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SPLS > SEC Filings for SPLS > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for STAPLES INC

Form 10-Q for STAPLES INC


14-Nov-2012

Quarterly Report


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

Forward Looking Statements

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

Results of Operations

Major contributors to our third quarter of 2012 results, as compared to the results for the third quarter of 2011, are reviewed in detail in the Consolidated Performance and Segment Performance discussions and are summarized below:

We generated $6.35 billion in sales, a decrease of 2.0%;

North American Delivery's sales increased 1.0%, and business unit income rate decreased to 8.7% from 9.5%;

North American Retail's sales decreased 0.4%, comparable store sales decreased 1%, and business unit income rate increased to 10.8% from 10.7%;

International Operations' sales decreased 11.6%, including an unfavorable impact from foreign exchange rates, and business unit (loss) income rate decreased to (0.2)% from 2.9%. Business unit loss in the third quarter of 2012 includes $15.6 million of accelerated tradename amortization;

(Loss) income from continuing operations attributable to Staples, Inc. for the third quarter of 2012 was $(568.7) million or $(0.85) per basic and diluted share compared to $323.8 million or $0.46 per share on a diluted basis for the third quarter of 2011;

On a non-GAAP basis, income from continuing operations attributed to Staples, Inc. was $309.8 million in the third quarter of 2012, which excludes pre-tax charges of $811.0 million related to the impairment of goodwill and long-lived assets, $30.4 million related to restructuring activities and $15.6 million for accelerated tradename amortization, as well as $21.5 million of related income tax expense; and

Non-GAAP earnings per diluted share from continuing operations attributed to Staples, Inc. in the third quarter of 2012 was $0.46, which compares with $0.46 per diluted share for the third quarter of 2011.

See the non-GAAP reconciliations in the "Non-GAAP Measures" section further below.

Outlook

Our financial guidance includes the impact of the 53rd week in fiscal year 2012 as well as the impact of foreign currency exchange rates. We expect full year 2012 sales to be flat compared to the prior year. We expect full year non-GAAP diluted earnings per share from continuing operations to increase in the low single-digits versus non-GAAP diluted earnings per share from continuing operations of $1.37 achieved in 2011. The company's full year non-GAAP diluted earnings per share estimate


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excludes the charges for goodwill and long-lived asset impairment, restructuring, accelerated tradename amortization and related incremental tax expense which were incurred during the third quarter of 2012, as well as approximately $160 million to $200 million of previously announced pre-tax charges related to European restructuring, U.S. store closures and accelerated Australian tradename amortization that we expect to record during the fourth quarter of 2012. See the non-GAAP measures section below for a reconciliation of the $1.37 earnings per share related to full year 2011 income from continuing operations.

Non-GAAP Measures

In our analysis of the results of operations, we have referred to non-GAAP financial measures for income from continuing operations attributed to Staples, Inc. and the related earnings per share and effective tax rate. We believe these non-GAAP financial measures better enable management and investors to understand and analyze our performance by providing meaningful information relevant to events that impact the comparability of underlying business results from period to period. In the measures presented, we have excluded impairment of goodwill and long-lived assets and accelerated tradename amortization because such items are non-cash in nature. Furthermore, we have excluded the impairment charges and accelerated amortization, along with the restructuring charges and deferred tax asset valuation allowances, because the exclusion of such amounts facilitates the comparison of the company's financial results to its historical operating results. However, these supplemental measures should be considered in addition to, and not as a substitute for or superior to, the related measures that are determined in accordance with GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are shown below (amounts in thousands, except for per share data):

                                                                      13 Weeks Ended
                                                                     October 27, 2012
                                                                        Adjustments
                                                 Impairment of                               Accelerated
                                                  Goodwill and        Restructuring          trade-name
                                As Reported    Long-Lived Assets         Charges            amortization         Non-GAAP
Operating (loss) income        $ (357,147 )    $        810,996     $         30,396     $          15,599     $  499,844
Interest and other expense,
net                               (40,882 )                                                                       (40,882 )
(Loss) income from
continuing operations before
income taxes                   $ (398,029 )                                                                    $  458,962

Income tax expense             $  170,703                                                                      $  170,703
Adjustments (1)                         -                                                                         (21,541 )
Adjusted income tax            $  170,703                                                                      $  149,162

(Loss) income from
continuing operations          $ (568,732 )                                                                    $  309,800
Loss attributed to the
noncontrolling interests              (39 )                                                                           (39 )
(Loss) income from
continuing operations
attributed to Staples, Inc.    $ (568,693 )                                                                    $  309,839

Effective Tax Rate                  (42.9 )%                                                                         32.5 %

Per share (loss) income from continuing operations attributed to Staples, Inc:
Basic and diluted earnings
per common share               $    (0.85 )                                                                    $     0.46

Weighted average common
shares outstanding                666,989                                                                         666,989
Effect of dilutive
securities                              -                                                                           4,354
Weighted average common
shares outstanding assuming
dilution                          666,989                                                                         671,343


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                                                                             39 Weeks Ended
                                                            October 27, 2012
                                                               Adjustments                                                  October 29, 2011
                                        Impairment of                               Accelerated
                                         Goodwill and        Restructuring          trade-name
                       As Reported    Long-Lived Assets         Charges            amortization         Non-GAAP       As Reported      Non-GAAP
Operating income      $   196,396     $        810,996     $         30,396     $          15,599     $ 1,053,387     $ 1,164,950     $ 1,164,950
Interest and other
expense, net             (123,413 )                                                                      (123,413 )      (129,988 )      (129,988 )
Income from
continuing
operations before
income taxes          $    72,983                                                                     $   929,974     $ 1,034,962     $ 1,034,962

Income tax expense    $   323,780                                                                     $   323,780     $   331,155     $   331,155
Adjustments (1) (2)             -                                                                         (21,541 )             -          20,800
Adjusted income tax   $   323,780                                                                     $   302,239     $   331,155     $   351,955

(Loss) income from
continuing
operations            $  (250,797 )                                                                   $   627,735     $   703,807     $   683,007
Loss attributed to
the noncontrolling
interests                    (119 )                                                                          (119 )          (751 )          (751 )
(Loss) income from
continuing
operations
attributed to
Staples, Inc.         $  (250,678 )                                                                   $   627,854     $   704,558     $   683,758

Effective Tax Rate          443.6 %                                                                          32.5 %          32.0 %          34.0 %

Per share (loss) income from continuing operations attributed to Staples, Inc:
Basic earnings per
common share          $     (0.37 )                                                                   $      0.93     $      1.01     $      0.98
Diluted earnings
per common share      $     (0.37 )                                                                   $      0.92     $      1.00     $      0.97

Weighted average
common shares
outstanding               673,366                                                                         673,366         698,813         698,813
Effect of dilutive
securities                      -                                                                           6,602           9,215           9,215
Weighted average
common shares
outstanding
assuming dilution         673,366                                                                         679,968         708,028         708,028

(1) The $21.5 million adjustment to income tax expense in 2012 relates to the establishment of valuation allowances for previously recorded deferred tax assets as a result of the planned closure of certain operations in our Europe Retail and Europe Catalog reporting units, net of tax benefits related to the impairment and restructuring charges and the accelerated tradename amortization.
(2) The tax benefit of $20.8 million in 2011 related to a refund due to Corporate Express from the Italian government that was previously deemed uncollectible, which was recorded as a discrete item in the second quarter of 2011.


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The Company's guidance for expected growth in earnings per share from continuing operations for the full year 2012 in the Outlook section above is based on 2011 adjusted earnings per share from continuing operations of $1.37, a figure which has not been previously disclosed and reconciled because the Company only began reporting discontinued operations in the third quarter of 2012. The following is a reconciliation of non-GAAP earnings per share from continuing operations in 2011 to the commensurate GAAP figure (amounts in thousands, except for per share data):

                                                                   52 Weeks Ended
                                                                  January 28, 2012
                                               As revised to present
                                                   discontinued
                                                    operations          Adjustments       Non-GAAP
Income from continuing operations before
income taxes                                   $     1,464,644         $          -     $ 1,464,644
Income tax expense                                     477,247               20,800         498,047
Income (loss) from continuing operations,
including the portion attributable to the
noncontrolling interests                               987,397              (20,800 )       966,597
Discontinued Operations:                                                                          -
Loss from discontinued operations, net of
tax benefit                                             (3,564 )                  -          (3,564 )
Consolidated net income (loss)                         983,833              (20,800 )       963,033
Loss attributed to the noncontrolling
interests                                                 (823 )                  -            (823 )
Net income (loss) attributed to
Staples, Inc.                                  $       984,656         $    (20,800 )   $   963,856

Amounts attributable to Staples, Inc.
Income (loss) from continuing operations       $       988,220         $    (20,800 )   $   967,420
Loss from discontinued operations                       (3,564 )                             (3,564 )
Net income (loss) attributed to
Staples, Inc.                                  $       984,656         $    (20,800 )   $   963,856

Diluted Earnings Per Common Share:
Continuing operations attributed to Staples,
Inc.                                           $          1.40         $      (0.03 )   $      1.37
Discontinued operations attributed to
Staples, Inc.                                                -                    -               -
Net (loss) income attributed to
Staples, Inc.                                  $          1.40         $      (0.03 )   $      1.37

Number of shares used in computing earnings
per share                                              704,019

Consolidated Performance

Third Quarter of 2012 Compared to the Third Quarter of 2011

Sales: Sales for the third quarter of 2012 were $6.35 billion, a $127.9 million or 2.0% decrease from the third quarter of 2011. The sales decline reflects ongoing weakness in International Operations, a $39.4 million unfavorable impact from foreign exchange rates, and a 1% decline in comparable store sales in North American Retail, partially offset by a 1% sales increase in North American Delivery. Declines in computers, technology accessories, and software were partly offset by growth in facilities and breakroom supplies and copy and print services.

Gross Profit: Gross profit as a percentage of sales was 27.6% for the third quarter of 2012 compared to 28.1% for the third quarter of 2011. The decrease in gross profit rate for the third quarter of 2012 was primarily driven by lower product margins in North American Delivery and International Operations and by deleverage of fixed costs in International Operations due to a decline in sales. The lower product margins in North American Delivery and International Operations reflect inflationary pressures on core office supplies and investments to drive sales and customer loyalty, and, with respect to International Operations, adverse customer and product mix in Europe.

Selling, General and Administrative Expenses: Selling, general and administrative expenses decreased by $38.6 million or 3.0% from the third quarter of 2011 to the third quarter of 2012, reflecting decreased compensation expense, due to headcount reductions and a change in the structure of management compensation, and lower marketing expense. These reductions were


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partially offset by increased investments in our online businesses. As a percentage of sales, selling, general and administrative expenses were 19.5% for the third quarter of 2012 compared to 19.7% for the third quarter of 2011.

Impairment of goodwill and long-lived assets: Goodwill and long-lived asset impairment charges incurred in the third quarter of 2012 were $771.5 million and $39.5 million, respectively. The goodwill impairment charges of $303.3 million and $468.1 million relate to our Europe Retail and Europe Catalog reporting units, respectively, components of our International Operations segment. The charges stem from a strategic decision to reallocate investment resources to areas of the Company with higher growth potential, and they reflect lower projections for sales growth and profitability for these businesses as a result of industry trends and the ongoing economic weakness in Europe.

The $39.5 million of long-lived asset impairment charges primarily relate to the Company's plans to close 46 retail stores in Europe and 15 retail stores in the United States, and to consolidate several sub-scale delivery businesses in Europe. As a result of these planned actions, we recorded long-lived asset impairment charges of $29.6 million and $5.1 million related to the Company's International Operations and North American Retail segments, respectively, primarily relating to leasehold improvements and company-owned facilities. As a result of the reduced long-term sales and profit projections, we also recorded $4.8 million of charges related to long-lived assets held for use in ongoing operations by our Europe Retail reporting unit, primarily relating to leasehold improvements at store locations.

Restructuring charges: Restructuring charges incurred in the third quarter of 2012 were $30.4 million. These charges relate to the strategic plan announced by the Company in the third quarter of 2012 to accelerate growth through the integration of our retail and online offerings, restructuring of our International Operations segment and the reduction of our footprint to improve the productivity in our stores in North America. The charges recorded in the third quarter of 2012 consist of $19.2 million of severance and benefit costs and $11.2 million of other costs associated with the planned closure of 46 retail stores and consolidation of certain sub-scale delivery businesses in Europe.

Amortization of Intangibles: Amortization of intangibles was $30.4 million for the third quarter of 2012 compared to $16.0 million for the third quarter of 2011, primarily reflecting the amortization of tradenames, customer relationships and noncompetition agreements related to the Corporate Express acquisition. Amortization for the third quarter of 2012 includes $15.6 million of accelerated amortization related to a strategic decision to rebrand our Australian business from the Corporate Express tradename to the Staples tradename as we continue to move towards one global brand. Amortization of intangibles resulting from our acquisition of Corporate Express was $24.1 million for the third quarter of 2012, including the accelerated amortization related to our Australian business, compared with $13.0 million for the third quarter of 2011.

Interest Income: Interest income decreased to $1.2 million for the third quarter of 2012 from $1.8 million for the third quarter of 2011. An unfavorable impact from lower interest rates was offset by a favorable impact from higher international cash balances for the third quarter of 2012.

Interest Expense: Interest expense decreased slightly to $40.3 million for the third quarter of 2012 from $40.9 million for the third quarter of 2011. Our interest rate swap agreements reduced interest expense by $5.1 million for the third quarter of 2012 compared to a reduction of $6.2 million for the third quarter of 2011.

Other Expense: Other expense was $1.8 million for the third quarter of 2012 compared to $3.7 million for the third quarter of 2011. The decreased expense was primarily due to lower foreign exchange losses in the third quarter of 2012.

Income Taxes: Our tax rate related to continuing operations was (42.9)% for the third quarter of 2012 compared to 33.5% for the third quarter of 2011. The negative tax rate for the third quarter of 2012 reflects the fact that we incurred charges of $811.0 million for goodwill and long-lived asset impairment and $30.4 million related to restructuring activities, the majority of which are either not tax deductible or, if deductible, the resulting deferred tax assets require valuation allowances. Our tax rate in the third quarter of 2012 also reflects additional tax expense related to establishing valuation allowances for previously recorded deferred tax assets as a result of the planned closure of certain operations in our Europe Retail and Europe Catalog reporting units. Tax expense recorded in the third quarter of 2012 for these valuation allowances, net of tax benefits related to the impairment and restructuring charges and the accelerated tradename amortization in Australia, was $21.5 million. Excluding the impact of these items, our effective tax rate was 32.5% in third quarter of 2012. See the non-GAAP reconciliation under the "Non-GAAP Measures" section above.

Our effective tax rate in any year is impacted by the geographic mix of earnings. Additionally, certain foreign operations are subject to both U.S. and foreign income tax regulations, and as a result, income before tax by location and the components of


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income tax expense by taxing jurisdiction are not directly related. The earnings generated primarily by our entities in Australia, Canada, Hong Kong and the Netherlands contributed to the foreign tax rate differential impacting the effective tax rate.

Discontinued Operations: In conjunction with the strategic plan we announced in the third quarter of 2012, we are pursuing the sale of our European Printing Systems Division business ("PSD"), a component of our International Operations segment which operates in five countries in Europe and focuses on the sale, rental and servicing of printing machinery. Loss from discontinued operations, net of tax, was $27.6 million in the third quarter of 2012 compared with income of $2.6 million for the third quarter of 2011. The loss in the third quarter of 2012 includes $18.4 million of restructuring charges related severance and benefit costs associated with a plan to rightsize PSD's operations in connection with our ongoing efforts to sell this business, as well as $4.5 million of incremental tax expense related to the planned sale.

Year-to-date 2012 Compared to Year-to-date 2011

Sales: Sales for year-to-date 2012 were $17.81 billion, a $477.9 million or 2.6% decrease from the year-to-date 2011. The decline reflects decreased sales in International Operations, a $223.5 million unfavorable impact from foreign exchange rates and a 1% decline in comparable store sales in North American Retail, partially offset by growth in our North American Delivery business. Declines in computers, technology accessories and software were partly offset by growth in facilities and breakroom supplies and copy and print services.

Gross Profit: Gross profit as a percentage of sales was 26.8% for year-to-date 2012 compared to 27.2% for year-to-date 2011. The decrease in gross profit rate was primarily driven by lower product margins in North American Delivery and International Operations and by deleverage of fixed costs in International Operations and North American Retail due to declines in sales. The lower product margins in North American Delivery and International Operations reflected inflationary pressures on core office supplies, investments to drive sales and customer loyalty and, with respect to International Operations, adverse customer and product mix in Europe.

Selling, General and Administrative Expenses: Selling, general and administrative expenses in year-to-date 2012 decreased by $83.0 million or 2.2% from year-to-date 2011, driven primarily by a reduction in marketing expense and lower compensation expense due to a change in the structure of management compensation and reduced headcount. These reductions were partially offset by severance-related expenses, increased costs associated with legal settlements, and investments in our online businesses. As a percentage of sales, selling, general and administrative expenses were 20.6% for year-to-date 2012 compared to 20.5% for year-to-date 2011.

Goodwill and long-lived asset impairment charges: Goodwill and long-lived asset impairment charges incurred in year-to-date 2012 were $771.5 million and $39.5 million, respectively. The goodwill impairment charges of $303.3 million and $468.1 million relate to our Europe Retail and Europe Catalog reporting units, respectively, components of our International Operations segment. The charges stem from a strategic decision to reallocate investment resources to areas of the Company with higher growth potential, and they reflect lower projections for sales growth and profitability for these businesses as a result of industry trends and the ongoing economic weakness in Europe.

The $39.5 million of long-lived asset impairment charges primarily relate to the Company's plans to close 46 retail stores in Europe and 15 retail stores in the United States, and to consolidate several sub-scale delivery businesses in Europe. As a result of these planned actions, we recorded long-lived asset impairment charges of $29.6 million and $5.1 million related to the Company's International Operations and North American Retail segments, respectively, primarily relating to leasehold improvements and company-owned facilities. As a result of the reduced long-term sales and profit projections, we also recorded $4.8 million of charges related to long-lived assets held for use in ongoing operations by our Europe Retail reporting unit, primarily relating to leasehold improvements at store locations.

Restructuring charges: Restructuring charges incurred in year-to-date 2012 were $30.4 million. These charges relate to the strategic plan announced by the Company in the third quarter of 2012 to accelerate growth through the integration of our retail and online offerings, restructuring of our International Operations segment and the reduction of our footprint to improve . . .

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