10-Q 1 a09-23137_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark one)

 

x

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended:  August 1, 2009

 

o

Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period  from                     to                    

 

Commission File Number:  0-17586

 

STAPLES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware
(State or other jurisdiction of
incorporation or organization)

 

 

04-2896127

(I.R.S. Employer

Identification No.)

 

Five Hundred Staples Drive, Framingham, MA  01702

(Address of principal executive office and zip code)

 

508-253-5000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o  No x

 

The registrant had 722,342,271 shares of common stock outstanding as of August 21, 2009.

 

 

 



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

FORM  10-Q
August 1, 2009
TABLE OF CONTENTS
 

 

 

Page

 

 

 

Part I – Financial Information:

 

 

 

 

 

Item 1.  Financial Statements:

 

 

Condensed Consolidated Balance Sheets (unaudited)

 

3

Condensed Consolidated Statements of Income (unaudited)

 

4

Condensed Consolidated Statements of Cash Flows (unaudited)

 

5

Notes to Condensed Consolidated Financial Statements

 

6-20

 

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

21-30

 

 

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

30

 

 

 

Item 4.  Controls and Procedures

 

30

 

 

 

Part II – Other Information

 

 

 

 

 

Item 1A. Risk Factors

 

31-34

 

 

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

34

 

 

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

34

 

 

 

Item 6.  Exhibits

 

34

 

 

 

Signatures

 

35

 

 

 

Exhibit Index

 

36

 

2



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

STAPLES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollar Amounts in Thousands, Except Share Data)

(Unaudited)

 

 

 

August 1,

 

January 31,

 

 

 

2009

 

2009

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

633,442

 

$

633,774

 

Receivables, net

 

1,798,411

 

1,841,231

 

Merchandise inventories, net

 

2,523,153

 

2,404,174

 

Deferred income tax asset

 

271,949

 

281,101

 

Prepaid expenses and other current assets

 

489,741

 

636,978

 

Total current assets

 

5,716,696

 

5,797,258

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

Land and buildings

 

1,046,402

 

1,040,754

 

Leasehold improvements

 

1,242,649

 

1,183,879

 

Equipment

 

1,965,160

 

1,949,646

 

Furniture and fixtures

 

965,821

 

926,702

 

Total property and equipment

 

5,220,032

 

5,100,981

 

Less accumulated depreciation and amortization

 

2,979,827

 

2,810,355

 

Net property and equipment

 

2,240,205

 

2,290,626

 

 

 

 

 

 

 

Lease acquisition costs, net of accumulated amortization

 

25,922

 

26,931

 

Intangible assets, net of accumulated amortization

 

631,708

 

701,918

 

Goodwill

 

4,157,726

 

3,780,169

 

Other assets

 

524,591

 

476,153

 

Total assets

 

$

13,296,848

 

$

13,073,055

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

2,095,691

 

$

1,967,597

 

Accrued expenses and other current liabilities

 

1,453,937

 

1,404,709

 

Commercial paper

 

107,087

 

1,195,557

 

Debt maturing within one year

 

496,074

 

277,691

 

Total current liabilities

 

4,152,789

 

4,845,554

 

 

 

 

 

 

 

Long-term debt

 

2,361,513

 

1,968,928

 

Other long-term obligations

 

601,643

 

636,142

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

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

 

 

 

Common stock, $.0006 par value, 2,100,000,000 shares authorized; issued 892,182,841 shares at August 1, 2009 and 882,032,761 shares at January 31, 2009

 

536

 

529

 

Additional paid-in capital

 

4,174,915

 

4,048,398

 

Accumulated other comprehensive loss

 

(170,542

)

(494,327

)

Retained earnings

 

5,484,668

 

5,367,341

 

Less: Treasury stock at cost - 167,707,941 shares at August 1, 2009 and 166,427,240 shares at January 31, 2009

 

(3,381,809

)

(3,357,734

)

Total Staples, Inc. stockholders’ equity

 

6,107,768

 

5,564,207

 

Noncontrolling interests

 

73,135

 

58,224

 

Total stockholders’ equity

 

6,180,903

 

5,622,431

 

Total liabilities and stockholders’ equity

 

$

13,296,848

 

$

13,073,055

 

 

See notes to condensed consolidated financial statements.

 

3



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Dollar Amounts in Thousands, Except Per Share Data)

(Unaudited)

 

 

 

13 Weeks Ended

 

26 Weeks Ended

 

 

 

August 1,

 

August 2,

 

August 1,

 

August 2,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

5,533,779

 

$

5,074,720

 

$

11,351,338

 

$

9,959,274

 

Cost of goods sold and occupancy costs

 

4,109,522

 

3,723,218

 

8,401,179

 

7,236,850

 

Gross profit

 

1,424,257

 

1,351,502

 

2,950,159

 

2,722,424

 

 

 

 

 

 

 

 

 

 

 

Operating and other expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

1,161,400

 

1,091,664

 

2,359,570

 

2,136,465

 

Integration and restructuring costs

 

29,633

 

163

 

48,630

 

163

 

Amortization of intangibles

 

26,644

 

14,259

 

48,515

 

18,415

 

Total operating expenses

 

1,217,677

 

1,106,086

 

2,456,715

 

2,155,043

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

206,580

 

245,416

 

493,444

 

567,381

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

1,329

 

6,293

 

3,001

 

17,781

 

Interest expense

 

(60,933

)

(21,190

)

(121,430

)

(28,446

)

Miscellaneous income (expense)

 

1,361

 

(604

)

(2,282

)

(389

)

Consolidated income before income taxes

 

148,337

 

229,915

 

372,733

 

556,327

 

Income tax expense

 

51,176

 

77,700

 

128,593

 

191,944

 

Consolidated net income

 

97,161

 

152,215

 

244,140

 

364,383

 

Income attributed to the noncontrolling interests

 

4,750

 

1,982

 

8,765

 

1,868

 

Net income attributed to Staples, Inc

 

$

92,411

 

$

150,233

 

$

235,375

 

$

362,515

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.13

 

$

0.22

 

$

0.33

 

$

0.52

 

Diluted earnings per common share

 

$

0.13

 

$

0.21

 

$

0.33

 

$

0.51

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share*

 

$

0.08

 

$

 

$

0.17

 

$

0.33

 

 


*In 2009, the Company changed its dividend policy from an annual dividend to a quarterly dividend.

 

See notes to condensed consolidated financial statements.

 

4



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)

(Unaudited)

 

 

 

26 Weeks Ended

 

 

 

August 1,

 

August 2,

 

 

 

2009

 

2008

 

Operating Activities:

 

 

 

 

 

Consolidated net income, including income from the noncontrolling interests

 

$

244,140

 

$

364,383

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

271,759

 

224,906

 

Stock-based compensation

 

90,558

 

86,797

 

Deferred tax expense

 

 

14,419

 

Excess tax benefits from stock-based compensation arrangements

 

 

(2,421

)

Other

 

15,836

 

6,239

 

Changes in assets and liabilities:

 

 

 

 

 

Decrease (increase) in receivables

 

125,884

 

(53,235

)

Increase in merchandise inventories

 

(20,938

)

(147,943

)

Decrease in prepaid expenses and other assets

 

131,017

 

30,450

 

Increase in accounts payable

 

38,257

 

96,181

 

Decrease in accrued expenses and other current liabilities

 

(172,422

)

(503,298

)

(Decrease) increase in other long-term obligations

 

(26,127

)

71,442

 

Net cash provided by operating activities

 

697,964

 

187,920

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

Acquisition of property and equipment

 

(129,865

)

(168,663

)

Acquisition of businesses and investments in joint ventures, net of cash acquired

 

 

(4,381,780

)

Proceeds from the sale of short-term investments

 

 

27,019

 

Purchase of short-term investments

 

 

(3

)

Net cash used in investing activities

 

(129,865

)

(4,523,427

)

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

Proceeds from the exercise of stock options and the sale of stock under employee stock purchase plans

 

45,338

 

70,678

 

(Repayments of) proceeds from issuance of commercial paper

 

(1,088,470

)

2,992,993

 

Proceeds from borrowings

 

1,139,820

 

650,809

 

Payments on borrowings, including payment of deferred financing fees

 

(565,498

)

(68,178

)

Cash dividends paid

 

(118,048

)

(231,460

)

Excess tax benefits from stock-based compensation arrangements

 

 

2,421

 

Purchase of treasury stock, net

 

(24,075

)

(79,814

)

Net cash (used in) provided by financing activities

 

(610,933

)

3,337,449

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

42,502

 

11,054

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(332

)

(987,004

)

Cash and cash equivalents at beginning of period

 

633,774

 

1,245,448

 

Cash and cash equivalents at end of period

 

$

633,442

 

$

258,444

 

 

See notes to condensed consolidated financial statements.

 

5



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

 

Note A  - Basis of Presentation

 

The accompanying interim unaudited condensed consolidated financial statements include the accounts of Staples, Inc. and its subsidiaries (“Staples”, “the Company”, “we”, “our” or “us”) and the July 2008 acquisition of Corporate Express N.V. (“Corporate Express”) (see Note C).  These financial statements are for the period covering the thirteen and twenty-six weeks ended August 1, 2009 (also referred to as the “second quarter of 2009” and the “first half of 2009”) and the period covering the thirteen and twenty-six weeks ended August 2, 2008 (also referred to as the “second quarter of 2008” and the “first half of 2008”).  All intercompany accounts and transactions are eliminated in consolidation.  Certain previously reported amounts have been reclassified to conform with the current period presentation.

 

These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements.  In the opinion of management, such interim financial statements reflect all normal recurring adjustments considered necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented.  The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year.  These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2009.

 

Note B — New Accounting Pronouncements

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”).  In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2, “Effective Date of FASB Statement No. 157”, which delayed for one year the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).  The Company adopted SFAS No. 157 for its financial assets and liabilities as of February 3, 2008 and adopted SFAS No. 157 for its nonfinancial assets and liabilities as of February 1, 2009.  The adoption had no impact on the Company’s financial condition, results of operations or cash flows.

 

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”).  SFAS No. 141(R) replaces SFAS No. 141, “Business Combinations”, but retains the requirement that the purchase method of accounting for acquisitions be used for all business combinations.  SFAS No. 141(R) expands on the disclosures previously required by SFAS No. 141, better defines the acquirer and the acquisition date in a business combination, and establishes principles for recognizing and measuring the assets acquired (including goodwill), the liabilities assumed and any noncontrolling interests in the acquired business.  SFAS No. 141(R) also requires the acquirer to record an adjustment to income tax expense for changes in valuation allowances or uncertain tax positions related to acquired businesses.  SFAS No. 141(R) is effective for all business combinations with an acquisition date in the first annual period following December 15, 2008.  The Company adopted this statement as of February 1, 2009.  This adoption had no impact on the Company’s financial condition, results of operations or cash flows.

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51” (“SFAS No. 160”).  SFAS No. 160 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.  SFAS No. 160 also 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.  SFAS No. 160 is effective for financial statements for fiscal years beginning on or after December 1, 2008 and interim periods within those years.  The Company adopted this statement as of February 1, 2009, including the required retrospective application to all prior periods presented.  SFAS No. 160 impacted the Company’s presentation of minority interests on the balance sheet and statement of income but had no impact on the Company’s financial condition, results of operations or cash flows.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”).  SFAS No. 161 enhances disclosures for derivative instruments and hedging activities, including: (i) the manner in which a company uses derivative instruments; (ii) the manner in which derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and (iii) the effect of derivative instruments and related hedged items on a company’s financial position.  SFAS No. 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years.

 

6



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

The Company adopted this statement as of February 1, 2009.  As SFAS No. 161 relates specifically to disclosures, this standard had no impact on the Company’s financial condition, results of operations or cash flows.

 

In December 2008, the FASB issued FSP No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP No. 132(R)-1”) which provides additional guidance on an employers’ disclosures about plan assets of a defined benefit pension or other postretirement plan.  This interpretation is effective for financial statements issued for fiscal years ending after December 15, 2009.  The Company will adopt this interpretation as of January 30, 2010.  The adoption of this interpretation will increase the disclosures in the financial statements related to the assets of the Company’s defined benefit pension plans.  The adoption of FSP No. 132(R)-1 is not expected to have a significant impact on the Company’s financial statements.

 

In April 2009, the FASB issued SFAS No. 107-1 and Accounting Principle Board (“APB”) Opinion No. 28-1 (“APB No. 28-1”), “Interim Disclosures About Fair Value of Financial Instruments” (“SFAS No. 107-1” and “APB No. 28-1”).  SFAS No. 107-1 and APB No. 28-1 require fair value disclosures in both interim as well as annual financial statements in order to provide more timely information about the effects of current market conditions on financial instruments.  SFAS No. 107-1 and APB No. 28-1 are effective for interim and annual periods ending after June 15, 2009.  The Company adopted these standards as of August 1, 2009.  As SFAS No. 107-1 and APB No. 28-1 relate specifically to disclosures, these standards had no impact on the Company’s financial condition, results of operations or cash flows.

 

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events (“SFAS No. 165”). SFAS No. 165 provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  SFAS No. 165 also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected.  SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009, and accordingly, the Company adopted this standard during the second quarter of 2009.  The implementation of this standard did not have any impact on the financial statements of the Company.  Subsequent events through the filing date of this Form 10-Q have been evaluated for disclosure and recognition.

 

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140” (“SFAS No. 166”).  SFAS No. 166 requires entities to provide more information regarding sales of securitized financial assets and similar transactions, particularly if the entity has continuing exposure to the risks related to transferred financial assets. SFAS No. 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and requires additional disclosures. SFAS No. 166 is effective for fiscal years beginning after November 15, 2009.  The Company has not completed its assessment of the impact SFAS No. 166 will have on its financial condition, results of operations or cash flows.

 

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”).  SFAS No. 167 modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated.  SFAS No. 167 clarifies that the 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. SFAS No. 167 requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. SFAS No. 167 also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. SFAS No. 167 is effective for fiscal years beginning after November 15, 2009. The Company has not completed its assessment of the impact SFAS No. 167 will have on its financial condition, results of operations or cash flows.

 

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB Statement No. 162” (“SFAS No. 168”).  SFAS No. 168 establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification is effective for interim and annual periods ending after September 15, 2009, and as of the effective date, all existing accounting standard documents will be superseded. The Codification is effective for the Company in the third quarter of 2009, and accordingly, its Quarterly Report on Form 10-Q for the quarter ending October 31, 2009 and all subsequent public filings will reference the Codification as the sole source of authoritative literature.

 

7



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

Note C — Business Combinations

 

In July 2008, Staples acquired 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 intends by the end of fiscal year 2009 to acquire the remaining capital of Corporate Express by means of a compulsory acquisition procedure in accordance with the Dutch Civil Code.  In July 2008, Staples also acquired, 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.

 

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):

 

 

 

As of July 2, 2008

 

Current assets (excluding acquired cash)

 

$

2,182,908

 

Property and equipment

 

322,987

 

Other assets

 

1,109,865

 

Goodwill

 

2,818,679

 

Intangible assets

 

727,560

 

Total assets acquired

 

$

7,161,999

 

 

 

 

 

Current liabilities

 

$

1,966,471

 

Long-term debt

 

151,826

 

Other long-term liabilities

 

661,891

 

Total liabilities assumed

 

$

2,780,188

 

 

 

 

 

Net assets acquired, excluding cash

 

$

4,381,811

 

 

During 2009, the Company finalized its integration and restructuring plans for Corporate Express, including employee severance, facility closures, system consolidation 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 acquisition reserves, intangible assets, deferred taxes and the Company’s reserve for uncertain tax positions.  The changes to intangible assets related to values only; no significant changes were made to estimated lives.

 

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 income statement.

 

8



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

The activity related to the Company’s reserves for the periods subsequent to the acquisition date is as follows (in thousands):

 

 

 

Purchase
accounting
adjustments
offset to goodwill

 

Usage

 

Balance as of
August 1, 2009

 

Transaction costs

 

$

41,616

 

$

(39,220

)

$

2,396

 

Severance

 

92,117

 

(31,570

)

60,547

 

Facility closures

 

36,218

 

(3,633

)

32,585

 

Other

 

11,074

 

(2,154

)

8,920

 

Total

 

$

181,025

 

$

(76,577

)

$

104,448

 

 

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.

 

Note D — Integration and Restructuring Costs

 

Integration and restructuring costs represent the costs associated with the integration of the acquired Corporate Express business with the Company’s pre-existing business and the consolidation of certain operations of the combined Company.  Integration and restructuring costs were $29.6 million and $48.6 million for the second quarter and first half of 2009, respectively.  Integration and restructuring costs for the second quarter of 2009 included a $20.7 million charge for severance and retention and $8.9 million of consulting and other fees.  Integration and restructuring costs for the first half of 2009 include a $22.9 million charge for severance and retention, $14.0 million of consulting and other costs, and an $11.7 million charge related to asset write-downs for assets whose use was expected to be limited as a result of the acquisition.  Integration and restructuring costs were $0.2 million for the second quarter and first half of 2008, and consisted primarily of consulting and other costs.

 

Note E — Debt and Credit Agreements

 

On March 3, 2009, the Company terminated and paid off all outstanding balances from the Corporate Express U.S. and European securitization programs that were assumed upon the acquisition of Corporate Express.

 

On March 27, 2009, the Company issued $500.0 million aggregate principal amount of notes (the “March 2009 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 March 2009 Notes was made pursuant to the terms of an underwriting agreement (the “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 March 2009 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”).

 

On March 27, 2009, the Company reduced its total commitment under the Credit Agreement, dated April 1, 2008, among the Company, Barclays Bank PLC and the other lenders named therein, as amended (the “2008 Agreement”) from $1.26 billion to $761.0 million, pursuant to the mandatory commitment reduction provisions triggered by the receipt of proceeds from the offering of the March 2009 Notes.  Originally, the total commitment under the 2008 Agreement was $3.0 billion.

 

9



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

On May 19, 2009, the Company entered into a $300.0 million accounts receivable securitization program (the “Securitization Program”) with several of its wholly owned subsidiaries and certain financial institutions.  Under the terms of the 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 Securitization Program are included as a component of current liabilities in the condensed consolidated balance sheet, while the accounts receivable securing these obligations are included as a component of net receivables in the condensed consolidated balance sheet.  Total borrowings outstanding under the Securitization Program at August 1, 2009 were $300.0 million.

 

On May 26, 2009, as a result of entering into the Securitization Program, the Company voluntarily terminated the entire remaining commitment under the 2008 Agreement, thereby terminating the 2008 Agreement earlier than its July 9, 2009 expiration date.  As a result of the termination of the 2008 Agreement, availability under the Company’s existing commercial paper program was reduced from approximately $1.5 billion to $750.0 million.  The commercial paper program continues to be backstopped by Staples’ existing $750.0 million revolving credit facility with Bank of America N.A. and other lenders named therein, which matures in October 2011 (the “Revolving Credit Facility”).  As of August 1, 2009, $107.1 million of Notes were outstanding under the Company’s commercial paper program.  The Notes have a weighted average remaining maturity of 29 days with a weighted average interest rate of 0.7%.

 

In connection with the March 2009 Notes, the issuance of $1.5 billion aggregate principal amount of notes due January 15, 2014 (the “January 2009 Notes”), the 2008 Agreement and the Securitization Program, the Company incurred financing fees of $33.1 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 $2.1 million and $4.1 million for the thirteen and twenty-six weeks ended August 1, 2009, respectively.  Unamortized financing fees of $3.3 million were included in prepaid and other current assets and unamortized fees of $12.2 million were included in other assets.

 

At August 1, 2009, the fair value of the January 2009 Notes was approximately $1.75 billion and the fair value of the March 2009 Notes was approximately $532 million.

 

There were no instances of default during the first half of 2009 under any of the Company’s debt agreements.

 

Note F — Fair Value Measurements, Derivative Instruments and Hedging Activities

 

Fair Value Measurements:  The following table shows the Company’s assets and liabilities as of August 1, 2009 that are measured at fair value on a recurring basis (in thousands):

 

 

 

Quoted Prices in
Active Markets for
Identical Assets or
Liabilities
Level 1

 

Significant
Other
Observable
Inputs
Level 2

 

Unobservable
Inputs
Level 3

 

Assets

 

 

 

 

 

 

 

Derivative assets

 

 

$

30,384

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Derivative liabilities

 

 

$

(2,164

)

 

 

                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.

 

10



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

Derivative Instruments and Hedging Activities:  Staples uses interest rate swaps to effectively convert certain fixed rate debt into variable rate debt and certain variable rate debt into fixed rate debt and uses 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 are 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 condensed consolidated statement of cash flows in the same category as the item being hedged.

 

Interest Rate Swaps:  On January 8, 2003, Staples entered into an interest rate swap, for an aggregate notional amount of $325.0 million, designed to convert Staples’ September 2002 notes due 2012 (the “September 2002 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 September 2002 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 September 2002 Notes.  At August 1, 2009, the interest rate swap agreement had a fair value gain of $21.2 million, which was included in other assets.  No amounts were included in the condensed consolidated statement of income for the second quarter of 2009, first half of 2009, the second quarter of 2008 or the first half of 2008 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, as scheduled, leaving a remaining balance of AUD $73.0 million as of August 1, 2009 (approximately $60 million, based on foreign exchange rates at August 1, 2009). The swap agreements are scheduled to terminate in three stages: AUD $8 million in January 2010, AUD $40 million in July 2010, and AUD $25 million in July 2011.  The agreements are designated as a cash flow hedge.  Under the terms of the agreements, the Company is required to make monthly interest payments at a weighted average interest rate of 6.8% 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 August 1, 2009, the interest rate swap agreements had a fair value loss of AUD $2.6 million (approximately $2.2 million), which was included in stockholders’ equity as a component of accumulated other comprehensive income, net. No amounts were included in the condensed consolidated statement of income for the second quarter or first half of 2009 or the second quarter or first half of 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.

 

11



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

Foreign Currency Swaps:  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 August 1, 2009, the currency swap had an aggregate fair value gain of $9.2 million, which was included in other assets. No amounts were included in the condensed consolidated statement of income for the second quarter of 2009, the first half of 2009, the second quarter of 2008 or the first half of 2008 related to ineffectiveness associated with this net investment hedge.

 

Foreign currency gains (losses), net of taxes, recorded in accumulated other comprehensive income were $13.9 million and $20.9 million for the second quarter and first half of 2009, respectively, and $0.2 million and $(1.3) million for the second quarter of 2008 and first half of 2008, respectively.

 

Note G — 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.

 

Under the Employee Stock Purchase Plans, U.S. and International associates may purchase shares of Staples common stock at 85% of the lower of the market price of the common stock at the beginning or end of an offering period through payroll deductions in an amount not to exceed 10% of an employee’s annual base compensation.  Under the Amended and Restated 2004 Stock Incentive Plan, the Company grants restricted stock and restricted stock units (collectively, “Restricted Shares”) and nonqualified stock options to associates.  The Restricted Shares are restricted in that they are not transferable (i.e. they may not be sold) until they vest. The nonqualified stock options cannot be exercised until they vest.  Vesting of the Restricted Shares and nonqualified stock options occurs over different periods, depending on the terms of the individual award, but expenses relating to these awards are all recognized on a straight line basis over the applicable vesting period.

 

The following table summarizes the nonqualified stock option and Restricted Share activity in the first half of 2009:

 

 

 

Nonqualified Stock Options (1)

 

Restricted Shares (2)

 

 

 

Number
of Shares

 

Weighted
Average
Exercise
Price
per Share

 

Number
of Shares

 

Weighted
Average
Grant Date
Fair Value
Per Share

 

Outstanding at January 31, 2009

 

47,248,741

 

$

18.86

 

12,390,942

 

$

24.34

 

Granted

 

 

 

344,012

 

18.56

 

Exercised / Released

 

(639,447

)

13.45

 

(332,327

)

22.48

 

Canceled

 

(729,466

)

20.49

 

(297,632

)

24.21

 

Outstanding at May 2, 2009

 

45,879,828

 

$

18.90

 

12,104,995

 

$

24.23

 

Granted

 

6,688,802

 

20.16

 

5,970,681

 

20.13

 

Exercised / Released

 

(1,196,652

)

17.50

 

(3,490,087

)

24.46

 

Canceled

 

(762,912

)

21.20

 

(129,994

)

23.97

 

Outstanding at August 1, 2009

 

50,609,066

 

$

19.07

 

14,455,595

 

$

22.48

 

 


(1) At August 1, 2009, the aggregate intrinsic value of the outstanding nonqualified stock options was $98.7 million and the aggregate intrinsic value of the exercisable nonqualified stock options was $116.4 million.

 

(2) Restricted Shares do not include performance shares (“Performance Shares”) which Staples grants to certain employees. These are awards under which restricted stock is only issued if the Company meets minimum performance targets.  If, at the end of each performance period, the Company’s performance falls between minimum and maximum targets, performance shares ranging from 70% to 200% of the underlying award will be issued.  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 August 1, 2009, Staples had 1.29 million Performance Shares outstanding, which were issued during 2007, 2008 and 2009. The shares have a weighted-average fair market value per share of $22.25.

 

12



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

In connection with its equity based employee benefit plans, Staples included $55.2 million and $90.6 million in compensation expense for the second quarter of 2009 and first half of 2009, respectively, and $53.4 million and $86.8 million in compensation expense for the second quarter of 2008 and first half of 2008, respectively.  As of August 1, 2009, Staples had $323.1 million of nonqualified stock options and Restricted Shares to be expensed over the period through July 2013.

 

Note H — Pension Plans

 

In connection with the acquisition of Corporate Express, Staples assumed the obligations under the defined benefit pension plans Corporate Express sponsored.  The pension plans cover most Corporate Express employees in Europe and certain employees in 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 in July 2008, the Company sponsored no defined benefit plans.

 

Net periodic pension cost recognized for the second quarter of 2009 and first half of 2009 is based upon preliminary estimates pending the final actuarial determination of such costs for fiscal 2009.  The following table presents a summary of the total net periodic cost recorded in the Condensed Consolidated Statement of Income for the second quarter of 2009 and first half of 2009 related to the plans (in thousands):

 

 

 

13 Weeks Ended August 1, 2009

 

26 Weeks Ended August 1, 2009

 

 

 

 

 

International

 

 

 

 

 

International

 

 

 

 

 

U.S. Plans

 

Plans

 

Total

 

U.S. Plans

 

Plans

 

Total

 

Service cost

 

 

$

 2,191

 

$

  2,191

 

 

$

 4,242

 

$

 4,242

 

Interest cost

 

$

511

 

11,600

 

12,111

 

$

989

 

22,461

 

23,450

 

Expected return on plan assets

 

(412

)

(14,050

)

(14,462

)

(798

)

(27,205

)

(28,003

)

Amortization of unrecognized losses

 

 

2,278

 

2,278

 

 

4,411

 

4,411

 

Net periodic pension cost

 

$

99

 

$

2,019

 

$

2,118

 

$

191

 

$

3,909

 

$

4,100

 

 

Cash contributions of $0.1 million and $2.9 million were made to the U.S. Plans and International Plans, respectively, during the second quarter of 2009.  Cash contributions of $0.3 million and $4.7 million were made to the U.S. Plans and International Plans, respectively, during the first half of 2009.  The Company expects to make additional cash contributions of $0.8 million and $6.7 million to the U.S. Plans and International Plans, respectively, during the remainder of fiscal 2009.

 

13



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

Note I — Stockholders’ Equity and Comprehensive Income

 

The following table reflects for the first half of 2009 and 2008 the changes in stockholders’ equity and comprehensive income attributable to Staples, Inc. and its noncontrolling interests (in thousands).  The noncontrolling interests reflect the 41% interest in Corporate Express Australia Limited, as Staples acquired a 59% ownership interest in this business in connection with its acquisition of Corporate Express.

 

 

 

Attributable
to Staples,
Inc.

 

Attributable to
Noncontrolling
Interests

 

Total

 

Stockholders’ equity at January 31, 2009

 

$

5,564,207

 

$

58,224

 

$

5,622,431

 

Comprehensive income:

 

 

 

 

 

 

 

Net income

 

235,375

 

8,765

 

244,140

 

Other comprehensive income:

 

 

 

 

 

 

 

Foreign currency translation adjustments, net

 

302,848

 

6,146

 

308,994

 

Changes in the fair value of derivatives, net (1)

 

20,937

 

 

20,937

 

Total comprehensive income

 

559,160

 

14,911

 

574,071

 

Issuance of common stock for stock options exercised and the sale of stock under employee stock purchases plans

 

45,338

 

 

45,338

 

Stock-based compensation

 

90,558

 

 

90,558

 

Cash dividends

 

(118,048

)

 

(118,048

)

Purchase of treasury stock, net

 

(24,075

)

 

(24,075

)

Other

 

(9,372

)

 

(9,372

)

Stockholders’ equity at August 1, 2009

 

$

6,107,768

 

$

73,135

 

$

6,180,903

 

 

 

 

Attributable
to Staples,
Inc.

 

Attributable to
Noncontrolling
Interests

 

Total

 

Stockholders’ equity at February 2, 2008

 

$

5,718,007

 

$

10,227

 

$

5,728,234

 

Comprehensive income:

 

 

 

 

 

 

 

Net income

 

362,515

 

1,868

 

364,383

 

Other comprehensive income

 

 

 

 

 

 

 

Foreign currency translation adjustments, net

 

14,843

 

(1,040

)

13,803

 

Changes in the fair value of derivatives, net (1)

 

(1,311

)

 

(1,311

)

Total comprehensive income

 

376,047

 

828

 

376,875

 

Issuance of common stock options for stock options exercised and the sale of stock under employee stock purchase plans

 

70,678

 

 

70,678

 

Tax benefit on exercise of options

 

2,421

 

 

2,421

 

Stock-based compensation

 

86,797

 

 

86,797

 

Cash dividends

 

(231,460

)

 

(231,460

)

Purchase of treasury stock, net

 

(79,814

)

 

(79,814

)

Noncontrolling interest acquired

 

 

69,272

 

69,272

 

Other

 

(1,803

)

 

(1,803

)

Stockholders’ equity at August 2, 2008

 

$

5,940,873

 

$

80,327

 

$

6,021,200

 

 


(1) Changes in the fair value of derivatives are net of taxes of $9.8 million and $0.2 million for the thirteen weeks ended August 1, 2009 and August 2, 2008, respectively, and net of taxes of $15.1 million and $1.0 million for the twenty-six weeks ended August 1, 2009 and August 2, 2008, respectively.

 

14



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

The following table summarizes the components of accumulated other comprehensive loss as of August 1, 2009 and January 31, 2009 (in thousands):

 

 

 

August 1, 2009

 

January 31, 2009

 

Cumulative foreign currency translation

 

$

10,212

 

$

(336,812

)

Net unrecognized gains on derivative instruments

 

3,802

 

27,041

 

Deferred pension costs

 

(184,556

)

(184,556

)

Accumulated other comprehensive loss

 

$

(170,542

)

$

(494,327

)

 

Note J - Computation of Earnings Per Common Share

 

The computation of basic and diluted earnings per share for the second quarter and first half of 2009 and 2008 is as follows (in thousands, except per share data):

 

 

 

13 Weeks Ended

 

26 Weeks Ended

 

 

 

August 1, 2009

 

August 2, 2008

 

August 1, 2009

 

August 2, 2008

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributed to Staples, Inc.

 

$

92,411

 

$

150,233

 

$

235,375

 

$

362,515

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

707,379

 

695,870

 

706,331

 

694,636

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Employee stock options and restricted shares

 

12,095

 

15,533

 

12,375

 

15,034

 

Weighted-average common shares outstanding assuming dilution

 

719,474

 

711,403

 

718,706

 

709,670

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.13

 

$

0.22

 

$

0.33

 

$

0.52

 

Diluted earnings per common share

 

$

0.13

 

$

0.21

 

$

0.33

 

$

0.51

 

 

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 23.9 million and 13.6 million shares of Staples common stock were excluded from the calculation of diluted earnings per share at August 1, 2009 and August 2, 2008, respectively.

 

Note K - Segment Reporting

 

Staples has three reportable segments: North American Delivery, North American Retail and International Operations. Staples’ North American Delivery segment consists of the U.S. and Canadian 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 operate office products stores and that sell and deliver office products and services directly to customers and businesses in 25 countries in Europe, Asia, Australia, and South America.

 

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”).    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 types of customers they service may be different, and the distribution methods used to deliver products to customers are different.  The International Operations are considered a separate reportable segment because of the significant differences in the operating environment from the North American operations.

 

15



Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

The following is a summary of sales and business unit income by reportable segment for the second quarter and first half of 2009 and 2008 and a reconciliation of total segment income to consolidated income before income taxes (in thousands):

 

 

 

13 Weeks Ended

 

26 Weeks Ended

 

 

 

August 1, 2009

 

August 2, 2008

 

August 1, 2009

 

August 2, 2008

 

 

 

Sales

 

Sales

 

North American Delivery

 

$

2,322,850

 

$

1,965,801

 

$

4,741,208

 

$

3,686,292

 

North American Retail

 

1,973,268

 

2,087,863

 

4,161,603

 

4,496,364

 

International Operations

 

1,237,661

 

1,021,056

 

2,448,527

 

1,776,618

 

Total reportable segments

 

$

5,533,779

 

$

5,074,720

 

$

11,351,338

 

$

9,959,274

 

 

 

 

13 Weeks Ended

 

26 Weeks Ended

 

 

 

August 1, 2009

 

August 2, 2008

 

August 1, 2009

 

August 2, 2008

 

 

 

Business Unit Income

 

Business Unit Income

 

North American Delivery

 

$

184,922

 

$

173,555

 

$

345,551

 

$

336,817

 

North American Retail

 

102,771

 

110,542

 

263,222

 

278,784

 

International Operations

 

3,741

 

14,917

 

23,859

 

38,740

 

Business Unit Income

 

$

291,434

 

$

299,014

 

$

632,632

 

$

654,341

 

Stock-based compensation

 

(55,221

)

(53,435

)

(90,558

)

(86,797

)

Total Segment Income

 

236,213

 

245,579

 

542,074

 

567,544

 

Interest and other expense, net

 

 (58,243

)

 (15,501

)

 (120,711

)

(11,054

)

Integration and restructuring cost

 

(29,633

)

(163

)

(48,630

)

(163

)

Consolidated Income Before Income Taxes

 

$

148,337

 

$

229,915

 

$

372,733

 

$

556,327

 

 

Note L - Guarantor Subsidiaries

 

Under the terms of the Company’s September 2002 Notes, the Revolving Credit Facility,  the commercial paper program, the January 2009 Notes, the March 2009 Notes, and prior to its voluntary termination on May 26, 2009, the 2008 Agreement, the Guarantor Subsidiaries guarantee repayment of the debt. The debt is fully and unconditionally guaranteed on an unsecured, unsubordinated 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 September 2002 Notes, the January 2009 Notes, and the March 2009 Notes and illustrates the composition of Staples, Inc. (the “Parent Company”), Guarantor Subsidiaries, and non-guarantor subsidiaries as of August 1, 2009 and January 31, 2009 and for the second quarter and first half of 2009 and 2008.  The non-guarantor subsidiaries represent more than an inconsequential portion of the consolidated assets and revenues of Staples.

 

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STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

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.

 

Condensed Consolidating Balance Sheet

As of August 1, 2009

(in thousands)

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

Staples, Inc.

 

Guarantor

 

Guarantor

 

 

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Consolidated

 

Cash and cash equivalents

 

$

86,353

 

$

59,810

 

$

487,279

 

$

 

$

633,442

 

Merchandise inventories, net

 

 

1,426,026

 

1,097,127

 

 

2,523,153

 

Other current assets

 

158,067

 

494,402

 

1,907,632

 

 

2,560,101

 

Total current assets

 

244,420

 

1,980,238

 

3,492,038

 

 

5,716,696

 

Net property, equipment and other assets

 

747,629

 

1,331,407

 

1,343,390

 

 

3,422,426

 

Goodwill

 

1,583,190

 

139,055

 

2,435,481

 

 

4,157,726

 

Investment in affiliates and intercompany, net

 

(2,398,574

)

7,299,941

 

1,577,079

 

(6,478,446

)

 

Total assets

 

$

176,665

 

$

10,750,641

 

$

8,847,988

 

$

(6,478,446

)

$

13,296,848

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

$

258,080

 

$

1,506,148

 

$

2,388,561

 

$

 

$

4,152,789

 

Total long-term liabilities

 

2,187,464

 

561,760

 

213,932

 

 

2,963,156

 

Total stockholders’ equity

 

(2,268,879

)

8,682,733

 

6,245,495

 

(6,478,446

)

6,180,903

 

Total liabilities and stockholders’ equity

 

$

176,665

 

$

10,750,641

 

$

8,847,988

 

$

(6,478,446

)

$

13,296,848

 

 

Condensed Consolidating Balance Sheet

As of January 31, 2009

(in thousands)

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

Staples, Inc.

 

Guarantor

 

Guarantor

 

 

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Consolidated

 

Cash and cash equivalents

 

$

74,255

 

$

45,083

 

$

514,436

 

$

 

$

633,774

 

Merchandise inventories, net

 

 

1,148,047

 

1,256,127

 

 

2,404,174

 

Other current assets

 

94,681

 

718,204

 

1,946,425

 

 

2,759,310

 

Total current assets

 

168,936

 

1,911,334

 

3,716,988

 

 

5,797,258

 

Net property, equipment and other assets

 

754,486

 

1,270,406

 

1,470,736

 

 

3,495,628

 

Goodwill

 

1,346,093

 

390,361

 

2,043,715

 

 

3,780,169

 

Investment in affiliates and intercompany, net

 

614,693

 

3,298,704

 

3,783,962

 

(7,697,359

)

 

Total assets

 

$

2,884,208

 

$

6,870,805

 

$

11,015,401

 

$

(7,697,359

)

$

13,073,055

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

$

1,510,628

 

$

1,046,703

 

$

2,288,223

 

$

 

$

4,845,554

 

Total long-term liabilities

 

1,640,609

 

469,365

 

495,096

 

 

2,605,070

 

Total stockholders’ equity

 

(267,029

)

5,354,737

 

8,232,082

 

(7,697,359

)

5,622,431

 

Total liabilities and stockholders’ equity

 

$

2,884,208

 

$

6,870,805

 

$

11,015,401

 

$

(7,697,359

)

$

13,073,055

 

 

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Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

Condensed Consolidating Statement of Income

For the thirteen weeks ended August 1, 2009

(in thousands)

 

 

 

Staples, Inc.

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Consolidated

 

Sales

 

$

 

$

2,896,122

 

$

2,637,657

 

$

5,533,779

 

Cost of goods sold and occupancy costs

 

3,403

 

2,157,935

 

1,948,184

 

4,109,522

 

Gross profit

 

(3,403

)

738,187

 

689,473

 

1,424,257

 

Operating and other expenses

 

(13,825

)

627,591

 

662,154

 

1,275,920

 

Consolidated income before income taxes

 

10,422

 

110,596

 

27,319

 

148,337

 

Income tax expense

 

 

30,543

 

20,633

 

51,176

 

Consolidated net income

 

10,422

 

80,053

 

6,686

 

97,161

 

Income attributed to the noncontrolling interests

 

 

 

4,750

 

4,750

 

Net income attributed to Staples, Inc.

 

$

10,422

 

$

80,053

 

$

1,936

 

$

92,411

 

 

Condensed Consolidating Statement of Income

For the thirteen weeks ended August 2, 2008

(in thousands)

 

 

 

Staples, Inc.

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Consolidated

 

Sales

 

$

 

$

2,824,114

 

$

2,250,606

 

$

5,074,720

 

Cost of goods sold and occupancy costs

 

4,171

 

2,118,793

 

1,600,254

 

3,723,218

 

Gross profit

 

(4,171

)

705,321

 

650,352

 

1,351,502

 

Operating and other expenses

 

26,395

 

594,978

 

500,214

 

1,121,587

 

Consolidated income before income taxes

 

(30,566

)

110,343

 

150,138

 

229,915

 

Income tax expense

 

 

36,639

 

41,061

 

77,700

 

Consolidated net income

 

(30,566

)

73,704

 

109,077

 

152,215

 

Income attributed to the noncontrolling interests

 

 

 

1,982

 

1,982

 

Net income (loss) attributed to Staples, Inc.

 

$

(30,566

)

$

73,704

 

$

107,095

 

$

150,233

 

 

Condensed Consolidating Statement of Income

For the twenty-six weeks ended August 1, 2009

(in thousands)

 

 

 

Staples, Inc.

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Consolidated

 

Sales

 

$

 

$

5,809,670

 

$

5,541,668

 

$

11,351,338

 

Cost of goods sold and occupancy costs

 

5,828

 

4,297,319

 

4,098,032

 

8,401,179

 

Gross profit

 

(5,828

)

1,512,351

 

1,443,636

 

2,950,159

 

Operating and other expenses

 

46,375

 

1,266,288

 

1,264,763

 

2,577,426

 

Consolidated income before income taxes

 

(52,203

)

246,063

 

178,873

 

372,733

 

Income tax expense

 

 

62,032

 

66,561

 

128,593

 

Consolidated net income

 

(52,203

)

184,031

 

112,312

 

244,140

 

Income attributed to the noncontrolling interests

 

 

 

8,765

 

8,765

 

Net income (loss) attributed to Staples, Inc.

 

$

(52,203

)

$

184,031

 

$

103,547

 

$

235,375

 

 

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STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

Condensed Consolidating Statement of Income

For the twenty-six weeks ended August 2, 2008

(in thousands)

 

 

 

Staples, Inc.

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Consolidated

 

Sales

 

$

 

$

5,953,807

 

$

4,005,467

 

$

9,959,274

 

Cost of goods sold and occupancy costs

 

7,340

 

4,422,554

 

2,806,956

 

7,236,850

 

Gross profit

 

(7,340

)

1,531,253

 

1,198,511

 

2,722,424

 

Operating and other expenses

 

37,151

 

1,236,436

 

892,510

 

2,166,097

 

Consolidated income before income taxes

 

(44,491

)

294,817

 

306,001

 

556,327

 

Income tax expense

 

 

95,997

 

95,947

 

191,944

 

Consolidated net income

 

(44,491

)

198,820

 

210,054

 

364,383

 

Income attributed to the noncontrolling interests

 

 

 

1,868

 

1,868

 

Net income (loss) attributed to Staples, Inc.

 

$

(44,491

)

$

198,820

 

$

208,186

 

$

362,515

 

 

Condensed Consolidating Statement of Cash Flows

For the twenty-six weeks ended August 1, 2009

(in thousands)

 

 

 

Staples, Inc.

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Consolidated

 

Net cash provided by operating activities

 

$

734,347

 

$

82,904

 

$

(119,287

)

$

697,964

 

Investing activities:

 

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

(11,095

)

(68,177

)

(50,593

)

(129,865

)

Cash used in investing activities

 

(11,095

)

(68,177

)

(50,593

)

(129,865

)

Financing Activities:

 

 

 

 

 

 

 

 

 

(Repayment of) proceeds from issuance of commercial paper

 

(1,088,470

)

 

 

(1,088,470

)

Proceeds from borrowings

 

815,310

 

 

324,510

 

1,139,820

 

Payments on borrowings, including payment of deferred financing fees

 

(341,209

)

 

(224,289

)

(565,498

)

Purchase of treasury stock, net

 

(24,075

)

 

 

(24,075

)

Cash dividends paid

 

(118,048

)

 

 

(118,048

)

Other

 

45,338

 

 

 

45,338

 

Cash (used in) provided by financing activities

 

(711,154

)

 

100,221

 

(610,933

)

Effect of exchange rate changes on cash and cash equivalents

 

 

 

42,502

 

42,502

 

Net increase (decrease) in cash and cash equivalents

 

12,098

 

14,727

 

(27,157

)

(332

)

Cash and cash equivalents at beginning of period

 

74,255

 

45,083

 

514,436

 

633,774

 

Cash and cash equivalents at end of period

 

$

86,353

 

$

59,810

 

$

487,279

 

$

633,442

 

 

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Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

 

Condensed Consolidating Statement of Cash Flows
For the twenty-six weeks ended August 2, 2008
(in thousands)

 

 

 

Staples, Inc.

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

(Parent Co.)

 

Subsidiaries

 

Subsidiaries

 

Consolidated

 

Net cash provided by (used in) operating activities

 

$

(3,920,386

)

$

126,753

 

$

3,981,553

 

$

187,920

 

Investing Activities:

 

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

(19,751

)

(89,170

)

(59,742

)

(168,663

)

Acquisition of businesses and investments in joint ventures, net of cash acquired

 

 

 

(4,381,780

)

(4,381,780

)

Proceeds from the sale of short-term investments

 

27,019

 

 

 

27,019

 

Purchase of short-term investments

 

(3

)

 

 

(3

)

Cash provided by (used in) investing activities

 

7,265

 

(89,170

)

(4,441,522

)

(4,523,427

)

Financing Activities:

 

 

 

 

 

 

 

 

 

Proceeds from borrowings and issuance of commercial paper, net

 

3,643,802

 

 

 

3,643,802

 

Payments on borrowings, including payment of deferred financing fees

 

(68,178

)

 

 

(68,178

)

Purchase of treasury stock, net

 

(79,814

)

 

 

(79,814

)

Excess tax benefits from stock-based compensation arrangements

 

914

 

1,210

 

297

 

2,421

 

Cash dividends paid

 

(231,460

)

 

 

(231,460

)

Other

 

70,678

 

 

 

70,678

 

Cash provided by financing activities

 

3,335,942

 

1,210

 

297

 

3,337,449

 

Effect of exchange rate changes on cash and cash equivalents

 

 

 

11,054

 

11,054

 

Net increase (decrease) in cash and cash equivalents

 

(577,179

)

38,793

 

(448,618

)

(987,004

)

Cash and cash equivalents at beginning of period

 

638,543

 

42,612

 

564,293

 

1,245,448

 

Cash and cash equivalents at end of period

 

$

61,364

 

$

81,405

 

$

115,675

 

$

258,444

 

 

Note M —  Contingencies

 

The Company is the subject of several class action lawsuits filed in various states, where the plaintiffs allege the Company failed to comply with federal and state overtime laws and that it failed to pay them overtime.   The Company intends to vigorously defend the cases.   The complaints generally seek unspecified monetary damages.   At this time, the Company cannot reasonably estimate the possible loss or range of losses that may arise from these lawsuits.

 

From time to time, the Company is involved in litigation arising from the operation of its business that is considered routine and incidental to its business. The Company does not expect the results of any of these actions to have a material adverse effect on its business, results of operations, or financial condition.

 

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Table of Contents

 

STAPLES, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

of Financial Condition and Results of Operations

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward Looking Statements

 

This Quarterly Report on Form 10-Q and, in particular, this management’s discussion and analysis contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”).  Any statements contained in or incorporated by reference into this report that are not statements of historical fact should be considered forward-looking statements.  You can identify these forward-looking statements by the use of the words “believes”, “expects”, “anticipates”, “plans”, “may”, “will”, “would”, “intends”, “estimates” and other similar expressions, whether in the negative or affirmative.  These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management’s beliefs and assumptions, and should be read in conjunction with our condensed consolidated financial statements and notes to condensed consolidated financial statements included in this report.  We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in the forward-looking statements made.  There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by such forward-looking statements.  These risks and uncertainties include, without limitation, those set forth under the heading “Risk Factors” of this Quarterly Report on Form 10-Q.  We do not intend to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

 

Acquisition of Corporate Express

 

In July 2008, we acquired Corporate Express N.V. (“Corporate Express”), a Dutch office products distributor with operations in North America, Europe and Australia, through a tender offer for all of its outstanding capital stock.

 

At the time the tender offer was fully settled on July 23, 2008, we had acquired more than 99% of the outstanding capital stock of Corporate Express.  We intend by the end of fiscal year 2009 to acquire the remaining capital of Corporate Express by means of a compulsory acquisition procedure in accordance with the Dutch Civil Code.  In July 2008, we also acquired, 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.

 

We 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.

 

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.  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 are no longer providing detailed financial information or any related discussion of our business after removing the impact of the Corporate Express business.

 

Overview

 

Our consolidated sales increased 9.0% for the second quarter of 2009, driven by sales derived from our acquisition of Corporate Express. Major contributors to our results for the second quarter of 2009 (compared to the results for the second quarter of 2008) are reviewed in detail in the Consolidated Performance and Segment Performance discussions and are summarized below:

 

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·                  On a consolidated basis, we generated $5.53 billion in sales, with sales growth of 9.0%.

·                  North American Delivery sales grew 18.2%, including the impact of our acquisition of Corporate Express.  Business unit income rate declined to 8.0% from 8.8%, primarily as a result of including the lower margin Corporate Express business.

·                  North American Retail’s comparable store sales declined 5%, and business unit income rate decreased slightly to 5.2% from 5.3%, as deleverage in fixed occupancy costs and labor driven by negative comparable store sales were partially offset by increased product margin rates and our ongoing focus on expense control.

·                  International Operations’ sales grew 21.2% and 31.9% in local currency, including the impact of our acquisition of Corporate Express.  Business unit income rate decreased to 0.3% from 1.5%.

·                  We now operate 2,255 stores worldwide, with a net addition of 9 stores during the second quarter of 2009.

·                  Year to date operating cash flow increased to $698 million from $188 million in 2008.

 

While maintaining our focus on expense control, we are also continuing to invest in new strategic initiatives to drive our long term success.  These strategic initiatives include:

 

·         Continued differentiation through the expansion of our own brand product line;

·         Cross-channel initiatives to encourage customers to spend more overall by shopping both Staples’ retail and delivery channels;

·         “Share of wallet” initiatives to sell a broader array of non-core office products to our customers, including cleaning and break room supplies, copy and print services and promotional products; and

·          Retail initiatives to drive sales, including increasing our focus on technology products and services, boosting sales of high margin copy and print services and other key categories such as ink and toner.

 

We view customer service as a key component of our long-term success.  For our customer service programs, our North American and European delivery businesses have focused on the “Perfect Order” program to improve product availability, ensure accuracy of orders, improve warehouse performance and productivity of our delivery trucks, and reduce product returns, resulting in fewer trips per order and higher customer satisfaction and retention.  In our North American Retail business, our selling models are designed to train associates to provide solutions for small business customers and drive attachment selling, while also rewarding store associates who provide great customer service.

 

Outlook

 

The global recession has reduced demand for office products While we expect sales and earnings to continue to be negatively impacted in the near term, we have been able to partially offset these declines through our customer service, customer retention and acquisition efforts, expense management and focused integration of Corporate Express.  We will endeavor to provide as much transparency as possible; however, as a result of the difficulty in forecasting sales in the current environment, we will not provide specific sales and earnings guidance for fiscal year 2009.  To the extent we have clear visibility, we will provide guidance on factors that will influence profitability, such as anticipated synergies from the Corporate Express integration, integration and restructuring expense, depreciation expense, amortization of intangibles and net interest expense.   We expect the following:

 

·                  Corporate Express integration synergies building to $300 million annually over a three year integration period;

·                  Integration and restructuring expense of $90 million to $110 million for 2009;

·                  Depreciation expense of $430 million to $440 million for 2009;

·                  Amortization of intangibles of $100 million to $110 million for 2009; and

·                  Net interest expense of $235 million to $245 million for 2009.

 

Consolidated Performance

 

Net income attributed to Staples, Inc. for the second quarter of 2009 was $92.4 million or $0.13 per diluted share compared to $150.2 million or $0.21 per diluted share for 2008.  Net income for the first half of 2009 was $235.4 million or

 

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$0.33 per diluted share compared to $362.5 million or $0.51 per diluted share for the first half of 2008.  Our results for the second quarter and the first half of 2009 include the results of the Corporate Express business, which was acquired on July 2, 2008.  Our results for the second quarter and the first half of 2009 also include integration and restructuring costs of $19.4 million, net of taxes ($0.03 per diluted share) and $31.9 million, net of taxes ($0.04 per diluted share), respectively.

 

Our 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, and managing working capital and capital spending were key contributors to sustaining our performance during the second quarter of 2009, despite the negative impact of a weakened economy on our customers and our organic sales growth.

 

Sales:  Sales for the second quarter of 2009 were $5.53 billion, an increase of 9.0% from the second quarter of 2008.  Sales for the first half of 2009 were $11.35 billion, an increase of 14.0% from the first half of 2008.  Our sales growth for the second quarter of 2009 and first half of 2009 is mainly attributed to our acquisition of Corporate Express.  The sales growth for the second quarter and first half of 2009 was partially offset by the following three factors, in order of magnitude:  lower sales to existing customers in our North American Delivery and International Operations businesses; the negative impact of foreign exchange rates of $164.6 million for the second quarter and $394.6 million for the first half of 2009; and a decrease in comparable store sales in our retail businesses driven by lower average order size.

 

Gross Profit:  Gross profit as a percentage of sales was 25.7% for the second quarter of 2009 and 26.0% for the first half of 2009 compared to 26.6% for the second quarter of 2008 and 27.3% for the first half of 2008. The decrease in gross profit rate for the second quarter and first half of 2009 was primarily driven by the inclusion of the results of Corporate Express, whose gross profit rate was lower than our pre-existing businesses and, to a lesser extent, deleverage in fixed occupancy costs in our North American Retail business.  These decreases were partially offset by increased buying synergies in all of our businesses.  In addition, the first half of 2009 also benefited from improved product margin rates in North American Retail.

 

Selling, General and Administrative Expenses:  Selling, general and administrative expenses were 21.0% of sales for the second quarter and 20.8% for the first half of 2009 compared to 21.5% for both the second quarter and the first half of 2008. The decrease in selling, general and administrative expenses as a percentage of sales for the second quarter and first half of 2009 was primarily driven by the inclusion of the results of Corporate Express, whose selling, general and administrative expense rate was lower than our pre-existing businesses.  The decrease also reflects reduced marketing expenses which were partially offset by deleverage in labor in all of our businesses.  Our results continue to reflect our ongoing focus on expense control.

 

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 $29.6 million for the second quarter of 2009 and $48.6 million for the first half of 2009 compared to $0.2 million for the second quarter and first half of 2008. Integration and restructuring costs for the second quarter of 2009 included a $20.7 million charge for severance and retention and $8.9 million of consulting and other fees.  Integration and restructuring costs for the first half of 2009 include a $22.9 million charge for severance and retention, $14.0 million of consulting and other costs, and an $11.7 million charge related to asset write-downs for assets whose use was expected to be limited as a result of the acquisition.    Integration and restructuring costs for the second quarter and first half of 2008 consisted primarily of consulting and other costs.

 

Amortization of Intangibles: Amortization of intangibles was $26.6 million for the second quarter of 2009 and $48.5 million for the first half of 2009 compared to $14.3 million for the second quarter of 2008 and $18.4 million for the first half of 2008, reflecting the amortization of certain trade names, customer relationships and non-competition agreements.  Amortization expense relating to intangibles resulting from our acquisition of Corporate Express was $18.7 million and $32.8 million for the second quarter and first half of 2009, respectively, compared to $8.6 million for the second quarter and first half of 2008.

 

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Interest Income:   Interest income decreased to $1.3 million in the second quarter of 2009 and $3.0 million for the first half of 2009 from $6.3 million for the second quarter of 2008 and $17.8 million for the first half of 2008. The decrease in interest income for the second quarter and first half of 2009 is primarily due to a decrease in our average cash balance resulting from the use of cash to acquire Corporate Express.

 

Interest Expense:  Interest expense increased to $60.9 million for the second quarter of 2009 and $121.4 million for the first half of 2009 from $21.2 million for the second quarter of 2008 and $28.4 million for the first half of 2008. The increase in interest expense for 2009 is primarily due to borrowings under our January 2009 Notes, our March 2009 Notes, 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 $62.9 million for the second quarter of 2009 and $124.4 million for the first half of 2009 compared to $22.4 million for the second quarter of 2008 and $29.7 million for the first half of 2008.

 

Miscellaneous Income (Expense):  Miscellaneous income was $1.4 million for the second quarter of 2009 and miscellaneous expense was $2.3 million for the first half of 2009. Miscellaneous expense was $0.6 million for the second quarter of 2008 and $0.4 million for the first half of 2008. These amounts primarily reflect foreign exchange gains and losses recorded in the respective periods.

 

Income Taxes:  Our effective tax rate was 34.5% for the second quarter and first half of 2009 compared to 33.8% for the second quarter of 2008 and 34.5% for the first half of 2008.  The lower effective tax rate for the second quarter of 2008 was the result of the acquisition of Corporate Express and changes in the geographical mix of earnings, which caused our annual effective tax rate to decrease from the 35.0% reported in the first quarter of 2008 to 34.5%.  We expect our effective tax rate for 2009 to be consistent with the 34.5% reported for the full year 2008.

 

Segment Performance

 

Our business is comprised of three segments: North American Delivery, North American Retail and International Operations.  Our 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 that operate office products stores and that sell and deliver office products and services directly to customers and businesses in 25 countries in Europe, Asia, Australia and South America.

 

The following tables provide a summary of our sales and business unit income by reportable segment.  Business unit income excludes integration and restructuring costs, stock-based compensation, interest and other expense, non-recurring items and the impact of changes in accounting principles (see reconciliation of total segment income to consolidated income before taxes in Note K in the Notes to the Condensed Consolidated Financial Statements):

 

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August 1, 2009

 

August 2, 2008

 

 

 

 

 

Increase

 

Increase

 

 

 

(Amounts in thousands)
13 Weeks Ended

 

(Decrease)
From Prior

 

(Decrease)
From Prior

 

 

 

August 1, 2009

 

August 2, 2008

 

Year

 

Year

 

Sales:

 

 

 

 

 

 

 

 

 

North American Delivery

 

$

2,322,850

 

$

1,965,801

 

18.2

%

24.7

%

North American Retail

 

1,973,268

 

2,087,863

 

(5.5

)%

(1.1

)%

International Operations

 

1,237,661

 

1,021,056

 

21.2

%

69.5

%

Total Segment Sales

 

$

5,533,779

 

$

5,074,720

 

9.0

%

18.3

%

 

 

 

(Amounts in thousands)
13 Weeks Ended

 

August 1, 2009

 

August 2, 2008

 

 

 

August 1, 2009

 

August 2, 2008

 

% of Sales

 

% of Sales

 

Business Unit Income:

 

 

 

 

 

 

 

 

 

North American Delivery

 

$

184,922

 

$

173,555

 

8.0

%

8.8