTech" offering. Currently, all
of our stores have at least one Staples EasyTech associate, and we continue to invest in training, labor, infrastructure and customer awareness to grow this business.
The following table shows our sales by each major product line as a percentage of total sales for the periods indicated:
Supply Chain
We operate two distinct networks to fulfill the majority of our replenishment and delivery needs in North America. Our network of 67 delivery fulfillment centers supports our North American Delivery operations. A key component of the integration of Corporate Express is the multi-year process of balancing or restructuring the combined fulfillment center network. Our integration plan is designed to increase supply chain productivity, improve customer service and save costs. We have converted our first warehouse in North America to fill orders from both legacy Corporate Express customers and Staples customers.
We operate a separate network of four large distribution centers to support our U.S. retail operations. Our retail distribution centers provide us with significant labor and merchandise cost savings by centralizing receiving and handling functions, and by enabling us to purchase in full truckloads and other economically efficient quantities from suppliers. Reducing the number of purchase orders and invoices processed results in significant administrative cost savings. Our centralized purchasing and distribution systems also permit our store associates to spend more time on customer service and store presentation. Since our distribution centers maintain backup inventory, our in-store inventory requirements are reduced, allowing us to operate smaller stores. A smaller store reduces our rental costs and provides us with greater opportunity to locate stores closer to our target customers.
In Europe, we are in the process of implementing a multi-year supply chain plan to reduce the complexity and redundancy of our distribution network. We are standardizing all of our supply chain processes and systems architecture, and continuing to consolidate facilities. These efforts are expected to improve customer service and quality, drive cost savings, and increase overall operating efficiency.
Marketing
We pursue a variety of marketing strategies to maintain high brand awareness and attract and retain our target customers. These strategies include broad-based media advertising such as television, radio, newspaper circulars, print, and Internet advertising, as well as catalogs, e-mail marketing, loyalty programs, and sophisticated direct marketing capabilities. In addition, we market to larger customers through a combination of direct mail catalogs, customized catalogs, and a field sales force. We change our level of marketing spend, as well as the mix of media employed, depending upon market, customer value, seasonal focus, competition, and cost factors. This flexible approach allows us to optimize the effectiveness and efficiency of our marketing expenditures.
Our marketing message focuses on the communication of our brand promise: we make buying office products easy. The look and feel of our advertising vehicles reflect our "Easy" brand promise, and we are consistently communicating the brand across all channels and customer touch points, including our signage, television commercials, catalogs, web sites, circulars, direct marketing, and store uniforms. Given the current weak economic environment, we have shifted our marketing message to emphasize that it is easy to save at Staples and to highlight our own brand products, which offer excellent value. We are in the process of transitioning to a global Staples brand, with a few exceptions such as Quill and Corporate Express Australia.
Our retail, catalog and Staples.com marketing efforts generally focus on small businesses and home offices. Our marketing strategies emphasize our strong brand and leverage all of our retail and delivery marketing vehicles to send a consistent message to our core customers. We also target our back-to-school, holiday, January back-to-business and
tax-time selling seasons, and drive greater awareness and trial of important growth initiatives such as copy and print services and Staples EasyTech. We continue to improve our systems and capabilities to track our customers' multi-channel purchasing behaviors and to execute more effective direct marketing and customer loyalty programs to drive higher sales across all our channels.
Associates, Training and Corporate Values
We have a strong corporate culture that values ethics, high performance, entrepreneurship, and teamwork. We place great importance on recruiting, training, retaining, and providing the proper incentives for high quality associates. Offering attractive growth and development opportunities and a commitment to a diverse and safe work environment, we pride ourselves on being a great place to work.
We consider customer relations and our associates' knowledge of our product and service offering to be significant to our marketing approach and our ability to deliver customer satisfaction. Associates are trained in a number of areas, including, where appropriate, sales techniques, management skills, and product knowledge.
As of January 30, 2010, Staples employed 54,149 full-time and 36,946 part-time associates.
Staples is committed to responsible corporate citizenship, or what we refer to internally as Staples Soul. Staples Soul is a holistic approach to business that recognizes the close connection between our financial success and our desire to make a positive impact on our associates, communities, and the planet. We believe that by practicing sound ethics, sustaining the environment, embracing diversity, and giving back to the community, we will solidify our place as the world's best office products company.
Ethics-Ethics at Staples is more than a set of policies on paper. It is part of our culture. Staples maintains ethical business practices by encouraging open and honest communication and giving associates practical tools to make sound decisions. We conduct ethics training around the world to help our associates understand that their actions have an impact on other associates, our customers, our suppliers, and our shareholders. Our training identifies ethical dilemmas that associates might face, and provides information on the many ways associates can get help and report concerns. In doing this, we ensure that Staples associates act in the best interest of the company and protect our brand reputation.
Environment-Staples seeks to make it easy for our customers, suppliers and associates to make a difference. We are committed to offering a broad selection of environmentally preferable products, providing easy recycling solutions for customers and associates, investing in operational improvements such as energy conservation and green building practices, working with our global suppliers to drive environmental improvements to their operations, and expanding environmental awareness internally and externally. Some of our environmental milestones include:
•Offering more than 3,000 office products with environmental features;
•The first retailer providing in-store recycling for computers, office technology, personal electronics and ink and toner cartridges;
•Limiting the speed on all delivery trucks to 60 miles per hour, improving fuel economy by 23 percent and lowering emissions;
•Participating in the Carbon Disclosure Project (CDP) for the past 5 years and establishing a 7% absolute carbon reduction goal to be achieved by 2010 as part of our participation in the US EPA Climate Leaders Program;
•Installing Maryland's largest single rooftop solar power system at our 200,200 square foot fulfillment center and hosting 26 solar systems on the rooftops of stores and distribution centers nationally; and
•Working with our own brand vendors to eliminate PVC in packaging by the end of 2010.
We continually monitor developments in climate change regulation and the related litigation landscape, particularly with respect to carbon dioxide emissions, chemical and other mandated product disclosure, and other requirements to ensure statutory and regulatory compliance. Further, through our partnerships with other organizations, we continue to seek opportunities to leverage successful environmental initiatives to improve long term economic performance. We believe our efforts help preserve natural resources for future generations while helping meet customer needs, create operational efficiencies, and spark new business prospects.
Diversity-Diversity at Staples goes beyond race and gender. We believe that by reflecting the face of our customers through our associates and suppliers, we are inspired to think more creatively as a company. Therefore, we strive to offer an inclusive business environment that offers a diversity of people, thought, and experiences globally to our customers,
associates and suppliers. Our diverse workforce and network of suppliers strengthens relationships with our customers, and gives us the flexibility to adapt to the ever changing marketplace.
Community-Staples is committed to supporting charitable endeavors that make a difference in each and every community where we operate. Through Staples Foundation for Learning, national charitable partnerships, and in-kind donations, we support communities worldwide by providing resources to non-profit organizations that provide educational opportunities for all people, with a special emphasis on disadvantaged youth. Some of Staples Foundation for Learning's partners include Boys and Girls Clubs of America, Ashoka, Earth Force and the Initiative for a Competitive Inner City.
Competition
We compete with a variety of retailers, dealers and distributors in the highly competitive office products market. We compete in most of our geographic markets with other high-volume office supply providers, including Office Depot, OfficeMax and Lyreco, as well as mass merchants such as Wal-Mart and Tesco, warehouse clubs such as Costco, computer and electronics superstores such as Best Buy, copy and print businesses such as FedEx Office, online retailers such as Amazon.com, ink cartridge specialty stores, and other discount retailers. In addition, our retail stores and delivery operations both compete with numerous mail order firms, contract stationers, electronic commerce distributors, regional and local dealers and direct manufacturers. Many of our competitors have increased their presence in our markets in recent years. Some of our current and potential competitors are larger than we are and have substantially greater financial resources.
We believe we are able to compete favorably against other high-volume office supply providers, mass merchants and other retailers, dealers and distributors because of the following factors: our focus on the business and home office customer; our tenured management team's ability to respond to the dynamic markets in which we operate and the changing needs of our customers; courteous, helpful and knowledgeable associates focused on making it easy for customers to buy office products and services; a wide assortment of office supplies that are in-stock and easy to find; fast checkout; easy to use web sites; reliability and speed of order shipment; convenient store locations; hassle-free returns and competitive prices.
Trademarks, Patents, Copyrights, and Domain Names
We own or have applied to register numerous trademarks and service marks in the United States and throughout the world in connection with our businesses. Some of our principal global and regional marks include Staples, the Staples red brick logo, Staples the Office Superstore, the Easy Button, "that was easy", Quill, the Quill feather logo, Corporate Express, and many other marks incorporating "Staples," which in the aggregate we consider to be of material importance to our business. While the duration of trademark registrations varies from country to country, trademarks are generally valid and may be renewed indefinitely so long as they are in use and their registrations are properly maintained.
We own and maintain a number of patents internationally on certain products, systems and designs. We also own copyrights for items such as packaging, training materials, promotional materials and in-store graphics. In addition, we have registered and maintain numerous Internet domain names, including many that incorporate "Staples."
Available Information
We maintain a web site with the address www.staples.com. We are not including the information contained on our web site as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge through our web site our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission (SEC).
We were organized in 1985 and are incorporated in Delaware.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers, their respective ages and positions as of February 26, 2010 and a description of their business experience is set forth below. There are no family relationships among any of the executive officers named below.
Kristin A. Campbell, age 48
Ms. Campbell has served as Senior Vice President, General Counsel and Secretary since June 2007. Prior to that, she served as Senior Vice President and Deputy General Counsel since March 2002. She has held other roles within Staples since joining in December 1993.
Joseph G. Doody, age 57
Mr. Doody has served as President-Staples North American Delivery since March 2002. Prior to that, he served as President-Staples Contract & Commercial from November 1998, when he first joined Staples, until March 2002.
Christine T. Komola, age 42
Ms. Komola has served as Senior Vice President and Corporate Controller since July 2004. Prior to that, she served as the Senior Vice President, General Merchandise Manager for furniture from January 2002 to July 2004. She has also held other roles within Staples since joining in April 1997, including Assistant Controller, Vice President of Planning, Margin and Control, and Chief Financial Officer of Staples.com.
John J. Mahoney, age 58
Mr. Mahoney has served as Vice Chairman and Chief Financial Officer since January 2006. Prior to that, he served as Executive Vice President, Chief Administrative Officer and Chief Financial Officer since October 1997, and as Executive Vice President and Chief Financial Officer from September 1996, when he first joined Staples, to October 1997.
Michael A. Miles, age 48
Mr. Miles has served as President and Chief Operating Officer since January 2006. Prior to that, he served as Chief Operating Officer since September 2003. Prior to joining Staples in September 2003, Mr. Miles was Chief Operating Officer, Pizza Hut for Yum! Brands, Inc. from January 2000 to August 2003.
Demos Parneros, age 47
Mr. Parneros has served as President-U.S. Stores since April 2002. Prior to that, he served in various capacities since joining Staples in October 1987, including Senior Vice President of Operations from March 1999 to March 2002 and Vice President of Operations from October 1996 to February 1999.
Ronald L. Sargent, age 54
Mr. Sargent has served as Chairman since March 2005, as Chief Executive Officer since February 2002 and as a Director since 1999. Prior to that, he served in various capacities since joining Staples in March 1989, including President from November 1998 to January 2006, Chief Operating Officer from November 1998 to February 2002, President-North American Operations from October 1997 to November 1998, and President-Staples Contract & Commercial from June 1994 to October 1997.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and, in particular, the description of our Business set forth in Item 1 and our Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in Appendix B ("MD&A") contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 ("the Exchange Act").
Any statements contained in or incorporated by reference into this report that are not statements of historical fact should be considered forward-looking statements. You can identify these forward-looking statements by use of the words "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 MD&A and our consolidated financial statements and notes to consolidated financial statements included in Appendix C. We cannot guarantee that we actually will achieve the plans,
intentions or expectations disclosed in the forward-looking statements made. There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by such forward-looking statements. These risks and uncertainties include, without limitation, those set forth below under the heading "Risk Factors" as well as risks that emerge from time to time that are not possible for us to predict. Forward-looking statements, like all statements in this report, speak only as of the date of this report (unless another date is indicated). We disclaim any obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.
Item 1A.
Item 1A. Risk Factors
Global economic conditions may continue to cause a decline in business and consumer spending which could adversely affect our business and financial performance.
Our operating results and performance depend significantly on worldwide economic conditions and their impact on business and consumer spending. Increases in the levels of unemployment, energy costs, healthcare costs, higher interest rates and taxes, combined with tighter credit markets, reduced consumer confidence and other factors, contribute to the decline in business and consumer spending. Although there has been some recent improvement in some of these measures, the level of business and consumer spending is not where it was prior to the global recession. This decline has caused our same store sales to decrease for much of 2009. We have also seen a decline in average sales per customer in both our delivery and retail businesses. Our business and financial performance may continue to be adversely affected by current and future economic conditions if there is a continued decline in business and consumer spending.
Our market is highly competitive and we may not be able to continue to compete successfully.
The office products market is highly competitive. We compete with a variety of local, regional, national and international retailers, dealers and distributors for customers, associates, locations, products, services, and other important aspects of our business. In most of our geographic markets, we compete with other high-volume office supply providers such as Office Depot, OfficeMax and Lyreco, as well as mass merchants such as Wal-Mart and Tesco, warehouse clubs such as Costco, computer and electronics superstores such as Best Buy, copy and print businesses such as FedEx Office, online retailers such as Amazon.com, ink cartridge specialty stores, and other discount retailers. Our retail stores and delivery operations also compete with numerous mail order firms, contract stationer businesses, electronic commerce distributors, regional and local dealers and direct manufacturers.
We strive to differentiate ourselves from our competitors in part by executing our brand promise: we make buying office products easy. This involves, among other things, offering our customers a broad selection of products, convenient store locations, and reliable and fast order delivery. Many of our competitors, however, have increased their presence in our markets in recent years by expanding their assortment of office products and services, opening new stores near our existing stores, and offering direct delivery of office products. Some of our current and potential competitors are larger than we are and have substantially greater financial resources that may be devoted to sourcing, promoting and selling their products. If we fail to execute on our brand promise or are otherwise unable to differentiate ourselves from our competitors, we may be unable to attract and retain customers.
Our growth may strain our operations and we may not successfully integrate acquisitions to realize anticipated benefits.
Our business has grown dramatically over the years. Although we expect our business to continue to grow organically and through strategic acquisitions, it will likely not grow at the rate experienced when we acquired Corporate Express. Sales of our products and services, the types of our customers, the nature of our contracts, the mix of our businesses, the number of countries in which we conduct business, the number of stores that we operate and the number of our associates have grown and changed, and we expect they will continue to grow and change over the long-term. This growth places significant demands on management and operational systems. If we cannot effectively manage our growth, it is likely to result in operational inefficiencies and ineffective management of our business. In addition, as we grow, our business is subject to a wider array of complex state, federal and international regulations, and may be increasingly the target of private actions alleging violations of such regulations. This increases the cost of doing business and the risk that our business practices could unknowingly result in liabilities that may adversely affect our business and financial performance.
In addition, our long term strategy for growth, productivity and profitability depends on our ability to make appropriate strategic acquisitions, and integrate such acquisitions quickly and effectively. We must also operate to realize or achieve any expected synergies and cost savings related to such acquisitions. For example, we have not fully completed
the integration of the Corporate Express acquisition. This integration has been and continues to be complex and time consuming. While we currently expect to realize the synergies and cost savings of the Corporate Express acquisition, if we fail to successfully integrate our past or future acquisitions or fail to realize the intended benefits of such acquisitions, our business may be adversely affected.
We may be unable to continue to enter new markets successfully.
An important part of our business plan is to increase our presence in new markets, which could include adding delivery operations or stores in new geographic markets or selling new products and services. For example, we plan to open approximately 50 new stores in 2010. For our strategy to be successful, we must identify favorable store sites, negotiate leases on acceptable terms, hire and train qualified associates and adapt management and operational systems to meet the needs of our expanded operations. These tasks may be difficult to accomplish, especially as we allocate time and resources to managing the profitability of our large existing portfolio of stores and renewing our existing store leases with acceptable terms. In addition, local zoning and other land use regulations may prevent or delay the opening of new stores in some markets. If we are unable to open new stores as efficiently as we planned, our future sales and profits may be adversely affected.
Our expansion strategy also includes providing new products and service offerings. We may have limited experience in these newer markets such as technology services and such offerings may present new and difficult challenges. In addition, customers may not be familiar with our brand, we may not be familiar with local customer preferences or our competitors may have a larger, more established market presence. Even if we succeed in entering new markets, our sales or profit levels in newer activities may not be successful enough to recoup our investments in them and may reduce our overall profitability.
Our expanding international operations expose us to risks inherent in foreign operations.
We currently operate in 24 different countries outside the United States and plan to continue to grow internationally. Operating in multiple countries requires that we comply with multiple foreign laws and regulations that may differ substantially from country to country and may conflict with corresponding U.S. laws and regulations. Cultural differences abroad and local practices of conducting business may conflict with our own business practices and ethics standards. Ensuring compliance to 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 and foreign currency exchange restrictions, complex import and export schemes, increased local competition, unfavorable foreign trade policies, unstable political or economic conditions, and geopolitical events, including war and terrorism.
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, particularly with Euros and Canadian dollars. 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, we may not be entirely successful in our strategy.
We may be unable to attract 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 and retaining a large number of qualified associates. We face intense competition for qualified associates. We face even tighter labor markets
as we expand into emerging markets such as India and China. Many of our associates 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 local labor laws and regulations. If we are unable to attract 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 with back-to-school, holiday, and back-to-business seasons when compared to the first half of our fiscal year. Factors that could also cause these quarterly fluctuations include: the mix of products sold; pricing actions of competitors; the level of advertising and promotional expenses; the outcome of legal proceedings; severe weather; 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 effective tax rate may fluctuate.
We are a multi-national, multi-channel provider of office products and services. As a result, our effective tax rate is derived from a combination of applicable tax rates in the various countries, states and other jurisdictions in which we operate. Our effective tax rate may be lower or higher than our tax rates have been in the past due to numerous factors, including the sources of our income, any agreements we may have with taxing authorities in various jurisdictions, and the tax filing positions we take in various jurisdictions. We base our estimate of an effective tax rate at any given point in time upon a calculated mix of the tax rates applicable to our company and to estimates of the amount of business likely to be done in any given jurisdiction. The loss of one or more agreements with taxing jurisdictions, a change in the mix of our business from year to year and from country to country, changes in rules related to accounting for income taxes, changes in tax laws in any of the multiple jurisdictions in which we operate, or adverse outcomes from tax audits that we may be subject to in any of the jurisdictions in which we operate could result in an unfavorable change in our effective tax rate which could have an adverse effect on our business and results of our operations.
If we are unable to manage our debt, it could materially harm our business and financial condition and restrict our operating flexibility.
We have long-term debt and debt service requirements, with $1.5 billion 9.75% notes due in January 2014, $500 million 7.75% notes due in April 2011 and $325 million 7.375% notes due in October 2012. Our consolidated outstanding debt as of January 30, 2010 was $2.54 billion. If we are unable to satisfy our debt service requirements, we may default under one or more of our credit facilities or the indentures governing our notes. If we default or breach our obligations, we could be required to pay a higher rate of interest or lenders could require us to accelerate our repayment obligations, and such a default could materially harm our business and financial condition.
Our level of indebtedness combined with volatile financial markets may have significant consequences, including: restricting our growth; making us more vulnerable to a downturn in our business; making it more expensive to obtain future financing; limiting our ability to borrow additional amounts for working capital, capital expenditures, debt service requirements, future acquisitions or other corporate purposes; restricting our flexibility to respond to changing market conditions; and limiting our ability to use operating cash flow in other areas of our business. As a result of our debt, we may also be placed at a competitive disadvantage against less leveraged competitors.
Our business may be adversely affected by the actions of and risks associated with our third-party vendors.
The products we sell are sourced from a wide variety of third-party vendors. We derive benefits from vendor allowances and promotional incentives which may not be offered in the future. We also cannot control the supply, design, function or cost of many of the products that we offer for sale and are dependent on the availability and pricing of key products, including paper, ink, toner, technology and printing equipment. Some of the products we offer are supplied to us on an exclusive basis and may be difficult to replace in a timely manner. Disruptions in the availability of raw materials used in the production of these products may also adversely affect our sales and result in customer dissatisfaction.
Global sourcing of many of the products we sell is an important factor in our financial performance. Our ability to find qualified vendors and access products in a timely and efficient manner is a significant challenge, especially with respect to goods sourced outside the United States. Political instability, the financial instability of suppliers, trade restrictions, tariffs, foreign currency exchange rates, transport capacity and costs, inflation and other factors relating to foreign trade are beyond our control. In addition, merchandise quality issues could cause us to initiate voluntary or mandatory recalls for our proprietary branded products or other products we sell which may then damage our reputation. These and other issues affecting our vendors could adversely affect our business and financial performance.
Our expanded offering of proprietary branded products may not improve our financial performance and may expose us to intellectual property and product liability claims.
Our product offering includes Staples, Quill and other proprietary branded products, which represented approximately 23% of our sales in fiscal 2009. Our proprietary branded products compete with other manufacturers' branded items that we offer. Our proprietary branded product offerings also expose us to risk that third parties will assert infringement claims against us with respect to such products. The more proprietary brand product offerings we sell, the more this risk increases. In addition, if any of our customers are harmed by our proprietary branded products, they may bring product liability and other claims against us or we may have to issue voluntary or mandatory recalls. Any of these circumstances could damage our reputation and have an adverse effect on our business and financial performance.
Technological problems may impact our operations.
We rely heavily on technology to sell and deliver our office products. Our ability to attract and retain customers, compete and operate effectively depends in part on a reliable and easy to use technology infrastructure. Any disruption to the Internet or our technology infrastructure, including those affecting our Web sites and computer systems, may cause a decline in our customer satisfaction, impact our sales volumes or result in increased costs. Although we continue to invest in our technology, if we are unable to continually add software and hardware, effectively manage and upgrade our systems and network infrastructure, and develop effective system availability, disaster recovery plans and protection solutions, our business may be adversely affected.
Our information security may be compromised.
Through our sales and marketing activities, we collect and store certain personal information that our customers provide to purchase products or services, enroll in promotional programs, register on our web site, or otherwise communicate and interact with us. We also gather and retain information about our associates in the normal course of business. We may share information about such persons with vendors that assist with certain aspects of our business. Despite instituted safeguards for the protection of such information, we cannot be certain that all of our systems are entirely free from vulnerability to attack. Computer hackers may attempt to penetrate our or our vendors' network security and, if successful, misappropriate confidential customer or business information. In addition, a Staples associate, contractor or other third party with whom we do business may attempt to circumvent our security measures in order to obtain such information or inadvertently cause a breach involving such information. Loss of customer or business information could disrupt our operations, damage our reputation, and expose us to claims from customers, financial institutions, regulators, payment card associations and other persons, any of which could have an adverse effect on our business, financial condition and results of operations. In addition, compliance with tougher privacy and information security laws and standards may result in significant expense due to increased investment in technology and the development of new operational processes.
Various legal proceedings, third party claims, investigations or audits may adversely affect our business and financial performance.
We are involved in various private legal proceedings, which include consumer, employment, intellectual property, tort and other litigation. As our workforce expands, we are subject to potentially increasing challenges by private litigants regarding compliance with local, state and national labor regulations, whether meritorious or not. For example, we recently entered into a national settlement for several class action lawsuits related to "wage and hour" claims.
As our operations grow, we are subject to claims that the technology we use or the products we sell infringe intellectual property rights of third parties. Such claims, whether meritorious or not, involve significant managerial resources and can become costly. Generally, we have indemnification protections in our agreements which our vendors
or licensors have historically honored; however, there are no assurances that such vendors or licensors will continue to do so in the future.
In addition, we may 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. The resolution of these legal proceedings, third party claims, investigations or audits could 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, third party claims, investigations or audits that could adversely affect our business and financial performance.
Changes in federal, state or local regulations may increase our cost of doing business.
We are subject to federal, state and local regulations. Last year in the U.S. there was a large number of new legislative and regulatory initiatives and reforms, and if such legislation is enacted, we may experience an increase in costs. Changes affecting our workforce such as raising the local minimum wage, laws encouraging unionization efforts among our associates, healthcare mandates, environmental regulations, and other wage or workplace regulations could increase our costs. In addition, proposed changes in tax regulations may also change our effective tax rate as our business is subject to a combination of applicable tax rates in the various countries, states and other jurisdictions in which we operate as described in more detail above.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
As of January 30, 2010, we operated a total of 2,243 superstores in 48 states and the District of Columbia in the United States, 10 provinces and 2 territories in Canada, and in Belgium, Denmark, Germany, Ireland, The Netherlands, Norway, Portugal, Sweden, the United Kingdom, China, Argentina and Australia. As of that same date, we also operated 125 distribution and fulfillment centers in 29 states in the United States, 8 provinces in Canada, and in Austria, Belgium, Denmark, France, Germany, Ireland, Italy, The Netherlands, Norway, Poland, Portugal, Spain, Sweden, the United Kingdom, China, Argentina, Brazil and Australia. The following table sets forth the locations of our facilities as of January 30, 2010.
RETAIL STORES
DISTRIBUTION AND FULFILLMENT CENTERS
Most of the existing facilities, including those acquired in connection with our acquisition of Corporate Express, are leased by us with initial lease terms expiring between 2010 and 2024. In most instances, we have renewal options at increased rents. Leases for 170 of the existing stores provide for contingent rent based upon sales.
We own our Framingham, Massachusetts corporate office, which consists of approximately 650,000 square feet.
Item 3.
Item 3. Legal Proceedings
From time to time, we may be subject to routine litigation incidental to our business.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of our security holders during the fourth quarter of fiscal 2009.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
NASDAQ
Our common stock is traded on the NASDAQ Global Select Market under the symbol "SPLS". The following table sets forth for the periods indicated the high and low sales prices per share of our common stock on the NASDAQ Global Select Market, as reported by NASDAQ.
Cash Dividend
Since 2004, we have returned cash to our stockholders through a cash dividend. During fiscal 2009, we paid quarterly dividends of $0.0825 per share of our outstanding common stock on April 10, 2009, July 10, 2009, October 15, 2009 and January 14, 2010, resulting in dividends paid of $0.33 per share on an annualized basis. During fiscal 2008, we paid an annual cash dividend of $0.33 per share on April 17, 2008.
Our payment of dividends is permitted under our public notes and existing financing agreements, although our revolving credit agreement restricts the payment of dividends in the event we are in default under such agreement or such payout would cause a default under such agreement. While it is our intention to continue to pay quarterly cash dividends for 2010 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.
Stock Performance Graph
The following graph compares the cumulative total stockholder return on Staples' common stock, the Standard & Poor's 500 Index and the Standard & Poor's Retail Index during our 2005 through 2009 fiscal years, assuming the investment of $100.00 on January 29, 2005 with dividends being reinvested.
TOTAL RETURN TO STOCKHOLDERS
Issuer Purchases of Equity Securities
During the first quarter of 2008, we suspended our share repurchase program in connection with the funding of our acquisition of Corporate Express. Therefore, there were no share repurchases during the fourth quarter of fiscal 2009. Although share repurchases are temporarily suspended, we have $1.01 billion of authorization remaining under our current share repurchase program.
Other Information
For information regarding securities authorized for issuance under our equity compensation plans, please see Note J in the Notes to the Consolidated Financial Statements contained in this Annual Report on Form 10-K.
At February 26, 2010, we had 5,777 holders of record of our common stock.
Item 6.
Item 6. Selected Financial Data
The information required by this Item is attached as Appendix A.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information required by this Item is attached as part of Appendix B.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The information required by this Item is attached as part of Appendix B under the caption "Quantitative and Qualitative Disclosures about Market Risks."
Item 8.
Item 8. Financial Statements and Supplementary Data
The information required by this Item is attached as Appendix C.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
1. Disclosure Controls and Procedures
The Company's management, with the participation of the Company's chief executive officer and chief financial officer, evaluated, as of January 30, 2010, 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 January 30, 2010, management, the chief executive officer and the chief financial officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level at that date.
2. Internal Control over Financial Reporting
(a) Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company's principal executive and principal financial officers and effected by the company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Staples' internal control system was designed to provide reasonable assurance to the Company's management and Board regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations which may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of Staples' internal controls over financial reporting as of January 30, 2010. In making this assessment, it used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, we conclude that, as of January 30, 2010, the Company has maintained, in all material respects, effective internal control over financial reporting based on those criteria.
The independent registered public accounting firm, Ernst & Young LLP, has audited the Consolidated Financial Statements and has issued an attestation report on Staples Inc.'s internal controls over financial reporting as of January 30, 2010, stated in its reports which are included herein.
(b) Attestation Report of the Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Staples, Inc.
We have audited Staples, Inc.'s internal control over financial reporting as of January 30, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Staples, Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Staples, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 30, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Staples, Inc. and subsidiaries as of January 30, 2010 and January 31, 2009 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended January 30, 2010 of Staples, Inc. and our report dated March 1, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Ernst & Young LLP
Boston, Massachusetts
March 1, 2010
(c) Changes in Internal Control Over Financial Reporting
No change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended January 30, 2010 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K and incorporated herein by reference to the definitive proxy statement with respect to our 2010 Annual Meeting of Stockholders (the "Proxy Statement"), which we will file with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Report.
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Certain information required by this Item is contained under the heading "Executive Officers of the Registrant" in Part I of this Annual Report on Form 10-K. Other information required by this Item will appear under the headings "Proposal 1-Election of Directors" and "Corporate Governance" in our Proxy Statement, which sections are incorporated herein by reference.
The information required by this Item pursuant to Item 405 of Regulation S-K will appear under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" in our Proxy Statement, which section is incorporated herein by reference.
We have adopted a written code of ethics that applies to our principal executive officer, principal financial officer, and principal accounting officer or controller, or persons performing similar functions. Our code of ethics, which also applies to our directors and all of our officers and associates, can be found on our web site, which is located at www.staples.com, and is also an exhibit to this report. We intend to make all required disclosures concerning any amendments to, or waivers from, our code of ethics by filing a Form 8-K disclosing such waiver, or to the extent permitted by applicable NASDAQ regulations, by posting such information in the Investor Information section of our web site.
Item 11.
Item 11. Executive Compensation
The information required by this Item will appear under the headings "Corporate Governance", "Director Compensation", and "Executive Compensation" including "Compensation Discussion and Analysis", "Compensation Committee Interlocks and Insider Participation" and "Compensation Committee Report" in our Proxy Statement, which sections are incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item will appear under the headings "Beneficial Ownership of Common Stock" and "Securities Authorized for Issuance under Equity Compensation Plans" in our Proxy Statement, which sections are incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item will appear under the headings "Certain Relationships and Related Transactions" and "Director Independence" in our Proxy Statement, which sections are incorporated herein by reference.
Item 14.
Item 14. Principal Accountant Fees and Services
The information required by this Item will appear under the heading "Independent Registered Public Accounting Firm's Fees" in our Proxy Statement, which section is incorporated herein by reference.
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a)Index to Consolidated Financial Statements.
1.Financial Statements. The following financial statements and schedules of Staples, Inc. are included as Appendix C of this Report:
•Consolidated Balance Sheets-January 30, 2010 and January 31, 2009.
•Consolidated Statements of Income-Fiscal years ended January 30, 2010, January 31, 2009 and February 2, 2008.
•Consolidated Statements of Stockholders' Equity-Fiscal years ended January 30, 2010, January 31, 2009 and February 2, 2008.
•Consolidated Statements of Cash Flows-Fiscal years ended January 30, 2010, January 31, 2009 and February 2, 2008.
•Notes to Consolidated Financial Statements.
2.Financial Statement Schedules.
•Schedule II-Valuation and Qualifying Accounts.
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission other than the one listed above are not required under the related instructions or are not applicable, and, therefore, have been omitted.
3.Exhibits. The exhibits which are filed or furnished with this report or which are incorporated herein by reference are set forth in the Exhibit Index on page D-1, which is incorporated herein by reference.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 1, 2010.
STAPLES, INC.
By:
/s/ RONALD L. SARGENT
Ronald L. Sargent,
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
APPENDIX A
STAPLES, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(Dollar Amounts in Thousands, Except Per Share Data)
The Company's fiscal year is the 52 or 53 weeks ending the Saturday closest to January 31. Results of operations include the results of acquired businesses since the relevant acquisition date.
(1)Stockholders' equity for all years presented has been restated to include the portion attributed to the noncontrolling interest to conform with ASC Topic 810.
(2)Results of operations for this period reflect $84.2 million ($55.2 million, net of taxes) of integration and restructuring costs associated with the acquisition of Corporate Express and a $42.0 million ($27.5 million, net of taxes) charge related to the settlement of retail wage and hour class action lawsuits.
(3)Results of operations for this period reflect $173.5 million ($113.7 million, net of taxes) of integration and restructuring costs associated with the acquisition of Corporate Express. The results of Corporate Express have been included since its acquisition in July 2008.
(4)Results of operations for this period reflect a $38.0 million ($24.3 million, net of taxes) charge related to the settlement of California wage and hour class action litigation.
(5)Results of operations for this period reflect a $33.3 million reduction in income taxes related to the favorable resolution of certain foreign and domestic tax matters and a $10.8 million ($8.6 million, net of taxes) charge to correct the measurement dates used to calculate prior years' stock-based compensation. A-1
APPENDIX B
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Our fiscal year is the 52 or 53 weeks ending on the Saturday closest to January 31. Fiscal 2009 ("2009") consisted of the 52 weeks ended January 30, 2010, fiscal year 2008 ("2008") consisted of the 52 weeks ended January 31, 2009 and fiscal year 2007 ("2007") consisted of the 52 weeks ended February 2, 2008.
Acquisition of Corporate Express
In July 2008, we acquired Corporate Express N.V. ("Corporate Express"), a Dutch office products distributor with operations in North America, Europe and Australia, through a tender offer for all of its outstanding capital stock.
At the time the tender offer was fully settled on July 23, 2008, we had acquired more than 99% of the outstanding capital stock of Corporate Express. We have worked diligently to acquire the remaining capital stock of Corporate Express by means of a compulsory judicial "squeeze out" procedure in accordance with the Dutch Civil Code. We, along with the other parties to the "squeeze out" procedure, have submitted our respective arguments to the Dutch court and are awaiting a decision. While we do not know the exact date that the Dutch court will render a judgment, we anticipate that a judgment will be rendered prior to the end of the first quarter of 2010. There is, however, no guarantee that the court will render a judgment before such time.
In July 2008, we also acquired, and subsequently paid off, all of the outstanding 8.25% Senior Subordinated Notes due July 1, 2014 and all of the outstanding 7.875% Senior Subordinated Notes due March 1, 2015 of Corporate Express U.S. Finance Inc., a wholly owned subsidiary of Corporate Express. The aggregate cash purchase price for the capital stock of Corporate Express and for the repayment of most of Corporate Express' debt was 2.8 billion Euros (approximately $4.4 billion, net of cash acquired).
The operating results of Corporate Express have been included in our consolidated financial statements since July 2, 2008, the date we declared the terms of the tender offer unconditional. The Corporate Express results are reported in our North American Delivery and International Operations for segment reporting.
In connection with this acquisition, we allocated assets of $3.48 billion, $3.47 billion and $284 million to the North American Delivery, International Operations and North American Retail segments, respectively. Included in total assets were goodwill and intangible assets totaling $3.55 billion, of which $1.71 billion, $1.55 billion and $284 million were allocated to the North American Delivery, International Operations and North American Retail segments, respectively.
Results of Operations
We have provided below an overview of our operating results as well as a summary of our consolidated performance and details of our segment performance. Net income is presented in our Consolidated Performance, in accordance with accounting principles generally accepted in the United States ("US GAAP") and as adjusted for certain items as noted in the reconciliation tables below. Management uses adjusted net income, among other standards, to measure operating performance. We have added this information because we believe it helps in understanding the results of our operations on a comparative basis. This adjusted information supplements, and is not intended to represent, a measure of performance in accordance with disclosures required by US GAAP.
Also, in order to enhance comparability between our 2008 and 2007 results, certain operational measures are accompanied by a presentation of such measure after removing the impact of the Corporate Express acquisition. Management used such adjusted operational measures in the initial post acquisition period to evaluate our pre-acquisition operating results against prior year results and our operating plan. As previously announced in the first quarter of 2009, because of the progress of the integration of the two businesses and the difficulty in accurately isolating the impact of Corporate Express operations on our business, we have not provided detailed financial information or any related discussion of our business after removing the impact of Corporate Express when comparing the 2009 and 2008 results.
B-1
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Overview
Major contributors to our 2009 results, as compared to the results for 2008, are reviewed in detail in the Consolidated Performance and Segment Performance discussions and are summarized below:
•On a consolidated basis, we generated $24.3 billion in sales, with sales growth of 5.2%, primarily due to the inclusion of non-comparable sales for Corporate Express.
•North American Delivery's business unit income rate decreased to 8.2% from 9.0% primarily due to the inclusion of the full year results of Corporate Express, whose business unit income rate was lower than our pre-existing business.
•North American Retail's comparable store sales declined 2% driven by lower average order size partially offset by positive customer traffic. North America Retail's business unit income rate increased to 8.3% from 8.1% driven by expense improvements.
•International Operations' business unit income rate decreased to 2.3% from 3.3%, reflecting losses in China and in our European printing systems businesses.
•We now operate 2,243 stores worldwide, with a net addition of 25 stores in 2009.
•Operating cash flow increased to $2.08 billion from $1.69 billion.
While maintaining our focus on expense control, we are also continuing to invest in strategic initiatives to drive our long-term success, including:
•Cross-channel initiatives to encourage customers to spend more overall by shopping both our delivery and retail channels;
•"Share of wallet" initiatives to sell a broader array of non-core office products to our customers, including technology products and services, facility and break room supplies, copy and print services and promotional products; and
•Continued differentiation through the expansion of our own brand product line.
Our commitment to customer service supports each of these strategic initiatives and is a key component of our long-term success. For our customer service programs, our North American and European delivery businesses are focused on the "Perfect Order" program to improve product availability, ensure accuracy of orders, improve warehouse performance and productivity of our delivery fleet, and reduce product returns, resulting in fewer trips per order and higher customer satisfaction and retention. In our North American Retail business, our selling models are designed to train associates to provide solutions for small business customers and drive attachment selling, while also rewarding store associates who provide great customer service.
Outlook
Our expectations for 2010 assume a gradual economic recovery extending throughout the year. For the first quarter of 2010, we expect sales to increase in the mid single-digits compared to the same period of 2009 and for the full year 2010, we expect total company sales to increase in the low single-digits compared to full year 2009. We expect to achieve diluted earnings per share, on a GAAP basis and an adjusted diluted earnings per share for the first quarter and full year 2010 as follows:
B-2
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
We expect to incur the following expenses during the first quarter and full year 2010:
As with all forward looking statements made in this Annual Report on Form 10-K, we do not intend to publicly update any of the forward looking statements above.
Consolidated Performance:
2009 Compared with 2008
Net income attributed to Staples, Inc. for 2009 was $738.7 million or $1.02 per diluted share compared to $805.3 million or $1.13 per diluted share for 2008, which includes the results of the Corporate Express business acquired on July 2, 2008. Our results for 2009 and 2008 include integration and restructuring costs and a settlement for wage and hour class action lawsuits in 2009. A reconciliation of net income adjusted to remove these items, net of taxes, is shown below (amounts in thousands, except per share data):
(1)The tax effect of all adjustments is based on our effective tax rate, 34.5%.
(2)See Note C to the Notes to the Consolidated Financial Statements.
(3)See Note H to the Notes to the Consolidated Financial Statements.
Our 2009 results reflect our continued focus on our strategy of driving profitable sales growth, improving profit margins and increasing asset productivity. We continue to work to deliver on our "Easy" brand promise to make buying office products easy for our customers in order to differentiate us from our competitors. Our commitment to customer service, customer acquisition and retention efforts, reducing expenses, focused integration of Corporate Express and managing working capital and capital spending were key contributors to sustaining our performance, despite the negative impact of a weakened economy on our customers and our sales growth.
Sales: Sales for 2009 were $24.3 billion, an increase of 5.2% from 2008. Our sales growth is mainly attributed to non-comparable sales from our acquisition of Corporate Express. This sales growth was partially offset by lower sales to existing customers in our delivery businesses and, to a much lesser extent, a decrease in comparable store sales in our retail businesses on lower average order size and the negative impact of foreign exchange rates of $80.4 million.
Gross Profit: Gross profit as a percentage of sales was 26.7% for 2009 compared to 27.1% for 2008. The decrease in gross profit rate primarily reflects the inclusion of the full year results of Corporate Express, whose gross profit rate was lower than our pre-existing businesses and, to a lesser extent, an unfavorable product mix as customers purchased fewer discretionary products with higher margins, partially offset by increased buying synergies.
Selling, General and Administrative Expenses: Selling, general and administrative expenses as a percentage of sales for 2009 were 20.2% compared to 20.1% for 2008. This increase was primarily driven by an increase in incentive
B-3
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
compensation and, to a lesser extent, the settlement of several retail wage and hour class action lawsuits. This increase was partially offset by the inclusion of the full year results of Corporate Express, whose selling, general and administrative expense rate was lower than our pre-existing businesses and, to a lesser extent, reduced marketing expense.
Integration and Restructuring Costs: Integration and restructuring costs represent the costs associated with the integration of the acquired Corporate Express business with our pre-existing business and the consolidation of certain operations of the combined company. Integration and restructuring costs were $84.2 million for 2009 and $173.5 million for 2008. Integration and restructuring costs for 2009 included $46.1 million of consulting and other costs, a $30.5 million charge for severance and retention, and a $7.6 million charge for facility closures and other asset write-downs. Integration and restructuring costs for 2008 include a $123.8 million charge related to the write-down of indefinite lived intangible tradenames associated with our European catalog business. The tradename write-down was the result of our decision to move toward one global brand with the acquisition of Corporate Express, eliminating, over time, the legacy brands used in our European catalog business. Integration and restructuring costs for 2008 also include a $26.3 million charge related to the write-down of software and facilities whose use was expected to be limited as a result of the acquisition and $23.4 million of consulting and other costs.
Amortization of Intangibles: Amortization of intangibles was $100.1 million for 2009 compared to $70.3 million for 2008. Amortization expense reflects the amortization of certain tradenames, customer relationships and non-competition agreements. Amortization expense relating to intangibles resulting from our acquisition of Corporate Express was $69.1 million for 2009 compared to $50.8 million for 2008.
Interest Income: Interest income decreased to $6.1 million for 2009 from $28.5 million for 2008. The decrease in interest income for 2009 was the result of a reduction in interest rates and our average cash balance, resulting from the use of cash to acquire Corporate Express.
Interest Expense: Interest expense increased to $237.0 million for 2009 from $149.8 million for 2008. The increase in interest expense for 2009 was primarily due to borrowings under our January 2014 Notes and our April 2011 Notes which was partially offset by decreases in interest expense associated with our commercial paper program, our Revolving Credit Facility and our 2008 Agreement (each as defined in "Sources of Liquidity") relating to our acquisition of Corporate Express. We use interest rate swap agreements to convert a portion of our fixed rate debt obligations into variable rate obligations and a portion of our variable rate obligations into fixed rate obligations. Excluding the impact of our interest rate swap agreements, interest expense would have been $245.2 million for 2009 compared to $152.1 million for 2008.
Miscellaneous Income (Expense): Miscellaneous income was $4.5 million for 2009 compared to miscellaneous expense of $7.6 million for 2008. Miscellaneous income (expense) primarily reflects foreign exchange gains and losses recorded in the respective periods.
Income Taxes: Our effective tax rate was 34.5% for 2009 and 2008. A reconciliation of the federal statutory tax rate to our effective tax rate on historical net income was as follows:
The effective tax rate in any year is impacted by the geographic mix of earnings. Income taxes have not been provided on certain undistributed earnings of foreign subsidiaries of approximately $602.7 million, net of the noncontrolling interest, because such earnings are considered to be indefinitely reinvested in the business. The
B-4
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
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.
2008 Compared with 2007
Net income attributed to Staples, Inc. for 2008 was $805.3 million or $1.13 per diluted share compared to $995.7 million or $1.38 per diluted share for 2007. Our results for 2008 included the results of the newly acquired Corporate Express business since the acquisition on July 2, 2008 and related integration and restructuring costs. Our results for 2007 included a settlement related to California wage and hour class action litigation. A reconciliation of net income adjusted to remove these items, net of taxes, is shown below (amounts in thousands, except per share data).
(1)The tax effect of all adjustments is based on our effective tax rate, 34.5%.
(2)See Note C to the Notes to the Consolidated Financial Statements.
(3)See Note H to the Notes to the Consolidated Financial Statements.
Sales: Sales for 2008 were $23.1 billion, an increase of 19.2% from 2007 sales. Our sales growth for 2008 reflected sales of $4.2 billion from the Corporate Express business. Excluding the sales from Corporate Express, sales decreased 2.7% for 2008. The 2.7% decline in sales in 2008 was substantially driven by a decrease in comparable store sales in our retail businesses, partially offset by sales from new stores. In 2008, foreign exchange rates did not have a material impact on sales.
Gross Profit: Gross profit as a percentage of sales was 27.1% for 2008 and 28.7% for 2007. The gross profit rate for 2008 was negatively impacted by 1.5% due to the inclusion of the results of Corporate Express, whose gross profit rate is lower than our pre-existing businesses. The remaining slight decrease in gross profit rate for 2008 was the result of deleverage in fixed occupancy costs on a decrease in comparable store sales offset by improved product margins and, to a lesser extent, supply chain improvements.
Selling, General and Administrative Expenses: Selling, general and administrative expenses were 20.1% of sales for 2008 and 20.6% for 2007. Selling, general and administrative expenses as a percentage of sales for 2008 included a 0.9% improvement related to the inclusion of the results of Corporate Express, whose selling, general and administrative expense rate was lower than our pre-existing businesses. The net increase in selling, general and administrative expenses for 2008 from 2007, excluding the improvement from Corporate Express, primarily reflected deleverage in labor, partially offset by reduced marketing expenses and, to a lesser extent, the $38.0 million charge related to the California wage and hour class action lawsuits included in 2007. These results continued to reflect our ongoing focus on expense control in a challenging economic environment.
Integration and Restructuring Costs: Integration and restructuring costs were $173.5 million for 2008. Included in integration and restructuring costs was a $123.8 million charge related to the write-down of indefinite lived intangible tradenames associated with our European catalog business, a $26.3 million charge related to the write-down of software and facilities whose use was expected to be limited as a result of the acquisition and $23.4 million of consulting and other costs.
B-5
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Amortization of Intangibles: Amortization of intangibles was $70.3 million in 2008 and $15.7 million in 2007, reflecting the amortization of certain tradenames, customer relationships and noncompetition agreements. Amortization expense relating to the intangibles resulting from our acquisition of Corporate Express for 2008 was $50.8 million.
Interest Income: Interest income decreased to $28.5 million in 2008 from $46.7 million in 2007. The decrease in interest income for 2008 was primarily due to a decrease in our average cash and short-term investment portfolio resulting from our acquisition of Corporate Express, combined with a decrease in interest rates.
Interest Expense: Interest expense was $149.8 million in 2008 compared to $38.3 million in 2007. The increase in interest expense for 2008 was primarily due to borrowings under our commercial paper program, our 2008 Agreement, our Revolving Credit Facility and the 2008 Term Credit Facility (each as defined in "Sources of Liquidity") relating to our July 2008 acquisition of Corporate Express, slightly offset by the impact of the repayment of our $200.0 million 7.125% notes in August 2007. Excluding the impact of our interest rate swap agreements, interest expense would have been $152.1 million for 2008 and $36.0 million for 2007.
Miscellaneous Expense: Miscellaneous expense was $7.6 million for 2008 and $2.2 million for 2007. These amounts primarily reflected foreign exchange gains and losses recorded in the respective periods.
Income Taxes: Our effective tax rate was 34.5% for 2008 and 36.0% for 2007. The decrease in the effective tax rate from 2007 to 2008 was due to geographical changes in the mix of earnings. A reconciliation of the federal statutory rate to our effective tax rate on historical net income is as follows:
Segment Performance
We have three reportable segments: North American Delivery, North American Retail and International Operations. Staples' North American Delivery segment consists of the U.S. and Canadian business units that sell and deliver office products and services directly to customers, and includes Contract (including Corporate Express), Staples Business Delivery and Quill. The North American Retail segment consists of the U.S. and Canadian business units that operate office products stores. The International Operations segment consists of business units (including Corporate Express) that sell and deliver office products and services directly to customers and businesses and operate office products stores in 23 countries in Europe, Asia, Australia and South America. Additional geographic information about our sales is provided in Note N in the Notes to the Consolidated Financial Statements.
In connection with our acquisition of Corporate Express, we allocated assets of $3.48 billion, $3.47 billion and $284 million to the North American Delivery, International Operations and North American Retail segments, respectively. Included in total assets were goodwill and intangible assets totaling $3.55 billion, of which $1.71 billion, $1.55 billion and $284 million were allocated to the North American Delivery, International Operations and North American Retail segments, respectively.
The following tables provide a summary of our sales and business unit income by reportable segment and store activity for the last three fiscal years. Business unit income excludes integration and restructuring costs, stock-based compensation, interest and other expense, non-recurring items and the impact of changes in accounting principles (see
B-6
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
reconciliation of total segment income to consolidated income before income taxes and minority interest in Note N in the Notes to the Consolidated Financial Statements):
North American Delivery
2009 Compared with 2008
Sales increased 8.0% for 2009. This increase was the result of non-comparable sales from our acquisition of Corporate Express and, to a much lesser extent, the impact of our customer acquisition and retention efforts, which was partially offset by lower spend from existing customers.
Business unit income as a percentage of sales decreased to 8.2% in 2009 from 9.0% in 2008. The decrease in business unit income as a percentage of sales for 2009 was primarily due to the inclusion of the full year results of Corporate Express, whose business unit income rate was lower than our pre-existing business. The decrease also reflects an unfavorable product mix as customers purchased fewer discretionary products with higher margins and, to a lesser extent, increased incentive compensation. These items were partially offset by buying synergies and, to a lesser extent, reduced marketing expense and improvements in supply chain productivity.
B-7
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
2008 Compared with 2007
Sales increased 35.0% in 2008. Excluding non-comparable sales from Corporate Express of $2.3 billion, sales would have decreased 0.3% for 2008. The slight decline in sales in 2008 reflected lower sales to existing customers substantially offset by the impact of our customer acquisition and retention efforts.
Business unit income as a percentage of sales decreased to 9.0% in 2008 from 10.8% in 2007. Business unit income as a percentage of sales for 2008 was reduced by 2.1% due to the inclusion of results of Corporate Express, whose business unit income rate is lower than our pre-existing business. Excluding the impact of Corporate Express for 2008, the increase in business unit income primarily reflected reduced marketing expense and, to a lesser extent, gross profit improvements driven equally by supply chain and product margin improvements.
North American Retail
2009 Compared with 2008
Sales decreased 1.3% for 2009. This decrease was primarily driven by a 2% decrease in comparable store sales, reflecting lower average order size. The decrease also reflects the negative impact of foreign exchange rates of $60.3 million, partially offset by slightly positive customer traffic and non-comparable sales for new stores opened in the past twelve months. Our comparable store sales decrease for 2009 reflects a significant decline in durable products, partially offset by a slight increase in consumables. The decline in durables was driven by business machines and furniture partially offset by positive performance in computers. The slight increase in consumables reflects positive performance in ink and toner and technology services substantially offset by core office supplies.
Business unit income as a percentage of sales increased to 8.3% for 2009 from 8.1% for 2008. The slight increase in 2009 primarily reflects expense improvements in marketing and, to a lesser extent, supply chain improvements and our focus on expense control partially offset by an increase in incentive compensation and, to a lesser extent, deleverage in fixed occupancy costs.
2008 Compared with 2007
Sales decreased 5.3% in 2008. The decrease in sales for 2008 primarily reflected a 9% decrease in comparable stores sales and the negative impact of foreign exchange rates of $55.5 million, partially offset by non-comparable sales for new stores opened in the past twelve months. Our comparable store sales decrease in 2008 reflected a significant decline in the performance of non-consumable products, including business machines, furniture and computer peripherals, followed by a modest decline in consumables, which was driven by core office supplies. Our decrease in consumable sales in 2008 was slightly offset by positive performance in ink and toner.
Business unit income as a percentage of sales decreased to 8.1% in 2008 from 9.5% in 2007. The decrease for 2008 primarily reflected deleverage in fixed occupancy costs resulting from a decrease in comparable store sales and, to a lesser extent, deleverage in labor as we focused on maintaining our customer service standards. These negative factors were partially offset by increased product margin rates and to a lesser extent, in order of magnitude, reduced marketing spend, supply chain improvements and our focus on expense control.
International Operations
2009 Compared with 2008
Sales increased 13.0% for 2009. This increase was the result of non-comparable sales from our acquisition of Corporate Express partially offset by lower sales in our Europe delivery businesses and in China, and, to a lesser extent, a 9% decrease in comparable store sales in Europe and the negative impact of foreign exchange rates of $24 million.
Business unit income as a percentage of sales decreased to 2.3% for 2009 from 3.3% for 2008. The decrease for 2009 reflects deleverage of fixed expenses on lower sales volume in our pre-existing businesses, increased losses in China and losses in our printing systems business. These decreases were slightly offset by buying synergies as well as the inclusion of Corporate Express whose business unit income was higher than our pre-existing businesses and, to a lesser extent, improvements in marketing expense.
B-8
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
2008 Compared with 2007
Sales increased 70.4% in 2008. Excluding non-comparable sales from Corporate Express of $1.9 billion for 2008, sales would have increased 0.8% in 2008. The increase for 2008 was the result of, in order of magnitude, non-comparable sales for new stores opened in the past twelve months, organic growth from our delivery businesses, and the positive impact of foreign exchange rates of $26.6 million. These three factors were substantially offset by a 5% decrease in comparable store sales in Europe.
Business unit income as a percentage of sales decreased to 3.3% in 2008 from 3.6% in 2007. The decrease for 2008 benefited by 0.1% due to the inclusion of the results of Corporate Express, whose business unit income was higher than our pre-existing business. The decrease excluding the impact of Corporate Express primarily reflected increased losses in China substantially offset by improvement in product margin rates due to product mix, better buying and selling a broader assortment of our own brand products in our European businesses and, to a lesser extent, supply chain improvements and our focus on expense control.
Stock-Based Compensation
Stock-based compensation includes expenses associated with the issuance of restricted shares, stock options and performance share awards and our employee stock purchase plans.
2009 Compared with 2008
Stock-based compensation decreased to $174.7 million in 2009 from $180.7 million in 2008. This decrease was primarily related to changes in the mix of equity awards granted, with the most significant change related to the Staples' Employees' 401(k) Savings Plan (the "401(k) Plan"). Prior to fiscal 2009, our contributions to the 401(k) Plan were made in the form of common stock, beginning in 2009, these contributions are made in cash, and therefore, are now classified within business unit income.
2008 Compared with 2007
Stock-based compensation increased to $180.7 million in 2008 from $173.3 million in 2007. This increase was primarily related to changes in the mix of equity awards granted.
Critical Accounting Policies and Significant Estimates
Our financial statements are based on the application of significant accounting policies, many of which require management to make significant estimates and assumptions (see Note A in the Notes to the Consolidated Financial Statements). We believe that the following are some of the more critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations.
Inventory: We record inventory at the lower of weighted-average cost or market value. We reserve for obsolete, overstocked and inactive inventory based on the difference between the weighted-average cost of the inventory and the estimated market value using assumptions of future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional reserves may be required.
Purchase and Advertising Rebates: We earn rebates from our vendors, which are based on various quantitative contract terms that can be complex and subject to interpretation. Amounts expected to be received from vendors relating to the purchase of merchandise inventories and reimbursement of incremental costs, such as advertising, are recognized as a reduction of inventory cost and realized as part of cost of goods sold as the merchandise is sold. Several controls are in place, including direct confirmation with vendors, which we believe allows us to ensure that these amounts are recorded in accordance with the terms of the contracts.
Impairment of Long-Lived Assets: We review our long-lived assets for impairment when indicators of impairment are present and the undiscounted cash flow estimated to be generated by those assets is less than the assets' carrying amount. Our policy is to evaluate long-lived assets for impairment at a store level for retail operations and an operating
B-9
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
unit level for our other operations. If actual market conditions are less favorable than management's projections, future write-offs may be necessary.
Impairment of Goodwill and Indefinite Lived Intangible Assets: We review goodwill and other intangible assets that have indefinite lives for impairment annually and when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. We determine fair value using discounted cash flow analysis, which requires us to make certain assumptions and estimates regarding industry economic factors and future profitability of acquired businesses. It is our policy to allocate goodwill and conduct impairment testing at a business unit level based on our most current business plans, which reflect changes we anticipate in the economy and the industry. The key assumptions used in the discounted cash flow approach include:
•The reporting unit's five year projections of financial results, except in the emerging markets which is ten years, which were based on our long-range plans at constant foreign exchange rates. The ten year projections are based on management's expectations of the development time for emerging markets. Sales growth and operating profit rates represent estimates based on our current and projected sales mix, profit improvement opportunities and market conditions.
•The projected terminal value, which is used to determine the total present value of projected cash flows beyond the last period in the discounted cash flow analysis. This value is based on several factors, including the maturity of the business, market opportunity, local economic factors and future growth plans.
•The discount rate is set using a weighted average cost of capital method that considers market and industry data as well as our specific risk factors.
Based on our calculations this year, the fair value of all reporting units adequately exceeded their respective carrying values. The underlying assumptions used in the fair value calculations, as discussed above, represent our best estimate. If actual results are not consistent with our assumptions and judgments, we could be exposed to a material impairment charge.
Income Taxes: The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which may result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reported date. For those tax positions for which it is more likely than not that a tax benefit will be sustained, we record the largest amount of tax benefit likely of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. Interest is accrued, where applicable. We recognize net tax-related interest and penalties in income tax expense. If we do not believe that it is more likely than not that a tax benefit will be sustained, no tax benefit is recognized. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities due to closure of income tax examinations, new regulatory or judicial pronouncements, or other relevant events. As a result, our effective tax rate may fluctuate significantly on a quarterly and annual basis.
We record deferred tax assets for timing differences related to tax payments. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We have considered estimated future taxable income and ongoing tax planning strategies in assessing the amount needed for the valuation allowance. If actual results differ unfavorably from those estimates used, we may not be able to realize all or part of our net deferred tax assets and additional valuation allowances may be required.
New Accounting Pronouncements
In June 2009, FASB issued Statement of Financial Accounting Standards ("SFAS") No. 168, "The FASB Accounting Standards Codification ("ASC") and the Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB Statement No. 162" (the "Codification") (ASC Topic 105). The Codification reorganized existing U.S. accounting and reporting standards issued by the FASB and other related private sector standard setters into a single source of authoritative accounting principles arranged by topic. The Codification supersedes all existing U.S. accounting standards; all other accounting literature not included in the Codification (other than SEC guidance for publicly-traded companies) is considered non-authoritative. The Codification was effective on a prospective basis for interim and annual reporting
B-10
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
periods ending after September 15, 2009. As a result of the adoption of this pronouncement, this Annual Report on Form 10-K for the year ending January 30, 2010 and all subsequent public filings will reference the Codification as the sole source of authoritative literature. Accordingly, all accounting references have been updated and SFAS references have been replaced with ASC references if the SFAS has been adopted into the Codification. The adoption of the Codification had no impact on our consolidated financial condition, results of operations or cash flows.
In December 2008, an accounting pronouncement was issued relating to employers' disclosures about post-retirement benefit plan assets which requires a company, as a plan sponsor, to provide disclosures about plan assets, including categories of plan assets, the nature of concentrations of risk and disclosures about fair value measurements of plan assets (ASC Topic 715). This pronouncement is effective for financial statements issued for fiscal years ending after December 15, 2009. We adopted this pronouncement as of January 30, 2010. As this pronouncement relates specifically to disclosures, the adoption had no impact on our consolidated financial condition, results of operations or cash flows.
On February 1, 2009, we adopted the accounting pronouncement related to fair value measurement of our nonfinancial assets and liabilities (ASC Topic 820). On February 3, 2008, we adopted the accounting pronouncement related to fair value measurement for our financial assets and liabilities. The adoption of these pronouncements had no impact on our consolidated financial condition, results of operations or cash flows.
On February 1, 2009, we adopted the revised accounting pronouncement relating to business combinations (ASC Topic 805), including assets acquired and liabilities assumed arising from contingencies. This pronouncement requires the use of the acquisition method of accounting, defines the acquirer, establishes the acquisition date, and applies to all transactions and other events in which one entity obtains control over one or more other businesses. This pronouncement also amends the accounting and disclosure requirements for assets and liabilities in a business combination that arise from contingencies. In addition, with the adoption of this pronouncement, changes to valuation allowances for deferred income tax assets and adjustments to unrecognized tax benefits generally are to be recognized as adjustments to income tax expense rather than goodwill. This adoption had no impact on our consolidated financial condition, results of operations or cash flows. Furthermore, we do not expect this pronouncement to have a material impact on our future income tax expense related to adjustments for changes in valuation allowances and tax reserves for prior business combinations.
On February 1, 2009, we adopted the accounting pronouncement on noncontrolling interests in consolidated financial statements (ASC Topic 810). This pronouncement requires that noncontrolling (or minority) interests in subsidiaries be reported in the equity section of a company's balance sheet, rather than in a mezzanine section of the balance sheet between liabilities and equity and changes the manner in which the net income of the subsidiary is reported and disclosed in the controlling company's income statement and establishes guidelines for accounting for changes in ownership percentages and for deconsolidation. This pronouncement required retrospective application to all prior periods presented. The adoption of this pronouncement impacted our presentation of minority interests on the consolidated balance sheets, statements of income and statements of stockholders' equity but had no impact on our consolidated financial condition, results of operations or cash flows.
On February 1, 2009, we adopted the accounting pronouncement relating to disclosures about derivative instruments and hedging activities, which requires disclosure regarding how and why an entity uses derivatives, how these instruments and the related hedged items are accounted for and how derivative instruments and related hedged items affect the entity's financial position, results of operations and cash flows (ASC Topic 815). As this pronouncement relates specifically to disclosures, the adoption of this pronouncement had no impact on our consolidated financial condition, results of operations or cash flows.
In June 2009, an accounting pronouncement was issued relating to information a company needs to provide regarding the sales of securitized financial assets and similar transactions, particularly if the company has continuing exposure to the risks related to transferred financial assets (ASC Topic 860). This pronouncement eliminates the concept of a "qualifying special-purpose entity," changes the requirements for derecognizing financial assets and requires additional disclosures. This pronouncement is effective for fiscal years beginning after November 15, 2009. We will adopt this pronouncement as of January 31, 2010. We do not expect this pronouncement will have any impact on our consolidated financial condition, results of operations or cash flows.
B-11
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
In June 2009, a pronouncement was issued that clarified how a company determines whether an entity, that is insufficiently capitalized or not controlled through voting (or similar rights), should be capitalized (ASC Topic 810). This determination of whether a company is required to consolidate an entity is based on, among other things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance. This pronouncement requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. This pronouncement also requires additional disclosures about a company's involvement in variable interest entities and any significant changes in risk exposure due to that involvement. This pronouncement is effective for fiscal years beginning after November 15, 2009. We will adopt this pronouncement as of January 31, 2010. We do not expect this pronouncement will have any impact on our consolidated financial condition, results of operations or cash flows.
On August 1, 2009, we adopted prospectively the accounting pronouncement regarding the general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before the financial statements are issued (ASC Topic 855). The implementation of this standard did not have any impact on our consolidated financial statements. Subsequent events through March 1, 2010 have been evaluated for disclosure and recognition.
In October 2009, a pronouncement was issued that amended the rules on revenue recognition for multiple-deliverable revenue arrangements. This amendment eliminated the residual method of allocation for multiple-deliverable revenue arrangements, and requires that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method (ASC Topic 605). This pronouncement establishes a selling price hierarchy for determining the selling price of a deliverable, which includes: (1) vendor-specific objective evidence if available, (2) third-party evidence if vendor-specific objective evidence is not available, and (3) estimated selling price if neither vendor-specific nor third-party evidence is available. In addition, this pronouncement expands the disclosure requirements related to a vendor's multiple-deliverable revenue arrangements. This pronouncement is effective for revenue arrangements entered into or materially modified in fiscal years beginning after June 15, 2010. We will adopt this pronouncement as of January 30, 2011. We are currently evaluating the potential impact, if any, of the adoption on our consolidated financial condition, results of operations and cash flows.
Liquidity and Capital Resources
Cash Flows
2009 Compared with 2008
Cash provided by operations was $2.08 billion in 2009 and $1.69 billion in 2008. The increase in operating cash flow from 2008 to 2009 is primarily due to improvements in working capital including reductions in income tax payments resulting from the use of net operating losses associated with the Corporate Express acquisition, partially offset by a reduction in net income adjusted for non-cash expenses.
Cash used in investing activities was $313.2 million in 2009 compared to $4.73 billion in 2008. The decrease from 2009 to 2008 is primarily due to the July 2008 acquisition of Corporate Express for 2.8 billion Euro (approximately $4.4 billion, net of cash acquired).
Cash used in financing activities was $1.04 billion in 2009 compared to cash provided by financing activities of $2.51 billion in 2008. The change in cash from financing activities from 2008 to 2009 is primarily related to the repayment or refinancing of the debt we entered into or assumed in connection with the Corporate Express acquisition. In 2009, our financing activities primarily consisted of repayments made on our Commercial Paper Program, as defined below, and the termination of our 2008 Agreement, as defined below, offset by the proceeds from our $500 million aggregate principal notes due April 1, 2011 (the "April 2011 Notes"). In 2008, our financing cash flows primarily consisted of the proceeds from the financing of our acquisition of Corporate Express.
2008 Compared with 2007
Cash provided by operations was $1.69 billion in 2008 and $1.36 billion in 2007. The increase in operating cash flow from 2007 to 2008 is primarily due to an increase in net income adjusted for non-cash expenses, combined with an improvement in working capital.
B-12
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Cash used in investing activities was $4.73 billion in 2008 and $217.7 million in 2007. The change from 2007 to 2008 is primarily due to the acquisition of Corporate Express.
Cash provided by financing activities was $2.51 billion in 2008 and cash used in financing activities was $966.2 million in 2007. The change in cash from financing activities from 2007 to 2008 is primarily related to the proceeds received in 2008 from the financing of our acquisition of Corporate Express combined with the repayment of our $200 million 7.125% notes due in August 2007. In addition, under our share repurchase program, we repurchased 2.8 million shares for $65.0 million in 2008 compared to 31.6 million shares for $750.0 million in 2007. Beginning in the first quarter of 2008, we suspended our share repurchase program in connection with the financing of our acquisition of Corporate Express, and as a result, there were no further repurchases of the our common stock under this share repurchase program. We have $1.01 billion authorization remaining under the share repurchase program.
Sources of Liquidity
We utilize cash generated from operations, short-term investments and our Revolving Credit Facility, as defined below, to cover seasonal fluctuations in cash flows and to support our various growth initiatives. At January 30, 2010, we had $2.60 billion in total cash and funds available through credit agreements, which consisted of $1.18 billion of available credit and $1.42 billion of cash and cash equivalents.
A summary, as of January 30, 2010, of balances available under our credit agreements and debt outstanding is presented below (amounts in thousands):
(1)The above table excludes scheduled interest payments on fixed rate debt obligations that are hedged with derivative instruments intended to convert the fixed rate debt agreements into variable interest rate obligations because the amount of future interest payments due on these obligations is not currently determinable (see Notes E and F in the Notes to the Consolidated Financial Statements). As a result, only the interest expense associated with the January 2014 Notes and April 2011 Notes is included in the table above.
(2)At January 30, 2010, the obligations under our Commercial Paper Program were backstopped by, and utilize borrowing capacity available under, our Revolving Credit Facility.
(3)Many of our purchase commitments may be canceled by us without advance notice or payment, and we have excluded such commitments, along with intercompany commitments. Contracts that may be terminated by us without cause or penalty, but that require advance notice for termination are, valued on the basis of an estimate of what we would owe under the contract upon providing notice of termination.
In September 2008, Barclays Bank PLC agreed to assume the obligations of Lehman Brothers Inc. and their affiliates under our 2008 Agreement, our Commercial Paper Program, our $400 million term credit facility and our Revolving Credit Facility, each as described below.
B-13
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
2008 Agreement
On April 1, 2008, we entered into a $3.0 billion credit agreement (the "2008 Agreement") with Lehman Commercial Paper Inc., as administrative agent, Bank of America, N.A. and HSBC Bank USA, National Association, as co-syndication agents, and Lehman Brothers Inc., as lead arranger and bookrunner, for a commitment period beginning on July 9, 2008 and continuing until 364 days thereafter, unless earlier terminated pursuant to the terms of the 2008 Agreement. The 2008 Agreement provided financing solely (1) for our acquisition of all of the outstanding capital stock of Corporate Express, including related transaction fees, costs and expenses, and (2) backstopped our Commercial Paper Program. Amounts borrowed under the 2008 Agreement could be borrowed, repaid and reborrowed from time to time. Originally, the aggregate principal amount of the loans outstanding could not exceed the maximum borrowing amount of $3.0 billion.
Borrowings made pursuant to the 2008 Agreement bore interest at either (a) the base rate (the higher of the prime rate, as defined in the 2008 Agreement, or the federal funds rate plus 0.50%) plus an "applicable margin," defined as a percentage spread based on our credit rating or (b) the Eurocurrency rate plus a different "applicable margin," also defined as a percentage spread based on our credit rating. Our obligations under the 2008 Agreement were unconditionally guaranteed on an unsecured unsubordinated basis by the Guarantor Subsidiaries, as defined below. On July 1, 2008, we entered into the first amendment to the 2008 Agreement. The amendment was entered into to provide that certain events, including the establishment of the $400 million term credit facility, in which we repaid the entire balance on November 26, 2008, and maintaining certain obligations of Corporate Express after the acquisition, would not reduce the maximum commitment available under the 2008 Agreement. On September 12, 2008, we entered into the second amendment to the 2008 Agreement. The amendment provided us with the flexibility, within ten business days of the receipt of proceeds from other indebtedness, to use such proceeds to repay the Commercial Paper Program, as described below.
On December 29, 2008, we voluntarily terminated $250 million of our borrowing ability under the 2008 Agreement which reduced the total commitment from $3.0 billion to $2.75 billion. On January 15, 2009, we reduced the total commitment amount under the 2008 Agreement from $2.75 billion to $1.26 billion and again on March 27, 2009 from $1.26 billion to $761.0 million. These reductions were made pursuant to the mandatory commitment reduction provisions triggered by the receipt of proceeds from the offering of the January 2014 Notes and April 2011 Notes, each as described below. On May 26, 2009, as a result of entering the May 2009 Securitization Program, as described below, we voluntarily terminated the entire remaining commitment under the 2008 Agreement, thereby terminating the 2008 Agreement earlier than its July 9, 2009 expiration date.
April 2011 Notes
On March 27, 2009, we issued $500.0 million aggregate principal amount of notes (the "April 2011 Notes") due April 1, 2011, with a fixed interest rate of 7.75% payable semi-annually on April 1 and October 1 of each year commencing on October 1, 2009. The sale of the April 2011 Notes was made pursuant to the terms of an underwriting agreement, dated March 27, 2009, with Barclays Capital Inc., Banc of America Securities LLC and HSBC Securities (USA) Inc., as representatives of the several underwriters named in the underwriting agreement. We received net proceeds, after the underwriting discount and estimated fees and expenses, of $497.5 million. Our obligations under the April 2011 Notes are unconditionally guaranteed on an unsecured unsubordinated basis by Staples the Office Superstore, LLC, Staples the Office Superstore East Inc., Staples Contract and Commercial, Inc. and Staples the Office Superstore Limited Partnership (collectively the "Guarantor Subsidiaries"). The Guarantor Subsidiaries are wholly owned by Staples. At January 30, 2010, the fair value of the April 2011 Notes was approximately $538 million. The fair value of the April 2011 Notes is based on quoted market prices.
Revolving Credit Facility
On October 13, 2006, we entered into the Amended and Restated Revolving Credit Agreement with Bank of America N.A. and other lending institutions named therein (the "Revolving Credit Facility") which amended and restated the Revolving Credit Agreement dated as of December 14, 2004.
B-14
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
The Revolving Credit Facility provides for a maximum borrowing of $750.0 million which, upon approval of the lenders, we may increase to $1.0 billion, and expires on October 13, 2011. Borrowings made pursuant to the Revolving Credit Facility may be syndicated loans, competitive bid loans, or swing line loans, the combined sum of which may not exceed the maximum borrowing amount. Amounts borrowed under the Revolving Credit Facility may be borrowed, repaid and reborrowed from time to time until October 13, 2011. The borrowings under the Revolving Credit Facility are unconditionally guaranteed on an unsecured unsubordinated basis by the Guarantor Subsidiaries.
Borrowings made pursuant to the Revolving Credit Facility as syndicated loans will bear interest, payable quarterly or, if earlier, at the end of any interest period, at either (a) the base rate, described in the Revolving Credit Facility as the higher of the annual rate of the lead bank's prime rate or the federal funds rate plus 0.50%, or (b) the Eurocurrency rate (a publicly published rate) plus a percentage spread based on our credit rating and fixed charge coverage ratio. Borrowings made as competitive bid loans bear the competitive bid rate as specified in the applicable competitive bid. Swing line loans bear interest that is the lesser of the base rate or the swing line rate as quoted by the administrative agent under the terms of the Revolving Credit Facility. Under the Revolving Credit Facility, we agree to pay a facility fee, payable quarterly, at rates that range from 0.060% to 0.125% depending on our credit rating and fixed charge coverage ratio, and when applicable, a utilization fee.
On May 5, 2008, we entered into the first amendment (the "Amendment") to the Revolving Credit Facility. The Amendment was entered into in connection with the acquisition of Corporate Express and provided certain post-acquisition cure periods to allow us to cure defaults that could arise (i) as a result of change in control provisions contained in Corporate Express' outstanding debt obligations and (ii) under Corporate Express' and our outstanding debt obligations as a result of events or circumstances, such as litigation, liens or defaults, affecting Corporate Express. The Amendment did not alter the amount that may be borrowed under, or the terms of, the Revolving Credit Facility and confirmed our obligations to the lenders and administrative agent who are parties thereto. At January 30, 2010, under the Revolving Credit Facility, there were no borrowings outstanding, no open letters of credit outstanding and no commercial paper issued, resulting in $750.0 million in availability.
October 2012 Notes
On September 30, 2002, Staples issued $325.0 million principal amount of notes due October 1, 2012 (the "October 2012 Notes"), with a fixed interest rate of 7.375% payable semi-annually on April 1 and October 1 of each year commencing on April 1, 2003. Staples has entered into an interest rate swap agreement to turn the October 2012 Notes into variable rate obligations (see Note F). Our obligations under the October 2012 Notes are unconditionally guaranteed on an unsecured unsubordinated basis by the Guarantor Subsidiaries.
January 2014 Notes
On January 15, 2009, we issued $1.5 billion aggregate principal amount of notes (the "January 2014 Notes") due January 15, 2014, with a fixed interest rate of 9.75% payable semi-annually on January 15 and July 15 of each year commencing on July 15, 2009. The sale of the January 2014 Notes was made pursuant to the terms of an underwriting agreement dated January 12, 2009 with Barclays Capital Inc., Banc of America Securities LLC and HSBC Securities (USA) Inc., as representatives of the several underwriters named in the underwriting agreement. We received net proceeds, after the underwriting discount and fees and expenses, of $1.49 billion. Our obligations under the January 2014 Notes are unconditionally guaranteed on an unsecured unsubordinated basis by the Guarantor Subsidiaries. At January 30, 2010, the fair value of the January 2014 Notes was approximately $1.8 billion. The fair value of the January 2014 Notes is based on quoted market prices.
Commercial Paper Program
On June 9, 2008, we established a commercial paper program (the "Commercial Paper Program") on a private placement basis under which we may issue unsecured commercial paper notes (the "Notes") up to a maximum aggregate principal amount outstanding at any time of $3.0 billion. The 2008 Agreement prior to the voluntary termination in May 2009, served as a backstop to our Commercial Paper Program. On January 15, 2009, in connection with the issuance of the January 2014 Notes, availability under our Commercial Paper Program was reduced from $3.0 billion to $2.0 billion.
B-15
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
On March 26, 2009, in connection with the issuance of the April 2011 Notes, availability under our Commercial Paper Program was reduced further from $2.0 billion to $1.5 billion. As a result of the termination of the 2008 Agreement, availability under our Commercial Paper Program was reduced further from $1.5 billion to $750.0 million. The Commercial Paper Program is backstopped by our Revolving Credit Facility. The 2008 Agreement also, prior to the voluntary termination on July 2009, served as a backstop to our Commercial Paper Program.
Under our Commercial Paper Program, we may issue Notes from time to time, and the proceeds of the Notes will be used for general corporate purposes, including working capital, capital expenditures, acquisitions and share repurchases. Maturities of the Notes vary but may not exceed 397 days from the date of issue. The Notes bear such interest rates, if interest bearing, or will be sold at such discount from their face amounts, as agreed upon from time to time by the dealers under the Commercial Paper Program and us. The payments under the Commercial Paper Program are unconditionally guaranteed on an unsecured unsubordinated basis by the Guarantor Subsidiaries, as defined below. The Commercial Paper Program contains customary events of default with corresponding grace periods. As of January 30, 2010, no Notes were outstanding under our Commercial Paper Program.
May 2009 Securitization Program
On May 19, 2009, we entered into a $300.0 million accounts receivable securitization program (the "May 2009 Securitization Program") with several of our wholly owned subsidiaries and certain financial institutions. Under the terms of the May 2009 Securitization Program, our subsidiaries sell substantially all the customer receivables of our North American Delivery business to a wholly owned bankruptcy remote special purpose entity, Staples Receivables LLC. We retain servicing responsibility. The special purpose entity then transfers an interest in the receivables to the financial institutions. Borrowings outstanding under our May 2009 Securitization Program are included as a component of current liabilities in our consolidated balance sheet, while the accounts receivable securing these obligations are included as a component of net receivables in our consolidated balance sheet. At January 30, 2010, there were no borrowings outstanding under the May 2009 Securitization Program.
Other Financing Agreements
Securitization Programs: In connection with the acquisition of Corporate Express, the Company assumed the obligations under Corporate Express' U.S. Securitization Program and European Securitization Program (collectively the "Securitization Programs"). On March 3, 2009, the Company terminated and repaid all outstanding balances under the Securitization Programs.
Australian Credit Facilities: Corporate Express Australia Limited and its subsidiaries, which are approximately 59% owned by Corporate Express, are parties to credit facilities under which approximately $134.9 million was outstanding at January 30, 2010.
Other Lines of Credit: We had $134.8 million available under other various lines of credit, which had an outstanding balance of approximately $10.0 million at January 30, 2010, with no letters of credit issued under the facilities.
There were no instances of default during 2009 under any of our debt agreements.
We expect that our cash generated from operations, together with our current cash, funds available under our existing credit agreements and other alternative sources of financing, will be sufficient to fund our planned store openings and other operating cash needs for at least the next twelve months.
Uses of Capital
As a result of our financial position, in addition to investing in our existing businesses and pursuing strategic acquisitions, we also expect to continue to return capital to our shareholders through a cash dividend program. Depending on our credit metrics and our liquidity position, from time to time, we may repurchase our outstanding shares or our public notes through repurchase programs.
B-16
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
In 2009, we continued to make significant progress in refinancing and reducing the debt entered into as a result of the Corporate Express acquisition. We have reduced total debt by approximately $1.9 billion from the second quarter of 2008, when we acquired Corporate Express.
We currently plan to spend approximately $450 million on capital expenditures during 2010 primarily related to continued investments in information systems, the integration of our distribution networks in North America and Europe, new store openings and remodels of existing stores and growth initiatives. We expect to open approximately 50 new stores in North America, Europe and Asia during 2010.
While we have primarily grown organically, we may use capital to engage in strategic acquisitions or joint ventures in markets where we currently have a presence and in new geographic markets that could become significant to our business in future years. We do not expect to rely on acquisitions to achieve our targeted growth plans. We consider many types of acquisitions for their strategic and other benefits, such as our 2008 acquisition of Corporate Express. In the past, excluding the Corporate Express acquisition, we have focused on smaller acquisitions designed to align with our existing businesses to drive long-term growth. We expect to continue this strategy and target such acquisitions when opportunities are presented and fit within our financial structure.
In 2009, we changed our dividend policy from an annual dividend to quarterly dividends. We paid quarterly dividends of $0.0825 per share on April 10, 2009, July 10, 2009, October 15, 2009 and January 14, 2010, resulting in a total dividend payment for 2009 of $236.9 million. In 2008, we paid an annual cash dividend of $0.33 per share of common stock on April 17, 2008, resulting in a total dividend payment of $231.5 million. While it is our intention to continue to pay quarterly cash dividends for 2010 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.
Inflation and Seasonality
While neither inflation nor deflation has had, nor do we expect them to have, a material impact upon operating results, there can be no assurance that our business will not be affected by inflation or deflation in the future. We believe that our business is somewhat seasonal, with sales and profitability historically higher during the second half of our fiscal year due to the back to school, holiday and January back to business seasons.
B-17
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Quantitative and Qualitative Disclosures about Market Risks
We are exposed to market risk from changes in interest rates and foreign exchange rates. We have a risk management control process to monitor our interest rate and foreign exchange risks. The risk management process uses analytical techniques, including market value, sensitivity analysis and value at risk estimates.
As more fully described in the notes to the consolidated financial statements, we use interest rate swap agreements to modify fixed rate obligations to variable rate obligations, thereby adjusting the interest rates to current market rates and ensuring that the debt instruments are always reflected at fair value. While our variable rate debt obligations, approximately $542 million at January 30, 2010, expose us to the risk of rising interest rates, management does not believe that the potential exposure is material to our overall financial position or results of operations. Based on January 30, 2010 borrowing levels, a 1.0% increase or decrease in current market interest rates would have the effect of causing a $5.4 million additional pre-tax charge or credit to our statement of operations.
As more fully described in Note F in the Notes to the Consolidated Financial Statements, we are exposed to foreign exchange risks through subsidiaries or investments in Canada, Europe, Asia, Australia and South America. We have entered into a currency swap in Canadian dollars in order to hedge a portion of our foreign exchange risk related to our net investment in foreign subsidiaries. Any increase or decrease in the fair value of our currency exchange rate sensitive derivative instruments would be offset by a corresponding decrease or increase in the fair value of the hedged underlying asset.
We account for our interest rate and currency swap agreements using hedge accounting treatment as the derivatives have been determined to be highly effective in achieving offsetting changes in the fair values and cash flows of the hedged items. Under this method of accounting, at January 30, 2010, we have recorded a $33.5 million asset representing gross unrealized gains on two of our derivatives and a $1.4 million charge to equity representing gross unrealized losses on another derivative. During fiscal 2001, we terminated an interest swap agreement resulting in a realized gain of $18.0 million which has been amortized into income through August 2007, the remaining term of the original agreement.
B-18
ITEM 8
APPENDIX C
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm
C-2
Consolidated Balance Sheets-January 30, 2010 and January 31, 2009
C-3
Consolidated Statements of Income-Fiscal years ended January 30, 2010, January 31, 2009 and February 2, 2008
C-4
Consolidated Statements of Stockholders' Equity-Fiscal years ended January 30, 2010, January 31, 2009 and February 2, 2008
C-5
Consolidated Statements of Cash Flows-Fiscal years ended January 30, 2010, January 31, 2009 and February 2, 2008
C-7
Notes to Consolidated Financial Statements
C-8 to C-44
Schedule II-Valuation and Qualifying Accounts
C-45
C-1
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Staples, Inc.
We have audited the accompanying consolidated balance sheets of Staples, Inc. and subsidiaries as of January 30, 2010 and January 31, 2009, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended January 30, 2010. Our audits also included the financial statement schedule listed in the Index at Item 15(a)2. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Staples, Inc. and subsidiaries at January 30, 2010 and January 31, 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 30, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note A to the accompanying financial statements, as of February 1, 2009, the Company adopted Financial Accounting Standards Board Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51 (codified in FASB Accounting Standards Codification Topic 810, Consolidation).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Staples, Inc.'s internal control over financial reporting as of January 30, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Ernst & Young LLP
Boston, Massachusetts
March 1, 2010
C-2
STAPLES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollar Amounts in Thousands, Except Share Data)
See notes to consolidated financial statements.
C-3
STAPLES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollar Amounts in Thousands, Except Share Data)
See notes to consolidated financial statements.
C-4
STAPLES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Dollar Amounts in Thousands)
For the Fiscal Years Ended January 30, 2010, January 31, 2009 and February 2, 2008
C-5
STAPLES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Dollar Amounts in Thousands)
For the Fiscal Years Ended January 30, 2010, January 31, 2009 and February 2, 2008
See notes to consolidated financial statements.
C-6
STAPLES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
See notes to consolidated financial statements.
C-7
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
NOTE A Summary of Significant Accounting Policies
Nature of Operations: Staples, Inc. and subsidiaries ("Staples" or the "Company") pioneered the office products superstore concept; and Staples is the world's leading office products company. Staples operates three business segments: North American Delivery, North American Retail and International Operations. The North American Delivery segment consists of the U.S. and Canadian business units that sell and deliver office products and services directly to customers, and includes Contract (including Corporate Express), Staples Business Delivery and Quill. The Company's North American Retail segment consists of the U.S. and Canadian business units that operate office products stores. The International Operations segment consists of business units (including Corporate Express) that sell and deliver office products and services directly to customers and that operate office products stores in 23 countries in Europe, Asia, Australia and South America.
Basis of Presentation: The consolidated financial statements include the accounts of Staples, Inc. and its wholly and majority owned subsidiaries, including Corporate Express N.V. ("Corporate Express") since its acquisition in July 2008 (see Note B). All intercompany accounts and transactions are eliminated in consolidation.
Fiscal Year: Staples' fiscal year is the 52 or 53 weeks ending on the Saturday closest to January 31. Fiscal year 2009 ("2009") consisted of the 52 weeks ended January 30, 2010, fiscal year 2008 ("2008") consisted of the 52 weeks ended January 31, 2009 and fiscal year 2007 ("2007") consisted of the 52 weeks ended February 2, 2008.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management of Staples to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash Equivalents: Staples considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Receivables: Receivables include trade receivables financed under regular commercial credit terms and other non-trade receivables. Gross trade receivables were $1.42 billion at January 30, 2010 and $1.50 billion at January 31, 2009. Concentrations of credit risk with respect to trade receivables are limited due to Staples' large number of customers and their dispersion across many industries and geographic regions. Included in trade receivables at January 31, 2009 was $289.1 million which secured the Company's borrowings outstanding under its U.S. Securitization Program and European Securitization Program (see Note E). The Company's obligations under the U.S. and European Securitization Programs were assumed in connection with its acquisition of Corporate Express and were terminated and paid off on March 3, 2009.
An allowance for doubtful accounts has been recorded to reduce trade receivables to an amount expected to be collectible from customers based on specific evidence as well as historic trends. The allowance recorded at January 30, 2010 and January 31, 2009 was $63.0 million and $57.3 million, respectively.
Other non-trade receivables were $450.2 million at January 30, 2010 and $397.5 million at January 31, 2009 and consisted primarily of purchase and advertising rebates due from vendors under various incentive and promotional programs. Amounts expected to be received from vendors relating to the purchase of merchandise inventories and reimbursement of incremental costs, such as advertising, are recognized as a reduction of inventory cost and realized as part of cost of goods sold as the merchandise is sold.
Merchandise Inventories: Merchandise inventories are valued at the lower of weighted-average cost or market value. The Company reserves for obsolete, overstocked and inactive inventory based on the difference between the weighted-average cost of the inventory and the estimated market value using assumptions of future demand and market conditions.
Private Label Credit Card: Staples offers a private label credit card which is managed by a financial services company. Under the terms of the agreement, Staples is obligated to pay fees which approximate the financial institution's cost of processing and collecting the receivables, which are non-recourse to Staples.
C-8
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE A Summary of Significant Accounting Policies (Continued)
Property and Equipment: Property and equipment are recorded at cost. Expenditures for normal maintenance and repairs are charged to expense as incurred. Depreciation and amortization, which includes the amortization of assets recorded under capital lease obligations, are provided using the straight-line method over the following useful lives: 40 years for buildings; 3-10 years for furniture and fixtures; and 3-10 years for equipment, which includes computer equipment and software with estimated useful lives of 3-5 years. Leasehold improvements are amortized over the shorter of the terms of the underlying leases or the estimated economic lives of the improvements.
Lease Acquisition Costs: Lease acquisition costs are recorded at cost and amortized using the straight-line method over the respective lease terms, including option renewal periods if renewal of the lease is probable, which range from 5 to 40 years. Accumulated amortization at January 30, 2010 and January 31, 2009 was $73.4 million and $71.0 million, respectively.
Goodwill and Intangible Assets: Financing Accounting Standards Board Accounting Standards Codification ("ASC") Topic 350 requires that goodwill and intangible assets that have indefinite lives not be amortized but, instead, tested at least annually for impairment. Management uses a discounted cash flow analysis, which requires that certain assumptions and estimates be made regarding industry economic factors and future profitability of acquired businesses to assess the need for an impairment charge. The Company has elected the fourth quarter to complete its annual goodwill impairment test. As a result of the fourth quarter impairment analyses, management has determined that no impairment charges are required.
The changes in the carrying amount of goodwill during the year ended January 30, 2010, which includes a net addition of $181.5 million in connection with purchase accounting adjustments related to the July 2008 acquisition of Corporate Express, are as follows (in thousands):
At January 30, 2010, intangible assets, which include registered trademarks and trade names and customer relationships, were $933.4 million, with accumulated amortization of $353.4 million and a weighted average life of 12 years. At January 31, 2009, intangible assets were $953.4 million, with accumulated amortization of $251.5 million and a weighted average life of 9.6 years.
Intangible assets at January 30, 2010 include $639.4 million of acquired intangibles, with accumulated amortization of $117.7 million, in connection with the July 2008 acquisition of Corporate Express.
During the third quarter of 2008, as a result of the Company's decision to move toward one global Staples brand, the Company recorded a non-cash, pre-tax charge of $123.8 million (see Note C). After this charge, all intangible assets were subject to amortization.
Impairment of Long-Lived Assets: ASC Topic 360 requires a Company to record an impairment loss on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Staples' policy is to evaluate long-lived assets for impairment at a store level for retail operations and an operating unit level for Staples' other operations.
Revenue Recognition: Revenue is recognized at the point of sale for the Company's retail operations and at the time of shipment for its delivery sales. The Company offers its customers various coupons, discounts and rebates, which are treated as a reduction of revenue. Staples sells certain machines to customers which are financed by external financing companies and for which they have given repurchase guarantees. The Company recognizes revenue from the
C-9
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE A Summary of Significant Accounting Policies (Continued)
sale of these machines only when the right of recourse has ended and the Company is legally released from its repurchase obligation.
Sales of extended service plans are either administered by an unrelated third party or by the Company. The unrelated third party is the legal obligor in most of the areas they administer and accordingly bears all performance obligations and risk of loss related to the service plans sold in such areas. In these areas, Staples recognizes a net commission revenue at the time of sale for the service plans. In certain areas where Staples is the legal obligor, the revenues associated with the sale are deferred and recognized over the life of the service contract, which is typically one to five years.
Cost of Goods Sold and Occupancy Costs: Cost of goods sold and occupancy costs includes the costs of: merchandise sold, inbound and outbound freight, receiving and distribution, and store and distribution center occupancy (including real estate taxes and common area maintenance).
Shipping and Handling Costs: All shipping and handling costs are included as a component of cost of goods sold and occupancy costs.
Selling, General and Administrative Expenses: Selling, general and administrative expenses include payroll, advertising and other operating expenses for the Company's stores and delivery operations not included in cost of goods sold and occupancy costs.
Advertising: Staples expenses the production costs of advertising the first time the advertising takes place, except for the cost of direct-response advertising, primarily catalog production costs, which are capitalized and amortized over their expected period of future benefits (i.e., the life of the catalog). Direct catalog production costs included in prepaid and other assets totaled $21.6 million at January 30, 2010 and $23.4 million at January 31, 2009. Total advertising and marketing expense was $553.5 million, $667.7 million and $710.0 million for 2009, 2008 and 2007, respectively.
Pre-opening Store Costs: Pre-opening store costs, which consist primarily of salaries, supplies, marketing and distribution costs, are expensed as incurred.
Integration and Restructuring Costs: Integration and restructuring costs represent the costs associated with the integration of the acquired Corporate Express business with the Company's pre-existing business and the consolidation of certain operations of the Company.
Stock-Based Compensation: The Company accounts for stock-based compensation in accordance with ASC Topics 505 and 718. Stock-based compensation for stock options is measured based on the estimated fair value of each award on the date of grant using a binomial valuation model. Stock-based compensation for restricted shares is measured based on the closing fair market value of the Company's common stock price on the date of grate. The Company recognizes stock-based compensation costs as expense ratably on a straight-line basis over the requisite service period.
Pension Benefits: The Company maintains pension plans for certain employees globally. These plans include significant pension obligations, which are calculated based on actuarial valuations. Key assumptions used in determining these obligations and related expenses included expected long-rate rates of return on plan assets, discount rates and inflation. The Company also makes assumptions regarding employee demographic factors such as retirement patterns, mortality, turnover and the rate of compensation increases. These assumptions are evaluated annually.
Foreign Currency Translation: The assets and liabilities of Staples' foreign subsidiaries are translated into U.S. dollars at current exchange rates as of the balance sheet date, and revenues and expenses are translated at average monthly exchange rates. The resulting translation adjustments, and the net exchange gains and losses resulting from the translation of investments in Staples' foreign subsidiaries, are recorded as a separate component of stockholders' equity.
Derivative Instruments and Hedging Activities: The Company recognizes all derivative financial instruments in the consolidated financial statements at fair value. Changes in the fair value of derivative financial instruments that qualify for hedge accounting are recorded in stockholders' equity as a component of accumulated other comprehensive income
C-10
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE A Summary of Significant Accounting Policies (Continued)
or as an adjustment to the carrying value of the hedged item. Changes in fair values of derivatives not qualifying for hedge accounting are reported in earnings.
Accounting for Income Taxes: In July 2006 the guidance within ASC Topic 740 related to accounting for income taxes was issued which clarified a company's accounting for uncertain income tax positions that are recognized in its financial statements. ASC Topic 740 also provides guidance on a company's derecognition of uncertain positions, financial statement classification, accounting for interest and penalties, accounting for interim periods, and disclosure requirements.
The Company adopted the accounting pronouncements for uncertain income tax positions as of February 4, 2007. At January 30, 2010, the Company had $264.3 million of gross unrecognized tax benefits, all of which, if recognized, would affect the Company's tax rate. At January 31, 2009, the Company had $222.9 million of gross unrecognized tax benefits, $84.1 million of which, if recognized, would affect the Company's tax rate. At February 2, 2008, the Company had $87.7 million of gross unrecognized tax benefits, $66.1 million of which, if recognized would affect the Company's tax rate. The Company does not reasonably expect any material changes to the estimated amount of liability associated with its uncertain tax positions through fiscal 2010. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Staples is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company has substantially concluded all U.S. federal income tax matters for years through 2005 and all material state, local and foreign income tax matters for years through 2000.
Staples' continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. The Company had $18.7 million, $17.6 million and $11.1 million accrued for interest and penalties as of January 30, 2010, January 31, 2009 and February 2, 2008, respectively.
New Accounting Pronouncements: In June 2009, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 168, "The FASB Accounting Standards Codification ("ASC") and the Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB Statement No. 162" (the "Codification") (ASC Topic 105). The Codification reorganized existing U.S. accounting and reporting standards issued by the FASB and other related private sector standard setters into a single source of authoritative accounting principles arranged by topic. The Codification supersedes all existing U.S. accounting standards; all other accounting literature not included in the Codification (other than SEC guidance for publicly-traded companies) is considered non-authoritative. The Codification was effective on a prospective basis for interim and annual reporting periods ending after September 15, 2009. As a result of the adoption of this pronouncement, this Annual Report on Form 10-K for the year ending January 30, 2010 and all subsequent public filings will reference the Codification as the sole source of authoritative literature. Accordingly, all accounting references have been updated and SFAS references have been replaced with ASC references if the SFAS has been adopted into the Codification. The adoption of the Codification had no impact on the Company's consolidated financial condition, results of operations or cash flows.
In December 2008, an accounting pronouncement was issued relating to employers' disclosures about post-retirement benefit plan assets which requires a company, as a plan sponsor, to provide disclosures about plan assets, including categories of plan assets, the nature of concentrations of risk and disclosures about fair value measurements of plan assets (ASC Topic 715). This pronouncement is effective for financial statements issued for fiscal years ending after
C-11
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE A Summary of Significant Accounting Policies (Continued)
December 15, 2009. The Company adopted this pronouncement as of January 30, 2010. As this pronouncement relates specifically to disclosures, the adoption had no impact on the Company's consolidated financial condition, results of operations or cash flows.
On February 1, 2009, the Company adopted the accounting pronouncement related to fair value measurement for its nonfinancial assets and liabilities (ASC Topic 820). On February 3, 2008, the Company adopted the accounting pronouncement related to fair value measurement for its financial assets and liabilities. The adoption of these pronouncements had no impact on the Company's consolidated financial condition, results of operations or cash flows.
On February 1, 2009, the Company adopted the revised accounting pronouncement relating to business combinations (ASC Topic 805), including assets acquired and liabilities assumed arising from contingencies. This pronouncement requires the use of the acquisition method of accounting, defines the acquirer, establishes the acquisition date, and applies to all transactions and other events in which one entity obtains control over one or more other businesses. This pronouncement also amends the accounting and disclosure requirements for assets and liabilities in a business combination that arise from contingencies. In addition, with the adoption of this pronouncement, changes to valuation allowances for deferred income tax assets and adjustments to unrecognized tax benefits generally are to be recognized as adjustments to income tax expense rather than goodwill. This adoption had no impact on the Company's consolidated financial condition, results of operations or cash flows. Furthermore, the Company does not expect this pronouncement to have a material impact on the Company's future income tax expense related to adjustments for changes in valuation allowances and tax reserves for prior business combinations.
On February 1, 2009, the Company adopted the accounting pronouncement on noncontrolling interests in consolidated financial statements (ASC Topic 810). This pronouncement requires that noncontrolling (or minority) interests in subsidiaries be reported in the equity section of a company's balance sheet, rather than in a mezzanine section of the balance sheet between liabilities and equity and changes the manner in which the net income of the subsidiary is reported and disclosed in the controlling company's income statement and establishes guidelines for accounting for changes in ownership percentages and for deconsolidation. This pronouncement required retrospective application to all prior periods presented. The adoption of this pronouncement impacted the Company's presentation of minority interests on the consolidated balance sheet, statement of income and statement of stockholders' equity but had no impact on the Company's consolidated financial condition, results of operations or cash flows.
On February 1, 2009, the Company adopted the accounting pronouncement relating to disclosures about derivative instruments and hedging activities, which requires disclosure regarding how and why an entity uses derivatives, how these instruments and the related hedged items are accounted for and how derivative instruments and related hedged items affect the entity's financial position, results of operations and cash flows (ASC Topic 815). As this pronouncement relates specifically to disclosures, the adoption of this pronouncement had no impact on the Company's consolidated financial condition, results of operations or cash flows.
In June 2009, an accounting pronouncement was issued relating to information a company needs to provide regarding the sales of securitized financial assets and similar transactions, particularly if the company has continuing exposure to the risks related to transferred financial assets (ASC Topic 860). This pronouncement eliminates the concept of a "qualifying special-purpose entity," changes the requirements for derecognizing financial assets and requires additional disclosures. This pronouncement is effective for fiscal years beginning after November 15, 2009. The Company will adopt this pronouncement as of January 31, 2010. The Company does not expect this pronouncement will have any impact on its consolidated financial condition, results of operations or cash flows.
In June 2009, a pronouncement was issued that clarified how a company determines whether an entity, that is insufficiently capitalized or not controlled through voting (or similar rights), should be capitalized (ASC Topic 810). This determination of whether a company is required to consolidate an entity is based on, among other things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance. This pronouncement requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. This pronouncement also requires additional disclosures about a company's involvement in variable interest entities and any significant changes in risk exposure due to that involvement. This
C-12
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE A Summary of Significant Accounting Policies (Continued)
pronouncement is effective for fiscal years beginning after November 15, 2009. The Company will adopt this pronouncement as of January 31, 2010. The Company does not expect this pronouncement will have any impact on its consolidated financial condition, results of operations or cash flows.
On August 1, 2009, the Company adopted prospectively the accounting pronouncement regarding the general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before the financial statements are issued (ASC Topic 855). The implementation of this standard did not have any impact on the consolidated financial statements of the Company. Subsequent events through March 1, 2010 have been evaluated for disclosure and recognition.
In October 2009, a pronouncement was issued that amended the rules on revenue recognition for multiple-deliverable revenue arrangements. This amendment eliminated the residual method of allocation for multiple-deliverable revenue arrangements, and requires that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method (ASC Topic 605). This pronouncement establishes a selling price hierarchy for determining the selling price of a deliverable, which includes: (1) vendor-specific objective evidence if available, (2) third-party evidence if vendor-specific objective evidence is not available, and (3) estimated selling price if neither vendor-specific nor third-party evidence is available. In addition, this pronouncement expands the disclosure requirements related to a vendor's multiple-deliverable revenue arrangements. This pronouncement is effective for revenue arrangements entered into or materially modified in fiscal years beginning after June 15, 2010. The Company will adopt this pronouncement as of January 30, 2011. The Company is currently evaluating the potential impact, if any, of the adoption on its consolidated financial condition, results of operations and cash flows.
Reclassifications: Certain previously reported amounts have been reclassified to conform with the current period presentation.
NOTE B Business Combinations
In July 2008, Staples acquired Corporate Express N.V. ("Corporate Express"), a Dutch office products distributor with operations in North America, Europe and Australia, through a tender offer for all of its outstanding capital stock.
At the time the tender offer was fully settled on July 23, 2008, Staples had acquired more than 99% of the outstanding capital stock of Corporate Express. Staples has worked diligently to acquire the remaining capital stock of Corporate Express by means of a compulsory judicial "squeeze out" procedure in accordance with the Dutch Civil Code. Staples and the other parties to the "squeeze out" procedure have submitted their arguments to the Dutch court and are awaiting a decision. While Staples does not know the exact date that the Dutch court will render a judgment, it anticipates that a judgment will be rendered prior to the end of the first quarter of fiscal 2010. There is, however, no guarantee that the court will render a judgment before such time. Any additional payments will be recorded in equity pursuant to ASC Topic 810.
In July 2008, Staples also acquired, and subsequently paid off, all of the outstanding 8.25% Senior Subordinated Notes due July 1, 2014 and all of the outstanding 7.875% Senior Subordinated Notes due March 1, 2015 of Corporate Express U.S. Finance Inc., a wholly owned subsidiary of Corporate Express. The aggregate cash purchase price for the capital stock of Corporate Express and for the repayment of most of Corporate Express' debt was 2.8 billion Euros (approximately $4.4 billion, net of cash acquired).
The operating results of Corporate Express have been included in the consolidated financial statements since July 2, 2008, the date Staples declared the terms of the tender offer unconditional. The Corporate Express results are reported in Staples' North American Delivery and International Operations for segment reporting.
C-13
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE B Business Combinations (Continued)
Adjustments were made during fiscal 2009 to the fair value of assets acquired and liabilities assumed based on information obtained subsequent to the acquisition. The following table summarizes the final estimated fair values of assets acquired and liabilities assumed (in thousands):
During the second quarter of 2009, the Company finalized its integration and restructuring plans for Corporate Express, including employee severance, facility closures, system consolidation, intangible assets and tax elections, the results of which impacted the final amount allocated to goodwill. The Company recorded approximately $181.5 million of adjustments during the first half of 2009, which resulted in an increase in goodwill. These adjustments primarily related to intangible assets, severance and facility closures. The changes to intangible assets related to values only; no significant changes were made to estimated lives.
In connection with this acquisition, Staples allocated assets of $3.48 billion, $3.47 billion and $283.8 million to the North American Delivery, International Operations and North American Retail segments, respectively. Included in total assets were goodwill and intangible assets totaling $3.55 billion, of which $1.71 billion, $1.55 billion and $283.8 million were allocated to the North American Delivery, International Operations and North American Retail segments, respectively. None of the goodwill is expected to be deductible for tax purposes. Any further changes to opening net assets, including tax related assets and liabilities, will result in income or expenses that would be recognized through the Company's consolidated statement of income.
Of the $727.6 million of acquired intangible assets, $628.8 million was assigned to customer relationships that are being amortized over a weighted average useful life of 12.3 years and $98.8 million was assigned to tradenames, which have lives ranging from 18 months to 8 years with a weighted average useful life of 5.4 years.
Estimated future amortization expense associated with the intangible assets acquired from Corporate Express at January 30, 2010 is as follows (in thousands):
For the valuation of customer relationships, the Company used the multi-period excess earnings method. This approach discounts the estimated after tax cash flows (including gross margins on revenues, operating expenses and
C-14
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE B Business Combinations (Continued)
market participant synergies, less a charge for the tradename and contributory charges) associated with the existing base of customers as of the acquisition date, factoring in expected attrition of the existing customer base. The present value of the cash flows was calculated using a discount rate of 11%.
The activity related to the Company's reserves for the periods subsequent to the acquisition date is as follows (in thousands):
The Company believes that the accruals above should be entirely utilized by the end of fiscal year 2010; however, some payments related to facility closures may be made over the remaining lease terms.
The following unaudited proforma summary presents information as if Corporate Express had been acquired as of February 4, 2007, the first day of the Company's 2007 fiscal year. In addition to an adjustment to amortization expense to reflect the value of intangibles recorded for this acquisition, the proforma amounts include incremental interest expense for all periods to reflect the increase in borrowings under the 2008 Agreement, the Commercial Paper Program, the 2008 Term Credit Facility, and the Revolving Credit Facility (each as defined in Note E) to finance the acquisition as if the increase had occurred at the beginning of fiscal 2007. Proforma interest expense also reflects the elimination of interest expense on Corporate Express debt that was repaid at the time of acquisition. No adjustment was made to reduce historical interest income to reflect the Company's use of available cash in this acquisition. The proforma summary also reflects the effective tax rate applicable for the combined company. The proforma amounts do not reflect any benefits from economies that might be achieved from combining the operations of the two companies.
The proforma information presented below (in thousands, except per share data) does not necessarily reflect the actual results that would have occurred had the companies been combined during the periods presented, nor is it necessarily indicative of the future results of operations of the combined companies.
(1)Fiscal 2008 results include approximately $124.0 million of costs, net of taxes, related to strategic initiatives and certain transaction costs incurred by Corporate Express prior to the transaction date.
During 2007, the Company paid an aggregate of $188.3 million to acquire all or a majority interest in certain delivery businesses headquartered in the United States and China. Additionally, in 2007, the Company made an investment in a joint venture in India. The Company recorded $181.1 million of goodwill, of which $38.0 million is expected to be deducted for tax purposes. For all acquisitions and investments completed in 2007, the Company recorded $20.7 million of intangible assets which was assigned to trade names and customer related intangible assets that will be amortized over a weighted average life of 8.1 years.
C-15
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
Note C Integration and Restructuring Costs
Integration and restructuring costs represent the costs associated with the integration of the acquired Corporate Express business with the Company's pre-existing business and the consolidation of certain operations of the combined Company.
Integration and restructuring costs are comprised of the following (in thousands):
Facility closure costs and other asset write-downs for 2008 included a $123.8 million charge related to the write-down of indefinite lived intangible trade names associated with the European catalog business. The trade name write-down was the result of the Company's decision to move toward one global brand with the acquisition of Corporate Express, eliminating, over time, certain legacy Staples brands used in the European catalog business. Facility closure costs and other asset write-downs for 2008 also included a $26.3 million charge related to the write-down of software and facilities whose use was expected to be limited as a result of the acquisition. There were no integration and restructuring costs in 2007.
NOTE D Accrued Expenses and Other Current Liabilities
The major components of accrued liabilities are as follows (in thousands):
C-16
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE E Debt and Credit Agreements
The major components of the Company's outstanding debt are as follows (in thousands)
Aggregate annual maturities of long-term debt and capital lease obligations are as follows (in thousands):
Future minimum lease payments under capital leases of $8.4 million, excluding $2.2 million of interest, are included in aggregate annual maturities shown above. Staples entered into capital lease obligations totaling $2.2 million in 2009 and entered into no such agreements during 2008. The Company assumed no obligations for such agreements in connection with the acquisition of Corporate Express.
Interest paid by Staples totaled $217.5 million, $113.5 million and $42.0 million for 2009, 2008 and 2007, respectively. There was no interest capitalized in 2009, 2008 or 2007.
In September 2008, Barclays Bank PLC agreed to assume the obligations of Lehman Brothers Inc. and their affiliates under the Company's 2008 Agreement, the Commercial Paper Program, the 2008 Term Credit Facility and the Revolving Credit Facility, each as described below.
2008 Agreement: On April 1, 2008, Staples entered into a $3.0 billion credit agreement (the "2008 Agreement") with Lehman Commercial Paper Inc., as administrative agent, Bank of America, N.A. and HSBC Bank USA, National Association, as co-syndication agents, and Lehman Brothers Inc., as lead arranger and bookrunner, for a commitment period beginning on July 9, 2008 and continuing until 364 days thereafter, unless earlier terminated pursuant to the terms of the 2008 Agreement. The 2008 Agreement provided financing solely (1) for the Company's acquisition of all of the outstanding capital stock of Corporate Express, including related transaction fees, costs and expenses, and (2) backstopped the Company's Commercial Paper Program. Amounts borrowed under the 2008 Agreement could be borrowed, repaid and reborrowed from time to time. Originally, the aggregate principal amount of the loans outstanding could not exceed the maximum borrowing amount of $3.0 billion.
C-17
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE E Debt and Credit Agreements (Continued)
Borrowings made pursuant to the 2008 Agreement bore interest at either (a) the base rate (the higher of the prime rate, as defined in the 2008 Agreement, or the federal funds rate plus 0.50%) plus an "applicable margin," defined as a percentage spread based on Staples' credit rating or (b) the Eurocurrency rate plus a different "applicable margin," also defined as a percentage spread based on Staples' credit rating. The Company's obligations under the 2008 Agreement were unconditionally guaranteed on an unsecured unsubordinated basis by the Guarantor Subsidiaries, as defined below. On July 1, 2008, Staples entered into the first amendment to the 2008 Agreement. The amendment was entered into to provide that certain events, including the establishment of the 2008 Term Credit Facility, as described below, and maintaining certain obligations of Corporate Express after the acquisition, would not reduce the maximum commitment available under the 2008 Agreement. On September 12, 2008, Staples entered into the second amendment to the 2008 Agreement. The amendment provided Staples with the flexibility, within ten business days of the receipt of proceeds from other indebtedness, to use such proceeds to repay the Commercial Paper Program, as described below.
On December 29, 2008, Staples voluntarily terminated $250 million of its borrowing ability under the 2008 Agreement which reduced the total commitment from $3.0 billion to $2.75 billion. On January 15, 2009, Staples reduced the total commitment amount under the 2008 Agreement from $2.75 billion to $1.26 billion and again on March 27, 2009 from $1.26 billion to $761.0 million. These reductions were made pursuant to the mandatory commitment reduction provisions triggered by the receipt of proceeds from the offering of the January 2014 Notes and April 2011 Notes, each as described below. On May 26, 2009, the Company, as a result of entering the May 2009 Securitization Program, as described below, voluntarily terminated the entire remaining commitment under the 2008 Agreement, thereby terminating the 2008 Agreement earlier than its July 9, 2009 expiration date.
2008 Term Credit Facility: On July 1, 2008, Staples entered into a $400.0 million credit facility (the "2008 Term Credit Facility") with Lehman Commercial Paper Inc., as administrative agent, Bank of America, N.A. and HSBC Bank USA, National Association, as co-syndication agents, and Lehman Brothers Inc., Banc of America Securities LLC and HSBC Securities (USA) Inc., as joint lead arrangers and joint bookrunners. On November 26, 2008, the Company repaid the entire remaining balance due and terminated this agreement. No further credit is available under this facility.
April 2011 Notes: On March 27, 2009, the Company issued $500.0 million aggregate principal amount of notes (the "April 2011 Notes") due April 1, 2011, with a fixed interest rate of 7.75% payable semi-annually on April 1 and October 1 of each year commencing on October 1, 2009. The sale of the April 2011 Notes was made pursuant to the terms of an underwriting agreement, dated March 27, 2009, with Barclays Capital Inc., Banc of America Securities LLC and HSBC Securities (USA) Inc., as representatives of the several underwriters named in the underwriting agreement. The Company received net proceeds, after the underwriting discount and estimated fees and expenses, of $497.5 million. The Company's obligations under the April 2011 Notes are unconditionally guaranteed on an unsecured unsubordinated basis by Staples the Office Superstore, LLC, Staples the Office Superstore, East Inc., Staples Contract & Commercial, Inc. and Staples the Office Superstore Limited Partnership (collectively, the "Guarantor Subsidiaries"). At January 30, 2010, the fair value of the April 2011 Notes was approximately $538 million. The fair value of the April 2011 Notes is based on quoted market prices.
Revolving Credit Facility: On October 13, 2006, Staples entered into a $750.0 million Amended and Restated Revolving Credit Agreement with Bank of America, N.A. and other lenders named therein, the ("Revolving Credit Facility") which amended and restated the Revolving Credit Agreement dated as of December 14, 2004.
The Revolving Credit Facility provides for a maximum borrowing of $750.0 million which, upon approval of the lenders, Staples may increase to $1.0 billion, and expires on October 13, 2011. Borrowings made pursuant to the Revolving Credit Facility may be syndicated loans, competitive bid loans, or swing line loans, the combined sum of which may not exceed the maximum borrowing amount. Amounts borrowed under the Revolving Credit Facility may be borrowed, repaid and reborrowed from time to time until October 13, 2011. The borrowings under this Revolving Credit Facility are unconditionally guaranteed on an unsecured unsubordinated basis by the Guarantor Subsidiaries.
Borrowings made pursuant to the Revolving Credit Facility as syndicated loans will bear interest, payable quarterly or, if earlier, at the end of any interest period, at either (a) the base rate, described in the Revolving Credit Facility as the higher of the annual rate of the lead bank's prime rate or the federal funds rate plus 0.50%, or (b) the Eurocurrency rate
C-18
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE E Debt and Credit Agreements (Continued)
(a publicly published rate) plus a percentage spread based on Staples' credit rating and fixed charge coverage ratio. Borrowings made as competitive bid loans bear the competitive bid rate as specified in the applicable competitive bid. Swing line loans bear interest that is the lesser of the base rate or the swing line rate as quoted by the administrative agent under the terms of the Revolving Credit Facility. Under the Revolving Credit Facility, Staples agrees to pay a facility fee, payable quarterly, at rates that range from 0.060% to 0.125% depending on the Company's credit rating and fixed charge coverage ratio, and when applicable, a utilization fee.
On May 5, 2008, Staples entered into the first amendment (the "Amendment") to the Revolving Credit Facility. The Amendment was entered into in connection with the acquisition of Corporate Express and provided certain post-acquisition cure periods to allow Staples to cure defaults that could arise (i) as a result of change in control provisions contained in Corporate Express' outstanding debt obligations and (ii) under Corporate Express' and Staples' outstanding debt obligations as a result of events or circumstances, such as litigation, liens or defaults, affecting Corporate Express. The Amendment did not alter the amount that may be borrowed under, or the terms of, the Revolving Credit Facility and confirmed Staples' obligations to the lenders and administrative agent who are parties thereto. At January 30, 2010, under the Revolving Credit Facility, there were no borrowings outstanding, no letters of credit outstanding, and no commercial paper issued, resulting in $750.0 million in availability.
October 2012 Notes: On September 30, 2002, Staples issued $325.0 million principal amount of notes due October 1, 2012 (the "October 2012 Notes"), with a fixed interest rate of 7.375% payable semi-annually on April 1 and October 1 of each year commencing on April 1, 2003. Staples has entered into an interest rate swap agreement to turn the October 2012 Notes into variable rate obligations (see Note F). The Company's obligations under the October 2012 Notes are unconditionally guaranteed on an unsecured unsubordinated basis by the Guarantor Subsidiaries.
January 2014 Notes: On January 15, 2009, Staples issued $1.5 billion aggregate principal amount of notes (the "January 2014 Notes") due January 15, 2014, with a fixed interest rate of 9.75% payable semi-annually on January 15 and July 15 of each year commencing on July 15, 2009. The sale of the January 2014 Notes was made pursuant to the terms of an underwriting agreement, dated January 12, 2009 with Barclays Capital Inc., Banc of America Securities LLC and HSBC Securities (USA) Inc., as representatives of the several underwriters named in the underwriting agreement. Staples received net proceeds, after the underwriting discount and estimated fees and expenses of $1.49 billion. The Company's obligations under the January 2014 Notes are unconditionally guaranteed on an unsecured unsubordinated basis by the Guarantor Subsidiaries. At January 30, 2010, the fair value of the January 2014 Notes was approximately $1.8 billion. The fair value of the January 2014 Notes is based on quoted market prices.
Commercial Paper Program: On June 9, 2008, Staples established a commercial paper program (the "Commercial Paper Program") on a private placement basis under which the Company may issue unsecured commercial paper notes (the "Notes") up to a maximum aggregate principal amount outstanding at any time of $3.0 billion. The 2008 Agreement also, prior to the voluntary termination on July 2009, served as a backstop to the Commercial Paper Program. On January 15, 2009, in connection with the issuance of the January 2014 Notes, availability under the Commercial Paper Program was reduced from $3.0 billion to $2.0 billion. On March 26, 2009, in connection with the issuance of the April 2011 Notes, availability under the Commercial Paper Program was reduced further from $2.0 billion to $1.5 billion. As a result of the termination of the 2008 Agreement, availability under the Company's Commercial Paper Program was reduced further from $1.5 billion to $750.0 million. The Commercial Paper Program is backstopped by Staples' existing Revolving Credit Facility.
Under the Commercial Paper Program, Staples may issue Notes from time to time, and the proceeds of the Notes will be used for general corporate purposes, including working capital, capital expenditures, acquisitions and share repurchases. Maturities of the Notes vary but may not exceed 397 days from the date of issue. The Notes bear such interest rates, if interest bearing, or will be sold at such discount from their face amounts, as agreed upon from time to time by the dealers under the Commercial Paper Program and Staples. The payments under the Commercial Paper Program are unconditionally guaranteed on an unsecured unsubordinated basis by the Guarantor Subsidiaries, as defined below. The Commercial Paper Program contains customary events of default with corresponding grace periods. As of January 30, 2010, no Notes were outstanding under the Company's Commercial Paper Program.
C-19
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE E Debt and Credit Agreements (Continued)
May 2009 Securitization Program: On May 19, 2009, the Company entered into a $300.0 million accounts receivable securitization program (the "May 2009 Securitization Program") with several of its wholly owned subsidiaries and certain financial institutions. Under the terms of the May 2009 Securitization Program, the subsidiaries sell substantially all the customer receivables of the Company's North American Delivery business to a wholly owned bankruptcy remote special purpose entity, Staples Receivables LLC. The Company retains servicing responsibility. The special purpose entity then transfers an interest in the receivables to the financial institutions. Borrowings outstanding under the May 2009 Securitization Program are included as a component of current liabilities in the consolidated balance sheet, while the accounts receivable securing these obligations are included as a component of net receivables in the consolidated balance sheet. There were no borrowings outstanding under the May 2009 Securitization Program at January 30, 2010.
Other Financing Agreements
Securitization Programs: In connection with the acquisition of Corporate Express, the Company assumed the obligations under Corporate Express' U.S. Securitization Program and European Securitization Program (collectively the "Securitization Programs"). On March 3, 2009, the Company terminated and repaid all outstanding balances under the Securitization Programs.
Australian Credit Facilities: Corporate Express Australia Limited and its subsidiaries, which are approximately 59% owned by Staples, are parties to credit facilities under which approximately $134.9 million was outstanding at January 30, 2010.
Other Lines of Credit: Staples had $134.8 million available under other various lines of credit, which had an outstanding balance of $10.0 million at January 30, 2010, with no letters of credit issued under the facilities.
There were no instances of default during 2009 under any of the Company's debt agreements.
Deferred Financing Fees
In connection with the issuance of the January 2014 Notes, the April 2011 Notes, the May 2009 Securitization Program and the 2008 Agreement, the Company incurred financing fees of $33.0 million, which are being amortized over the terms of the related debt instruments. Amortization of the financing fees is classified as interest expense. Deferred financing fees amortized to interest expense were $7.9 million and $13.5 million for 2009 and 2008, respectively. There was no amortization of financing fees in 2007. At January 30, 2010, unamortized financing fees of $1.2 million were included in prepaid expenses and other current assets and unamortized fees of $10.4 million were included in other assets. At January 31, 2009, unamortized financing fees of $1.6 million were included in prepaid expenses and other current assets and unamortized fees of $10.4 million were included in other assets.
NOTE F Fair Value Measurements, Derivative Instruments and Hedging Activities
Fair Value Measurements: ASC 820 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).
C-20
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE F Fair Value Measurements, Derivative Instruments and Hedging Activities (Continued)
The following table shows the Company's assets and liabilities as of January 30, 2010 that are measured at fair value on a recurring basis (in thousands):
The fair values of cash and cash equivalents, receivables, accounts payable, accrued expenses and other current liabilities and short-term debt approximate their carrying values because of their short-term nature. The fair values of long-term debt (except as disclosed in Note E above) approximate their carrying values because of the Company's use of derivative instruments that qualify for hedge accounting. The fair values of long-term assets associated with the Company's pension plans are described in detail in Note K.
Derivative Instruments and Hedging Activities: Staples uses interest rate swaps to turn certain fixed rate debt into variable rate debt and certain variable rate debt into fixed rate debt and currency swaps to hedge a portion of the value of Staples' net investment in Canadian dollar denominated subsidiaries. These derivatives qualify for hedge accounting treatment as the derivatives have been highly effective in offsetting changes in fair value of the hedged items.
All derivatives are recorded at fair value and the changes in fair value are immediately included in earnings if the derivatives do not qualify as effective hedges. If a derivative is designated as a fair value hedge, then changes in the fair value of the derivative are offset against the changes in the fair value of the underlying hedged item in earnings. If a derivative is designated as a cash flow hedge, then the effective portion of the changes in the fair value of the derivative is recognized as a component of accumulated other comprehensive income until the underlying hedged item is recognized in earnings or the forecasted transaction is no longer probable of occurring. If a derivative or a nonderivative financial instrument is designated as a hedge of the Company's net investment in a foreign subsidiary, then changes in the fair value of the financial instrument are recognized as a component of accumulated other comprehensive income to offset a portion of the change in the translated value of the net investment being hedged, until the investment is sold or liquidated. The Company formally documents all hedging relationships for all derivative and nonderivative hedges and the underlying hedged items, as well as its risk management objectives and strategies for undertaking the hedge transactions. There are no amounts excluded from the assessment of hedge effectiveness.
The Company classifies the fair value of all its derivative contracts and the fair value of its hedged firm commitments as either current or long-term, which are included in other assets, debt maturing within one year and other long-term obligations, depending on whether the maturity date of the derivative contract is within or beyond one year from the balance sheet date. The cash flows from derivatives treated as hedges are classified in the Company's consolidated statement of cash flows in the same category as the item being hedged.
Interest Rate Swaps: During fiscal year 1999, Staples entered into interest rate swaps, for an aggregate notional amount of $200.0 million, to turn Staples' fixed rate of the August 1997 Notes into a variable rate obligation. On October 23, 2001, Staples terminated these interest rate swaps which were originally scheduled to terminate on August 15, 2007. Upon termination of the swaps, Staples realized a gain of $18.0 million, which was amortized over the remaining term of the underlying hedged debt instrument, as an adjustment to interest expense. Simultaneous with the termination of these interest rate swaps, Staples entered into another $200.0 million of interest rate swaps whereby Staples was entitled to receive semi-annual interest payments at a fixed rate of 7.125% and was obligated to make semi-annual interest payments at a floating rate based on the LIBOR. These swap agreements were designated as fair value hedges of the August 1997 Notes and terminated on August 15, 2007. Upon the termination of these swap agreements, Staples settled accrued interest in the amount of $0.1 million, which was included in interest expense.
C-21
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE F Fair Value Measurements, Derivative Instruments and Hedging Activities (Continued)
On January 8, 2003, Staples entered into an interest rate swap, for an aggregate notional amount of $325.0 million, designed to convert Staples' October 2012 Notes into a variable rate obligation. The swap agreement, scheduled to terminate on October 1, 2012, is designated as a fair value hedge of the October 2012 Notes. Under the interest rate swap agreement, Staples is entitled to receive semi-annual interest payments at a fixed rate of 7.375% and is required to make semi-annual interest payments at a floating rate equal to the 6 month LIBOR plus 3.088%. The interest rate swap agreement is being accounted for as a fair value hedge and the differential to be paid or received on the interest rate swap agreement is accrued and recognized as an adjustment to interest expense over the life of the agreement and the October 2012 Notes. At January 30, 2010, the interest rate swap agreement had a fair value gain of $26.1 million, which was included in other assets. No amounts were included in the consolidated statement of income for 2009, 2008 or 2007 related to ineffectiveness associated with this fair value hedge.
In connection with Staples' acquisition of Corporate Express, the Company assumed interest rate swaps, for a notional amount of AUD $103.0 million, designed to convert Corporate Express' variable rate credit facilities into fixed rate obligations. AUD $30 million of these swaps matured in July 2009 and AUD $8 million of these swaps matured in January 2010, as scheduled. The Company also entered into interest rate swap agreements in August 2009, for a notional amount of AUD $35.0 million, designed to convert local variable rate credit facilities into fixed rate obligations. As of January 30, 2010, the total notional amount of all outstanding interest rate swap agreements is AUD $100.0 million (approximately $89.4 million, based on foreign exchange rates at January 30, 2010). The remaining swap agreements are scheduled to terminate in four stages: AUD $40 million in July 2010, AUD $25 million in July 2011, AUD $10 million in August 2011 and the remaining AUD $25 million in August 2012. Under the terms of the agreements, the Company is required to make monthly interest payments at a weighted average interest rate of 6.34% and is entitled to receive monthly interest payments at a floating rate equal to the average bid rate for borrowings having a term closest to the relevant period displayed on the appropriate page of the Reuters screen (BBSY). The interest rate swaps are being accounted for as a cash flow hedge and the differential to be paid or received on the interest rate swap agreements is accrued and recognized as an adjustment to interest expense over the life of the agreements. At January 30, 2010, the interest rate swap agreements had a fair value loss of AUD $1.5 million (approximately $1.4 million), which was included in stockholders' equity as a component of accumulated other comprehensive income. No amounts were included in the consolidated statement of income for 2009 or 2008 related to ineffectiveness associated with this cash flow hedge. The amount of estimated cash flow hedges' unrealized net gains or losses expected to be reclassified to earnings in the next twelve months is not significant.
Foreign Currency Swaps: During fiscal year 2000, Staples entered into a currency swap, for an aggregate notional amount of $200.0 million. Staples, upon maturity of the agreement, was entitled to receive $200.0 million and was obligated to pay 298 million in Canadian dollars. On November 16, 2006, Staples entered into a currency swap, for an aggregate notional amount of $7.5 million. Staples, upon maturity of the agreement, was entitled to receive $7.5 million and was obligated to pay 8.6 million in Canadian dollars. Staples was also entitled to receive quarterly interest payments on $7.5 million at a fixed rate of 5.3725% and was obligated to make quarterly interest payments on 8.6 million Canadian dollars at a fixed rate of 4.315%. During 2007, Staples entered into currency swaps, for an aggregate notional amount of $17.5 million. Staples, upon maturity of the agreements, was entitled to receive $17.5 million and was obligated to pay 20.1 million in Canadian dollars. Staples was also entitled to receive quarterly interest payments on $17.5 million and was obligated to make quarterly interest payments on 20.1 million Canadian dollars. On August 15, 2007, Staples paid $83.3 million to settle all of these foreign currency swaps. These swaps were designated as a foreign currency hedge on Staples' net investment in Canadian dollar denominated subsidiaries and the loss was recorded as a cumulative translation adjustment in stockholders' equity.
On August 15, 2007, the Company entered into a $300.0 million foreign currency swap that has been designated as a foreign currency hedge on Staples' net investment in Canadian dollar denominated subsidiaries. Staples, upon maturity of the agreement in October 2012, will be entitled to receive $300.0 million and will be obligated to pay 316.2 million in Canadian dollars. Staples will also be entitled to receive quarterly interest payments on $300.0 million at a fixed rate of 5.28% and will be obligated to make quarterly interest payments on 316.2 million Canadian dollars at a fixed rate of 5.17%. At January 30, 2010 the currency swap had an aggregate fair value gain of $7.4 million, which was included in other assets. No amounts were included in the consolidated statement of income for 2009, 2008 or 2007 related to ineffectiveness associated with this net investment hedge.
C-22
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE G Accumulated Other Comprehensive Income (Loss)
Amounts included in accumulated other comprehensive income for the Company's derivative instruments and minimum pension liabilities are recorded net of the related income tax effects. The following table details the composition of accumulated other comprehensive income (loss) for 2009, 2008 and 2007 (in thousands):
NOTE H Commitments and Contingencies
Staples leases certain retail and support facilities under long-term non-cancelable lease agreements. Most lease agreements contain renewal options and rent escalation clauses and, in some cases, allow termination within a certain number of years with notice and a fixed payment. Certain agreements provide for contingent rental payments based on sales.
Other long-term obligations at January 30, 2010 include $138.8 million relating to future rent escalation clauses and lease incentives under certain existing store operating lease arrangements. These rent obligations are recognized on a straight-line basis over the respective terms of the leases. Future minimum lease commitments due for retail and support facilities (including lease commitments for 41 retail stores not yet opened at January 30, 2010) and equipment leases under non-cancelable operating leases are as follows (in thousands):
Future minimum lease commitments do not include $40.0 million of minimum rentals due under non-cancelable subleases.
Rent expense was approximately $797.0 million, $744.6 million and $646.2 million for 2009, 2008 and 2007, respectively.
As of January 30, 2010, Staples had purchase obligations of $498.4 million. Many of the Company's purchase commitments may be canceled by the Company without advance notice or payment, and the Company has excluded such commitments, along with intercompany commitments from the following schedule. Contracts that may be terminated by the Company without cause or penalty, but that require advance notice for termination, are valued on the basis of an
C-23
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE H Commitments and Contingencies (Continued)
estimate of what the Company would owe under the contract upon providing notice of termination. Such purchase obligations will arise as follows (in thousands):
Letters of credit are issued by Staples during the ordinary course of business through major financial institutions as required by certain vendor contracts. As of January 30, 2010, Staples had open standby letters of credit totaling $154.1 million and open trade letters of credit totaling $49.2 million.
Various class action lawsuits were brought against the Company for alleged violations of what is known as California's "wage and hour" law. The plaintiffs alleged that the Company improperly classified store managers as exempt under the California wage and hour law, making such managers ineligible for overtime wages. In November 2007, the Company settled the remaining class action lawsuit relating to the misclassification of assistant store managers, recording a charge of $38.0 million, including interest and class counsel's attorney's fees. This charge is included in selling, general and administrative expenses. The Company previously settled a class action suit relating to the misclassification of store general managers for $3.9 million in December 2006.
After the settlement of the California "wage and hour" class action lawsuits, the Company became the subject of several class action lawsuits filed in various states, where the plaintiffs alleged the Company failed to comply with federal and state overtime laws and that it failed to pay them overtime because assistant store managers were misclassified as exempt from overtime pay. In January 2010, the Company and the attorneys for the plaintiffs jointly announced a settlement of these suits recording a charge of $42.0 million, including interest, class counsel's attorney's fees and a previous jury verdict obtained in February 2009 for one of these class action lawsuits. Under the terms of the settlement, the Company does not admit to any wrongdoing in connection with misclassification, resolves claims for damages as far back as 2002 and that cover approximately 5,500 current and former associates.
In 1991, Corporate Express acquired a French company, Agena S.A. Corporate Express issued arbitration proceedings against the sellers of the Company for misrepresentation of the financial position of the company in the acquisition balance sheet. Corporate Express was awarded EUR 79 million for this claim in 2003. In connection with the Agena acquisition, Corporate Express also initiated legal proceedings against Béfec (a predecessor of PricewaterhouseCoopers, France), the accountants who certified the acquisition balance sheet. The claim itself and the amount of damages are being judged in proceedings before the Commercial Court in France. These proceedings are expected to continue through much of 2010. Corporate Express is claiming damages totaling EUR 134 million plus interest and fees. No amounts have been accrued in the financial statements for this claim, as its outcome is currently uncertain.
In addition, the Company is involved from time to time in litigation arising from the operation of its business that is considered routine and incidental to its business; however, the Company does not expect the results of any of these actions to have a material adverse effect on its business, results of operations, or financial condition.
C-24
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE I Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The approximate tax effect of the significant components of Staples' deferred tax assets and liabilities are as follows (in thousands):
The deferred tax asset from tax loss carryforwards of $439.1 million represents approximately $2.0 billion of net operating loss carryforwards, $1.5 billion of which are subject to expiration beginning in 2010. The remainder has an indefinite carryforward period. The valuation allowance decreased by $140.9 million during 2009, due to a reassessment of the Company's overall tax position.
For financial reporting purposes, consolidated income before income taxes includes the following components (in thousands):
C-25
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE I Income Taxes (Continued)
The provision for income taxes consists of the following (in thousands):
A reconciliation of the federal statutory tax rate to Staples' effective tax rate on historical net income is as follows:
The effective tax rate in any year is impacted by the geographic mix of earnings.
The tax impact of the unrealized gain or loss on instruments designated as hedges of net investments in foreign subsidiaries is reported in accumulated other comprehensive income (loss) in stockholders' equity.
The Company operates in multiple jurisdictions and could be subject to audit in these jurisdictions. These audits can involve complex issues that may require an extended period of time to resolve and may cover multiple years. In the Company's opinion, an adequate provision for income taxes has been made for all years subject to audit.
Income tax payments were $236.1 million, $470.4 million and $479.5 million during 2009, 2008 and 2007, respectively.
Income taxes have not been provided on certain undistributed earnings of foreign subsidiaries of approximately $602.7 million, net of the noncontrolling interest, because such earnings are considered to be indefinitely reinvested in the business. The determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable because of the complexities associated with its hypothetical calculation.
NOTE J Equity Based Employee Benefit Plans
Staples offers its associates share ownership through certain equity based employee benefit plans, including the Amended and Restated 1998 Employee Stock Purchase Plan and the Amended and Restated International Employee Stock Purchase Plan (collectively the "Employee Stock Purchase Plans") and the Amended and Restated 2004 Stock Incentive Plan (the "2004 Plan").
In connection with certain equity based employee benefit plans, Staples included approximately $174.7 million, $180.7 million and $173.3 million in compensation expense for 2009, 2008 and 2007, respectively. The income tax benefit related to stock-based compensation was $8.8 million, $5.8 million and $18.6 million for 2009, 2008 and 2007, respectively. As of January 30, 2010, Staples had $244.2 million of nonqualified stock options, restricted stock and restricted stock units to be expensed over the period through September 2013.
C-26
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE J Equity Based Employee Benefit Plans (Continued)
Employee Stock Purchase Plans
The Amended and Restated 1998 Employee Stock Purchase Plan authorizes a total of up to approximately 22.8 million shares of common stock to be sold to participating employees and the Amended and Restated International Employee Stock Purchase Plan authorizes a total of up to approximately 2.8 million shares of common stock to be sold to participating employees of non-U.S. subsidiaries of the Company. Under both plans, participating employees may purchase shares of common stock at 85% of its fair market value at the beginning or end of an offering period, whichever is lower, through payroll deductions in an amount not to exceed 10% of an employee's annual base compensation.
Stock Award Plans
The 2004 Plan was implemented in July 2004 and replaced the amended and restated 1992 Equity Incentive Plan (the "1992 Plan") and the amended and restated 1990 Director Stock Option Plan (the "1990 Plan"). Unexercised options under both the 1992 Plan and the 1990 Plan remain outstanding. Under the 2004 Plan, Staples may issue up to 77.4 million shares of common stock to management and employees using various forms of awards, including, restricted stock and restricted stock units (collectively, "Restricted Shares"), nonqualified stock options and performance shares. The Restricted Shares are restricted in that they are non transferable (i.e. may not be sold until they vest). The nonqualified stock options cannot be exercised until they vest. Vesting of Restricted Shares and nonqualified stock options occurs over different periods depending on the terms of the individual award. Options outstanding under the Company's plans have an exercise price equal to the fair market value of the common stock on the date of grant. Options outstanding are exercisable at various percentages of the total shares subject to the option starting one year after the grant. All options expire ten years after the grant date, subject to earlier termination in the event of employment termination.
Stock Options
Information with respect to stock options granted under the above plans is as follows:
(1)The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of an option.
The weighted-average fair values of options and employee stock purchase plan shares granted during 2009, 2008 and 2007 were $5.57, $6.16 and $6.92, respectively. The weighted average remaining contractual life of options outstanding and exercisable at January 30, 2010 is 5.8 years and 4.6 years, respectively.
For options granted prior to May 1, 2005, the fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model. For stock options granted on or after May 1, 2005, the fair value of each award is estimated on the date of grant using a binomial valuation model. The binomial model considers characteristics of fair value option pricing that are not available under the Black-Scholes model. Similar to the Black-Scholes model, the binomial model takes into account variables such as volatility, dividend yield rate, and risk free interest rate. However, in addition, the binomial model considers the contractual term of the option, the probability that the option will be exercised prior to the end of its contractual life, and the probability of termination or retirement of the option holder in
C-27
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE J Equity Based Employee Benefit Plans (Continued)
computing the value of the option. For these reasons, the Company believes that the binomial model provides a fair value that is more representative of actual experience and future expected experience than that value calculated using the Black-Scholes model.
The fair value of options granted in each year was estimated at the date of grant using the following weighted average assumptions:
The expected stock volatility factor was calculated using an average of historical and implied volatility measures to reflect the different periods in the Company's history that would impact the value of the stock options granted to employees. The fair value of stock options is expensed over the applicable vesting period using the straight line method.
Restricted Shares
In 2003, the Company began granting Restricted Shares in lieu of special grants of stock options. Beginning in fiscal 2006, the Company began issuing Restricted Shares to employees and directors as part of its regular equity compensation program. All shares underlying awards of Restricted Shares are restricted in that they are not transferable (i.e., they may not be sold) until they vest. Subject to limited exceptions, if the employees who received the Restricted Shares leave Staples prior to the vesting date for any reason, the Restricted Shares will be forfeited and returned to Staples. The fair value of restricted shares is expensed over the applicable vesting period using the straight line method. The following table summarizes the Company's grants of Restricted Shares in 2009:
Performance Shares
In fiscal 2006, the Company began making performance share awards which are restricted stock awards whose underlying performance shares vest only if the Company meets minimum performance targets. For the 2009 performance share awards, the potential payouts are based on 2009 earnings per share performance, with the actual shares earned to be awarded in March 2010 and then vesting equally over the following three years (2011 to 2013). Based on the extent to which the objective is achieved, 70% to 200% of the target shares will be awarded. For the 2008 performance share awards, the performance target was established based on a cumulative three year earnings per share goal. If, at the end of the three year period, the Company's performance falls between minimum and maximum targets, then a percentage of the performance shares, from 90% to 200%, will vest. If the Company does not achieve the minimum performance target for the 2008 awards, none of the performance shares will vest. The 2006 and 2007 performance award shares did not vest as the minimum performance targets were not met. As the 2008 performance awards are based on a cumulative three year earnings per share target, it is not currently possible to determine whether or not these performance shares will vest. The 2009 performance share awards met the performance target that was established and these performance shares are expected to be awarded in March 2010, subject to the three year vesting requirement identified above.
C-28
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE J Equity Based Employee Benefit Plans (Continued)
The fair value of performance shares is based upon the market price of the underlying common stock as of the date of grant. As of January 30, 2010, Staples had 853,304 performance shares outstanding, which were issued during 2009 and 2008. The shares have a weighted-average fair market value of $20.84.
Employees' 401(k) Savings Plan
Staples' Employees' 401(k) Savings Plan (the "401(k) Plan") is available to all United States based employees of Staples who meet minimum age and length of service requirements. Beginning in 2009, contributions to the 401(k) Plan are made in cash and vest ratably over a five year period. Previously, contributions were made based upon a matching formula applied to employee contributions in the form of Company common stock and vested ratably over a five year period. The Supplemental Executive Retirement Plan (the "SERP Plan"), which is similar in many respects to the 401(k) Plan, is available to certain Company executives and other highly compensated employees, whose contributions to the 401(k) Plan are limited, and allows such individuals to supplement their contributions to the 401(k) Plan by making pre-tax contributions to the SERP Plan. Company contributions to the SERP Plan are based on a similar matching formula and vesting period; however, beginning in October 2004, such contributions were made in cash rather than in Company common stock.
The expense associated with the Company's match for the Staples 401(k) Savings Plan for 2009, 2008 and 2007 was $27.3 million, $26.0 million and $16.9 million, respectively.
At January 30, 2010, 56.1 million shares of common stock were reserved for issuance under Staples' 2004 Plan, 401(k) Plan and employee stock purchase plans.
Note K Pension Plans
In connection with the acquisition of Corporate Express in July 2008, Staples assumed the obligations under the pension plans Corporate Express sponsored. The pension plans cover certain employees in Europe and the United States. The benefits due to U.S. plan participants are frozen. A number of the defined benefit plans outside the U.S. are funded with plan assets that have been segregated in trusts. Contributions are made to these trusts, as necessary, to meet legal and other requirements. Prior to the acquisition of Corporate Express, the Company sponsored no defined benefit plans.
The following table presents a summary of the total projected benefit obligation for the defined benefit plans, the fair value of plan assets and the associated funded status recorded in the Consolidated Balance Sheet at January 30, 2010 and January 31, 2009 (in thousands):
C-29
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
Note K Pension Plans (Continued)
The following table presents a summary of the total net periodic cost recorded in the Consolidated Statement of Income, for 2009 and the period subsequent to the acquisition in 2008 related to each of the plans (in thousands):
The following table presents the changes in benefit obligations for each of the defined benefit pension plans since the acquisition in 2008 (in thousands):
The accumulated benefit obligation for the U.S. Plans and International Plans at January 30, 2010 was $32.2 million and $880.3 million, respectively. The accumulated benefit obligation for the U.S. Plans and International Plans at January 31, 2009 was $28.1 million and $741.1 million, respectively.
C-30
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
Note K Pension Plans (Continued)
The following table presents the changes in plan assets for each of the defined benefit pension plans since the acquisition in 2008 (in thousands):
The funded status for the U.S. Plans and International Plans at January 30, 2010 was $7.3 million underfunded and $92.2 million overfunded, respectively. The funded status for the U.S. Plans and International Plans at January 31, 2009 was $6.4 million underfunded and $23.5 million over funded, respectively.
Amounts recognized in the Consolidated Balance Sheet consist of the following (in thousands):
Amounts recognized in accumulated other comprehensive loss that have not yet been recognized as components of net periodic pension costs at January 30, 2010 and January 31, 2009 are comprised exclusively of actuarial losses.
The amount of accumulated other comprehensive loss expected to be recognized as a component of net periodic pension cost during 2010 is approximately $4.0 million.
There were no significant amendments to any of the Company's defined benefit pension plans during the post acquisition period in 2008 or 2009 that would have had a material effect on the Consolidated Statement of Income in these periods.
C-31
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
Note K Pension Plans (Continued)
Assumptions Used to Determine Plan Financial Information
The valuation of benefit obligations and net periodic pension cost uses participant-specific information such as salary, age and years of service, as well as certain assumptions, the most significant of which include estimates of discount rates, expected return on plan assets, rate of compensation increases, interest rates and mortality rates.
The following table presents the assumptions used to measure the net periodic cost and the year-end benefit obligations for the defined benefit pension plans for the post acquisition period in 2008 and 2009.
The following table shows the effect on pension obligations at January 30, 2010 of a change in discount rate and other assumptions (in thousands):
The discount rate used is the interest rate on high quality (AA rated) corporate bonds that have a maturity approximating the term of the related obligations. In estimating the expected return on plan assets, appropriate consideration is taken into account of the historical performance for the major asset classes held, or anticipated to be held, by the applicable pension funds and of current forecasts of future rates of return for those asset classes.
C-32
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
Note K Pension Plans (Continued)
The Company's defined benefit pension plans' actual and target asset allocations at January 30, 2010 are as follows:
No plan assets are expected to be returned to the Company during 2010.
The intent of the pension trust's investment policies is to maximize return on plan assets in the long-term while keeping contributions stable. In order to achieve this stability, a sufficient funding level is maintained. Investments in debt securities are primarily made when they bear a fixed rate of interest. A portion of the currency risk related to investments in equity securities, real estate and debt securities are hedged.
Information on Fair Value of Plan Assets
The fair values of the Company's pension plan assets at January 31, 2010 by asset category are as follows (in thousands):
(1)This category includes investments in equity securities of large, small and medium sized companies in the U.S. and in foreign companies, including those in developing countries. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund.
C-33
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
Note K Pension Plans (Continued)
(2)This category includes investments in investment grade fixed income instruments, U.S. dollar denominated debt securities of emerging market issuers and high yield fixed-income securities that are rated below investment grade. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is issued to value the fund.
(3)This category includes investments in mortgage-backed and asset-backed securities. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund.
(4)This category includes commodities of $37.6 million and non-separated investments with insurance companies of $13.6 million.
The change in the fair value for the pension assets valued using significant unobservable inputs (Level 3) was due to the following:
Expected Benefit Payments and Contributions
The following table presents the expected benefit payments to defined benefit pension plan participants for the next five years, and the aggregate for the following five years (in thousands):
These payments have been estimated based on the same assumptions used to measure the plans' projected benefit obligation at January 31, 2010 and include benefits attributable to estimated future compensation increases.
The 2010 expected benefit payments to defined benefit pension plan participants not covered by the respective plan assets (that is, underfunded plans) represent a component of other long-term obligations in the Consolidated Balance Sheet.
C-34
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
Note K Pension Plans (Continued)
The following table presents, based on current assumptions, the Company's expected contributions for the next five years, and the aggregate for the following five years (in thousands):
NOTE L Stockholders' Equity
In 2008, the Company repurchased 2.8 million shares of the Company's common stock for a total purchase price (including commissions) of $65.0 million under the Company's 2005 and 2007 share repurchase programs. In 2007, the Company repurchased 31.6 million shares of the Company's common stock for a total purchase price (including commissions) of $750.0 million under the Company's 2005 and 2007 share repurchase programs. The 2007 share repurchase program replaced the 2005 $1.5 billion share repurchase program and went into effect during the second quarter of 2007. The 2007 share repurchase program allows for the repurchase of $1.5 billion of Staples common stock and has no expiration date.
Beginning in the first quarter of 2008, the Company suspended the 2007 share repurchase program as a result of the acquisition of Corporate Express, and as a result, no repurchases of the Company's common stock under the Company's 2007 share repurchase program have been made from the end of the first quarter of 2008 through the end of fiscal 2009. The Company has $1.01 billion authorization remaining under the 2007 share repurchase program.
NOTE M Computation of Earnings per Common Share
Earnings per share has been presented below for Staples common stock for 2009, 2008 and 2007 (amounts in thousands, except per share data):
Options to purchase shares of common stock are excluded from the calculation of diluted earnings per share when their inclusion would have an anti-dilutive effect on the calculation. Options to purchase 12.7 million shares, 33.2 million shares and 9.8 million shares of Staples common stock were excluded from the calculation of diluted earnings per share for 2009, 2008 and 2007, respectively.
C-35
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE M Computation of Earnings per Common Share (Continued)
For purposes of calculating diluted earnings per common share, net income was not adjusted for the difference between Corporate Express Australia Limited's reported diluted and basic earnings per share multiplied by the number of shares of Corporate Express Australia Limited held by Staples, as the impact on earnings per share is not material.
NOTE N Segment Reporting
Staples has three reportable segments: North American Delivery, North American Retail and International Operations. The North American Delivery segment consists of the U.S. and Canadian business units that sell and deliver office products and services directly to customers, and includes Contract (including Corporate Express), Staples Business Delivery and Quill. The North American Retail segment consists of the U.S. and Canadian business units that operate office products stores. The International Operations segment consists of business units (including Corporate Express) that that sell and deliver office products and services directly to customers and businesses and that operate office products stores in 23 countries in Europe, Asia, Australia and South America.
In connection with the acquisition of Corporate Express, Staples allocated assets of $3.48 billion, $3.47 billion and $284 million to the North American Delivery, International Operations and North American Retail segments, respectively. Included in total assets were goodwill and intangible assets totaling $3.55 billion, of which $1.71 billion, $1.55 billion and $284 million were allocated to the North American Delivery, International Operations and North American Retail segments, respectively.
Staples evaluates performance and allocates resources based on profit or loss from operations before integration and restructuring costs, stock-based compensation, interest and other expense, non-recurring items and the impact of changes in accounting principles ("business unit income"). The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note A. Intersegment sales and transfers are recorded at Staples' cost; therefore, there is no intercompany profit or loss recognized on these transactions.
Staples' North American Delivery and North American Retail segments are managed separately because the way they market products is different, the classes of customers they service may be different, and the distribution methods used to deliver products to customers is different. The International Operations are considered a separate reportable segment because of the significant differences in the operating environment from the North American operations.
C-36
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE N Segment Reporting (Continued)
The following is a summary of significant accounts and balances by reportable segment for 2009, 2008 and 2007 (in thousands):
The following is a reconciliation of total segment income to consolidated income before income taxes for 2009, 2008 and 2007 (in thousands):
C-37
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE N Segment Reporting (Continued)
Geographic Information:
NOTE O Guarantor Subsidiaries
Under the terms of the Company's April 2011 Notes, the Revolving Credit Facility, the October 2012 Notes, the January 2014 Notes and the Commercial Paper Program, the Guarantor Subsidiaries guarantee repayment of the debt. The debt is fully and unconditionally guaranteed on an unsecured, joint and several basis by the Guarantor Subsidiaries. The term of guarantees is equivalent to the term of the related debt. The following condensed consolidating financial data is presented for the holders of the April 2011 Notes, the October 2012 Notes, and the January 2014 Notes and illustrates the composition of Staples, Inc. (the "Parent Company"), Guarantor Subsidiaries, and non-guarantor subsidiaries as of January 30, 2010 and January 31, 2009 and for the years ended January 30, 2010, January 31, 2009 and February 2, 2008. The Guarantor Subsidiaries are wholly owned by Staples, Inc. The non-guarantor subsidiaries represent more than an inconsequential portion of the consolidated assets and revenues of Staples.
Investments in subsidiaries are accounted for by the Parent Company on the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are, therefore, reflected in the Parent Company's investment accounts and earnings. The principal elimination entries eliminate the Parent Company's investment in subsidiaries and intercompany balances and transactions.
C-38
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE O Guarantor Subsidiaries (Continued)
Condensed Consolidating Balance Sheet
As of January 30, 2010
(in thousands)
Condensed Consolidating Balance Sheet
As of January 31, 2009
(in thousands)
C-39
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE O Guarantor Subsidiaries (Continued)
Condensed Consolidating Statement of Income
For the year ended January 30, 2010
(in thousands)
Condensed Consolidating Statement of Income
For the year ended January 31, 2009
(in thousands)
C-40
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE O Guarantor Subsidiaries (Continued)
Condensed Consolidating Statement of Income
For the year ended February 2, 2008
(in thousands)
Condensed Consolidating Statement of Cash Flows
For the year ended January 30, 2010
(in thousands)
C-41
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE O Guarantor Subsidiaries (Continued)
Condensed Consolidating Statement of Cash Flows
For the year ended January 31, 2009
(in thousands)
C-42
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE O Guarantor Subsidiaries (Continued)
Condensed Consolidating Statement of Cash Flows
For the year ended February 2, 2008
(in thousands)
NOTE P Quarterly Summary (Unaudited)
C-43
STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE P Quarterly Summary (Unaudited) (Continued)
(1)Results of operations for this period include a $12.4 million charge, net of taxes ($0.02 per diluted share) related to integration and restructuring costs.
(2)Results of operations for this period include a $19.4 million charge, net of taxes ($0.03 per diluted share) related to integration and restructuring costs.
(3)Results of operations for this period include a $10.4 million charge, net of taxes ($0.01 per diluted share) related to integration and restructuring costs.
(4)Results of operations for this period include a $12.9 million charge, net of taxes ($0.02 per diluted share) related to integration and restructuring costs and a $27.5 million charge, net of taxes ($0.04 per diluted share) related to the settlement of retail wage and hour class action litigation.
(5)Results of operations include Corporate Express since July 2, 2008, the date Staples declared the terms of the tender offer unconditional. Results of operations for this period also include a $0.1 million charge, net of taxes related to integration and restructuring costs.
(6)Results of operations for this period include a $86.6 million charge, net of taxes ($0.12 per diluted share) related to integration and restructuring costs and a $57.0 million income tax charge ($0.08 per diluted share) for the establishment of a reserve related to foreign tax credits expected to expire.
(7)Results of operations for this period include a $26.9 million charge, net of taxes ($0.04 per diluted share) related to integration and restructuring costs and the reversal of the $57.0 million income tax charge ($0.08 per diluted share) established in the third quarter of 2008, as the tax planning strategies to optimize the benefits of the foreign tax credits were finalized.
C-44
(8)Item 15(a)2
Staples, Inc.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
Accounts Receivable Allowance for Doubtful Accounts
Valuation and qualifying account information related to operations is as follows (in thousands):
C-45
EXHIBIT INDEX
D-1
D-2
*A management contract or compensatory plan or arrangement required to be filed as an exhibit to this annual report pursuant to Item 15(b) of Form 10-K.
**Portions of the exhibit have been omitted pursuant to a grant of confidential treatment.
^An exhibit previously filed with the Securities and Exchange Commission and incorporated herein by reference. Unless otherwise indicated, such exhibit was filed under Commission File Number 0-17586.
+Filed herewith.
++Furnished herewith.
D-3